A little more on the connection (if any) on the status of our dollar and the war written by a couple of macroeconomists.
Basically, the US has been running an extensive deficit over the last (many)
years, internal and external. Internal is fiscal budget deficit. External is
trade balance deficit. In a great measure this deficit is financed by the
overvaluation of the dollar. This excess value helps to finance the deficit
due to more investment money going into the US than going out. This was
easy due to the fact that the stock market in the 90s was living a
speculative bubble that helped to suck in investment money, and due to the
fact that a lot of outside investors were keen to buy US companies.
But the fact remains that this overvaluation works much like a tax that is
imposed on the rest of the world, as long as you need to buy dollars for
some reason, they are a "subsidy" on the US economy. Much like when you
devalue your currency, it works as an internal subsidy. You make your goods
artifically cheap, and encourage others to buy them. Now, the US currency is
under tremendous danger. Theoretically, devaluation should help the economy
in the US, but you need someone to buy those cheaper goods. The rest of the
world's economy is very sluggish (and Japan is a very specific concern here)
and will probably not be able to drive the US exports to a point where it is
sensible to devalue.
In addition, European Union expansion into the East means a lot of cheap
investment opportunities, as well as a lot of cheap goods at zero import
rates (whereas, the US have been creating havoc in the World Trade
Organization and triggering a semi-import-duties crisis). All this means,
that even if the dollar devalues, little benefit will be derived from it by
the US economy. As one of the sources say: "several years of trade deficit
have finally caught up to the dollar, at a time when the US can ill afford
to devalue" (Andrew Walker, BBC economic consultand, an analysis you should
be able to find if you look under these names as well as key words dollar
euro deficit). More than this, expansion of the EU into additional economies
increases the euro zone, further pressuring the dollar. A complex situation
will also arise when the UK switches to the euro, no doubt one of the
reasons it hasn't yet...
Now, few people realize that the fact that oil is traded in dollars is part
of the "as long as you need to buy dollars for some reason". The fact that
Iraq switched to trading its oil in euros is a dramatic switch, more than
you can imagine. Iraq held 10 billion USD in a cash reserve with the UN
under the "oil for food" program. They have been trying for some time to
have it switched to euros, I haven't been able to find out if they have done
it ('Iraq: Baghdad Moves to Euro'
http://www.rferl.org/nca/features/20...2000160846.asp ). What you
need to realize is that if they have done it, it is pretty much the
equivalent of European central bank doing two or three rounds of shoring up
the euro by buying it! It's that much. The dollar is under pressure from
other Axis of Evil (..?) countries, and few commentators have missed the
political and economic implications of it (see 'Economics Drive Iran Euro
Oil Plan, Politics Also Key' (August 2002
http://www.iranexpert.com/2002/econo...l23august.htm, 'Iran
may switch to the euro for crude sale payments' (Sept 2002)
http://www.gasandoil.com/goc/news/ntm23638.htm, even North Korea is
switching to the euro "North Korea embraces the euro’ (Nov 2002),
http://news.bbc.co.uk/1/hi/world/asi...ic/2531833.stm). Whenever someone
needs to buy oil, he needs first to buy dollars, a huge advantage to the US
in terms of its trade deficit, in the sense that it sort of works as an
investment (hidden) into the US economy. Also, this explains the opposition
the US has made to some third world countries trying to enter into bartering
agreements to sell their oil reserves, another threat to the dollar.
Venezuela is currently one of the bad guys, as it has hammered "barter
deals" with a number of South American countries, circulating oil with no
corresponding dollar buying.
Strength of the dollar is strongly tied to the fact that it is the reserve
currency for oil trading in the world. Oil producing countries receive
dollars and reinvest them into the US economy (treasury bills, stocks, real
estate, etc...).
