And we'd be speaking German too.

Well Gen, some of us would be dead, or would not exist because our ancestors would have been the victims of genocide. I will stay grateful that the US entered the war in this case.

A New Reserve Currency to Challenge the Dollar – What’s Really Going On in The Straits of Hormuz.

By David Malone
http://www.veteranstoday.com/2012/01/11/....

A little over a year ago on 1st November 2010, I wrote what I called “…a little bit of scurrilous speculation.” In it I speculated that an unintended consequence of QE had been to spur several countries to think very seriously of how they could replace the dollar as their settlement currency for international deals. The Settlement Currency just means the currency both parties agree is stable, internationally trusted and accepted, and in plentiful supply which may not be the case for their own currencies. I wondered if doubts about the longer term stability of the dollar and of US debt levels, was combining with a political desire in China and perhaps other countries as well to challenge the US via the dollar with the eventual goal of creating an alternative reserve currency backed by gold rather than, as the dollar now is, by debt.

Various countries have been buying gold. Russia, China, India have all bought a lot….Which brings me to my speculation. The list of countries accumulating gold is similar to the list of countries that were reported to be talking about the need for a new reserve currency to replace the dollar.

I wonder if those who are seriously thinking of trying to unseat the dollar and create a currency which is backed by something other than debt and is not under the control of America’s corrupt banks and even more corrupt government, are investing in gold as a precursor to making a real bid for a new currency.

Later, in Making the New Sub Prime Part 2, I looked at the growing network of bilateral agreements in major trade deals gradually replacing the dollar as a settlement currency.

Being a ‘Settlement’ currency is not quite the same as being a ‘Reserve Currency’ like the dollar, but it a major step in that direction. It is, in fact, a very large step. Which currency large international trades are done in matters. It is a fact that in 2000, Iraq signed an agreement to sell its oil, all its oil, in Euros. Iran was contemplating doing the same at around the same time. The Iraq decision involved the large French bank PNB-Paribas. France was not one of those who supported the war and Washington led a hate campaign vilifying the French. The worry was that a switch from dollar to Euro settlement might gain momentum. Any major move away from dollar settlement would cripple the US.

In January of this year the India Times reported that India was talking to Iran about moving out of dollar settlements so as to be able to buy Iranian oil despite a US embargo.

India said it was discussing settling in Gold. Remember, India has just signed a settlement agreement with China to use the Yuan.

A very good summary of recent news by ZeroHedge suggests I may have been on the right track. And recently the pace has picked up.

China and Russia!
China and Russia have been trading directly in their own currencies and using them both interchangeably for settlement for over a year. As the The China Daily article reports,

China is allowing greater use of its currency for cross-border transactions to reduce reliance on the US dollar, after Premier Wen Jiabao said in March he was “worried” about holdings of assets denominated in the greenback.

Then on 26th December 2011 Bloomberg reported, Japan and China will promote direct trading of the yen and yuan without using dollars and will encourage the development of a market for companies involved in the exchanges, the Japanese government said.

China is Japan’s largest trading partner. Japan will also start in 2012 buying Chinese debts. How much Dollar debt will either of them buy? They have both already been buying less.

Two days later (Dec.28th) the Iranain news service reported,

Iran and China on Wednesday signed two agreements on expansion of trade ties and joint investments.

These trades too will not be settled in Dollars or in Euros.

Three days after that The China Post reported that on the last day of 2011, US President Obama had signed a new law in which

U.S. imposes sanctions on banks dealing with Iran….Sanctioned institutions would be frozen out of U.S. financial markets.

Sounds tough. A bit like sending an aircraft carrier to the Straits of Hormuz. But as the article went on to report, with only barely concealed delight, the threat may be as hollow as the dollar itself. The law comes with exemptions which may eventually highlight America’s plight rather than its might.

The sanctions target both private and government-controlled banks – including central banks – and would take hold after a two- to six-month warning period, depending on the transactions, a senior Obama administration official said.

Under the law, the president can move to exempt institutions in a country that has significantly reduced its dealings with Iran and in situations where a waiver is in the U.S. national security interest or otherwise necessary for energy market stability. He would need to notify Congress and waivers would be temporary, but could be extended.

And as if to make the point, only a couple of days after this on Jan 7th, came the news that, Iran and Russia replaced the U.S. dollar with their national currencies in bilateral trade, Iran’s state-run Fars news agency reported, citing Seyed Reza Sajjadi, the Iranian ambassador in Moscow.

