Japan Switches To Stimulus and Gets Growth

It's rare to see a macroeconomics experiment play out in real time in the way we are seeing it right now in Japan and in Europe. Prime Minister Shinzō Abe has embarked on aggressive measures to stimulate Japan's long-moribund economy since he took office in December, and the result so far has been strong growth -- and, perhaps, liftoff after a triple-dip recession. Europe, on the other hand, remains mired in the muck of austerity and economic contraction.

To briefly recap Japan's economic woes: the Japanese economy has been largely stagnant for the last two decades.

Since the financial crisis in 2008, it has gone through three bouts of negative growth.

Its economic output per person -- GDP per capita -- was actually lower in 2012 than it was in 2008.

In the economics profession, this is what they refer to in technical terms as "not good."

However, Japan's economy surged in the first quarter of this year, growing at an annualized rate of 3.5 percent. For its part, the Abe administration credits a three-pronged economic strategy, dubbed Abenomics: "unprecedented monetary stimulus, a big boost to government spending, and structural reforms designed to make Japanese industry and institutions more competitive."

Then there's Europe, which refuses to shift away from austerity. Its economy shrank for the sixth consecutive quarter, the longest downturn since World War II.

"The real economy is responding [in Japan]," said Adam S. Posen, president of the Peterson Institute for International Economics in Washington. "The last five months, six months, there's been a mini consumer boom. All the things that people said could never happen in Japan have turned around."

He added: "Japan's central bank is supporting recovery, and it's working. The European Central Bank is supporting stagnation, and it's working."

Some in Europe understand that austerity is not the solution, but rather the problem. Unfortunately, that "some" does not include the people making the decisions:

"'The elites in Europe don't learn,' said Stephan Schulmeister, an economist with the Austrian Institute of Economic Research. 'Instead of saying, Something goes wrong, we have to reconsider or find a different navigation map, change course, instead what happens is more of the same.'"

Schulmeister added that German Chancellor Angela Merkel -- austerity's champion and the one person who could push Europe to change course -- is "not willing to learn" the lesson offered by Japan's recent switch from contraction to growth.

Apparently, Europe (read: Germany) sees austerity as a kind of "morality play" whereby the profligate must suffer for their sins. And yet the people most responsible for Europe's economic crisis -- bankers and politicians -- are the ones suffering the least from austerity. Although unemployment in the eurozone reached a new high in March, you don't see bankers and politicians on the unemployment line. What's really immoral is an austerity policy that punishes the innocent while one guilty party bails out the other.

Regardless of who is hurting, austerity is simply not always the best way to achieve its supposed goal: reducing government deficits. As Europe reminds us, it prevents recession-battered economies from growing. The alternative is to prime the economic pump by having governments engage in fiscal and monetary stimulus.

When economies grow under this approach, Keynesian economists like Paul Krugmanargue, governments collect more in the way of revenues, straightening out their finances faster than they would by reducing their spending. Once a country's economy is again operating at capacity, government should cut spending -- and increase taxes on those who can afford it -- in order to deal with the problem of deficits in a balanced, moral way that neither grievously harms the economically vulnerable nor sacrifices the long-term investments by government that are necessary to further growth over time.

The lessons to be drawn from the recession are counterintuitive. The dominant morality tell us to tighten our belts and save up. But if the government as well as the private sector hoards cash during a recession, the economy slows to a crawl. That is the kind of economic suicide that Europe has leaped into: painful cuts, no growth, and rampant unemployment. America has avoided the worst of Europe's fate thanks in part to the stimulus passed in 2009, and Japan, at last, looks to be hurtling in the opposite direction due to its recent stimulative policies. The key question is whether the pro-austerity politicians who currently control the purse strings in Washington and Brussels will take a hard look at the evidence accumulating around them -- or retreat back into their comfortable, self-righteous views of the world.

John Maynard Keynes, the father of the proactive approach to economic policy that now bears his name, had something to say on this topic as well. Responding to a critic who questioned his shifting position on monetary policy during the Great Depression, the British economist answered: "When my information changes, I alter my conclusions. What do you do, sir?"

Swiss Prepare Army For Euro Zone Fallout

Switzerland launched the military exercise “Stabilo Due” in September to respond to the current instability in Europe and to test the speed at which its army can be dispatched. The country is not a member of the union or among the 17 countries that share the euro.

