For several months a lively debate has been developing within international financial circles: is the dollar so overvalued as to be at risk of a brutal collapse, on the order of 15 to 40% depending on the commentator? The controversy is kept alive by a disputed rumour whereby some oil contracts might be on the verge of being converted from dollars into euros. This, in turn, would spawn a depreciation of the US currency.

Until now, official statements on this issue seemed to belong to the realm of psychological warfare between rival powers. As such, they were subject to question. But suddenly, on March 28th, 2006, the Asian Development Bank (ADB) chose to put its credibility at stake among its members by issuing a memo advising them to be ready for a collapse of the dollar. In the same note, the ADB specifies that there is a certain degree of uncertainty as to whether this might happen or not, but that the immediate consequences would be severe if it were to happen [1]. The ADB is already in the process of working on the creation of a regional alternative to the dollar – the ACU, a basket of currencies modelled on the principles of the European ECU.

The ADB was founded as an institution by sixty-four national states. Contrary to what its name might otherwise suggest, its member states are not only countries from Asia and the Pacific Rim, but also countries from the South Sea Islands, North America and Europe (including France, Belgium and Switzerland). It is controlled in equal parts by Japan and the USA, owning 15% each. This makes the ADB’s warning of an impending monetary turmoil all the more significant.

In spite of being located in Asia, the countries of the Persian Gulf are not members of the ADB. Six of them have preferred to set up their own regional organization, the Gulf Cooperation Council (GCC). They are actively putting efforts into bringing their economies closer together with the aim of creating a single currency on the model of the euro. The project’s aim is not to give in to the fads of our time; rather, it is a response to a particular need. These countries’ oil reserves are declining [2] and, accordingly, there is no question of their reinvesting their petrodollars into the development and modernisation of their oil infrastructure - only maintenance needs to be taken care of. They only want to reinvest their dollars in the US, or to convert them into other currencies in order to reinvest them in other countries. In the latter case, the conversion of such large monetary assets would have dramatic consequences on the dollar and on the US economy.

Thus, everyone is looking for a solution to the problem that is agreeable to all parts involved. Yet, the US, which produces increasingly fewer consumer goods, is in need of extensive and highly lucrative investments in order to expand its imports of manufactured goods from China. This is why the Gulf states have resolved, on the one hand, to endow themselves with the world’s most impressive air cargo fleet and, on the other hand, to buy and develop the six largest commercial ports in the US. This was a convenient solution for the Bush administration, which was already working together with the United Arab Emirate consortium Dubai Ports World, whose Jebel Ali shipping terminal serves as a hub for the flow of military cargo towards Afghanistan and Iraq.

Nevertheless, US congressmen, who believe in those Bush administration fairy tales that characterize all muslims as terrorists, have been frightened by the idea of surrendering their ports to Dubai Ports World. In the name of their national security phantasms, they have demanded that the consortium’s assets be relinquished to a US group that would manage them on behalf of the Emirates - a scheme which, needless to say, was bound to be rejected by the latter, as they would stand to lose most of the return on their investment and perhaps even the whole of it at some point in the future.

Oil traders are increasingly reluctant to entrust investment funds with their money. They know that international accounting standards have been modified in such a manner that nowadays, both national states and multinational corporations have assets they do not own entered in their balance-sheets. The shares they hold are being posted in their accounting, not at the purchase price, but at the actual stock quotation. While this is of no consequence at times when markets are on the rise, it will prove fatal in the case of a stock market crash. From one day to the next, central banks and major corporations could find themselves completely ruined.

The Gulf countries, therefore, are trying as a matter of course to invest their money in Europe. This should lead them to converting their dollars into euros, to the USA’s great detriment. In this context, Sultan Al Suweidi, the governor of the Central Bank of the United Arab Emirates, has announced on March 22nd, 2006 that he was considering the conversion into euros of 10% of the bank’s dollar reserves, and his Saudi counterpart, Saud Al Sayyari, publicly condemned the decision of the US House of Representatives in the Dubai Ports World affair [3].

These decisions are being taken even as some of the oil-producing countries, with whom Washington has entered into a state of latent conflict, are in the process of diverting their capital flows to invest them outside of the dollar zone. This is the case of Syria, which has gradually been converting its reserves into euros during the past two years [4]. It is also the case of the recent rapprochement between Venezuela and the Vatican Bank for the purpose of exchanging the oil-producing country’s dollars, mainly into euros and Chinese yuan.

Above all, this could well be the case with Iran. As a matter of fact, rumours are multiplying that the Islamic Republic is about to open an oil exchange in euros [5]. This project, announced for March, has not yet seen the light of day, and has been called propaganda by numerous commentators. We have attempted to verify its existence with the authorities in Tehran. At first, they refused to either confirm or deny the information, but later, special advisor to Iran’s Oil Minister Mohammad Asemipur declared that the project would be brought to completion in spite of the typical delays when realizing this type of endeavour [6]. The Oil Bourse in euros will be established on Kish, a small island in the Persian Gulf turned by Iran into a free trade zone. Oil corporations TotalFinaElf (France) et Agip (Italy) have already set up their regional headquarters on Kish.

