The War To Save The U.S. Dollar
(First released March 26, 2003; revised April 18, 2003.)
http://us.altnews.com.au/article.php?sid=4645
The URL for this article is:
www.trinicenter.com/oops/iraqeuro.html
The Americans could live with Saddam until he started selling oil for euros instead of U.S. dollars. Then the Europeans could live with him.
by Gavin R. Putland [email protected]
GOOD AS GOLD
At the end of World War II, the USA was the world's biggest national economy and the only great power whose industrial base was not damaged by the war. America's huge productive capacity made the U.S. dollar the easiest currency to spend in the global market and consequently the most acceptable foreign currency outside the USA. By the late 1950s, however, the recovery of Europe and Japan caused a suspicion that there were too many dollars in circulation. Central bankers began to exchange their dollars for gold under the terms of the 1944 Bretton Woods treaty, whereby the currencies of participating countries were backed by gold. In 1971, in response to the depletion of U.S. gold reserves, President Richard Nixon announced that the dollar would no longer be redeemable for gold. So the system of fixed exchange rates via gold-backing fell apart. It was thought that the dollar would decline in value as traders relied less on the dollar and more on the emerging European and Asian currencies. But support for the dollar came from an unlikely quarter.
GOLD TURNS BLACK
In 1973, the Organization of Petroleum Exporting Countries (OPEC) quadrupled the price of oil but continued to accept only U.S. dollars in payment, so that demand for dollars soared. From then on, the dollar was effectively backed by oil instead of gold -- and the U.S. government didn't even have to own the oil!
Because dollars can buy oil, exporters in countries that need to import oil -- i.e. most developed countries -- will accept dollars for their exports. Hence everyone who needs to buy from those exporters will accept dollars as payment for other things, and so on. To pay their bills, importers must have reserves of dollars. To prop up their currencies against speculative attacks, the central banks of all countries must have reserves of dollars. To get capital, poor countries must borrow dollars, and to service these debts they must export goods to obtain more dollars. About 2/3 of all currency reserves, more than 4/5 of all currency transactions, more than half of the world's exports, and all loans from the International Monetary Fund (IMF) are denominated in dollars. As these things create demand for the dollar and shore up its value, oil exporters are the more willing to accept payment in dollars. So the process is self-reinforcing; it's called "dollar hegemony".
In the late 1970s, falling oil prices reduced demand for the dollar while mounting third-world debt reduced confidence in dollar-denominated deposits. The U.S. Federal Reserve defended the dollar by raising interest rates to record levels. Heavily indebted poor countries are still paying for that episode. But the second oil-price shock (1979-80) restored demand for the dollar.
So America can export dollars, which cost nothing to produce, and receive real goods and services in return. When those dollars eventually find their way into foreign reserves, they can be invested only in American assets. This creates a demand for U.S. treasury bills without high interest rates, and inflates the U.S. property market and stock market -- to the benefit of current owners of land and shares, and to the detriment of the working poor who live in caravans ("trailers") on the fringes of American cities because they do not "earn" enough to buy or rent a home. Ordinary home owners may think they benefit from rising property values; but in fact, every time an owner moves to a new home, the higher sale price of the old home is offset by the higher purchase price of the new one. The real winners are the big investors.
But this continuous inflow of foreign investment (on the "capital account") is needed to balance America's mammoth trade deficit (on the "current account"). America's imports now exceed its exports by almost 50%, or 5% of GDP. Its net foreign debt is more than a quarter of annual GDP, and its public debt is about 60% of annual GDP.
CLEAR AND PRESENT DANGER
The main threat to the global hegemony of a single currency is the desire for diversity in investment. Dollar hegemony was secured by the size of the U.S. economy and the pricing of oil in dollars. But if a second currency were allowed into the oil market, it would soon become a general-purpose trading and reserve currency, especially if it were legal tender in an economy comparable in size to the USA.
In 1999, eleven member states of the European Union (EU) adopted the euro as a common accounting currency. Greece joined the Euro Zone a year later. On January 1, 2002, the twelve countries withdrew their old money from circulation, completing the biggest currency reform in history.
The Euro Zone already has a bigger share of world trade than the USA. In particular, it imports more oil than the USA and is the main trading partner of the Middle East. It offers higher interest rates than the USA, but does not have a huge foreign debt or trade deficit. Member states must accept tight constraints on budget deficits, and the European Central Bank has an exceptionally strong mandate to preserve the purchasing power of its currency. These things inspire confidence in the euro. In 2002, the central banks of Russia, China, Taiwan and Canada converted some of their reserves from dollars to euros. The strength of the euro also encourages expansion of the EU and puts pressure on current members Denmark, Sweden and the U.K. to join the Euro Zone. In December 2002, ten new countries were accepted for EU membership with effect from May 2004. This will create a common market of 450 million people, which will buy more than half of OPEC's oil.
So the only argument for preferring dollars to euros is that dollars can buy oil. As that argument does not affect oil exporters, it would make sense for OPEC members to convert most of their reserves to euros by mid 2004. Then if they were to price their oil in euros, at least for exports to the Euro Zone, they would increase global demand for the euro, causing a handsome increase in the value of their new euro reserves. Similar arguments apply to non-OPEC oil exporters such as Norway and Russia.
