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Some news stories are screamed in 100 headlines in 100 different newspapers and media outlets.  This one however is so quiet it's almost a whisper, yet it may be one of the biggest stories next year.

It all begins here, with a blurb so tiny that I'll reprint the entire thing.  From the Federal Reserve's website, November 10, 2005:

On March 23, 2006, the Board of Governors of the Federal Reserve System will cease publication of the M3 monetary aggregate. The Board will also cease publishing the following components: large-denomination time deposits, repurchase agreements (RPs), and Eurodollars. The Board will continue to publish institutional money market mutual funds as a memorandum item in this release.

To fully understand how the "Federal Reserve" is neither federal nor a reserve of anything of value, see my full-length story here.

But what is the M3? And how is it relevant?

The Fed collects data on how much money is in circulation, where it's being stored (as cash, as stocks, etc) and prints these statistics on a quarterly basis.  These are the "M" series of reports.

M0 (M Zero) is simply how much physical American money is in circulation, both coins and bank notes.  M1 is M0 plus all the money that's in a bank that someone could withdraw immediately (usually known as "checking" accounts).  M2 is M1 plus other types of accounts, including money markets and smaller CDs (under $100,000).<br</p>

M3, the one that will no longer be printed, is M2 plus Eurodollars.  While Eurodollars sounds like plastic money used at EuroDisney, it actually refers to dollars being held in non-American banks (originally most dollars held overseas were in European banks, but "eurodollars" could just as easily be held in China).

I for instance have some "eurodollars" since I live in Romania and have a few bucks in the local bank.  But 99% of American money being held outside its borders are actually under the control of central banks and large institutions.

Why does this matter?  Why would keeping track of how many dollars are being held overseas matter to anyone except perhaps some bankers?

The answer has to do with oil.  Texas tea.  Black gold.  The stuff which wars are fought over, and alliances made to crush human rights in order to obtain a steady supply of it.

While oil can be drilled and refined and transported anywhere, there's only two places where it can be officially purchased.  One is in New York City on the NYMEX stock exchange and the other in London on the IPE exchange.  I should mention that London's IPE is actually now owned by an American country named "ICE".

This doesn't mean that oil actually has to be transferred from say, Saudi Arabia, to New York where it sits in a real barrel until it's sold to a customer in Japan.  What it does mean however is that oil is traded like any commodity, via these two (and ONLY these two) stock exchanges.  There are also "futures" or promises of future oil deliveries sold and traded as well.

So the customer in Japan, perhaps a large oil refinery company, buys the oil "shares" via one of the two exchanges from one of the oil owners, a company such as ExxonMobil or Saudi Arabia's ARAMCO.  And while the oil itself never actually gets to London or New York, all the money involved flows through those two cities.  And every single barrel of oil is bought and sold in American dollars.

This means that every single country which wishes to buy oil has to own dollars to do it.  Since these dollars are held overseas, they are referred to as Eurodollars, although once again they don't have to be in Europe.  A dollar in China is a dollar in America too - they aren't valued any differently.

The world sells and buys billions of barrels of oil per day, and every single one of those billions is in the form of an American dollar.  The effect of this is that every single country in the world which holds large reserves of dollars (for the purpose of buying oil) is essentially propping up the American economy on a huge scale.

If you read my full-length article on the dollar, you will know it's not worth anything of intrinsic value.  It isn't backed by gold, or even by the American government.  It's simply a piece of paper (or blip on a screen) that everyone "believes" has worth.  So a country like Saudi Arabia ends up selling their tangible resource (oil) in exchange for billions of pieces of green paper (dollars).

Those little pieces of green paper, in order to make them worth anything, must then be traded for something of value.  That could be anything from food to cars to high-tech weaponry.

Think of it this way.  Imagine that the world was one very large casino.  Players could trade in oil or food or electronic equipment for chips that are manufactured and designed by the casino itself.  The chips aren't worth anything by themselves, as they're just painted pieces of plastic.  But for any player to cash out, they need to redeem the chips for tangible goods made by the casino, at the rate that the casino sets.  If you swap "casino chips" for "dollars", that's a pretty good way to understand how the system works.

Another way to think of it is that every drop of oil is worth a portion of a dollar, meaning oil is dollars and vice versa.  Which means that all the vast wealth that is oil is in effect, also adding that wealth to the United States.

So back to the Fed and their decision to stop reporting the holdings of dollars overseas.  Why does that matter?

There is a lot of speculation out there, but one good guess is that Spring 2006 is when Iran's oil bourse will debut.

I wrote an entire article about it which you can find here but here is an excerpt:

Iran is a member of OPEC, which currently restricts all foreign sales to the American dollar. So is there any way for Iran to start selling its oil without having to resort to the currency of its foe?

The answer is close to completion and yet I've seen almost no mention of it in the American mainstream media. If it wasn't for the trade journals, I'd never even have heard of what Iran has planned.

In June 2004, Iran announced it was creating an oil bourse. The word "bourse" is a French word which means "exchange" and refers to an international market exchange where oil can be traded. Currently the only two oil bourses are in London and New York.

Should Iran's oil bourse be successful and sales be denominated in Euros, this will induce hedging of the Euro versus the dollar and fundamentally alter the prices of oil. Some reports show that both China and Russia, large trading partners with Iran, have begun to increasing their holdings of Euros.

Iran had originally scheduled to open its bourse (or stock exchange where oil could be sold and bought in Euros) in 2005.  That obviously hasn't happened, but now the date is set for Spring 2006.  Exactly when the Fed says it will stop printing statistics of how many dollars are in existance overseas.  In fact, just this week the Iranian government has issued preliminary licenses to trade on that bourse.

What's not well known is that Saddam Hussein decided to switch from selling Iraq's oil in dollars to Euros in November 2000.  This was not widely reported.  At the time, Iraq's oil sales were limited and were under UN supervision (as part of the "Oil for Food" program) so the sale in Euros did not have a major impact.

According to the Ithaca News, one of the top 10 stories that the press should've reported in 2005 but didn't was Iran's oil bourse:

The Bush administration has been paying a lot more attention to Iran recently. Part of that interest is clearly Iran's nuclear program - but there may be more to the story. One bit of news that hasn't received the public vetting it merits is Iran's declared intent to open an international oil exchange market, or "bourse."

Not only would the new entity compete against the New York Mercantile Exchange and London's International Petroleum Exchange (both owned by American corporations), but it would also ignite international oil trading in euros.

"A shift away from U.S. dollars to euros in the oil market would cause the demand for petrodollars to drop, perhaps causing the value of the dollar to plummet," Brian Miller and Celeste Vogler of Project Censored wrote in Censored 2006.

"Russia, Venezuela, and some members of OPEC have expressed interest in moving towards a petroeuro system," he said. And it isn't entirely implausible that China, which is "the world's second largest holder of U.S. currency reserves," might eventually follow suit.

"Barring a U.S. attack, it appears imminent that Iran's euro-dominated oil bourse will open in March, 2006," Miller and Vogler continued. "Logically, the most appropriate US strategy is compromise with the EU and OPEC towards a dual-currency system for international oil trades."

I'm not enough of an economist to be able to predict the impact on the removal of the dollar as the sole currency for the purchase of oil, but there are plenty of experts who predict some pretty scary things, the least of which is a massive destabilization of the American economy.

What's interesting is that plenty of people will tell you that Iran's bourse is of no threat, and not even financially viable.  This however reminds me of a Radio Free Europe story on Saddam Hussein's move back in 2000:

Iraq is going ahead with its plans to stop using the U.S. dollar in its oil business in spite of warnings the move makes no financial sense.

Baghdad this week insisted on and received UN approval to sell oil through the oil-for-food program for euros only after 6 November. Iraq had threatened to suspend all oil exports -- about 5 percent of the world's total -- if the body turned down the request.

The move comes despite repeated cautions that Baghdad's departure from the oil industry standard of the dollar will cost the country millions in currency conversion fees. UN officials have said Iraq will have to reduce the price of its crude oil by about 10 cents a barrel in order to compensate buyers for the additional costs.

But Saddam Hussein profited handsomely on the conversion, especially because the Euro rose approximately 17% in value.  The Euro, which at the time was 82 cents to the dollar, is now worth about $1.25 and could easily rise if its value becomes connected to oil on a large scale.

As I've written about extensively, there are plenty of reasons for the Iranian and American government to be at loggerheads.  They certainly represent wildly different political ambitions and they will clash for a number of different reasons, not solely due to the threat of selling oil for euros.

That being said, it does seem ominous that the Fed wants to stop printing the statistics of how many dollars are being held overseas precisely when those amounts may go down dramatically.  So far this story has been restricted to a few financial websites and "tinfoil hat" locations but definitely needs to be brought into the mainstream so it can be analyzed and debated.

For a more financially-based interpretation of the Fed's ending of the M3, see here, including this:

M3 is very important. Indeed of the Fed's monetary numbers only M3 was of major importance and in other G7 countries we also focus on M3 including our own Bank of Canada. No word that they intend to follow. So why are they dropping M3? Well we have seen nothing to tell us why we only know they are doing it. Oh it's not that the numbers will completely disappear. For those that wish to take the time they can pore through the Flow of Funds accounts (released quarterly as Z.1 release and the H.8 bulletin released weekly for commercial banks) and piece together the former M3. Painstaking, but that is not the way it is supposed to be. European Central Bankers put great stead in M3 so why has the Fed after all these years decided to cease publication?

Some of the reasons we have seen floated around are as follows:

  • History has shown that only failing economies e.g. Soviet Union keep data secret (Financial Sense - Toni Straka - Unpleasant M3 Trend, November 12, 2005). An interesting premise and a theme we saw woven amongst a number of writers is that they have something to hide. The claim is that the Fed should be transparent and by not publishing the number the Fed now lacks transparency.

  • The end of publishing of M3 in March 2006 coincides with the start of the Iranian Oil Bourse. The premise here is that the with the oil bourse trading in Euros there will be a rush out of US$ into Euros and that M3 could drop sharply. A sharp drop in M3 would of course presage a recession as falling M3 is a characteristic of weak economic periods.

  • M3 is a measure of inflation in the economy. A somewhat unproven rule of thumb is GDP + inflation = M3. Will be able to properly measure inflation going forward if we don't know what M3 really is.

  • We are about to enter a period of hyperinflation and by eliminating M3 we will not know how much liquidity the Fed is pumping into the system. Remember the Fed doesn't really print money it is the banking system that expands money supply. But the Fed influences it through open market operations. We will have to watch daily Fed repo action very carefully irrespective of whether they are going to publish Repos (RPs) as noted in the bulletin above. The Fed doing repos puts money into the system and the Fed doing reverse repos takes money out of the system. Of course as well this is the exact opposite of the collapse in M3 premised with the oil bourse above.

  • Further on the theme above a period of hyperinflation would occur as the Fed tries to save us from a collapsing housing market and softer consumer demand. The Fed adds more and more liquidity to the system to stave off a sharp economic decline. By not publishing Repos (RPs) as noticed in their bulletin above the Fed again is hiding what they do on a day to day basis. This will make it difficult for both currency traders and equity traders to know what the Fed is up to.

  • The conclusion is that the Federal Reserve will be hiding a debasement of the US$.

All of the above are quite troubling.  And that's not the words of any kook, but from an experienced industry insider.

The U.S. has certainly interfered in Iranian politics before, overthrowing an elected government and installing a dictator, all in the name of oil.  And it certainly has been making lots of rumbling noises about removing the government.  From this week:

Bill Frist, the leader of the Republican majority in the US Senate, has called for action against Iran before it is too late.

Of course most of the saber-rattling is over Iran's nuclear program and the word "bourse" is never mentioned.  But the IAEA has consistently stated that Iran is in full compliance with its regulations and the conditions of the Nuclear Non-Proliferation Treaty.  That doesn't negate Iran's political alignment and support for terrorism, but their nuclear energy program is hardly the threat it's made out to be.

