The Situation With Iran and the Strait of Hormuz
- Thread starter Pentaprism
- Start date
Black Jack Shellac
Active Member
Could Iran go back to a gold standard?
Ananda
The Bunker Group
It can if Iran wants to. But who they are going to trade with when everyone else especially major trading nation's has not using Gold Standard since Breton Woods.
If Iran used standard that nobody else uses, then it's back to what value Iran Rial will be arbitrage with. Global exchange rate system basically is a system where every currencies being valued upon based on mechanism on trading. The more your currency being traded in the market, the more stable your currency is. The valuation based on your International trade, your macro Economics stability and combination of future prospect.
The problem again is Iran accessibility to Global Market that being dominated by USD as dominance currency that every other currencies arbitrage their value as my previous post say. Again if you can't used USD (as case of Iran due to US sanction), then Iran has to trade on other mechanism that not influence by USD.
So does not matter if Iran used Gold or Black Gold, the problem is how to circulated financial payment outside Global trade market that being dominated by USD or US market. That's why European nation has to set up separate exchange mechanism to trade with Iran.. that's why China also set separate direct payment trade with Iran outside Global money market...
It will cost Iran, the European and Chinese will take more premium, but what choice Iran has, if they still want to sell their oil.
But if they used the gold standard, and gold has a dollar valuation, wouldn't they be able to use that as a price point without needing as complex of a set up? Or is there something I'm missing here?
I dont think that really solves their fundamental problem. My grunt's understanding is that global trade is basically a three step process involving the common exchange currency. If someone in Iran wants to buy something from France say, they don't pay in €, because no one in Iran has or wants €, just as no one in France has or wants rial. They pay in rial, which then gets converted to US$, then reconverted to €. The middle transaction is the one the US is using to cut Iran's trade access, even if the trade in question doesn't directly involve the US.
Commodities like gold and oil are priced in US$, but pegging currency to a commodity doesn't create an exchange mechanism. If said commodity is traded on the international markets (denominated in US$) at any point it becomes subject to sanctions, hence the need for a completely separate mechanism.
I take it that an appropriate quantity of gold as the middle component wouldn't work?
That's a straight barter system that probably would have higher transaction costs than the INSTEX mechanism already established.
Ananda
The Bunker Group
Just to add from Hone posts, there's reason why USD being called Hard Currency. Because it's a currency that can be traded extensively in Global market.
Actually Iran doesn't need Gold to traded it's oil, as oil is also a heavily traded commodity. That's why it's called black gold.
The problem is Gold or Oil are not Hard Currencies, and Financial market need Hard Currencies to traded with each other. In theory Euro, Yen, GBP and Yuan are now also consider Hard Currencies, however on Money Market their valuation also being influence to their each valuation to USD. Take the USD out of the equation, then you need another exchange mechanism. That's what Euro INSTEX coming on.
Even if the gold in question never leaves a vault and the middle conversion only takes place digitally? I'm not arguing or disagreeing, but I am curious, where does the added cost come from?
Is there a particular reason why there needs to be just one central hard currency? Or is it just a quirk of history? I.e. would it be possible for the combination of currencies to displace the dollar, either as co-equal mediums, or as some sort of an established currency basket?
Ananda
The Bunker Group
@Feanor I'll try to elaborate more on my answer in other posts. Simple answer why USD is the one Central hard currency being used today was begin in Breton Woods. When dominant trading nation's (outside Soviet Blocks) decided to used USD pegging Gold system as standard. Thus even Gold still used as standard, it's peg the value to USD make USD the 'core' currency. By 70's US tell the market they don't want to peg the USD to gold, and make currencies exchange rate basically 'floating', and most of the other major currencies basically followed. Why, cause after WW2 market used to have USD as arbritage value for other currencies to trade with each other.
In theory the other major currencies also consider Hard Currencies. However the reality core hard currency still USD, as this is the most traded currency. Can other currency take the role of this 'core' currency? Well they have tried, French and German try to used Euro as arbitrage valuation when trading with EU, China try to used Yuan, however when the trade still used Global Financial system, most of the users still trade using USD as common denominator.
Trading partners preference to USD:
1. It's easier and more convenient for them to trade on one denominator, instead has to prepare multiple denominator.
2. It's most traded currency thus the supply and exchange mechanism will be more available and relative stable on long term (compared to others).