Swiss newspaper Der Sonntag reported recently that the exercise centered around a risk map created in 2010, where army staff detailed the threat of internal unrest between warring factions as well as the possibility of refugees from Greece, Spain, Italy, France, and Portugal.

The Swiss defense ministry told CNBC that it doesn’t not rule out having to deploy troops in the coming years.

“It's not excluded that the consequences of the financial crisis in Switzerland can lead to protests and violence,” a spokesperson told CNBC.com. “The army must be ready when the police in such cases requests for subsidiary help.”

Some 2,000 troops were part of the drill exercise in eight different towns across the country. 

Infantry soldiers were used as well as the Air Force and special forces personnel in an assignment that took years to organize.

Quoted in a Schweizer Soldat magazine, Defense Minister Ueli Maurer warned of an escalation of violence in Europe.

"I can’t exclude that in the coming years we may need the army," he said.

According to the minister, under pressure to save, some European countries didn’t renew their armies as they could no longer afford the upkeep of modern systems.

He said that the situation could amplify dramatically, with countries that couldn’t defend themselves facing the possibility of “blackmail.” In the paper, he also asked how long the crisis could be calmed with money alone.

Der Sonntag newspaper also reported that army chief André Blattmann is set to submit a proposal in December to utilize four battalions of military police. This will consist of 1,600 soldiers guarding strategic points in the country including the airport, industrial plants, and the international organizations in Geneva.

Via: "CNBC"

Argentina's Model: An Alternative To Austerity

Soybeans sit in a field before being harvested in Ines Indart, Argentina. Photograph: Diego Giudice/Getty Images


Argentina's Record Levels Of Employment and Massive Reductions In Poverty Have Little To Do With Exports

By Mark Weisbrot
Friday 4 May 2012 14.59 ED
Courtesy Of "The Guardian"

One of the great myths about the Argentine economy that is repeated nearly every day is that the rapid growth of the Argentine economy during the past decade has been a "commodity export boom". For example, the New York Times reported last week:

"Riding an export boom for commodities like soybeans, Argentina's economy grew at an average rate of 7.7% from 2004 to 2010, almost twice the average annual growth of 4.3% in Chile, a country often cited as a model for economic policies, over the same period."

Michael Shifter, the president of the inter-American dialogue and probably the most quoted source on Latin America in the US press, wrote in a disparaging article about Argentina this week that "If the sales and price of soybean, Argentina's principal export (mainly to China), remain high, then the country may be able to continue its path of economic growth."

I haven't seen any economists make the claim that Argentina's remarkable economic growth over the past nine years – which has brought record levels of employment and a two-thirds reduction in poverty – has been driven by soybeans or a commodities export boom. Maybe that is because it is not true.

I know what you're thinking: "Who cares?" Well, try to keep reading, because this does have implications beyond the sprawling soybean farms in the Argentine province of Cordoba.

What does it mean to have a "commodities boom", or growth driven by the export of commodities? One possibility would be based on quantity: the production and export of these commodities grows so fast that it makes up a large part of the country's real growth in output. Thus, as a matter of accounting, we could look at real GDP growth for 2002-2010, the last year for which we have complete data on exports, and ask, how much of this real, inflation-adjusted, growth is due to exports of commodities?

It turns out that only 12% of Argentina's real GDP growth during this period was due to any kind of exports at all. And just a fraction of this 12% was due to commodity exports, including soybeans. So Argentina's economic growth from 2002-2010 was not an export-led growth experience, by any stretch of the imagination, still less, a "commodities boom".

The other possibility is based on prices: the price of soybeans and other commodity exports also rose during part of this period. This can boost the economy in various ways, even if the physical amount of exports does not increase as rapidly as the economy. If this were driving Argentina's growth, we would expect the dollar value of these exports to have grown faster than the rest of the economy. But this did not happen either. The value of agricultural exports, including of course soybeans, as a percent of Argentina's GDP didn't rise during the expansion. It was about 5% of GDP when the economy started growing in 2002, and 3.7% of GDP in 2010.

In other words, there is no plausible story that anyone can tell from the data to support the idea that Argentina's growth over the past nine years was driven by a "commodities boom." Why does this matter? Well, as economist Paul Krugman noted yesterday, "articles about Argentina are almost always very negative in tone ― they are irresponsible, they are renationalizing some industries, they talk populist, so they must be going very badly." Which, he points out, "doesn't speak well for the state of economics reporting." It sure doesn't.

