The War to Save the Dollar
--------------------------
The Americans could live with Saddam until he started
selling oil for euros instead of U.S. dollars. Then the
Europeans could live with him.
* * *
GOOD AS GOLD
>From 1944 to 1971, the U.S. dollar was ``backed'' by gold,
meaning that the government agreed to buy and sell gold for
a fixed price in dollars. Other governments did likewise,
leading to fixed exchange rates between their currencies.
In 1971, when U.S. President Nixon abandoned gold backing,
the exchange rate system began to unravel. Domestically,
the U.S. dollar became a ``fiat'' currency, i.e. a currency
whose only ``backing'' is the legal obligation to accept
that currency as final payment of debts. Internationally,
however, there is no such thing as a fiat currency, and no
currency will be accepted as payment unless it is
guaranteed to buy some valuable commodity.
GOLD TURNS BLACK
In 1973, the Organization of Petroleum Exporting Countries
(OPEC) quadrupled the price of oil but continued to accept
only U.S. dollars in payment, so that the demand for
dollars soared. From then on, the dollar was effectively
backed by oil instead of gold -- and the U.S. government
didn't even have to own the oil!
Because dollars can buy OPEC oil, countries that need to
import oil -- i.e. most developed countries -- will accept
dollars as payment for their exports. Hence everyone who
needs to buy from those exporters will accept dollars as
payment for other things, and so on, so that the dollar is
the preferred global currency. To pay their bills,
importers must have reserves of dollars. To prop up their
currencies against speculative attacks, the central banks
of all countries must have reserves of dollars. To get
capital, poor countries must borrow dollars, and to service
these debts they must export goods to obtain more dollars.
About 2/3 of all currency reserves, more than 4/5 of all
currency transactions, more than half of the world's
exports, and all loans from the International Monetary Fund
(IMF) are denominated in dollars. As these things create
demand for the dollar and shore up its value, OPEC is the
more willing to accept payment in dollars. So the system
is self-reinforcing.
The result is that America can export dollars, which cost
nothing to produce, and receive real goods and services in
return. As long as those dollars are spent outside
America, they don't cause domestic inflation. And when
they eventually find their way into foreign reserves, they
can only be invested in American assets. This continuous
flow of foreign investment (on the ``capital account'')
props up the American real-estate market and stock market,
and allows America to run a mammoth trade deficit (on the
``current account'') without devaluing the dollar.
America's imports now exceed its exports by almost 50% (or
5% of GDP) and its foreign debt is 60% of annual GDP.
If OPEC were to abandon the dollar in favour of some other
currency, the whole process would slam into reverse.
America could no longer export paper dollars for real goods
and services. Corporations and central banks would sell
their dollar reserves, causing the value of the dollar to
plummet. The redemption of dollar reserves would force
sales of the assets in which those dollars are invested, so
that the American property and stock markets would crash.
Other investors who have bought American property and
stocks with borrowed money would declare themselves
bankrupt, causing some American banks to collapse under the
weight of bad debts. The newly liberated dollars could
only be spent on American goods and services, which would
begin to flow out of the country (reducing living
standards), while the glut of dollars chasing these same
goods and services would cause massive domestic inflation.
The flow of foreign investment would dry up, so that
America could no longer run a trade deficit, but would have
to export yet more goods and services to pay for its
imports, and to service its massive foreign debt, and to
accumulate reserves of the new global currency -- whatever
that currency might be...
EUROPE STRIKES BACK
In 1999, eleven member states of the European Union (EU)
adopted the euro as a common accounting currency. Greece
joined the Euro Zone a year later. On January 1, 2002, the
twelve countries withdrew their old money from circulation,
completing the biggest currency reform in history.
The Euro Zone already has a bigger share of world trade
than the USA. In particular, it imports more oil than the
USA and is the main trading partner of the Middle East. It
offers higher interest rates than the USA, but does not
have a huge foreign debt or trade deficit. These things
inspire confidence in the euro. It was perhaps for that
reason that in 2002, China started converting some of its
currency reserves from dollars to euros, while North Korea
abandoned the dollar and started using euros for trade.
The strength of the euro also encourages expansion of the
EU and puts pressure on current members Denmark, Sweden and
the U.K. to join the Euro Zone. In December 2002, ten new
countries were accepted for EU membership with effect from
May 2004. This will create a common market of 450 million
people, which will buy more than half of OPEC's oil.
In summary, the only argument for preferring dollars to
euros is that dollars can buy oil. As that argument does
not affect OPEC, it would make sense for OPEC to convert
its reserves to euros by mid 2004. If OPEC were then to
price its oil in euros, it would increase demand for the
euro, causing a huge increase in the value of its new euro
reserves. These possibilities are not discussed in the
U.S. media.
ROGUE STATES
The first OPEC member to show serious disloyalty to the
dollar was Iran. Since 1999, Iran has been talking about
pricing oil in euros. In January 2002, George W. Bush
named Iran in his ``axis of evil'' although the country is
experimenting with democracy -- something that the USA, if
true to its professed values, would want to reward and
encourage. Undeterred, Iran converted most of its currency
reserves to euros during 2002, and a proposal to price oil
in euros is being considered by the central bank and the
parliament.
Let us see whether the Americans find an excuse to topple
Iran's fledgling democracy and to replace it with a
dictatorship that just happens to prefer dollars to euros.
The second offender was Venezuela. In 2002, Venezuela's
twice elected president Hugo Chavez called a conference on
the future of fossil fuels and renewable energy. The
report of the conference, delivered by Chavez to the OPEC
summit in September 2000, recommended that OPEC set up a
high-tech electronic barter system, so that members could
trade oil for goods and services without the use of dollars
or any other currency. The chief beneficiaries would be
OPEC's poorer customers, who did not have large currency
reserves. Chavez made 13 such deals. In one of them, Cuba
provided health services in Venezuelan villages.
In April 2002 there was a coup against Chavez. The coup
was welcomed by the Bush administration and by editorials
in numerous American newspapers, but collapsed two days
later, leaving evidence that the U.S. administration was
behind it [1].
The third and most blatant offender was Iraq. In October
2000, Saddam announced that Iraqi oil would be sold for
euros instead of dollars, with effect from November 6.
Soon afterwards, Saddam converted Iraq's entire $10 billion
``oil for food'' reserve fund from dollars to euros. These
facts went unreported in the U.S. media.
George W. Bush assures us that Iraq's oil belongs to the
Iraqi people. But any asset priced in dollars is at least
partly an American asset because it adds to the demand for
dollars, allowing America to export more dollars and
receive more goods and services in return. So the test of
America's sincerity will be whether its new regime in Iraq
continues to accept euros for oil.
---
Dr Gavin R. Putland
Brisbane, Australia
March 26, 2003.
REFERENCES
[1] See fair.org ,
observer.co.uk .
For more information on the oil currency war, see
feasta.org and the
links on that page. On the fortunes of the U.S. dollar,
see npq.org .
For more reflections on the economic significance of
natural resources, see prosper.org.au and
earthsharing.org.au . |
