10 September 2003
“…I hypothesize that President Bush intends to topple Saddam in 2003 in a pre-emptive attempt to initiate massive Iraqi oil production in far excess of OPEC quotas, to reduce global oil prices, and thereby dismantle OPEC’s price controls. The end-goal of the neo-conservatives is incredibly bold yet simple in purpose, to use the `war on terror’ as the premise to finally dissolve OPEC’s decision-making process, thus ultimately preventing the cartel’s inevitable switch to pricing oil in euros.
“How would the Bush administration break-up the OPEC cartel’s price controls in a post-Saddam Iraq? First, the newly installed regime (apparently a U.S. General) will convert Iraq back to the dollar standard. Next, with the U.S. military protecting the oil fields, the new ruling junta will undertake the necessary steps to rapidly increase production of Iraq oil — well beyond OPEC’s 2 million barrel per day quota.” – W. Clark, ‘The Real Reasons for the Upcoming War with Iraq’  (January 2002)
$87 billion? The cost of freedom according to Bush the smaller. At first glance, a staggering and obscene amount of money (around 1/8th the UK’s total annual budget). It strikes me that if they just divided it up and handed it out to each and every Iraqi citizen, they’d all be millionaires or very nearly. Yet as a percentage of the US deficit in trade with the rest of the world, it’s just a drop in a barrel of oil (or blood).
Which brings me to the quote above and the underlying economics of the invasion, which have all been but lost in the shuffle. The $87 billion points to the fact of just how desperate US imperialism is to ‘regularise’ the situation in Iraq and why we search in vain through the corporate media for any kind of analysis of the role of oil and the petro-dollar in the equation of the ‘war on terror’.
It also highlights why the corporate press went to such lengths to denigrate anyone who dared suggest that oil was the key commodity that determined US policy. By relegating any analysis of the central role of oil to ‘conspiracy corner’, the world’s media have not only done the citizen a disservice, they have also dissed those capitalists who have a firmer grasp of what’s going on and what is really at stake.
As ever, I have to return yet again to an analysis that first appeared in a Z-Net article by Immanual Wallerstein for an insight into the reality of events:
“A major warning signal has been launched by Morgan Stanley, one of the world’s leading financial investor firms, in their Global Economic Forum. Stephen Roach [a Morgan Stanley investment analyst] writes there that a “US-centric world” is unsustainable for the world-economy and bad in particular for the United States. He specifically takes on Robert Kagan, a leading neo-con intellectual, who has been arguing that American hegemony can only increase, particularly vis-a-vis Europe. Roach could not agree less. He sees the present world situation as one of “profound asymmetries” in the world-system, one that cannot last.
“And now the unwinding of a new disequilibrium is at hand – the rebalancing of a U.S.-centric world.” Why? First of all because of the “ever-widening disparities in the world’s external accounts.” He says that “as the United States squanders its already depleted national saving” and “as the rest of the world remains on a subpar consumption path,” the situation can only get worse.
“Finally, the conclusion: “Can a saving-short US economy continue to finance an ever-widening expansion of its military superiority? My answer is a resounding ‘no.'” What will therefore happen? The “prices of dollar-denominated assets compared to those of non-dollar-denominated assets” must fall, and fall drastically soon. Roach estimates: “a 20% drop in real exchange rates and nearly double that in nominal terms, higher real interest rates, reduced growth in domestic demand, and faster growth overseas.” He ends his piece by saying that “the world is not functioning as a global economy” (so much for the globalization theorists) and that “for a lopsided global economy, a weaker dollar may well be the only way out.”
Empire and the Capitalists, Immanuel Wallerstein May 21 2003
Of course, you have to ask the question, where’s the $87 billion money coming from? Well it’s being printed stoopid. With the US deficit currently running at around $4 trillion, and with the Federal Reserve having a monopoly on printing dollars, they can produce as much as like, at least in theory. In for $87 billion, in for $4 trillion.