The myth of the "commodities export boom" is one way that Argentina's detractors dismiss Argentina's economic growth as just dumb luck. But the reality is that the economic expansion has been < a href="http://www.cepr.net/index.php/publications/reports/the-argentine-success-story-and-its-implications">led by domestic consumption and investment. And it happened because the Argentine government changed its most important macroeconomic choices: on fiscal, monetary, and exchange rate policies. That is what took Argentina out of its 1998-2002 depression and turned it into the fastest-growing economy in the Americas.

Now for the world-wide significance of how Argentina's recovery actually happened: as I and many other economists have written, the policies currently being imposed on the eurozone economies – especially the weaker ones – are similar to what Argentina went through during the depression that led to its default and devaluation. These policies were pro-cyclical, meaning that they amplified the impact of the downturn. Together with a fixed, overvalued exchange rate, they made the economy worse. By defaulting on its debt and devaluing its currency, Argentina was freed to change its most important macroeconomic policies.

If the European authorities (the European Commission, the European Central Bank, and the IMF) continue to block the eurozone's economic recovery with senseless austerity measures, individual countries will want to consider more rational alternatives in order to restore full employment. The people of Greece, Spain, Portugal, Ireland, and other countries are told every day that they must swallow this bitter medicine, and that there is no alternative to the prolonged suffering and high unemployment that they are going through. But the Argentine experience – in reality rather than in mythical portrayals – indicates that this is not true. There aredefinitely better alternatives – and they have nothing to do with soybeans or commodity export booms.

The Future Of The USA

An Insolvent and Ungovernable United States

(First Part)

- Excerpt GEAB N°60 (December 16, 2011) -


Mercredi 28 Mars 2012
Courtesy Of "Leap 2020 Euro"

In this issue, our team gives its anticipations regarding the future of the United States for the 2012-2016 period. We recall that since 2006 and the first GEAB issues, LEAP/E2020 described the global systemic crisis as a phenomenon characterizing the end of the world as we know it since 1945, marking the collapse of the American pillar on which this world order has rested for nearly seven decades. Since 2006, we had identified the period 2011-2013 as that during which the “Dollar Wall” on which the power of the United States sits would fall apart. Summer 2011, with the cut in the United States’ credit rating by S & P, marked an historic turning point and confirmed that the “impossible” (1) was indeed in the process of coming true. Therefore today, it seems essential to provide our subscribers with a clear anticipatory vision of what awaits the “pillar” of the world before the crisis at the point when the crisis moved into “top gear” in summer 2011 (2).

Thus, according to LEAP/E2020, the 2012 election year, which opens against the backdrop of economic and social depression, complete paralysis of the federal system (3), strong rejection of the traditional two-party system and a growing questioning of the relevance of the Constitution, inaugurates a crucial period in the history of the United States. Over the next four years, the country will be subjected to political, economic, financial and social upheaval such as it has not known since the end of the Civil War which, by an accident of history, started exactly 150 years ago in 1861. During this period, the US will be simultaneously insolvent and ungovernable, turning that which was the “flagship” of the world in recent decades into a “drunken boat”.

To make the complexity of the current process understandable, our team has chosen to organize its anticipations around three key areas:

1. US institutional deadlock and the break-up of the traditional two-party system
2. The unstoppable spiral of recession/depression/inflation
3. The breakdown of the US socio-political fabric

US institutional deadlock and the break-up of the traditional two-party system

From the beginning of 2010 our team had anticipated the state of institutional paralysis that has characterized the United States since the November 2010 elections. 2011 has allowed everyone to discover that, in fact, it had now become impossible for Washington to take any decision of importance, especially regarding economic and budgetary affairs, even though at the heart of the country's difficulties. Federal authorities are now unable to take measures to reduce the federal deficit, to adopt a sustainable federal budget, to implement policies to support the economy... Whether the Presidency, Congress or the Federal Reserve, each of these three key institutions is proving powerless to decide and/or implement meaningful policies.

The example of the Fed’s inability to implement QE3 (4) is indicative of the internal deadlock of the political system as it is now up against the public opposition of the Republican Party, the Tea Party and Occupy Wall Street (not to mention the outward opposition of most of the world’s central banks). And, far from improving, on the contrary the situation will get worse in 2012 and after.

