Monday, March 22, 2010

One of The Dollar's Multiverses: Insufferable Indifference

Love it or hate it, the U.S. dollar is still the world's premier reserve currency. The primary reason is that the United States (5% of the world's population) accounts for 20% of global GDP.  Or, you could turn the argument around and say that, being the issuer of the global reserve currency,  the U.S. can consume much more than it could otherwise.

Whichever came first, the chicken (a huge U.S. GDP) or the egg (the dollar's global  reserve status), we know for certain that a fundamental undrpinning for the "egg" is the fact that crude oil is priced in dollars.  Simple math: the world consumes some 85 million barrels of oil per day.  At current prices that's around 2.5 trillion dollars per year, or ~4% of global GDP.  Add natural gas, LPG, the value added to petroleum and gas products by refining, shipping and marketing and the entire complex easily reaches 10% of GDP.  Hydrocarbons are by far the world's single biggest business.  And that's before finance is added into the pot: trading of energy-related derivatives alone amounts to multiple trillions annually in nominal activity, doubtlessly producing significant amounts of  "real" dollars that are ultimately counted as GDP.

Then, consider the capital sunk into this business: oil and gas wells, drilling rigs and platforms, pipelines, tankers, refineries, storage tanks, service stations, the oil-fueled transportation infrastructure... I don't know if there is a comprehensive global estimate, but I bet that when it is all added up it comes second to only real estate in terms of invested capital.

Global financial supremacy is not a monolith, but a composite.  It is a mosaic of energy and currency cross-relationships that are now supposed to be threatened by the emergence of  the euro as a possible alternative to the established dollar hegemony.  But can the replacement, alone, of one fiat currency for another be the undoing of an Empire?  Of course not - after all they are just book entries.  Just as debt and money cannot create an Empire by themselves, they cannot bring it down, either.  For that to happen a paradigm shift is necessary.  Or, in more classical terms, Rome was not built in one day and didn't come crashing down in one, either.


So, what is the paradigm shift that could bring the dollar hegemony down?  No, it's not the economic parallax error  that goes by the name of China.  As the term parallax implies, that's just a shift of reference points not substance. The Chinese have even adopted the dollar for their currency in all but name, since the yuan is firmly pegged against the dollar.

Oh yes, Chimerica is a very apt name, particularly if you enjoy Graeco-Roman mythology.
    


The Mythical Chimera

A shift in the energy paradigm, however, will certainly be monumental and could spell the end of the dollar as global reserve currency.  As the world moves away from a highly centralized fossil fuel regime and adopts more distributed solar, wind, geothermal and other renewable sources, then it becomes much more likely that the dollar will lose its global fiat power. It is not Mrs. Merkel's histrionics about the euro that matter, but what goes on in Siemens, Vestas, Gamesa and Desertec.

The threat to the dollar, then, does not lie in the euro, per se, but in its marginalization via the adoption of much more modern, powerful and appropriate energy technologies.  In one quantum multiverse, one that could indeed be our own future,  no one cares about the dollar which is relegated to being the internal exchange medium for a has-been empire.  It will suffer from plain old indifference, just like no one gave a damn who was the emperor of Rome after the 3rd Century AD (does the name Avitus ring a bell? Majorian?).

15 comments:

Debra said...

Geez, what time did you post this ?? 4:00AM ?
Time to hit the hot milk bottle. Wouldn't want you to collapse with insomnia..
The problem of the dollar is one of an unholy trinity.
Dollar/reserve status intricated to the oil economy intricated to... FIAT and the idea of fiat.
(Notice that I said "intricated", and not... +. They're different. The... TRINITY tends to hang together in a very complicated way that is not a zero sum issue.)
I think you are right. The moment we start NOTICING that the Empire MAY be threatened is the moment when its decline is already well under way.
WE can't see this of course. Because WE are not in that cute omniscient place that I keep harping on. (Yeah, some of us have our soapboxes on this blog, right ?)
Wonder what form "money" is going to take when we finish mopping up after the debt destruction...

Hellasious said...

There is no problem with modern money being debt. In a sense, it always was, at least after it stopped being something useful, like grain.

The REAL issue is HOW FAST it grows.

(See, I can use CATITALS selectively too ! ;).

Bon Jour,

H.

Tiago said...

Questions, questions...

1. What will be the consequence of the printing press being used a lot, especially since part of the money ends up in the real economy????

2. Can we maintain a similar quality of life with renewable energy, or the energy density of hidrocarbons will entail a quantum leap (down!) even with an adapted society?

3. How much of renewables is really dependent on oil? ie, is the process net positive or only possible via a oil subsidy in energy terms? Producing a solar panel does consume energy...

4. One word, one big question: Nuclear?

OkieLawyer said...

Speaking of cataclysmic shifts:

The Triffin Dilemma

The dollar is not about to lose its reserve status completely. But it is set to become less “special”. In future, it will increasingly have to share its reserve status with the euro, the yen and perhaps the currencies of the other advanced economies. In time, it may even have to share its status with China’s yuan.