So now almost none of Iran’s oil will be traded in Dollars.

India and Japan have also recently agreed a 15 billion dollar currency exchange. This will tie their two currencies closer together.

The list of countries and trades no longer using the dollar for settlement for their trade is now considerable. How close are we to reaching the tipping-point where it no longer makes sense for nations to use dollars and makes more sense for them, both economically and politically, to use the network of currencies tied to the Yuan? When we reach that point the Yuan becomes in reserve currency in all but name.

China, India, Russia and Iran are all large holders of physical gold and most of them are also large producers of it. None of them are firm allies of the US. They all have long term relations with each other. All of them have expressed concern over US debts and printing. None of them will like QE3, nor Euro printing, when they both arrive later this year.

I think the stand-off with Iran in the Straits of Hormuz over sanctions is as much to do with the moves to replace the dollar as anything else. The standoff is as much with China and its allies as it is specifically with Iran. The US is testing China’s nerve and the solidity of its network of bilateral currency settlement agreements. We are seeing military power deployed to counter economic power. I think the US will lose. Depending on the nature of its loss we could see a precipitate decline in the standing of the dollar as global reserve currency.

2012 could see the beginning of large scale defections from the dollar settlement currency. Which would in turn have massive, perhaps even catastrophic consequences for how the world perceives what an acceptable level of debt for the US is. What is acceptable when you have the global reserve currency is quite different from what is acceptable when you don’t.

And the reverse is also true. If China can transform the network of bilateral agreements which centre upon China and the Yuan, in to becoming accepted as a de facto reserve currency, then for those, like me, who wonder how China can possibly avoid a hard landing as its bad bank and property bubble deflates faster and faster, look no further.

There is no denying China has an absolutely massive bad debt crisis fermenting. Every one of its banks is gagging on bad loans made to every one of China’s regional governments. There are trillions of Yuan worth of loans which will not be repaid, on property and land valued at hugely inflated but now defaulting prices. But if China can become a rival and rising reserve currency at the centre of a new and growing collection of trading partners, then China can and will bury the debts in a mass unmarked grave somewhere in its hinterland.

At the moment when America is seen as being no longer the pre-eminent reserve currency and its debt load is re-considered accordingly, China and its debt load will go the other way. America and its currency risk being seen as too rotted by debt to be trusted and it’s claims of economic growth seen as fake, empty, paper-based, accountancy-conjured growth. The Dollar and America itself risk being seen as the fiat currency and fiat nation par excellence .While China and the Yuan will be seen as backed by gold and real growth.


Are you sure you really own gold and silver, or is it a worthless paper ...
One more question to ask in all this is – how far have the big banks and brokerages managed to turn even gold and silver (at least gold and silver held in the West) in to another fiat currency? Gold and bullion bugs among you might argue the question makes no sense. But consider re-hypothecation. How much gold and silver has been pledged and re-pledged, hypothecated and re-hypothecated? How many more paper contracts for and claims upon gold and silver exist above and beyond the amount of actual physical gold and silver? After all gold and silver are the ultimate in ‘good’ assets which counterparties will happily accept. So it seems likely to me that gold and silver (or contracts for them) will have been in demand in those repo and hypothecation markets. If so then I wonder how many conflicting and contesting claims will surround every ounce of gold and silver in the West when investors start demanding to see their ‘investment’.

I think the big old sterling silver coin may already have dropped for some investors. That is why prices for physical silver are surging above the price for paper claims on silver. I think some traders are getting nervous about buying paper claims on silver and now want only the metal itself. They suspect that in the end, if you have only a paper claim or contract for, silver that is exactly all you will ever have – the paper. Only those with the actual metal in their hands will get what they paid for. I think there is a fiat, paper currency version of gold and silver floating around and parasitizing the metals themselves. Those who own that paper stuff may get…well … stuffed.

Where Europe goes in all this is another story which I will try to say something about when I get back from filming. I am away for this week, back on Saturday and away again filming till the 20th.

I have not read though this entire thread so maybe this has been covered but won't they just kill what little there is of our economy if they force us to pay $5 or more gas prices? Are they really ready to see the ramifications of this here in the US?

Since when has the government been able to see or care about unintended consequences.

Russia says would be threatened by Iran military action
1:34pm EST
http://www.reuters.com/article/2012/01/1....

