Article by J. Bilberg -2003©
The Real Reasons for the War With Iraq: (And Now Iran)
The Euro / Petro-Dollar Wars.
"If a nation expects to be ignorant and free, it expects what never was and never will be . . . The People cannot be safe without information. When the press is free, and every man is able to read, all is safe."
Those words by Thomas Jefferson embody the unfortunate state of affairs that have beset our nation. As our government prepares to go to war with Iraq, our country seems unable to answer even the most basic questions about this upcoming conflict. First, why is there a lack of a broad international coalition for toppling Saddam? If Iraq's old weapons of mass destruction (WMD) program truly possessed the threat level that President Bush has repeatedly purported, why are our historic allies not joining a coalition to militarily disarm Saddam? Secondly, despite over 400 unfettered U.N inspections, there has been no evidence reported that Iraq has reconstituted its WMD program. Indeed, the Bush administration's claims about Iraq's WMD capability appear demonstrably false. [1] [2] Third, and despite President Bush's repeated claims, the CIA has not found any links between Saddam Hussein and Al Qaeda. To the contrary, some intelligence analysts believe it is more likely Al Qaeda might acquire an unsecured former Soviet Union Weapon(s) of Mass Destruction, or potentially from sympathizers within a destabilized Pakistan.
President Bush was informed in January 2001 of North Korea's suspected nuclear program). Despite the obvious contradictions, President Bush has not provided a rationale answer as to why Saddam's seemingly dormant WMD program possesses a more imminent threat that North Korea's active nuclear weapons program. Millions of people in the U.S. and around the world are asking the simple question: "Why attack Iraq now?" Well, behind all the propaganda is a simple truth -- one of the core drivers for toppling Saddam is actually the euro currency, the -- euro dollar symbol.
Although apparently suppressed in the U.S. media, one of the answers to the Iraq enigma is simple yet shocking. The upcoming war in Iraq war is mostly about how the CIA, the Federal Reserve and the Bush/Cheney administration view hydrocarbons at the geo-strategic level, and the unspoken but overarching macroeconomic threats to the U.S. dollar from the euro. The Real Reasons for this upcoming war is this administration's goal of preventing further OPEC momentum towards the euro as an oil transaction currency standard, and to secure control of Iraq's oil before the onset of Peak Oil (predicted to occur around 2010). However, in order to pre-empt OPEC, they need to gain geo-strategic control of Iraq along with its 2nd largest proven oil reserves. This essay will discuss the macroeconomics of the `petrodollar' and the unpublicized but real threat to U.S. economic hegemony from the euro as an alternative oil transaction currency. The following is how an individual very well versed in the nuances of macroeconomics alluded to the unspoken truth about this upcoming war with Iraq:
"The Federal Reserve's greatest nightmare is that OPEC will switch its international transactions from a dollar standard to a euro standard. Iraq actually made this switch in Nov. 2000 (when the euro was worth around 82 cents), and has actually made off like a bandit considering the dollar's steady depreciation against the euro. (Note: the dollar declined 17% against the euro in 2002.)
"The real reason the Bush administration wants a puppet government in Iraq -- or more importantly, the reason why the corporate-military-industrial network conglomerate wants a puppet government in Iraq -- is so that it will revert back to a dollar standard and stay that way." (While also hoping to veto any wider OPEC momentum towards the euro, especially from Iran -- the 2nd largest OPEC producer who is actively discussing a switch to euros for its oil exports)."
Although a collective switch by OPEC would be extremely unlikely barring a major panic on the U.S. dollar, it would appear that a gradual transition is quite plausible. Furthermore, despite Saudi Arabia being our `client state,' the Saudi regime appears increasingly weak/threatened from massive civil unrest. Some analysts believe civil unrest might unfold in Saudi Arabia, Iran and other Gulf states in the aftermath of an unpopular U.S. invasion and occupation of Iraq [3]. Undoubtedly, the Bush administration is acutely aware of these risks. Hence, the neo-conservative framework entails a large and permanent military presence in the Persian Gulf region in a post-Saddam era, just in case we need to surround and control Saudi's large Ghawar oil fields in the event of a Saudi coup by an anti-western group. But first back to Iraq.
"Saddam sealed his fate when he decided to switch to the euro in late 2000 (and later converted his $10 billion reserve fund at the U.N. to euros) -- at that point, another manufactured Gulf War become inevitable under Bush II. Only the most extreme circumstances could possibly stop that now and I strongly doubt anything can -- short of Saddam getting replaced with a pliant regime.
