People's Democracy

The Mystery Of The US Dollar

  Dipak Basu

USA CONTROLS three major financial institutions, The World Bank (WB), International Monetary Fund (IMF) and the World Trade Organisations (WTO) by various means to control the world economy. These organisations advise other countries to be prudent, not to have deficits in the balance of payments or in the government finance. However, USA itself from time to time has massive deficits in the balance of payments and government finance, as these are now under George Bush. However, none from the IMF is asking USA to control itself. There is no massive depreciation of dollar. There is no sign of impending bankruptcy of the US economy. Foreigners are rushing to buy US assets. One may wonder why the laws of economics do not apply to USA.

UNIQUE STATUS OF US DOLLAR

The answer is the special status of the US dollar, which is now under threat since Europe introduced the euro. The dollar is the facto world reserve currency: the US currency accounts for approximately two thirds of all official exchange reserves. More than four-fifths of all foreign exchange transactions and half of all world experts are denominated in dollar. In addition, all IMF loans are denominated in dollars. The strength of the dollar is not justified by the economic strength of the of the US, because whatever USA can export, can be obtained from alternative sources.

The more dollars there are circulating outside the US, or invested by foreign owners in American assets, the more the rest of the world has had to provide the US with goods and services in exchange for these dollars. The dollars cost theUS next to nothing to produce, so the fact that the world uses the currency in this way means that the US is importing vast quantities of goods and services virtually for free.

It is as if, the Reserve Bank of India is printing money and India is buying whatever it needs without thinking about the cost of imports, which would be borrowed from the rest of the world for the foreseeable future. If rupee would be in the same position as dollar, there was no need for India in 1990 to send all its gold reserve to London to guarantee payments for India’s imports and surrender India to the IMF and World Bank, the two agents of the US to implement highly unpopular anti-people ‘Economic Reforms’. It would have been sufficient for Narasimha Rao to print more rupees. If all developing countries would have the same facility, they would be able to develop very quickly. However, now only USA has that status. Britain used to have the same status at the time of the British Empire. The self imposed restriction on Britain was the links between he Pound and the gold, because of which Britain had captured countries after countries with goldmines and ended up with a gold reserve of more than 300 tons in the Bank of England. Dollar has no such restrictions since 1973.

Since so many foreign-owned dollars are not spent on American goods and services, the US is able to run a huge trade deficit year after without apparently any major economic consequence. One of the stated economic objectives, and perhaps the primary objective, when setting up the euro was to turn it into a reserve currency to challenge the dollar so that Europe too could get something for nothing.

POSSIBLE DISASTER FOR THE US

This however would be a disaster for the US. Not only would they lose a large part of their annual subsidy of effectively free goods and services, but also countries switching to euro reserves from dollar reserves would bring down the value of the US currency. Imports would start to cost Americans a lot more an as increasing numbers of those holding dollars began to spend them, he US would have to start paying its debts by supplying in goods and services to foreign counties, thus reducing American living standards.

If countries and businesses convert their dollar assets into Euro assets, the US property and stock market bubbles would burst without doubt. The Federal Reserve would no longer be able to print more money to rejuvenate the economy, as it is currently doing, because, without lots of eager foreigners prepared to accept dollar, a serious inflation would result which, in turn, would make foreigners even more reluctant to hold the US currency and thus heighten the crisis.

The above scenario may never take place, because of the safety net the trade in oil or crude petroleum provides to the US. Oil is not just by far the most important commodity traded international; it is the lifeblood of all modern industrialized economies. Until recently, all OPEC (Organisation of Petroleum Producing Countries) countries agreed to sell their oil for dollars only. So long as this remained the case, the euro was unlikely to become the major reserve currency. This arrangement also meant that the US effectively controlled the entire world oil market: a country can only buy oil if it had dollars, and only one country had the right to print dollar – the US. The US thus in effect can just print more dollars and import oil as much as it likes, without worrying about the price.

POLITICAL DECISION OF OPEC 

If on the other hand OPEC were to decide to accept euro only for its oil, then American economic dominance would be over. Not only would Europe not need as many dollars anymore, but Japan which imports over 80 per cent of its oil from the Middle East would convert a large potion of its dollar assets to Euro assets. Japan is the major subsidiser of the US because it holds about US government bonds works 400 billion US dollar. In this way Japan is effectively maintaining the US government. The US on the other hand, being the world’s largest oil importer would have, to run a trade surplus to acquire euro. It would be a very painful conversion jus like Latin America and South East Asia has gone through.