BRUSSELS (Reuters) - Russia would regard any military intervention linked to Iran's nuclear program as a threat to its own security, Moscow's departing ambassador to NATO warned on Friday.

"Iran is our neighbor," Dmitry Rogozin told reporters in Brussels. "And if Iran is involved in any military action, it's a direct threat to our security."

Rogozin was speaking two days after the killing of a nuclear scientist in Tehran by a hitman on a motorcycle.

Kremlin Security Council head Nikolai Patrushev, who is close to Russian Prime Minister Vladimir Putin, said Israel was pushing the United States towards war with Iran, according to the Interfax news agency.

Russia, however, opposes a boycott of Iranian oil.

"We are definitely interested in the non-proliferation of weapons of mass destruction," Rogozin said on Friday. "But at the same time, we believe that any country has the right to have what it needs to feel comfortable, including Iran."

Rogozin, often described as an anti-Western hawk, was appointed deputy prime minister in December, and will oversee Russia's defense sector when he returns to Moscow.

The United States, the European Union and Japan are drawing up sanctions on Iran to try to force it to abandon its suspected nuclear weapons program. Tehran says its program does not have military aims.

The United States on Thursday took punitive action against three oil companies dealing with Iranian oil.

EU foreign ministers are expected to agree on a ban on imports of Iranian crude oil on January 23 - though with a grace period to give European companies time to find alternative sources of crude.

Japan on Thursday pledged to take concrete action to cut its oil imports from Iran.

(Reporting By Sebastian Moffett; Editing by Sophie Hares)

Quote:

From ZH:

Hyperinflation has struck again, this time at ground zero of the most sensitive geopolitical conflict in ages: Iran. EA WorldView reports:

An EA source reports that a relative in Tehran ordered a washing machine for 400,000 Toman (about $240) this week. When he went to the shop the next day, he was told that --- amidst the currency crisis and rising import costs --- the price was now 800,000 Toman (about $480). Another EA source says that the price of an item of software for a laptop computer has tripled from 50,000 Toman to 150,000 Toman within days.

And so the opportunity cost for the Ahmedinejad regime to preserve its status quo gradually grinds to zero, as the entire economy implodes (courtesy of a few strategic financially isolating decisions)

Oh, well, gee, ah, the Iranian government can reign in its hyperinflation anytime it wants to by not printing any more notes. My goodness! How hard can it be to just yank the plug out of the wall?

Quote:

....making further escalation virtually inevitable, in a 100% replica of the US-planned Japanese escalation that led to the Pearl Harbor attack, and gave America the green light to enter the war.

Yes, and when the Iranians are Raping Nanking, allied with genocidal kraut goosesteppers, and sending torpedo bombers after the Pacific fleet in a sneak-attack, the analogy will be fully "100 replica" complete.

(Who comes up with this ****?)

Endarkenment.

"...I am not kidding when I say that human thought is coming to a halt."

Quote:

Yes, and when the Iranians are Raping Nanking, allied with genocidal kraut goosesteppers, and sending torpedo bombers after the Pacific fleet in a sneak-attack, the analogy will be fully "100 replica" complete.

(Who comes up with this ****?)

Careful Bez, Landshark and I already went 'round on that one, which resulted in a lot of posts being yanked from this thread and escorted into the Bilge. But yeah, I'm with 'ya.

If there's an analogy with history right now it's 1914 not 1939.

Regardless of the disagreements I may have with some folks around here, I really tend to think this is more about reserve currency status than anything else.

But the potential for something to go very, very wrong is definitely there.

I remember when Massoud was assassinated in Afghanistan, I had a feeling something really bad was going to happen. 2 days later the Twin Towers were hit.

I have the same feeling about this Iranian scientist assassination. Iran is going to hit back. The Mossad probably did it, but in many ways the US is an easier target to hit than Israel.

And isn't it coincidental that in the past week, US ships have rescued not just one, but 2 boats of Iranian sailors in trouble? It's almost like we are going out of our way to prove how friendly we are.

This is coming to a nasty conclusion. It almost doesn't matter who strikes first - it could easily be an accident that starts the shooting war now.

I suspect at some point Khamenei will call Ohitler's bluff. He knows that Europe won't be a big supporter, they've got too many problems and can't take an oil shock, he knows Russia and China will side with Iran and I expect him to say **** it at some point.

