The U.S. dollar, the international currency of global commerce
and of world reserves since the end of WWII, is
currently under pressure to make room for the 5-year
old European currency, the Euro.
The dollar accounts for about 2/3rd
of all official exchange transactions; half of all
world exports are denominated in dollars; so are
all IMF loans; and it is the de facto world reserve
currency. But, the real strength of the dollar lies
in its position as the sole currency for all oil
transactions (‘petro dollars’).
This status of the dollar is based
on a tacit understanding with the Saudi royal family
that they would accept payment for their oil in
the U.S. dollars only. In return the U.S. would
protect, through its mighty war machine, the royal
family’s right to rule. There is, however,
no international commitment or compulsion that the
dollar will be the only monetary instrument for
payments for oil. It is the oil producers, the members
of OPEC, who demand payments in dollars. Every one
accepts dollars because dollars can buy oil -the
most crucial commodity for manufacturing, energy,
communication etc.
Only the U.S. can print the dollars
and pay them to various nation states in return
for their commodities and services. The nation states
give a bulk of them to OPEC members for oil, who
in their turn recycle them back into the U.S. through
purchases of Treasury Bills, U.S. stocks, real estate,
etc.
The world’s interlinked economies
compete now chiefly to capture the needed dollars
to service dollar-denominated foreign debts and
to accumulate dollar reserves to sustain the exchange
value of their domestic currencies. This hegemonic
position of the dollar is sustaining the status
of the US as the supreme economic power despite
constant current account deficits and the biggest
national debt. The U.S. national debt by April,
2003 had already crossed $6 trillion against a gross
domestic product of $9 trillion.
An analytical article appearing on
the front page of the L.A. Time of November 14 mentioned
that the dollar had dropped in the first week of
November “to a record low against the 5-year
old Euro ($1.30=E 1), a 12 year low against the
Canadian dollar ands a nine year low against an
index of major currencies”. Many analysts
don’t see anything that will stop the decline.
Foreigners who had been buying almost half of the
U.S. bonds and securities, the country’s IOUs,
were conspicuous by their absence when the treasury
bonds were offered for sale on September 9. Fortunately,
the buyers returned soon after, ending the ensuing
panic.
“We are borrowing”, remarked
Pat Buchanan in his latest book “$1 trillion
a year to finance our new empire, our welfare-warfare
state, and our binge-buying at the malls.”
Considering the crucial role of the
dollar in the world trading system, particularly
in respect of oil, Saddam Hussein sealed his fate
when he decided to switch to the Euro in November,
2000, as he did not want to deal ‘in a currency
of the enemy’. Not only that, he later on
converted his $10 billion reserve fund at the UN,
accumulated through the facility of ‘oil for
food’, into Euro @ $ 0.82= E 1.00. This subversive
step caused, as expected a fall in the par value
of the dollar as against the Euro. Within a year,
the Euro was selling for $1.05. Iraq’s move
also created a momentum among other OPEC countries
towards Euro as an oil transaction currency standard.
That had to be stopped, Iraqi oil well captured,
a pliable regime installed that may enable the U.S.
to smash OPEC’s hold over oil prices.
The other major oil producing country, Venezuela,
fourth biggest oil producer, shifted to barter deals
by accepting from its South American neighbors products
and commodities for its oil. That brought the wrath
of the U.S. against President Chevez.
North Korea, a member of the Axis
of Evil, has already dropped the dollar in favor
of Euro as the currency covering its trade.
Another member of the Axis, that has
been stepping out of line, is Iran. It has already
converted a major portion of its central bank reserve
funds to the Euro and has been debating the pros
and cons of a total shift to Euro in its oil exports.
It is constantly being charged of enriching uranium
to acquire atomic weapons, despite its solemn assurance
that it had stopped the project, and despite the
certification of the concerned UN agency -IAEA-
that the country was no longer engaged in such activities.
That reminds one of the Weapons of Mass Destruction
(WMD) charge against Iraq, or the tiger of the fable
accusing the ewe of roiling the stream water.
Iranians should be seeing clearly
the writing on the wall and may therefore avoid
“the Great Satan” outlook and adopt,
one hopes , a pragmatic strategy like that of Col.
Gaddafi of Libya.
Some members of OPEC expressed an
interest, at their meeting in Spain in mid April,
2002, in leaving the dollar in favor of the Euro.
The U.S., it might be relevant to
point out, has been tolerating the OPEC cartel since
1973 as the members have been investing their surplus
petro-dollars in U.S. economy, by buying the U.S.
treasury bonds (IOUs), stocks, real estate, etc.
If members of OPEC do adopt a firm stand against
the dollar, it might toll the bell for that organization
itself. The ruling neo-conservatives cannot be expected
to be tolerant of such moves which remove the main
fiscal pillar on which the economy stands. The administration
stands committed that it would not enhance taxes
or impose any new levy. It cannot reduce the defense
expenses and withdraw troops from over 100 foreign
countries.
As for the erosion of the value of
U.S. dollar, it is attributable to a huge budget
deficit -$413 billion in fiscal ending Sept. 30,
2004- an enormous trade deficit -for every $20 of
exports, the imports were $36- the current account
deficit has risen from 1% of GDP in 1990 to 5.4%
now. To maintain the status quo, government will
have to request the Congress to raise the government’s
$7.4 trillion debt ceiling so it could borrow more
money to maintain current level of consumption.
A sinking currency represents the silent theft of
a people’s wealth by their rulers, argues
Buchanan. “You cannot run a world empire on
a collapsing currency”.
But it would be wise to remember that
the U.S. has a war machine which cannot be trumped
by all the armies of the world combined and the
U.S. has no hesitation in exercising its policy
of preemptive strike. It would go to any extent
to fend off any attempt by OPEC or any of the oil
producing countries to dump greenbacks.
As the eminent historian, Arnold Toyenbee,
has found no civilization has ever been destroyed
by any outsider until it has started eroding from
inside. The U.S. will have to be wary of its economic
implosion much more than using its stick against
anyone who is not servile and obsequious to its
will. - Arifhussaini@hotmail.com
November 17, 2004
