In 1999, Iraq, with the world's second largest oil reserves, switched to
trading its oil in euros. American analysts fell about laughing; Iraq
had just made a mistake that was going to beggar the nation. But two
years on, alarm bells were sounding; the euro was rising against the
dollar, Iraq had given itself a huge economic free kick by switching.
Iran started thinking about switching too; Venezuela, the 4th largest
oil producer, began looking at it and has been cutting out the dollar by
bartering oil with several nations including America's bete noir, Cuba.
Russia is seeking to ramp up oil production with Europe (trading in
euros) an obvious market.
The greenback's grip on oil trading and consequently on world trade in
general, was under serious threat. If America did not stamp on this
immediately, this economic brushfire could rapidly be fanned into a
wildfire capable of consuming the US's economy and its dominance of
world trade.
HOW DOES THE US GET ITS DOLLAR ADVANTAGE?
Imagine this: you are deep in debt but every day you write cheques for
millions of dollars you don't have -- another luxury car, a holiday home
at the beach, the world trip of a lifetime.
Your cheques should be worthless but they keep buying stuff because
those cheques you write never reach the bank! You have an agreement with
the owners of one thing everyone wants, call it petrol/gas, that they
will accept only your cheques as payment. This means everyone must hoard
your cheques so they can buy petrol/gas. Since they have to keep a stock
of your cheques, they use them to buy other stuff too. You write a
cheque to buy a TV, the TV shop owner swaps your cheque for petrol/gas,
that seller buys some vegetables at the fruit shop, the fruiterer passes
it on to buy bread, the baker buys some flour with it, and on it goes,
round and round -- but never back to the bank.
You have a debt on your books, but so long as your cheque never reaches
the bank, you don't have to pay. In effect, you have received your TV
free.
This is the position the USA has enjoyed for 30 years -- it has been
getting a free world trade ride for all that time. It has been receiving
a huge subsidy from everyone else in the world. As it debt has been
growing, it has printed more money (written more cheques) to keep
trading. No wonder it is an economic powerhouse!
Then one day, one petrol seller says he is going to accept another
person's cheques, a couple of others think that might be a good idea. If
this spreads, people are going to stop hoarding your cheques and they
will come flying home to the bank. Since you don't have enough in the
bank to cover all the cheques, very nasty stuff is going to hit the fan!
But you are big, tough and very aggressive. You don't scare the other
guy who can write cheques, he's pretty big too, but given a 'legitimate'
excuse, you can beat the tripes out of the lone gas seller and scare him
and his mates into submission.
And that, in a nutshell, is what the USA is doing right now with Iraq. |