"Big Picture Perspective: Everything else aside from the reserve currency and the Saudi/Iran oil issues (i.e. domestic political issues and international criticism) is peripheral and of marginal consequence to this administration. Further, the dollar-euro threat is powerful enough that they will rather risk much of the economic backlash in the short-term to stave off the long-term dollar crash of an OPEC transaction standard change from dollars to euros. All of this fits into the broader Great Game that encompasses Russia, India, China."
This information about Iraq's oil currency is not discussed by the U.S. media or the Bush administration as the truth could potentially curtail both investor and consumer confidence, reduce consumer borrowing/spending, create political pressure to form a new energy policy that slowly weans us off Middle-Eastern oil, and of course stop our march towards a war with Iraq. This quasi `state secret' is addressed in a Radio Free Europe article that discussed Saddam's switch for his oil sales from dollars to the euros, to be effective November 6, 2000:
"Baghdad's switch from the dollar to the euro for oil trading is intended to rebuke Washington's hard-line on sanctions and encourage Europeans to challenge it. But the political message will cost Iraq millions in lost revenue. RFE/RL correspondent Charles Recknagel looks at what Baghdad will gain and lose, and the impact of the decision to go with the European currency."
At the time of the switch many analysts were surprised that Saddam was willing to give up approximately $270 million in oil revenue for what appeared to be a political statement. However, contrary to one of the main points of this November 2000 article, the steady depreciation of the dollar versus the euro since late 2001 means that Iraq has profited handsomely from the switch in their reserve and transaction currencies. Indeed, The Observer surprisingly divulged these facts in a recent article entitled: `Iraq nets handsome profit by dumping dollar for euro,' (February 16, 2003).
"A bizarre political statement by Saddam Hussein has earned Iraq a windfall of hundreds of millions of euros. In October 2000 Iraq insisted upon dumping the US Dollar -- `the currency of the enemy' -- for the more multilateral euro."
Although Iraq's oil currency switch appears to be completely censored by the U.S. media conglomerates, this UK article illustrates that the euro has gained almost 25% against the dollar since late 2001, which also applies to the $10 billion in Iraq's U.N. `oil for food' reserve fund that was previously held in dollars has also gained that same percent value since the switch. It was reported in 2003 that Iraq's UN reserve fund had swelled from $10 billion dollars to euro dollar symbol26 billion euros. According to a former government analyst, the following scenario would occur if OPEC made an unlikely, but sudden (collective) switch to euros, as opposed to a gradual transition.
"Otherwise, the effect of an OPEC switch to the euro would be that oil-consuming nations would have to flush dollars out of their (central bank) reserve funds and replace these with euros. The dollar would crash anywhere from 20-40% in value and the consequences would be those one could expect from any currency collapse and massive inflation (think Argentina currency crisis, for example). You'd have foreign funds stream out of the U.S. stock markets and dollar denominated assets, there'd surely be a run on the banks much like the 1930s, the current account deficit would become unserviceable, the budget deficit would go into default, and so on. Your basic 3rd world economic crisis scenario.
"The United States economy is intimately tied to the dollar's role as reserve currency. This doesn't mean that the U.S. couldn't function otherwise, but that the transition would have to be gradual to avoid such dislocations (and the ultimate result of this would probably be the U.S. and the E.U. switching roles in the global economy)."
Although the above scenario is unlikely, and most assuredly undesirable, under certain economic conditions it is plausible. In fact, one of the conditions that could create such an environment is a near unilateral U.S. led war in the Middle East. For example, a large spike in oil prices could create huge problems for the imperiled Japanese banking system, the world's largest holder of U.S. dollar reserves. Unfortunately the current Bush administration has chosen a military option instead of a multilateral conference on monetary reform to resolve these issues. In the aftermath of toppling Saddam it is clear the U.S. will keep a large and permanent military force in the Persian Gulf. Indeed, there is no talk of an `exit strategy,' as the military will be needed to protect the newly installed regime, and to send a message to other OPEC producers that they too might receive `regime change' if they convert their oil payments to euros.
