Friday, December 30, 2005

The Failing Dollar and War in Iraq

My eyes glaze over when it comes to economics. But my brother tried explaining fiat currency to me over Christmas, and has recommended a read from March, 2003, right before the Iraq invasion.

We on the left probably remember our own opinions of the reasons for war in Iraq: for oil; hegemony over the oil market, thence over Eurasia; revenge on Hussein. And I do recall the reason of euros versus dollars. I think all those aspect were contributory to the war.

From the link my brother provided, Not Oil, But Dollars vs. Euros, the reasons the author listed for war in Iraq:

  • Safeguard the American economy by returning Iraq to trading oil in US dollars, so the greenback is once again the exclusive oil currency.
  • Send a very clear message to any other oil producers just what will happen to them if they do not stay in the dollar circle. Iran has already received one message -- remember how puzzled you were that in the midst of moderation and secularization, Iran was named as a member of the axis of evil?
  • Place the second largest reserves of oil in the world under direct American control.
  • Provide a secular, subject state where the US can maintain a huge force (perhaps with nominal elements from allies such as Britain and Australia) to dominate the Middle East and its vital oil. This would enable the US to avoid using what it sees as the unreliable Turkey, the politically impossible Israel and surely the next state in its sights, Saudi Arabia, the birthplace of al Qaeda and a hotbed of anti-American sentiment.
  • Severe setback the European Union and its euro, the only trading bloc and currency strong enough to attack the USA's dominance of world trade through the dollar.
  • Provide cover for the US to run a covert operation to overturn the democratically elected government of Venezuela and replace it with an America-friendly military supported junta -- and put Venezuala's oil into American hands.

The last one made sense, but it happened in 2002, before the invasion of Iraq. And it didn't go so well for the U.S. And they so far haven't tried again, though Pat Robertson might be up to the task. (pdf link to mad magazine, scroll to page 5).

The article also gives explanations for Britain's and Australia's willing involvement, two things I couldn't figure out. I could only figure Britain's poodle had rolled over because Bush had something big on him. But I recall now that Britain was and still is rejecting the euro.
Australia, of course, has significant US dollar reserves and trades widely in dollars and extensively with America. A fall in the US dollar would reduce Australia's debt, perhaps, but would do nothing for the Australian dollar's value against other currencies. John Howard, the Prime Minister, has long cherished the dream of a free trade agreement with the USA in the hope that Australia can jump on the back of the free ride America gets in trade through the dollar's position as the major trading medium. That would look much less attractive if the euro took over a significant part of the oil trade.

Britain has yet to adopt the euro. If the US takes over Iraq and blocks the euro's incursion into oil trading, Tony Blair will have given his French and German counterparts a bloody nose, and gained more room to manouevre on the issue -- perhaps years more room. Britain would be in a position to demand a better deal from its EU partners for entering the "eurozone" if the new currency could not make the huge value gains guaranteed by a significant role in world oil trading. It might even be in a position to withdraw from Europe and link with America against continental Europe.

However, this part
Second -- in reality, war will cost the USA very little -- or at least, very little over and above normal expenditure. This war is already paid for! All the munitions and equipment have been bought and paid for. The USA would have to spend hardly a cent on new hardware to prosecute this war -- the expenditure will come later when munitions and equipment have to be replaced after the war. But munitions, hardware and so on are being replaced all the time -- contracts are out. Some contracts will simply be brought forward and some others will be ramped up a bit, but spread over a few years, the cost will not be great.

missed one very important consideration: war profiteering. The war is costing tons of money because of corrupt contracting practices, crony capitalism, theft, mismanagment, etc. Billions of dollars are missing, just missing, and we're being asked for more. In terms of fiat currency -- the illusory nature of the dollar -- that still doesn't mean much until the dollar collapses, especially given how much further in debt this Administration's economic policies and warmongering have put us.

The next question would be, besides taking over the world with wars and threats to people who would rather switch to other forms of currency and get their own power to benefit their own people -- in effect, war forever -- what can we do to protect our own economic interests? It's not enough to get off an oil-driven economy and withdraw from Iraq, and stop meddling in the Middle East. The dollar has to be strengthened somehow.

Speaking of which, the above argument about the oil trading being the main booster for the U.S. dollar sure goes a long way to explaining this government's reluctance to aggressively push for alternate fuels, doesn't it?

The author kindly offers suggestions.
Could America agree to share the trading goodies by allowing Europe to have a negotiated part of it? Not very likely, but it is just possible Europe can stare down the USA and force such an outcome. Time will tell. What about Europe taking the statesmanlike, humanitarian and long view, and withdrawing, leaving the oil to the US, with appropriate safeguards for ordinary Iraqis and democracy in Venezuela?

Europe might then be forced to adopt a smarter approach -- perhaps accelerating the development of alternative energy technologies which would reduce the EU's reliance on oil for energy and produce goods it could trade for euros -- shifting the world trade balance.

"What do you think, Patriots?"

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