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Iranian Oil Bourse

February 27th, 2006

I got an email asking me about the Iranian Oil Bourse, which is causing great excitement among the Peak Oil crowd. Here’s my draft response. Comments appreciated.


“Bourse” is just another word for “exchange”, and the creation of one in Iran is an attempt to capture more of the economic activity associated with international oil markets and also perhaps to exert more control over oil markets.

The US gains directly from the fact that people hold US currency (since it costs almost nothing to print, but can be used by the US government to buy goods and services – this is called “seignorage”) and indirectly in terms of perceived power and influence from the fact that the $US is the dominant world currency. The switch to euros threatens both. However, the total benefits are not that great. The seignorage benefit to the US from overseas holdings of $US is between $15 billion and $50 billion per year, and the United States has many more important sources of power and influence than the $US.

There is a lot of talk, as in the Peak Oil article linked above, about how Saddam’s switch to euros led to the Iraq War. Actually, as the Iran example shows, overt decisions to switch are usually the result of bad relations with the US, not the cause. Still, this is part of a general pattern of incidents, small in themselves, where aggressive US foreign policy is exacerbating conflict over economic issues, and thereby weakening the US economy.

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  1. Terje
    March 14th, 2006 at 15:31 | #1

    Okay we are we are getting unspecific with the word money again.

    I don’t have time right to respond fully just at this moment but later I will try and decipher where you have meant “base money” and where you have meant “credit money”. Just for the record I will continue to interchange the terms “base money”, “currency” and “M0″ unless this creates any undue confusion for anybody.

    P.S. The last column on the following link is a useful historical reference.

    http://www.federalreserve.gov/releases/h3/hist/h3hist2.txt

  2. sdfc
    March 14th, 2006 at 15:38 | #2

    Despite fluctuations real GDP was 0.3% lower in Q4 1982 than it had been in Q4 1979. Over this same period annual consumer price inflation fell from 13.3% to 3.8%. Suggesting Reagan’s tax cuts first took effect in October 1981, from Q4 1981 to Q4 1982 real GDP fell 1.4%. (Contractions and expansions are rarely uniform across quarters)

    Suggesting the cuts reduced inflation by spurring economic growth in this period is nonsense.

    M0 growth was an annual 7.5% in December 1979, it unsurprisingly fell to its lowest level during this period in 1981 when policy was most restrictive, reaching 4.4% year-on-year growth in November 1981, before rising again. It was 7.5% in December 1982.

    You need to check how GDP is measured. Go to the ABS website.

    I will have to get back to you about the rest I need to earn my living.

  3. Terje Petersen
    March 14th, 2006 at 20:00 | #3

    Sdfc,

    Is the period Q4 1979 to Q4 1982 the one you wish to base this discussion on? I doubt we will find anything conclusive over such a time frame however I am happy to explore the data with you if you are happy to commit to a specific date range.

    Regards,
    Terje.

  4. sdfc
    March 15th, 2006 at 00:43 | #4

    Volker made his announcement in October 1979 that monetary policy would be used to reduce the rate of inflation. If you are unhappy with it I’m afraid there is not much I can do about it. I can’t change the dates in which events occurred.

    Also am I right in thinking that by your reasoning that disinflation or deflation due to falling aggregate demand is not a macro event but a micro event. I think your getting yourself into knots trying to justify a position that just isn’t backed up in the real world.

  5. P Long
    March 15th, 2006 at 09:29 | #5

    I am a journalist and through the years I’ve learned who are the ones who deserve the title.
    I really think Quiggin’s comments are really shallow. Sometimes people feel they need to talk about things they don’t know much about it.
    Today some Arab Central banks are tranfering reserves to Euro. It started.
    Soon the domino effect will start.
    Good try Quiggins but better study a little more about M3 report , fiat dollar, etc…

  6. Terje
    March 15th, 2006 at 09:35 | #6

    Volker made his announcement in October 1979 that monetary policy would be used to reduce the rate of inflation. If you are unhappy with it I’m afraid there is not much I can do about it.

    I am more than happy with your choice. I shall start digging up the relevant data.

    Also am I right in thinking that by your reasoning that disinflation or deflation due to falling aggregate demand is not a macro event but a micro event.