Only time will tell whether regime change is in the cards for Iran, especially at the hands of the United States.  But the Fed's quiet decision to no longer print the M3 is definitely quite ominous.

This is cross-posted from Flogging the Simian

Peace

Originally posted to Soj on Tue Dec 27, 2005 at 08:57 AM PST.

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Comment Preferences

  •  Have you been reading the news (none)
    About Russia and OPEC?

    Russia will now be having annual meetings with OPEC and is trying to force the door to the G-8 open to  China, India, and Brazil.

    Is this a BRIC through the window of the G-8's grip on the world economy?  Is Russia going to join OPEC?

  •  No, no, Soj, no! (4.00)
    Your points about the linkage between the value of the dollar and oil are well made, and the fact that the Fed has stopped publishing M3 data is indeed strange, but the Iranian exchange has nothing to do with it.

    The Iranian exchange will NOT work because nobody will trade on it:

    • traders need a common currency to work together. Once they've set on one, it's really hard to make them change - hence the fact that a number of commodities are still traded in pound sterling despite the fact that the UK hasn't been the main market for quite a bit of time. The existence of a standard is more important that which one it is. Cf the dominance of Windows as an operating system: it's used because it's used. To switch, you need everybody to switch at the same time. Only a monopolist (or a monopsonist) can force that, and Iran is far from being one;

    • in addition, the oil market is not just about oil, today it is about all the financial instruments derived from oil - term sales, derivatives, structured products, etc... The same constraints as above apply to these markets, which are even more diverse and globalised than the oil markets. Also traders have all their references, price histories, and standard trading instruments based on the dollar. To change all this, again, would require massive effort and coordination (remember how much effort it took to switch to the euro in 1999);

    • the other thing you need to have a market is a stable and trustworthy regulatory and legal system. People will not go trade in Iran because the risks or abitrary interventions and meddling are too high. The euro can be an alternative to the dollar as a reserve currency because European rule of law and regulation is seen as acceptable, and the currency is backed by a real economy, but Iran stands no chance to impose any switch of any kind for trade, financial instruments or anything else.

    Please forget these ideas, they are totally cut from the reality of financial markets.

    In the long run, we're all dead (Keynes)
    Read more on the European Tribune - bringing dKos to Europe

    by Jerome a Paris on Tue Dec 27, 2005 at 09:12:13 AM PST

    •  Don't be suprised (4.00)
      While Iran would be taking a risk, I can see other countries going to this pretty easily.  I would think that Asian countries would be eager to do business directly with the Iranians rather than going through the U.S., I could see nations like Venezuela being one of the first Latin American oil-producing countries to use it at least partially.  So while I agree with you that there isn't an overwhelming evidence that this could work, it's not as unlikely as you seem to think.
      •  It's NOT going to happen (4.00)
        Even if all of OPEC got together to push it, it would not happen.

        Nobody will trust Iran (or any other OPEC country, for that matter) as a fair regulator of contracts.

        Nobody will want to switch to another currency unless everybody else does, and a minority of market participants will not trigger it (and believe me, the selles of physical oil are only a minority of the market).

        Iran cannot unwind all the existing positions on the market, and thus they will continue.

        In the long run, we're all dead (Keynes)
        Read more on the European Tribune - bringing dKos to Europe

        by Jerome a Paris on Tue Dec 27, 2005 at 09:24:53 AM PST

        [ Parent ]

        •  There will be significant arbitrage opportunities (none)
          The buy/sell contracts on the two exchanges will be of different price.

          If there is a profit to be had, someone will make it, and unless this market is deemed 'illegal' it will happen.

          Capitalism is beautiful, is it not?

          Russ Feingold: steel balls and a heart of gold. On the down side, it makes air travel diffcult.

          by Heartcutter on Tue Dec 27, 2005 at 09:44:10 AM PST

          [ Parent ]

          •  Doubt it (none)
            How does one arbitrage between paper markets?

            You can trade the spread perhaps, but the two markets settle separately and there's just no way the Iranians are going to offer a physical delivery FOB the Persian Gulf to whoever ends up with the contracts at expiry with free reign to take them whereever they please.  NFW.

            •  While it may not be a powerhouse market (none)
              iran's plans do in some respects seem as a 'threat' to 'murka as the bu$hCo oilmen see it, and thus will require an 'intervention'

              But i do think it will be somewhat popular, if only among muslim nations who do not want to trade in dollars anymore (and who represent about 50-60% of all oil supply).

              So it seems that China and it's vast holdings of US dollars (and dollar-denominated holdings like OUR DEBT) could be the butterfly that sets this chaos in motion.

              Seeing as how a successful Iranian oil market could cause China's dollar denominated-assets to potentially decrease in value (due to increased demand for euro's in order to trade on this new market) some major selling pressue on the dollar due to the Chinese unloading our currency (AND DEBT) could result in a spike of interest rates, a crash of the value of our dollar AND possibly a major spike in the price of OIL, denominated by an already over-valued (relative to the dollar) Euro.

              A nightmare scenario, yes but only IF their market is a success.  Time will tell of course, but I would imagine that other nations like Venezuela, and now Bolivia, would be interested in trading THEIR oil using the Euro instead of the dollar.  Possibly even some European/nordic nations such as Iceland, Sweeden and others with some oil production could also take notice since they are directly affected by the Euro and the European market.

              As for arbitrage, it's so long to get into but basically the price of oil in Dollars fluctuates.  It also fluctuates in terms of the Euro but it's STILL a barrel of oil worth SOMETHING.

              If it falls dramatically in dolllar terms and the dollar's value relative to the Euro falls by a greater amount, that difference between the inherent currency-denominated value of that barrel of oil and it's "market value" on the exchange could provide a possible profit opportunity to either a buyer or a seller...IF you take advantage of it before the "market" realizes this opportunity and also acts on it, pushing the price "back" to it's "normal level"
              The gall of Iran to keep all of our natural gas under their soil.

              •  sorry, can't agree at all (none)
                You are making a bunch of assumptions.

                1. that the muslim countries prefer euros to dollars.  no sign of that.  The ones with large forex reserves are not dumping dollars that I've heard of.  They have diverse holdings now and I doubt they'll exclude investments in the largest economy on earth.

                2.  What Muslim countries are serious oil importers? Few other than perhaps Egypt.  The bulk of Muslim oil producing nations oil flows to the EU, USA, Japan etc.  This crowd isn't going to rush to trade in Iran on an easily manipulated market.  same applies to the Scandis, they sell a lot to the US.  

                3. the the Iranian oil bourse is anything beyond a figment of some Iranian bureaucrats imagination.  I can't find any details at all as to how it would work.  Until they at least come out with some framework proposal, they're just jerking us all off.

                There is no hard evidence behind the idea that stopping oil trade in dollars would make the dollar tumble in value.  Unless the holders of US denominated instruments overseas dump them and stop buying stuff from the US or buying our bonds, what difference does it make?  

                This whole arguement sounds like a great big, tin hat, boyIwishtheUSDwouldgethammeredsoBushwillsweat wet dream.  Sorry to be rude, but I don't see any real data or even a coherent argument as to why the butterfly's wingbeat will cause the US to crash rather than any other wild scenario.

                as for:

                As for arbitrage, it's so long to get into but basically the price of oil in Dollars fluctuates.  It also fluctuates in terms of the Euro but it's STILL a barrel of oil worth SOMETHING......

                you lost me.  I used to arb oil for a living for 10 years.  I wouldn't have cared what currency you started me with.  I'd have just gotten a quote from the boys over the next aisle on how to flip in/out of whatever currency I needed to play.  What you appear to be describing is a market call on oil plus a market call on currency.  No need to play them together unless you just want to.  Have you ever traded this kind of stuff or are you fingerpainting?

        •  I was hoping Jerome would comment (none)
          Glad to read a comment from you.  I never know how to judge these articles until I hear from you or bondad.  

          Thanks!  

        •  OKAY...... (none)
          Well, how did Iraq pull off their conversion to euros even while their country was under military occupation (no-fly zones) for 10 years?  And who says that Saudia Arabia isn't just chafing for some leverage against us to balance the playing field in the middle-east?  Do you really think they're that happy with the US, and its support of Israel?   Isn't SA the home of Bin Laden?   Weren't 15 of the 19 hijackers from SA?   Don't they want the US military bases out of their country?   Don't all of these things sound like the behaviors of a country none too happy with the way things are?

          Although I realize that derivatives make us a vast majority of any commodity trading, the underlying suppliers of the physical product must have some type of leverage.  In fact, it would seem that they are actually in the driver's seat.  All of the derivatives are based on the underlying, and if you have some type of control of the underlying, then you can really mess with the derivatives, right?   And you can also, it seems, really profit quite handsomely from doing so.......

          It seems that this is just another nail in the coffin being prepared, not the final blow.  That depends on what the US does or doesn't do.  So far, it seems that "more professional bunch" over the Fed are banging away with all their hammers as hard as possible at those nails.  And "Helicopter Ben" ain't the answer.

          What you are seeing is an entire world looking for a way of protecting themselves against the arrogant, out-of-control bully-child of the known universe, us.   That day will come, eventually, and it won't be pretty.  They've got the numbers, we've got the missiles, remember that McArthur wisely stopped pursuing the Korean campaign for his nightmare of seeing seething walls of Chinese soldiers streaming towards him.  Sometimes the missiles win.  Sometimes there is safety in numbers.   The real question is who is willing to be more ruthless and inhumane.   Perhaps, just like Jack Nicholson in A Few Good Men, we want George and Dick and Rummy et al. on that wall, we need them on that wall.....

        •  Question for Jerome or any Economist... (none)
          I can see what you guys are saying about the Iranian Exchange not being very influential.

          However, now that you guys have said that, can you tell us why the fed would be getting rid of the M3? At least the public version of it. Is it simply to hide what a fucked up shambles Bush and the Grand Theft Party are leaving this country in?

          •  IANAE*, but... (none)
            I would say that's probably pretty likely. Remember all that talk about how much money China owns? I'm guessing some focus group turned up some ugly results ("Oh my god! They're killing us with this!", particularly in the "OH NO! Yellow men have our red-white-and-blue money!" category) and now we don't get those numbers anymore. This is if i understand what makes up M3 correctly. They probably said "Well damn, we don't have to give them stuff to hit us over the head with!" And here we are.

            (*: I Am Not An Economist)

            The Shapeshifter's Blog -- Politics, Philosophy, and Madness!

            by Shapeshifter on Tue Dec 27, 2005 at 07:21:10 PM PST

            [ Parent ]

        •  Jerome, I WANT to believe (none)
          You yourself mentioned the inauguration of the Euro. Yes it was "difficult" but it was a long-term decision that they did manage to pull off. Who knew the fractious nations of Europe could?
          Perhaps, also long term, America has spoiled its' relations with too many nations. (?)
          Randy Newman said "They all hate us anyhow" in 1972...
          I don't think our standing has improved much in the last 5 years....
      •  Oil exchange in Iran (none)
        is just a fantasy.

        What's the use of happiness? It can't buy you money- Henny Youngman

        by sheep in wolf clothing on Tue Dec 27, 2005 at 03:38:33 PM PST

        [ Parent ]

      •  right yet wrong (none)
        The Asians already purchase Iranian crude directly.  What i doubt they do to any great extent is use some goofy Tehran based crude futures contract to set the price.  

        If the Iranians force them, they might dabble a bit, but I'd bet pretty large that price discovery remains off of Platts/Argus price estimates of Brent or other Asian marker crudes.

        The root of the problem will be how they settle the price.  If it's a cash settlement, why bother.  Just stick with 3rd party (Platts etc) estimates.  

        If you can have physical delivery (like NYMEX WTI), there is really only 1 seller who has complete control of the facilities/crude coming from Iran.  How can you have a fair market with only one seller?
        and there's no way the Iranians are going to set up a system where any Tom, Dick or Abdul can arbitrage their crude using their own system.  They are control freaks.

