Dollar, Achilles Heel of the Empire

verfasst von Morpheus, 10.05.2003, 11:14

-->Dollar, Achilles Heel of the Empire
Srdja Trifkovic
April 30, 2003
posted May 10, 2003
Chronicles Magazine

With the victory in Iraq the United States appears more powerful than ever in its history, indeed mightier than any power in the whole of history. For better or worse the Bush Administration proved that it was able to do what it had set its mind on doing many months ago. It has stepped on many toes in the process, humiliating the Old Europe (which was avoidable and regrettable), embittering the Arab world (inevitable), and rendering the United Nations irrelevant (excellent). The aftermath of the victory creates an excellent basis for a creative American role in the Israeli-Palestinian conflict and for a gradual rapprochement with the Europeans and Russians from the position of statesmanlike strength devoid of arrogance.

There is a problem, however. The ideologues of global dominance in Washington have always looked upon the war against Iraq merely as a stepping-stone to their stunningly ambitious global agenda. The Project for a New American Century, conceived and staffed by people destined to become key players in President Bushs administration and their neoconservative friends and allies, was created specifically to advocate a world order completely dominated by unrestrained American power. Their tool of choice, the theory of pre-emption, was inaugurated in the new strategic doctrine in September 2002 and tested this spring. Its advocates will call the initial result an unqualified success, and they will clamor for more of the same.

The global-imperial scheme has a weak spot: the dollar. The U.S. currency is increasingly seen at home and abroad, by proponents and opponents of the New American Century alike as the potential Achilles heel of the project. When the war in Iraq was launched last month, many voices all over the Arab world demanded that OPEC countries start selling oil for euros, not US dollars. The threat is not new: a generation ago it backfired when oil producers demands for payments in gold briefly drove its price to over $900 per ounce. Today an alternative to gold exists, however, and it is called the euro. Saddam Hussein made the switch last fall and reaped considerable benefits from it in the few remaining months of his rule: the $10 billion Iraqi oil-for-food fund at the UN gained a hefty billion thanks to the conversion. The decision will no doubt be reversed by his U.S.-influenced successors, but the option will be considered seriously by the House of Saud, in Iran, and along the coast of the Gulf.

The benefits of current arrangements to the United States are considerable. For as long as oil is traded in dollars, central banks around the world have to prevent speculative attacks on their currencies by holding huge dollar reserves. According to Henry C.K. Liu of the New York-based Liu Investment Group, the higher the market pressure to devalue a particular currency, the more dollar reserves its central bank must hold:

This creates a built-in support for a strong dollar that in turn forces the worlds central banks to acquire and hold more dollar reserves, making it stronger. This phenomenon is known as dollar hegemony, which is created by the geopolitically constructed peculiarity that critical commodities, most notably oil, are denominated in dollars. Everyone accepts dollars because dollars can buy oil. The recycling of petro-dollars is the price the US has extracted from oil-producing countries for US tolerance of the oil-exporting cartel since 1973.

Other countries dollar reserves must be invested in American assets, creating an artificial capital-accounts surplus for the US economy. Even after a sharp drop the Dow is still at a 25-year high, and trading at a 56 percent premium, compared with the emerging markets. It is therefore hugely significant that the euro now the joint currency of most European Union member-states (including the Old Europes Franco-German axis) has appreciated by one third against the dollar since early 2002, when it traded at 84 cents. This is a truly astonishing gain for the euro, in view of the fact that the economy of the European Union is neither booming nor absorbing huge investment funds from around the world. It demonstrates the underlying weakness of the dollar even now, while it is still the worlds reserve currency. (Dollars account for 68 percent of global currency reserves.) If the petro-euro threat were carried out, global demand for dollars would slacken and throw exchange rates into turmoil. Some analysts predict that something like two dollars for one euro would be the likely result within a year.

The consequences for the global economy would be incalculable, and for the United States literally cataclysmic. World trade would cease being a game in which the US produces dollars and the rest of the world produces things that dollars can buy. The American economy would no longer enjoy the benefits of a gigantic subsidy provided by the goods and services of countries holding their reserves in dollars, notably by Japan, which imports four-fifths of its oil from the Middle East. The fewer dollars circulating outside the U.S. would soon translate into fewer goods and services that this country will be able to obtain from abroad on what amounts to interest-free credit. American consumers would no longer be able to buy cheap imports, and the most obvious result would be at the pump: the price of euro-discounted oil would soon exceed 40 dollars per barrel, pushing the gallon of unleaded above $3. Spiraling energy costs would turn current recovery sluggish and uncertain as it is into a slump unseen since Hoovers presidency. Current account deficits half a trillion dollars last year alone would no longer be financed by foreign capital because its influx would simply cease. Global demand for shares of American companies and U.S. Treasury bonds, already weak compared to the heady days of the nineties, would collapse altogether if oil producers stop unloading their petrodollars in the American market. The Dow would drop below five thousand within weeks, and property markets would collapse within months. Without foreign investors, interest rates would zoom into double digits and the Fed would find inflationary pressures simply irresistible. Mr. Greenspan would excuse himself from another term on the grounds of age and poor health.

