Paul Krugman doesn't buy the "oil bourse" war rational re: Iran

[WilliamPitt]

From TimesSelect:

Readers respond to Paul Krugman's Apr. 10 column, "Yes He Would"

George Whitty, Nyack, N.Y.: To what extent do you believe Iran's declared plans to open an oil exchange denominated in euros this spring factors into the Bush administration's plans for war there? And to what extent do you believe that Iraq's efforts in a similar direction had to do with Bush's subsequent invasion there? Needless to say, any change from the current system in which dollars must be purchased to buy oil would bring about enormous changes in the world dynamic.

Paul Krugman: I'm all for healthy suspicion of the Bush administration's motives; these days, yesterday's crazy conspiracy theory often turns out to be today's conventional wisdom. But this one, which has been around for a while, just isn't right, for two reasons.

First, the currency denomination of oil sales just doesn't matter very much. The U.S. derives two advantages from the special role of the U.S. dollar. First, foreign individuals hold a lot of U.S. currency — actual green stuff. This is, in effect, a zero-interest rate loan.

Second, foreign governments, especially in Asia, hold a lot of reserves in low-interest U.S. bonds, another form of cheap loan. Neither of these decisions is likely to change because oil prices are set in euros rather than dollars. So the alleged motivation isn't there.

Third, whom do you imagine is dictating U.S. foreign policy based on sophisticated economic arguments? John Snow? Karl Rove? In general, it's a bad idea to assume that people in power know what they're doing. And to imagine that this administration, of all administrations, is driven by deep economic concerns is an unlikely fantasy.

http://krugman.page.nytimes.com/

[Terran1212]

1. I'm not sure Krugman is really into the antiwar talk

He mostly deals with overt policy and good or bad for US. I'm not sure he wants to deeply investigate US motives in the Middle East to begin with.

[BurtWorm]

13. Where do you get that idea?

This Q&A was in response to a question from a reader about his column on Monday entitled "Yes He Would" which essentially argued, don't think Bush won't invade Iran, citing the Iraq experience as evidence. That was all about Bushism's motives in the Middle East.

[HamdenRice]

2. The last argument cuts both ways

Krugman said:

Third, whom do you imagine is dictating U.S. foreign policy based on sophisticated economic arguments? John Snow? Karl Rove? In general, it's a bad idea to assume that people in power know what they're doing. And to imagine that this administration, of all administrations, is driven by deep economic concerns is an unlikely fantasy.

In other words, the Bush administration would be too stupid to even think about the effect of an oil bourse on the dollar and hence the economy.

But that cuts both ways. I don't think the oil bourse is necessarily a big deal either; but the Bush administration may be stupid enough to over estimate the effect of an oil bourse on the economy and the dollar.

[KoKo]

7. Yep...third paragraph of the quote from your post..."too stupid..."

Krugman "qualifies." (and since we DU'ers know he and his Admins are "too stupid" what does this say? :eyes: )
But that cuts both ways. I don't think the oil bourse is necessarily a big deal either; but the Bush administration may be stupid enough to over estimate the effect of an oil bourse on the economy and the dollar.

[cynatnite]

14. What is an oil bourse?

I googled it, but didn't come with anything that helped explaining it.

[muriel_volestrangler]

16. A trading exchange for crude oil and oil products

'Bourse' is the French for a trading exchange (I don't know why the French term is used so often for an Iranian exchange). There are currently 2 large ones in the world - one in New York, one in London, though both quote all prices in dollars.

[SoCalDem]

3. MOST rationales fail when we talk about oil..The ONLY rationale that works

is just plain greed..in any currency...

[enid602]

4. dollar diplomacy

". . . whom do you imagine is dictating U.S. foreign policy based on sophisticated economic arguments?" What an elegant way to describe dollar diplomacy.

[cliss]

5. I'm going to disagree with Prof. Krugman

on the currency argument. Krugman doesn't seem to feel there is any difference between Petrodollars and PetroEuros. There is a huge difference.

The fact that the US has all oil purchases in petrodollars means we get to be the loan shark of the world. Someone pointed out that we derive SO much benefit from it, in fact, that our oil is essentially free. The rest of the world get stuck holding the bag.

Why do they hold the bag?