If the euro becomes a global currency to rival the dollar, central banks and other traders will sell down their dollar reserves, causing the value of the dollar to plummet (and devaluing the debts of poor countries at the expense of their creditors). The unwanted dollars will be withdrawn from the U.S. asset market and will flood the market for U.S. goods and services. The U.S. property market will deflate (so that poor Americans can more easily afford homes, at the expense of current property owners). The U.S. stock market, being more volatile than the property market, will fall faster. The real prices of property and shares will fall further than the dollar prices because the dollar itself will be devalued. The additional dollars chasing U.S. goods and services will fuel domestic inflation. They will also increase exports, reducing the current account deficit to compensate for the slowdown of foreign investment, and reducing domestic living standards as measured by consumption of goods and services. Inevitably, the Federal Reserve will raise interest rates in order to reduce the inflation, support the dollar, attract more foreign investment, and delay the day of reckoning on which America will have to export real goods and services to pay for its imports, service its foreign debt, and accumulate reserves of euros. But that will not rescue the landowners and shareholders and bond holders, because their assets can be devalued not only by reduced foreign investment, but also by higher interest rates.
And of course the price of oil in U.S. dollars will increase; but this time there will be no compensating increase in the global demand for dollars.
ROGUE STATES
The first OPEC member to show serious disloyalty to the dollar was Iran, which has expressed interest in the euro since 1999. In January 2002, George W. Bush named Iran in his "axis of evil", provoking a wave of anti-American demonstrations reminiscent of the Khomeini era, and undoubtedly setting back the political and religious liberalization of that country. Undeterred, Iran converted most of its currency reserves to euros during 2002, and a proposal to price Iran's oil in euros has been submitted to the central bank and the parliament.
Let us see whether the Americans find an excuse to destabilize Iran's toddling democracy in favor of a dictatorship that just happens to prefer dollars to euros.
The second offender was Venezuela. In 2000, Venezuela's President Hugo Chavez convened a conference on the future of fossil fuels and renewable energy. The report of the conference, delivered by Chavez to the OPEC summit in September 2000, recommended that OPEC set up a computerized barter system so that members could trade oil for goods and services without the use of dollars or any other currency. The chief beneficiaries would be OPEC's poorer customers, who did not have large currency reserves. Chavez made 13 barter deals. In one of them, Cuba provided health services in Venezuelan villages.
In April 2002 there was a coup against the twice-elected President Chavez. The coup was welcomed by the Bush administration and by editorials in numerous American newspapers, but collapsed after two days, leaving evidence that the U.S. administration was behind it [1].
The third and most blatant offender was Iraq. In October 2000, Iraq persuaded the United Nations to allow Iraqi oil to be sold for euros instead of dollars, with effect from November 6. Iraq then converted its entire $10 billion "oil for food" reserve fund from dollars to euros. These events went unreported in the U.S. media.
Given America's record of toppling elected governments whose policies it didn't like (as in Chile, Nicaragua, and almost Venezuela), it is hard to believe that the motives of Operation Iraqi Freedom were as pure as its name suggested, especially considering how cheap "freedom" has become in U.S. domestic politics [see the Appendix]. The test of America's sincerity will be whether the new regime in Iraq continues to sell oil for euros.
Having occupied Iraq, America then stepped up its rhetoric against neighboring Syria. Coincidentally, Syria would like to sell oil for euros because most of its imports are purchased with euros.
* * *
If this oil-currency-war theory is a delusion, the U.S. administration can easily discredit it -- by declaring that the USA has no objection if oil exports to the Euro Zone are denominated in euros.
The Proposed Iranian Oil Bourse
by Krassimir Petrov
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I. Economics of Empires
A nation-state taxes its own citizens, while an empire taxes other nation-states. The history of empires, from Greek and Roman, to Ottoman and British, teaches that the economic foundation of every single empire is the taxation of other nations. The imperial ability to tax has always rested on a better and stronger economy, and as a consequence, a better and stronger military. One part of the subject taxes went to improve the living standards of the empire; the other part went to strengthen the military dominance necessary to enforce the collection of those taxes.
Historically, taxing the subject state has been in various forms—usually gold and silver, where those were considered money, but also slaves, soldiers, crops, cattle, or other agricultural and natural resources, whatever economic goods the empire demanded and the subject-state could deliver. Historically, imperial taxation has always been direct: the subject state handed over the economic goods directly to the empire.
For the first time in history, in the twentieth century, America was able to tax the world indirectly, through inflation. It did not enforce the direct payment of taxes like all of its predecessor empires did, but distributed instead its own fiat currency, the U.S. Dollar, to other nations in exchange for goods with the intended consequence of inflating and devaluing those dollars and paying back later each dollar with less economic goods—the difference capturing the U.S. imperial tax. Here is how this happened.
Early in the 20th century, the U.S. economy began to dominate the world economy. The U.S. dollar was tied to gold, so that the value of the dollar neither increased, nor decreased, but remained the same amount of gold. The Great Depression, with its preceding inflation from 1921 to 1929 and its subsequent ballooning government deficits, had substantially increased the amount of currency in circulation, and thus rendered the backing of U.S. dollars by gold impossible. This led Roosevelt to decouple the dollar from gold in 1932. Up to this point, the U.S. may have well dominated the world economy, but from an economic point of view, it was not an empire. The fixed value of the dollar did not allow the Americans to extract economic benefits from other countries by supplying them with dollars convertible to gold.
