The Iranian Bourse, Commodity Prices and Monetary Policy Part I
I had some thoughts after reading Soaring Commodity Prices and Strange Ideas about the Iranian Bourse at James Hamilton's Econbrowser.
A bricklayers thought, when petro dollars get recycled into US bonds, their velocity goes to zero?
A doctors question, what would the effect on total velocity be if a large amount of dollars which are tied up or used as petro dollars in oil transactions, were to be liberated or displaced by Euros?
Increase or decrease in: monetary velocity, inflationary pressure, interest rates and dollar valuation? Or would the effects be negligible or a wash?
These questions may be answered if the Iranian bourse actually opens and is patronized to any degree. Just a passing thought and those are rare moments for me. Usually I'm trying to think, but nothing happens.
Oh my, another fleeting thought, a corollary to my last question.
Over the last few years, with oil going from $12 to $70 a barrel, has this not increased the demand for dollars?
In essence, creating a kind of defacto petro float or buoyancy premium on the dollar, since it is used in all oil transactions.
Professor James Hamilton at Econbrowser correctly asserts "What ultimately determines the demand for dollars is not the unit of account for the transaction, but rather the desired asset holdings of those who are accumulating the wealth." and the "personal financial interests" of those accumulating the wealth.
This is a sound economic fact regarding the question of dollars or Euros and what consequences may shake out with the Iranian Oil Bourse.
But with regard to capital flows, we must also bare in mind that the valuation of the dollar will dictate the valuation of the dollar denominated assets that are currently held or to be sold and purchased.
Of late America has had a big discount sign hanging on its door. M3 money supply has gone hog wild since 2000 due to lax monetary policy (i.e. corporate welfare through "free money").
Subsequently the Dollar vs Euro, from .85 = 1 Euro to 1.35 = 1 Euro; back down to 1.22 = 1 Euro.
With the acceleration of oil prices in the last two years, it would seem that the petro float has buoyed the dollar.
Is this petro float and the portion of windfall profits recycled back into our bond market, a method of "cooperative" sterilization? We think so. More to come in Part II.
A bricklayers thought, when petro dollars get recycled into US bonds, their velocity goes to zero?
A doctors question, what would the effect on total velocity be if a large amount of dollars which are tied up or used as petro dollars in oil transactions, were to be liberated or displaced by Euros?
Increase or decrease in: monetary velocity, inflationary pressure, interest rates and dollar valuation? Or would the effects be negligible or a wash?
These questions may be answered if the Iranian bourse actually opens and is patronized to any degree. Just a passing thought and those are rare moments for me. Usually I'm trying to think, but nothing happens.
Oh my, another fleeting thought, a corollary to my last question.
Over the last few years, with oil going from $12 to $70 a barrel, has this not increased the demand for dollars?
In essence, creating a kind of defacto petro float or buoyancy premium on the dollar, since it is used in all oil transactions.
Professor James Hamilton at Econbrowser correctly asserts "What ultimately determines the demand for dollars is not the unit of account for the transaction, but rather the desired asset holdings of those who are accumulating the wealth." and the "personal financial interests" of those accumulating the wealth.
This is a sound economic fact regarding the question of dollars or Euros and what consequences may shake out with the Iranian Oil Bourse.
But with regard to capital flows, we must also bare in mind that the valuation of the dollar will dictate the valuation of the dollar denominated assets that are currently held or to be sold and purchased.
Of late America has had a big discount sign hanging on its door. M3 money supply has gone hog wild since 2000 due to lax monetary policy (i.e. corporate welfare through "free money").
Subsequently the Dollar vs Euro, from .85 = 1 Euro to 1.35 = 1 Euro; back down to 1.22 = 1 Euro.
With the acceleration of oil prices in the last two years, it would seem that the petro float has buoyed the dollar.
Is this petro float and the portion of windfall profits recycled back into our bond market, a method of "cooperative" sterilization? We think so. More to come in Part II.
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