In fact, one of the major causes of this institutional deadlock is the break-up of the traditional two-party system that accelerated with the November 2010 Congressional elections. Already, for over a decade, one of the phenomena that had allowed US bipartisanism to run relatively smoothly since 1945 was being lost, namely the wide permeability between both parties’ political views: the absence of a strong ideological divide enabling the avoidance of the paralysis that threatens any system with a strict separation of powers backed by the two-party system (5). During the 2000s, this permeability has completely disappeared against the background of growing ideological tensions, particularly at the initiative of the Republican Party and its constituent parts, ultra-religious, anti-tax and now anti-federal government.

Yet, since 2009, we are witnessing the rapid emergence of a new cause of institutional deadlock: the breakup of the two-party system pure and simple. This profound change has begun to register clearly in the US Congressional debates from November 2010 and especially during the summer of 2011 with the stalemate on the budget discussions and the surreal debate on the US public debt ceiling. Elected officials claiming to be representative of the Tea Party movement (TP) have, de facto, become a party within the Republican party, or rather, according to LEAP/E2020, the embryo of a new party in the process of splitting the traditional Republican Party: their arguments akin to the confederate speeches of the Civil War (pro-state, anti-federal, anti-tax, pro-white, isolationist ... and in general manipulated by powerful economic and financial interests).

Autumn 2011, witnessed the emergence of the Tea Party’s "democrat twin", namely the Occupy Wall Street movement (OWS). Like the Tea Party movement, OWS brings very disparate trends together: anti-Wall Street, anti-interventionist, anti-military, environmental, in favour of a social security system,... The two movements represent the widespread frustration of US public opinion in the face of the federal political system’s deadlock and the widespread corruption prevailing in Washington (6). LEAP/E2020 believes that the TP and OWS will be key players in the November 2012 Congressional elections. The search for new players outside the two major parties has become a priority for a growing number of American citizens.

As regards the 2012 presidential election, it’s unrealistic to believe that a third force will be able to present an alternative presidential candidate. In fact, at less than a year from the election, no personality has appeared capable of personifying this third avenue, and there is no organization capable of carrying such a candidature countrywide. On the other hand, for the elections to Congress (and certainly in many State elections), the TP and OWS will play the role of “breakers” of the traditional Democrat / Republican duopoly.

For 2012, LEAP/E2020 anticipates an even more divided Congress than this one, with the two movements strongly represented in the House of Representatives. Out of the total, we estimate that elected officials linked to the TP and OWS will account for one third of the House of Representatives and 15% of the Senate. This additional splitting into four parties/movements, with ideologies increasingly closed to the idea of any compromise, will strengthen Congress’ ungovernable nature and therefore the Federal government, since the President cannot do much when Congress hasn’t a secure majority and, on the contrary, it is deeply divided on the country’s broad direction (including the President’s role). The institutional system of the United States is totally helpless in the face of a four-party system, especially when this change represents a rejection of the current system.

Comparison between the Tea Party / Occupy Wall Street movements - Source Big picture, 11/2011

Therefore, LEAP/E2020 expects an increase in the number of partial and short-term measures from 2013 (as we have seen already with these partial and last minute budget agreements to “keep the Federal State going" (7)), the inability to schedule the country’s main fiscal balances (8), and in 2014 at the latest (a new election year) a radicalization of competing arguments around a redefinition of what is the United States.

It’s at this moment that the “window of opportunity” will open for the heaven-sent man (9) intended to “save the country”. As a matter of fact, there could be several candidates for the “rescue”, which will strengthen the country’s internal divisions. That man will have the 2016 presidential elections in his sights, with a necessary worsening of the domestic and overseas situation on the menu to enhance his position of “savior” (10).

Our team, like many observers of US politics for that matter, has already identified one of the possible candidates for this role of “savior of the Nation”: General David Petraeus. Besides his name that sounds like a Roman governor, he behaved as such during his term as head of the US Armed Forces in Iraq and Afghanistan. Many are the soldiers, diplomats, and other federal bureaucrats who would like to see a man of this “calibre” restore order in the country and an unquestionable federal state in command. The fans of order (11), for the rest love uniforms.

In the opposite camp, for now, there is no one of any credibility in terms of national visibility or charisma. 2012 may still change that and bring out a strong leader in the OWS movement or the left of the Democratic Party. But here our team remains guarded because this political family has often great difficulty in producing charismatic leaders (12), especially in a country where their mortality rate is particularly high (the Kennedy brothers, Martin Luther King,...).

