The Truth About the Dollar and Iran

“This is the way the world ends. Not with a bang but a whimper.”
— T.S. Eliot

We begin today’s reckoning with a response to reader mail: “Inevitable” and “imminent” do not mean the same thing.

“I have to respectfully question the validity of your argument,” our correspondent begins. “The petrodollar deal was made with Saudi Arabia, who is not happy with the Iran deal. Russia and China have been actively plotting to weaken the dollar and seeking to unseat its lead role as reserve currency. I do not think the Iran deal is going to stop their aims. Besides, even Jim Rickards thinks the impact of including the yuan in the IMF mix would not be dramatic, but rather a slow grind over decades. So I think it’s OK to muffle the panic call a bit.”

Indeed.

That’s why we wrote, “the system’s coming unglued” yesterday, not “the system is unglued.”

Semantics? Meh. Maybe.

“The mother of all financial bubbles,” Addison has often mused, “is the slowest moving financial crisis in history.” On that, we can all agree.

Our consideration yesterday — the chance that the U.S. backs out of the nuclear accord with Iran — would mean a faster shuffle toward the endgame.

Here, we pause for a quick program note. There are often disagreements among the writers and readers who contribute to The Daily Reckoning. Case in point…

Jim says:

The trend away from the dollar and toward alternative reserve currencies (euros, yuan), regional reserve currencies (rubles), gold and world money (Special Drawing Rights) is already visible and well-established.

“The euro, the yen, or the yuan won’t replace the dollar as the world reserve currency. The Special Drawing Right (SDR) will. The SDR is not a mix of those other currencies; it’s its own paper money.”

In Demise of the Dollar,Addison writes:

“In theory, SDRs could function as the beginnings of an international currency. But given the widespread use of the U.S. dollar as the peg for so many currencies worldwide, it is unlikely that such a shift to a new direction will occur before circumstances make it the only choice.

“The monetary system is evolving before our eyes. Never before in human history has the reserve currency of the world been so burdened with debt. And never has the transfer of one international currency to another been peaceful. Is the euro likely to supplant the dollar as international money? Perhaps it will be the Chinese yuan.”

Our second reader says:

“I think we’re starting to see U.S. policy make an about-face. We’re going to have responsible fiscal and monetary policy. [Ha! Sometimes we can’t help ourselves.] Technology is going to bring dollars and jobs back to the U.S. We’re going to start exporting oil and natural gas, and King Dollar will return. Besides, if you think the dollar is so bad, what currency is in better shape to replace it? The yen? The euro? The yuan? A mix of those sh*t currencies?

“I don’t think so…”

The SDR… the yuan… the dollar? The question is now before the jury. The only thing we know for certain is: In monetary affairs nothing happens quickly… or in a vacuum.

Let’s return to the impact of the U.S./Iran nuclear deal on the dollar.

“If the government tries enforcing the sanctions,” Jim Rickards asserts, “after backing out of the president’s deal by using the dollar payments system as leverage, it will accelerate the trend away from the dollar. The predicament they’re in today is all self-inflicted damage. The president’s warning of a ‘deal or war’ is correct, but it’s like holding a gun at your own head and saying, ‘Nobody move, or I’ll shoot!’”

All the while, the slow grind continues. Here’s what still needs to play out for the Iran accord to be abandoned…

— Congress has to pass a bill to kill the Iran deal

— President Obama needs to then veto that bill

— Then Congress has to override the president’s veto.

“My sources,” adds Jim, “say there may be 61 votes, but no one sees 67. Even still, the whole deal could get killed again if a Republican is sworn in as president 17 months from now.” As we said, grab a Snickers.

“U.S. policy is really a mess,” Mr. Rickards continues, “and our ‘allies’ are getting fed up with the on-again, off-again nature of sanctions, negotiations, etc.” As a board member of one of the lead organizations in the debate about the Iran accord, Jim’s close to the behind-the-scenes discussions underpinning headlines.  

“The bottom line on this is that the dollar is being pushed aside with or without an Iran deal defeat, but such a defeat for Obama would definitely hasten the process.”

Meanwhile, treat hard-and-fast predictions saying, “The dollar will die on [enter date here]” as suspect. “That’s not how it works,” Jim explains. “This will be a gradual process. It took 30 years for the dollar to totally replace sterling (1914-1944). That’s about the time frame the elites see for SDRs to replace dollars, starting in 2009.

“However, we expect that timeline will be greatly compressed, not by geopolitics, but by the next financial panic and global liquidity crisis, which could come at any time. That’s what sets our analysis apart from others.

“We’re not waiting for some specific announcement (China’s gold update, yuan devaluation, China to join the SDR basket, etc., etc.). We’re focused on the dynamic processes under the surface that could erupt at any time, without warning.”

Jim purposely avoided calling his second book “The Death of the Dollar.” Instead, he called it The Death of Money. “When the SDR rises,” he says, “all other forms of money (except gold) will be pushed aside, not just the dollar.”

Click here for more hysterics, boiled down to the truth, by Jim…

Cheers,

Peter Coyne
for The Daily Reckoning

P.S.  Saudi Arabia is a huge part of this discussion,” added Jim, in postface. “But they tend to work behind the scenes. They are working with China on energy deals for yuan right now. They just need somewhat greater yuan acceptance and liquidity as well as the IMF ‘seal of approval’ via SDRs. Then they will be ready to accept yuan instead of dollars for oil. That’s a bigger earthquake than Iran sanctions, but, of course, it’s related to the Iran deal because that’s what encouraged them to look away from the dollar in the first place.”

The Daily Reckoning