By Dean Baker
For at least the last decade, a persistent, recurring conspiracy theory has held that major oil exporters will stop pricing oil in dollars, which will then lead to a collapse in the U.S. economy as the dollar becomes worthless. According to some accounts, Iraq’s decision to price its oil in euros rather than dollars precipitated the U.S. overthrow of Saddam Hussein, and Iran’s threats to move away from the dollar is the real reason the U.S. government is raising the alarm over the country’s nuclear program.
The latest item in this tradition was an article by Robert Fisk, a longtime Middle East correspondent, in the London-based Independent. The article warns of a grand conspiracy between the Arab oil states, China, Japan, Russia, and France to stop pricing oil in dollars by 2018. When this happens, Fisk says, the dollar will suffer a severe blow to its international standing and the United States might struggle to pay for its oil. The article apparently caused a shudder in the currency markets yesterday, as panicked investors unloaded dollars in reaction to the terrifying prospect of this alleged international oil conspiracy.
But they really shouldn’t be concerned. Fisk’s theory would make a good plot for a Hollywood movie, but it doesn’t make much sense as economics. It is true that oil is priced in dollars and that most oil is traded in dollars, but these facts make relatively little difference for the status of the dollar as an international currency or the economic well-being of the United States.
With the United States’ ascendancy as the pre-eminent economic power after World War II, the dollar became the world’s reserve currency: Most countries held dollars in reserve in the event that they suddenly needed an asset other than their own currency to pay for imports, or to support their own currency. Much international trade, including trade not involving the United States, was carried through in dollars. In addition, most internationally traded commodities became priced in dollars on exchanges. However, the dollar was never universally used to carry through trade (even trade in oil), and the pricing of commodities in dollars is primarily just a convention.
Any market — a stock market, a wheat market, or the oil market — requires a unit of measure. The importance of the U.S. economy made the dollar the obvious choice for most markets. But there would be no real difference if the euro, the yen, or even bushels of wheat were selected as the unit of account for the oil market. It’s simply an accounting issue.
Suppose that prices in the oil market were quoted in yen or bushels of wheat. Currently, oil is priced at about $70 a barrel. A dollar today is worth about 90 yen. A bushel of wheat sells for about $3.50. If oil were priced in yen, then the current price of a barrel of oil in yen would 6,300 yen. If oil were priced in wheat, then the price of a barrel of oil would be 20 bushels. If oil were priced in either yen or wheat it would have no direct consequence for the dollar. If the dollar were still the preferred asset among oil sellers, then they would ask for the dollar equivalents of the yen or wheat price of oil. The calculation would take a billionth of a second on modern computers, and business would proceed exactly as it does today.
It does matter slightly that the trade typically takes place in dollars. This means that those wishing to buy oil must acquire dollars to buy the oil, which increases the demand for dollars in world financial markets. However, the impact of the oil trade is likely to be a very small factor affecting the value of the dollar. Even today, not all oil is sold for dollars. Oil producers are free to construct whatever terms they wish for selling their oil, and many often agree to payment in other currencies. There is absolutely nothing to prevent Saudi Arabia, Venezuela, or any other oil producer — whether a member of OPEC or not — from signing contracts selling their oil for whatever currency is convenient for them to acquire.
Even if all oil were sold for dollars, it would be a very small factor in the international demand for dollars, as can be seen with a bit of simple arithmetic. World oil production is a bit under 90 million barrels a day. If two-thirds of this oil is sold across national borders, then it implies a daily oil trade of 60 million barrels. If all of this oil is sold in dollars, then it means that oil consumers would have to collectively hold $4.2 billion to cover their daily oil tab.
By comparison, China alone holds more than $1 trillion in currency reserves, more than 200 times the transaction demand for oil. In other words, if China reduced its holdings of dollars by just 0.5 percent, it would have more impact on the demand for dollars than if all oil exporters suddenly stopped accepting dollars for their oil.
‘Medicare for All’ Isn’t Sounding So Crazy Anymore
To be able to deliver on its promises, single payer would not only require trillions in new revenue through higher taxes, but also huge cost savings from slashing payments to drug companies, doctors and hospitals. “There are a million and one complexities” to single payer that no one has really dealt with, said Dean Bake
.. Senator Sanders went out of his way to list all the tax hikes he’d use to pay for his 2016 proposal, including an across-the-board 2.2 percent income tax. But two prominent policy analysts said the plan would cost about twice as much as the senator claimed.
.. But many advanced, industrialized democracies with universal coverage don’t have a pure single-payer system. France, for instance, has health care for all that is largely state-financed, but most people also buy private supplemental coverage.
.. Mr. Baker believes the top priority is a credible transition plan. “If you just take everyone with employer-provided insurance and put all of them on a public plan, you’re going to freak people out,” he said. He’s interested in reviving the public option — a government-run plan that would compete with private insurance on the exchanges — as well as opening up Medicare or Medicaid to those who want to buy in.
.. Democrats risk making the same mistake on health care as Republicans: big promises without a plan to follow through.
Modern Economists: The Inept Firefighters’ Club
The problem is with the behavior and the incentive structure of the practitioners. There is overwhelming pressure to produce work that supports the status quo (i.e. redistributing to the rich), that doesn’t question authority, and that is needlessly complex. The result is a discipline in which much of the work is of little use, except to legitimate the existing power structure.
.. When I tried to raise these issues in years prior to the crash, my arguments were largely laughed off by a wide range of economists. I didn’t have the stature, and besides, the argument was far too simple.
.. I pointed out that his Administration’s assumed rates of return in the stock market were impossible given the current price-to-earnings (P/E) ratios in the market and the economic growth rates assumed by the Social Security trustees. This was an argument based on simple algebra.
.. it was necessary to have something more complex than simple algebra to be taken seriously at Brookings.
.. And how about a little accountability for economists when they mess up? There is a large literature on the importance of being able to dismiss workers who do not perform their jobs well. We all know and expect that a dishwasher who keeps breaking the dishes or a custodian who can’t clean the toilets loses his job.
.. I have suggested that economists who prescribe policies that turn out badly, or who can’t see multi-trillion dollar housing bubbles coming whose collapse sinks the economy, ought to pay a price in terms of their careers. Invariably people think I am joking. When they realize I am serious, they think I am crazy or vindictive.