Amsterdam- 19 September 2007- This is an interactive journalistic article in diary format. The three components of the story are hyper modern 'cities' which are interconnected and, who knows, perhaps interchangeable by the time the story ends. Collaboratively the three cities are M3. In today's world, M3 is an economic indicator that the US Federal Reserve has given up on publishing in 2006, for undisclosed reasons. How the three cities will become interconnected/interchangeable will be the plot of the story. Which hopefully which weaves itself.
Let’s pick the parties to this threesome. They are an oil industry computer terminal, a car manufacturer’s terminal and a US-made anti tank vehicle known as M3.
We’ll base the oil terminal in Iran. It connects oil traders to an exchange. The car manufacturer terminal? BMW M3 production line. The M3 tank destroyer is also known as The Stuart. It was a strategic armoured vehicle during WWII. It’s our link to the past, so not a computer terminal but something quaintly tangible.
When the three cities connect, they are M3. Collectively, they represent the flow of currency. Whether you know it or not.
My advice; do or do not put up resistance. It’s not even futile. Money in itself is nothing.
This is a historic moment, because the story starts here. Too bad the first line’s already hit the page. I'll keep the champagne for the last line. As for the drum rolls, this story will hopefully contribute to them not becoming manifest by means of armoured tanks...
Events in the Tale of Three Cities (M3 for short) revolve around that very same thing that makes the world go round; money. (Thank GOD, thank GOWWD, this isn’t the first line. What a crapper. Deep breath...)
Incidentally, Charles Dicken's novel is best known for its first and last lines. These are
"It was the best of times, it was the worst of times..." and "It is a far, far better thing that I do..."
Money connects the three ‘cities’ more than only superficially or by sheer coincidence.
To introduce you to the most commonly known definition of M3; it’s a money supply indicator which measures the amount of a country’s currency held in overseas banks. We need to inform you of one more fact; in the case of the US, it doesn’t exist publicly any more since a year ago. The Federal Reserve, in its utter wisdom, decided it no longer publishes the number. Nobody really knows why. Economists are not too deprived, they can live without it easily. Other indicators are far more informative. Some of them say there’s no policy move behind it, others believe it's the biggest story of 2006 and again others say that it's a signal from US monetary authorities that the rules of the game are about to be changed fundamentally, on a par to Nixon's decision to close the window on gold.
"[I’ve] long since discounted [the decision to no longer publish M3 by the Fed] as being of anything more than presentational significance", says Chris Cook. He is the person that dreamt up the idea of the Iran Oil Bourse. He argues that it’s way more important to be in the know about the US trade deficit than to know M3 numbers.
"M3 is of course a partial measure of the US Money Supply and has a fairly muddy relationship with the US fiscal deficit, but it is the trade deficit which is the principal reason why the $ is coming under strain", he says. Finance is a fast world and people that are involved in it soon forget. The story hardly made headlines and by now has died a death.
Nevertheless, I am putting in an inquiry at the FED and some financial cowboys into this matter. For the time being, in the absence of an official explanation, rather than assigning meaning the disappearance of the US M3 number, let’s simply say it adds to the mysterious setting of our Tale of Three Cities;
We’ll say that in M3, where cities are interchangeable with computer terminals or army tanks only because of numbers, you might simply not be able to ‘dial’ a number. Something of the sort.
The future might not be as far removed from us as the science fiction stories tend to indicate. For starters, our three Cities are not fictional; Plans for an Iranian oil bourse competing with London and New York’s oil traders are in the pipeline. The Stuart has a curiously ominous presence to it. Modern anti tanks don't look any different from it. We’ll have this destroyer tank symbolize the Chinese military threat. The BMW entry provides a possibly more random aspect. Google this exact phrase ‘What is the importance of M3’ and you’ll find an Ebay ad for a BMW M3 in Belgium topping the list. It's not relevant at all, but I am using the example to see how much room for absolute randomness there’ll be in a future scenario. Perhaps the BMW contestant simply won’t ‘make it’ to the final chapter I am reserving for it, but we'll see.
Life is either going to be far from ideal in M3. Sounds twee but it's simple truth. Am I kidding? Is this going to be a mockery? An account of a tragic irony? Utter speculation, interspersed with dashes of structured planning?
Who knows? The future’s not here yet.
Let’s try our level best to be as realistic as possible in writing as detailed, factually correct an account of the real life M3 components and their connection to each other.
First, the Iranian Oil Bourse (IOB). Is this the odd one out, because there’s no direct M3 terminology? Not at all. Our first contestant is highly relevant precisely because of its M3 connection.
Since it was first announced it would be launched, there’s been a lot of speculation about the bourse’s supposed plan to compete with the US dollar’s supremacy in global oil markets. That it was a follow up to Iraqi President Saddam Hussein’s plan to switch to the Euro, only months before his country was invaded.
