Max Keiser discusses the real estate collapse in Dubai. The conclusion that can be drawn from his analysis: in the land of the blind, the one- eyed man is King:
Keiser posits the possibility of a Persian Gulf states’ common currency partially backed by gold, even suggesting that this was behind some of the gold purchases by central banks and the general increase in gold price over the past few months. I disagree with the gold- currency concept but gold- price inflation relative to the punk dollar is valid.
The Gulf states long- running efforts to create a currency union have suggested various pegs, generally a dollar, euro or basket of currencies. The debt bomb exploding in Dubai renders any potential currency union much less certain.
The problem confronting the union has been the inflation aftershocks from last year’s oil price spike followed by the consequent collapse in oil prices and demand. Dubai’s implosion is a part of the long running currency/credit inflation/deflation piece.
The strains are a consequence of large flows of currencies into Gulf state’s economies as a result of near- $150 oil. This caused severe difficulties in countries where assets weren’t available to purchase as inflation hedges such as Iran, Iraq, Qatar and to some degree Saudi Arabia. Inflation effects were amplified by local currency pegs to the dollar and euro. Countries frantically sterilized dollars and released massive amounts of the local Ducats into circulation to keep their own oil dependent consumption economies from succumbing to price- induced rigor mortis. In the Emirates and Dubai, the currency flood forced prices of villas and islands shaped like palm trees to the stratosphere. In Iran, the same flood sparked headline price inflation leading to civil unrest. There are no palm tree shaped islands to buy in Iran with excess rials, only necessities such as food. Economic misery metastasized and discontent emerged from the background to become a direct challenge to the so- called Islamic government. The establishment responded with a coup by Revolutionary Guards radicals within that government.
Yemen, a Gulf nation with little oil and no investment assets fell deeper into the grip of fundamentalist insurrection. The distortions make a common currency less and less likely as the asset ‘have nots’ would be a very great burden on the ‘haves’. A common currency would tend to cement the status quo in the region. Currency winners such as UAE and Saudia would gain an instant ‘family’ to support of fractious credit inebriates, much like those habitués of McSorley’s saloon pictured by John Sloan.
To set another example, a currency union crisis is emergent in Greece, whose unpayable and marginally serviceable deficits are poised to wreck the euro union, regardless of (in)actions taken. Greece cannot print its own currency to service its own debts but remains an appendage of Germany’s continued willingness to forgive its balance sheet excesses. The asset value collapse in Dubai similarly poses economic hazards for Abu Dhabi; Dubai loans are denominated in local currency (Dirhams) but largely payable to entities outside of Dubai. The dirham is the currency for all the individual Emirates, the UAE is a de facto currency union. As Dubai falls further into default status leaving more loans uncollectable, it becomes a ‘hole’ in the Emirates’ currency donut.
Currency unions are the tactic of resource consumers, not producers. The resource being consumed in the putative Gulf union is credit. Currency leaves nowhere to hide when the credit runs out just as the Euro demonstrates its uselessness when the oil runs out.
Keiser’s suggestion of a partial- gold monetary regime by oil producers poses an interesting question: how much of the gold price rise in recent months has been the result of a three- way hedge between the (declining) dollar, (increasing) gold and (steady) oil? If oil producers are using oil proceeds to buy equivalent amounts of gold at a fixed ratio, gold price increases would stand in as increases in oil prices while those prices themselves remained firm.
Since both oil and gold are both ‘short- dollar’ trades, the arbitrage between oil and gold – sell oil @ ‘X’ price and buy gold – would be unwound if the US dollar increased in value.
The dollar is increasing in value. It remains to be seen whether this is the longer term trend. The ongoing market call here @ Economic Undertow blog has been to close out all dollar- short positions, the smart money already has done so. The market top was probably $82 oil at which case the dollar became notably ‘hard’ relative to dollar/gold and dollar/other currencies. $80 is the new $147. The dollar world – the entire world – has become that much poorer in one year.
Also becoming clear is the world’s power dynamic; Saudi Arabia, with its last remaining spare production capacity, determines the direction of world commerce. It has driven this commerce into a corner. Neither the markets, nor Wall Street, nor the central banks nor Washington policy makers can effect the direction of commerce. Saudia holds the price of oil at a certain dollar price level – below $90 a barrel – in order to ‘prevent economic decline’; the resulting oil/dollar peg is the catalyst for an economic decline by casting the dollar as the hardest of currencies! The alternative Saudi strategy of letting the dollar sink sink in value relative to oil would cause another ‘spike’ and immediate collapse in demand … albeit at a price level much lower than last year’s.
Damned if you do, damned if you don’t. The takeaway is the peril of the US handing dollar sovereignty to its resource suppliers. Economists focus on China’s growth and accompanying currency hegemony via its dollar peg. Saudi Arabia is China … writ large.
Keiser mentions the “10 percent decline over three years” in oil production from Saudi Arabia’s Ghawar oil field and uses the term ‘Peak Oil’ in a sentence. He gets it!
In the universe of silly and inconsequential currencies issued by silly and inconsequential central banks, governments and corrupt finance, the one- eyed dollar is still the King.