Sunday, January 29, 2012



John Connally, US Secretary to the Treasury under President Nixon, in 1971, famously remarked to a group of European Finance ministers worried about the US exporting inflation via the dollar; “it’s our currency but your problem”. He also supported the US running an annual budget deficit of USD 50 Billion, would you believe, to stimulate the economy.

Apart from the fact a USD 50 Billion deficit these days lasts about 2 weeks, not much has changed. The USD is still the reserve currency and the US Treasury knows very well the power that this gives to export inflation world wide.

When the USD is no longer the reserve currency in which almost all international trade is conducted, the demand for USD will collapse, as will the exchange rate, and the inflation that the US currently exports, will come home to roost big time.

This has a direct implication in the current stand off with Iran. America made Iran into the region’s most powerful country, thanks mainly to the US the military industrial machine’s decision to invade and destroy Iraq. Iran’s oppressive regime, their implacable hatred for Israel and their thinly disguised bid to acquire nuclear weapons, is clearly not acceptable to the Western powers.

The saber rattling between the US and Iran, notably with Iran having military exercises in the straits of Hormuz, and the US having at one point three aircraft carriers in the region, have been getting a lot of attention by the international press and military strategists alike.

However the real war in the region is not seen by the general public and scarcely talked about in the press. It is a currency war.

The sanctions against Iran, apart from the depriving the ordinary citizen of basic essentials of life, include freezing of Iran’s central bank assets, principally USD received on the sale of oil, by far the country’s major export.

The impact of this has created massive overnight inflation, with black market exchange rates to USD skyrocketing. This means that all imports, from motor cars to washing machines, to food staples and medical supplies, have rocketed in price. This forces a significant sector of the population below the poverty level, and deprives the middle class of their hard earned standard of living. Clearly the purpose of sanctions is to foment enough internal misery, starvation and discontent to destabilize the country. In effect the west has already declared a clandestine war on Iran, and is waiting for them to lash out in order for the west to say we retaliated to an act of aggression.

However, unlike Iraq, which was put into a similar situation, Iran has a number of powerful allies, who do not want Iran to fall into the western sphere of influence. They include China, India and Russia, who understand the game perfectly well.

Iran supplies the majority of its oil to these countries, versus about 20% to Europe, and the last thing any of them want is for the US to have control over their supply.

A bomb shell was announced this week when Iran agreed with India to accept payment of oil in gold and not in USD. China and Russia are likely to follow and they are also receiving cooperation from Turkish banks, effectively by passing the western currency embargo.

Physical gold cannot be blocked in a New York bank account. President Chavez understood this perfectly when he insisted on taking physical delivery in Venezuela of the country’s gold reserves, much to the chagrin of the US in particular.

This move is of enormous significance, as in parallel, major trading partners such as China, Russia, India and Japan are creating payment arrangements which bypass the USD.  It is extremely bullish for Gold and very bad news for the USD whose dominance of USD denominated world trade suffered a major blow.

This may even be the turning point in the decline of the USD’s importance in world trade.

Through these acts of economic aggression, the US and the west have probably polarized not only the Middle East but also aligned against them a formidable grouping of economically powerful countries, who felt their vital interests were being threatened.

Currency wars are every bit as real as shooting wars, and for the moment Iran has played their cards rather well.

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