    •  It's not just about economic costs (none)
      I think the key question about the Iranian bourse is whether there are enough countries out there with a political reason to move away from petrodollars. Think of it as the Linux revolution for oil.

      Russia and China could both benefit strategically from a shift to the Euro, as it would weaken the U.S. in their spheres of influence and it could lead to a potential economic benefit (if they get a reduced price as a result of the switch). Venezuela and like minded regimes elsewhere in South America also have strong political reasons to swtich, although their tight integration with the U.S. economy make the move harder.

      Your caution is certainly warranted, as the deck is stacked against Iranian bourse. But I wouldn't dismiss it out of hand.

      - "You're Hells Angels, then? What chapter are you from?"
      - REVELATIONS, CHAPTER SIX.

      by Hoya90 on Tue Dec 27, 2005 at 09:37:25 AM PST

      [ Parent ]

      •  Like Venezuela? (none)
        Who else?

        (none / 0), (none / 0), it's off to Kos we go, with a...

        by doorguy on Tue Dec 27, 2005 at 10:44:37 AM PST

        [ Parent ]

        •  Bolivia for starters (none)
          Evo Morales has already made it clear he will nationalize the oil and gas industry currently dominated by European firms.

          Should Ollenta Humala win later this year in Peru, he'd likely pursue a similar path.

          Realistically, none of the South American nations can avoid dealing in dollars, as most of their oil and gas exports stay in the Western Hemisphere.

          - "You're Hells Angels, then? What chapter are you from?"
          - REVELATIONS, CHAPTER SIX.

          by Hoya90 on Tue Dec 27, 2005 at 01:22:29 PM PST

          [ Parent ]

          •  Morales (none)
            has indicated this will be a compensated buy out, not an expropriation, so ironically, this could require Bolivia to buy a large number of dollars to natinonalize the industry.
            •  Well, then, he's a fool (none)
              By the same logic, he might as well compensate Vivendi for the rainwater that his people "stole" in the major cities that suffered from private water ownership.  And what difference does it make whether he compensates or expropriates the oil/gas industries?  Either way they'll just help sponsor the coup that seeks to put him in an unmarked grave.  By expropriating, he'll at least have more money left over for his people--if, of course, that's his purpose.
    •  one word (none)
      China.

      China had 3 suppliers of oil prior to the Iraq war and now has 48.  Their recent attempt to purchase the Khazak oil co (can't remember the name off the top of my head) were denied.

      Their economy grew an astounding 17% last year.  They need the oil to drive the machine.

      •  Not enough (none)
        As I wrote, a number of commodities are STILL traded today in London in pound sterling despite the emergence of the USA in the past century. China will not be the undisputed superpower alone as the USA swere, so that alone will not be enough.

        In the long run, we're all dead (Keynes)
        Read more on the European Tribune - bringing dKos to Europe

        by Jerome a Paris on Tue Dec 27, 2005 at 09:45:27 AM PST

        [ Parent ]

        •  China (none)
          can make a difference, if even in the attitude of other buyers.

          France and Germany could follow suit.

          Plus, if even they can get 1% of market to trade in euros, then 1% of a large amount of money is a pretty big amount of money.

        •  What about the repurchase agreements? (none)
          I'm more concerned with the new Fed chairman's purported fondness for using repos to expand the money supply. I recall someone asking you to address this some time ago, but I missed the reply.

          The question is, can Bernake inflate away US debt using repos while hiding the fact through the non-publication of the M3 numbers; and if so, is there another set of indicators that can give one a heads-up as it is happening?

        •  Jerome (none)
          I'm glad you are on this; I was waiting for your comments.

          In your opinion, what is the reason for the termination of M3 publication? Would it be possible for someone besides the fed accurately to calculate M3 and publish it?

          As far as Iran goes, I suppose we will soon see what actually happens. What are the methods by which the US and other interested parties could cause the failure of the Iran bourse (other than a war, that is)?

          Come see TV from the reality-based community at RealityBasedTV.com

          by MarkInSanFran on Tue Dec 27, 2005 at 10:24:30 AM PST

          [ Parent ]

        •  If the US Debases It's Currency... (none)
          the escape hatch will be created somewhere. Positions that lose money will be unwound and no new positions will be taken.

          Perhaps the Iranians will set up their HQ in some other commercial hub with a stable judicial and property rights system, like Zurich or Belgium.

          I leave out Tokyo, Hong Kong and Singapore, but there is no reason to be euro-location centric, either.

          China is going to start paying its' workers better and create a domestic market. And China and many other countries are going to diversify in every way they can out of the dollar,too.

          Recent history shows market fragmentation not consolidation to be the trend. And frankly, who cares where the computers are?  

          The only thing proping up the US economy right now has been the williness of our trading partners to still accept debt denominated in dollars. When they stop doing it the loans stop, the markets collapse and the US is forced to pay for it's purchases like everybody else.

          If the US continues to borrow and squander, and the Bushiters are TELLING US they are going to stop being open financially!

          The world will move to a safer distance as fast as they can and watch the Bushit dream of empire collapse.

          LL

          "There is a time for compromise, and it is called 'Later'!"

          by LeftyLimblog on Tue Dec 27, 2005 at 10:32:27 AM PST

          [ Parent ]

        •  Such As? (none)
          As I wrote, a number of commodities are STILL traded today in London in pound sterling despite the emergence of the USA in the past century.

          Such as?  Cocoa?  London Wheat?  The metals on the LME?

          Those are the only remnants I know of London's erstwhile dominance in global commodities trade, and they seem paltry to me.

          For that matter, it's an open question whether the first two are still "traded in London," given that LIFFE is now part of Euronext.

          Our planet's youngest civilization has invaded its oldest... this can't be good...

          by Irfo on Tue Dec 27, 2005 at 11:17:07 AM PST

          [ Parent ]

      •  A Chinese company bid on (none)
        Unocal. Is that who you are thinking of?

        ... we now know a lot of things, most of which, we already knew... (-dash888)

        by Tirge Caps on Tue Dec 27, 2005 at 10:19:10 AM PST

        [ Parent ]

      •  China is Key (none)
        China has had economy growing in double digits for over a decade, from what I understand. I believe I also hear that did some deal on a natural Gas company in Canada together with India. They are extremely cash rich, that is as long the dollar is worth something. Their Strategy is not only to find the fuel to drive their expansion, but also diversify their holding to real gold-like substance. Russia is already in cahoots with Iran,, Venezuela would jump at any chance to scew the US. The ONLY thing holding this back is that the Iran President, Mahmoud Ahmadinejad, is really crazy. This has caused many to withdraw investments. Unless something is done to remove him, I cannot see this happening in the Spring. However, the nay-sayers who say this will NEVER happen, sounds like famous last words to me. Its just a matter of time.

        "Perhaps the meek shall inherit the Earth, but they'll do it in very small plots . . . about 6' by 3'." -- Robert A. Heinlein

        by marko on Tue Dec 27, 2005 at 12:52:52 PM PST

        [ Parent ]

    •  The key point (none)
      People will not go trade in Iran because the risks or abitrary interventions and meddling are too high.

      This is indeed the most likely show-stopper for the success of an Iranian oil exchange.  But it is not an absolute barrier.  Strong leadership in Iran could insure honest operation of a free market, and could start with a small number of traders.  If this market then demonstrates over 5-10 years that the risks of arbitrary interventions and meddling are low, then they are competitive with other markets.  Because there are traders who definitely want an alternative to US oil markets.  You might find Brazil, China, Venezuela, Russia marketing small lots through the Iran market just to test the waters.

      But this is not absolute but relative to other oil exchanges.

      Which raises a legitimate question.  To what extent are the existing exchanges subject to arbitrary interventions and meddling?  By any entity, government or private?

      -6.00/-7.18 The revolution starts now--in your own back yard, in your own home town

      by TarheelDem on Tue Dec 27, 2005 at 09:45:01 AM PST

      [ Parent ]

      •  An honest operation is not essential, but (4.00)
        a stable one is. Corporations love stability, as evidenced by how many times dictators have been installed at their behest. A little graft is a small price to pay compared to what guarding against the unknowns of a free society.
        •  From an Arab Viewpoint (none)
          The US government has repeatedly seized the assets of Arab entities like Libya, Iran and Iraq.

          And the Arab nations have the oil, if enough of them want to diversify there will be vendors to supply them with a safe place to do business.

          Zurich strikes me as an excellent choice, because they are 'close' to Europe, Russian and the Middle East as well as having a sterling reputation for staying out of the affairs of other nations.

          If I was an Arab nation looking for a better deal, I would support a Zurich oil bourse, and let the 'gnomes of Zurich' guard my money.

          Of course, it might trigger the Helvetian War (for those Kossaks who are fans of David Brin), but the Swiss have been trusted for money transactions since... a long time before Granpappy Bushiter supported the Nazis.

          LL

          "There is a time for compromise, and it is called 'Later'!"

          by LeftyLimblog on Tue Dec 27, 2005 at 10:47:41 AM PST

          [ Parent ]

        •  True. (none)
          People do big business in Indonesia, the most corrupt Govt in Asia. Indonesian generals frequently sell purloined oil in Europe on the black market.

          "Doing the world a favor since 1963."

          by Petruk on Tue Dec 27, 2005 at 03:24:59 PM PST

          [ Parent ]

      •  Oil for food? (none)
        Illegal trading with an unstable entity.

        I don't understand why people dont think this will happen, is it because that was outside the markets?

        •  This is different in this way (none)
          The subject here is a commodities trading floor and associated back offices for oil trading located in Teheran.  Another oil exchange.

          The Oil for Food trading was direct buyer to seller transactions, not through a commodities market.

          -6.00/-7.18 The revolution starts now--in your own back yard, in your own home town

          by TarheelDem on Tue Dec 27, 2005 at 01:54:00 PM PST

          [ Parent ]

    •  jerome, i don't agree with you at ALL! (none)
      it would be very easy to destabilize the seller's market by playing off the use of dollars and euros - the idea is to buy at the BEST price for the buyer - so buying from the iranian bourse could offer an excellent chance to DO that!

      also, there are enough nations that hate america that would relish the opportunity to buy elsewhere.

      once the initial fracture is made, then the customer benefits from the "competition" that will ensue.

      one seller (oil for dollars) equals controlled price.  two sellers (oil for EITHER dollars or euros) equal competition!

      you are assuming too much when you think that the market seeks "stability" - it doesn't.  it seeks profit.  period.

      •  sorry, this is silly (none)
        The Iranians already sell all their crude.  There is no new crude that a consumer can buy whether they hate the US or not.  With no new production, how can prices change because of a decision to price in a different currency?

        There is nothing stopping the Iranians from instantly dumping dollars coming from Japanese buyers or asking for yen instead at the then current exchange rate.  So why would pricing them originally in a different currency make any difference?

        Trying to establish a floating, transparent (honest) market where crude price discovery occurs in Euros/metric ton instead of $/bbl will require overcoming an enormous inertia.  

        First, both buyer and seller must agree that this mechanism leads to a fair price.  There's no way anyone is going to trust a bourse run by the Iranian government when they are the sole supplier of the crude.  What group of idiots would agree to buy off of Tehran Bourse's Iranian Light quote for next August for the entire production rate when the Iranians can simply cut back production to squeeze their own market?

        Secondly, to repeat myself, I just don't see the Iranians physically settling their contracts giving any buyer the right to pull a tanker up to their loading terminal and take delivery for any market anywhere.  They will go nuts when the trading community starts using their own bbls to move their market around (and having been part of this game, they will make this market jump around like kangaroo on crack).

        There is no "one seller".  Crude producing countries are a fractious bunch with varying political and economic needs.  And I disagree, OPEC very much seeks stability.  Just like the oil majors, they fear big investments suddenly having a nil payback if prices crash.

        You seem to be basing your model on the idea that oil prices only go up.  History will tell you that the real pain for the oil industry/trade is when it collapses due to oversupply.  Bang, Zoom to the Moon on oil prices may be a popular theory on the left at the moment, but it won't be a straight line (hence the dearth of Countdown to $100 oil diaries of late -- apols to Jerome).

