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Dr. Faber called the Crash of 1987, the Japanese stock market crash of 1990, and the Asia – Pacific financial crisis of 1998. As such, I tend to respect his opinions. A few months earlier, while speaking at a Dallas luncheon, Dr. Faber touched on the same topic. Because his comment was so different from what we normally hear in the world of investment advice, it was quite memorable. He said: “Today the brokerage industry does not have analysts whose specific job is to evaluate geopolitical risk. I think, over the next several years, this will change to where we will see analysts who specialize in areas such as this.” I am certainly not a geopolitical analyst. Yet, I have begun to monitor circumstances with which some of you are already familiar. With the gravity and scope of the potential effects of this situation, I feel compelled to present an orderly and balanced account. Depending on how far back one wants to look, these events have been unfolding for decades, if not longer. All of this has led us to a point where Iran has taken center stage. Dr. Krassimir Petrov, a Ph.D. from Ohio State who is currently a professor at the American University in Bulgaria, has recently completed a very informative article titled, “The Proposed Iranian Oil Bourse.” 2 This article opened my eyes to the immediacy of the tensions that have been building in the Middle East. These developments carry with them such a massive potential for detrimental change to the U.S., that “financial warfare” could be considered a fitting term. Financial warfare is not a term of my own creation. Rather, the term comes from a book, Unrestricted Warfare, which claims to be a direct translation of an original Chinese document, written by Colonels Qiao Liang and Wang Xiangsui of the People’s Liberation Army and published in China in February of 1999. The publisher notes: “Pan American Publisher’s Edition: The original translation of Unrestricted Warfare contains inconsistencies in style and spelling. Adhering to the translation as closely as possible, the editor has made changes only where necessary to clarify or to correct egregious misspellings. Numbers and text in brackets are translators’ notes.” 3 The book also notes that the original document is well known by the CIA and America’s national security establishment. In addressing various types of “unrestricted warfare” where “there are no rules,” the authors introduce “Financial War.” “Financial warfare has now officially come to war’s center stage – a stage that for thousands of years has been occupied only by soldiers and weapons, with blood and death everywhere. We believe that before long, “financial warfare” will undoubtedly be an entry in the various types of dictionaries of official military jargon.” 4 But China is neither the focus of this newsletter nor of the upcoming event in March of 2006. On March 20, 2006, a historic event will take place, which does not bode well for the reserve currency status of the U.S. dollar. On that date, Iran is scheduled to open an Oil Bourse (Exchange) that will trade in Euros. 5 As always, it is only in understanding the past that we can perceive the magnitude of this exchange. In August of 1971, Nixon took the United States off of the gold exchange standard and the last bastion of gold-based currencies, ceased. Prior to this point, foreign central banks had the ability to exchange any U.S. dollars they accumulated for gold. Because we were expanding our money supply rapidly, many central banks around the world had done just that. As such, from 1958 to 1971, our gold stock had fallen from $19 billion to $10 billion, and over the same time, U.S. liquid liabilities to foreign central banks had risen to over $60 billion. 6 Though, this is, comparatively, a pittance to the trillions we owe today, the demand, especially from France and Britain, became so strong that the United States reneged on this agreement, and the world embarked on the current free floating currency system we know today. But, the world needed something to take the place of gold as the “anchor” for currencies. Oil became this benchmark. Even though OPEC had discussed pricing oil with a basket of currencies, it would appear that America made an under the table deal with Saudi Arabia, the largest oil producer in the early 70s, to sell oil solely in dollars. 7 The rest of OPEC followed suit, and oil has been priced in dollars ever since. To this day, when oil trades on the New York Mercantile Exchange (NYMEX) or the London International Petroleum Exchange (IPE), all of the pricing is in dollars. This means that every country in the world holds U.S. dollars in order to buy or sell oil. 8 Again, if Russia, Argentina, or Iran wants to sell oil to China, India, or France, the oil is priced in U.S. dollars. Because of this, each country keeps an ample supply of dollars on hand, hence the term “reserve currency.” Needless to say, this gives the U.S. certain economic advantages. Yet, all of this is about to change. On March 20, 2006, Iran is scheduled to begin trading oil contracts on its own exchange and, you guessed it, none of the contracts will trade in U.S. dollars. Instead, they will trade in Euros. This