Date: Wednesday, February 19, 2003 @ 15:07:08 EST Topic: Paul Harris
By Paul Harris YellowTimes.org Columnist (Canada)
(YellowTimes.org) - There are many reasons for George Bush's
single-minded drive toward Baghdad. In other articles I have written for
YellowTimes.org, I hinted that a not so obvious reason for the drive
against Iraq is Bush's war against Europe. In fact, I have now come to
believe that is the primary reason for his Iraqophenia.
Whenever a nation decides to go to war, there are plans made for who is
going to win and who is going to lose; no one goes to war expecting to
lose, but it isn't always the obvious target of the aggression that is
the real thrust behind the war. Sometimes, it isn't a case of what you
expect to win from a war, but rather a case of what you hope someone
else loses; and it doesn't have to be your stated enemy who you hope
will sustain the losses.
In this case, Bush's hoped-for victim is the European economy. It is
robust, and is likely to become much stronger in the easily foreseeable
future. Britain's entry into the European Union is inevitable;
Scandinavia will join sooner rather than later. Already, even without
those countries, there will be 10 new member nations in May 2004, which
will swell the GDP of the E.U. to about $9.6 trillion with 450 million
people as against $10.5 trillion and 280 million people in the United
States. This represents a formidable competing block for the United
States but the situation is significantly more complex than what is
revealed just by those numbers. And much of it hinges on the future of
Iraq.
I have written before, as have many others, that this upcoming war is
about oil. To be sure there are other reasons, but oil is the single
most impelling force. Not in the way you might expect, however. It isn't
so much that there are believed to be huge untapped oil reserves in
Iraq, untapped only due to outdated technology; it isn't so much an
American desire to get its grubby hands on that oil; it is much more a
question of whose grubby hands the Americans want to keep it out of.
What precipitated all of this was not September 11, nor a sudden
realization that Saddam was still a nasty guy, nor just the change in
leadership in the United States. What precipitated it was Iraq's
November 6, 2000 switch to the euro as the currency for its oil
transactions. At the time of the switch, it might have seemed daft that
Iraq was giving up such a lot of oil revenue to make a political
statement. But that political statement has been made and the steady
depreciation of the dollar against the euro since then means that Iraq
has derived good profits from switching its reserve and transaction
currencies. The euro has gained about 17 percent against the dollar
since that time, which also applies to the $10 billion held in Iraq's
United Nations "oil for food" reserve fund.
So the question arises, as it did for George Bush, what happens if OPEC
makes a sudden switch to euros? In a nutshell, all hell breaks loose.
At the end of World War II, an agreement was reached at the Bretton
Woods Conference which pegged the value of gold at $35 per ounce and
that became the international standard against which currency was
measured. But in 1971, Richard Nixon took the dollar off the gold
standard and ever since, the dollar has been the most important global
monetary instrument, and only the United States can produce them. The
dollar, now a fiat currency, is at a 16-year trade-weighted high despite
record U.S. current-account deficits and the status of the U.S. as the
leading debtor nation. The U.S. national debt as of April 4, 2002 was
$6.021 trillion against GDP of $9 trillion.
Trade between nations has become a cycle in which the U.S. produces
dollars and the rest of the world produces things that dollars can buy.
Nations no longer trade to capture comparative advantage but rather to
capture needed dollars to service dollar-denominated foreign debts and
to accumulate dollar reserves in order to sustain the exchange value of
their domestic currencies. In an effort to prevent speculative and
potentially harmful attacks on their currencies, those nations' central
banks must acquire and hold dollar reserves in amounts corresponding to
their own currencies in circulation. This creates a built-in support for
a strong dollar that in turn forces the world's central banks to acquire
and hold even more dollar reserves, making the dollar stronger still.