        •  i'm not basing my thoughts on oil (none)
          prices going up - i am looking at a theocracy that considers the u.s. an evil satan and any means that they can use to destabilize the u.s. economy is a win for their political side.  the seller's market is interested in one thing - profit.  the buyers are interested in one thing - lower prices that translate to profit.

          just as midlands texas manipulated the pricing structure over the last year and a half by pushing up the ppbl to the high mark - and successfully breaking the price band of opec, so could the iranians by selling BELOW market value for euros break the back of the u.s. market for light,sweet.

          the real test is who cries uncle first.  the desired oil is the light sweet, out of texas and the north sea - that is why it has been at premium.  easier to refine, easier to turn around.  texas has the refining capability to make light, sweet into gas - it doesn't have the refineries to convert the heavy, sour as readily.

          so, our light sweet (u.s. & britain) are the choice and easiest and most expensive.

          pushing the prices up caused the opec members who have light sweet to break out of the price band (pure greed/ if oil is at 55-60, selling at 39/bbl was too hard to take!, so the opec members broke out of their agreement to keep the oil market stable.)

          now, imagine the theocracy that wants to take out the u.s. with a vengeance.  how better than to try to destabilize the u.s. currency by pushing euros instead of dollars - and to do that, you need buyers.  how do you get buyers in euros?  undercut the price.  NObody will pay more than they have to pay - and if the u.s. loses, all the better.  it is TIME (according to many nations) that we have our arrogance handed to us on a platter.  

          this isn't about "profits" - it is about "control"... the u.s. is flexing too much muscle -and there are many countries just waiting to take us down.  the real terrorist threat is economic - 9/11 proved that - and is still proving it.

          remember, the folks who would do us harm are infintely patient.  selling a commodity they have much of for a loss is a small short-term price to pay.

          look beyond the surface and think like a very "old" enemy... one who hates america and would do anything to do the u.s. harm.

          •  sorry, I guess I'm dense (none)
            but I find this mostly incoherent or wrong.

            First, you accept that Iran can actually establish a viable market and that pricing their oil in another currency even matters.  That's ID not science from my vantage.  I know you believe it, but where's the data?

            Second, how did "midlands texas" manipulate up WTI?  Looked like more demand than supply and a huge fear premium based on paranoia that the Mid East would go up in flames or some other geopolitical problem.  Not to mention hurricanes knocking a big chunk of supply off the market.  What basis do you have to claim "manipulation" other than the price went up and it pisses you off?

            Texas has huge capacity to refine horrible, heavy high sulfur crudes.  Your info is the common wisdom and wrong.  What is true is that at the margin, they can squeeze out slightly more product with lighter, sweeter crudes.  Older, simpler refiners (esp on the east coast) are more limited to lt. sweet.  The USG is the world center for heavy oil refineries.

            The best light, sweet crudes are African -- Nigerian, Angolan, Libyan.  Much better than WTI or Brent.   Both on gravity  and sulfur level.  There are small amounts of very sweet US crudes, but not like the flows from Africa.

            Iran undercutting price????  you have never watched OPEC.  Saudi's are the downers, Iran are the price hawks.  They're not going to discount just to switch currencies.  They could get the Japanese to pay in Yen tmw just by asking.  It's small beer on the world currency markets.  

            And by cutting the price on heavy sours, how does one break the back of the Lt. Sweet mkt?  The spread just widens leaving lt sweet up if the market is truly constrained by capacity to refine heavy sour.

            If Iran just wanted to fuck with us, all they have to do is pull 2 MMBD of oil off the market by faking a production problem (blow up a pipeline or loading facility).  Much more direct impact on us if crude spikes to $80/bbl.  Or if they want to provoke a war, block the straits of Hormuz.

            If it's so obvious that changing currencies will bring the US to it's knees, won't Busco just treat it as and act of war anyway?    We have troops on both their borders.  We could be in Teheran by Feb 1st (not that we could hold it).  Think down the chessboard, yourself.

            This whole tin hat, bring 'em down by currency speculation meme, reads more like a really bad novel with an evil cabal meeting in a Star chamber to rule the world.  This is the sort of crap that that makes the far left the butt of jokes.

            •  ok, i'll grant you incoherently written without (none)
              backup - it was 2 am and i was exhausted.

              i am on my way out right now, but i will come back to this and do it as a diary soon.  i have followed this for over two years - watched the push by the wti standard while opec frantically tried to stop the price rise - did the research on peak oil in midlands and followed through the price push.  also with pnac and the neocon desire to break up opec's control - it never happened UNTIL the texas wti was "speculated" through the roof in the ny markets (followed by the asian and european buyers) AND followed by brent north sea.

              and i'll answer you more later...  one quick one, though...

              If it's so obvious that changing currencies will bring the US to it's knees, won't Busco just treat it as and act of war anyway?    We have troops on both their borders.  We could be in Teheran by Feb 1st (not that we could hold it).  Think down the chessboard, yourself.

              in my opinion and the opinions of OTHERS, that is exactly what bushco DID - he went to war with iraq when saddam was pushing for changeover to euros for his oil.  not that this was the only reason, but if you followed papers at the time, this was a serious concern when hussein first began talking the switch.

              secondly, iran has a viable fighting force and is willing to use it.  saddam did not have the capability to fight back! at least, in the traditional sense.  his was a world of "bluff" and for years, the "bluff" about chemical and other weapons kept iran at bay - that was his reason, NOT to keep the u.s. out.  and as for being in teheran by feb 1st.?  we can't even hold our own in iraq and afghanistan.  exactly what troops do you propose we use?  the national guard that is on it's third deployment?  the exhausted full-timers? do we raid the v.a. hospitals for those who already have their replacement limbs?  or do you think we could use all those new recruits - oh, i forgot - we don't have any.

              bush has decimated our military force and the world sees it - that, imho opinion, is one of the major reasons we will not go into iran - except by airstrike - but then all hell will break loose.  maybe we could pick on a small nation like syria - and i wouldn't put it past bush to try to flex his penismuscle to do so, but if we are lucky, the congress will block him.  if not, we will just be further in the toilet with a weakened military and discredited nation.  think "check" and it won't be us making the move...

              more later on oil.  can't pull two years of research together cogently in ten minutes.  but i WILL get back to you on this!

              •  please do (none)
                my gut reaction is you are chasing a conspiracy theory with nothing behind it, but I've been wrong before.  I'd like to hear the argument.

                As for the WTI market being "speculated" through the roof, I think you are way off.  There are real, tangible reasons why crude oil is high at the moment.  Tops being that there is essentially no spare crude capacity left in the world and we are on the edge of having the Middle East in flames, Venz in revolution (ditto Nigeria) hurricanes knocking out US production, China sucking ever harder on the AG supply (ditto India).

                The world, especially the US, has been cutting inventory levels for years to improve return on capital (and to flush out the capital deemed to be wasted on "excess" inventories).  Now, with usage way up, and stocks still where they were 15 years ago, we just don't have enough cushion.  That leads to purchases/hoarding by refiners based on fear.  That tends to keep prices buoyed as they fear not having supply.  Management won't let them have more stocks so they keep paying up for supply.  

                Also, because there is more demand for US products than the worldwide refinery system can produce, margins on crude are huge.  So no problem to pay up for crude oil.  The profit is there so a refiner is much more likely to be bollocked by his bosses for running out of crude when margins are huge than for paying 5% too much.

                As a former speculator, working on the 2nd largest oil trading desk in NY, I can tell you one major point you are missing.  While a speculator can squeeze a contract pretty easily, it's damn near impossible to do it 2 months in a row.  Why?  Because you can't just eat the stuff.  you have to sell eventually.  Something the Hunts forgot back in the 80s....  For prices to stay up this high this long, the supply demand balance is pretty tight.  Even with the Saudis pumping near capacity.

                And as an aside, oil prices really aren't that high on an inflation adjusted basis.  We've been living high on free beer the last 20 years as far as energy goes.  $50/bbl for crude is still way cheap compared to what you'd pay if you had to to keep our transportation system working.

                As for invading Iran, we wont.  But we could easily if we wrote off Iraq.  Iran has no airforce any more.  We could rip up every bit of infrastructure in a month and waltz right in with the 175K troops we have in Iraq + Afghanistan.  As for an army, Saddam's was quite a bit larger, but regardless, either going up against the US Army is like 10 yr olds playing against Shaq.  We could easily slice into Western Iran and take their main oil fields.  Could we hold them for long?  Doubt it, for the reasons you propose.  Unless we have a draft which would be the last thing Bush did as president.  The mushy middle would oust him toute suite if their own kids had to go..

                As for your opinion that Bushco went to war over currency switches on crude sales, it remains an opinion with no hard evidence to back it up.  I doubt it was even in the top 10 of excuses.  You guys just dont seem to understand large scale finance.  Crude buyers can hold their own currency(or any hard currency) right up to the day they have to settle their oil purchases in USD.  And the seller can flip out of the dollars 5 min after the wire transfer.   Jerome has it right.  The risk is if China, Saudi, Taiwan, Korea, others dump our debt back on us.  THAT is the risk.  If the rest of the world decides to write off our currency as a dog our asses are grass.  Switching oil sales into another currency might be an indication of the loss of confidence, but it won't intrinsically cause havoc, IMO.

    •  Jerom is correct (4.00)
      up until 10 yrs ago I was an oil trader for 2 of the largest players.  Jerome's analysis here is right on target.

      No serious volume will trade on an Iranian exchange.  Perhaps a few folks trying to suck up to the Ayatollahs will dabble, but no serious players will move from effective markets like the NYMEX and IPE to an exchange in a country run by religious fundys (doesn't bode well for NYMEX).  Even contracts in real countries like Singapore can die due to lack of interest=liquidity.  

      In the past Dubai crude was used as a forward marker crude for the AG area.  The contract died due to lack of interest.  The Arabian Gulf players are content to use Brent or WTI as the main element of their pricing.  For example, Saudi might term up a sale into Italy or Japan at Dated Brent - X using the quotes as published in Platts either on B/L date +/-3 days or B/L + 25 days.  They used to price either off date of lifting or approx date of delivery depending on how both sides feel about the market.  (B/L = bill of lading = paperwork describing the cargo quantity)

      The X represents a market discount due to quality and location differences.  Saudi used to just impose this monthly.  And X varied depending on where in the world you were going.  They don't allow traders to arbitrage their oil.  For US markets, it was WTI - Z.  They could be very flexible on pricing formula when they needed to move crude.  I suspect those days are gone.

      I've seen term deals done off of assumed refinery yields so that the crude is priced to guarantee the refiner a margin (doubt this happens anymore -- it was a wheeze to move crude when the world was way oversupplied).

      Secondly, SOJ (as much as I like her) is dead wrong about how these markets work.  Very little "real" oil actually trades on the exchanges.  People hedge their physical trades there and speculate, but the wet stuff trades off the exchange via private contracts.  Especially the term business with Saudi, Kuwait, Venz, etc.
      The exchanges are where the market goes to hammer out the price.  many, many products have no counterpart on any exchange.  For example, naphtha traded in the Far East.  Their is a forward contract used to speculate/hedge, but to a great extent, the "market" is set by people jawboning the reporting services so that in the end, a 25 year old journalism major making $25,000/yr sets the last 3-5% of the price.  Braindead system.

      As for settling the cash component, it's true that most oil entities settle in USDs.  But as Jerome says, the same folks can trade the currencies in the next heartbeat.

      •  Dude, (none)
        You should post more. Kos needs your brainpower.