The purely economic arguments for OPEC converting to the euro, at least for a while seem very strong. The Euro-zone does not run a huge trade deficit nor is it heavily indebted to the rest of the world like the US. Interest rates in the Euro-zone are also significantly higher. The Euro-zone has a larger share of world trade than the US and is the Middle East’s main trading partner. Nearly everything a country can buy for dollars it can also buy for euros. Furthermore, if OPEC were to convert their dollars assets to euro assets and then require payment for oil in euros, their assets would immediately increase in value, since oil-importing countries would be forced to also convert part of their assets, driving up the exchange rate of euro. However, Economics is not the basis of decisions of these kinds, but international politics is.         

SWITCH TO EURO

So far, only one OPEC country has dared switch to the euro. Iraq, in November 2002. However, the consequences for Iraq to make that decision were the US invasion, total destruction of the country and loss of independence.

One other OPEC country that has been talking publicly about possible conversion to the Euro since 1999 is Iran, a country that has since been included in the George W Bush’s ‘axis of evil’.

A third OPEC country that has recently fallen out with the US government is Venezuela and it too has been showing disloyalty to the dollar. Under Hugo Chaves’s rule, Venezuela has established barter deals for trading its oil with 12 Latin American countries as well as Cuba. This means that the US is missing its usual subsidy. This might help explain the American wish to destabilise Venezuela.                    

At the OPEC summit in September 2000, Chavez delivered to the OPEC heads of state the report of the ‘International Seminar on the Future of Energy’, a conference called by Chavez earlier that year to examine the future supplies of both fossil and renewable energies. One of the two key recommendations of the report was that ‘OPEC take advantage of high-tech electronic barter and bi-lateral exchanges of its oil with its developing country customers’ i.e. OPEC should avoid using both the dollar and the euro for many transactions.

In April 2002, a senior OPEC representative gave a public speech in Spain during Spain’s presidency of he EU. During that he made clear that though OPEC had as yet no plans to make oil available for euros, it was an option that was being considered and which could well be of economic benefit to many OPEC countries, particularly those of the Middle East.

THE THREE PHASE OF AMERICAN DOMINANCE

The coalition of interests, which converged on war against Iraq, concluded powerful permanent interests, on whose global role American economic influence depends, such as the influential energy sector around Halliburton, Exxon Mobil, Chevron, Texaco and other giant multinationals. It also included the huge American defense industry interests around Boeing, Lockheed-Martin, Raytheon, Northrup-Grumman and others. The issue for these giant defense and energy conglomerates is for the very continuance of American power in the coming decades of the current century.

American domination in the world ultimately rests on two pillars – its overwhelming military superiority, especially on the seas; and its control of world economic flows through the role of he dollar as the world’s reserve currency. Increasingly it is clear that the Iraq war was more about preserving the second pillar – the dollar role – than the first, the military. In the dollar role, oil is a strategic factor. 

The first Phase of Fixed Exchange Rate, 1945-1970: The United States had emerged from the War clearly as the one sole superpower, with a strong industrial base and the largest gold reserves of any nation. The role of the dollar was directly tied to that of gold. The gold Exchange Standard began to break down, as Europe got on its feet economically and began to become a strong exporter by the mid-1960. This growing economic strength in Western Europe coincided with soaring US public deficits as Johnson escalated the tragic war in Vietnam. During the 1960s, France followed by other countries began to demand gold from the US Federal Reserve. By May 1971 the drain of US Federal Reserve gold had become alarming, and even the Bank of England joined the Central Bank of France in demanding US gold for their dollars. The Nixon Administration opted to abandon gold entirely, going to a system of floating currencies in August 1971.

Floating Exchange Rate since 19709 and the Petrol-Dollar: The sudden increase in oil prices by 400 per cent in 1973 by the OPEC created enormous demand for the dollar. Oil importing countries from Germany to Argentina to Japan, all were faced with how to expert in dollars to pay their expensive new oil import bills. OPEC countries were flooded with new oil dollars. US and UK banks took he OPEC dollars and relent them as eurodollar bonds or loans, to countries of the Third world desperate to borrow dollars to finance oil imports. Hundreds of billions of dollars were recycled between OPEC, London, and New York banks and back to Third World borrowing countries.

