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.) <5>
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.