threatens the reserve currency status of our dollar, and as such, has huge implications for our heavily indebted and fiscally unbalanced nation. The following comments from Jerome Corsi’s February 2006 article titled, “Iran, Venezuela declare war on petrodollar,” point to the fact that some OPEC countries are already divesting themselves of U.S. dollar reserves, and that China has declared this intention as well. “Venezuela and Iran have in mind a politically motivated decision to move out of foreign-exchange currency holdings in the dollar as a conscious decision to wage economic war against America. Beginning in 2003, Iran began demanding oil payment in euros, not dollars, although the oil itself was still priced in dollars. In October 2005, Venezuelan President Hugo Chavez announced that Venezuela was ready to move the country’s foreign-exchange holdings out of the dollar and into the euro. In 2004, the Switzerland-based Bank for International Settlement reported that the U.S. dollar-denominated deposits of OPEC countries fell from 75 percent of their total deposits in the third quarter of 2001 to 61.5 percent by the end of 2003. In the same period, the share of euro-denominated deposits of OPEC countries rose from 12 percent to 20 percent. OPEC member euro-denominated deposits reached 44 billion in June 2004, nearly double the 23.4 billion euros these countries held in the third quarter of 2001. In 2005, China negotiated major oil and natural-gas rights from Iran. Now under pressure of being referred to the [United Nation’s] Security Council over their nuclear program, Iran is counting on China to veto any strong move by the United States to have Iran sanctioned. China has the world’s second-largest cache of foreign-exchange currency – some $800 billion today. In January 2006, China announced an intention to reduce 75 percent of its foreign-exchange reserves currently held in the dollar. Whether we realize it or not, we are already involved in an economic war that could easily turn in to a shooting war, starting with Iran.” 9 I should make something perfectly clear. As disappointed as I am with a few of America’s dealings in an attempting to preserve our reserve currency status, I am glad that I do not live in Iran and am not naïve enough to believe that the Ayatollah Khomeini is anything close to a benevolent dictator. Since the Ayatollah Khomeini took power in 1979, the country’s economic situation has drastically worsened and their track record on human rights has become increasingly atrocious. The following comments from Congressman Curt Weldon’s Iranian contact, “Ali,” point to Iran’s abysmal economic track record. In 1975 and 1976, following an increase in oil revenues, Iran paid back all of its international debt. In 2003, even after rescheduling its debt several times, Iran’s foreign debt exceeded $20 billion. In 1979, per capita income was $2,300. In 2003, it had declined to $750. In 1979, the foreign exchange rate was $1 to 70 rials. In 2003, the rate was $1 to 8,500 rials, an increase of 1200 percent. The inflation rate is well above 250 percent per year. In 2003, Iran’s unemployment rate was around 30 percent. 10 In regards to Iran’s human rights violations, in 2004: “Scores of political prisoners, including prisoners of conscience, continued to serve prison sentences following unfair trials in previous years. At least 159 people were executed in 2004, including at least one minor. Scores of others, including at least 10 people who were under 18 at the time the crime was committed were sentenced to death. At least 36 people were sentenced to flogging. Torture continued to be routine in many prisons. The true number of those executed or subjected to corporal punishment was believed to be considerably higher. On 15 August, Atefeh Rajabi, reportedly aged 16, was hanged. She was sentenced after a grossly unfair trial. 11 If a woman does not wear her veil properly, or is caught wearing ‘vulgar’ shoes or sunglasses, she is sentenced to seventy-six lashes.” 12 It is painful to write such things, but we must realize that we are not dealing with kind leaders who are only retaliating against U.S. provocations. Many, writing about our currency issues of late, write only of U.S. grievances and omit the fact that we are dealing with a government that crushes its own citizens under a state of terrorism and oppression. Over the last three years, in seeking to understand and assess Iran as a military threat to the U.S., I have read a fair amount on the subject. In reading Petrov’s piece on the Iranian Oil Bourse, the history of the petrodollar allows us to see an angle to this conflict that was previously elusive. We are confronted with the proposition that America is capable of being the aggressor in a financial war. Now, we have to face that the fact that American leadership and Iranian leadership seem to be moving our world into a broader war. Nukes or No Nukes: That is the question The official and unofficial versions of Iran’s nuclear capabilities differ. Since geopolitical risks are a valid risk to investors, this topic is not some irrelevant discussion of war and politics. We can see the situation that has come about as the result of the U.S. domination of oil trade. Yet, some