    No. Please read what I said again and if you are still stuck on my meaning I will be happy to ellaborate.

  7. Terje
    March 15th, 2006 at 10:17 | #7

    You said that:-

    “Despite fluctuations real GDP was 0.3% lower in Q4 1982 than it had been in Q4 1979.”

    Which to me means that during the period in question the economy CONTRACTED, however by such a small amount we might almost assume no change at all (0.3% is very close to 0.0%).

    At the end of Q3 1979 (ie September 1979) the US base money supply was $149,513 million. At the end of Q4 1982 (ie December 1982) the US base money supply was $180,353 million. So the base money supply expanded 20% over this period.

    Now all we need is the CPI number at the beginning and at the end of this period. Based on your figures for the rate of change in CPI my best guess (yet to be verified by actual data) is that the CPI was about 27% higher at the end of the period compared with the beginning of the period.

    I arrived at this number by inference from the data you offered. You said 13.3% change in the first year and 3.8% in the last year, and I extrapolated to assume 8% in the middle year.

    1.133 * 1.08 * 1.038 = 1.27

    ie a 27% change in the CPI price level over the period in question.

    My prefered price measure of value (ie gold) suggests that during this period the US dollar lost about 40% in value. So it also points to significant inflation.

    So in summary:-

    1. Economy contracts 0.3%.
    2. Base money supply grows 20%.
    3. CPI rises by ~27% (yet to be confirmed).

    Now I don’t see any of this as evidence to disprove what I have said about the relationship between economic activity and inflation/deflation.

    Now if somebody can actually locate the monthly CPI numbers for the period involved we could see if my 27% figure is a fair guess.

    Whilst I have said the period does not disprove anything I also don’t think it confirms anything I have said. It does not seem like a useful test period because M0 (base money) changed a lot and the change in the size of the economy was all together neglibible.

    Also changes in consumer prices have a large lag. The period preceding this had a lot of monetary turbulance (mostly inflation) and I would expect that a lot of the consumer price changes were still snaking their way through the system.

    A more useful test period would be one that was:-

    a) A bit longer.
    b) Preceded by relative price stability (to remove noise).

  8. jquiggin
    March 15th, 2006 at 10:28 | #8

    “I am a journalist and through the years I’ve learned who are the ones who deserve the title.
    I really think Quiggin’s comments are really shallow. Sometimes people feel they need to talk about things they don’t know much about it.
    Today some Arab Central banks are tranfering reserves to Euro. It started.
    Soon the domino effect will start.
    Good try Quiggins but better study a little more about M3 report , fiat dollar, etc…”

    This is the kind of comment that really annoys me.

    P Long claims expertise in economics because (s)he is a journalist (no evidence given, of course) spouts a bunch of gobbledygook which no doubt impresses the kiddies where (s)he usually hangs out, and can’t spell my name right even though it’s right there at the top of the blog. Unless you have something better to contribute than this, P Long, I suggest you take your expertise elsewhere.

  9. March 15th, 2006 at 12:12 | #9

    PrQ,
    Of course journalists know more about economics than economists. Just ask any journalist.

  10. sdfc
    March 15th, 2006 at 15:44 | #10

    Terje we are talking about disinflation aren’t we and CPI growth declined, this is called disinflation. The fact that the price level rose 27% during the period highlights just how critical it was that something was done and is just another mark in the column headed why Terje should learn to give credit where it is due. What is more if you take the 3 years to December 81 you get an increase of 38.5%, while the three years to December 83 the increase is 17.3%, see the pattern?

    Another tip for you, zero growth over a period of three years is a sign of serious economic malaise.

    I seriously don’t think we are going to get anywhere with this exchange, but I will tell you something Gold Man I am no great fan of the current monetary system and the more I read the more concerned I become, I am just not convinced that a commodity currency is the answer.
    rner

  11. Terje Petersen
    March 15th, 2006 at 23:23 | #11

    Terje we are talking about disinflation aren’t we and CPI growth declined, this is called disinflation.

    The GDP growth figure you gave was the aggregate across the entire period. There is no implication in the data that economic growth was slowing. All we have is the period aggregate. So all we can reasonable compare it to is the inflation aggregate across the period.