@Gollum...I think you are right. I was just at the WWI museum today. The only Memorial to the WWI veterans in the country is in Kansas City and it's an excellent museum. 2 1/2 hours was not enough to see everything.

One assasination leads to a clash of nations. Only this time, instead of an Archduke, it's scientist who produces nukes. Russia warning that they are Irans ally. And, yeah, it probably is about currency. In the end, isn't it always about money? Power and money.

The story of the assasination of the Archduke is quite interesting. It's almost like it was supposed to happen, no matter what. The assasins not getting the word that it was called off, the driver going down the wrong street and having to back up slowly, right past the last of the assasins still around to make it happen. Wierd. 2 weeks later, just about all of Europe is at war with each other.

The war starts on or about Jan 23 (new moon)

The military channel runs a mini series "The First World War" that is very informative. In looking at the world it seems we are in a very similar time, the actors may have changed but the plot seems chillingly similar. If Arch Duke Ferdinand getting assisinated hadn't set it off something else would have. A lot of people I debate this with argue that Russia and China are blustering, which they do until they aren't anymore if you know what I mean. I don't think either of them wants a world war either, but one move by a country results in another move by another power (even an economic one in the case of China), maybe yet another power misinterperts one of the prior moves and makes a miscalculation. It's not hard to see how we could end up in a global war largley through blustering and miscalculation. Right now I think we calculate China and Russia will do nothing if we attack Iran, and that we won't see upheavel in the arab world as a result of that same attack.

Here are two good articles from the Abu Dhabi paper.

IMHO--Iran needs money and time to get their bomb. They aren't going to do anything stupid...it's the Israel wildcard we need to worry about.

Iran
http://www.thenational.ae/news/uae-news/....

Although the Russians seem to be stepping on their dick a lot these days. Qatar Emir wants the GCC to send troops to Syria and Russia is caught sending guns and bullets to Assad.

Russia and Middle East
http://www.thenational.ae/thenationalcon....

From Landshark's post above re: Russia's view of force against Iran:

Quote:

BRUSSELS (Reuters) - Russia would regard any military intervention linked to Iran's nuclear program as a threat to its own security, Moscow's departing ambassador to NATO warned on Friday.

"Iran is our neighbor," Dmitry Rogozin told reporters in Brussels. "And if Iran is involved in any military action, it's a direct threat to our security."

snip

Rogozin, often described as an anti-Western hawk, was appointed deputy prime minister in December, and will oversee Russia's defense sector when he returns to Moscow.

It is essential to keep in mind the recent hijacking of the RQ-170 drone via exceedingly sophisticated means. That almost certainly involved the Russians. Their assisting Iran like that, demonstating their ability to disrupt US GPS guidance systems, was a hugely risky step they would not have taken lightly. A VERY large saber was rattled there. IMHO, the Russians WANT Iran to have the bomb. Think about that.

Dogfarm said:

Quote:

IMHO--Iran needs money and time to get their bomb. They aren't going to do anything stupid...it's the Israel wildcard we need to worry about.

Spot on. At the end of the day, Israel will always act if they believe their existence is threatened, and the opinions of other countries won't matter much.

It will be interesting to see if Iran begins to mollify Israel. That's when we should all begin to get very concerned.

Buck350..... actually, i hadn't thought about this (naively) but yes, what if the Russians do want Iran to have the bomb. It is obvious. How could i be so ****ing blind in all of my mental masturbation to miss this variable.

at first i thought the Russians just wanted to ***** out their nuclear power plant construction services, but that's a piker business. now having lost Libya and getting ready to lose Syria (Assad is like a tick, but eventually all ticks come off a dog)...so losing Syria will make the biggest Russian presence in the Middle East the - drum roll - the Russian tourist population buying fur coats in Dubai. http://www.thenational.ae/arts-culture/a....

I suppose the Russians at one point wanted to keep Iran on a short leash, but given that the Russians are losing out in the game of Risk (Taliban winning, US declining, Russia getting clock cleaned starting with Afghanistan in the 80s and now Muslim Brotherhood taking over in Egypt)

So yes, clearly Russia wants Iran to have the bomb - or at least a negotiating tool (ie, small, non deliverable bomb).Why? Because the Middle East is too important for their southern border sphere of influence and they need to keep the caspian region under their gaze. Also, the Russian armament industry needs to keep selling tanks and bullets to keep X number of Russians employed (anyone have any idea how many russians work in munitions factories? i don't) Besides, I suspect (hope and pray) that any equipment the Russians provide they can also control via maintenance and parts embargoes to keep Iran in check.