The issue of balanced budgets in a recession, the financing of deficits and, therefore, the level of the military budget, will considerably push the military-industrial complex (13) to act, reinforcing all the more the option of a “heaven-sent man in uniform”. In summary, the current deadlock in Washington will become more marked from 2012 and become a source of widespread political chaos from 2013, knowing that powerful interests will be tempted to play politics of the worst kind to ensure the victory of a “savior” in 2016.

The problem for these "Beltway" players (14) is that the country isn’t facing a “normal” crisis or even a “serious” one like 1929, but really an historic crisis that happens unexpectedly once every four or five centuries (15). Thus since 2008 the United States has been embroiled, with a significant acceleration in 2011, in an unstoppable economic spiral: the sequence of recession/depression/inflation. 

----------
Notes:

(1) Let’s remember just a year ago it seemed totally crazy to anticipate such a breakdown. Financial experts, the specialized media and other experts of “the future as a mirror image of the past” considered such a breakdown impossible, or possible after five or ten years if the country's financial situation continued to deteriorate.

(2) This requirement is all the higher that the media and financial sectors are completely parasitized by the “lure” of the “Euro crisis” destined, as we have been emphasizing for the last two years, to hide the seriousness of the situation at the heart of the global financial system, namely on Wall Street and in the City. David Cameron’s resounding failure in Brussels last week incidentally shows the panic that reigns in the heart of Anglo-Saxon finance.

(3) Euroland, despite its “handicaps”, repeated at length in the Anglo-Saxon media and the hysterical gibes of Wall Street and City intermediaries, has managed for nearly two years to build a whole new politico-institutional device to pass through the crisis and prepare for the world after. On the contrary, the United States is proving itself totally incapable of the least initiative to adapt itself to the new world order as was once again recently demonstrated with the failure of the deficit reduction super-committee goal despite its very limited target of 1.5 trillion in reductions over 10 years (see chart above). The history of states, like the species, shows however that the ability to adapt is essential for survival, and it's a law that has no exceptions.

(4) A situation that we had anticipated since QE2 whilst the conventional wisdom of financial markets was that nothing could prevent the Fed from running its printing press indefinitely. Stock market investors currently pay a high price for this mistaken belief.

(5) In fact, the United States institutional system, a faithful reflection of the ideas of the Enlightenment, and of Montesquieu in particular, puts face to face powers that have almost no control over each other. When it works, it's called the balance of power and one marvels at it (the constitutional law courses of these last sixty years have thus made the US a model of its kind). But when it malfunctions, it leads straight to paralysis because no one authority is able to dominate the others and therefore difficult decisions are constantly being deferred, which very quickly throws the country into chaos, especially since this type of situation tends to occur in times of crisis (when very difficult decisions to be taken quickly) and not when all is going well.

(6) Because we really must call “a spade a spade”: the US institutional system is now totally corrupted by the private interests of the country’s richest 1% (big business, hedge funds, billionaires,...) and it really is this observation that causes the anger of American citizens of all stripes. The Supreme Court’s 2010 decision to remove all limits on the financing of political campaigns by businesses merely ratifies the situation whilst showing that the judiciary itself is now also corrupted at the highest level. Our team wishes to clarify that this type of observation is now common currency in the whole of the US population whilst still marginal until 2008. And this shift of the margin to the “mainstream” is a sign that the country is about to face a serious political crisis: the loss of confidence in institutions is always a terrible trauma for a country, especially when it follows an almost blind confidence in these institutions. There’s only the Americanists outside the United States, and in Europe particularly, to still believe in the virtues of the US system, this stage is now well outmoded for the majority of Americans.

(7) This week we are once again witnessing an episode which risks, for the third time this year, closing the federal administration absent a temporary budget agreement. Source: CNBC, 14/12/2011

-8) We think it highly likely that the 2013 budget would be simply impossible to adopt, helping to strengthen the prevailing chaos. In fact, the two opposing trends that make social or military expenditure budgetary “taboos” will find themselves strengthened after November 2012, making any compromise still more illusory. And our team does not believe in the implementation of the “automatic reductions” in 2013 resulting from the failure of the super-commission on the deficit: the military-industrial lobby will not accept this sharp reduction. Only the three major rating agencies pretend to believe it, to defer the timing of a further US downgrade.

(9) Or woman.