    If we knew the GDP growth rate month to month as well as the inflation rate month to month then we may be able to infer some causation between growth and inflation. However we don’t have such detailed information at hand for the period. If you want to impute causation from the data presented I think you are clutching at straws. However if you have more detailed data I am happy to look at it.

    Another tip for you, zero growth over a period of three years is a sign of serious economic malaise.

    And what a very fine and accurate tip it is. However I don’t see that this is relevant to what we were discussing.

  12. sdfc
    March 16th, 2006 at 00:44 | #12

    bizarre.

  13. Majorajam
    March 16th, 2006 at 04:56 | #13

    Terje,

    Not that you have to, but in case you’ve forgotten, these have yet to fetch an explanation:

    http://johnquiggin.com/index.php/archives/2006/02/27/iranian-oil-bourse/#comment-45982

    http://johnquiggin.com/index.php/archives/2006/02/27/iranian-oil-bourse/#comment-45990

    Btw, what’s the word on how I can store a link in a word?

  14. jquiggin
    March 16th, 2006 at 09:09 | #14

    “Btw, what’s the word on how I can store a link in a word?”

    Ordinary HTML will do this. You write a href =”URL” in angle brackets, then the linkword(s) then /a in angle brackets.

  15. Majorajam
    March 16th, 2006 at 10:45 | #15

    Many thanks. I am a neophyte in all things Blog (though I can find my way around a bookmark pretty ok).

  16. Terje Petersen
    March 17th, 2006 at 07:24 | #16

    Consumer prices increasing throughout the 90s on a global basis with the exception of Japan, and with the exception of 1998 in certain Asian countries. At the same time, money supply growth was rapidly outpacing real GDP growth in most developed markets. On what basis do you claim that this was a deflationary environment? Because the price of raw materials and demonetized commodities were falling?

    In short yes. But it was only really during the middle years of the 1990s and it was not everywhere. Mostly just the USA and parts of Asia.

    You have not differencitated between base money and credit money. So I will assume the former. These days money supply can grow lots faster than GDP and not be inflationary. So long as there is foreign demand for the currency then the increased supply will be okay.

    If the USA prints a lot of new dollars and buys a lot of new Yen that Japan just printed we will have a huge increase in the quantity of currency but no serious price effect. With so many currencies being reserves for eachother the game is a bit mad and the quantities don’t reflect inflation.

    This is the problem with floating fiat currencies backed by other floating fiat currencies (in the loose sence of the word) . Each new issue of dollars creates a demand for a new issue of Euros or Yen. And vise versa.

    Lets say the USA and China were the only nations on earth. And lets say that the USA wanted to devalue against the Yuan. And that China wanted to maintain a fixed peg. The USA could spend bucket loads of freshly printed dollars buying Yuan but it would not work so long as China printed bucket loads of Yuan. In the end both may remain stable against commodities and real goods whilst M0 for both nations went through the roof.

  17. Majorajam
    March 18th, 2006 at 02:20 | #17

    Terje,

    Lets say the USA and China were the only nations on earth. And lets say that the USA wanted to devalue against the Yuan. And that China wanted to maintain a fixed peg. The USA could spend bucket loads of freshly printed dollars buying Yuan but it would not work so long as China printed bucket loads of Yuan. In the end both may remain stable against commodities and real goods whilst M0 for both nations went through the roof.

    In this example of perfectly offsetting excess monetary expansions, the price level would indeed rise, and in both currencies. A currency’s exchange value with other currencies does not bear on its exchange value with goods, services, etc. Why would it?

    Getting back to the original point, if I understand you correctly you are saying that not only do commodities detect price level increases first, but that detect price level increases only. Ergo, Japan’s deflation of the beginning of this decade was actually an inflation? Ergo, the quickest path out of inflation is a discovery of new deposits of commodities or technology that increases extraction rates at existing ones?

    You are overlooking the fact that the market for a brick of gold is not fundamentally different than the market for a stick of butter. Each have demand and supply curves that determine their relative pricing, that is to say their exchange value with other goods and services. The relative growth of the money stock determines only the aggregate price level, i.e. unitizes a basket of goods.

    As that goes, a good way to get a handle on how monetary policy errs and how those errors lead to symptoms in the real economy from consumer prices to asset prices to balance of payment imbalances, is to examine credit creation and credit creation excess. On this, the Asia crisis was highly instructive- see my notes on the subject.