A very interesting article in The Asian Times focuses on this (and is echoed
by many in Europe). It is at
http://www.atimes.com/global-econ/DD11Dj01.html. Here are a few quotes:
(...) "World trade is now a game in which the US produces dollars and the
rest of the world produces things that dollars can buy. The world's
interlinked economies no longer trade to capture a comparative advantage;
they compete in exports to capture needed dollars to service
dollar-denominated foreign debts and to accumulate dollar reserves to
sustain the exchange value of their domestic currencies. To prevent
speculative and manipulative attacks on their currencies, the world's
central banks must acquire and hold dollar reserves in corresponding amounts
to their currencies in circulation. The higher the market pressure to
devalue a particular currency, the more dollar reserves its central bank
must hold. This creates a built-in support for a strong dollar that in turn
forces the world's central banks to acquire and hold more dollar reserves,
making it stronger. This phenomenon is known as dollar hegemony, which is
created by the geopolitically constructed peculiarity that critical
commodities, most notably oil, are denominated in dollars. Everyone accepts
dollars because dollars can buy oil. The recycling of petro-dollars is the
price the US has extracted from oil-producing countries for US tolerance of
the oil-exporting cartel since 1973. By definition, dollar reserves must be
invested in US assets, creating a capital-accounts surplus for the US
economy. Even after a year of sharp correction, US stock valuation is still
at a 25-year high and trading at a 56 percent premium compared with emerging
markets."
(...) and then, explaining the "international tax" concept I introduced
earlier: "The US capital-account surplus in turn finances the US trade
deficit. Moreover, any asset, regardless of location, that is denominated in
dollars is a US asset in essence. When oil is denominated in dollars through
US state action and the dollar is a fiat currency, the US essentially owns
the world's oil for free. And the more the US prints greenbacks, the higher
the price of US assets will rise. Thus a strong-dollar policy gives the US a
double win." (...) "A strong-dollar policy is in the US national interest
because it keeps US inflation low through low-cost imports and it makes US
assets expensive for foreign investors. (...) an arrangement ...(which) has
kept the US economy booming in the face of recurrent financial crises in the
rest of the world. It has distorted globalization into a "race to the
bottom" process of exploiting the lowest labor costs and the highest
environmental abuse worldwide to produce items and produce for export to US
markets in a quest for the almighty dollar, which has not been backed by
gold since 1971, nor by economic fundamentals for more than a decade."
Actually, I strongly urge you to read through this article. It has
incredible information value.
It seems then, that a clear action by the US, as a reaction to the above
should be to convert Iraq oil back to dollars and increase production, fast.
You get no prizes for remembering that Bush has just called for Iraqis who
destroy oil tech and industry to be treated as "genocides", equated to those
who would use weapons of mass destruction (see monday's speech). The entry
of Iraq at full capacity into the oil trade probably spells collapse for
OPEC, as well as a drastic fall in oil price (see ‘Iraq and Oil ‘ (December
2002) http://www.pakistanlink.com/nayyer/12132002.html an interesting essay
from early december that opens with "Ignore everything that is going on with
the weapons inspectors. Bush will strike Saddam in the first three months of
2003 and the US will find itself occupying Iraq. The inspections game is
being played out of a desire to appease the rest of the world by creating at
least an impression of showing deference to the UN Security Council, but the
US will not be constrained by anything the weapons inspectors find or don¹t
find.").
The policies of the Bush administration are pretty much spelled out in Gore
Vidal's "The Enemy Within". Wether you like him or not, or have any respect
for what he says, go ahead and read this essay you will never find in any US
major paper (‘The Enemy Within’
http://www.ratical.org/ratville/CAH/EnemyWithin.html). He also calls to
attention a number of interesting geopolitical considerations, made by
Brzezinski four years ago, where he essentially concludes: "...that the
establishment, consolidation and expansion of US military hegemony over
Eurasia through Central Asia would require the unprecedented, open-ended
militarisation of foreign policy, coupled with an unprecedented manufacture
of domestic support and consensus on this militarisation campaign."
A lot of other interesting info can be seen at a number of places. Being a
good communist here on the list, I have accessed a few "liberal and leftist"
sites (sorry for being rude, Mrs. V), but they lead to sound articles and
good research, I even read Gore Vidal! Gosh! So in no particular order:
http://www.democraticunderground.com...27/1641.html#3 is a
specific forum where this matter is discussed and is highly crammed with
info. Take with a grain of salt, but it's serious discussion. Also,
http://www.mediamonitors.net/williamclark1.html, (The Real Reasons for the
War), ‘Japan’s Economy at Risk of Collapse’ (December 11, 2002)
http://www.msnbc.com/news/845708.asp?0cl=cR is an alarming overview of the
Japanese economy, http://www.prudentbear.com/creditbubblebulletin.asp a good
review of the chaotic US situation, fairly complex though, keep at it to the
end ("....we do recognize that the Credit system is firing on all cylinders.