  The Third World debt crisis began when Paul Volcker and the US Federal Reserve had unilaterally hiked US interest rates in late 1979 to try to save the failing dollar. After three years of record high US interest rates, the dollar was ‘saved’, but with the entire developing world suffocating economically under high US interest rates on their petrodollar loans. To enforce debt repayment to the London and New York banks, the banks brought the IMF to act as ‘debt policeman’ of the world. Public spending for health, education, welfare was slashed on IMF orders to ensure the banks got timely debt service on their petrodollars.

The IMF ‘Washington Consensus’ was developed to enforce draconian debt collection on Third World countries, to them to repay dollar debts, prevent any economic independence for the nations of the South, and keep the US banks and the dollar afloat. This phase during the Reagan years was based on ever-worsening economic decline in living standards across the world, as IMF policies destroyed national economic growth and broke open markets for globalising multinationals seeking cheap production outsourcing in the 1980s and especially into the 1990s.

Rise of Europe since 1990: The destruction of the Soviet Union and the emergence of a new single Europe and the European Monetary Union in the early 1990s began to present an entirely new challenge to the American hegemony. Washington increasingly sees Euroland especially ‘Old Europe’ of Germany and France as the major strategic threat to American hegemony. A hidden war between the dollar and the new eurocurrency for global hegemony is at the heart of this new phase.

Dollar as the fiat money: By their firm agreement with Saudi Arabia, as the largest OPEC oil producer, Washington guaranteed that oil, an essential commodity for every nation’s economy, the basis of all transport and much of the industrial economy, could only be purchased in world markets in dollars. In 1975 OPEC officially agreed to sell its oil only for dollars. A secret US military agreement to arm Saudi Arabia was the quid pro quo.      

Until November 2000, no OPEC country dared to violate the dollar price rule. So long as the dollar was the strongest currency, there was little reason to violated their rule as well. Then French and other Euroland members finally convinced Saddam Hussein to defy the United States by selling Iraq’s oil for food not in dollars, only for Euros. If it would have continued, it could create a panic sell off of dollars by foreign central banks and OPEC oil producers.

In the months before the latest Iraq war, hints in this direction were heard from Russia, Iran, Indonesia, and even Venezuela. And Iranian OPEC official, Javad Yarjani, delivered a detailed analysis of how OPEC at some future point might sell its oil to the EU for euros not dollars. He spoke in April 2002 in Oviedo Spain at the invitation of the EU. The invasion of Iraq was the easiest way to deliver a deadly pre-emptive warning to OPEC and others, not to flirt with abandoning the petro-dollar system in favour of one based on the euro.       

So long as almost 70 per cent of world trade is done in dollars, the dollar is the currency, which central banks accumulate as reserves. Because oil is an essential commodity for every nation, the petrodollar system, which exists to the present, demands the buildup of huge trade surpluses in order to accumulated dollar surpluses. This is the case for every country but one— the United States, which controls the dollar and prints it at will. Because today the majority of all international trade is done in dollars, everyone aims to maximise dollar surpluses from their export trade. 

The central banks of Japan, China, South Korea, Russia, and the rest all but US Treasury securities with their dollars. That in turn allows the United states to have a 500 billion dollar annual balance of payments deficit with the rest of the the world. The Federal Reserve controls the dollar printing presses, and the world needs US dollars.

THE US FOREIGN DEBT 

The US trade deficits, and net debt or liabilities to foreign accounts were well over 22 per cent of GDP in 2000, and have been climbing rapidly. In 1999, the year of peak of the dot.com bubble fury, US net debt to foreigners was some 1.4 trillions dollar. By the end of 2003, it had exceeded an estimated 3.7 trillion dollars. Before 1989, the United States had been a net creditor, gaining more from its foreign investments than it paid to them as interest on Treasury bonds or other US assets. Since 1990, the United States has become a net foreign debtor nation to the tune of 3.7 trillion dollars.

With an annual current account (mainly trade) deficit of some 500 billion dollars, which is some 5 per cent of GDP, the United States must import or attract at least 1.4 billion dollar every day, to avoid a dollar collapse and keep its interest rates low enough to support the debt-burdened corporate economy.

That net debt is getting worse at a dramatic pace. If France, Germany, Japan, Russia and a number of OPEC oil countries would shift even a small portion of their dollar reserves into euro to buy bonds of Germany or Frances or the like, the United States would face a crisis beyond which, would destroy its economy.

The future of America’s sole superpower status depended on pre-empting the threat emerging from Eurasia and Euroland especially. Thus, the hidden reasons for the decision to have a ‘regime change’ in Iraq, was to pre-empt this threat. Iraq was an is a chess piece in this strategic game of supreme importance, one for the highest stakes.

INVASION OF IRAQ  

This fight over petro-dollar versus petro-euros, which started in Iraq, is by no means over, despite the apparent victory of the United States in Iraq. The euro was created by French geopolitical strategists for establishing a multi-polar world after the collapse of the Soviet Union. The aim was to balance the overwhelming dominance of the US in world affairs. An alliance between Paris, Moscow, and Berlin running from the Atlantic to Asia could foreshadow a limit to US power.

This emerging threat from a French-led euro policy with Iraq and other countries, led some leading circles in the US policy establishment to begin thinking of pre-empting threat to the petro-dollar system well before bush become even president.

In September 2000, Project for a New American Century (PNAC), released a major policy study: Rebuilding America’s Defenses: Strategies, Forces and Resources for a New Century. This PNAC paper is the essential basis for the September 2002 presidential White Paper, ‘The National Security Strategy of the United States of America’. The PNAC’s paper supports a, ‘blueprint for maintaining global US pre-eminence, precluding the rise of a great power rival, and shaping the international security order in line with American principles and interests The American Grand Strategy must be pursued as far as possible in the future. Further, the US must ‘discourage advanced industrial nations from challenging our leadership or even aspiring to a larger regional or global role.’

The PNAC membership in 2000 included Cheney, his wife Lynne Cheney, neo-conservative Cheney aide, Lewis Libby; Donald Rumsfeld; Rumsfeld Deputy Secretary Paul Wolfowitz. It also included NSC Middle East head, Elliott Abrams; John Bolton of the State Department; Richard Perle and William Kristol. As well, former Lockheed-Martin vice president, Bruce Jackson, and ex-CIA head James Woolsey were on board, along with Norman Podhoretz, another founder. Woolsey and Podhoretz speak openly about the ‘World War IV’.

Most of these people are also members of a group in USA. American Committee for Peace in Chechnya (ACPC), which supports the Chechen terrorists against Russia. It is becoming increasingly clear to many that the war in Iraq is about preserving an American global dominance, but Iraq is not the end.

EXXON and BP (British Petroleum) have invested heavily in the former Soviet Republics of Azerbaijan, Turkmenistan, Uzbekistan, and Kazakhstan to eliminate Russian in influence on these countries. Both Kazakshtan and the Caspian Sea have some of the biggest oil fields of the world. Russian oil fields are in Tatarstan, a Muslim majority province and in Siberia.

Chechnya has some oil fields, but the importance of Chechnya rests on the facts that the major oil and gas pipelines from both Russian and Kazak oil fields are passing through Chechnya. Thus, if its is possible to cut of Chechnya from Russia, it will affect Russian ability to export oil and natural gas the European market significantly. Independence of Chechnya will create chain reactions in the other Muslim majority provinces in Russia, Tatarstan in particular. Separation of both Chechnya and Tatarstan will reduce Russia’s crude oil deposits to a low level, as the Siberian oil fields are located in the most inhospitable areas of the world. As a result, Russia will be reduced to a very poor country without any military significance. That is the reason for the Anglo- American supports for the Chechen terrorism against Russia.

Thus, the invasion of Iraq was needed to ensure two objects. The first is the occupation of the second largest oil fields in the Middle East, thus to ensure both future oil resources of the US and trade of oil in dollars. The second objective is to scare away any other countries to even think about de-linking dollar from the oil trading. De-linking oil trading from dollar will diminish the special status of the dollar and the ability of the US economy to buy goods and services virtually free from the rest of the world and to force countries with trade surplus with the US to lend money to the US. That would certainly destroy the economy of the US built on borrowed money.

Because Iraq was the first oil producing country to convert its foreign exchange reserves from dollar to euro, it became the first country to come under the US attack. Venezuela already had a coup. Currently it is going through a US inspired destabilisation process. OPEC countries in the Middle East are accused of harbouring terrorists, so they are scared about converting their foreign exchange reserves. As a result the lows of commies would not apply to the USA and dollar would survive as a supreme currency.