Previous

Page - II

This creates a great demand for dollars outside the U.S. In contrast, the U.S. only has to print dollar bills in exchange for goods. Even for its own oil imports, the U.S. can print dollar bills without exporting or selling its goods.
The imported goods are paid by printing "fiat" dollars. Fiat money or currency (usually paper money) is a type of currency whose only value is that a government made a "fiat" (decree) that the money is a legal method of exchange. Fiat money is a promise to pay by the usurer and does not necessarily have any intrinsic value. Its value lies in the issuer's financial means and creditworthiness.

Such fiat dollars are invested or deposited in U.S. banks or the U.S. Treasury by most non-oil producing, underdeveloped countries to protect their currencies and generate oil credit. Today, foreigners hold 48 percent of the U.S. Thus, the U.S. effectively controls the world oil-market, as the dollar has become the "fiat" international trading currency. Today, U.S. currency accounts for approximately two-thirds of all official exchange reserves. More than four-fifths of all foreign exchange transactions and half of all the world exports are denominated in dollars, and U.S. currency accounts for about two-thirds of all official exchange reserves. The fact that billions of dollars worth of oil is priced in dollars ensures the world domination of the dollar.

However, the tables began turning when in November 2000, Iraq, at France's persuasion, agreed to accept payment for its oil in Euro. At first this seemed unwise as the Euro was selling well below the dollar. But now with the Euro at a premium, Iraq reaped a huge profit. This made other oil producers take note of Iraq's success and soon follow the Iraq's footsteps. If the trend continues then other non-oil producing countries will also start trading in Euros. This avalanche will then surely bury the dollar.

Next

* Contributed by -
Swetha Narayanaswamy,
First Year M.B.A.,
ICFAI Business School, Mumbai.