Friday, May 11, 2018

The US pulled out of Iran Nuclear Deal because it’s too broke

Here’s a perspective on Trump’s decision to pull out of JCPOA, a.k.a. the Iran Nuclear Deal, that definitely doesn’t get enough airtime. It’s all about money. Following the Iranian revolution of 1978-79, Jimmy Carter froze Iran’s assets in the US. Ever since then, the US has been holding on to between $100 and $120 billion in Iranian assets, which have been accruing rent and interest. After the JCPOA, which stipulated the lifting of sanctions on Iran, Washington has been doing its best to drag its feet on releasing these assets, but they would have had to be returned to Iran sooner or later… unless the US pulled out of the deal, which it just did.

It is very important to note that these frozen Iranian assets are US dollar-denominated. And what would be the first thing that the Iranians would do upon regaining control of them? Why, of course, they would convert them out of US dollars. This is a requirement written into Iranian law: no US dollars allowed, and nobody in Iran has the power to change that even if they wanted to. According to the Iranians, US officials have pleaded with the Iranians not to liquidate their dollar-denominated assets, but that the Iranians told them that nobody has the authority to change this law.

A sudden liquidation of this size would have punched an irreparable hole in the dollar system, which hinges on the ability to sell huge quantities of US treasury paper on the international market. The Iranian liquidation of dollar assets would have come at a time when the US is in dire need of foreign debt buyers, the demand is soft, and liquidity at the primary dealers for US debt is at record lows. It might have been enough to trigger a run on the US dollar as everybody dumped their treasury paper and lead to the collapse of the entire scheme by which the US robs the rest of the world by forcing it to continuously buy up its debt.

Thus, Trump’s decision to pull out of JCPOA is an attempt to postpone the inevitable—to buy the US a little bit more time. It is a move that smells of fear and desperation. In taking this step, Washington becomes the biggest loser: nobody will want to negotiate any more agreements with the Americans now that they have shown themselves to be incapable of abiding by them. On the other hand, it would appear that Iran will not be hurt much by this development; it has been living under sanctions of one form or another for the past 40 years and is doing quite well in spite of them.

And then there are some winners. With all the geopolitical uncertainty this move brings, oil prices are heading up. Thanks to higher oil prices, the fracking industry within the US will finally get a chance to start paying back their massive debt (they barely made a cent of actual profit so far). And, of course, Putin & Co. will be laughing all the way to the central bank. With oil once again providing a massive stream of tax receipts, Putin’s ambitious six-year plan to dramatically improve the living standards of all Russians will be easy to pay for.

Holders of US debt around the world will get a chance to de-dollarize gradually instead of suddenly and catastrophically. Many countries, and China in particular, have been very active in negotiating currency swaps among themselves to avoid using the US dollar in trade. These arrangements will insulate them from dollar-related woes when the US debt pyramid scheme finally collapses. The US itself won’t be so lucky: when US Treasuries crater, the US government’s spending ability will evaporate.

And then the $1.3 trillion or so in circulation around the world (most of it in the form of $100 bills which Americans rarely see) will come flooding back. Foreign buyers armed with bushels of $100 bills will descend on the US like locusts, buying up anything that isn’t nailed down, and asset-strip it bare. Once that final feeding frenzy is over, nobody will know or care much what goes on in the badlands of what used to be the United States, just like nobody knew or cared much what went on in the former USSR in the 1990s: “Nobody goes there any more, it’s too unsafe.”

You should certainly feel free to believe Donald Trump when he says that his decision to violate the JCPOA is based on the fact that Iran is trying to build a nuclear bomb. (Fact?... Sorry, facts require evidence, and there ain’t any in spite of the most invasive inspections regime in history.) But the evidence that does exist points in a different direction. The US used to bomb countries (Iraq, Libya) that tried to leave the dollar system. Now it just refuses to give them their money back and lies about the reasons. This may work once or twice, but eventually the world will say, “You can keep the stupid money; just shut up and go away.”


Kammy said...

Most interesting, but not altogether surprising.

Joe F. said...

It's an interesting thought, but somehow I can't see how a few hundred billion dollars could bring the system down, except as a straw that breaks a large camel's back, in which case the United States monetary system has already reached critical mass.

Chris said...

That is a good point, though I suspect the real reason for reneging on the Iran nuclear deal has more to do with Israel. Hours after Trump made his announcement, Israel started attacking Iranian positions in Syria and this may yet escalate into a wider conflict. The fact is that Israel (and by extension, NATO) lost the Syrian war and Russia, allied with Assad and Iran, won. This is a repeat of the brief Georgian conflict a few years back, where the Israeli-US trained and armed Georgian forces where swiftly defeated by the Russian army. The whole thing is turning into a bit of an embarrassment for the West and the US and Israel in particular. It seems this "coalition" of the weaklings is unable to win any war or armed conflict, no matter how weak or backward the enemy. I am reminded of the Italians in Abyssinia, where they were literally running like rabbits, holding machince guns and machetes, chased by native soldiers with spears and bows and arrows. The entire Western leadership is so incompetent it beggars belief. If it wasn't for all those unnecessary deaths, it would actually be funny.

Wheels Go Round said...

Iran is a member of OPEC. As such, all of its petroleum sales have been in exchange for US Dollars, since 1945. (That agreement dates to 1945, between FDR and Ibn Saud).

There is some five trillion dollars of Forex volume every day.

A couple hundred billion, more or less, is a blip on a Bloomberg terminal screen.

JustTruth said...

Agree with you D. Its all about the dollar- Iraq, Lybia, and now Iran. All countries when DE-dollarizing threatened by US. The flip side of the USd is oil, which now conveniently rises to the benefit of Saudis, US fracking, Russians. Iran will benefit too by increasing oil sales to China, which is a strategic ally now, and China will buy less from Saudis.