Economically, the American Empire was born with Bretton Woods in 1945. The U.S. dollar was not fully convertible to gold, but was made convertible to gold only to foreign governments. This established the dollar as the reserve currency of the world. It was possible, because during WWII, the United States had supplied its allies with provisions, demanding gold as payment, thus accumulating significant portion of the world’s gold. An Empire would not have been possible if, following the Bretton Woods arrangement, the dollar supply was kept limited and within the availability of gold, so as to fully exchange back dollars for gold. However, the guns-and-butter policy of the 1960’s was an imperial one: the dollar supply was relentlessly increased to finance Vietnam and LBJ’s Great Society. Most of those dollars were handed over to foreigners in exchange for economic goods, without the prospect of buying them back at the same value. The increase in dollar holdings of foreigners via persistent U.S. trade deficits was tantamount to a tax—the classical inflation tax that a country imposes on its own citizens, this time around an inflation tax that U.S. imposed on rest of the world.
When in 1970-1971 foreigners demanded payment for their dollars in gold, The U.S. Government defaulted on its payment on August 15, 1971. While the popular spin told the story of “severing the link between the dollar and gold”, in reality the denial to pay back in gold was an act of bankruptcy by the U.S. Government. Essentially, the U.S. declared itself an Empire. It had extracted an enormous amount of economic goods from the rest of the world, with no intention or ability to return those goods, and the world was powerless to respond— the world was taxed and it could not do anything about it.
From that point on, to sustain the American Empire and to continue to tax the rest of the world, the United States had to force the world to continue to accept ever-depreciating dollars in exchange for economic goods and to have the world hold more and more of those depreciating dollars. It had to give the world an economic reason to hold them, and that reason was oil.
In 1971, as it became clearer and clearer that the U.S Government would not be able to buy back its dollars in gold, it made in 1972-73 an iron-clad arrangement with Saudi Arabia to support the power of the House of Saud in exchange for accepting only U.S. dollars for its oil. The rest of OPEC was to follow suit and also accept only dollars. Because the world had to buy oil from the Arab oil countries, it had the reason to hold dollars as payment for oil. Because the world needed ever increasing quantities of oil at ever increasing oil prices, the world’s demand for dollars could only increase. Even though dollars could no longer be exchanged for gold, they were now exchangeable for oil.
The economic essence of this arrangement was that the dollar was now backed by oil. As long as that was the case, the world had to accumulate increasing amounts of dollars, because they needed those dollars to buy oil. As long as the dollar was the only acceptable payment for oil, its dominance in the world was assured, and the American Empire could continue to tax the rest of the world. If, for any reason, the dollar lost its oil backing, the American Empire would cease to exist. Thus, Imperial survival dictated that oil be sold only for dollars. It also dictated that oil reserves were spread around various sovereign states that weren’t strong enough, politically or militarily, to demand payment for oil in something else. If someone demanded a different payment, he had to be convinced, either by political pressure or military means, to change his mind.
The man that actually did demand Euro for his oil was Saddam Hussein in 2000. At first, his demand was met with ridicule, later with neglect, but as it became clearer that he meant business, political pressure was exerted to change his mind. When other countries, like Iran, wanted payment in other currencies, most notably Euro and Yen, the danger to the dollar was clear and present, and a punitive action was in order. Bush’s Shock-and-Awe in Iraq was not about Saddam’s nuclear capabilities, about defending human rights, about spreading democracy, or even about seizing oil fields; it was about defending the dollar, ergo the American Empire. It was about setting an example that anyone who demanded payment in currencies other than U.S. Dollars would be likewise punished.
Many have criticized Bush for staging the war in Iraq in order to seize Iraqi oil fields. However, those critics can’t explain why Bush would want to seize those fields—he could simply print dollars for nothing and use them to get all the oil in the world that he needs. He must have had some other reason to invade Iraq.
History teaches that an empire should go to war for one of two reasons: (1) to defend itself or (2) benefit from war; if not, as Paul Kennedy illustrates in his magisterial The Rise and Fall of the Great Powers, a military overstretch will drain its economic resources and precipitate its collapse. Economically speaking, in order for an empire to initiate and conduct a war, its benefits must outweigh its military and social costs. Benefits from Iraqi oil fields are hardly worth the long-term, multi-year military cost. Instead, Bush must have went into Iraq to defend his Empire. Indeed, this is the case: two months after the United States invaded Iraq, the Oil for Food Program was terminated, the Iraqi Euro accounts were switched back to dollars, and oil was sold once again only for U.S. dollars. No longer could the world buy oil from Iraq with Euro. Global dollar supremacy was once again restored. Bush descended victoriously from a fighter jet and declared the mission accomplished—he had successfully defended the U.S. dollar, and thus the American Empire.
II. Iranian Oil Bourse
The Iranian government has finally developed the ultimate “nuclear” weapon that can swiftly destroy the financial system underpinning the American Empire. That weapon is the Iranian Oil Bourse slated to open in March 2006. It will be based on a euro-oil-trading mechanism that naturally implies payment for oil in Euro. In economic terms, this represents a much greater threat to the hegemony of the dollar than Saddam’s, because it will allow anyone willing either to buy or to sell oil for Euro to transact on the exchange, thus circumventing the U.S. dollar altogether. If so, then it is likely that almost everyone will eagerly adopt this euro oil system:
· The Europeans will not have to buy and hold dollars in order to secure their payment for oil, but would instead pay with their own currencies. The adoption of the euro for oil transactions will provide the European currency with a reserve status that will benefit the European at the expense of the Americans.
· The Chinese and the Japanese will be especially eager to adopt the new exchange, because it will allow them to drastically lower their enormous dollar reserves and diversify with Euros, thus protecting themselves against the depreciation of the dollar. One portion of their dollars they will still want to hold onto; a second portion of their dollar holdings they may decide to dump outright; a third portion of their dollars they will decide to use up for future payments without replenishing those dollar holdings, but building up instead their euro reserves.