Economics is not something that the ‘average’ citizen wants to get involved in especially as it’s mostly mumbo-jumbo, based more on fancy than fact. Generally speaking, when there is no rational explanation to hand, it’s down to some ‘act of nature’ over which we have no control. Very convenient if you want to maintain the status quo and it leads to the view adopted by most, that economics is mostly guesswork and something over which nobody has any control.
Yet interestingly, defenders of the economic status quo invariably have great gobs of cash sloshing about in bank accounts, stocks and shares, land and so on. Downturns in the economy (what we experience as being laid off) mean little to people who have capital and savings to fall back on. They can ride out the bad times without missing a beat or at worst, with only a hiccup in their social rounds.
What can’t be denied is that the world is infinitely richer now than it’s ever been. So where’s the dosh?
Search in vain in the business section of your favourite newspaper for any kind of explanation as to why, in a world so wealthy, there is an increasing army of poor. It’s as if hidden somewhere, there’s an economic ‘black hole’ into which wealth gets sucked, never to be seen again. And of course it’s true, it’s called the United States of America.
It’s pointless rolling out the same old statistics about how 5% of the world’s population consume 30% of the world’s energy, but there I’ve done it anyway and for those of you who want to know more, there are dozens of sources on just how much the US consumes and how little it actually produces. What is critical is just how the US pulls off this sleight of hand on the world and central to the con job is the role of the petro-dollar.
Buddy can you spare a petro-dollar?
The problem of course, in dealing with economics is that once you mention the word, people tune out and turn off and who can blame them? So much crap has been written about economics that for most it verges on the mystical. Talk of inflation, deflation, stagflation (a combination of inflation and deflation) says more about economists than it does about economics. In actuality, economics is not rocket science, it’s actually economic science, well of a kind anyway and this is part of the problem because if you admit that capitalism is an irrational system you have to start explaining why. Much better to leave it to the ‘gods’ or God, that way, when things go wrong, you’ve got an out (you can always blame a ‘higher authority’).
And course mystifying the entire process is part of the con job. If one states that the stock exchange is just another form of gambling (which it is), you get all kinds of excuses such as, ‘Well it’s not really gambling, it depends on a knowledge of the market’ (the horses), ‘trends’ (form), ‘investment strategies’ (spreading your bets) and so on.
And because so much about economics is buried in history, following the money trail gets really complicated. This is never more true than it is of the petro-dollar. We have to go back to WWII in order to get a handle on the role of the US$ in the world’s economy.
The entire post-war economic situation was (and is) based upon the overwhelming economic and military dominance of the US. Using institutions such as the World Bank, the IMF, the Import-Export Bank (all based in Washington DC) in conjunction with US control of the world’s energy supplies, and the role of the US$ that all countries are forced to use in order to trade, the essential relationship is effectively hidden from view.
And of course, the media of the lesser capitalist powers have been just as complicit in the coverup. Hence checking the business section of your newspaper or the electronic media is unlikely to inform you as to the true state of affairs.
At the end of WWII the US came out as the world’s numero uno creditor nation, with virtually all of the major industrial nations in hock up to their necks to US capital, especially the UK. And this dominance was maintained until around 15-20 years ago.
“US economy’s net foreign indebtedness–the accumulation of two decades of running larger and larger trade deficits–will reach nearly 25 percent of US GDP this year , or roughly $2.5 trillion. Fifteen years ago, it was zero. Before America’s net balance of foreign assets turned negative, in 1988, the United States was a creditor nation itself, investing and lending vast capital to others, always more than it borrowed. Now the trend line looks most alarming. If the deficits persist around the current level of $400 billion a year or grow larger, the total US indebtedness should reach $3.5 trillion in three years or so. Within a decade, it would total 50 percent of GDP.” – William Greider, The Nation (9/23/02)
Part of the problem lies in the fact that unravelling the role of the petro-dollar in determining the fate of the world’s economies means unpacking a complex relationship that ‘globalisation’ has made all the murkier but essentially, this is how it works:
Because oil lubricates every economy and the vast bulk of it has to be paid for in dollars, all countries are forced to trade in dollars (the so-called reserve currency).