Another OPEC `Axis of Evil' country, Iran, will most likely switch
their oil exports to the euro currency in the near future. If
Iran switches to the euro it is highly probable that the USA would
be compelled to find any reason to invade Iran as well. Any talk
of this kind would undoubtedly cause Gold to reach upwards of
$600.00 an ounce and possibly much higher plus quickly push Silver
prices over $13.00 an ounce as the international bankers brace
for a massive decline in the global economic value of the U.S.
dollar.
PRINTED IN 2003 - Not A bad prediction for 2003 since it is all coming true NOW!!!!!!!!!
MORE THINGS TO THINK ABOUT
THE GOLD STANDARD
Under the Bretton Woods Treaty of 1944, each participating government
agreed that its currency would be "backed'' by gold; that
is, the government promised to buy and sell gold for a fixed price
in its own currency. As long as these promises were credible,
the exchange rates between the participating currencies were fixed.
But because of the vast array of goods and services available
in America, the U.S. dollar was the easiest currency to spend
in the global market, and consequently the most acceptable foreign
currency in other countries. The demand for dollars grew until
the late 1950s, when the recovery of Europe and Japan caused a
suspicion that there were too many dollars in circulation, so
that dollar holders began to demand gold. In 1971, in response
to the depletion of U.S. gold reserves, President Richard Nixon
announced that America would no longer keep its commitment to
give gold for dollars [1], causing the system of fixed exchanges
rates to unravel. So the U.S. dollar is now a "fiat'' currency:
its only official ``backing'' is the legal obligation to accept
it as payment in the USA and its territories.
Internationally, however, there is no such thing as fiat money, and a currency is not acceptable unless it is somehow guaranteed to buy something of value [2].
BLACK GOLD
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 oil, countries that need to import oil -- i.e. most developed countries -- will accept dollars for their exports. Hence everyone who needs to buy from those exporters will accept dollars as payment for other things, and so on. 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. This self-reinforcing process is called "dollar hegemony''.
So America exports dollars and receives real goods and services in return. America's real imports now exceed its real exports by almost 50%, or 5% of GDP. Its net foreign debt is more than a quarter of annual GDP, and its public debt is about 60% of annual GDP. But when the exported dollars eventually find their way into foreign reserves, they can only be invested in American assets such as treasury bills, real estate, and shares. This inflow of investment creates a surplus on the "capital account'' and balances the deficit on the "current account'' (which includes imports, exports, interest, rent, and dividends). If the value of the dollar rises, the current account deficit widens because imports increase and exports fall, while the capital account surplus narrows because investment in the country becomes more expensive; so dollars flow out of the country and counteract the rise in value. If the valueof the dollar falls, the opposite effects occur. At equilibrium, the value of the dollar is that which balances the current account and the capital account.
LAND PRICES, RENTS, AND INTEREST RATES
Investment in real estate necessarily includes investment in land,
and the supply of land is fixed. So when foreign reserves of U.S.
dollars are invested in U.S. real estate, they push up land prices.
They also push up rents, because potential renters are in competition
with potential buyers. The winners are the big property owners
(i.e. the rich). The losers are first-time buyers and renters
(i.e. the poor). So we find full-time workers living in "trailers''
(caravans) on the fringes of American cities because they do not
``earn'' enough money to buy or rent a home.
Ordinary home owners are easily convinced that they benefit from rising land prices. But in fact, every time a home owner moves to a new home, the higher sale price of the old home is offset by the higher purchase price of the new one. If the only property that you own is your home, you cannot benefit from an increase in its value unless you somehow turn it into a retirement income stream -- in which case you forfeit the option of bequeathing it to your heirs, who will then be among the losers!
The flow of foreign investment into real estate also pushes up share prices, because land constitutes part of the asset backing of shares. Shares are also partly backed by other non-replicable assets ("land-like assets''), including natural monopolies (e.g. water and electric power distribution), statutory monopolies (e.g. patents and mineral extraction rights), and other licenses and privileges conferred by governments. As the market cannot produce more of these assets in response to increased demand, foreign investment in the share market pushes up share prices for the benefit of current shareholders.
Simple arithmetic dictates that America's current account deficit must be either eliminated (e.g. by allowing the dollar to depreciate, so that living standards fall) or balanced by a stream of foreign investment. One way to attract foreign investment is to offer high interest rates on treasury bills. This of course forces other financial institutions, andother countries needing foreign investment, to raise their rates in order to compete. But the growth of currency reserves that can only be invested in American assets has allowed America to obtain the necessary investment with lower interest rates than would otherwise be needed [3]. Not much of this investment finds its way into export industries or import replacement industries, however, because the competitiveness of these industries is damaged by the high dollar. So the investment does not address the cause of the current account deficit, but merely masks the symptoms while propping up the prices of land and shares.
