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There are much debates and rhetoric about potential decoupling of tax largest market in the tax from Asian market. Many of the like discussions attempt to address concerns of the Asian markets would stand strong or escape with modest effect from the recession in US. Many of these doomsayers inappropriately painted the worst economic scenario in US and boasted the robustness of Asian market which could withstand the economic recession in US by their domestic demand and subsequently decouple from the world’s largest market.

The weak economic indicators reported in the press and the corporate meltdowns have been employed to justify their arguments. The 5% unemployment rate in December, slower than expected retail sales, Citigroup and Merill Lynch’s write down of bad loans, credit crunch and others, undeniably are indicators of potential recession, which some of the doomsayers say the recession could last until the next first or second quarters. During this downturn, many emerging countries would very likely to take over the role played by US as the largest buyer in the world. Obviously these countries are China and India, and some focuses on Eurozone as the appreciating Euros increases the purchasing power.

However, the decoupling scenario is rather far fetched, at least not in this near five to ten years. Asian market as a whole, which is now being engined and propelled by China could not possibly absorb the overall Asian’s supply. Since China was admitted to WTO and its role in world production network increases, many manufacturers have shifted their operation to China to reap on the advantage of low cost and other benefits that the country offers. Most of these companies are hardly indigenous; they are owned by Taiwanese, US, Europeans, and others. It is safe to say that China is a global factory, and many of the products produced are shipped to developed countries, such as US and Europe.

The relocation to China is seldom caused by the mass market. Places except Shanghai, Hong Kong, Shenzen, and other coastal provinces, are either undeveloped or outright neglected in the course of development. Thus, the overall purchasing power of the mass population is very low. The idea that China could replace US as largest market is impossible.

Robust economic growth of China in the past decade has created concern of potential price bubbles. The growth has increased the business sentiments and potential of the economy, which has caused the inventories to build up, increase of production, positive potential has helped to buoy the demand further and the whole economy boasted a more than 10% growth in the past decade. As the result, price of property has been artificially shot up by speculation and hot money, corruption has been wide spread. Recognizing the danger of business cycle and the looming bubble burst, policies have been drawn up to curb the over exposure of the economy; control of prices of essential goods, stricter environmental regulations to curb excessive production of manufacturers, more stringent export rules, higher quality assurance and inspection on exporting products, and higher reserves required in conventional banks. These steps are being taken amid financial crisis in the US market. Expectedly, the policies are to cool the economy in the next quarter or so, and the domestic demand dynamics which were witnessed in the past decades would be reduced tremendously.

At the other front, the overall Asian markets are gripped with potential high inflation rate. Singapore, Taiwan, Malaysia are seeing their purchasing power being eroded by edging price of crude oil. The depreciation of Greenbacks has caused the price of oil expensive in these economies. The notion that domestic demand could offset the demand evaporated due to US recession is therefore not so promising. Contrasting with the positive perceptions that the markets are undergoing structural shifts and become more robust, and thus could decouple from US market, the local Governments are now face with the potential inflation ( due to price surge in oil), and since US has been the largest export market, the potential of lower external demand is looming large. In other words, the local Governments are juggling with either increase the short term rate to combat the inflation or reduce to boost local demand to cushion the US recession. Either way, the economies in the region are very much exposed to the recession due to their long history of depending on US market.

This dependence can be seen in technology sector. High number of manufacturers in the region depends on tech spending in the US market. Since the mortgage crisis, the spending has proven to be very slow or outright negative. The crisis is not confined to mortgage market, its spread is seen in manufacturing, retail, and general business. The securitization of the sub prime loans, and coupled with the grading of these securities had supported the investments. The sudden drop due to the dry up of demand, and the revelations of so many unscrupulous practices in granting of loans and investment practices have caused one to question the integrity of grading of these investment tools. The lost in sentiment is further enhanced by the evaporating asset values, which its appreciation had fueled demand in the past decades. These have caused the cut down in expansion of businesses, lower demand in retails, and most importantly the cut down in tech spending which causes a large impact on import of the gadgets from Asian markets. Thus, the demand of the core sector of Asian economies is quickly running out.

The focus is now on two other developed nations to help cushion the impact; Europe and Japan. However, Japan has been experiencing economic slow down since early 1990s. Its short term rate has been low and has raised concern of potential high price in the economy. With the expected slower demand from US market, it has been tough for the economy to raise rate in the short term. The other factor relates to the concern of business pressure on Greenback if Japan increases the short term rate. The effort could trigger higher re-purchase of Yen due to unwinding of carry trades, and put a downward pressure on dollars, thus aggravating the recession. European markets are facing high unemployment rate since relocation of manufacturers to low cost emerging markets such as Asia, and Eastern Europe. The recession and depreciation of dollar has caused huge damage to the businesses exposed to the US market but operating in Europe. Further, the idea that the continent could offset the demand drop and absorb the shocks is impossible.