· The Russians have inherent economic interest in adopting the Euro – the bulk of their trade is with European countries, with oil-exporting countries, with China, and with Japan. Adoption of the Euro will immediately take care of the first two blocs, and will over time facilitate trade with China and Japan. Also, the Russians seemingly detest holding depreciating dollars, for they have recently found a new religion with gold. Russians have also revived their nationalism, and if embracing the Euro will stab the Americans, they will gladly do it and smugly watch the Americans bleed.
· The Arab oil-exporting countries will eagerly adopt the Euro as a means of diversifying against rising mountains of depreciating dollars. Just like the Russians, their trade is mostly with European countries, and therefore will prefer the European currency both for its stability and for avoiding currency risk, not to mention their jihad against the Infidel Enemy.
Only the British will find themselves between a rock and a hard place. They have had a strategic partnership with the U.S. forever, but have also had their natural pull from Europe. So far, they have had many reasons to stick with the winner. However, when they see their century-old partner falling, will they firmly stand behind him or will they deliver the coup de grace? Still, we should not forget that currently the two leading oil exchanges are the New York’s NYMEX and the London’s International Petroleum Exchange (IPE), even though both of them are effectively owned by the Americans. It seems more likely that the British will have to go down with the sinking ship, for otherwise they will be shooting themselves in the foot by hurting their own London IPE interests. It is here noteworthy that for all the rhetoric about the reasons for the surviving British Pound, the British most likely did not adopt the Euro namely because the Americans must have pressured them not to: otherwise the London IPE would have had to switch to Euros, thus mortally wounding the dollar and their strategic partner.
At any rate, no matter what the British decide, should the Iranian Oil Bourse accelerate, the interests that matter—those of Europeans, Chinese, Japanese, Russians, and Arabs—will eagerly adopt the Euro, thus sealing the fate of the dollar. Americans cannot allow this to happen, and if necessary, will use a vast array of strategies to halt or hobble the operation’s exchange:
· Sabotaging the Exchange—this could be a computer virus, network, communications, or server attack, various server security breaches, or a 9-11-type attack on main and backup facilities.
· Coup d’état—this is by far the best long-term strategy available to the Americans.
· Negotiating Acceptable Terms & Limitations—this is another excellent solution to the Americans. Of course, a government coup is clearly the preferred strategy, for it will ensure that the exchange does not operate at all and does not threaten American interests. However, if an attempted sabotage or coup d’etat fails, then negotiation is clearly the second-best available option.
· Joint U.N. War Resolution—this will be, no doubt, hard to secure given the interests of all other member-states of the Security Council. Feverish rhetoric about Iranians developing nuclear weapons undoubtedly serves to prepare this course of action.
· Unilateral Nuclear Strike—this is a terrible strategic choice for all the reasons associated with the next strategy, the Unilateral Total War. The Americans will likely use Israel to do their dirty nuclear job.
· Unilateral Total War—this is obviously the worst strategic choice. First, the U.S. military resources have been already depleted with two wars. Secondly, the Americans will further alienate other powerful nations. Third, major dollar-holding countries may decide to quietly retaliate by dumping their own mountains of dollars, thus preventing the U.S. from further financing its militant ambitions. Finally, Iran has strategic alliances with other powerful nations that may trigger their involvement in war; Iran reputedly has such alliance with China, India, and Russia, known as the Shanghai Cooperative Group, a.k.a. Shanghai Coop and a separate pact with Syria.
Whatever the strategic choice, from a purely economic point of view, should the Iranian Oil Bourse gain momentum, it will be eagerly embraced by major economic powers and will precipitate the demise of the dollar. The collapsing dollar will dramatically accelerate U.S. inflation and will pressure upward U.S. long-term interest rates. At this point, the Fed will find itself between Scylla and Charybdis—between deflation and hyperinflation—it will be forced fast either to take its “classical medicine” by deflating, whereby it raises interest rates, thus inducing a major economic depression, a collapse in real estate, and an implosion in bond, stock, and derivative markets, with a total financial collapse, or alternatively, to take the Weimar way out by inflating, whereby it pegs the long-bond yield, raises the Helicopters and drowns the financial system in liquidity, bailing out numerous LTCMs and hyperinflating the economy.
The Austrian theory of money, credit, and business cycles teaches us that there is no in-between Scylla and Charybdis. Sooner or later, the monetary system must swing one way or the other, forcing the Fed to make its choice. No doubt, Commander-in-Chief Ben Bernanke, a renowned scholar of the Great Depression and an adept Black Hawk pilot, will choose inflation. Helicopter Ben, oblivious to Rothbard’s America’s Great Depression, has nonetheless mastered the lessons of the Great Depression and the annihilating power of deflations. The Maestro has taught him the panacea of every single financial problem—to inflate, come hell or high water. He has even taught the Japanese his own ingenious unconventional ways to battle the deflationary liquidity trap. Like his mentor, he has dreamed of battling a Kondratieff Winter. To avoid deflation, he will resort to the printing presses; he will recall all helicopters from the 800 overseas U.S. military bases; and, if necessary, he will monetize everything in sight. His ultimate accomplishment will be the hyperinflationary destruction of the American currency and from its ashes will rise the next reserve currency of the world—that barbarous relic called gold.