The effect of this is manyfold. Firstly, it artificially inflates the value of the dollar. So any country wishing to buy oil has to exchange its own (under-valued) currency for the US$.
Effectively, this is a legal ‘pyramid scheme’ as during the exchange, the US$ accrues value simply during the process of exchange. More extreme versions of this scheme can bring a country’s economy to its knees as currency speculators trade back and forth between dollars and local currencies, shaving points off every transaction. Again, no real wealth is generated, this is all ‘funny money’ that ultimately flows into the US economy.
Secondly, it forces countries wishing to trade to use dollars and dollar-denominated instruments (letters of credit, government bonds, guarantees and so forth). Once again, the US economy benefits every time a transaction takes place. This con job has been going on for the past fifty years, and it now effectively bankrolls the vast US trade deficit especially to the detriment of the poor countries of the world.
“World trade is now a game in which the US produces dollars and the rest of the world produces things that dollars can buy. The world’s interlinked economies no longer trade to capture a comparative advantage; they compete in exports to capture needed dollars to service dollar-denominated foreign debts and to accumulate dollar reserves to sustain the exchange value of their domestic currencies. To prevent speculative and manipulative attacks on their currencies, the world’s central banks must acquire and hold dollar reserves in corresponding amounts to their currencies in circulation. 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 world’s 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.
“By definition, dollar reserves must be invested in US assets, creating a capital-accounts surplus for the US economy. Even after a year of sharp correction, US stock valuation is still at a 25-year high and trading at a 56 percent premium compared with emerging markets.” – Henry C Lui, Asian Times (04/11/02)
Buddy can you spare a €?
The arrival of the Euro has the potential to change this unequal relationship:
“[T]he effect of an OPEC switch to the euro would be that oil-consuming nations would have to flush dollars out of their (central bank) reserve funds and replace these with euros. The dollar would crash anywhere from 20-40% in value and the consequences would be those one could expect from any currency collapse and massive inflation (think Argentina currency crisis, for example). You’d have foreign funds stream out of the U.S. stock markets and dollar denominated assets, there’d surely be a run on the banks much like the 1930s, the current account deficit would become unserviceable, the budget deficit would go into default, and so on. Your basic 3rd world economic crisis scenario.
“The United States economy is intimately tied to the dollar’s role as reserve currency. This doesn’t mean that the U.S. couldn’t function otherwise, but that the transition would have to be gradual to avoid such dislocations (and the ultimate result of this would probably be the U.S. and the E.U. switching roles in the global economy).”
And this process is already well underway. More than half of Iran’s Forex Reserve Fund assets has been converted from dollars to euros. In 2002 China began diversifying its currency reserves away from dollars into euros. Russia’s Central Bank in the past year has doubled its euro holdings to 20 percent of its $48 billion foreign exchange reserves. Bank of Canada, People’s Bank of China, and Central Bank of Taiwan predicted that by the end of 2002, 20% the world’s global currency reserves will be held in Euros. And it doesn’t stop here. Libya, Venezuela as well as OPEC itself have been pushing for a switch to the Euro and for sound economic reasons as the real value of the dollar plummets.
The fantasy that the Bush clique along with his sidekick Blah have been pushing, that the coming crash of the US economy can somehow be avoided by invading the rest of the planet, is finally being revealed. The quote that opened up this essay reveals the bankrupt thinking behind the Bush clique’s strategy, as far from opening up Iraq’s oil production, the reverse has been the case. It also explains Bush’s turnaround vis a vis the UN, not so much from the perspective of paying for the occupation but from the pressing need to get Iraq’s oil flowing.
More than anything else, the competition between the dollar and the Euro explains the division we have seen between the leading EU nations and the US over the invasion of Iraq. For behind the vast military dominance of the US lies a fragile debtor nation that no amount of bellicosity can hide. That the leading media in the US and the UK refuse to deal with this fundamental issue is of course to be expected. That we have a government in the form of Blah is frightening to say the least, for it illustrates just how out of touch our ruling political elite is and why it’s so vital not only to expose the madness but to formulate a viable alternative.