  18. Tom
    March 21st, 2006 at 20:13 | #18

    Did the bourse open on March 20 or what happened? I have read all the messages about it will but now it’s the 21 and still no reactions from Amerika!? Did they halt the opening? Thanks to anybody who can help out.

  19. Terje Petersen
    March 21st, 2006 at 22:39 | #19

    Getting back to the original point, if I understand you correctly you are saying that not only do commodities detect price level increases first, but that detect price level increases only. Ergo, Japan’s deflation of the beginning of this decade was actually an inflation? Ergo, the quickest path out of inflation is a discovery of new deposits of commodities or technology that increases extraction rates at existing ones?

    Not correct. That is not what I believe or have endeavoured to state. This would be like saying that the price of bread and bananas is only effected by monetary policy. Which of course they are not.

    You are overlooking the fact that the market for a brick of gold is not fundamentally different than the market for a stick of butter.

    I would counter that you are overlooking the fact that the market for a bundle of Yen is not fundamentally different than the market for a stick of butter.

    Each have demand and supply curves that determine their relative pricing, that is to say their exchange value with other goods and services.

    Exactly. If you run an inflationary policy the exchange value of your currency relative to other goods and services will change.

    The relative growth of the money stock determines only the aggregate price level, i.e. unitizes a basket of goods.

    Agree in concept. But what type of goods?

    My point is that the nominal price of many goods are not free to adjust. If you have a ten year office lease with the rent set in a contract at $1000 per month and indexed 5% per annum then a basket of such services will not tell you much at all about about the prevailing monetary policy.

    Some goods are indicative, whilst some are not. Some prices adjust rapidly in response to a change in monetary fundamentals whilst others take years to catch up.

    Moving the monetary centre is a bit like God (or a big meteor) moving the Sun a few million kilometres to the left. Some planetary bodies will move quickly to align with the new location for the centre of mass, some will be displaced and struggle to find their way back into orbit, yet others will be left to wander far from any stable orbit for many eons. If you use the position of the latter as a rough proxy for the centre of mass you will be seriously deluded, even if you attribute a lot of such wandering planets to your basket.

    To really labour the metaphor I might add that the monetary centre of mass is more like a black hole than a sun. It has a big influence on its surroundings but any movement in its position can only be indirectly inferred from its effect on other heavenly bodies. You can’t directly see the thing.

  20. Majorajam
    March 22nd, 2006 at 11:42 | #20

    Terje,

    Allow me to reintroduce the thread. I asked:

    Consumer prices increasing throughout the 90s on a global basis with the exception of Japan, and with the exception of 1998 in certain Asian countries. At the same time, money supply growth was rapidly outpacing real GDP growth in most developed markets. On what basis do you claim that this was a deflationary environment? Because the price of raw materials and demonetized commodities were falling?

    You answered:

    In short yes. But it was only really during the middle years of the 1990s and it was not everywhere. Mostly just the USA and parts of Asia.

    I replied:

    if I understand you correctly you are saying that not only do commodities detect price level increases first, but that detect price level increases only.

    As in the change in price of certain commodities are the lone determinant of the inflationary state of monetary policy. You responded:

    Not correct. That is not what I believe or have endeavoured to state.

    However, this is exactly what you have stated. The 1990′s were characterized by money supply growth well in excess of the growth of the real economy, and with a strongly positive trend in that growth differential. Simultaneously, world wide consumer prices were uniformly increasing during the period outside of Japan (and due to some intermediation implosion following the EM crisis, a few other countries in 1998). Yet, you have doggedly claimed that the period was deflationary. If not for the falling price of a few commodities during the period, on what is this claim based?

    I should point out here that the 90s are a perfect counterexample to your claim that commodities are first to detect inflation (given that they registered deflation then). A perfect counterexample that is, unless the mere fact that commodities registered price decreases at the time renders the contemporaneous monetary policy deflationary (in which case, you’ve got yourself an identity- deflation is when commodity prices go down- commodity prices go down as a result of deflation).

    I would counter that you are overlooking the fact that the market for a bundle of Yen is not fundamentally different than the market for a stick of butter.