(First released March 26, 2003; revised April 18, 2003.)
http://us.altnews.com.au/article.php?sid=4645
The URL for this article is:
www.trinicenter.com/oops/iraqeuro.html
The Americans could live with Saddam until he started selling oil for euros instead of U.S. dollars. Then the Europeans could live with him.
by Gavin R. Putland [email protected]
GOOD AS GOLD
At the end of World War II, the USA was the world's biggest national economy and the only great power whose industrial base was not damaged by the war. America's huge productive capacity made the U.S. dollar the easiest currency to spend in the global market and consequently the most acceptable foreign currency outside the USA. By the late 1950s, however, the recovery of Europe and Japan caused a suspicion that there were too many dollars in circulation. Central bankers began to exchange their dollars for gold under the terms of the 1944 Bretton Woods treaty, whereby the currencies of participating countries were backed by gold. In 1971, in response to the depletion of U.S. gold reserves, President Richard Nixon announced that the dollar would no longer be redeemable for gold. So the system of fixed exchange rates via gold-backing fell apart. It was thought that the dollar would decline in value as traders relied less on the dollar and more on the emerging European and Asian currencies. But support for the dollar came from an unlikely quarter.
GOLD TURNS BLACK
In 1973, the Organization of Petroleum Exporting Countries (OPEC) quadrupled the price of oil but continued to accept only U.S. dollars in payment, so that demand for dollars soared. From then on, the dollar was effectively backed by oil instead of gold -- and the U.S. government didn't even have to own the oil!
Because dollars can buy oil, exporters in countries that need to import oil -- i.e. most developed countries -- will accept dollars for their exports. Hence everyone who needs to buy from those exporters will accept dollars as payment for other things, and so on. To pay their bills, importers must have reserves of dollars. To prop up their currencies against speculative attacks, the central banks of all countries must have reserves of dollars. To get capital, poor countries must borrow dollars, and to service these debts they must export goods to obtain more dollars. About 2/3 of all currency reserves, more than 4/5 of all currency transactions, more than half of the world's exports, and all loans from the International Monetary Fund (IMF) are denominated in dollars. As these things create demand for the dollar and shore up its value, oil exporters are the more willing to accept payment in dollars. So the process is self-reinforcing; it's called "dollar hegemony".
In the late 1970s, falling oil prices reduced demand for the dollar while mounting third-world debt reduced confidence in dollar-denominated deposits. The U.S. Federal Reserve defended the dollar by raising interest rates to record levels. Heavily indebted poor countries are still paying for that episode. But the second oil-price shock (1979-80) restored demand for the dollar.
So America can export dollars, which cost nothing to produce, and receive real goods and services in return. When those dollars eventually find their way into foreign reserves, they can be invested only in American assets. This creates a demand for U.S. treasury bills without high interest rates, and inflates the U.S. property market and stock market -- to the benefit of current owners of land and shares, and to the detriment of the working poor who live in caravans ("trailers") on the fringes of American cities because they do not "earn" enough to buy or rent a home. Ordinary home owners may think they benefit from rising property values; but in fact, every time an owner moves to a new home, the higher sale price of the old home is offset by the higher purchase price of the new one. The real winners are the big investors.
But this continuous inflow of foreign investment (on the "capital account") is needed to balance America's mammoth trade deficit (on the "current account"). America's imports now exceed its exports by almost 50%, or 5% of GDP. Its net foreign debt is more than a quarter of annual GDP, and its public debt is about 60% of annual GDP.
CLEAR AND PRESENT DANGER
The main threat to the global hegemony of a single currency is the desire for diversity in investment. Dollar hegemony was secured by the size of the U.S. economy and the pricing of oil in dollars. But if a second currency were allowed into the oil market, it would soon become a general-purpose trading and reserve currency, especially if it were legal tender in an economy comparable in size to the USA.
In 1999, eleven member states of the European Union (EU) adopted the euro as a common accounting currency. Greece joined the Euro Zone a year later. On January 1, 2002, the twelve countries withdrew their old money from circulation, completing the biggest currency reform in history.
The Euro Zone already has a bigger share of world trade than the USA. In particular, it imports more oil than the USA and is the main trading partner of the Middle East. It offers higher interest rates than the USA, but does not have a huge foreign debt or trade deficit. Member states must accept tight constraints on budget deficits, and the European Central Bank has an exceptionally strong mandate to preserve the purchasing power of its currency. These things inspire confidence in the euro. In 2002, the central banks of Russia, China, Taiwan and Canada converted some of their reserves from dollars to euros. The strength of the euro also encourages expansion of the EU and puts pressure on current members Denmark, Sweden and the U.K. to join the Euro Zone. In December 2002, ten new countries were accepted for EU membership with effect from May 2004. This will create a common market of 450 million people, which will buy more than half of OPEC's oil.
So the only argument for preferring dollars to euros is that dollars can buy oil. As that argument does not affect oil exporters, it would make sense for OPEC members to convert most of their reserves to euros by mid 2004. Then if they were to price their oil in euros, at least for exports to the Euro Zone, they would increase global demand for the euro, causing a handsome increase in the value of their new euro reserves. Similar arguments apply to non-OPEC oil exporters such as Norway and Russia.
If the euro becomes a global currency to rival the dollar, central banks and other traders will sell down their dollar reserves, causing the value of the dollar to plummet (and devaluing the debts of poor countries at the expense of their creditors). The unwanted dollars will be withdrawn from the U.S. asset market and will flood the market for U.S. goods and services. The U.S. property market will deflate (so that poor Americans can more easily afford homes, at the expense of current property owners). The U.S. stock market, being more volatile than the property market, will fall faster. The real prices of property and shares will fall further than the dollar prices because the dollar itself will be devalued. The additional dollars chasing U.S. goods and services will fuel domestic inflation. They will also increase exports, reducing the current account deficit to compensate for the slowdown of foreign investment, and reducing domestic living standards as measured by consumption of goods and services. Inevitably, the Federal Reserve will raise interest rates in order to reduce the inflation, support the dollar, attract more foreign investment, and delay the day of reckoning on which America will have to export real goods and services to pay for its imports, service its foreign debt, and accumulate reserves of euros. But that will not rescue the landowners and shareholders and bond holders, because their assets can be devalued not only by reduced foreign investment, but also by higher interest rates.