In Washington the threat is currently regarded as remote because any significant decline in the value of the dollar would hurt major oil producers. The Saudis and others cannot afford to see the value of their U.S. currency reserves and Treasury bonds depleted, the argument goes, and the resulting economic downturn in the U.S. would be felt around the world and additionally hurt their oil revenues by reducing demand. The additional, unspoken assumption is that the U.S. will assume control, by whatever means, of the Iraqi oil, and that it will be again traded in dollars come what may. Yes, the oil belongs to the people of Iraq as we are repeatedly assured, but whoever is eventually recognized in Washington as the peoples legitimate representative will be expected to use a sizeable chunk of those dollars for the rebuilding of Iraq by Bechtel et al.

There is a problem, however. Quite apart from politics, the economic argument for the switch seems compelling. It would mean that whatever you can get for dollars you can get for euros and your euro-reserves would be safer in the long term. The Eurozone does not run huge trade deficit like the United States. It is not heavily indebted to the rest of the world, and it is not subjected to the political will of a single national decision-making structure. Europe is the Middle Easts biggest trading partner, it imports more oil and petroleum derivates than the United States, and it has a bigger share of global trade. Even short-term prospect may be inciting: if oil producers play their hand right and convert their dollar assets to euro assets first, and only then start demanding payment for oil in euros, those assets would immediately increase in value.

The political argument is even more compelling. In the aftermath of the war in Iraq its most determined advocates demand that the United States proceed with its mission of bringing democracy to the Middle East Syria today, Iran tomorrow, Libya in-between, and even such friendly states such as Saudi Arabia and the Emirates in the longer term. Former CIA Director James Woolsey states that the United States is engaged in fighting an open-ended campaign for democracy in the Middle East. Norman Podhoretz dubbed the project World War IV: it is aimed at regime changes all over the Middle East, and winnable provided that America has the stomach to impose a new political culture on the defeated parties. Arab oil producers and Iran quite rightly see all this as a threat, and may conclude that the monetary weapon is the only one they can effectively use. Unlike the neoconservative-dominated U.S. administration, the Eurozone countries do not threaten them. Quite the contrary, as the French foreign minister de Villepins current Middle Eastern tour demonstrates, the powers of Old Europe are busy staking its claim as the best friend the Arabs have in the Western world.

Paradoxically this may be the argument for speeding up the liberation of the Middle East. As British analyst Michael Stenton says, If the neocons don't do Saudi Arabia, the US might lose the Saudis at just the point in time that Iraq becomes most difficult. Their case must be We cant stop now! because only by marching on can they protect the dollar the greatest weapon the U.S. has. They know that if it goes, the project of global hegemony goes with it. The ultimate corollary of this argument is that only an American-ruled world will be safe for the dollar. The notion is pleasing to the neocons, but it is insane and certain to result in Americas destruction more thorough and irreversible than any dislocation resulting from the war of the currencies.

The short-to-medium-term defense of the dollar demands the emergence of a realist and prudent approach to Middle Eastern affairs. Yes, a strong-dollar policy is in the U.S. national interest because it keeps inflation low through low-cost imports and it makes American assets costly to foreign investors. It is therefore necessary to remove political incentives for the regions oil producers to switch to the euro as a defensive ploy against what they rightly perceive as unrestrained U.S. interventionism. Scrupulously even-handed and creative American approach to the Israeli-Palestinian problem would be a visible litmus test of a more benevolent regional intent. It makes a lot of sense on geopolitical and moral grounds, and it can be made conditional on the retention of the financial status quo by the key players such as Saudi Arabia. The looming danger to the dollar, with all its incalculable consequences, makes moral and geopolitical sense, but it also necessitates a new start in the Middle East on the grounds of enlightened American self-interest.

Srdja Trifkovic
April 30, 2003
Chronicles Magazine

Dr. Trifkovic continues to hold the post of foreign-affairs editor of the Institute's magazine, Chronicles: A Magazine of American Culture. Even as a part-time foreign affairs editor, Dr. Trifkovic has made a substantial contribution to a further expansion of the magazine's coverage and analysis of foreign affairs. His regular column Signs of the Times serves as a venue for reporting news from the foreign press that would otherwise go unreported in the United States. He has also enhanced the activities of the Institute, by initiating and co-organizing conferences, lecture tours and other events in which the Institute and the magazine were present--from Toronto to Sydney, from London to Belgrade over the past year alone. In addition, as a foremost expert on Southeast Europe in the United States over the past year Dr. Trifkovic he has published op-eds and commentaries in the Times of London, the San Francisco Chronicle and the Philadelphia Inquirer, to name but some. He has appeared on a myriad of national and international TV and radio programs, including the Ollie North Show (MSNBC), CNN, CNN International, BBC World Service and CBC. On every occasion he was described as a Chronicles editor.

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• Dollar, Achilles Heel of the Empire - Morpheus, 10.05.2003, 11:14