In this gloomy environment, it is best that one does not predict any miracle could emerge that could absorb the goods that the region produces, or rather to debate on the possible decoupling of the markets. The most important lesson learnt from the past crisis was the evolution of new industrial structure, which is resulted from phasing out of obsolete and incompetent industries, businesses becoming more lean, and therefore, improvement of overall business environment.

John Chng at http://economicsandpolitics.blogspot.com/

“This notion that the United States is getting ready to attack Iran is simply ridiculous [...]. Having said that, all the options are on the table” (President George W. Bush, February 2005)

Who would have ever imagined it?

Forget about the Prophet Mohammed, Islam, the Koran, President Ahmadinejad and his nuclear program, Islamofascism and all the umpah-pah. The Mullahs do not like American Dollars anymore. As reported by Reuters UK (http://rtv.rtrlondon.co.uk/2006-12-18/3e56a070.html) Iran announced that it has ordered its Central Bank to start using Euros for foreign transactions, and to transform the nation’s Dollar-denominated assets held abroad into the single European currency. “The government has ordered the Central Bank to replace the Dollar with the Euro to limit the problems of the executive organs in commercial transactions,” government spokesman Gholam Hossein Elham told reporters.

Coming from OPEC’s fourth oil producer, this is a move that will undoubtedly have both deep economic reverberations and grave political consequences worldwide. It would certainly appear that rather than ‘wiping out Israel’ from the face of the planet, Iran is setting the tempo to wipe out American capitalism and influence everywhere. To understand the implications of such a move in financial affairs, one has to first revert to the importance of money in our economic systems and the effects that the ravages of inflation have over it.

Money is one of man’s most amazing inventions. Imagine the difficulty of our daily lives without those metal coins and coloured pieces of paper. To make any kind of transaction - from shopping for groceries to purchasing a real estate asset - you would have to find someone who had what you want and who wanted what you have, and then the two of you could barter. In a world with thousands of products, one would spend most of the time looking for trading partners and devoting very little time to actually earn an income. The alternative to avoid having to find trading partners would be for each and everyone of us to do a little bit of everything by ourselves.

But with money on the scene everything becomes more straightforward, simple and less time-consuming, and all of us can increase our productivity by and through specialization - that is doing what we do best, and then trade with our partners. As a direct and proximate consequence of our increased productivity, each of us can therefore become richer. It is easy to lose sight of the very basic economic point that we all owe a large part of our high living standards to the existence of money, its possession and the spending power that stems out of it.

But there is a catch: money works best when its value is stable over time. And this is nowhere more true than in international trade.

Economically speaking, the power of the American Dollar and its influence in economic and financial affairs worldwide was born during the United Nations Monetary and Financial Conference held at Bretton Wood, New Hampshire in July 1944. The Conference was attended by the delegates of all 45 allied nations directly and indirectly involved in the fight against the powers of the Axis - Nazi Germany, Imperial Japan and Fascist Italy, and their socio-economic doctrines. As a result of the Bretton Woods Conference, a system of exchange rate among different currencies was set up anchored on the American Dollar, which was made convertible to gold - the common denominator and measure of wealth worldwide. Thus, the American Dollar became de facto the reserve currency of the world, accepted and traded everywhere. This system remained in place until the early 1970’s and it allowed countries to accumulate reserves in American Dollars, as opposed to gold.

When in 1970-1971 an economically resurgent Western Europe began demanding payment for their US Dollars, as it became clear that the American Government did not have enough gold reserves to buy back all those Dollars, the US Treasury under the Nixon Administration rather than defaulting on its payment ‘de-anchored’ the Greenback - that is it severed the link between the Dollar and gold. To avoid an international collapse of the American currency in world markets, however, the US treasury had to substitute gold with another valuable commodity so as to entice foreign countries to keep their foreign reserves in Dollars and to continue accepting the American currency.

Thus in 1972-73 an iron-clad arrangement was made with Saudi Arabia to support the power of the House of Saud in exchange for accepting only U.S. Dollars for its oil. The rest of OPEC was to follow suit and also accept only American Dollars. Because the world had to buy oil from the Arab oil-producing countries, it now had the reason to hold Dollars as payment for oil. Because the world needed ever increasing quantities of oil at ever increasing oil prices, the world’s demand for Dollars could only increase. Even though Dollars could no longer be exchanged for gold, they were now exchangeable for oil. The Petrodollar was born.