So now, when Syria goes, that will leave Russia with Iran whom they will support even if they are crazy as ****house rats. Why? Because Russia wants to counterbalance US European expansion.

Which takes me back to my original point that it is the Israeli wildcard we have to worry about and if they attack Iran, the Russians are going to be ****ing enraged. What will they do to Israel? Keep selling missiles, bullets and guns to Iranian proxy fighters who will get mid evil on Israel - which is sadly ironic for the Russians given the number of Russian Jews living in Israel, but I guess somethings never change and the current Russian admin probably gives less of a **** about expat Russian Jews than Obama does about the American Middle Class.

another piece in the puzzle. click.

When your life is about dollars, you often assume everyone else's life is about money.
Assuming your value system is universal, is the final sign of a closed mind.

I think there are larger issues here.

bob

Dogfarm

From STRATFOR:
http://www.stratfor.com/weekly/iran-us-a....

Iran, the U.S. and the Strait of Hormuz Crisis
January 17, 2012 | 1222 GMT

By George Friedman

The United States reportedly sent a letter to Iran via multiple intermediaries last week warning Tehran that any attempt to close the Strait of Hormuz constituted a red line for Washington. The same week, a chemist associated with Iran's nuclear program was killed in Tehran. In Ankara, Iranian parliamentary speaker Ali Larijani met with Turkish officials and has been floating hints of flexibility in negotiations over Iran's nuclear program.

This week, a routine rotation of U.S. aircraft carriers is taking place in the Middle East, with the potential for three carrier strike groups to be on station in the U.S. Fifth Fleet's area of operations and a fourth carrier strike group based in Japan about a week's transit from the region. Next week, Gen. Michael Dempsey, chairman of the Joint Chiefs of Staff, will travel to Israel to meet with senior Israeli officials. And Iran is scheduling another set of war games in the Persian Gulf for February that will focus on the Islamic Revolutionary Guard Corps' irregular tactics for closing the Strait of Hormuz.

While tensions are escalating in the Persian Gulf, the financial crisis in Europe has continued, with downgrades in France's credit rating the latest blow. Meanwhile, China continued its struggle to maintain exports in the face of economic weakness among its major customers while inflation continued to increase the cost of Chinese exports.

Fundamental changes in how Europe and China work and their long-term consequences represent the major systemic shifts in the international system. In the more immediate future, however, the U.S.-Iranian dynamic has the most serious potential consequences for the world.

The U.S.-Iranian Dynamic
The increasing tensions in the region are not unexpected. As we have argued for some time, the U.S. invasion of Iraq and the subsequent decision to withdraw created a massive power vacuum in Iraq that Iran needed -- and was able -- to fill. Iran and Iraq fought a brutal war in the 1980s that caused about 1 million Iranian casualties, and Iran's fundamental national interest is assuring that no Iraqi regime able to threaten Iranian national security re-emerges. The U.S. invasion and withdrawal from Iraq provided Iran an opportunity to secure its western frontier, one it could not pass on.

If Iran does come to have a dominant influence in Iraq -- and I don't mean Iran turning Iraq into a satellite -- several things follow. Most important, the status of the Arabian Peninsula is subject to change. On paper, Iran has the most substantial conventional military force of any nation in the Persian Gulf. Absent outside players, power on paper is not insignificant. While technologically sophisticated, the military strength of the Arabian Peninsula nations on paper is much smaller, and they lack the Iranian military's ideologically committed manpower.

But Iran's direct military power is more the backdrop than the main engine of Iranian power. It is the strength of Tehran's covert capabilities and influence that makes Iran significant. Iran's covert intelligence capability is quite good. It has spent decades building political alliances by a range of means, and not only by nefarious methods. The Iranians have worked among the Shia, but not exclusively so; they have built a network of influence among a range of classes and religious and ethnic groups. And they have systematically built alliances and relationships with significant figures to counter overt U.S. power. With U.S. military power departing Iraq, Iran's relationships become all the more valuable.

The withdrawal of U.S. forces has had a profound psychological impact on the political elites of the Persian Gulf. Since the decline of British power after World War II, the United States has been the guarantor of the Arabian Peninsula's elites and therefore of the flow of oil from the region. The foundation of that guarantee has been military power, as seen in the response to Iraq's invasion of Kuwait in 1990. The United States still has substantial military power in the Persian Gulf, and its air and naval forces could likely cope with any overt provocation by Iran.

