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The Situation With Iran and the Strait of Hormuz

Discussion in 'Geostrategic Issues' started by Pentaprism, May 6, 2019.

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  1. ASSAIL

    ASSAIL Defense Professional Verified Defense Pro

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    Thanks for that succinct explanation Ananda, it’s great that such a diversity of experience can be followed on this forum and I’m happy to say that my ignorance on matters of international trade and finance has been slightly lessened.
     
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  2. Black Jack Shellac

    Black Jack Shellac Active Member

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    Could Iran go back to a gold standard?
     
  3. Ananda

    Ananda Well-Known Member

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    It can if Iran wants to. But who they are going to trade with when everyone else especially major trading nation's has not using Gold Standard since Breton Woods.

    If Iran used standard that nobody else uses, then it's back to what value Iran Rial will be arbitrage with. Global exchange rate system basically is a system where every currencies being valued upon based on mechanism on trading. The more your currency being traded in the market, the more stable your currency is. The valuation based on your International trade, your macro Economics stability and combination of future prospect.

    The problem again is Iran accessibility to Global Market that being dominated by USD as dominance currency that every other currencies arbitrage their value as my previous post say. Again if you can't used USD (as case of Iran due to US sanction), then Iran has to trade on other mechanism that not influence by USD.

    So does not matter if Iran used Gold or Black Gold, the problem is how to circulated financial payment outside Global trade market that being dominated by USD or US market. That's why European nation has to set up separate exchange mechanism to trade with Iran.. that's why China also set separate direct payment trade with Iran outside Global money market...
    It will cost Iran, the European and Chinese will take more premium, but what choice Iran has, if they still want to sell their oil.
     
  4. Feanor

    Feanor Super Moderator Staff Member

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    But if they used the gold standard, and gold has a dollar valuation, wouldn't they be able to use that as a price point without needing as complex of a set up? Or is there something I'm missing here?
     
  5. Hone C

    Hone C Member

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    I dont think that really solves their fundamental problem. My grunt's understanding is that global trade is basically a three step process involving the common exchange currency. If someone in Iran wants to buy something from France say, they don't pay in €, because no one in Iran has or wants €, just as no one in France has or wants rial. They pay in rial, which then gets converted to US$, then reconverted to €. The middle transaction is the one the US is using to cut Iran's trade access, even if the trade in question doesn't directly involve the US.
    Commodities like gold and oil are priced in US$, but pegging currency to a commodity doesn't create an exchange mechanism. If said commodity is traded on the international markets (denominated in US$) at any point it becomes subject to sanctions, hence the need for a completely separate mechanism.
     
  6. Feanor

    Feanor Super Moderator Staff Member

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    I take it that an appropriate quantity of gold as the middle component wouldn't work?
     
  7. Hone C

    Hone C Member

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    That's a straight barter system that probably would have higher transaction costs than the INSTEX mechanism already established.
     
  8. Ananda

    Ananda Well-Known Member

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    Just to add from Hone posts, there's reason why USD being called Hard Currency. Because it's a currency that can be traded extensively in Global market.
    Actually Iran doesn't need Gold to traded it's oil, as oil is also a heavily traded commodity. That's why it's called black gold.

    The problem is Gold or Oil are not Hard Currencies, and Financial market need Hard Currencies to traded with each other. In theory Euro, Yen, GBP and Yuan are now also consider Hard Currencies, however on Money Market their valuation also being influence to their each valuation to USD. Take the USD out of the equation, then you need another exchange mechanism. That's what Euro INSTEX coming on.
     
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  9. Feanor

    Feanor Super Moderator Staff Member

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    Even if the gold in question never leaves a vault and the middle conversion only takes place digitally? I'm not arguing or disagreeing, but I am curious, where does the added cost come from?

    Is there a particular reason why there needs to be just one central hard currency? Or is it just a quirk of history? I.e. would it be possible for the combination of currencies to displace the dollar, either as co-equal mediums, or as some sort of an established currency basket?
     
  10. Ananda

    Ananda Well-Known Member

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    @Feanor I'll try to elaborate more on my answer in other posts. Simple answer why USD is the one Central hard currency being used today was begin in Breton Woods. When dominant trading nation's (outside Soviet Blocks) decided to used USD pegging Gold system as standard. Thus even Gold still used as standard, it's peg the value to USD make USD the 'core' currency. By 70's US tell the market they don't want to peg the USD to gold, and make currencies exchange rate basically 'floating', and most of the other major currencies basically followed. Why, cause after WW2 market used to have USD as arbritage value for other currencies to trade with each other.

    In theory the other major currencies also consider Hard Currencies. However the reality core hard currency still USD, as this is the most traded currency. Can other currency take the role of this 'core' currency? Well they have tried, French and German try to used Euro as arbitrage valuation when trading with EU, China try to used Yuan, however when the trade still used Global Financial system, most of the users still trade using USD as common denominator.
    Trading partners preference to USD:
    1. It's easier and more convenient for them to trade on one denominator, instead has to prepare multiple denominator.
    2. It's most traded currency thus the supply and exchange mechanism will be more available and relative stable on long term (compared to others).

    Thus that's why China eventough has try to ask some of it's trading partners to used direct Yuan and Their respecitive currencies in trading with each other, in reality only less then 10% China's International trading used this direct Yuan exchange mechanism. The rest still used Global market which dominated by USD as arbitrage core valuation.

    This perhaps also answer your question to Hone on what additional costs doing barter. Any direct bilateral exchange system whether doing other major currencies or even direct barters 'outside' Global USD dominated financial market create additional transaction costs because of less volume in trading. USD as most traded currency create less transaction costs because everyone using it. The more your Currency traded, the more efficient the transaction costs will be.

    If you pay using Gold, how you are moving around your Gold as payment. Moving around Gold as payment create more costs compare using Hard Currencies to trade, even the gold is not move around (only through mediators). Those mediators is more limited in trading volume compared to global Financial market, thus they will ask more premium on their exchange service.
    Compared that to using the core currency that everyone used, then the cost will be much more efficient.

    When you send your payment through global market Financial system, your Bank usually has to correspond to your trading partner Bank. Say an Australian wants to trade with an Icelander, now Iceland in a small trading nation thus to send to Iceland, Australian Bank has to send the fund to major financial center like New York or London, before being send to Iceland. Because it's through Financial Centers first, it more efficient in cost due to trading volume that come in those centers.

    Since USD is the most traded currency, for convenience many of the Banks in smaller Nation's only want to maintain only one or two currency in their international correspondence accounts to be efficient in their costs, and most of them maintain USD account.
    If you take USD out of the equation due to US embargoes like the case of Iran, then you can used other currencies but off course the costs will be more, since you have to used other channels that not influence by USD.

    So, yes you can barter using Gold, Oil or other major currencies, but you have to used separate exchange mechanism, separate transactions movement mechanism other than usual trade and Financial payment mechanism. As consequences it will cost you more on premium transaction fee. The more restricted the trading nation access (like Iran) the more premium any trading will be charged.

    In the end this is the reasons why most global trading Partners still used USD cause it's the most cost effective, easy to trade thus convenience and most importantly it's relatively still what most international trade hold in relative preference.
     
    Last edited: Dec 6, 2019 at 5:01 AM
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