        "Doing the world a favor since 1963."

        by Petruk on Tue Dec 27, 2005 at 03:42:43 PM PST

        [ Parent ]

      •  i have a question (none)
        wouldn't a communist country like China that is a net importer of oil and a net exporter of most other products want to match a part of their currency holding diversification to forward contracts on oil?  For example right now China converts a portion of Euros received from selling exports to Dollar holdings in order to purchase U.S. bonds.  Because they purchase forward contracts on oil in Dollars their bond holdings in dollar denomination match this, limiting their currency based risk.  Asian central banks, inlcluding Chinas have signaled a desire to diversify their central bank holdings away from the dollar.  I am assuming that countries with state control of oil imports would want to be able to purchase forward contracts on oil in both Euros and Dollars to match their diversified central bank holdings and better match the current flow of funds into their countries from exporting.  The ASEAN and Chian Mai Initiative come to mind in this regard with many asian central banks agreeing to a cooperative initiative including currency swaps to diversify holdings and eventually move to a single unified currency.   I don't see why a market for trading futures contracts on oil in Euros couldn't be successful.  Euro countries would buy these contracts, as would countries with a net trade surplus with Euro countries.  

        In the absence of fear, truth becomes absolute.

        by bohdi777 on Tue Dec 27, 2005 at 10:05:38 PM PST

        [ Parent ]

        •  whew, where to start (none)
          1)  what does China being Communist have to do with the argument?

          2)  You assume that China is buying their forward oil on a fixed price basis.  I really doubt that.  Far more likely they are paying on a floating, market based price, ie, Brent/WTI/Tapis/OPEC basket +/- whatever negotiated element.  I've never seen sovereign players buy or sell on a flat, fixed price basis.  Price discovery doesn't occur until the oil is lifted.  I'm way out of date, but I don't see the Saudis selling to them on a fixed and firm price way forward.

          I also doubt the Chinese are using futures to fix their forward price all that much.  Even if they are, the margin on futures contracts is only about 5% so you really don't need all that much cash to hedge your price exposure.  So I doubt they stay up nights sweating currency changes vis a vis oil purchases.  They have many, many times more exposure on their existing bond/cash portfolio.

          3) You assume the Chinese need to turn euros into dollars to buy oil.  They only buy about 3 MMBD of crude.  At $55/bbl that's only $165 million per day.  or $60 billion/yr.  Our trade deficit with them is several multiples of that.  I suspect they just recycle Euros into whatever they feel is best for their overall portfolio including Euro denominated bonds etc.  And again, flipping $150 million of USD into whatever other hard currency is nothing in the currency markets.

          4)  The argument is less that a Euro denominated oil market can't work than that such a market based in Tehran, run by their whacko, fundy government can't work.  I don't care if the Iranians price in $$, you'd have to be nuts to put money at risk in a market run by those people.  Who will guarantee performance?  

          If the IPE switches to euros on oil, that might be more interesting as to how our govt would react.  

          •  well.......an answer (none)
            1)  what does China being Communist have to do with the argument?

            Communist governments by their very nature control much more of the economy than a capitalist based economy.   This includes the central bank coordinating the purchase of commodities such as oil.  

            2)  You assume that China is buying their forward oil on a fixed price basis.  I really doubt that.  Far more likely they are paying on a floating, market based price, ie, Brent/WTI/Tapis/OPEC basket +/- whatever negotiated element.  I've never seen sovereign players buy or sell on a flat, fixed price basis.  Price discovery doesn't occur until the oil is lifted.  I'm way out of date, but I don't see the Saudis selling to them on a fixed and firm price way forward.

            My argument was more about natural hedge diversification than anything else.  If possible central banks would like to diversify their risk and being able to match trade surplus currencies with net deficit imports is desired.  Because oil trades only in $, countries didn't much have a problem with holding large amounts of $ denominated bonds/currency. With the long term pressure on the dollar from growing twin deficits, i think many countries are questioning this strategy.  The ASEAN countries have a desire of moving towards a Dollar/Yen/Euro basket.  In the end natural hedges are much preferred to synthetic ones and if more central banks with their hand in purchasing commodities are diversifying away from the dollar, I would expect there to be a desire for more commodities to trade in Euros, including oil.

            3) You assume the Chinese need to turn euros into dollars to buy oil.  They only buy about 3 MMBD of crude.  At $55/bbl that's only $165 million per day.  or $60 billion/yr.  Our trade deficit with them is several multiples of that.  I suspect they just recycle Euros into whatever they feel is best for their overall portfolio including Euro denominated bonds etc.  And again, flipping $150 million of USD into whatever other hard currency is nothing in the currency markets.

            You can flip currency when received but i'm talking long term diversification strategies.  Holding Euro denominated bonds pays euro interest, unless you have it in a swap agreement.  I think central banks that are attempting to diversify risk and better match trade balances with their main trading partners would like to be able to match their interest received/bond maturities with longer term commodities contracts, especially in communist countries with government control of business. You can achieve all of these means through the use of derivatives but i think many would prefer the efficiency a secondary market for pricing in another currency would provide.

            4)  The argument is less that a Euro denominated oil market can't work than that such a market based in Tehran, run by their whacko, fundy government can't work.  I don't care if the Iranians price in $$, you'd have to be nuts to put money at risk in a market run by those people.  Who will guarantee performance?  

            I agree.  A Euro market can work.  Here's where the ethnocentric viewpoint comes in.  While you or I might not want to trade with Iran,  China, Russia, France, Syria, Saudi Arabia, Iraq, India, and the entire eastern bloc really have no problem with it.  Especially for China and Russia, do trade with Iran and really have no qualms about it.   China and Russia guarantee performance through paternal military dominance.  

            If the IPE switches to euros on oil, that might be more interesting as to how our govt would react.

            All it takes is one.  If one market gets off the ground with enough liquidity trading in Euros, i would expect other markets to start offering trading in Euros.  Thats where things get interesting.   Are we in a long term trend away from the $ as the fiat currency of the world?  

            In the absence of fear, truth becomes absolute.

            by bohdi777 on Wed Dec 28, 2005 at 11:46:14 AM PST

            [ Parent ]

            •  on this point I think you are dead wrong (none)
              I know how oil markets work.

              An Iranian market can only be based on Iranian Crude.  Unless you think the other sovereign sellers in the area will allow their crude to be controlled by an exchange clearing mechanism in Tehran.

              Why?  Because at some point you have to settle a futures contract.  You have 2 choices.  You either do a cash settle where the buyer with open long contracts at expiry and the seller with open shorts are matched up by the exchange and a final closing price is set by some independant, honest 3rd party (usually Platts Oilgram or Argus).  But how can you have an honest evaluation of a market with only one seller --Iran National Oil?  Especially one where little to no oil trades in a spot, cash market (they term up most if not all of their oil sales).  

              If there is no open, honest spot market for the market crude, then you can't have an honest settle ment in cash.

              That leaves option 2.  INOC has to let the longs pull a tanker  up to Kharg Island and load their oil.  This is what happens at Cushing on WTI except it is tank transfer or pipeline tickets etc.  There is no way INOC is going to let their oil be traded spot in their tanks.  I could be wrong, but I just don't see it.  Not to mention, if you can't trade spot in the tank for small quantities, then you have to go off long tanker loads which is  really ugly for market liquidity.

              While i agree that some wont have a problem with the goofy religious nature of the Iranians, what they will have problems with is an illiquid, easily manipulated market as a vehicle for speculation or hedging.

              On the other points, the argument is morphing to different ground.  I agree that if the big USD portfolio holders diversify away from the USD we're in a world of hurt.  But that's not the same as just executing oil trades in a different currency which is the original point of contention.

              So

              •  maybe i just (none)
                don't understand oil markets as well as you do.  What prevents Iraq, Libya, Russia, and other players from trading on an Eastern exchange (not to mention Venezuela would probably do it just to spite the U.S.)?  You are assuming it will only be Iranian crude on offer. I am saying there are numerous political reasons why some of these countries would want to start trading on an exchange that they have more control over and that allows them to diversify away from petrodollar control.    Delivery could be had from numerous ports in the Black Sea, Mediterranean, or Persian Gulf.  Just look at Russias recent moves with regards to natural gas delivery. If over 1/2 of the holders of the physical commodity want to create a new market, i think it could certainly be successful.   This could be a long term military strategy for them to move away from funding the U.S. current accounts deficit hampering our defense spending.  Just speculating on the coming energy wars.

                In the absence of fear, truth becomes absolute.

                by bohdi777 on Wed Jan 04, 2006 at 08:01:42 PM PST

                [ Parent ]

    •  But, but, but... (none)
      Israel readies forces for strike on nuclear Iran  (Sunday UK Times)

      ISRAEL'S armed forces have been ordered by Ariel Sharon, the prime minister, to be ready by the end of March for possible strikes on secret uranium enrichment sites in Iran, military sources have revealed.

      The order came after Israeli intelligence warned the government that Iran was operating enrichment facilities, believed to be small and concealed in civilian locations.

        Iran's stand-off with the International Atomic Energy Agency (IAEA) over nuclear inspections and aggressive rhetoric from Mahmoud Ahmadinejad, the Iranian president, who said last week that Israel should be moved to Europe, are causing mounting concern.

      The crisis is set to come to a head in early March, when Mohamed El-Baradei, the head of the IAEA, will present his next report on Iran. El-Baradei, who received the Nobel peace prize yesterday, warned that the world was "losing patience" with Iran.

      A senior White House source said the threat of a nuclear Iran was moving to the top of the international agenda and the issue now was: "What next?" That question would have to be answered in the next few months, he said.

      Defence sources in Israel believe the end of March to be the "point of no return" after which Iran will have the technical expertise to enrich uranium in sufficient quantities to build a nuclear warhead in two to four years.

    •  how about gold? (none)
      From what I've heard, the Iranian oil bourse will be using gold.    

      If supplies are tight enough, I think traders will bite.  

      "Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist." - Kenneth Boulding

      by randym77 on Tue Dec 27, 2005 at 04:40:00 PM PST

      [ Parent ]

    •  Not Russia, Not China? (none)
      These guys are tight with Iran and they've read PNAC's "Rebuilding America's Defenses" and know they are on the target-list. So if not with the Iran bourse, when and where will they strike at the $US? Does the global chess game never trump market interests?
    •  M3-No; MZM-Yes (none)
      The fed will still publish MZM which is an even broader monetary measure. BTW, the financial blogs have been all over the M3 publication issue for months. Some folks believe the Fed wants to stop publishing the M3 data series to reinflate to monetize the US debts(exploding M3 figures) and others like Soj believe just the opposite (collapse in M3).

      In any case with increased deregulation and instantaneous cross-border capital flows, the M series is becoming less useful relative to numbers on MBS, ABS, CDS and CDO. These credit markets are becoming much larger (multi trillion dollar) and growing even more rapidly. But more importantly the "moneyness" of these instruments are also rising as many central banks use these as part of their reserves just like they would a US Treasury bond or Gilt.

      On Iran creating a Euro denominated petroleum market, I think initially it will not have sufficient depth or liquidity. But over time if enough big suppliers trade a portion of their production, speculators (like hedge funds) will arrive. Creating liquid markets is not easy and sometimes it takes a lot of effort. Iran will be climbing uphill not only because the market will be illiquid initially but there will be political pressure on western banks to not drive liquidty to the Iranian bourse.

      On the other hand it is worth waiting to see what happens.

    •  Jerome, aren't you forgetting one thing? (none)
      I don't know of a single capitalist who wouldn't sell his own grandmother for a 10% discount on trillion-dollar (or EC) deals. Saddam Hussein made effective use of this concept infiltrating the US and the UN during the Oil for food era. In fact authoritarian regimes have a slight advantage in this game because they can just shuffle 50% of their yearly budget at will.

      I think many of us are thinking small potatoes here or are looking for an over-night armageddon, which seem inconceivable. But I think this is a kind of move that could get the Bush buddies themselves to back the bourse if there's  enough profit in it for them. If Iranians are smart, they would have made sure there's some support for it before even going "live" on this venture. This is the beginning of the "end game" of peak-oil. Every man for himself.

      Why would they set it up only to fail if it's so obvious? I would think veteran oil traders are smarter than that. I'm betting, that among other options, there's also a serious "let's make friends with Iran" discussion happening somewhere behind the scenes.