(10) These are standard methods for countries in a serious crisis. History is full of such situations. However, losing their outrageous status in terms of wealth and isolation, the US now belongs to history. They are no longer a dream that floats above the harsh reality of other continents.

(11) Which includes, of course, the great fortunes of US business in their ranks and Republicans of all persuasions or substantially all (except the Tea Party libertarian fringe like Ron Paul). Source: Time, 24/06/2011

(12) Generally, the left doubts leaders.

(13) We remind subscribers that this expression was not invented by an inveterate leftist pacifist but by President Dwight D. Eisenhower in his speech at the end of his term of office in 1960. Source: Wikipedia.

(14) Which refers to “insiders” who work at the heart of federal government, inside the Washington ringroad (Beltway).

(15) In other words, the United States has never experienced such a "tsunami" because they it’s too new for that.

So Long, US Dollar

The Media Won't Touch This Story About The End Of The US Dollar

By Marin Katusa
Source: "Casey Research"
May 01, 2012
Courtesy Of "Information Clearing House"

There's a major shift under way, one the US mainstream media has left largely untouched even though it will send the United States into an economic maelstrom and dramatically reduce the country's importance in the world: the demise of the US dollar as the world's reserve currency.

For decades the US dollar has been absolutely dominant in international trade, especially in the oil markets. This role has created immense demand for US dollars, and that international demand constitutes a huge part of the dollar's valuation. Not only did the global-currency role add massive value to the dollar, it also created an almost endless pool of demand for US Treasuries as countries around the world sought to maintain stores of petrodollars. The availability of all this credit, denominated in a dollar supported by nothing less than the entirety of global trade, enabled the American federal government to borrow without limit and spend with abandon.

The dominance of the dollar gave the United States incredible power and influence around the world… but the times they are a-changing. As the world's emerging economies gain ever more prominence, the US is losing hold of its position as the world's superpower. Many on the long list of nations that dislike America are pondering ways to reduce American influence in their affairs. Ditching the dollar is a very good start.

In fact, they are doing more than pondering. Over the past few years China and other emerging powers such as Russia have been quietly making agreements to move away from the US dollar in international trade. 

Several major oil-producing nations have begun selling oil in currencies other than the dollar, and both the United Nations and the International Monetary Fund (IMF) have issued reports arguing for the need to create a new global reserve currency independent of the dollar.

The supremacy of the dollar is not nearly as solid as most Americans believe it to be. More generally, the United States is not the global superpower it once was. These trends are very much connected, as demonstrated by the world's response to US sanctions against Iran.

US allies, including much of Europe and parts of Asia, fell into line quickly, reducing imports of Iranian oil. 

But a good number of Iran's clients do not feel the need to toe America's party line, and Iran certainly doesn't feel any need to take orders from the US. Some countries have objected to America's sanctions on Iran vocally, adamantly refusing to be ordered around. Others are being more discreet, choosing instead to simply trade with Iran through avenues that get around the sanctions.

It's ironic. The United States fashioned its Iranian sanctions assuming that oil trades occur in US dollars. That assumption – an echo of the more general assumption that the US dollar will continue to dominate international trade – has given countries unfriendly to the US a great reason to continue their moves away from the dollar: if they don't trade in dollars, America's dollar-centric policies carry no weight! It's a classic backfire: sanctions intended in part to illustrate the US's continued world supremacy are in fact encouraging countries disillusioned with that very notion to continue their moves away from the US currency, a slow but steady trend that will eat away at its economic power until there is little left.

Let's delve into both situations – the demise of the dollar's dominance and the Iranian sanction shortcuts – in more detail.

Signs the Dollar Is Going the Way of the Dodo

The biggest oil-trading partners in the world, China and Saudi Arabia, are still using the petrodollar in their transactions. How long this will persist is a very important question. China imported 1.4 million barrels of oil a day from Saudi Arabia in February, a 39% increase from a year earlier, and the two countries have teamed up to build a massive oil refinery in Saudi Arabia. As the nations continue to pursue increased bilateral trade, at some point they will decide that involving US dollars in every transaction is unnecessary and expensive, and they will ditch the dollar.

When that happens, the tide will have truly turned against the dollar, as it was an agreement between President Nixon and King Faisal of Saudi Arabia in 1973 that originally created the petrodollar system. 