In 2000, the first man who actually began demanding Euros for his oil was none other than Saddam Hussein of Iraq - and we all know what has happened to him. To be more specific, in fact, Saddam Hussein Abd al-Majid al-Tikriti (1937-2006), former President of Iraq, made two strategic mistakes, the second one of which would ultimately cost him his neck - literally.

Firstly, on August 2, 1990 he invaded Kuwait, a country very friendly with both the United Kingdom and the United States, and holding approximately ten percent of the world’s oil reserves. Saddam, furthermore, became a real threat to Saudi Arabia as well. By invading Kuwait and threatening Saudi Arabia, Saddam breached the Carter Doctrine postulated by President Jimmy Carter in 1980, which states that “[...] an attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America, and such an assault will be repelled by any means necessary, including military force.” The Carter Doctrine was later on upheld by President George H.W. Bush in 1989 with National Security Directive 26, which declares that “Access to Persian Gulf oil and the security of key friendly states in the area are vital to U.S. national security [...].” The Gulf War ensued in January 1991.

The second mistake of Saddam was to start demanding payment for his oil in Euros. At first, his demand was met with ridicule, later with neglect, but as it became clearer that he meant business the need arose to make an example of anyone who demanded payment in currencies other than U.S. Dollars. The punishment came with the worsening of the geo-political situation after the 9/11 attacks on the Twin Towers and an increased perception and worry about Saddam’s weapons of mass destruction - which he had used extensively against the Kurds and his own citizens. President Bush’s Shock-and-Awe intervention in Iraq followed, which ultimately brought about the demise of the Iraqi dictator.

Contemporary warfare has traditionally involved underlying conflicts regarding economics and resources. Today these intertwined conflicts also involve international currencies, and thus increased complexity. Current geopolitical tensions between the United States and Iran extend beyond the publicly stated concerns regarding Iran’s nuclear intentions, and likely include a proposed Iranian “petroeuro” system for oil trade - the Iranian Oil Bourse (’Bourse’ is the French word for Stock Exchange). The proposed Iranian Oil Bourse signifies that without some sort of US intervention, the Euro is going to establish a firm foothold in the international oil trade.

This is so, because the Europeans would no longer have to buy and hold Dollars in order to secure their payment for oil, but would instead pay with their own currency. The adoption of the Euro for oil transactions would provide the European currency with a reserve status that would benefit the European at the expenses of the Americans. Given U.S. foreign debt levels and trade deficit, Tehran’s objective constitutes an obvious encroachment on the Dollar supremacy in the crucial international oil markets, and America can hardly afford that to happen. It is really a case of lethal economic terrorism and financial warfare, a matter of life and death.

And speaking of economic terrorism and financial warfare, it is very interesting and worth mentioning the link between oil and Euros on one side and Iran’s nuclear programme on the other side that Gholam Hossein Elham has made during the foresaid announcement. He has stated: “They (the Westerners) should put an end to their hostilities towards our nation and should also be aware that we are capable of achieving nuclear technology through very transparent and legal methods - something that they must respect. They must not waste their time with venting hostility against this nation, otherwise they will be harmed, more so than us.”

If Iran follows up with the intention to charge Euros for its oil, the upcoming Iranian Bourse will introduce Petroeuros currency hedging in direct competition with traditional Petrodollars. More than that, in political terms, it will pit America, Israel and Sunni Islam against Iran, Syria and Shiite Islam and will fundamentally create new dynamics and competition into the biggest markets in the world - those of global oil and gas trade. One of the Federal Reserve’s nightmares may well begin to unfold if it appears that international buyers will have a choice of buying a barrel of oil for USD 60 on the NYMEX and IPE - or purchase a barrel of oil for €45 - €50 through the Iranian Bourse. In essence, America would no longer be able to expand effortlessly its debt-financing with the issuance of US Treasury bills, and the international demand and liquidity of the American Dollar would fall. This is a very good reason to go to war.

Welcome to 2007.

Luigi Frascati is a Real Estate Agent based in Vancouver, British Columbia. He holds a Bachelor Degree in Economics and maintains a weblog entitled the Real Estate Chronicle where you can find the full collection of his articles on Real Estate Economics and Finance. Luigi is associated with the Sutton Group, the largest real estate organization in Canada, and is based with Sutton-Centre Realty in Burnaby, BC.

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