But that's not how the Iranians operate. For all their rhetoric, they are cautious in their policies. This does not mean they are passive. It simply means that they avoid high-risk moves. They will rely on their covert capabilities and relationships. Those relationships now exist in an environment in which many reasonable Arab leaders see a shift in the balance of power, with the United States growing weaker and less predictable in the region and Iran becoming stronger. This provides fertile soil for Iranian allies to pressure regional regimes into accommodations with Iran.

The Syrian Angle
Events in Syria compound this situation. The purported imminent collapse of Syrian President Bashar al Assad's regime in Syria has proved less imminent than many in the West imagined. At the same time, the isolation of the al Assad regime by the West -- and more important, by other Arab countries -- has created a situation where the regime is more dependent than ever on Iran.

Should the al Assad regime -- or the Syrian regime without al Assad -- survive, Iran would therefore enjoy tremendous influence with Syria, as well as with Hezbollah in Lebanon. The current course in Iraq coupled with the survival of an Alawite regime in Syria would create an Iranian sphere of influence stretching from western Afghanistan to the Mediterranean. This would represent a fundamental shift in the regional balance of power and probably would redefine Iranian relations with the Arabian Peninsula. This is obviously in Iran's interest. It is not in the interests of the United States, however.

The United States has sought to head this off via a twofold response. Clandestinely, it has engaged in an active campaign of sabotage and assassination targeting Iran's nuclear efforts. Publicly, it has created a sanctions regime against Iran, most recently targeting Iran's oil exports. However, the latter effort faces many challenges.

Japan, the No. 2 buyer of Iranian crude, has pledged its support but has not outlined concrete plans to reduce its purchases. The Chinese and Indians -- Iran's No. 1 and 3 buyers of crude, respectively -- will continue to buy from Iran despite increased U.S. pressure. In spite of U.S. Treasury Secretary Timothy Geithner's visit last week, the Chinese are not prepared to impose sanctions, and the Russians are not likely to enforce sanctions even if they agreed to them. Turkey is unwilling to create a confrontation with Iran and is trying to remain a vital trade conduit for the Iranians regardless of sanctions. At the same time, while the Europeans seem prepared to participate in harder-hitting sanctions on Iranian oil, they already have delayed action on these sanctions and certainly are in no position politically or otherwise to participate in military action. The European economic crisis is at root a political crisis, so even if the Europeans could add significant military weight, which they generally lack, concerted action of any sort is unlikely.

Neither, for that matter, does the United States have the ability to do much militarily. Invading Iran is out of the question. The mountainous geography of Iran, a nation of about 70 million people, makes direct occupation impossible given available American forces.

Air operations against Iran are an option, but they could not be confined to nuclear facilities. Iran still doesn't have nuclear weapons, and while nuclear weapons would compound the strategic problem, the problem would still exist without them. The center of gravity of Iran's power is the relative strength of its conventional forces in the region. Absent those, Iran would be less capable of wielding covert power, as the psychological matrix would shift.

An air campaign against Iran's conventional forces would play to American military strengths, but it has two problems. First, it would be an extended campaign, one lasting months. Iran's capabilities are large and dispersed, and as seen in Desert Storm and Kosovo against weaker opponents, such operations take a long time and are not guaranteed to be effective. Second, the Iranians have counters. One, of course, is the Strait of Hormuz. The second is the use of its special operations forces and allies in and out of the region to conduct terrorist attacks. An extended air campaign coupled with terrorist attacks could increase distrust of American power rather than increase it among U.S. allies, to say nothing of the question of whether Washington could sustain political support in a coalition or within the United States itself.

The Covert Option
The United States and Israel both have covert options as well. They have networks of influence in the region and highly capable covert forces, which they have said publicly that they would use to limit Iran's acquisition of nuclear weapons without resorting to overt force. We assume, though we lack evidence, that the assassination of the Iranian chemist associated with the country's nuclear program last week was either a U.S. or Israeli operation or some combination of the two. Not only did it eliminate a scientist, it also bred insecurity and morale problems among those working on the program. It also signaled the region that the United States and Israel have options inside Iran.