      I'm of course no expert and realize you do know what you're talking about economics, and enormously respect you for it. But I also pride myself in knowing about Capitalism, Imperialism and American History. To me this is not farfetched, especially if you look at the long term.  

      Those who write these arbitrary rules can change them at will.

      (-9.13, -8.10) Political violence is a perfectly legitimate answer to the persecution handed down by dignitaries of the state. - Riven Turnbull

      by Florida Democrat on Tue Dec 27, 2005 at 10:02:34 PM PST

      [ Parent ]

      •  Iran, discounts? (none)
        Hard to imagine.  Check out the EIA's analysis on Iran from last spring.  Admittedly prices are well up but....

        http://www.eia.doe.gov/...

        a few points:

        Despite higher oil revenues, Iranian budget deficits remain a chronic problem, in part due to large-scale state subsidies on foodstuffs, gasoline, etc. Expenditures on fuels were estimated at $4.7 billion in 2004, and the country's parliament (the Majlis) has rejected measures to raise consumer prices.....

        Iran exports around 2.5 million bbl/d, with major customers including Japan, China, South Korea, Taiwan, and Europe.  Iran's main export blends include Iranian Light (34.6° API, 1.4 percent sulphur); Iranian Heavy (31° API, 1.7 percent sulphur); Lavan Blend (34°-35° API, 1.8-2 percent sulphur); and Foroozan Blend/Sirri (29-31° API). Iran's domestic oil consumption, 1.5 million bbl/d in 2004, is increasing rapidly as the economy and population grow.  As mentioned above, Iran subsidizes the price of oil products heavily, resulting in a large amount of waste and inefficiency in oil consumption.

        The Ayatollahs have more to worry about from cutting subsidies to the growing poor, young population than they can gain from tweaking us.  They need the cash.  they only charge the populace around 40cts/gal for mogas...

        2.5 MMBD X $50ish = $125 million/day.  Over a population of 69 million that's just $1.80 per day.  not even counting the big chunk of that revenue they need to develop new fields and to keep the old ones pumping.

        •  don't quite see it that way (none)
          The Ayatollahs seems to have plenty of cash when it comes to financing pipelines, nuclear energy, missiles and sending up sattellites; not to mention Hizbollah and Military/Intelligence. They have contributed significantly to Afghanistan and have promissed $1Billion to Iraq. And that's not even counting the corruption.

          If they want to sweeten the deal for a few key oil players using a few $Billion here and there, I'm sure they can find it. Besides giving it up for cheap isn't the only trick you can play. All kinds of contract awarding and non-petroleum purchases and other types of favoritism can play a role too.

          It's possible they will bring a couple of natural gas wells online for production. Iran is sitting on a lot of NG and they've been talking about doing it for years. There are other industries in Iran, too not so much for export, but internal consumption. Years of sanctions have made the country self-sufficient to a higher degree than the Arab Sheikhdoms.

          Also don't forget that standard of living, while it may be low to us, is far higher than what it was during the Iran/Iraq war when they were being bombed conventionally and chemically on daily basis, their production was way down and they were spending massively on defence.

          So, they can endure much more than this.

          (-9.13, -8.10) Political violence is a perfectly legitimate answer to the persecution handed down by dignitaries of the state. - Riven Turnbull

          by Florida Democrat on Wed Dec 28, 2005 at 05:38:08 AM PST

          [ Parent ]

    •  I did not know about the Fed info... (none)
      Honestly I always thought it WAS part of the US gov't. I'd like to read your thoughts on this subject someday....
  •  Question (none)
    What is the best way to purchase Euros, or set up a savings account in a nation that uses them?  It seems like it would be a good thing to have to diversify a savings account.  The Iranians are just one potential threat to the dollar, and it would probably be a good thing for everyone to have some other currencies.
    •  try everrbank.com (eom) (none)
    •  Two words of warning: (4.00)
      (1) The "Duluth" principle (which I hereby name after Gore Vidal's novel, in which the principle is articulated by a mandible-clacking insect author of bodice-rippers): All currencies lose value over time.  Invest in goods or services people will actually want.  Holding onto currencies in the long term is a bad idea, because sooner or later they pay for indiscretions of the governments, banks, and economies behind them.

      This much said,

      (1) The "quod licet Iovi non licet bovi" principle (i.e. what Jupiter is allowed to do, cattle may not): Only the United States is allowed to run crippling deficits and debt without consequence.  Okay, with little consequence so far.  Sooner or later, every other currency gets smacked down hard because of the balance-of-payments problems of the host country.  Note how the NZ kiwi was hammered recently--sooner or later you just can't keep raising interest rates in the hopes that others will finance your fiscal irresponsibility.  I'm more than a bit leery of Everbank's pushing of the Icelandic krona on its customers, as Iceland is quite the debtor nation too.  Iceland may well have a stable long-term future, as it could probably go energy-autonomous without convulsions that would entirely obliterate its economy . . . but if you want to put your money in Iceland, buy a geyser, not its currency.
           Now in all of this, the USA is--you guessed it--Jupiter.  We're so large that other countries have to humor our addiction to debt.  If they don't, they go down the toilet with us.  This could change some day--there must be a correction someday if the laws of gravity apply to finance, but (a) maybe they don't apply, and (b) even if they do, that correction may not come anytime soon.

      •  Yeah,I thought I was so clever (none)
        buying NZ CD's, betting on weaker dollar. Boy, did I get whacked on that one! Well, so far anyway. The dollar is amazingly strong. It just reminds me that banks don't manufacture anything, but they do pretty well. The US is the world's bank. It has tremendous power. As to oil trading, the market runs on futures contracts. That kind of market places a huge premium on stability, especially in the currency used for trading, it seems to me. So, I agree with Jerome. I have seen many predictions of changes in the oil business, but none have ever come to pass. In fact, the oil market will become even more invested in USD as other factors become more intense drivers of price.
  •  i heard before the war (none)
    that the real reason to go into iraq wasnt about revenge or terrorism or oil...but to control oil currency.....now i finally understand what that means.

    I wish I had a penis on the back of my head.

    by anna in philly on Tue Dec 27, 2005 at 09:53:02 AM PST

    •  not only control the oil currency (none)
      but also deny the actual oil to other nations.

      You, have a safe and happy holiday and a lovely '06. May our heads be free of angst and our headlines full of indictments.

      by sadair on Tue Dec 27, 2005 at 12:04:34 PM PST

      [ Parent ]

      •  Key Point (4.00)
        Control of oil is a proxy for control of an economy.  OIl is the critical component and the USA is trying to control as much of it as possible so that it can forestall any rivals be they China, the EU, or India.

        We don't necessarily want all the oil for ourselves.  We want to be able to control the flow of oil so that even when it goes to other countries, that flow still serves our purposes.  Not serving our purposes then no oil flows.  Too bad.

        Solar is Civil Defense

        by gmoke on Tue Dec 27, 2005 at 02:12:21 PM PST

        [ Parent ]

    •  I heard (none)
      that Elvis is really alive and living in Albania.

      Doesn't make it true.  Go read the neocon manifesto.  Those whackos really believed they could do a reverse domino effect in the Mid East.  Keeping the oil flowing was just a nice benefit.

      •  you know, you really DON"T need to be (none)
        insulting - elvis and tinfoil hat comments are not productive.  i am not downrating your comment, but i AM suggesting that engaging in productive discussion is better than demeaning the opinions of others.

        perhaps explaining WHY you disagree would further the discussion rather than insulting the poster then commenting.

  •  The other implication (none)
    If the United States is quietly accommodating a sea change in Sinodollar holdings, and matching its shutdown of M3 reporting with the opening of the Iran oil bourse, that suggests quite strongly that the US is no longer giving talk of invading/attacking Iran serious consideration...the chief reason being that any intrusion into Iran would provoke a serious downturn in relations with China, and perhaps Russia, and Pakistan, and perhaps India, as well.

    It's not a special interest, if you're especially interested in it. :)

    by cskendrick on Tue Dec 27, 2005 at 09:53:26 AM PST

    •  yes, and no (none)
      US is still pushing for UN Sanctions, as Frists article also reiterated.

      Sanctions, if followed internationally (and that's a big if) can accomplish the same thing in this case.

      (-9.13, -8.10) Political violence is a perfectly legitimate answer to the persecution handed down by dignitaries of the state. - Riven Turnbull

      by Florida Democrat on Tue Dec 27, 2005 at 10:11:48 PM PST

      [ Parent ]

  •  Not all oil is traded on exchanges. (4.00)
    Oil is also traded in private contracts off the exchanges.  Those contracts, including some of the bigger ones, sometimes are traded in Euros.  So, the Euroization of the oil market has already begun.

    I'm not nearly so pessimistic.  I don't believe that the fate of the American economic will be deeply influenced by the change from trading oil in dollars to a euros in some markets.  Oh, it may be horrible news for a few Manhattan and Dallas and Houston and London financial firms, but the monetary phenomena that impacts most people is inflation.

    Inflation is, more or less, a function of how many dollars are chasing how many goods.  When a large quantity of oil transaction are removed from the world dollar denominated economy, M3, the measure of the money supply that includes eurodollar shrinks, but the goods (mostly oil) that those eurodollars were chasing goes away too.

    Also, the dollar isn't entirely ephemeral.  There are many long term obligations (e.g. mortgages and Treasury bonds) which are denominated in dollars.  No amount of inflation changes the nominal amount of dollars needed to satisfy those obligations and this provides a brake in the economy on massive changes in currency values over short periods of time.

    "Those who can make you believe absurdities can make you commit atrocities" -- Voltaire

    by ohwilleke on Tue Dec 27, 2005 at 10:02:05 AM PST

  •  Thanks, Soj. Nice try. (4.00)
    But, unfortunately, this will fall off the screen real quick.  I think you're spot on, but, as you can see, you've violated "conventional wisdom".

    A few of us noticed when Saddam tried to switch to the Euro. There is a body of thought that posits that this was the real reason we went to war, to slap that idea down fast.

    I don't agree with Jerome ("nobody will come to the new store") because I think he discounts the schaedenfreud factor (spelling?).  I think a lot of folks are going to be delighted to have a different store to go to buy oil, and to use Euros, just to stick it to Uncle Sam and his keepers, Big (American) Oil.  I think, given a choice to do so, that a whole lot of the world might very well flock to this new market.  I don't think it's unrealistic to say that the rest of the world is quite tired of being pushed around by the Americans.

    We might not attack Iran to stop this happening. I can foresee a clandestine, low-intensity war of sabotage against infrastructures that support the new market. A stealthy cruise missle or two will speak a loud message to those refineries or pipelines or oilfields that dare to participate. Conveniently blamed on the "terrists", of course.

    I'm rolling this little stinkbomb out across the discussion floor, but I have to leave for town right now.  I'll be back to view the wreckage later.

    -8.0, -7.03 don't always believe what you think...

    by claude on Tue Dec 27, 2005 at 10:06:59 AM PST

  •  This story has some real substance (4.00)
    thanks for the in depth behind the scenes look at what is going on.

    Fascinating.

    The Petrol Wars continue.

     Russia, Syria, Argentina (possibly China), in my humble opinion, seem to be leaning to cut the US out of the Oil Monopoly, by creating conditions in Iraq originally and now Iran for an interesting geo-political settling of an old score. See Soviet-Afghan Conflict.

    inspire change...don't back down

    by missliberties on Tue Dec 27, 2005 at 10:10:46 AM PST

  •  I reco'd because this raises some (4.00)
    very interesting questions.  I think there must be something profound behind the M3 issue, so that warrants some discussion in its own right.  Given how the Bush Junta operates, any information going secret is a red flag to me.  What are they up to????

