The end of Bretton Woods?

Petrodollar75.jpgThe mainstream media doesn’t seem to understand the potential magnitude of changes currently underway in the sensitive international monetary balance. On December 8th Iran decided to no longer accept the US dollar in exchange for its oil. Since the mainstream media did not cover it either, you may not remember that this was one of the last actions of any international significance done by Saddam Hussein before he once again caught the attention of the US (and incidentally, it is one of the first things to be undone after Baghdad fell). It looks like Iran is switching to the Euro rather than the basket of currencies that OPEC is considering in the wake of the US dollar’s recent weakness. An exodus from the dollar would effectively mark the end of the Bretton Woods agreement under which the US currency was established as the currency of oil and therefore international banking.

To further add to the dilemma, countries that have maintained their currency’s value at parity with the US Dollar under what is referred to as Bretton Woods II are increasing going their separate ways. Oil-rich countries and other countries that have large trade deficits with the US, such as China, are also slowly trying to get rid of their US treasury bonds (if they remove them too fast the dollar will crash, drastically reducing the value of their remaining bonds).
In another worrying development, Russia’s Oil and Gas giant Lukoil announced today that it may switch from the US dollar as soon as 2009. Venezuela’s leader, Hugo Chavez, recently denounced the US Dollar as a worthless piece of paper so it is entirely possible that Venezuela may soon make an announcement as well.
I am not going to make any conclusions on where this is all leading to us but I hope that there will be a good discussion on the consequences.

3 responses

  1. Fascinating. Assuming things are rolling away from the dollar with regards to oil, how might you advice those of us holding large amounts of cash US Dollars? How about people in the US who are deeply in debt?

  2. If I had a lot of US Dollars I would invest them in Europe. Being diversified is always a good idea, which is why about 60% of my money is in Europe, 50/50 between a world market investment account and a high-yield savings account.
    I think it’s always a good idea to be debt free but as long as you have a low interest rate that is locked in you should be all set. A Dollar crash would dampen the economy and you might lose your job so be sure that you can pay the debt eventually. If you have money in Europe and the Euro does well you will have comparatively more funds than if you had left it in the US.

  3. I am particularly intrigued with the information about China’s move to rid themselves of Treasury bonds. Where can one find out more about this? Since a significant portion of our currently borrowing (for Iraq war, etc.) is being financed by China one wonders how long our deficit spending can continue, and who would bank roll it?
    On the trivial side, I am reminded of the movie “Rollover” (Kristofferson and Fonda) from the 1980’s.

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