In fact, the whole concept of a single reserve currency (the dollar) and a principal reserve asset (U.S. Treasury bonds) is set to undergo a profound shift. Policymakers, businesses and households will in future think about and hold a whole portfolio of competing reserve currencies and assets. Multipolarity in the world of security and economic relations is set to be matched by a world with multiple reserve currencies.

Debra said...

Check out my post in the Saloon as a response to what you just wrote, Hell.
The issue of HOW FAST hides the REAL issue of...
the nature of "time" that we construct, and WHAT we base it on.
I count on (lol) you to understand the implications of this post...

Edwardo said...

Perhaps you are correct, but my view is that the primary threat to the dollar's heretofore hegemonic status isn't the pending end of the fossil fuel age so much as the very functioning of the US financial and political system itself which is now well understood (at least by powerful interests and actors operating outside US borders) as being profoundly and incorrigibly corrupt.

But even if our shores were a font of transparency and rectitude, the dollar is doomed by virtue of the fact that US finances are now saddled with intractable debt.

Having said all that about our currency regime, fiats across the globe are in a state of steady deterioration, and the best proof of that claim is in the action of gold over the last decade which, in the aggregate, has appreciated smartly against all fiat.

Thai said...

Sorry to be off topic but Ooucchhh!

To the extent it is true, I'll assume it does not apply to anyone here. ;-)

And I agree with you Tiago- it seems nuclear is our most realistic option (which I have to swallow hard to even type as the thought absolutely terrifies me).

... Talk about switching one problem for another. :-(

The problem with a number of these more distributed energies is they simply have some fundamental boundary constraints such as the solar constant, etc...

I guess we can move a lot of manufacturing to areas where the wind blows, but even then there are issues.

And Hell, if a Chinese researcher develops a drug which cures your cancer and lets you get back to work, are Americans or even you worse off if this is so and some monies travel from our economy to theirs as payment?

"Nothing great has ever been accomplished without irrational exuberance"

-- Tom Evslin

Debra said...

Okie Lawyer, "the creation of multisupport reserve currencies " ??
Euh... that is exactly what destroys the special status of a reserve currency. That writer had blinders on. He wasn't using his neurons.
Edwardo : the questionability of linking the dollar's status and performance to oil availability ?
Na. Because we are animals that hook a lot of things together, JUST LIKE OUR NEURONS, and our thoughts.
The way the financial system is functioning right now is intricated into the NATURE of our energy, oil, and its... FLUIDITY, should I say ? (Some people would say... liquidity..)
Check out my post in the Saloon about time.
If you work the web through (!) you will see that it all connects. (No conspiracy there. Unless our nervous SYSTEM is a conspiracy...)
Thai : the problem is not the green label. The problem is self righteousness and finger pointing.
PINNING it to green behavior is experimentally unethical. Green behavior is just a content. Self righteousness is an overlying structure for that content.

OkieLawyer said...

@Thai:

Read this comment in regards to your "green consumer" link:

response

And my post today over at Street Rat touches upon the subject of organic foods (which is tangentially related to the subject of that article).

Tiago said...

@Thai, your link does not surprise me at all. In fact, it is something that I've observed countless times: People take the moral high ground on X and become sloppy on something else.

I actually do not buy the idea of "moral balancing" at all. I just think that people see themselves as "more enlightened" and simply become less self-critical: They start to see themselves as models of perfection. If one is perfect, (s)he can dispense of self-criticism.

Some (most?) liberals are indeed elitist. Elitism is a big problem.

About nuclear energy... I just asked, honestly. I have not been able to form an opinion.

Thai said...

If you do come up with a reasonable one that avoids its use, I would love to hear it as I am not fond of nuclear at all.

The solar constant means we would need a surface area of at least Delaware for solar and the difficulties transporting electricity combined with the unpredictability of wind is a problem as well... not to mention the problems with manufacturing solar cells, etc...

I like the idea of bio-fuels a lot, but as this exists now it won;t work either.

A combo of many different approaches seems the most logical approach with a significant improvement in societal energy efficiency- assuming this possible- but I don't see how we can get out of at least some nuclear and nuclear simply scares me.

OkieLawyer said...

Tiago:

I am not an elitist; I'm just pretentious.

(/snark)

Tiago said...

Being an European Socialist (TM)(R), i.e. more liberal than liberals, you don't even want to know how it feels here.

I see the whole universe below my feet, man! And it looks tiny.

;)

Debra said...

Tiago...
A European socialist in the U.K. ???...
Sans commentaire...

Tiago said...

;)

Not in the sense of pro-EU-bureaucrats, mind you. More in the sense of Scandinavian social democracy. Norwegian, nowadays.

Or maybe early 20th century Iberian libertarian socialism.

;)

Still undecided