The Dollar, Gold, and Oil

Although the original article has been publicly discredited by figures such as Saudi Central Bank Governor Muhammad al-Jassar and Japanese Finance Minister Hirohisa Fujiich, I find it worthwhile to discuss the claims that were made and the responses to those claims.

Supposedly, “secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.” The alternatives being discussed include the “Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council.”

What exactly does this mean? An end to dollar hegemony as we know it. One reason the USD has fared better than it would have otherwise is because of the demand associated with it. Commodities, for the most part, were and still are, traded in USD. The need for commodities results in a need for USD. But all of this is changing.

The rest of the world is beginning to realize that the USD is not a stable unit of exchange. Many individuals would argue that it never was. After all, it is fiat money.

But, what do nations such as Russia, China, Japan, and Brazil stand to gain, and what do they stand to lose? By trading commodities in alternative currencies (including their own), the demand for said currencies will increase. Increased demand for a currency strengthens the currency. A stronger currency leads to more clout in the international arena.

Unfortunately, as of July 2009, these four nations own over 50% of the United States Treasury securities. By professing a “deadline for the currency transition [of] 2018,” the nations will weaken the dollar. A weakened dollar will lead to substantial losses in their portfolio of Treasury securities, which totals nearly $2 trillion.

As such, the motive behind denying such “secret meetings” becomes apparent. The nations would like to preserve the value of their investment, not destroy it. To do so, they must walk a fine line.

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