We also appreciate that the resulting liquidity is drawn more to the
hyperactive financial sphere rather than the despondent economic sphere.
This lends support to the view that acute financial fragility and
instability are the paramount inflationary manifestations at this late stage
of the Great Credit Bubble. (...) We have reached the point where there is
no turning off the Credit excess, no turning off the GSEs, no turning off
the Mortgage Finance Bubble, no turning off the destabilizing world of
derivative trading, and no turning off the rampant financial speculation and
its increasingly destabilizing effects. It is truly one massive Bubble
running out of control." (...)),
http://www.opec.org/NewsInfo/Speeche...SpainApr14.htm a speech
on using euros for oil (The Choice of Currency for the Denomination of the
Oil Bill by Mr Javad Yarjani, Head, Petroleum Market Analysis Dept ). And
http://listproc.ucdavis.edu/class/20...-f02/0001.html an interesting
little report on Euro vs. Dollar trends by the Deutsche Bank.
Conclusions? I don't have any. I have feelings, that this war is a major
gamble to retake control over oil production and a complex geopolitical
area, and to drive oil prices (over a period of a couple of years) to under
20 USD a barrel, in part to break OPEC and to attempt to diminish dependency
on an unstable ally, Saudi Arabia (and the fact that strong OPEC countries
are leaning more and more to fundamentalist islamic attittudes provides more
good reasons). It is a major gamble, I think, with the prospect of actually
driving prices to the 45 USD range (as in the 91 Gulf War), which if it
lasts for more than a few months might trigger a world wide recession,
especially in the Pacific Rim area, mostly due to Japanese economy weakness,
but perhaps spreading catastrophically to China and other countries, which
would hurt both euro and dollar (with unforeseen consequences for the US
economy, though). Sadly, I suspect this war has abolutely nothing to do with
war on terrorism (or War on Some Terrorists, as Robert Anton Wilson calls
it), September 11, Iraqi threats on US, links to Al-Qaeda (unproven as of
yet) or weapons of mass destruction. I believe it has a lot more to do with
geopolitics.
-----------------------------------------------
---------------------------------------------------
The previous post generated questions, and they turned into discussions!
Hello William,
"I disagree, this doesn't make sense to me. If the U.S. wanted to go to war
for oil, we would conquer (or "liberate", LOL) Canada and Mexico, and their
oil reserves and facilities. No more dependence on Saudi Arabia; problem
solved; and we wouldn't have to travel half way around the world to do it.
I doubt that this conflict is about oil; I think it's about the war on
global terror, just as GWB says, however ineloquently."
Your observations made some sense, so I've been hunting for answers. I had
an immediate suspicion, which I will explain, but I've been looking to
substantiate it with more info. I am not saying you are wrong (I have no
strong opinion here, as I said I have just feelings), simply that it is
perfectly defensible to say that geopolitical considerations probably rank
very high in the US strategies. More than that: I think it is a perfectly
acceptable strategy! I am no fool or idealist, and it makes perfect sense
that oil is the central tenet of strategy; I am not even entirely sure that
I disapprove of this strategy, in practice (in principle would be something
else). Oil is the one single thing we can easily identify as the foundation
of western prosperity as of now (this would of course send us into another
entirely different conversation, on the merits of western oil dependent
industry, but let's leave that for another day).
1) your question begs the fact that the US policies as they are TODAY
predate and were actually put in motion well before September 11 (they were
in motion by at least June 2001). see below for links.
2) the major answer to your question is a simple showing of oil reserves in
the world. Look:
World proven oil reserves, million tons.