Another common motive for raising official interest rates is to restrict credit creation, thereby fighting inflation. Clearly the price of oil must be included in any realistic measure of inflation. But because oil is priced in dollars, an increase in oil prices attracts dollars out of the USA, reducing the inflationary impact within the USA. Thus America is protected from the inflationary effects of oil price rises without resorting to high interest rates.
Low interest rates are generally desirable because they encourage productive investment rather than hoarding of money, and because they minimize the flow of income from debtors to creditors (debtors being generally poorer than creditors). However, the benefits of low interest rates extend higher up the socio-economic scale than one might think. The price of a land-like asset is roughly equal to its rental value divided by the real interest rate (i.e. the interest rate net of inflation). So lower interest rates mean higher land prices. Big property owners are again the obvious winners. Owners with mortgages are also among the winners, because their equity increases while their interest payments decrease. Intending buyers do not gain so much, because the benefit of lower interest rates is offset by the need to borrow more; indeed, people who buy when interest rates are lowest are actually buying at the top of the market, which is a fool's game.
THE EURO THREAT
The biggest impediment to global hegemony of a single currency
-- whatever that currency may be -- is the desire for diversity
in investment [4]. Dollar hegemony was secured by the size of
the U.S. economy and the pricing of oil in dollars. But if a second
currency were to enter the oil market, the desire for diversity
would soon establish that currency as a second general-purpose
trading and reserve currency, especially if that currency were
legal tender in an economy comparable in size to the USA.
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. Member states must accept tight constraints on budget deficits, and the European Central Bank has an exceptionally strong mandate to preserve the purchasing power of its currency. These things inspire confidence in the euro. It was perhaps for that reason that in 2002, Russia and China started converting some of their 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.
So the only remaining 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 members to convert most of their reserves to euros by mid 2004. If OPEC members were then to price their oil in euros, whether for all customers or only for customers in the Euro Zone, they would increase demand for the euro, causing a handsome increase in the value of their new euro reserves. Similar arguments apply to non-OPEC oil exporters such as Norway and Russia. In short, if the oil-exporting nations treat the euro on its merits, dollar hegemony will end.
If the demand for dollars falls, the consequences for America are clear. Fewer dollars will be exported for goods and services, and fewer dollars will return to prop up the real estate market and stock market. The dollar prices of American land and shares will fall, and the real values will fall further because the dollar itself will be devalued. The excess dollars on the global market will flow back into the American domestic market, where they will be spent on goods and services, fueling inflation and increasing exports. The increased exports will reduce the current account deficit to compensate for the slowdown of foreign investment, but will also reduce domestic living standards as measured by consumption of goods and services. Inevitably, the Federal Reserve will raise interest rates in order to reduce the inflation, support the dollar, attract more foreign investment, and delay the day of reckoning on which America will have to pay its way by producing and exporting real goods and services in return for its imports. But that will not rescue the landowners and shareholders, because, to the extent that land and shares are not devalued by reduced foreign investment, they will be devalued by the higher interest rates.
If interest rates are raised in America, they will also have to be raised in other countries which have large current account deficits, and which therefore compete with America for foreign investment. Those countries notably include Britain and Australia. So if the reign of the U.S. dollar ends, land prices and share prices will fall not only in America, but also in Britain and Australia.
ROGUE STATES
The first OPEC member to show serious disloyalty to the dollar
was Iran, which has expressed interest in the euro since 1999.
In January 2002, George W. Bush named Iran in his "axis of
evil'', provoking a wave of anti-American demonstrations reminiscent
of the Khomeini era, and undoubtedly setting back the political
and religious liberalization of that country. Undeterred, Iran
converted most of its currency reserves to euros during 2002,
and a proposal to price Iran's oil in euros has been submitted
to the central bank and the parliament.
Let us see whether the Americans find an excuse to destabilize Iran's fledgling democracy in favour of a dictatorship that just happens to prefer dollars to euros.
The second offender was Venezuela. In 2000, Venezuela's 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 barter deals. In one of them, Cuba provided health services in Venezuelan villages.
In April 2002 there was a coup against the twice elected Chavez. The coup was welcomed by the Bush administration and by editorials in numerous American newspapers, but collapsed after two days, leaving evidence that the U.S. administration was behind it [5][6].
The third and most blatant offender was Iraq. In October 2000, Saddam decreed 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 events went unreported in the U.S. media.
Given America's record of toppling elected governments whose policies it didn't like (as in Chile, Nicaragua, and almost Venezuela), it is hard to believe that the motives of Operation Iraqi Freedom are as pure as its name suggests, especially considering how cheap ``freedom'' has become in U.S. domestic politics [see the Appendix].
Answering the allegation that the war was all about oil, George W. Bush assured the world 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 import more goods and services. The exported dollars eventually return and drive up land prices and share prices, making rich Americans richer. So the test of America's sincerity will be whether the new regime in Iraq continues to accept euros for oil.
APPENDIX: THE PRICE OF FREEDOM IN
AMERICA
It is well known that more than 100 death-row prisoners in the
USA have been found to be innocent since 1973. When we add non-death-row
prisoners found innocent after serving long periods in prison,
the number rises to over 200, most of whom were cleared by DNA
evidence in the last decade.
What is not so well known outside the USA is that more than two thirds of these people got NO COMPENSATION. Not even reimbursement of legal costs. Not even back-pay at standard rates for the work they had to do in prison.
Only 15 of the 50 American States have laws providing compensation for wrongful imprisonment. In 13 of those States the compensation is capped, and the limit is invariably less than what a film star would expect to receive for a defamatory media report. In the other 35 States the legislature can pay compensation if it wants to, which it usually doesn't. The Federal jurisdiction has a compensation scheme under which the maximum payout is $5000 (yes, five thousand dollars).
Some wrongful convictions, though not all, are honest mistakes. But when a wrongful conviction is discovered and publicly admitted, any failure to compensate the victim for years of incarceration and vilification cannot be explained by ignorance, misunderstanding, error, lack of freedom, or (especially in America) lack of resources. It can be explained only by callous indifference.
REFERENCES
[1] Howard Wachtel, ``Adventures of the Dollar'' (1987) http://www.npq.org/archive/1987_fall/adventures.html
.
[2] "In the international arena... no overarching sovereign exists to decree what is money. Instead, a myriad of private agents must somehow reach agreement on which currency to use... [If a currency is] to be acceptable, market participants must be willing to hold it as a store of value. A necessary condition of that willingness is that a currency's future value in terms of goods and services be viewed as predictable.'' --- Alan Greenspan (Chairman of the U.S. Federal Reserve), "The Euro as an International Currency'', remarks at the Euro 50 Group Roundtable, Washington D.C., Nov. 30, 2001, http://www.federalreserve.gov/boarddocs/speeches/2001/200111302/default.htm.
[3] An exception occurred in the late 1970s, when falling oil prices and mounting third-world debt -- both denominated in U.S. dollars -- undermined confidence in the dollar. The Federal Reserve responded by raising interest rates to record levels (reference [1]). Heavily indebted poor countries are still paying for that episode. But demand for the U.S. dollar rose again in response to the second oil shock of 1979-80.
[4] ``[T]he most important factor inhibiting the emergence and persistence of a single vehicle currency throughout the world is the attraction of portfolio diversification. This can be a powerful counterforce, especially because currencies offer far greater opportunities for diversification than most other assets. The average price of all currencies, by construction, is trendless, tending to increase the negative covariance within a portfolio of currencies.'' --- Alan Greenspan, loc. cit., http://www.federalreserve.gov/boarddocs/speeches/2001/200111302/default.htm.
[5] FAIR: "U.S. Papers Hail Venezuelan Coup as Pro-Democracy Move'', Media Advisory, April 18, 2002, http://www.fair.org/press-releases/venezuela-editorials.html.
[6] Ed Vulliamy (New York, April 21, 2002): "Venezuela coup linked to Bush team'', THE OBSERVER, http://www.observer.co.uk/international/story/0,6903,688071,00.html.
For the sources of the oil-currency-war theory, see http://ist-socrates.berkeley.edu/~pdscott/iraq.html, http://www.ratical.org/ratville/CAH/RRiraqWar.html,
http://www.commondreams.org/views03/0215-05.htm, and http://www.feasta.org/documents/papers/oil1.htm .