    With regard to the possible oil connection, color me sceptical.  Daily dollar flows directly tied to oil are, very roughly, $5 billion per day (84 million bl/dy * $60/bl).  I'm sure the economists on this site can give a much better estimate for foreign exchange flows directly linked to oil.  Nevertheless, foreign exchange markets trade roughly $1.5 TRILLION per day.  Dollar trade directly coupled to oil is a drop in the bucket / barrel so to speak.  So, even if all oil trades were to be suddenly denominated in euros overnight, I can't see how that in itself could cause a dollar crisis, or am I missing something?

    If the US Establishment really fears a threat to dollar dominance in the oil markets, I think it would be for reasons other than concerns over the dollar's external value in ForEx markets.

    The intrinsic nature of Power is such that those who seek it most are least qualified to wield it.

    by mojo workin on Tue Dec 27, 2005 at 10:15:07 AM PST

    •  Multiplier effect (none)
      Not all the dollars used to buy oil actually exist as such.

      Suppose someone puts cash dollars into a bank in Romania. Then that same bank lends it out to another person, who deposits it into another bank until such time as he uses it to make a transaction. During that period, the original $100 becomes $200 according to the way M1 is measured, since the original depositor still has his $100 waiting for him in his account in the bank. This does not mean there are $200 waiting to return to the United States to destroy the economy. The extra $100 will eventually disappear once the loan is repaid.

      If you want to worry about the US economy, worry about the outrageous US government budget deficit, not nebulous things like Iranian oil bazaars.

    •  Hey eggheads (none)
      how big a ripple might be needed to start this? Soros brought down the British pound by selling 10 Billion short.
      http://en.wikipedia.org/...

      If anyone has good reference material on this debate, please post links.

  •  Another diary (4.00)
    I did a diary on the ending of the M3 a few weeks ago.
      It might be interesting enough for you to read.

    "In her mercy, history anesthetizes those whom she intends to destroy." -Leon Trotsky

    by gjohnsit on Tue Dec 27, 2005 at 10:18:20 AM PST

  •  How does all of this affect those (none)
    countries that use the US$ as either their official or de facto currency? How will the switch to a Euro standard impact them? How will it affect their debts to the World Bank and IMF?
  •  Thanks, Soj! (none)
    It's extremely intriguing to examine all the economic data reports that are:
    1. no longer being released or no longer being reported
    2. that have their indexes "adjusted" (what's being measured) or
    3. how -- using estimates and surveys (instead of hard data.
    4. staging  releases -- first press release is wildly optimistic/spin -- and what registers with the public, later releases "clarify"

    Thanks again for shining light on these numbers.

  •  Holey guacamole (none)
    Must print out and get to friends without computer. Subscribed to author. Recommended.

    Oh dear.

    In troubling times, it's good to read true stories about real people doing good things. HeroicStories, free

    by AllisonInSeattle on Tue Dec 27, 2005 at 11:06:37 AM PST

  •  Isn't it the Bush Bubble writ large? (none)
    If M3's 100% inflation over 9 years is bad news, make it go away by not letting the government publish it anymore?

    BTW: ghonshit's diary is nice.

  •  This leads to an important question... (4.00)
    while this is an issue that has been largely ignored (or just not talked about) as it has been going on for almost as long as this country has been in its existence, is whether we really want the U.S. to be a country that invades others & tries to control the politics of the entire world, just so we can drive SUVs and live in the suburbs.

    The fact of the matter is, we have already been doing this for a long time, but nobody wants to admit it (see--the Shah of Iran).  Actually, it's been going on for a long time with regard to other commodities besides oil (I believe that various fruit companies have always had a strong interest in Latin & South American politics & the abundance of rubber likely had something to do with our involvement in Vietnam).

    Whether this diary draws the proper conclusions about where the Iranian bourse could lead with respect to American currency valuation is, I think, a relatively minor issue versus the larger point that I think this diary leads us to...which is, what do we really want our country to be?  

    It is speculated that WWII took place largely because Hitler needed to make war to prop up the failing German economy.  Is that what will become of the U.S.?  Are we going to be the country that makes war solely for the purpose of sustaining an economic path which would otherwise be unsustainable?  I like to think not...I'm generally not a believer in the doomsday type of scenario, but I have to confess that seemingly minor reports like this one, when gathered together, paint an ominous picture of our future in that regard.

    I would rather be exposed to the inconveniences attending too much liberty than those attending too small a degree of it. -- Thomas Jefferson [-4.25, -5.33]

    by GTPinNJ on Tue Dec 27, 2005 at 11:16:01 AM PST

  •  The emperor's old clothes (none)
    Ever get the feeling that our emperor takes off his clothes in the belief that by doing so his nakedness will disappear?  i.e., if you're not reporting something, it isn't happening.

    very interesting diary.

    Democrats give you the Bill of Rights; Republicans sell you a bill of goods!

    by barbwires on Tue Dec 27, 2005 at 11:40:25 AM PST

  •  There is another reason for getting rid of M3 (none)
    dollar counts:  the drugs markets are also done in dollar based transactions, and mostly in cash.  

    People are usually more convinced by reasons they discovered themselves than by those found by others.

    by BlaiseP on Tue Dec 27, 2005 at 12:12:37 PM PST

    •  I read reports that Euros are now the preferred (none)
      currancy among Russian and South American drug cartels.
      •  Is it because there is a larger deenomination... (none)
        Euro that is in circulation than the dollar? More easily concealable, as the number of bills/bank notes would be considerably less to equal the same amount of dollars?

        People in Eurasia on the brink of oppression: I hope it's gonna be alright... Pet Shop Boys: Introspective

        by rgilly on Tue Dec 27, 2005 at 10:28:23 PM PST

        [ Parent ]

        •  No. (none)
          It's because of the convenience of dealing in the currency that you will ultimately spend on yourself.

          Drug dealers aren't committed to the idea of numbering themselves amongst the currency inteeligentsia.  They don't hang around the US as much as they used to because the heat's too hot - and they party in Europe.  Note also that the Canadian Dollar is a primary illegal transaction currency.

          JF

          Invest in your future - VOTE DIEBOLD!

          by Jaime Frontero on Wed Dec 28, 2005 at 08:12:27 AM PST

          [ Parent ]

          •  I only heard that euro denomination factoid... (none)
            quoted before. Europe is a much cooler place to spend money, and I imagine the Cartagena bunch and others don't really mind having to pay VAT.

            As far as Canada is concerned, I would be guessing Montreal and not Ottawa as being the preferred destination for the illicit compounds manufacturing set.

            People in Eurasia on the brink of oppression: I hope it's gonna be alright... Pet Shop Boys: Introspective

            by rgilly on Thu Dec 29, 2005 at 03:55:21 AM PST

            [ Parent ]

  •  iraq's oil output (none)
    this is off on a tangent, but with so may oil and econ wonks on the thread i thought it was worth asking again.

    soj mentions that iraq tried to switch over to petroeuros in november of 2000.  earlier this year i was looking at a graph of iraq's oil output and noticed that output began to drop in 2001 two years before we invaded.

    i was unable to find any reason for this, nor any mention at all, actually.  there were a few comments in the diary i posted here, but no answers.

    anybody here have any ideas?

    we'd better decide now if we are going to be fearless men or scared boys.
    — e.d. nixon, montgomery improvement association

    by zeke L on Tue Dec 27, 2005 at 12:17:51 PM PST

    •  pretty straighforward (none)
      we embargoed oil field equipment to Iraq.  Without maintenance, more drilling etc, things decline.

      By all reports, the oil infrastructure in Iraq was held together with bailing wire, chewing gum and scotch tape.  It will take billions to get the place up to the same standards at Saudi or Kuwait.

      •  when did the embargo start? (none)
        are you saying that we originally allowed equipment (and presumably american oil services providers) into iraq when the oil-for-food program began in 1995, but then embargoed that as a result of the switch to petro-euros?

        that could explain it, although i thought that french and russian providers were taking up the slack.

        we'd better decide now if we are going to be fearless men or scared boys.
        — e.d. nixon, montgomery improvement association

        by zeke L on Tue Dec 27, 2005 at 01:12:29 PM PST

        [ Parent ]

        •  no (none)
          but before 1991 the Iraqis could buy from anyone.  After GWI, most equipment was embargoed from any supplier.  Especially as the bulk of the revenues had to go to buy food.  

          this whole "switch to euros triggering chaos" meme is just ridiculous.  It would have made no tangible difference to the markets, either oil or currency.
          what would effect the USD is the rest of the world making a decision to not hold our currency as a reserve.  

          •  you're not addressing my question then (none)
            look at the graph.

            following GW1 iraq's output was just slightly over domestic consumption.  in 1995 they were allowed to export via oil-for-food, and production went up to over 2.5 Mbl, not quite as much as before the invasion of kuwait, but close.

            in 2001 the production dropped.  if the equipment embargo started in 2001, that can't be the reason.

            we'd better decide now if we are going to be fearless men or scared boys.
            — e.d. nixon, montgomery improvement association

            by zeke L on Wed Dec 28, 2005 at 02:51:19 PM PST

            [ Parent ]

            •  ok I'll try (none)
              after GW1 (1992), Iraqi exports were shut off by UN embargo.  All they could produce was enough for domestic consumption + whatever they could smuggle to Turkey, Jordan, etc.  IIRC, oil field equipment was also embargoed so hard to repair some equipment or buy drilling bits etc.

              After oil for food, they jumped up production as much as they could to generate cash for food and whatever else they could sneak via smuggling(1995).  They were no where near their pre-war peak as a lot of stuff had been damaged and sat idle for years. IIRC, they could produce about 3.5MMBD (OPEC quota was lower constraining real production) before GW1 and were heading toward 5 MMBD.  They were allowed to buy some limited amount of oil field equipment but they couldn't do much given most of the money had to go to food, reparations to Kuwait etc.  

              at 2001, IIRC Saddam cut back on exports to punish the US etc (oil weapon).  that and the prelude to the war hit production.

  •  I'm not sure of the reason (none)
    Many thanks for posting the news of this decision, of which I wasn't previously aware.  I'm not sure you're right on the reason for this decision, but there is certainly SOME reason, and the fact that the Fed hasn't seen fit to explain what it is strongly suggests that it's one that wouldn't really withstand the light of day -- such as wanting to be able to hide what the Fed already anticipates doing.

    Interestingly, there are several columnists who think that Bernanke is something of a closet inflationist and may be wanting to hide a substantial INCREASE in M3.  Below are some links that I've found that discuss this rather bizarre decision (none of which I'm all that familiar with, so I certainly don't vouch for their credibility):

    http://www.gillespieresearch.com/...

    http://www.gillespieresearch.com/...

    http://www.safehaven.com/...

    http://www.suite101.com/...

    http://economistsview.typepad.com/...

    http://prudentinvestor.blogspot.com/...

    http://prudentinvestor.blogspot.com/...

    One that summarizes various theories (and has an obvious bias toward anything that pumps up the price of gold) is:

    http://news.goldseek.com/...

    Whatever the explanation, however, one quote kept recurring in several of the articles, although I don't know who originally wrote it:  "Looking back into history economic data was only kept a secret in failing economies, e.g. the Soviet Union."  And whatever the explanation, I don't think it's likely to be a good one for the U.S. dollar or the U.S. economy.

  •  TINFOIL HAT ALERT (4.00)
    Once again it becomes necessary to debunk the notion that it matters what currency they quote oil prices in.  It doesnt.  And no, you dont actually need the dollars to execute the transaction.  Oil traders have those nifty forex screens on their computers just like everyone else and they too know the exchange rates to 10 decimal places.  They will be happy to take hard currency and convert it at the going exchange rate.

    What really matters to the value of the dollar is what currency the various parties choose to hold their assets in at the end of the day.  For ex. if the oil trader receives dollars and immediately turns them into euros (which can be done in 5 seconds, quite literally) then there is no increase in demand for dollars as a result of the transaction EVEN IF THE TRANSACTION NOMINALLY TOOK PLACE IN DOLLARS.  

    Sure, you need to pick one currency to post prices in or everyone gets confused but it is a serious mistake to think that this somehow stabilizes dollar prices (as I have seen argued on this site from time to time)  To convince yourself of this just print out a series of oil prices over the past 5 years in dollars and in euros and you will see that the euro price is far more stable.