1 - Saudi Arabia 35,700
2 - Iraq 13,400
3 - Kuwait 13,300
4 - United Arab Emirates 12,700
5 - Iran 12,000
6 - Venezuela 9,300
7 - Former USSR 7,800
8 - Mexico 7,100
9 - Libya 3,900
10 - USA 3,700
11 - China 3,300
12 - Nigeria 2,800
13 - Algeria 1,200
14 - Norway 1,100
15 - Canada 900
16 - India 800
17 - Indonesia 700
17 - Oman 700
17 - Angola 700
20 - Malaysia 600
20 - United Kingdom 600
(From http://www.petroleum.co.uk/education/natural/3.htm, and educational
site which seems nonetheless to have sound data).
Basically, Gulf/Middle East countries control fully 67% of known reserves
(of the top 20 reserve countries, not of the total amount, but still should
be over 50% of ALL oil in the world: Saudi Arabia, Iraq, Iran, Oman Kuwait,
United Arab Emirates hold 87.800 tons of the total 131.600 shown). This is
slightly more impoertant than Mexico and Canada...
3) there is an effect called the Hubbert effect, named after the geologist
who first enunciated it. Basically, it says that a given oil reserve peaks
in production at approximately half of its total reserves, and also that
this is the point at which extracting it is cheaper (there are slightly
different estimates, at 55 or 60%, taking into account financial provisions
for payback of equipments, amortizations, investment, and so on, but
basically you get the picture). From then on it becomes more and more
expensive to drill and exploit a given reserve. This effect is basically
used to predict, from known reserves (and assuming the figure is sort of
accurate), when a country will hit its peak, and then when it becomes
uneconomical to exploit its reserves. These predictions have been known to
work well in a number of occasions (most notably the US oil reserves:
Hubbert predicted in the 50's that US production would peak somewhere around
1970... which it did. (Nonetheless this theory is challenged by many, see
below to links that offer alternate views).
Now, most predictions and institutes are saying that the Hubbert crest for
world oil production say that the mid-point of production (where it is
cheapest and where production is larger) has/will be reached between
1999/2005. This has a significant impact on strategies for controling
reserves. Essentially, it means that the US should project its power to
where it can control the reserves that haven't yet hit their Hubbert crest,
or are closer to it (I say the US because they use currently 25% of all oil
production in the world, much more than anyone else, so they are the most
dependent). I will quote from From Wind Energy Weekly (Vol. 15, #684, 12
February 1996, http://www.awea.org/wew/684-1.html):
"...The problem of gradually tightening world oil supplies is exacerbated by
a growing concentration of remaining reserves in the Persian Gulf. All other
producing countries but the five Persian Gulf states (Saudi Arabia, Iran,
Iraq, Kuwait, and the United Arab Emirates) will peak before 2000. The Oak
Ridge report points out that by the turn of the century only OPEC will have
the capability of developing and producing energy in the quantity required.
The report says the problem is not one of the United States running out of
oil, but that a handful of nations, which today control about two-thirds of
the world's reserves, will have the monopolistic power of a cartel as early
as the turn of the century. During the 1970s the OPEC cartel was able to
raise prices dramatically, extracting billions of dollars from consuming
nations. But higher prices spurred drilling activity worldwide, and newer
technologies reduced consumption to the point that the world had excess
capacity for more than a decade. Now supply and demand are nearly in balance
and the advantage is swinging to the oil producers. With world demand
increasing and the reserves of most producers gradually diminishing, the
OPEC cartel with its many resources appears ready to control the market for
oil during the early days of the new century, the Oak Ridge analysts said."
Notice the phrase "All other producing countries but the five Persian Gulf
states will peak before 2000...". My immediate suspicion after reading your
post was simple: the risk/investment into Mexico and Canada, given their
already proximity and control by the US economy (and relative proximity
ideologically) is not worth it, since their oil fields are not vital or
strategic anymore. More than that, I would wager that oil from those two
countries is actually more expensive to produce than oil from the Gulf and
that their peak has passed.
This text, written in 1996, has all the necessary strategy elements for the
US in it: "...The scene, the researchers conclude, is set for another major
oil price shock. With a chronic shortfall in supply, the world faces a
permanent increase in the price of oil. The data supplied by
Petroconsultants lend support to the conclusions reached in the Oak Ridge
report that deal largely with economic consequences to the United States and
its standard of living in having to deal with a cartel and its pricing
power..." from the same source.