And of course the price of oil in U.S. dollars will increase; but this time there will be no compensating increase in the global demand for dollars.
ROGUE STATES
The first OPEC member to show serious disloyalty to the dollar was Iran, which has expressed interest in the euro since 1999. In January 2002, George W. Bush named Iran in his "axis of evil", provoking a wave of anti-American demonstrations reminiscent of the Khomeini era, and undoubtedly setting back the political and religious liberalization of that country. Undeterred, Iran converted most of its currency reserves to euros during 2002, and a proposal to price Iran's oil in euros has been submitted to the central bank and the parliament.
Let us see whether the Americans find an excuse to destabilize Iran's toddling democracy in favor of a dictatorship that just happens to prefer dollars to euros.
The second offender was Venezuela. In 2000, Venezuela's President Hugo Chavez convened a conference on the future of fossil fuels and renewable energy. The report of the conference, delivered by Chavez to the OPEC summit in September 2000, recommended that OPEC set up a computerized barter system so that members could trade oil for goods and services without the use of dollars or any other currency. The chief beneficiaries would be OPEC's poorer customers, who did not have large currency reserves. Chavez made 13 barter deals. In one of them, Cuba provided health services in Venezuelan villages.
In April 2002 there was a coup against the twice-elected President Chavez. The coup was welcomed by the Bush administration and by editorials in numerous American newspapers, but collapsed after two days, leaving evidence that the U.S. administration was behind it [1].
The third and most blatant offender was Iraq. In October 2000, Iraq persuaded the United Nations to allow Iraqi oil to be sold for euros instead of dollars, with effect from November 6. Iraq then converted its entire $10 billion "oil for food" reserve fund from dollars to euros. These events went unreported in the U.S. media.
Given America's record of toppling elected governments whose policies it didn't like (as in Chile, Nicaragua, and almost Venezuela), it is hard to believe that the motives of Operation Iraqi Freedom were as pure as its name suggested, especially considering how cheap "freedom" has become in U.S. domestic politics [see the Appendix]. The test of America's sincerity will be whether the new regime in Iraq continues to sell oil for euros.
Having occupied Iraq, America then stepped up its rhetoric against neighboring Syria. Coincidentally, Syria would like to sell oil for euros because most of its imports are purchased with euros.
* * *
If this oil-currency-war theory is a delusion, the U.S. administration can easily discredit it -- by declaring that the USA has no objection if oil exports to the Euro Zone are denominated in euros.
The Proposed Iranian Oil Bourse
by Krassimir Petrov
RELATED NEWS:
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I. Economics of Empires
A nation-state taxes its own citizens, while an empire taxes other nation-states. The history of empires, from Greek and Roman, to Ottoman and British, teaches that the economic foundation of every single empire is the taxation of other nations. The imperial ability to tax has always rested on a better and stronger economy, and as a consequence, a better and stronger military. One part of the subject taxes went to improve the living standards of the empire; the other part went to strengthen the military dominance necessary to enforce the collection of those taxes.
Historically, taxing the subject state has been in various forms—usually gold and silver, where those were considered money, but also slaves, soldiers, crops, cattle, or other agricultural and natural resources, whatever economic goods the empire demanded and the subject-state could deliver. Historically, imperial taxation has always been direct: the subject state handed over the economic goods directly to the empire.
For the first time in history, in the twentieth century, America was able to tax the world indirectly, through inflation. It did not enforce the direct payment of taxes like all of its predecessor empires did, but distributed instead its own fiat currency, the U.S. Dollar, to other nations in exchange for goods with the intended consequence of inflating and devaluing those dollars and paying back later each dollar with less economic goods—the difference capturing the U.S. imperial tax. Here is how this happened.
Early in the 20th century, the U.S. economy began to dominate the world economy. The U.S. dollar was tied to gold, so that the value of the dollar neither increased, nor decreased, but remained the same amount of gold. The Great Depression, with its preceding inflation from 1921 to 1929 and its subsequent ballooning government deficits, had substantially increased the amount of currency in circulation, and thus rendered the backing of U.S. dollars by gold impossible. This led Roosevelt to decouple the dollar from gold in 1932. Up to this point, the U.S. may have well dominated the world economy, but from an economic point of view, it was not an empire. The fixed value of the dollar did not allow the Americans to extract economic benefits from other countries by supplying them with dollars convertible to gold.
Economically, the American Empire was born with Bretton Woods in 1945. The U.S. dollar was not fully convertible to gold, but was made convertible to gold only to foreign governments. This established the dollar as the reserve currency of the world. It was possible, because during WWII, the United States had supplied its allies with provisions, demanding gold as payment, thus accumulating significant portion of the world’s gold. An Empire would not have been possible if, following the Bretton Woods arrangement, the dollar supply was kept limited and within the availability of gold, so as to fully exchange back dollars for gold. However, the guns-and-butter policy of the 1960’s was an imperial one: the dollar supply was relentlessly increased to finance Vietnam and LBJ’s Great Society. Most of those dollars were handed over to foreigners in exchange for economic goods, without the prospect of buying them back at the same value. The increase in dollar holdings of foreigners via persistent U.S. trade deficits was tantamount to a tax—the classical inflation tax that a country imposes on its own citizens, this time around an inflation tax that U.S. imposed on rest of the world.