Nixon asked Faisal to accept only US dollars as payment for oil and to invest any excess profits in US Treasury bonds, notes, and bills. In exchange, Nixon pledged to protect Saudi oilfields from the Soviet Union and other potential aggressors, such as Iran and Iraq.

That agreement created the foundation for an incredibly strong US dollar. All of the world's oil money started to flow through the US Federal Reserve, creating ever-growing demand for both US dollars and US debt. Every oil-importing nation in the world started converting its surplus funds into US dollars to be able to buy oil. Oil-exporting countries started spending their cash on Treasury securities. And slowly but surely the petrodollar system spread beyond oil to encompass almost every facet of global trade.

The value of the US dollar is based on this role as the conduit for global trade. If that role vanishes, much of the value in the dollar will evaporate. Massive inflation, high interest rates, and substantial increases in the cost of food, clothing, and gasoline will make the 2008 recession look like nothing more than a bump in the road. This will be a crater. The government will be unable to finance its debts. The house of cards, built on the assumption that the world would rely on US dollars forever, will come tumbling down.

It is a scary proposition, but don't bury your head in the sand because countries around the world are already starting to ditch the dollar.

Russia and China are leading the charge. More than a year ago, the two nations made good on talks to move away from the dollar and have been using rubles and renminbi to trade with each other since. A few months ago the second-largest economy on earth – China – and the third-largest economy on the planet – Japan – followed suit, striking a deal to promote the use of their own currencies when trading with each other. The deal will allow firms to convert Chinese and Japanese currencies into each other directly, instead of using US dollars as the intermediary as has been the requirement for years. China is now discussing a similar plan with South Korea.

Similarly, a new agreement among the BRICS nations (Brazil, Russia, India, China, and South Africa) promotes the use of their national currencies when trading, instead of using the US dollar. China is also pursuing bilateral trades with Malaysia using the renminbi and ringgit. And Russia and Iran have agreed to use rubles as a means of currency in their trades.

Then there's the entire continent of Africa. In 2009 China became Africa's largest trading partner, eclipsing the United States, and now China is working to expand the use of Chinese currency in Africa instead of US dollars. Standard Bank, Africa's largest financial institution, predicts that $100 billion worth of trade between China and Africa will be settled in renminbi by 2015. That's more than the total bilateral trade between China and Africa in 2010.

The idea of moving away from the dollar is also finding support from major international agencies. The United Nations Conference on Trade and Development has stated that "the current system of currencies and capital rules that binds the world economy is not working properly and was largely responsible for the financial and economic crises." The statement continued, saying "the dollar should be replaced with a global currency." The International Monetary Fund agrees, recently arguing that the dollar should cede its role as global reserve currency to an international currency, which is in effect a basket of national currencies.

There is also a host of countries that have started using their own currencies to complete oil trades, a move that strikes right at the heart of US-dollar dominance. China and the United Arab Emirates have agreed to ditch the dollar and use their own currencies in oil transactions. The Chinese National Bank says this agreement is worth roughly $5.5 billion annually. India is buying oil from Iran with gold and rupees. China and Iran are working on a barter system to exchange Iranian oil for Chinese imported products.

Speaking of Bartering for Oil… How about Those Iranian Sanctions?

The United States and the European Union based their Iran sanctions on the financial system behind Iran's oil trade. The country uses its central bank to run its oil business – the bank settles trades through the Belgium company Swift (Society for Worldwide Interbank Financial Telecommunication) and the trades are always in US dollars. Once they take full effect in July, US and EU sanctions against Iran will make transactions with the Iranian central bank illegal. When that occurs, this official avenue of trade will shut down. In fact, Iran was shut out of Swift a few weeks ago, so that road is already blockaded.

But the arrogance in the sanctions is the assumption that Iran can only use this one, dollar-based avenue. In reality, the Islamic Republic is considerably more agile than that; removing its ability to trade in the official manner is only encouraging the country to find imaginative new methods to sell its oil.

Since the sanctions were announced, Tehran's official oil sales have certainly declined. Iran actually preemptively halted oil shipments to Germany, Spain, Greece, Britain, and France, which together had bought some 18% of Iran's oil. But covert sales have curbed or perhaps even reversed the reduction in shipments. It is impossible to know the details, as buyers and sellers involved in skirting the sanctions are being very discreet, but the transactions are undoubtedly happening.

As mentioned above, Iran is selling oil to India for gold and rupees. China and Iran are working on a barter system to exchange Iranian oil for Chinese imported products. China and South Korea are also quietly buying Iranian oil with their own currencies.