Last weekend I interviewed Chris Cook about this for an article on Global Politician and got a sneak peak into the world of finance. Which is somewhat intermarried to the world of politics, but financiers are a different breed. You know, those types that you generally sort of casually avoid at parties until you meet the one that informs you equally casually of THE reason Congo was also casually split into two (the internet). That type. This bunch is far wilder than sad historians on the lookout for clues as to why Maya civilizations seem to be spontaneously re-occurring in city neighborhoods.
At first, the Iranian Oil Bourse’s inventor appeared to be a let down. Cook indicated the bourse has received a lot of ill placed hype. Perhaps it’s because reality on the ground in Iran sort of brings you back to your senses. Cook experienced virtually no progress working on the oil bourse since 2004. "I’m off the market radar screen at the moment. No-one takes the "Iranian Oil Bourse" seriously, because of the delays, and all the nonsense on the Internet", he says. The bourse’s lauch has been delayed repeatedly. That must be quite frustrating.
Cook says that there is no substance to the idea that the Iranian Oil Bourse is going to take the life out of the US finances. All he is trying to do is to provide a solution to ‘systemic oil market manipulation by trading intermediaries such as investment banks’. When in 2001 he "blew the whistle" about investment banks’ greedy immoral market manipulation and pointed out how this impacts on producers and consumers, a well connected Iranian introduced him to the Iranian Central Bank Governor. Who is also convinced about the necessity for a Middle Eastern oil exchange which is not susceptible to speculator driven volatility and manipulation by middlemen. "A couple of years later we were invited to draw up blueprints for the "IOB" project", says Cook.
He’s going back to Iran after Ramadan, but it’s not certain that he’ll really gets things going this time, despite President Ahmadinejad’s attempt to shake up the Oil Ministry. A development Cook might inadvertently have had a part in. A while ago, he wrote to President Ahmadinejad to complain about the role of the Iranian Oil Ministry in holding back the project and request his personal support. Asked what President Ahmadinejad answered, Cook says there’s not been a reply to date. "[..] but we know (through top level contacts) he read it. We know he put the Oil Minister on the spot with it, and we know it was a major reason why he was able to sack the Oil Minister recently, and replace him with an interim Minister who is busily sacking some of the "oil mafia", while he can".
This is the letter. I'll publish it in its entirely because it is hilarious.
Further to our previous letter to Your Excellency dated 6 July 2006, it is our understanding that you have tasked Dr Saleh Abadi, the Chairman of the Tehran Stock Exchange with implementation of the above Project.
Upon Dr Abadi’s invitation we therefore made presentations in Tehran on 30th and 31st October 2006 outlining the steps required to develop and implement the necessary elements of an Exchange, and a strategy in relation to contract design both consistent with Islamic Values and providing a new "asset-based" financing option or "enterprise model".
We agreed with our partners, the Tehran Stock Exchange Services Company, a "Road Map" document, for agreement forthwith by the Oil Ministry and Ministry for the Economy jointly, setting out an achievable implementation strategy, and we understood that following this agreement control of the project would pass to Dr Abadi.
Regrettably the Oil Ministry now appears to have "mislaid" this document, which is entirely consistent with their approach to this Project throughout.
We humbly submit that we believe it is necessary for Your Excellency to issue detailed written instructions to the relevant Ministers, with a timeline for delivery, in respect not only of the formal transition of responsibility for this Project to Dr Saleh Abadi, but also of the allocation forthwith of the necessary financial resources into the control of the Consortium.
Furthermore, it appears to be the case that the Oil Ministry took the view that the best way to prevent the Project from progressing was to refrain from paying those responsible for carrying it out, and we therefore remain unpaid after 2 years and 3 months in respect of work done in good faith for the Ministry. While we might not be surprised at such business conduct in a bazaar, we did not expect it from one of Your Excellency’s Ministers.
We therefore humbly submit that your Excellency may give consideration to the Presidential Office settling this embarrassingly long-outstanding matter directly and recovering the necessary amount administratively in due course from the Oil Ministry.
As previously stated, we believe that this project is of an importance which behoves us to brief you in respect of it personally, and can report that following a meeting with Mr Kamal Daneshyar, the Chairman of the Majlis Energy Commission, he expressed the view that we should be invited to address the Majlis Energy Commission as well, which we would of course be honoured to do.
Cook hopes to brief President Ahmadinejad personally. He plans to meet the Governor of the Central Bank soon after Ramadan. His Iranian business partner also met Khatami, who was right behind the Bourse, 'but by then had no power to do anything about it', says Cook.