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 reality is that the strength of the dollar since 1945 rests on being
the international reserve currency for global oil transactions (i.e.,
"petro-dollar"). The U.S. prints hundreds of billions of these fiat
petro-dollars, which are then used by nation states to purchase oil and
energy from OPEC producers (except presently Iraq and, to some degree,
Venezuela). These petro-dollars are then re-cycled from OPEC back into
the U.S. via Treasury Bills or other dollar-denominated assets such as
U.S. stocks, real estate, etc. The recycling of petro-dollars is the
price the U.S. has extracted since 1973 from oil-producing countries for
U.S. tolerance of the oil-exporting cartel.
Dollar reserves must be invested in U.S. assets which produces a
capital-accounts surplus for the U.S. economy. Despite poor market
performance during the past year, U.S. stock valuation is still at a
25-year high and trading at a 56 percent premium compared with emerging
markets. The U.S. capital-account surplus finances the U.S. trade
deficit.
Since it is the U.S. that prints the petro-dollars, they control the
flow of oil. Period. When oil is denominated in dollars through U.S.
state action and the dollar is the only fiat currency for trading in
oil, an argument can be made that the U.S. essentially owns the world's
oil for free.
So what happens if OPEC as a group decides to follow Iraq's lead and
suddenly begins trading oil on the euro standard? Economic meltdown.
Oil-consuming nations would have to flush dollars out of their central
bank reserves and replace them with euros. The dollar would crash in
value and the consequences would be those one could expect from any
currency collapse and massive inflation (think of Argentina for an easy
example). Foreign funds would stream out of U.S. stock markets and
dollar denominated assets; there would 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.
And that's just in the United States. Japan would be particularly hard
hit because of total dependence on foreign oil and incredible
sensitivity to the U.S. dollar. If Japan's economy tumbles, so does that
of many other countries, especially the United States in a crescendo of
dominos.
Now, this is the potential effect of a "sudden" switch to euros. A more
gradual shift might be manageable but even that would change the
financial and political balance of the world. Given the size of the
European market, its population, its need for oil (it actually imports
more oil than the U.S.), it may be rapidly approaching that the euro
will become the de facto monetary standard for the world.
There are some good reasons for OPEC as a group to follow Iraq and begin
to value oil in euros. There seems little doubt that they would relish
the opportunity to make a political statement after years of having to
kowtow to the U.S., but there are solid economic reasons as well.
The mighty dollar has reigned supreme since 1945, and in the last few
years has gained even more ground with the economic dominance of the
United States. By the late 1990s, more than four-fifths of all foreign
exchange transactions, and half of all world exports, were denominated
in dollars. In addition, U.S. currency accounts for about two thirds of
all official exchange reserves. The world's dependency on U.S. dollars
to pay for trade has seen countries bound to dollar reserves, which are
disproportionately higher than America's share of global output.
It is important to note that the euro is not at any disadvantage versus
the dollar when one compares the relative sizes of the economies
involved, especially given the E.U. enlargement plans. Moreover, the
E.U. has a bigger share of global trade than the U.S. and while the U.S.
has a huge current account deficit, the E.U. has a more balanced
external accounts position. One of the more compelling arguments for
keeping oil pricing and payments in dollars has been that the U.S.
remains a large importer of oil, despite being a substantial producer
itself. But the EU is an even larger importer of oil and petroleum
products than the U.S., and represents for OPEC a more attractive
market, closer and less domineering.
The point of Bush's war against Iraq, therefore, is to secure control of
those oil fields and revert their valuation to dollars, then to increase
production exponentially, forcing prices to drop. Finally, the point of
Bush's war is to threaten significant action against any of the oil
producers who would switch to the euro.
In the long run, then, it is not really Saddam who is the target; it is
the euro and, therefore, Europe. There is no way the United States will
sit by idly and let those upstart Europeans take charge of their own
fate, let alone of the world's finances.
Of course, all of this depends on Bush's insane plan not becoming the
trigger for a Third World War, as it so readily might.
[Paul Harris is self-employed as a consultant providing Canadian
businesses with the tools and expertise to successfully reintegrate
their sick or injured employees into the workplace. He has traveled
extensively in what we arrogant North Americans refer to as "the Third
World," and he believes that life is very much like a sewer: what you
get out of it depends on what you put into it. Paul lives in Canada.]
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