Interesting piece on petrdollar
The Unstated US Goal of Preserving Dollar Hegemony Over the Global
Oil Market
Dominance of Middle Eastern oil will mean in effect maintaining
dollar hegemony over the world oil economy. Given its present
strategies, the US is constrained to demand no less. As I explain
in this extract from my book, Drugs, Oil, and War, the present
value of the US dollar, unjustified on purely economic grounds, is
maintained by political arrangements, one of the chief of which is
to ensure that all OPEC oil purchases will continue to be
denominated in US dollars. (This commitment of OPEC to dollar oil
sales was secured in the 1970s by a secret agreement between the US
and Saudi Arabia, before the two countries began to drift apart
over Israel and other issues.)
The chief reason why dollars are more than pieces of green paper is
that countries all over the world need them for purchases,
principally of oil. This requires them in addition to maintain
dollar reserves to protect their own currency; and these reserves,
when invested, help maintain the current high levels of the US
securities markets.
As Henry Liu has written vividly in the online Asian Times
(4/11/02),
"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."
But central bankers around the world do not expect either the US
dollar or the US stock markets to sustain their current levels. As
William Greider in The Nation (9/23/02) has pointed out:
"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."
There is also a major potential threat to the overpriced dollar in
Japan's unresolved deflationary crisis. As observers like Lawrence
A. Joyce have commented, the dollar would take a major pummeling if
the Japanese government (as seems quite possible) were suddenly
required to fulfil its legal obligations to bail out failed
Japanese banks (which could easily happen if a sustained scarcity
of oil were to keep oil prices at $40 a barrel or higher):
"There is only one place where the Japanese government can get
enough money to bail out its banking system: The Japanese
government owns about 15% of our U.S. Treasury securities. And it
would have to start selling them if it found itself facing a major
banking crisis.
"That would send the already ailing dollar down even further. And
the initiation of a sale of our Treasury securities by Japan, of
course, would immediately trigger a worldwide stampede to do the
same before the securities become worth only a fraction of what
they were purchased for. At the same time, interest rates in the
U.S. would immediately go through the roof."
Washington is of course aware of these problems, and believes that
overwhelming military strength and the will to use it supply the
answer, persuading or forcing other countries to support the dollar
at its artificial level as the key to their own security. In an
article entitled "Asia: the Military-Market Link," and published by
the U.S. Naval Institute in January 2002, Professor Thomas Barnett
of the US Naval War College, wrote: "We trade little pieces of
paper (our currency, in the form of a trade deficit) for Asia's
amazing array of products and services. We are smart enough to know
this is a patently unfair deal unless we offer something of great
value along with those little pieces of paper. That product is a
strong US Pacific Fleet, which squares the transaction
nicely."
There is some merit to this argument with respect to friendly
countries like Japan, whose defense costs have been lowered by the
US presence in Asia. But of course the Islamic countries of the
world are less likely to appreciate the "great value" of a
threatening US presence. Instead they are more likely to follow the
example of Malaysian Prime Minister Mahathir Mohamad, and turn to
the Islamic gold dinar as a way to diminish dollar hegemony in
world markets and increase the power of Islamic nations to
challenge US policies.
The United States has at present little reason to fear a challenge
to the dollar from Malaysia. But Malaysia is an Islamic country;
and the US has every reason to fear a similar challenge from the
Islamic nations in OPEC, were they to force OPEC to cease OPEC oil
sales in dollars, and denominate them instead in euros.
The Unstated US Goal of Preserving Dollar Hegemony Against
Competition from the Euro
As noted in a recent article by W. Clark, "The Real But Unspoken
Reasons for the Iraq War", the OPEC underpinning for the US dollar
has shown signs of erosion in recent years. Iraq was one of the
first OPEC countries, in 2000, to convert its reserves from dollars
to euros. At the time a commentator for Radio Free Europe/Radio
Liberty predicted that Saddam's political act "will cost Iraq
millions in lost revenue." In fact Iraq has profited handsomely
from the 17 percent gain in the value of the euro against the
dollar in that time.
Other countries have gradually been climbing on to the euro
bandwagon. An article in the Iran Financial News, 8/25/02, revealed
that more than half of Iran's Forex Reserve Fund assets had been
converted from dollars to euros. In 2002 China began diversifying
its currency reserves away from dollars into euros. According to
Business Week (2/17/03) Russia's Central Bank in the past year has
doubled its euro holdings to 20 percent of its $48 billion foreign
exchange reserves. And for a very good reason, according to its
First Deputy Chairman Oleg Vyugin: "Returns on dollar instruments
are very low now. Other currency instruments pay more."
