In response to this Robert Fisk report on ending dollars for oil, a couple of interesting things come up. Of course the Saudis denied it immediately. I really don’t see much of a change if they substitute renminbi for dollars because within very narrow limits, yuan ARE dollars. (Although beyond a doubt, the Chinese would love to take away our control over terms-of-trade. Would definitely come in handy for them someday. And they have been cutting side deals with the Saudis and the Iranians for years now anyway.)

If there’s any logic to this at all, it’s to insulate the gulf states from what they have today, which is that they import our monetary policy through the mechanism of linked currencies. We’re creating money like it was going out of style, but we suffer no noticeable inflation because there’s no demand or investment in the US. States like Saudi that link their money to ours DO get the inflation, however. If they were to sell oil in some harder currency (meaning, one with higher short-term interest rates) like the euro, then they’re insulated from some of that pressure.

As always, however, the problem with trading in anything but dollars is that there isn’t enough of anything else to float the global economy, and that will take years to change.

The most outlandish thing I heard, however, is that they would want to trade oil for gold. I’m not at all sure this is possible for technical and logistical reasons, but it would be a radical change if something like it could ever happen. It would end the whole mechanism for the global imbalances that are the cause of the serial financial crises. It would whack a big chunk off US standards of living overnight and touch off a deep global recession. I’m still thinking about whether it could be the long term fix the world needs.

Something like this could be the trigger to force Americans to start developing a real economy again, but there’s a very frightening risk that we would lurch sharply in the wrong direction, toward more socialism. With Obama in the White House, I don’t want to take this risk.