    I am not the one bestowing special meaning to the prices set by one particular market over another. The remark precipitating this comment related to your fixation on commodities which relates to the comments above and to come. As regards, butter and Yen, while they both indeed have markets that set their prices, i.e. exchange values, one’s being money and the other’s not does make them fundamentally dissimilar. In particular, the Yen derives its value from the butter it can buy, while the converse does not hold. Another way of saying the same is that butter is not subject to the whims of people’s confidence. This line of argument however, is tending toward the metaphysical.

    Exactly. If you run an inflationary policy the exchange value of your currency relative to other goods and services will change.

    This is a non sequitur. My point was that you can price anything in terms of anything else. The relative size of the money stock determines the units assigned to the exchange value, not the exchange value.

    My point is that the nominal price of many goods are not free to adjust. If you have a ten year office lease with the rent set in a contract at $1000 per month and indexed 5% per annum then a basket of such services will not tell you much at all about about the prevailing monetary policy.

    Here you have demonstrated that a single hypothetical office lease will not detect changes to the price level (without noting that they factor into them). Even if we extend this hypothetical observation to all office leases, neigh, all commercial real estate leases (notwithstanding the large turnover in these things), that is insufficient to demonstrate that consumer prices do not detect inflation. Rather, this example smacks of a smoke screen. I indicated to you the rather large spot market in finished goods, but yet you have ignored this comment. Why should the effect of deflationary or inflationary monetary policy be felt in commodities, but not in finished goods (and btw, typically price indices are broken out by their components)?

    Some goods are indicative, whilst some are not. Some prices adjust rapidly in response to a change in monetary fundamentals whilst others take years to catch up.

    The answer is that all goods must be included with their appropriate GDP weighting to accurately measure inflation. Without such things it is impossible to differentiate between changes in the relative exchange value of goods and changes in the aggregate price level. Of course, the price level is difficult to measure and that difficulty is made worse by policy makers with an axe to grind (hedonic adjustments, et. al.). Measurement difficulty aside, that is the appropriate definition of inflation.

    Not clear on what “moving the monetary centre” is meant to refer to, but we have our plate full as it is.

  21. April 12th, 2006 at 00:30 | #21

    I think this is just a hoax that was copied over and over again.
    I colleted som facts about it in my blog:

    http://fakten.blogspot.com/2006/04/blogs-creating-news.html

  22. MEMBER OF ILLUMINATI
    May 11th, 2006 at 17:22 | #22

    ITS NOT ABOUT SEIGNORAGE. ITS ABOUT BEING ABLE TO BORROW HUGE SUMS OF MONEY AND RUN UP HUGE DEBTS AND TRADE DEFICITS WITHOUT THE DOLLAR COLLAPSING. THIS ENABLES “AMERICA” TO PRESERVE ITS ECONOMIC AND THEREBY ITS MILITARY DOMINANCE FOR THE PURPOSE OF PRIMITIVE ACCUMULATION OF RESOURCES AND THE ABILILTY TO EXTRACT MORE SURPLUS VALUE FROM THE WORLDS LABOR IN ORDER TO GROW AT A RATE THAT WILL KEEP GLOBAL CAPITALISM GOING AND THUS KEEP ALIVE OUR LONG TERM ABITIONS OF BUILDING A WORLD ECONOMIC SYSTEM FOR THE PURPOSE OF EVENTUALLY HAVING A WORLD GOVERNMENT WHICH HAS ALWAYS BEEN OUR GOAL SINCE WE CAME TO EARTH THOUSANDS OF YEARS AGO.

  23. Jake
    August 25th, 2006 at 05:55 | #23

    I think it’s a pity that people are labelling the “Oil Bourse as a casus belli” meme as a conspiracy theory. Even if it’s not the real cause (or a cause) of strife between the US and Iran, it’s just wrong, not a conspiracy theory.

    Even so, I for one, don’t discount it entirely. Devaluation of the dollar by countries diminishing their dollar reserves would indeed drive many in the govt to think that the only solution to the problem is military conflict.

    I don’t think it was the main reason for invading and occupying Iraq, but to me it seems as though it was the catalyst. The UN sanctions were due to expire in 2003 and Saddam was about to sell gobs and gobs of oil (sending the price downward) for nothing but Euros. Demand for dollars would be very low. They’d come back home and the US would be poorer on the whole. Now that we’ve invaded Iraq, oil is still sold worldwide for pretty much dollars only, and the price is through the roof.