When in 1970-1971 foreigners demanded payment for their dollars in gold, The U.S. Government defaulted on its payment on August 15, 1971. While the popular spin told the story of “severing the link between the dollar and gold”, in reality the denial to pay back in gold was an act of bankruptcy by the U.S. Government. Essentially, the U.S. declared itself an Empire. It had extracted an enormous amount of economic goods from the rest of the world, with no intention or ability to return those goods, and the world was powerless to respond— the world was taxed and it could not do anything about it.
From that point on, to sustain the American Empire and to continue to tax the rest of the world, the United States had to force the world to continue to accept ever-depreciating dollars in exchange for economic goods and to have the world hold more and more of those depreciating dollars. It had to give the world an economic reason to hold them, and that reason was oil.
In 1971, as it became clearer and clearer that the U.S Government would not be able to buy back its dollars in gold, it made in 1972-73 an iron-clad arrangement with Saudi Arabia to support the power of the House of Saud in exchange for accepting only U.S. dollars for its oil. The rest of OPEC was to follow suit and also accept only dollars. Because the world had to buy oil from the Arab oil countries, it had the reason to hold dollars as payment for oil. Because the world needed ever increasing quantities of oil at ever increasing oil prices, the world’s demand for dollars could only increase. Even though dollars could no longer be exchanged for gold, they were now exchangeable for oil.
The economic essence of this arrangement was that the dollar was now backed by oil. As long as that was the case, the world had to accumulate increasing amounts of dollars, because they needed those dollars to buy oil. As long as the dollar was the only acceptable payment for oil, its dominance in the world was assured, and the American Empire could continue to tax the rest of the world. If, for any reason, the dollar lost its oil backing, the American Empire would cease to exist. Thus, Imperial survival dictated that oil be sold only for dollars. It also dictated that oil reserves were spread around various sovereign states that weren’t strong enough, politically or militarily, to demand payment for oil in something else. If someone demanded a different payment, he had to be convinced, either by political pressure or military means, to change his mind.
The man that actually did demand Euro for his oil was Saddam Hussein in 2000. At first, his demand was met with ridicule, later with neglect, but as it became clearer that he meant business, political pressure was exerted to change his mind. When other countries, like Iran, wanted payment in other currencies, most notably Euro and Yen, the danger to the dollar was clear and present, and a punitive action was in order. Bush’s Shock-and-Awe in Iraq was not about Saddam’s nuclear capabilities, about defending human rights, about spreading democracy, or even about seizing oil fields; it was about defending the dollar, ergo the American Empire. It was about setting an example that anyone who demanded payment in currencies other than U.S. Dollars would be likewise punished.
Many have criticized Bush for staging the war in Iraq in order to seize Iraqi oil fields. However, those critics can’t explain why Bush would want to seize those fields—he could simply print dollars for nothing and use them to get all the oil in the world that he needs. He must have had some other reason to invade Iraq.
History teaches that an empire should go to war for one of two reasons: (1) to defend itself or (2) benefit from war; if not, as Paul Kennedy illustrates in his magisterial The Rise and Fall of the Great Powers, a military overstretch will drain its economic resources and precipitate its collapse. Economically speaking, in order for an empire to initiate and conduct a war, its benefits must outweigh its military and social costs. Benefits from Iraqi oil fields are hardly worth the long-term, multi-year military cost. Instead, Bush must have went into Iraq to defend his Empire. Indeed, this is the case: two months after the United States invaded Iraq, the Oil for Food Program was terminated, the Iraqi Euro accounts were switched back to dollars, and oil was sold once again only for U.S. dollars. No longer could the world buy oil from Iraq with Euro. Global dollar supremacy was once again restored. Bush descended victoriously from a fighter jet and declared the mission accomplished—he had successfully defended the U.S. dollar, and thus the American Empire.
II. Iranian Oil Bourse
The Iranian government has finally developed the ultimate “nuclear” weapon that can swiftly destroy the financial system underpinning the American Empire. That weapon is the Iranian Oil Bourse slated to open in March 2006. It will be based on a euro-oil-trading mechanism that naturally implies payment for oil in Euro. In economic terms, this represents a much greater threat to the hegemony of the dollar than Saddam’s, because it will allow anyone willing either to buy or to sell oil for Euro to transact on the exchange, thus circumventing the U.S. dollar altogether. If so, then it is likely that almost everyone will eagerly adopt this euro oil system:
· The Europeans will not have to buy and hold dollars in order to secure their payment for oil, but would instead pay with their own currencies. The adoption of the euro for oil transactions will provide the European currency with a reserve status that will benefit the European at the expense of the Americans.
· The Chinese and the Japanese will be especially eager to adopt the new exchange, because it will allow them to drastically lower their enormous dollar reserves and diversify with Euros, thus protecting themselves against the depreciation of the dollar. One portion of their dollars they will still want to hold onto; a second portion of their dollar holdings they may decide to dump outright; a third portion of their dollars they will decide to use up for future payments without replenishing those dollar holdings, but building up instead their euro reserves.
· The Russians have inherent economic interest in adopting the Euro – the bulk of their trade is with European countries, with oil-exporting countries, with China, and with Japan. Adoption of the Euro will immediately take care of the first two blocs, and will over time facilitate trade with China and Japan. Also, the Russians seemingly detest holding depreciating dollars, for they have recently found a new religion with gold. Russians have also revived their nationalism, and if embracing the Euro will stab the Americans, they will gladly do it and smugly watch the Americans bleed.
