W Clark's paper (Part 3)
ratical.org
Addendum: Notable International monetary movements
(late January 2003)
After completing my essay, I began to read about some interesting international monetary developments and the related opinions of analysts. These recent developments warrant inclusion as an addendum. The following two articles relate to the rapid devaluation of the dollar in late January relative to the euro. This occurred in the week immediately preceding President Bush's State of the Union address. Both of these articles suggest that Russia -- a traditional holder of dollar reserves -- may be linking `political overtones' to their exchanges of dollars for euros. The following article may illustrate things to come if President Bush continues on his present unilateral position on Iraq.
"The dollar remained on the ropes on Thursday, buffeted by some hawkish remarks from the US administration about the standoff with Iraq. It was also stung by a pointed signal from Russia's central bank that the appeal of dollar-denominated assets is waning.
"Oleg Vyugin, first deputy chairman at the Russian central bank, said the bank plans to cut the share of US dollars in its foreign exchange reserves and increase the share of other currencies. . . .
"Some analysts questioned whether there may be political overtones to Vyugin's remarks, that could be related to the widening rift between the US and some other potential allies about how to persuade Iraq to comply with UN weapons' inspectors requirements.
"Although Russia's own foreign exchange reserves are fairly small by comparison with the world's biggest central banks, the question is, `Will other central banks follow and what does this do to the ability of the US to finance its current account deficit?' said Marc Chandler, chief currency strategist with HSBC in New York.
"That deficit is currently around 5% of gross domestic product and proving to be an increasingly heavy millstone around the dollar's neck." [23]
The next day (January 25th) some analysts reiterated that these monetary movements may be related not only to the current geo-political tensions, but may also indicate political motivations. Is this perhaps a `warning shot over the bow' for the Bush administration regarding their position on Iraq?
"All of a sudden, the dollar's supposedly slow and gradual decline isn't looking so slow, or gradual.
"In fact the speed of the dollar's slide, against the euro in particular, has taken even the most seasoned analysts by surprise: a Dow Jones Newswires foreign exchange survey just ten days ago showed the major currency trading banks forecasting the euro climbing to $1.06 by the middle of February and not coming near $1.10 until the end of the year.
"Instead, the euro has leaped to highs of around $1.0850 on Friday and has already gained 4% on the dollar this year, leaving strategists increasingly scrambling to update their forecasts. The Swiss franc keeps reaching fresh four-year highs, and the dollar is on the ropes against sterling and a host of other key rivals.
"Perhaps a more important barometer of broader confidence in U.S. markets is the Treasurys market. With the dollar falling, gold spiking and stocks under pressure, Treasurys continue to retain their safe haven appeal.
"But there are warning signals here, too, that are beginning to get more attention. This week, the Russian central bank said it was lowering the U.S. asset portion of its foreign exchange reserves -- in other words selling Treasurys -- calling the dollar a low-yielding currency.
"Analysts believe some of the large Asian central banks -- that between them hold the lion's share of the world's dollar reserves -- are also considering rejigging their Treasury holdings. A U.S.-led war in Iraq could further accelerate that trend.
"Indeed, some political analysts believe that U.S. policy over Iraq may already be having a direct impact on holdings of U.S. assets, particularly with much of the rest of the world so opposed to war. `It's hard for me to believe that the flow of capital cannot help but be affected by how the U.S. is perceived around the world,' said Larry Greenberg, an international economist at Ried Thunberg & Co. in Westport, Conn.
"`Today if you have the U.S. acting (in Iraq) against world opinion, there could be an even faster pullback out of dollar-denominated assets,' said Joseph Quinlan, global economist with Johns Hopkins University, in Washington. `How we go to war influences the rate of decline of the dollar' he said." [24]
The day after this the UK Observer's Will Hutton wrote a forceful article against Bush's unilaterism. This article further emphasizes the unfortunate economic imbalances of the U.S. economy, and suggests that the potential geo-political fallout of a unilaterist war in Iraq could create a devastating divestiture of U.S. dollar denominated assets.
"The US's economic position is far too vulnerable to allow it to go war without cast-iron multilateral support that could underpin it economically as well as diplomatically and militarily. The multi-lateralism Bush scorns is, in truth, an economic necessity. . . .
"On latest estimates, its net liabilities to the rest the world are more than $2.7 trillion, nearly 30 per cent of GDP, a scale of indebtedness associated with basket-case economies in Latin America.
"Its industrial base is so uncompetitive that it consistently imports more than it exports; its current-account deficit, the gap between all its current foreign earnings and foreign spending, is now a stunning 5 per cent of GDP, continuing a trend that has lasted for more than 25 years and which is the cause of all that foreign debt. As a national community, it has virtually ceased to save so that government and individuals alike live on credit.
To finance the current-account deficit, a reflection of the lack of saving, the US relies on foreigners supplying it with the foreign currency it can't earn itself. . . .
"BUT IF FOREIGNERS got windy about the prospects for share and property prices and stopped buying, or began to withdraw some of the trillions they have invested in the US economy, then the dollar would collapse. Already, it has fallen nearly 10 per cent against the euro over the last six weeks, but that could just be the beginning. Economists at the Federal Reserve have estimated that the dollar needs to fall by 30 per cent to bring the flow of imports and exports into balance, but in today's markets such a fall doesn't happen gradually. It happens precipitately.