who write of U.S. dollar hegemony seem naïve in their assessment of terrorist states. While we have touched on our country’s historical mistakes, the view that the Mullahs, Iran’s religious leaders, and Mahmoud Ahmadineja, Iran’s president, are honest leaders who have no nuclear weapons is dangerous and keeps us from seeing developments in a bigger picture. As evidence of dichotomy, on one side we see the discussion of U.S. attempts to preserve its reserve currency status, and on the other side we see the discussion of Iran’s nuclear and terrorist capabilities. Indeed, Iran’s nuclear capabilities are far more advanced that many sources have led us to believe. Consider the following: In an article separate from his earlier mentioned book, William Clark notes: “The Washington Post reported that the most recent National Intelligence Estimate (NIE) of Iran’s nuclear program revealed that, ‘Iran is about a decade away from manufacturing the key ingredient for a nuclear weapon, roughly doubling the previous estimate of five years.’” 13 Timmerman describes Iran’s firing of a long-range missile, the Shahab-3, on July 21, 1998 and CIA director George Tenet’s response. “Under the watchful eyes of Russian technicians and Revolutionary Guards officers from the newly formed Missile Corps, the first Shahab-3 prototype was hoisted into a vertical position on its Mercedes launch vehicle, and the huge, liquid-fueled engine fired. Seconds later a warning flashed on the giant video screen in the war room inside Cheyenne Mountain, when U.S. Air Force Space Command early-warning satellites and long-range phased array radar picked up the launch. Later that day, photo analysts at the National Reconnaissance Office poured over the imagery. CIA director George Tenet was stunned. And angry. Just months earlier he had told a congressional panel that Iran was still ‘five to ten years away’ from developing medium-range missiles capable of reaching Israel and would not be capable of building a missile that could threaten the United States before 2010.” 14 Ron Paul, a congressman I highly respect, recently stated the following: “The administration announcement in 2001 that Iran was part of the axis of evil didn’t do much to improve the diplomatic relationship between our two countries. Recent threats over nuclear power, while ignoring the fact that they [Iran] are surrounded by countries with nuclear weapons, doesn’t seem to register with those who continue to provoke Iran. With what most Muslims perceive as our war against Islam, and this recent history, there’s little wonder why Iran might choose to harm America by undermining the dollar. Iran, like Iraq, has zero capability to attack us.” 15 Yet, Congressman Curt Weldon, whom I also highly respect, is Vice Chairman of the House Armed Service Committee. Weldon received the following communiqué from an Iranian contact, “Ali”, on April 29, 2003. “5) Iran is going to experiment with a missile in the next weeks. Iran has several missiles with a range of 3500 km. 6) I gave you a memorandum on Iran’s atom bomb program. I am trying to get you the information you asked me. As you emphasized yourself this is of utmost importance. Tehran believes firmly that with regard to its program of missiles and atomic bomb, Israel deserves no future in the region, and Iran is concentrating more and more on a second 11 September attack against the United States.” 16 Timmerman corroborates this extreme terrorist view. “Dr. Hassan Abassi was the top theoretician for the Revolutionary Guards. In the early 1980s he formulated the doctrine of export of the revolution that led to the creation of Hezbollah in Lebanon. He’d been inspiring and indoctrinating young Iranians ever since. Abassi believed the Islamic Republic of Iran had a mission to expand the Dar al Islam – the House of Islam – until Islam had conquered the world. It had been the Prophet’s mission at the birth of Islam. Imam Khomeini had made it Iran’s mission today.” 17 I believe that, whether their focus is on financial or militarily aspects, we can and must learn from those who are experts on Iran’s impact to our world. Both groups have excellent points that must be considered. If we exclude one side of the equation, we will come to skewed and incorrect conclusions. We must listen to both the financial and military sides of the discussion of Iran. In so doing, we will avoid the rhetoric of political infighting and the dualism that keeps us from seeing some of the crucial elements of this risk that we all face. The Iranian Oil Bourse may turn out to be one of the most important developments of our lifetime. Sources:
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INFORMATION Best Minds, Inc is a registered investment advisor that looks to the best minds in the world of finance and economics to seek a direction for our clients. To be a true advocate to our clients, we have found it necessary to go well beyond the norms in financial planning today. We are avid readers. In our study of the markets, we research general history, financial and economic history, fundamental and technical analysis, and mass and individual psychology. The opinions of FSU contributors do not necessarily reflect those of Financial Sense. |