  24. Terje (say tay-a)
    August 29th, 2006 at 08:52 | #24

    The USA seems quite capable of devaluing their own currency, and pretty pleased about it so far.

  25. Alan
    November 27th, 2006 at 21:19 | #25

    Having waded through many dozens of similar responses elsewhere, only to find no means of making a reply, I’m glad of the opportunity to speak out here. I’ll try and keep this simple.

    Governments and leaders have, throughout history, sought to debase the currency for profit. Roman emperors would reduce the gold and silver content and so on. Paper money is even easier to debase and every government does so today. In short it is a form of taxation – by printing more money (including digital credits etc etc) you literally enjoy the benefits of printing fake money. Governments do this for the exact same reason that YOU would love to be able to print your own money. For you to actually do so is “illegal”, for the government to do so is “fiscal policy”.

    America realised the whole world would need oil and basically offered to prop up Saudi Arabia in exchange for the need to use dollars to buy or even price oil. In short, instead of being backed by American gold, the dollar became backed by the rest of the world’s oil, for Saudi Arabia heads OPEC.

    If America just kept printing dollars the value of each dollar would drop and drop and soon no-one would want the thing, but because of the arrangement with OPEC the world NEEDS dollars and so the dollar is artificially “valuable”.

    However this means that America could just print the money and buy everything in existence. So all other countries have no choice but to “inflate” their own currency, just to try and keep up. They call this “pegging” to the dollar. As the US prints more money, so does every other nation. They cannot print faster, for they would devalue their own currency but if they print less, they become “poorer” compared to the print-happy Americans.

    The net result of all this is that America can literally print it’s own wealth, with the rest of the world grudgingly having to devalue their own currency just to keep up. Don’t get me wrong, every other government would love to get away with this “stealth tax” as well, but right now they have to because otherwise America would buy the entire planet with “dollars”.

    Bottom line, the American government draws much of its income from the taxation of the rest of the planet, which in every nation we call “inflation”. Even Americans find themselves paying this inflation tax, though schoolteachers will try and convince you that inflation is the fault of the “market” (which is nonesense, markets bring prices down, not up).

    If the world no longer needed dollars for oil, the world no longer needs dollars. America just doesn’t produce enough tangible goods or services to maintain anything resembling it’s current wealth, in fact even with the printing presses pumping away America is sliding ever further into debt. Even America cannot print that much money without destroying itself but is so used to “spend spend spend” that it cannot help itself.

    So yes, anything that breaks the strangle-hold on oil=dollars would VERY seriously undermine the US economy. America’s only real industry is arms, aside from that you don’t offer much, though Hollywood helps. Anyone who thinks the US is rich because you sell GM cars or burgers is kidding themselves. 5% of the world’s population, with a trade deficit, doesn’t get to consume 1/3 of the world’s output without something holding up this economic farce. That something is the *need* for dollars to buy oil, coupled to the threat of force/coup to those that dissent (see Iraq).

    There is effectively nothing holding the dollar up without the oil link, aside from threats. Hence the threats we see today against Iran. If the dollar started to drop rapidly it could easily go into free-fall, and yes, you’d see the worse crash since the 30′s, in fact possibly a great deal worse.

    The real question is, does the US economy having enough oomph to cover current spending without the petrodollar holding it up? The answer, considering your levels of debt even with the petrodollar, is “Not a hope in hell”.

    There’s nothing “kooky” about it, America is wealthy because it prints money, it only gets away with printing money because of the petrodollar, it only gets away with the petrodollar because of threats and propping up the House of Saud.

    Sweep that away and one is reminded of the cartoon characters running in thin air.

  26. Mike
    May 4th, 2008 at 04:20 | #26

    You are miss lead if you think America has more important sources of power and influnces than the dollar!
    The war in Iraq was about the Dollar and we will soon deal with Iran over the so called change to the euro verses the Dollar for oil.
    Not saying America is justified, but if we were not lead hook line and seanker by the I.R.S.
    Witch in my belief needs to be done away with as of now!
    I think you know where I’m going.

    Take care,

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