Thus that's why China eventough has try to ask some of it's trading partners to used direct Yuan and Their respecitive currencies in trading with each other, in reality only less then 10% China's International trading used this direct Yuan exchange mechanism. The rest still used Global market which dominated by USD as arbitrage core valuation.
This perhaps also answer your question to Hone on what additional costs doing barter. Any direct bilateral exchange system whether doing other major currencies or even direct barters 'outside' Global USD dominated financial market create additional transaction costs because of less volume in trading. USD as most traded currency create less transaction costs because everyone using it. The more your Currency traded, the more efficient the transaction costs will be.
If you pay using Gold, how you are moving around your Gold as payment. Moving around Gold as payment create more costs compare using Hard Currencies to trade, even the gold is not move around (only through mediators). Those mediators is more limited in trading volume compared to global Financial market, thus they will ask more premium on their exchange service.
Compared that to using the core currency that everyone used, then the cost will be much more efficient.
When you send your payment through global market Financial system, your Bank usually has to correspond to your trading partner Bank. Say an Australian wants to trade with an Icelander, now Iceland in a small trading nation thus to send to Iceland, Australian Bank has to send the fund to major financial center like New York or London, before being send to Iceland. Because it's through Financial Centers first, it more efficient in cost due to trading volume that come in those centers.
Since USD is the most traded currency, for convenience many of the Banks in smaller Nation's only want to maintain only one or two currency in their international correspondence accounts to be efficient in their costs, and most of them maintain USD account.
If you take USD out of the equation due to US embargoes like the case of Iran, then you can used other currencies but off course the costs will be more, since you have to used other channels that not influence by USD.
So, yes you can barter using Gold, Oil or other major currencies, but you have to used separate exchange mechanism, separate transactions movement mechanism other than usual trade and Financial payment mechanism. As consequences it will cost you more on premium transaction fee. The more restricted the trading nation access (like Iran) the more premium any trading will be charged.
In the end this is the reasons why most global trading Partners still used USD cause it's the most cost effective, easy to trade thus convenience and most importantly it's relatively still what most international trade hold in relative preference.
Last edited:
I appreciate the detailed explanation, and this makes sense. I have to wonder though, there has been a definite movement by multiple countries away from the dollar. From what you say, and based on my own impression, this movement represents a very small portion of global trade, but if the trend continues, would this not lessen the benefits of the dollar as a reserve currency? I.e. the more transactions are taken out of the dollar exchange mechanism into some other form, the less efficient the dollar exchange mechanism becomes due to shrinking volume?
Ananda
The Bunker Group
If that happen, yes it will reduce the USD dominance in Global trade.
Will it happens ? I will say based on market trend, not in foreseable future. You see those movement away from USD derived on Political need and not Commercial need.
Global trade is vastly dominated by private sectors that derive their decision based on commercial need. Even China with it's big dominance SOE, still most of it's international trade run by their private sectors with commercial need.
So, for Private sectors they will only see which give them most efficient cost benefits. Trading with USD with multiple transaction instruments available, run through large Financial centers and run by relative stable and trustworthy regulators (market may not trust Trump, but market still trust Federal Reserve) provide the most cost effective way to trade.
Corporation treasurer also will not like to trade on multiple currencies (at least most corporation), it's make their international trade become more complex and complexity drove higher costs.
So, what incentive for Private corporation to reduce their USD trading ? Even China which is the second trading nation with much reserve and has political need to reduce USD dependency on it's Global trade still have difficulty to attract Commercial trade to used direct Yuan transaction (means using direct exchange rate between the trade Partner currency with Yuan).
Many Asian nation already talk to used direct transaction using their Currencies to each other without the need to arbitrage to USD, however their own corporation and private business still trade mostly through USD.
Many of the Nation that has political drive to reduce USD usage actually Nation's that right now their own currency valuation is dropping, like Turkey or Venezuela. So, they are not going to have any real effect to the Global trade since their trade is small. Even Erdogan (as example) told his countryman to dump USD in reality (from what I read the trade data) most Turkish private sectors still trading in USD.
As long as private sectors not see commercial incentive to reduce USD on their International trade, then they have no incentive to change from USD.