It is perfectly admissible to say that the military intervention in the Gulf
stems from this very fact. It is indeed what I've said in my previous post,
that these considerations seem to me to be more important than any war on
terrorism.
As for France and Russia's opposition to this war, I also believe that keen
geopolitical/economic concerns are primary. Total debt of Iraq to both, and
contracts already signed (that Russia and France could lose) to develop more
resources are estimated to exceed 65 Billion US (7 BnUS debt to Russia, + 20
Bn US contracts, plus 38 Bn contracts to France plus unspecified debt).
France and Russia's fear of default or not honouring of past contracts to
them by a new government in Iraq are probably worth vetoing a decision in
the Security Council. (good article on this at
http://www.observer.co.uk/internatio...805530,00.html). Note
also that "Russia turned a blind eye to US troops in central Asia, on the
tacit condition that US-Russian trade restrictions would be lifted. But they
are still there, and other benefits expected after 11 September have also
not materialised", therefore resentment with US policies is also a strong
factor.
As for the strategies in place before Sept. 2001 even, here are interesting
tidbits (you can also go to the Energy report, so-called Dick Cheney report
of May 2001). On the Afghan pipeline, a timeline of the rivalry for its
building pre-2000 at
http://www.worldpress.org/specials/p..._timeline.htm, a history of
rivalry and unstability affecting a large scale project... (Unocal is a US
corp. and Bridas an Argentinian one recently merged with BP Amoco, the
Argentinian branch of BP). Also,
http://news.bbc.co.uk/1/hi/business/1984459.stm. and
http://www.rediff.com/news/2002/sep/17guest.htm a very informative little
article. Also, this stunning May 28 article:
http://www.rferl.org/nca/features/20...001113208.asp. A summary of
this issue at http://www.flora.org/library/wtc/flandersj2.html.
More documents on oil price and economic/strategic impact at :
http://criepi.denken.or.jp/eng/PR/Pr.../20021204e.pdf (Central Research
Institute of Electrical Power Energy),
http://www.iea.org/g8/world/oilsup.htm has good explanations of price
fluctuations versus reserves and demand (International Energy Agency),
http://www.awea.org/wew/684-1.html has excellent explanations on the Hubbert
effect and world oil reserves, as does www.hubbertpeak.com). Note also that
I've come across a number of referneces to an inflation of Iraqi reserves
(which in part contradict my own opinion) stating that they are of a
magnitude of >100 bn barrels, rather than >300 bn
(http://www.hubbertpeak.com/iq/iraqLaherrere.pdf. Do not get confused but
the 13.000 million tons quoted above are roughly the 300 bn barrels). A
highly technical paper, but worth reading. Despite the fact that it reviews
Iraq reserves downward, it also says, quote: "Iraq's oil production costs
are amongst the world's lowest, making it a highly attractive oil prospect."
It also has many other interesting tidbits, and if you read between the
lines you will find a strong disagreement between French and US experts (!),
as well as a simple prediction saying in effect that oil prices could go
down significantly due to the recession we are entering into now, rather
than up.
More variables! This document even cites the concern of an OPEC switch to
the euro as a probable cause of US invasion of Iraq (this is from the
Institut Français du Pertole, the French Oil Institute). Should you be
interested in an alternative and opposite view (opposite to Hubbert) go to
http://sepwww.stanford.edu/sep/jon/w...r/lynch2.html; simply note
that the "superfields" in Kazakhstan have recently benn diminished in size
to less than 20% previously thought of. The Energy Information
Administration (I think a governement agency?) has a good site to celebrate
the 25th Anniversary of the OPEC embargo of 1973 (!), chockfull of (chilly)
info on US dependency on imported oil (roughly 50% of used oil); I am
looking for info on Japan, but it is even more dramatic.
http://www.eia.doe.gov/emeu/25opec/anniversary.html.
A final caveat: I don't believe in any of this. Actually, I don't believe in
anything. I have varying degrees of opinion, and reserve "belief" to
situations where I need the power it brings to your action. Other situations
are not worthy of "belief". Belief is a tool, not a goal. The earlier
question of bias and fairness of the press or CNN is very germnane to this
discussion. I much prefer a source of news that is clearly biased (ie, which
announces its bias) to one that purports to be, and tries to appear, as
unbiased but holds hidden assumptions in its information. The problem is not
bias, but "unseen" bias. To recognize it, you need information, plenty of
it. Unfortunately, most "citizens" in the world (not only the US ones) are
not sufficiently informed to recognize the existence of bias in what they
see or read.
Don't take my word for anything I've said. Go lookit up!
------------------------------------
I would add also that there is an information propaganda war going on
regarding the estimates of the oil reserves worldly and of the Hubbert
point, wether it will happen now (2000-2005) or further off (2020-2030).
This discussion is not innocent!!! There are basically two sides (to
generalize), a french/european view that tends to be more catastrophist and
a US one (including UK, and surprise, surprise, China) which tends to be
non-alarmistic. Since these views have powerful impact on the energy
policies of various nations, I don't think we can trust so-called objective,
scientific data on this issue. I am not convinced one way or the other, so I
will reserve an opinion on this issue. But it is one of the more important
issues ever.
Best to all, and sorry for this HUGE post.
José de Freitas
Portugal
Finally, for further reflection, Reality Bytes essay and some questions and
answers. Brilliant, and enlightening on this theme (even if you don't agree,
which I don't, not totally).
(...)
One of several reasons why the Iraq adventure is fraught with peril
obviously relates to the potential for oil price shock – almost certain in
the event of any prolonged Gulf conflict. Indeed, it's this fear of economic
disruption that has compelled the administration to build up military forces
in such an incremental, almost invisible fashion. Similarly, this desire to
avoid sudden fluctuations in oil prices is why they’ve entertained such
ridiculous notions as paratrooping a quick-strike force into Baghdad as
opposed to a full-frontal attack with overwhelming force. Aside from the
historical reference of the ’91 recession following Gulf War I, it’s no
secret that the anemic U.S. economic ‘recovery’ presently stands ill
equipped to handle significant economic tensions.
At first glance this wouldn’t appear too daunting a prospect; the $10
trillion American economic powerhouse could absorb a relatively brief rise
in oil prices without too great dislocation – in part with the assistance of
the National Petroleum Reserve. Granted, even a ’91 style recession with
7.5% unemployment and so on wouldn’t exactly suggest a promising political
setting for Dubya's 2004 campaign, but even so there’s the parallel war on
terrorism, military affairs, and domestic security issues to ride back into
office. However, the nightmare economic scenario which may well unfold in
the aftermath of a Gulf War Part Deux doesn’t originate with America, but
rather the greatest danger appears within: Japan.
To begin with, here’s a recent MSNBC overview regarding the alarming state
of Japan’s moribund economy as well as the persistent inability of that
nation to confront its structural impediments:
‘Japan’s Economy at Risk of Collapse’ (December 11, 2002)
http://www.msnbc.com/news/845708.asp?0cl=cR
Japan’s banking system has been teetering on the verge of collapse for years
now. Even having discharged over $1 trillion of nonperforming loans during
this past decade, that nation’s financial houses are still carrying at least
another $1 trillion of dead weight on the books. Once accounting for several
hundreds of billions in various assets, you’re still left with a system deep
in red ink negative worth. Indeed, the implosion of the world’s second
largest economy is now seemingly inevitable, within at most 4-6 years
national debt service – already at 140% of national GDP – will rise high
enough to crash its bond markets forcing the banks to divert sufficient
reserves to service their institutional debt which would drive their equity
capital below operational levels.
In fact, it’s this imminent specter of Japan Inc.’s ultimate liquidation
that likely more than any other factor drives the administration’s Mideast
policies. The hope is that dropping oil prices can both jumpstart a renewed
American boom cycle and give the Japanese industrial/consumer base some
breathing room in which to eventually enact imperative reforms. In theory,
American consumers would once again propel their buying power to an
altogether unprecedented level which coupled with the American worker’s
unmatched productivity would fuel a resurgence in the European & Japanese
export sectors. This would encourage a renewed round of investment in
developing Latin American, Eastern European, and Asian economies which would
consequently set the stage for the next expansion in global consumer demand.
Toward these broad ends, the U.S. establishment views (and rightly so) a
combination of stable Persian Gulf oil production & orderly shipping lanes
as critical – which in turn according to the neocon geostrategic framework
requires American hegemonic direction of the region. To go way back and
finally clarify my comments regarding the significance of the dollar/euro
international transaction & reserve standard toward this present conflict,
it is not directly *because* of Iraq’s switch (to the euros in November
2000) but rather to *prevent* any future moves toward a general OPEC
transition. It is toward this foremost end, among other less compelling
factors, that the U.S. desires to finally seize control of OPEC’s
decision-making process – and Saddam Hussein currently stands directly in
the path of that juggernaut. The reasons should become clearer in a moment,
but first, back to Japan.
Japan’s import dependence on oil is extreme – far and away when compared to
other developed nations – with its frail economy acutely susceptible to even
minor fluctuations in the oil supply. There’s good reason to believe that
$45 a barrel oil (such as that seen during the *buildup* to Gulf War I)
would convulse its economy back over the precipice, a sustained period of
such price hikes or anything approaching the $80 to $100 a barrel some have
speculated would plunge the Japanese economy into death throes. The
immediate effect would include a run on the banks and the yen, which would
make the Argentine debacle of this past spring resemble a sunny day at the
beach. A Japanese meltdown would spark a predictable chain reaction that
should prove nothing short of Armageddon for the post-war capitalist
economic order.
The immediate effect on the global economy would be seen with an
instantaneous devaluation of the Chinese yuan followed by comparable
markdowns of the won, the baht, and other Far East currencies which would
reverberate onward to the Indian rupee, the South African rand, the
Brazilian real, and then permeate throughout the developing world.
Meanwhile, the Japanese maelstrom would soon begin sucking in America’s
financial institutions, with Japan forced to withdraw its funds invested
here to cover the domestic fiscal collapse. Japan remains the largest
foreign investor in U.S. Treasuries, and this enormous capital flight –
easily exceeding $500 billion – would naturally collapse the U.S. bond
markets and crash U.S. stock exchanges (well, equities would already be
crashing hard by this point).
Eventually, this would render the huge current account deficit unsustainable
and also lead to a government default on the Federal debt, however, as ugly
a portrait as we have already, much of the economic devastation is still
fairly containable to this point – now, add to this equation: the Russians.
The Russian people are without parallel the greatest holders of hard dollars
outside the Americans themselves – estimated at upward of $300 billion. As
Japanese capital streamed out of the U.S., you’d have a situation with the
dollar spiking mightily against the yen (because domestic hyperinflation in
Japan should far outstrip the devaluing impact of liquidating U.S. assets –
which if nothing else would bring Japan’s deflationary spiral to a
spectacular close...) while the dollar should be sinking against the euro.
This would place immediate exchange cost pressures on European investors to
withdraw funds from the United States, but again, this could perhaps get
contained.
However, with most of their life savings held in dollars stuffed inside
mattresses, the Russians would storm the currency exchanges at the snap of
two fingers the moment they saw the numbers scrolling wildly on the local
obmen valyutyi... In brief, the United States and the European Union have a
number of mechanisms by which they can strive to keep the dollar/euro
exchange rate stable enough to contain much of the economic fallout to the
Pacific Rim, however they can’t control the Russian man on the street. The
risk of a general Russian bolt to the exchanges is quite genuine, leading
the Kremlin for example to coordinate a public confidence campaign this past
summer when fears grew of such a development. A Russian dollar panic could
alone easily drive the dollar down 10 cents or more against the euro, which
in turn would have European investors facing an exchange rate sinkhole of
losses in their U.S. assets.