The evidence? Millions of barrels of Iranian oil that were in storage in Iranian tankers a few weeks ago now seem to have disappeared. Officially, no one knows where the oil went. Was it rerouted? Has production been shut in? Is the oil being stored elsewhere?

Oil is fungible, which means one barrel of crude is interchangeable with another. Once it leaves its home country, it can be nearly impossible to know where a barrel of oil originated, if its handlers so desire. And it's not just barrels that are hard to track – even though oil is carried on ships so large they are dubbed "supertankers" it is surprisingly difficult to keep tabs on every tanker full of Iranian oil.

And the Iranians are using every trick in the book to move their oil undetected. In the last week it became apparent that Tehran has ordered the captains of its oil tankers to switch off the black-box transponders used in the shipping industry to monitor vessel movements and oil transactions. As such, most of Iran's 39-strong fleet of tankers is "off radar." According to Reuters, only seven of Iran's Very Large Crude Carriers (VLCCs) are still operating their onboard transponders, while only two of the country's nine smaller Suezmax tankers are trackable.

Under international law ships are required to have a satellite tracking device on board when traveling at sea, but a ship's master has the discretion to turn the device off on safety grounds, if he has permission from the ship's home state. Some tankers turned off their trackers to avoid detection last year during the Libyan civil war in order to trade with the Gaddafi government.

And Iran is about to gain even greater flexibility in disguising the locations of oil sales, as the National Iranian Tanker Company (NITC) is about to take delivery of the first of 12 new supertankers on order from China.

The new tankers will add much-needed capacity to NITC's fleet at a time when the number of maritime firms willing to transport Iranian crude has dwindled significantly, forcing Iran's remaining buyers to rely on NITC tankers. Thankfully for NITC, the 12 new VLCCs – each capable of transporting two million barrels of crude – will significantly expand the company's current fleet of 39 ships.

Sanctions or no sanctions, Iran is moving its oil. But even having your own, off-radar ships to transport oil bought in renminbi or rupees or won doesn't mean all these tricks and maneuvers don't have a cost.

Freight costs for each voyage add up to nearly $5 million, a sizable hit for Tehran. Iran is often also shelling out millions of dollars in insurance for each oil shipment, because the majority of international shipments are insured through a European insurance consortium that is backing away from Iranian vessels because the EU sanctions will make such transactions illegal.

And since business is business, buyers are also demanding much better credit terms from the National Iranian Oil Company (NIOC) than normal. Traders are reporting agreements giving the buyer as much as six months to pay for each two-million-barrel cargo, a grace period that would cost Tehran as much as $10 million per shipment.

For Tehran to cover freight costs, insurance, and the cost of generous credit terms wipes out as much as 10 percent of the value of each supertanker load. Beyond that, customers are also negotiating better prices. For example, the flow of Iranian oil to China did slow in the first quarter of the year, but not because China endorsed the sanctions. Rather, Chinese refiner Sinopec reduced purchases to negotiate better prices with the National Iranian Oil Company. The country's imports from Iran are expected to climb back to the 560,000 barrel-per-day level in April.

That trade, along with non-dollar-denominated deals with India, Turkey, Syria, and a long list of other friendly nations, will keep Iran's finances afloat for a long time. The sanctions may be preventing Tehran from banking full value for each tanker of oil, but there is still a lot of Iranian oil money flowing.

The mainstream media is avoiding all discussion of the demise of the US dollar as the world's reserve currency. Even fewer people are talking about how sanctions based on Iran's supposed need to use the US dollar to sell its oil leave loopholes wide enough for VLCCs to sail right through.

Without acknowledging the elephant in the room, articles about Iranian tankers turning off their transponders or India using gold to buy Iranian oil invariably sound like plot developments in a spy thriller. Much more useful would be to convey the real message: The world doesn't need to revolve around US dollars anymore and the longer the US tries to pretend that the dollar is still and will remain dominant, the more often its international actions will backfire.

[The end of dollar dominance is a very ominous sign for the US economy… especially since the federal government seems to be ignoring this enormous elephant. Ignore it at your peril – or get advice from over 30 financial experts that will help you thrive during the tumultuous times ahead.]

Marin Katusa, an accomplished investment analyst, is the senior editor of Casey Energy Opportunities, Casey Energy Confidential, and Casey Energy Report.