Don't get me wrong, the dominance of USD is not as strong as say a decade ago in global trade (especially after 2008 recession), however market still not see other major currencies as alternative as main dominance currency.
John Fedup
The Bunker Group
@Ananda ....your comment on the USN thread about the affordability of block V subs and the new Ford CVN fleets is reasonable but who in Congress will oppose the expenditures with the growing global tensions? Low interest rates and minimal concern over the current 20 trillion dollar debt I can see the USN fleet renewal (and other stuff) pushing the debt to 25 trillion. At what point does the commercial sector start to question the USD as a reserve currency. Will interest rates start to move?
My own take is that the commercial sector will start questioning the use of USD as reserve currency when the Federal Reserve does something that shows that they are no longer independent and is instead subservient to the political convenience. Because once they've shown that, people can no longer trust in the currency's stability and thus they will move to something else.
Ananda
The Bunker Group
I seconded tonnyc post..the moment Market lost confidence on Fed, they will begin to abandoning USD. The thing is, until now market still have relative more confidence to Fed compared to others big regulators like Euro Central Banks, or Japan Central Banks on stabilize market.
One of draw back on Chinese effort to make Yuan more usage in global transaction is that market still not have confidence in Chinese Central Banks to be independent from Chinese political whims. They see that Chinese Central Banks still used many 'tricks' to regulate Yuan real value. The way US administrations from Clinton, Bush, Obama and Trump accused China to manipulate Yuan real value for their competitive edge in international trading has merits. Thus market will not have good confidence to use Yuan as currency to arbitrage international exchange rate mechanism.
That's why many Democrats or even some Republican have critisised heavily on Trump's effort to coerced Federal Reserve policy say in interest rate for example. Fed independent is one of corner Stone in US economy. It will make sure USD is reliable currency that move based on market mechanism alone. After all USD is one of the most important US commodity. It represents US dominance on Global Economics mechanism.
Apologies Feanor for the late response to your question; I see Ananda has answered it in far more detail than I could have. The attached article from the Strategist highlights the ongoing dominance of the US dollar in internaional trade.
The indispensable dollar | The Strategist
The indispensable dollar | The Strategist
Last edited:
Thank you for the response. It's an interesting read if very brief. What I was trying to get at was the same concern expressed in the article, that a heavy use of sanction mechanisms by the US creates a powerful incentive for alternatives to the dollar not only as a means of bypassing sanctions in the here and now, but also as a permanent backup system.
Certainly we live in interesting times. The US dollar dominance that has held sway since Bretton Woods is under pressure, but I can't see any viable alternative at this stage. It does raise important geopolitical and geo-economic questions though, although maybe not appropriate to this page?
Last edited:
Novascotiaboy
Active Member
An article in todays Halifax Chronicle Herald, sorry cannot link, reports on the repression of Irans citizens who attempted to protest the governments decision to raise gas prices back in November. Upwards of 1500 died as a result of Khomenies edict to stop the rioters at all costs. The article stated as many as 200,000 were involved in "attacks" around the country.
For those more keenly aware of the situation can we expect to see more subversion amongst the young of the country to try and topple the regime?
For those more keenly aware of the situation can we expect to see more subversion amongst the young of the country to try and topple the regime?
Al Jazeera have a special report on it, and it doesn't make for nice reading. Basically the order is protect the regime at all costs so the gloves have come off. It's not Khomeini's edict because he's long dead, but the Supreme Leader Ayatollah Ali Khamenei, who made the edict.
I think that you would be reaching to claim that the riots are about toppling the regime. Those claims would love to be made by some of the more hawkish members of the US, Israeli & Saudi political establishments and their supporters, however in this case they're being used by the Iranian regime to justify the crackdown and most likely the justification for original cause of the petrol price rise being hiked by 200% and that's a very harsh increase in anybody's language. That's what started the riots and people are just really frustrated and very annoyed, so they are venting their pent up frustrations. However, from a political security point of view, if the regime don't clamp down quickly and efficiently, this could turn into a revolt against them. There are plenty of examples throughout history, and it would most likely result in a terrible blood-letting no matter which side succeeded.
Special Report: Iran’s leader ordered crackdown on unrest - 'Do whatever it takes to end it'
Last edited: