People's Democracy

BY the middle of 1970s, the global economic dependence underwent dramatic change. Oil importing countries – developing as well as developed - were suddenly faced with huge resource crunch. How were they to meet the burgeoning oil import bills? These countries found themselves in a scramble to acquire these export-based petrodollars which were aplenty. A never before demand for the oil surplus of floating dollar was created.

CHANGE IN GLOBAL ECONOMIC DEPENDENCE

The Bilderberg group discussed different scenarios. One was the extent of increase in petrodollars circulation. And, how to ‘manage’ this to the best advantage of the Western banks (mostly American and British) that would handle them? How could this be used to the best advantage of their economies? The minutes of this meeting projected OPEC oil prices increasing by as much as 400 per cent! If this was what was envisaged could the present oil price hike be just market driven?

In 1974, brokered by Henry Kissinger, the then US Secretary of State and assisted by the then Assistant Secretary of the Treasury and a prominent London based Eurodollar firm, a secret financial compact was concluded with the Saudi SAMA that enabled US Federal Reserve and the Bank of England to benefit from the huge flow of petrodollars. This windfall came as a veritable boon to the sagging economies of US and UK and their banking and financial circles as it did to their petroleum conglomerates. After all it was they who managed these petrodollar flows. But what about the fate of consumers – their own and in other countries? What about national economies which had to bear the brunt of the burden of terrible hike in oil prices?

The mechanism worked out was simple. The US and UK banks that handled petrodollar deposits relent them as Eurobonds to resource starved governments of developing countries. These loans were not necessarily used for development of their economies but mostly to meet the burgeoning petroleum import bills. While these banks and financial institutions flourished and profited enormously, the consumers were burdened with the cascading effect of high oil prices that resulted in spiraling inflation. The victims included the consumers of developed countries as well.

The developing countries that were compelled to borrow, found themselves enmeshed in unbearable debt which they found increasingly difficult to repay. The debt burden was further exacerbated when the US Federal Reserve under the Chairmanship of Paul Volcker increased interest rates arbitrarily in the name of stemming the tide of inflation. Under the onslaught of this usurious interest rates, the debt burden reached unbearable proportions in the 1980s. By 1982, Mexico was on the verge of defaulting and most of the other countries were not far behind.

Under the circumstances of hyperinflation that continued from 1980 through 1981 and thereafter and falling purchasing power, to expect the dollar to remain firm and strong would be foolhardy. However, the US avoided the ignominy of devaluation of its dollar by shifting the burden on the developing countries. It was then when the developing countries were drowning in the burden of debt, the International Monetary Fund (IMF) that policeman of international financial system intervened by imposing the infamous austerity programmes on developing countries in the name of structural adjustment that has become widely known. Under this, the indebted developing countries were compelled to cutback on their development programmes. Stringent fiscal control measures were imposed. Prompt debt servicing of petrodollar loans at high interest rates was given precedence over welfare programmes for the people like providing food, health care, education and employment and the like. The people of these countries were subjected to further inhuman deprivation in the name of IMF dictated development model. In the process, national assets were also indentured through privatisation programmes.

This then is the history of petrodollar supremacy imposed on the world community by the US ruling classes. This could be achieved through manoeuvring the US dollar into becoming the world reserve currency. This ploy might have retarded the decline of US dollar’s hegemonic power temporarily; but the world cannot forget that in the process it has heaped innumerable burdens on the people of developing countries. While keeping the US banks and its dollar in health though for the time being, it subverted the economic independence of developing countries. This is the vile nature of the IMF-Washington consensus, the full blown characteristic of which is neoliberal globalisation. This is the background of US dollar attaining its status of world reserve currency. The full implication of what George Kennan wrote as early as 1948 (and obviously accepted as continuing policy of the US despite all the rhetoric to the contrary) that the US "…should cease to talk about vague and unreal objectives such as human rights, the raising of living standards, and democratisation", could now be understood.

In the process of dealing in ‘straight power concepts’ as Kennan urged, the US might have strengthened itself militarily. But politically and morally its position has greatly eroded among the comity of nations and people of the world. Economically too its position is waning. The military adventures it has been indulging in, including its war of occupation in Iraq, have started becoming a terrible strain on its economy, not to speak of the erosion in its standing. The cost of Iraq war alone has reached a staggering $300 billion and is still increasing and its armed forces are stretched. And the occupation has virtually led to a quagmire. This and its other military escapades could well result into what historians have chronicled about the demise of empires that were smug with complacency that nothing could go wrong. This could well be the classic instance of the ‘imperial overstretch’ that we have been referring to.

As we have been pointing out, the question is whether America can continue to preserve economic and technological bases of its power from erosion in the face of constantly shifting patterns of global production and trade. The possible challenges are already visible. The falling value of its currency and its burgeoning deficits are instances in point as is its huge and increasing debt.

It is a travesty indeed that the richest country is the most indebted. America lives on borrowed money. Its public debt in January 2004 is in excess of $5 trillion and as for its people, their cumulative debt is around $2 trillion in January 2004. (By November 2005, the National debt stood at over $8.026 trillion – around 65 per cent of the country’s GDP of $12.5 trillion. The US government expects to borrow a further $171 billion in the first three months of 2006 to finance its daily operations. Source: US Treasury as published in The Hindu, November 3, 2005) Its domestic savings is practically nothing being confined to corporate savings. It is an extraordinary feature of the American economy that its people do not save. On the contrary they borrow into their future savings and indulge in their current consumption spree. The American economy as a whole seems to be drawing heavily on a huge credit card. It is the expectation that so long as this kind of line of credit continues uninterrupted, the wheels of the American economy would remain well oiled!

Take for example India by comparison. Its domestic savings is around 28 per cent of GDP out of which around 18 per cent constitutes household savings. Among the many avenues of savings, over 70 per cent bank deposits are by Indian households. Our public banking system truly services people’s savings. The same is true of most other developing countries.

In contrast, the funds lent by American banks and financial institutions that handle vastly superior amounts, are mostly recycled petrodollar funds. When they lend or invest as FDIs and in stock markets, it is not American people’s money they are investing or the surpluses generated in the American economy but recycled petrodollars or the amount lent to them by other countries that hold foreign exchange reserves like India or trade surpluses like China and Japan.

It is a jugglery of sorts that America is doing. It absorbs debt capital from around the globe and recycles it as equity capital. This bluff can go on only so long as the people in the rest of the world are credulous and fail to call the bluff for what it is. For this, broadest awareness of the masses is required.

Already, moves are afoot to attack the dollar hegemony by divesting it of its world reserve currency status. A decade back there was no other currency that could challenge dollar supremacy. Now another currency, the euro has come into the picture and is getting strengthened. There are already moves afoot to bill international transactions in euro side by side with the dollar. There are also attempts to make both US dollar and the euro as combined reserve currency. If it happens, it would be good for the nations of the world and its people as this would herald the waning of the hegemony of the US dollar. This is not the first time the world would be experiencing dealing with other currencies or basket of currencies. The pound sterling ruled the roost for long. Financial history speaks of other basket of currencies in vogue as well in the past. And, this could happen; rather such a development would be in the interest of the economies of all countries.

Before concluding, one lesser known truth must be mentioned. The war of occupation against Iraq was claimed to be Saddam Hussein’s regime possessing and developing weapons of mass destruction. The US and Britain that asserted this and went to war now stand thoroughly exposed. Did they not know that their ploy was a hoax, a humbug? They clearly did. What then was the cause? What is well known is that the US imperialism always coveted control over the Middle–East oil riches. Iraq that has the second biggest known oil reserve came as the natural target. It would give the US a bigger foothold in the strategic Middle-East. Its eye is now directed against Iran. This is not all. The lesser known truth is that Saddam Hussein’s regime had started its oil transactions in terms of the fledgling euro to the exclusion of the US dollar. This indeed is a major reason for going to war against the conscience of the world community. That perhaps is a major reason for France and Germany - whose economies stood as the fulcrum of the development of euro - opposing the war. This would require further elucidation of course. But that should wait another occasion.