The U.S. desire to support an Iranian anti-government movement generally has failed. Tehran showed in 2009 that it could suppress demonstrations, and it was obvious that the demonstrators did not have the widespread support needed to overcome such repression. Though the United States has sought to support internal dissidents in Iran since 1979, it has not succeeded in producing a meaningful threat to the clerical regime. Therefore, covert operations are being aimed directly at the nuclear program with the hope that successes there might ripple through other, more immediately significant sectors.

As we have long argued, the Iranians already have a "nuclear option," namely, the prospect of blockading the Strait of Hormuz, through which roughly 35 percent of seaborne crude and 20 percent of the world's traded oil passes daily. Doing so would hurt them, too, of course. But failing to deter an air or covert campaign, they might choose to close off the strait. Temporarily disrupting the flow of oil, even intermittently, could rapidly create a global economic crisis given the fragility of the world economy.

The United States does not want to see that. Washington will be extremely cautious in its actions unless it can act with a high degree of assurance that it can prevent such a disruption, something difficult to guarantee. It also will restrain Israel, which might have the ability to strike at a few nuclear facilities but lacks the force to completely eliminate the program much less target Iran's conventional capability and manage the consequences of that strike in the Strait of Hormuz. Only the United States could do all that, and given the possible consequences, it will be loathe to attempt it.

The United States continues, therefore, with sanctions and covert actions while Iran continues building its covert power in Iraq and in the region. Each will try to convince the region that its power will be supreme in a year. The region is skeptical of both, but will have to live with one of the two, or with an ongoing test of wills -- an unnerving prospect. Each side is seeking to magnify its power for psychological effect without crossing a red line that prompts the other to take extreme measures. Iran signals its willingness to attempt to close Hormuz and its development of nuclear weapons, but it doesn't cross the line to actually closing the strait or detonating a nuclear device. The United States pressures Iran and moves forces around, but it doesn't cross the red line of commencing military actions. Thus, each avoids triggering unacceptable actions by the other.

The problem for the United States is that the status quo ultimately works against it. If al Assad survives and if the situation in Iraq proceeds as it has been proceeding, then Iran is creating a reality that will define the region. The United States does not have a broad and effective coalition, and certainly not one that would rally in the event of war. It has only Israel, and Israel is as uneasy with direct military action as the United States is. It does not want to see a failed attack and it does not want to see more instability in the Arab world. For all its rhetoric, Israel has a weak hand to play. The only virtue of the American hand is that it is stronger -- but only relatively speaking.

For the United States, preventing the expansion of an Iranian sphere of influence is a primary concern. Iraq is going to be a difficult arena to stop Iran's expansion. Syria therefore is key at present. Al Assad appears weak, and his replacement by a Sunni government would limit -- but not destroy -- any Iranian sphere of influence. It would be a reversal for Iran, and the United States badly needs to apply one. But the problem is that the United States cannot be seen as the direct agent of regime change in Syria, and al Assad is not as weak as has been claimed. Even so, Syria is where the United States can work to block Iran without crossing Iran's red lines.

The normal outcome of a situation like this one, in which neither Iran nor the United States can afford to cross the other's red lines since the consequences would be too great for each, would be some sort of negotiation toward a longer-term accommodation. Ideology aside -- and the United States negotiating with the "Axis of Evil" or Iran with the "Great Satan" would be tough sells to their respective domestic audiences -- the problem with this is that it is difficult to see what each has to offer the other. What Iran wants -- a dominant position in the region and a redefinition of how oil revenues are allocated and distributed -- would make the United States dependent on Iran. What the United States wants -- an Iran that does not build a sphere of influence but instead remains within its borders -- would cost Iran a historic opportunity to assert its longstanding claims.

We find ourselves in a situation in which neither side wants to force the other into extreme steps and neither side is in a position to enter into broader accommodations. And that's what makes the situation dangerous. When fundamental issues are at stake, each side is in a position to profoundly harm the other if pressed, and neither side is in a position to negotiate a broad settlement, a long game of chess ensues. And in that game of chess, the possibilities of miscalculation, of a bluff that the other side mistakes for an action, are very real.

Europe and China are redefining the way the world works. But kingdoms run on oil, as someone once said, and a lot of oil comes through Hormuz. Iran may or may not be able to close the strait, and that reshapes Europe and China. The New Year thus begins where we expected: at the Strait of Hormuz.

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in that game of chess, the possibilities of miscalculation, of a bluff that the other side mistakes for an action, are very real.

WWI all over again? As the saying goes, while history never repeats, it always rhymes or something like that.