Friday, April 4, 2008

The US Declares War on Iran

The US Declares War on Iran (Part III)
by Mark Nestmann, Nestmann Blog, 04/2008

Part I: America's Financial "Nuclear Attack" on Iran
Part II: The North Korean example

What could go wrong with America's effort to isolate Iran from the global finance system?

Lots. Soaring oil prices and a further slump in the U.S. dollar are the likely results of this policy.

Iran's Revolutionary Guards have made detailed plans to close the strategically vital Strait of Hormuz if Iran is attacked militarily. Through this strait between the Gulf of Oman and the Persian Gulf flows about 20% of global oil production; around 16 million barrels every day.

America's attack on Iran's financial system is no less real, and just as devastating, as a military attack. If the financial sanctions I described in the first two parts of this article begin to have a serious effect on Iran's economy, could Iran close the Strait of Hormuz? It almost certainly could, although it remains to be seen if it will.

If the strait is closed, for whatever reason, oil prices will soar. Some experts predict oil could reach US$200/barrel.

Since oil is priced in U.S. dollars, those higher prices will be felt most in the United States. That would be a catastrophe for the already reeling U.S. economy. But the pain would be felt worldwide, leading to political pressure on the United States to reverse its sanctions.

Even if Iran doesn't to the Strait of Hormuz, severing its international banking relationships will disrupt transport and payment for the 2.5 million barrels it exports daily. That's about 3% of global oil production. That will put further upward pressure on oil prices.

It will also put downward pressure on the U.S. dollar. Since oil is priced in dollars, oil prices and the dollar have a nearly perfect negative correlation: as oil prices rise, the dollar usually falls in value. If oil prices go to $200/barrel, the dollar will almost certainly fall beyond its all-time lows of a few weeks ago.

Another threat to the dollar is that the global financial system is beginning to insulate itself against further declines in its value. Many countries in Asia and the Mideast are selling their reserves of dollars and replacing them with foreign currencies and gold. There are serious discussions of pricing oil in euros, or even gold.

When the United States applies financial sanctions that make it more difficult to deal in dollars, it only exacerbates this trend. Despite the apparent cooperation of Europe, Japan, and China in enforcing financial sanctions against Iran, this unity may not last long, particularly if oil prices soar toward US$200/barrel.

Under the USA PATRIOT Act, the U.S. Treasury has the authority to confiscate the U.S. correspondent accounts of foreign banks. If it begins confiscating the correspondent accounts not just of Iranian banks, but of foreign banks that deal with Iran, some banks may try to disconnect from the U.S. banking system altogether.

That's a tall order, since the U.S. dollar still serves as the world's "reserve currency." But it may be possible using clearing systems in other currencies or even with an electronic version of the Malaysian gold dinar. (Former Malaysian Prime Minister Tun Dr Mahathir Mohamad has proposed that Islamic countries use the gold dinar as an alternative to the U.S. dollar in global trade and for reserves in central banks.)

The U.S. dollar has rebounded from its all-time lows of a few weeks ago. But it's still on a precipice. Blowback from America's declaration of financial war on Iran is only one more act that could launch it over the cliff.

Copyright © 2008 by Mark Nestmann

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