Argumenty #1 Look at our foreign trade balance. It's been off kilter for about 30 years on and off. After Viet Nam, we went from a net creditor nation to a net debtor nation. That growing bigger, every year.

How is it possible that a country can keep this up for SO LONG, without going broke? Answer = our currency hegemony.

Look at how the dollar has been going down in value these past few years. The countries that have big dollar holdings (Japan, China, Saudi Arabia) get to watch their portfolios go DOWN in value. A year later, their holdings are worth less. Of course they are pissed about this.

Argument #2: Trading in PetroEuros would have a devastating effect on the dollar. Saddam Hussein started trading in Euros in 2002. According to rumour, he made about $452 million in currency trading.

Krugman is wrong. It's about the only thing keeping our economy going right now. We're bankrupt.

[lastliberalintexas]

6. I think Hussein started trading in Euros in 2000

Or maybe it was that the UN approved Iraq's switch to the Euro in 2000?

I agree with you. Normally I think Krugman is spot on, but I think he's ignoring the elephant in the room here.

[unblock]

10. it's more mouse than elephant

not saying it's nothing, just that it's small compared to other issues.

eventually oil is likely to be traded in euros anyway, i think it's just a matter of time.

when the saudis finally change to euros, the same banana republicans will say that it's not big deal or even claim that it's in america's best interests.

[Neil Lisst]

8. I've never bought that rationale, either. IMHO, it's bogus.

The reasons Bush has gone and will continue to go to war are completely unconnected from whether oil is purchased in dollars or Euros.

[Imperialism Inc.]

9. Krugman would certainly know.

Though I would say that "Neither of these decisions is likely to change because oil prices are set in euros rather than dollars." seems to be a subjective judgment.

I wish he would explain why he feels that is the case. Why wouldn't foreign governments be more inclined to keep euros and euro-bonds? Isn't the reason for keeping US bonds and dollars as a buffer against changing exchange rates ,since dollars will eventually be needed to buy oil? If they could use Euros too and guessed that the Euro would be improving relative to the dollar, it seems like it would be a smart move to switch holdings to Euros. Which seems like it would indeed have an effect on how strong the dollar is.

[unblock]

11. as long as the u.s. is the largest economy

and maintainer the largest and most liquid bond market in the world, people will invest in the u.s. and hold dollars and dollar-denominated currency and investments.


now, if the u.s. were to start defaulting on its debt, or permit rampant inflation to erode those investments, THAT would turn foreign investors away.

[KoKo]

12. Thanks for bringing this up....btw

DU Marketeer's sight discusses this all the time over in LBN..Ozy's post that's our daily "fix."

I did read a couple of articles lately saying to not pay attention to the "Bourse" argument. But many of us (as Krugman acknowledges) felt that that was one of the main reasons that BushBots/Neo/Con's and Business Interests fought so hard to get us into Iraq. That Saddam was going to go to Euro's to price oil. It was the "threat" on top of Bush's vendetta that was the "hidden reason" that the Business interests don't want to admit to.

It's possible Krugman really feals that this is a "Red Herring" or he's trying to keep the conversation on what the "Public" might accept. And most Americans don't get what the big deal would be about Oil priced in Euro's instead of dollars might mean for us.

Krugman probably is steering the dialog...but OTH....he might have his own interests ....not saying ANYTHING sinister about his interests, but just that he wants the subject to stay on Bush's incompetence rather than getting off on a tangent.

He also would make a great Secretary of the Treasury in a new Dem Administration.....lots of considerations there.

I LOVE KRUGMAN!!!! (just so you don't get the wrong idea about my post. I just believe he is as pragmatic as the best of them.)

Nice post...btw...for a topic that doesn't get much discussion here, usually except with Ozy's "Daily Feature," here on DU. Thanks...

[muriel_volestrangler]

15. Back in February, I tried an comparison of oil and currency trading

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=102&topic_id=2105616&mesg_id=2107611

$2 billion worth of oil is traded each day in open markets; $1500 billion is traded each day on the currency markets. While a lot of the currency trading is speculation, I reckoned 8% was a high estimate of how much 'real' world trade is in the oil markets. Given that huge currency market which allows oil purchasers and sellers to convert between dollars and euros (or yen or whatever) with little loss, I think Krugman is right - pricing oil in euros in one new market is not going to hurt the dollar significantly.