"If America and Britain spurn a second UN Resolution and go to war with the active opposition of key members of the Security Council like France and Russia, be sure the flow of dollars into the US will slow down dramatically, and be sure there will be a stampede of foreigners trying to sell. Shares on Wall Street that Bush is so anxious to prop up are still massively overvalued. Against this background, there could be a devastating sell-off, with all the depressing knock-on consequences for American consumer confidence and business investment.
"What the markets were signaling last week was that this is sufficiently within the bounds of possibility that it was worth taking precautionary action, hence the selling. If the war was over in a few weeks, the risks would be containable, and there will be some shares well worth buying at today's prices. But if the war was prolonged or the subsequent peace unstable, then the pressure on the dollar and Wall Street could become very severe indeed, reinforcing the depressive influences on an economy where the underlying imbalances are so extraordinary. . . .
"The US approach has been unilateralist here as everywhere else: it does what it likes as it likes, a policy that is now showing its limits. Bush needs badly to change course, which Tony Blair should be urging on him. The UN process needs to be respected and reinforced, not least to reassure the markets, and better systems of economic governance need to be put in place. The US's military capacity may allow unilateralism; its soft economic underbelly, we are discovering, does not." [25]
These articles indicate that the world community is reducing its reliance on dollars in their central banks, and thus quite possibly sending a message about their opposition to the U.S.'s position on Iraq.
European Commentary on the Essay:
`The Real Reasons for the Upcoming War With Iraq'
In January 2003, Mr. Coílín Nunan reviewed a draft of my essay on an Internet forum. He subsequently published an exceptional summary of this research on an Irish website (www.feasta.org). Hopefully my essay along with his article may create additional public awareness, and thus facilitate a real debate regarding the Iraq issues. Below are excerpts from his article "Oil, Currency, and the War on Iraq":
"One of the stated economic objectives, and perhaps the primary objective, when setting up the euro was to turn it into a reserve currency to challenge the dollar so that Europe too could get something for nothing.
"This however would be a disaster for the US. Not only would they lose a large part of their annual subsidy of effectively free goods and services, but countries switching to euro reserves from dollar reserves would bring down the value of the US currency. Imports would start to cost Americans a lot more and as increasing numbers of those holding dollars began to spend them, the US would have to start paying its debts by supplying in goods and services to foreign countries, thus reducing American living standards. As countries and businesses converted their dollar assets into euro assets, the US property and stock market bubbles would, without doubt, burst. The Federal Reserve would no longer be able to print more money to reflate the bubble, as it is currently openly considering doing, because, without lots of eager foreigners prepared to mop them up, a serious inflation would result which, in turn, would make foreigners even more reluctant to hold the US currency and thus heighten the crisis.
"There is though one major obstacle to this happening: oil. Oil is not just by far the most important commodity traded internationally, it is the lifeblood of all modern industrialised economies. If you don't have oil, you have to buy it. And if you want to buy oil on the international markets, you usually have to have dollars. Until recently all OPEC countries agreed to sell their oil for dollars only. So long as this remained the case, the euro was unlikely to become the major reserve currency: there is not a lot of point in stockpiling euros if every time you need to buy oil you have to change them into dollars. This arrangement also meant that the US effectively part-controlled the entire world oil market: you could only buy oil if you had dollars, and only one country had the right to print dollars -- the US.
"If on the other hand OPEC were to decide to accept euros only for its oil (assuming for a moment it were allowed to make this decision), then American economic dominance would be over. Not only would Europe not need as many dollars anymore, but Japan which imports over 80% of its oil from the Middle East would think it wise to convert a large portion of its dollar assets to euro assets (Japan is the major subsidizer of the US because it holds so many dollar investments). The US on the other hand, being the world's largest oil importer would have, to run a trade surplus to acquire euros. The conversion from trade deficit to trade surplus would have to be achieved at a time when its property and stock market prices were collapsing and its domestic supplies of oil and gas were contracting. It would be a very painful conversion.
"The purely economic arguments for OPEC converting to the euro, at least for a while, seem very strong. The Euro-zone does not run a huge trade deficit nor is it heavily indebted to the rest of the world like the US and interest rates in the Euro-zone are also significantly higher. The Euro-zone has a larger share of world trade than the US and is the Middle East's main trading partner. And nearly everything you can buy for dollars you can also buy for euros -- apart, of course, from oil. . . .
"All of this is bad news for the US economy and the dollar. The fear for Washington will be that not only will the future price of oil not be right, but the currency might not be right either. Which perhaps helps explain why the US is increasingly turning to its second major tool for dominating world affairs: military force." [26]
It appears that Mr. Nunan concurs with my hypothesis with respect to the euro and this upcoming war. Tragically, President Bush and his administration do not appear willing to initiate the arduous structural changes that our economy must undertake if we are to adapt and compete with the euro. Instead, they intend to enforce U.S. dollar hegemony for oil transactions via the application of superior U.S. military force. However the Bush administration's dangerous strategy will most likely result in failure, as monetary maneuvers against the U.S. dollar by the international community indicate they will not tolerate aggressive U.S. imperialism over Iraq's oil and its choice of oil currency.
References: Addendum Section
Associated Press, "US Dollar on Shaky Ground," nzoom.com (January 24, 2003)
onebusiness.nzoom.com
McCarthy, Grainne "Dollar's Decline Starting To Accelerate, Rattling Nerves,"
sg.biz.yahoo.com
Hutton, Will, "Why Bush is sunk without Europe - Even while George Bush growls out his bellicose message, his country has never been in such an enfeebled state," The Observer, (January 26, 2003)
observer.co.uk
Nunan, Coílín, "Oil, Currency, and the War on Iraq," (January 2003)
feasta.org
feasta.org |