So what is the Iranian Oil Bourse going to be all about, if it’s not a deliberate attempt to kick the US dollar in the goolies? "The currency of the IOB contracts was never a consideration," says Cook. Nevertheless it completely takes the dollar out of the equasion. The bourse will be trading on a concept that is new in the oil markets but which is already operating in other fields. It's bafflingly simple Buyers and sellers directly connecting via the internet on a Peer to Peer market place. There’s an additional clearing function to ensure the actual delivery. No trading intermediaries such as investment banks as middlemen making hefty profits.
While the global oil price is determined by supply and demand, Cook believes that the proposed IOB structure will remove much of the current price volatility caused by a toxic combination of speculation by hedge funds and market manipulation by intermediary traders.
It’s most likely that the pool the IOB starts out with is going to be an uncontroversial item like Bitumen (thick stuff that’s a main ingredient in tarmac). "You can’t run before you can walk, and there is huge resistance in Iran to transparency in the existing market in crude oil. That’s why [ ..] we got nowhere with crude oil", Cook says.
Bitumen will be traded through the buying and selling of units in a corporate vehicle either owning the stuff, or rights to its future production .This trading will work pretty much along the same lines as the way gold is traded; it confers no income but acts as a "store of value" or "hedge against inflation". The bitumen-owning "Pool" entity will issue redeemable "units" or "shares" denominated not in cash, but in (say) tonnes of bitumen. Bitumen users can buy these units which may then be exchanged or redeemed against the physical material. The seller (say an Iranian state company) receives an interest-free loan in exchange for selling bitumen into the Pool. In return, the seller must accept units in exchange for bitumen production if offered them instead of cash by a buyer wishing to actually use the stuff, say on roads..
Nifty idea or what? Other oil exchanges trade futures contracts, ie claims to assets which are denominated in a currency that is issued by a central bank and which is offering in return investors with the opportunity to invest their profits in a non tangible substance; US debt. What the Iranian Oil Bourse aims to establish is something that connects investors more directly to the tangible world that they are investing in. By cutting out the dollar, a huge speculative element is taken out of the equation. First, investors do not have to buy a currency to do their oil trading in from a country that offers little else than T-bills by means of assets that foreign investors may hold.
The IOB's scrapping the dollar, if not practically then psychologically is going to significantly embody a counterweight to dollar domination of the oil markets. The US economy's weakness is that it is deficit based. It is beginning to make all Americans loath their own consumption addiction with a vehemence. Cook hates this type of hyped up speculation but he admits that the US has got a problem. A dollar currency is traded on oil markets globally, but it's without an equivalent asset base in the US.
Cook says that oil is not priced in dollars but dollars are priced in oil. That is eery, both from an investor and from a US government point of view. "If proceeds from oil sales are not being invested in US Treasury Bonds or other US assets (or liabilities), then it makes it that much more difficult for the $ to avoid further declines", he says.
Sharia’h has no problem with profits provided risks are fairly shared. For that matter, a Nymex style exchange simply wouldn’t work in the Middle East. "Any "deficit-based" contract involving "gearing" is essentially un Islamic, which rules out virtually any conventional derivatives contract", says Cook. The closest real life comparison to the Iran oil bourse is exchange traded funds invested in commodities, and Real Estate Investment Trusts ("REITs") invested in property.
So it’s back to basics at the IOB. Literally and not as a figure of speech. The IOB is a worthy contestant to our Tale of Three Cities. We’ll hunt around to see if there are more initiatives that extend this logic. It will be a good counterweight to the more war prone M3 components that I will introduce you to later.
I need to go job hunting today and must go. One last thing;
Cook's experiences in the Iranian oil industry highlight how ridiculous the US embargo against this country is. Foreign involvement isn't even what this country appears to be AFTER. Iranians are not keen at all to get foreigners to gain control over their natural resources. Just like the American debt problem is totally due to the US' own hesitance to allow foreign investment in tangible assets.
The fact that sanctions do not hurt Iran as much as the US would like, has since the end of August become the published excuse for lobbying for stricter sanctions. Iran is not listening because it keeps at the nuclear program so must be punished more to beat it into submission, so the politicians tell us. But Iran has signed its August 23 deal with the IAEA pledging to show all its records of the past 5 years. News that broke yesterday of the Iranians' supposed possession of some 600 Shehab-3 cluster bombs underlines once again the dual standards that the US has in nuclear issues. Last February when 46 nations called for a ban of these weapons, Washington said these bombs should be allowed as part of countries' arsenals.
Under normal circumstances, the Iranian sanctions should be lifted. The Iranian stubbornness in continuing the nuclear program is simply not the issue anymore, because it tentatively abides by the law.
O yes, by the way; Google might feature in a sequel (a Tale of Thee Plus One Cities). It’d be a real time account of Google sponsored car manufacturer Rover’s attempt to make a trip to the moon. It’s our direct link to God maybe. It’ll depend on the plot of this tale...
(to be continued...)