Business Week continues:
`The story is the same across the globe. Money traders say that
institutions as diverse as Bank of Canada, People's Bank of China,
and Central Bank of Taiwan are giving more weight to the European
currency. By the end of this year, they predict, the euro could
account for 20% of global foreign currency reserves, which today
amount to a cool $2.4 trillion. Little more than a year ago, the
euro made up just 10%. "No one is saying that the euro's going to
replace the dollar as the premier reserve currency," says Michael
Klawitter, a currency strategist at WestLB Research in London. "But
it will increase in importance for many central banks."...
`The shift to the euro has big implications for the foreign
exchange markets and the U.S. and European economies. Currency
specialists say the yawning U.S. current account deficit, now at
5%, is bound to drive the dollar down further, and the euro still
higher, over the next two to four years. Although the greenback may
stage a short-term recovery once the looming war with Iraq is over,
predictions are that it will then continue its downward trend, and
that central banks will play their part in the descent. "Even if
central banks increase their euro holdings by just a few percent,
it will have a major impact in the markets," says Klawitter. "We're
talking many billions of dollars."'
If not deterred, OPEC could follow suit. Libya has been urging for
some time that oil be priced in euros rather than dollars. Javad
Yarjani, an Iranian senior OPEC official, told a European Union
seminar in April 2002 that, despite the problems raised by such a
conversion, "I believe that OPEC will not discount entirely the
possibility of adopting euro pricing and payments in the
future."
Meanwhile Hugo Chavez has been taking Venezuelan oil out of the
petrodollar economy by bartering oil directly for commodities from
thirteen other third world countries. Although this has not yet
qualified Venezuela for official membership in Bush's "axis of
evil," the heavy hand of the Bush Administration in the recent coup
attempt against Chavez was only too obvious. (See "Venezuela Coup
Linked to Bush Team," London Observer, 4/21/02, for details about
the roles of US officials Elliot Abrams, Otto Reich, and John
Negroponte.)
Conclusion: How Should the US Be Addressing These Real
Problems?
To conclude, the Bush administration is not threatening Iraq out of
pique or whim. The recent policies of both parties have indeed made
the US vulnerable to foreign oil and petrodollar pressures. But
hopefully decent Americans will protest the notion that it is
appropriate to rain missiles and bombs upon civilians of another
country, who have had little or nothing to do with this crisis of
America's own making.
Some in addition will continue to explore avenues whereby America's
oil and financial vulnerabilities can be diminished without
continuing down the road to Armageddon. These problems are serious,
but economists have put forward proposals for diminishing them
peacefully and multilaterally. With respect to oil, Ralph Nader has
just written, "The demand is simple: Stop this war before it starts
and immediately establish a sane national energy security
strategy." In fact one key ingredient of such a strategy,
restriction of demand, can be found in saner parts of the Baker
Institute reports that the Bush administration has so far chosen to
ignore.
But an energy strategy for the United States must be addressed in
the larger context of an economic and financial restructuring of
global institutions and currency flows. With respect to the more
esoteric financial problems of the dollar, the economist and
futurist Hazel Henderson has written that "My recommendations for
reforming current international institutions, revitalizing the UN
and expanding civic society are summarized in Beyond Globalization
(1999). A more balanced world order must center on reforming global
finance, taxing currency exchange and reducing the dollar's
unsustainable role as the world's de facto reserve currency (which
is destructive for all countries -- even the US itself). I favor a
global reserve currency regime based on the parity of the US dollar
and the euro. The fundamentals in the USA and the EU suggest that
the G-8 has an opportunity to peg the dollar and the euro into a
trading band. This, together with the new issue of SDR's [Special
Drawing Rights]. proposed by all the IMF country members, promoted
by George Soros and opposed only by the USA, would lend to more
stable currency markets."
Without endorsing these specific proposals, I wish to second two
rather obvious principles:
1) The problems of global financial instability must be addressed.
As George Soros, famed as the man who broke the British pound in
1992, wrote later in the Financial Times,? "To argue that financial
markets in general, and international lending in particular, need
to be regulated is likely to outrage the financial community. Yet
the evidence for just that is overwhelming."
2) A multilateral approach to these core problems is the only way
to proceed. The US is strong enough to dominate the world
militarily. Economically it is in decline, less and less
competitive, and increasingly in debt. The Bush peoples' intention
appears to be to override economic realities with military ones, as
if there were no risk of economic retribution. They should be
mindful of Britain's humiliating retreat from Suez in 1956, a
retreat forced on it by the United States as a condition for
propping up the failing British pound.
America's influence in the world has up to now been based largely
on good will generated by its willingness to resolve matters
multilaterally. This legacy of good will is being squandered
recklessly, as US officials insult European leaders and steer NATO
towards irreconcilable disagreement.
The assumption seems to be that America does not need Europe and
can afford to break up an entente that has endured since World War
II. The risks of such arrogance are explored in a separate
Postscript.