    As for not posting M3 figures I dont know for a fact but I strongly suspect that they are doing this as a cost cutting measure. (And also they dont really care about data).  US banks have to report holdings so the govt. gets that no matter what.  European banks are NOT required to report holdings to the US, nor are Japanese banks, etc. etc.   It is somewhat more of a pain to actually get this data and they probably just dont want to bother anymore.

    Hide the "debasement of the currency"?  Please.  If there ever was a market where you couldnt hide the true value of things it is the foreign exchange market.  You may think (and I certainly do) that the currency traders get it wrong and have the attention span of a flea.  But the ability of the government to swing this market in directions they like is limited to nonexistent.

    So chill on the fantastical conspiracy theories.  I know quite a few people who work in the Federal Reserve and a more professional bunch you would be hard to find.  Even Bernanke stands out as perhaps the only truly qualified professional without any political agenda nominated for a top post by the current administration in a long time.

    No, the lunacy of our economic policy isnt hidden at all.  It is right out there in the open for all to see.  We are on track to borrow another $800 billion from the foreigners this year, largely as a result of the Republican obsession with tax cutting and increasing spending on pet projects.  THAT is the elephant in the living room folks, no need to resort to conspiracy theories.

  •  damn! have bookmarked your diary (none)
    for further study when i'm not time pressed - but halfway through it was this tidbit...
    Iran had originally scheduled to open its bourse (or stock exchange where oil could be sold and bought in Euros) in 2005.  That obviously hasn't happened, but now the date is set for Spring 2006.  Exactly when the Fed says it will stop printing statistics of how many dollars are in existance overseas.  In fact, just this week the Iranian government has issued preliminary licenses to trade on that bourse.

    What's not well known is that Saddam Hussein decided to switch from selling Iraq's oil in dollars to Euros in November 2000.  This was not widely reported.  At the time, Iraq's oil sales were limited and were under UN supervision (as part of the "Oil for Food" program) so the sale in Euros did not have a major impact.

    thought it was worth repeating since this is the reason we will attack iran!

    prior to the attack of iraq, i had been screaming the same thing: oil for euros is the reason bush is going after hussein!  his attempt to switch to euros was the catalyst as it would break the financial back of the u.s.

    i had almost forgotten this little story - but when you now speak of the iranian bourse, watch for an attack in the works sometime in the very near future!

    damn...damn... damn...  they will used the excuse of nuclear weapons again, JUST like the last time.

    when will we ever learn? when will we EVER learn!

  •  Getting the info (none)
    What actions can be taken to retrieve M3 info after Spring '06?  It would be good to request that info somehow and then publish it on a separate website.

    Thanks for the post, Soj, and for the refresher on your blog about the Fed.  

    The Brudaimonia | what freedom's not some under's mere above? - e.e. cummings

    by Brudaimonia on Tue Dec 27, 2005 at 12:51:08 PM PST

  •  Clearly Oil Should Be Denominated in iPods (4.00)
    Then America's economic future would be assured.  ;)

    None are more hopelessly enslaved than those who falsely believe they are free. - Goethe

    by Necons Will Ban Me on Tue Dec 27, 2005 at 01:07:55 PM PST

  •  The main purpose (none)
    of hiding the M3 is to hide the upcoming debt monetization that the Federal Reserve is planning.  Since we have structural deficits, the Fed almost has no other choice but to fire up the presses to repurchase US Treasuries.  If the markets knew the M3, then they would know exactly how to devalue the dollar and we can't have that now, can we??
    •  Monetization (none)
      Seems the Fed is printing lots of money already. Check this out:

      Over the past two days, December 21st - when our first Hindenburg Omen (of whatever cluster is coming) - and Thursday December 22nd, the Federal Reserve has conducted one of the largest two-day Repo injections of money into the system since back in September 2001. On Wednesday they added $18.0 billion in reserves and on Thursday they added another $20.0 billion. . . . The date when M-3 will start being hidden also happens to be the exact month that Iran will declare economic war against the U.S. Dollar by trading its oil in Petro-Euros on its new bourse. But there is more. The Federal Reserve currently has three vacancies within the 19 top Regional Bank and Board of Governor spots. Why? Part of ongoing wholesale resignations.
      . . .
      So what about M-3 the past week? The latest figures show that on a seasonally adjusted basis, M-3 rose 27.3 billion last week, a 14.0 percent annualized clip, and is up $76 billion over the past month, a 9.8 percent growth rate. But those are the massaged numbers. For the raw figures, fasten your seat belt. Are you ready? M-3 was increased $58.7 billion last week (that does not include the huge Repo infusions noted above), a 30.0 percent annualized rate of growth. For the past two week, the Fed added $93.5 billion to the money supply, a 24.0 percent annual clip. Over the past 6 weeks it is up $192.9 billion, a 16.7 percent Banana Republic hyperinflationary pace. This is nuts, folks - unless there is an incredible risk out there we are not being told about. That is a lot of money for the Plunge Protection Team's arsenal to buy markets - stocks, bonds, currencies, whatever. This level of irresponsible money supply growth makes shorting markets hazardous, yet at the same time says markets are at huge risk of declining. Maybe M-3 growth doesn't stop the decline this time. Should be a fascinating storm in 2006.
  •  Cashing out? (none)
    Thanks for your informative diary.  I would agree with your casino analogy - my question is; is it possible to cash out? If so, how and what would it take?   I can only think of getting away from dependance on foreign oil and investing in energy technology. (my hope's withITER)
    Still 2016 is a long time away ...
  •  Canada's too cold to move to (none)
    Perhaps I could try Okinawa?

    I re-did my website! See how pretty DailyGranola.com is now.

    by OrangeClouds115 on Tue Dec 27, 2005 at 04:03:50 PM PST

  •  ya see? (none)
    now, this is why i love dailykos.
    Thanks for the info Soj.
  •  Other reasons to hide M3? (none)
    I'm no expert and can hardly tell the panic-ists from the realists but I found, from Dec 23, this interesting


    So what about M-3 the past week? The latest figures show that on a seasonally adjusted basis, M-3 rose 27.3 billion last week, a 14.0 percent annualized clip, and is up $76 billion over the past month, a 9.8 percent growth rate. But those are the massaged numbers. For the raw figures, fasten your seat belt. Are you ready?

    M-3 was increased $58.7 billion last week (that does not include the huge Repo infusions noted above), a 30.0 percent annualized rate of growth. For the past two week, the Fed added $93.5 billion to the money supply, a 24.0 percent annual clip. Over the past 6 weeks it is up $192.9 billion, a 16.7 percent Banana Republic hyperinflationary pace. This is nuts, folks - unless there is an incredible risk out there we are not being told about. That is a lot of money for the Plunge Protection Team's arsenal to buy markets - stocks, bonds, currencies, whatever. This level of irresponsible money supply growth makes shorting markets hazardous, yet at the same time says markets are at huge risk of declining. Maybe M-3 growth doesn't stop the decline this time. Should be a fascinating storm in 2006.

    The recent rise in Gold catalogued 74 points over about a month, a 16 percent rally from precisely the day the Fed announced it would hide M-3 from taxpayers and citizens of this great nation. That is no coincidence. Gold sees hyperinflation, monetization of debt, and intervention into free markets. Gold is telling us it expects Ben Bernanke to be an inflationist.

    My purely kneehigh-to-an-amateur understanding of global economics connects this article with recent news items I've heard--big job growth expected next year (remember there's an election coming up), economy growing and strong, etc etc

  •  This story comes from... (none)
    a website that blogrolls rense.com  (http://www.safehaven.com/...) . As a fairly newbie to stock trading, it had me upset for days after reading it, even though I knew the author to be a "doom and gloom tonic salesman". Thank you Jerome, for easing the burden.....

    The first duty of a revolutionary is to get away with it.. Abbie Hoffman

    by meagert on Tue Dec 27, 2005 at 06:41:57 PM PST

  •  And the Water is Next (none)
    I highly recommend taking the time to read this dairy.

    Who Owns the Rain

    inspire change...don't back down

    by missliberties on Tue Dec 27, 2005 at 08:11:10 PM PST

  •  WOW (none)
    This is HUGE. It took a while to understand what you were saying, but holy shit, Batman.

    Here's a laundry list of things that will make the economy suck eggs very soon that I posted to Jerome's diary. This is yet one more sucky thing that will give America's economy a karate kick in the rocks come next spring.

    I don't like Bizarro World... I want to go home to America.

    by willers on Tue Dec 27, 2005 at 08:45:09 PM PST

  •  Iranq Oil (none)
    What happens when Iran trades its own oil on its own bourse in Euros, in addition to all Iraq's oil? Sadddam's Iraq was already gearing to sell in Euros, and Iran has been steadily moving to control Iraq's government since the US invasion. Now that Iranian spy and US puppet Chalabi has been discarded by the election last week in favor of exclusively Iranian Shi'ite ministers, a faithful Iranian Oil Minister can direct a regional economy like NAFTA. And why shouldn't Saudi Arabia sell through the local exchange, when it increases Saudi control of Euro economies as well as the NYMEX has hooked America's?
  •  Federal Reserve System Major Error!!! (none)
    Soj, your understanding of the Fed is badly off.  

    To fully understand how the "Federal Reserve" is neither federal nor a reserve of anything of value, see my full-length story here.

    Your full length story states that the Fed is privately owned.  This is false.  

    Check out the Fed's website.  You need to read the  FAQ's (http://www.federalreserve.gov/...)

    For example:

    How is the Federal Reserve funded?

    The Federal Reserve's income is derived primarily from the interest on U.S. government securities that it has acquired through open market operations. Other sources of income are the interest on foreign currency investments held by the System; fees received for services provided to depository institutions, such as check clearing, funds transfers, and automated clearinghouse operations; and interest on loans to depository institutions (the rate on which is the so-called discount rate). After paying its expenses, the Federal Reserve turns the rest of its earnings over to the U.S. Treasury.

    emphasis mine

    •  Um (none)
      That just talks about earnings not ownership. It's well documented that the US government does not own shares and it is a private entity.
      •  The Reserve Banks (none)
        The Reserve Banks issue shares of stock to member banks.

        The stock may not be sold or traded or pledged as security for a loan; dividends are, by law, limited to 6 percent per year.[1]

        The dividends paid to member banks are considered partial compensation for the lack of interest paid on member banks' required reserves held at the Fed.

        Its decisions do not have to be ratified by the President or anyone else in the executive or legislative branches of government, it does not receive funding from Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms.

        http://en.wikipedia.org/...

        •  keep trying (none)
          Who owns the Federal Reserve?

          The Federal Reserve System is not "owned" by anyone and is not a private, profit-making institution. Instead, it is an independent entity within the government, having both public purposes and private aspects.

          As the nation's central bank, the Federal Reserve derives its authority from the U.S. Congress. It is considered an independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government, it does not receive funding appropriated by Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms. However, the Federal Reserve is subject to oversight by Congress, which periodically reviews its activities and can alter its responsibilities by statute. Also, the Federal Reserve must work within the framework of the overall objectives of economic and financial policy established by the government. Therefore, the Federal Reserve can be more accurately described as "independent within the government."

  •  Great diary! (none)
    I read that same little news release about the Fed and thought that to be kind of strange.  The reporting of M3 had always been an important stat.  I know the world is changing and all that, but still I thought that a little odd.

    Highly recommend.

    If the people lead, the leaders will follow.

    by Mz Kleen on Wed Dec 28, 2005 at 04:52:54 AM PST

  •  Iran can shut down a significant part (none)
    Iran can shut down a significant part of world oil trade just by terrorizing the Hormuz Straight. If they start harassing tankers and sinking them - you can be the price of oil will shoot up. Kuwait, Saudi Arabia, Iran, Iraq... all the boats have to go through that bottleneck. What percentage of the market it that? Image pops

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