· The Arab oil-exporting countries will eagerly adopt the Euro as a means of diversifying against rising mountains of depreciating dollars. Just like the Russians, their trade is mostly with European countries, and therefore will prefer the European currency both for its stability and for avoiding currency risk, not to mention their jihad against the Infidel Enemy.
Only the British will find themselves between a rock and a hard place. They have had a strategic partnership with the U.S. forever, but have also had their natural pull from Europe. So far, they have had many reasons to stick with the winner. However, when they see their century-old partner falling, will they firmly stand behind him or will they deliver the coup de grace? Still, we should not forget that currently the two leading oil exchanges are the New York’s NYMEX and the London’s International Petroleum Exchange (IPE), even though both of them are effectively owned by the Americans. It seems more likely that the British will have to go down with the sinking ship, for otherwise they will be shooting themselves in the foot by hurting their own London IPE interests. It is here noteworthy that for all the rhetoric about the reasons for the surviving British Pound, the British most likely did not adopt the Euro namely because the Americans must have pressured them not to: otherwise the London IPE would have had to switch to Euros, thus mortally wounding the dollar and their strategic partner.
At any rate, no matter what the British decide, should the Iranian Oil Bourse accelerate, the interests that matter—those of Europeans, Chinese, Japanese, Russians, and Arabs—will eagerly adopt the Euro, thus sealing the fate of the dollar. Americans cannot allow this to happen, and if necessary, will use a vast array of strategies to halt or hobble the operation’s exchange:
· Sabotaging the Exchange—this could be a computer virus, network, communications, or server attack, various server security breaches, or a 9-11-type attack on main and backup facilities.
· Coup d’état—this is by far the best long-term strategy available to the Americans.
· Negotiating Acceptable Terms & Limitations—this is another excellent solution to the Americans. Of course, a government coup is clearly the preferred strategy, for it will ensure that the exchange does not operate at all and does not threaten American interests. However, if an attempted sabotage or coup d’etat fails, then negotiation is clearly the second-best available option.
· Joint U.N. War Resolution—this will be, no doubt, hard to secure given the interests of all other member-states of the Security Council. Feverish rhetoric about Iranians developing nuclear weapons undoubtedly serves to prepare this course of action.
· Unilateral Nuclear Strike—this is a terrible strategic choice for all the reasons associated with the next strategy, the Unilateral Total War. The Americans will likely use Israel to do their dirty nuclear job.
· Unilateral Total War—this is obviously the worst strategic choice. First, the U.S. military resources have been already depleted with two wars. Secondly, the Americans will further alienate other powerful nations. Third, major dollar-holding countries may decide to quietly retaliate by dumping their own mountains of dollars, thus preventing the U.S. from further financing its militant ambitions. Finally, Iran has strategic alliances with other powerful nations that may trigger their involvement in war; Iran reputedly has such alliance with China, India, and Russia, known as the Shanghai Cooperative Group, a.k.a. Shanghai Coop and a separate pact with Syria.
Whatever the strategic choice, from a purely economic point of view, should the Iranian Oil Bourse gain momentum, it will be eagerly embraced by major economic powers and will precipitate the demise of the dollar. The collapsing dollar will dramatically accelerate U.S. inflation and will pressure upward U.S. long-term interest rates. At this point, the Fed will find itself between Scylla and Charybdis—between deflation and hyperinflation—it will be forced fast either to take its “classical medicine” by deflating, whereby it raises interest rates, thus inducing a major economic depression, a collapse in real estate, and an implosion in bond, stock, and derivative markets, with a total financial collapse, or alternatively, to take the Weimar way out by inflating, whereby it pegs the long-bond yield, raises the Helicopters and drowns the financial system in liquidity, bailing out numerous LTCMs and hyperinflating the economy.
The Austrian theory of money, credit, and business cycles teaches us that there is no in-between Scylla and Charybdis. Sooner or later, the monetary system must swing one way or the other, forcing the Fed to make its choice. No doubt, Commander-in-Chief Ben Bernanke, a renowned scholar of the Great Depression and an adept Black Hawk pilot, will choose inflation. Helicopter Ben, oblivious to Rothbard’s America’s Great Depression, has nonetheless mastered the lessons of the Great Depression and the annihilating power of deflations. The Maestro has taught him the panacea of every single financial problem—to inflate, come hell or high water. He has even taught the Japanese his own ingenious unconventional ways to battle the deflationary liquidity trap. Like his mentor, he has dreamed of battling a Kondratieff Winter. To avoid deflation, he will resort to the printing presses; he will recall all helicopters from the 800 overseas U.S. military bases; and, if necessary, he will monetize everything in sight. His ultimate accomplishment will be the hyperinflationary destruction of the American currency and from its ashes will rise the next reserve currency of the world—that barbarous relic called gold.
Thanks and Regards
Zamir M Iqbal
sounds like another conspiracy to me. Honestly there was more to the war than saving a currency. Like the fact that Saddam had weapons of mass destruction, and that Iraq was part of 9-11. (sarcasm) Not to mention Haliburton and the billions of dollars in no-bid contracts . If you ask me it was more about making money than trying to save the dollar and besides Bush is pro Amero. So he would prefer it to devalue (WAIT!!! SON OF A BITCH!!! ISN'T THAT WHAT'S HAPPENING RIGHT NOW???)
