Over the past few weeks, a number of Mountaineers have asked about our views and the prospects of a war with Iran. Here is an excellent article on the subject matter, an excerpt from the March issue of the McAlvany Intelligence Advisor (www.miatoday.com), written by our friend, Don McAlvany.
US interests in the Middle East are a complex web of various agendas. For decades, the US foreign policy toward the Middle East was geared toward keeping the region off balance. Keeping the region in turmoil kept the Arabs from uniting and becoming a formidable enemy. While this goal has not changed, the added motive for turmoil prevented the region from aligning with another country or countries to threaten the dollar´s hold on the oil market. The dollar‘s reign of power rests largely on oil trading in greenbacks. Thanks to arrangements with the Saudi‘s, oil is traded in dollars. If Europe wants to buy oil, they first have to buy dollars.
Now, the US appears to be losing its grip both on oil and on the Middle East. Iran‘s emergence as the dominant power in the region – and its alignment with other major players (namely Russia, China, and India) – is threatening the dollar‘s preeminence. Iran‘s development of nuclear weapons is a much greater threat to the dollar than it is to the US´s physical well-being. It will allow Iran to dictate how it sells its oil, thus destroying the hegemony of the dollar in the oil trade and allowing countries to trade in whatever currency best serves their national interests. Iran will move the oil market away from the dollar as fast as it can – and is already making moves to that end.
The chess moves we see in the next six months could dramatically impact the world order. As Iran and other countries move oil away from the dollar, the superpower status of the US will be severely threatened. The moves could push the US into a massive war with Iran, Syria, Egypt, and other Arab nations. The media will tell us the war is to destroy Iranian nuclear capabilities and protect our oil interests. That´s only part of the story. The part they won´t tell you is that the main reason for the war will be to support the dollar as the only currency in which oil can be traded. Fiat currency´s role in the world is on the precipice. The US will do all it can to protect the Fed and its currency. Winning the war will keep the US dollar alive to fight another day, though it will still be severely crippled. Losing the war will topple the US economic system, plunging us into deep depression.
The Coming War in the Middle East
In its efforts to curtail Iran´s nuclear program, the US has placed new sanctions on Iran. These sanctions penalize any country buying Iran‘s oil or placing transactions with Iran´s central bank. Europe has joined the US sanctions, but the United Nations has not. Because the UN has not endorsed the sanctions, some countries are looking for ways to make an end-run around them. India may have been the first to try.
In January, news surfaced that India had agreed to buy oil from Iran using gold rather than dollars. This development would make sense in light of India‘s historical and recent heavy gold purchases. The Times of India says India will route the payments through the Kolkata-based UCO Bank.
India has not confirmed or denied the news report, but India´s government has made it clear they will abide by UN sanctions only, not those imposed by independent nations or blocs of nations. The country is highly dependent on crude oil imports to meet its economic needs. Next to China, India is Iran‘s second largest customer, purchasing $12 billion worth of Iranian oil every year. With 12-13% of its consumption coming from Iran, it‘s clear India and other countries are not going to hurt their own economies for the sake of US sanctions.
Most of the media reports on India´s action come from one source – the Israeli DEBKAfile. While the reports appear to have a large degree of truth, there‘s some question about how far and how fast India will go in leaving the dollar. Asia Times says India has agreed to pay for the oil with rupees (up to 45% of its transactions) and other currencies. But gold isn‘t on the official list as of yet. If India does indeed drop the US dollar-for-oil purchases (or at least diminishes the dollar‘s role in its purchases), it won‘t be the last country to do so. It could trigger a domino effect. Other nations are watching to see what happens to India, Iran, and the oil market. If the ramifications are negligible, others will quickly follow suit. China is likely to be next on that list.
India is in a precarious situation, though. In 1998, the US put sanctions on India for its nuclear ambitions. Those sanctions largely concerned India´s access to US nuclear technology. In 2005, the Bush administration offered to lift the sanctions – for a price. According to the Asia Times (Feb. 9, 2012), “India was eager to have these sanctions mitigated or withdrawn. In exchange, the US would provide India with access to nuclear material from the Nuclear Suppliers Group, and so effectively recognize India as a nuclear power. This was despite the fact that the Indian government‘s own studies showed that nuclear power at best would only provide for 5% of India´s energy needs and so not be a substitute for oil or natural gas. In return, India would have to vote with the US against Iran in the International Atomic Energy Agency (IAEA). India‘s bourgeois political parties went for the deal.” Because India doesn‘t want sanctions reinstated against itself, it has to move cautiously with Iran. But Iran is eager for India to trade in anything other than the dollar.
Iran Takes the Offensive against the Dollar
The Iranians have been after the dollar for a long time, often threatening to take other currencies in exchange for their oil. They announced to the world in 2008 that they would accept other currencies in such trades. Then, in September 2009, Iran dumped the dollar for the euro. But with the EU mired in its sovereign debt crises, the euro isn‘t as attractive as it was a few years ago. So Iran is now open to looking at other currencies.
India Offers an Attractive Trading Partner
As Asia grows in world prominence, Iran is expected to gladly welcome the offer to move away from Western currencies – and their attendant debt crises – and begin accepting other currencies on March 20, 2012. India, as well as China, has been stockpiling gold for years while western central banks have been selling. In the end, India may not want to part with its gold. It‘s possible India will end up paying for Iran´s oil with rupees, especially in the long term. Regardless, the move essentially gives the rupee intrinsic value if India appears willing to back its rupees with gold.
Both India and China are major buyers of Iranian oil. India buys about 22% of its oil from Iran and China about 13%. With such massive dependence on Iran, both countries have refused to join with the US and EU sanctions. Since the sanctions will punish anyone using their own central banks to buy Iranian oil, these countries have to establish a reliable way of paying for crude. It has to be completely independent of the global financial system – at least the parts controlled by New York and London. The Israeli-based news website DEBKAfile says India plans to use two state-owned banks to handle the payments: India‘s UCO Bank and Turkey´s Halk Bankasi. Turkey is another country that hasn‘t supported the sanctions.
The result? If Iran switches to the non-dollar terms for its oil payments, the U.K.‘s Telegraph says, “there could be a new oil price that would be denominated in euro, yen or even the yuan or rupee.”
Grave Future for the Dollar and the US
The obvious impact of Iran´s move is on the value of the dollar and gold, depressing the dollar and boosting the price of gold. Since the US struck a deal with the Saudis in 1973, the dollar has been on a de facto oil standard – the dollar gets its value from oil. As the world sees that it doesn‘t need the dollar to buy oil, unhinging the dollar will turn its value back to ‘the full faith and credit´ of the US government. With massive debt and a credit downgrade, the ‘faith and credit´ of the US government is dwindling fast, giving the dollar little to stand on. Gold‘s value can only increase, as the world becomes accustomed to using it in transactions once again.
There is another, far greater impact on the dollar, though. A substantial portion of the US dollars in circulation today is held by nations planning to use them to buy oil. If they don´t need the dollars to buy oil any longer, nations could call for the US to repurchase its now worthless notes. Such attempts to flee the dollar would plunge the US into depression, with little hope of honoring all its notes. The US doesn´t have any ability to stand behind its currency. In other words, the delinking of the US dollar from global oil transactions could ultimately trigger a worldwide stampede out of the US dollar – with all the horrific implications that would follow.