Be that as it may, the Bourse will only handle a small portion of Iran’s energy markets. Substantial contracts have already been signed between national states: with China for the sale of crude oil [7], and with Indonesia for oil refining [8].

To counter this activity, Washington is betting on natural gas, the role of which, as we all know, is bound to be strengthened by the growing scarcity of oil. The Bush administration has encouraged Qatar – which hosts CENTCOM, the US Central Command’s Deployable Headquarters and which holds the world’s third largest reserves of natural gas – to lay the foundations for a gigantic "Energy City". $2.6 bn. are to be invested for the purpose of attracting the energy market’s global actors to a gas exchange in dollars [9]. Microsoft has already offered to provide for the bourse’s electronic brokerage infrastructure.

For his part, Norwegian Bourse director Sven Arild Andersen is studying the possibility of creating an oil exchange priced in euros in his country, which would compete advantageously with the City of London [10]. As a matter of fact, as British oil production is slumping (minus 8% in 2005), the weight of the City’s influence is appearing increasingly disproportionate.

The ADB warning of a pending monetary turmoil will undoubtedly bring about a hastening of all this large-scale scheming. Independent of the oil trade’s reasoning with regard to the possibilities of reinvesting petrodollars, the banking sector is also concerned with the real value of today’s dollar.
One might remember that the US were not able to finance their war effort in Vietnam for very long. Mired in a conflict without end, they resolved to let their allies bear the brunt of the situation, and, in 1971, they stopped guaranteeing their currency’s gold convertibility. From then on, its value has only been resting on the confidence placed in it. The dollar is no longer supported by the economy of the issuing country, but by the economies of those utilizing dollar reserves; banks, however, are able to verify the currency’s adequacy using the M-3, an annual indicator which establishes the volume of greenbacks in circulation.
Presently, the USA is bogged down in Iraq and is incapable of financing its military occupation there. The only way it can pay its suppliers is to keep the printing press running. The announcement, late in March 2006, that the publication of the M-3 indicator would be suspended, together with all the sub-indicators which could have made feasible its reconstruction by aggregates, means that the actual volume of dollars in circulation has become a secret that cannot be divulged. It is no longer possible to precisely evaluate the currency’s real value.

Through a cascading effect, the US are also concealing the costs of their presence in Iraq in order to hide the size of the fraud they are committing.
Refusing to cover up for an escapist monetary policy which sooner or later is bound to lead to a catastrophe comparable to 1929, several senior officials of the FED, the US Federal Reserve, have tendered their resignations [11].

In an interview to the German weekly Der Spiegel, Nobel Prize Laureate in Economics Joseph Stiglitz has estimated the real budget of the US war effort in Iraq to be in range of $1 to $2 trillion over the first four years [12], in other words two to four times higher than the official figures. The hidden part of the war budget thus stands at $500 billion to $1.5 trillion. This sum, if it were to be publicly accounted for, would have to be added to the US public deficit, which is already soaring at over $400 billion per year. It is being absorbed by the printing of worthless paper dollars. In a true market economy, this use of the Mint would lead to a corresponding depreciation of the currency.

For the past three weeks, signs of a bear market have begun to make their appearance on the Gulf Bourses [13]. From now on, any political crisis could trigger a panic on the international markets.

[1"Asia must prepare for dollar collapse", Al Jazeera with AFP, March 28, 2006.

[2For further details on the "oil peak" phenomenon, see "The Power of Oil in the 21st Century", by Arthur Lepic and Jack Naffair, Voltaire, May 10, 2004.

[3"UAE, Saudi considering to move reserves out of dollar", Middle East Forex News, March 22nd, 2006.

[4"Syria switches from dollars to euros", Associated Press, February 14th, 2006.

[6"Iranian oil exchange is ‘on hold’ ", by Jim Willie, Kitco, March 21st, 2006.

[7See in particular "Iran allies with China to face the United States", Voltaire, November 17th, 2004 and "The India-Iran Alliance", Voltaire, February 17th, 2005.

[8"Indonesia, Iran to sign multi-billion-dollar investment deal in refinery", Xinhuanet via Tehran Times, March 14th, 2006.

[9«Qatar to build ’Energy city’», Emirates News Agency, May 5th, 2005.

[10"Norwegian Bourse Director wants oil bourse – priced in Euros", by Laila Bakken and Petter Halvorsen, NRK via Energy Bulletin, December 27th, 2005.

[11"Is the federal reserve preparing for Iran?", by Robert McHugh, February 26th, 2006.

[12"The War Is Bad for the Economy", Der Spiegel, April 5th, 2006.

[13« Black Tuesday : Mideast stock markets nosedive », Middle East Online, March 14th, 2006.