In very short order – especially combined with all the turmoil already
described above – the exchange costs would drive the Europeans to abruptly
repatriate funds back to Europe, further driving up the euro against the
dollar. It’s at this critical juncture that both OPEC and Russia would come
under intense pressure to switch their international oil transaction
currency standard from the dollar to the euro or face severe losses in their
own finances. Such a development would strike a dagger in the heart of the
American economic order – already reeling with the aftermath of the Japanese
dissolution. Citigroup and J.P. Morgan should have by now burst apart at the
seams, taking out a few other flagship corporations and the finance industry
as a whole right along with them. Several economic sectors, such as
telecommunications, would near certainly have to get nationalized, at least
for the intermediate term. General price/wage controls & rationing would
probably follow as well; after a run on the banks which would make 1932 look
like a picnic...
Hard as it might be to believe in the midst of all this economic, political,
(and probably societal) chaos, the U.S. economy of its own accord still
would possess most of the necessary elements to pull itself back out of the
gutter – particularly in light of the dollar as international reserve
currency. That's America's ace in the hole. The problem here, though, is
that in such a close-to-worst-case sequence as outlined above, the dollar’s
leverage to preserve its standing as a reserve currency would require that
it remain the international transaction currency which by extension requires
that it remain the OPEC standard. As various nations, including Europe and
China which for very different reasons would relatively best weather the
crisis (even with their own major dislocations) moved to reorganize their
economic houses, the use of the dollar in reserves (even if on an inferior
basis to the euro) would offer one key pivot on which to rebuild the
American economy as well. Otherwise, should the dollar get comprehensively
flushed out of every nation’s reserves, the U.S. could become an economic
backwater for a generation or more, easily eclipsed by an ascendant Europe &
China.
This is the potential scenario which awaits whenever (if ever) Japan finally
plunges into the crucible, dragging the rest of the globe right along in its
wake. Granted, there are some alternatives which may stanch the bleeding
well short of this outline, or even some that could plumb darker depths
(Chinese civil warfare & the European Union spinning apart) magnifying the
impact even further. So this is just my latest shot across the bow of idle
speculation regarding Jeb Bush’s 2008 campaign, by example.
WATSON’s question #1 - "Let's assume that you are right, and the U.S. dollar
is significantly weakened. So what? Why is that going to lead to another
great depression?"
Reality Bytes:
Hmmm.. I'm not completely certain what you're asking; in the scenario I've
described above, you would have far more taking place than just a weakening
dollar (in itself a mixed bag). The loss of wealth from collapsing bond,
equity, and real estate values would probably stand somewhere between $25
trillion to $45 trillion once that cycle had run its course. We wouldn't be
talking about a 4000 Dow but something closer to a 400 Dow (actually, the
New York Stock Exchange would probably have to get shut down for some
while). I've outlined a fairly disastrous scenario in which the weakness of
the dollar is just one of several key components.
The greater relevance to the scenario above is that contemporary American
economic dominance is based almost entirely on two factors: (1) the dollar's
leverage as international reserve & transaction currency standard; (2) the
U.S. financial markets acting as global 'safe haven' which permits the
servicing of a massive current account deficit. Toward the end of this
scenario, I've removed both these overarching factors upon which America
vaulted to global economic hegemony since the Second World War ended. It's
not so much a problem of natural resources, worker productivity, education
levels, infrastructure development, or technological advancement (most of
the typical guideposts of a nation's economic potential); it's a problem (at
least in the sense discussed here) that the United States dominated economic
order is premised on and structured about those two prime factors above.
In short, the United States economy would have to get restructured in some
fashion to account for the absence of those two pivotal advantages.
Incidentally, this would follow a necessary government default on the
national debt in accordance to the scenario I've outlined above, with its
associated dislocations as well. You would have other major dislocations
follow in addition: much of the current military superstructure would become
financially unsustainable, you'd probably have some "brain drain" from the
U.S. to at least Europe, the financial reserves of several economic sectors
would fall below operating levels - they'd have to get nationalized for a
time. I'm not saying that the United States would not reemerge from such a
debacle, but that it would take a generation or two which would include a
significant depressionary cycle (worse than the 1930s in this scenario).
I suspect a good comparison would be either the post-Versailles Weimar
Republic before the rise of Hitler or perhaps the post-Cold War remnants of
the Soviet Union, without the additional burden of transition from a command
economy toward a market economy. As I stated in my original scenario, I've
constructed close to a worse case scenario (it's not worst-case, because
I've preserved China & Europe with sufficient economic stability to fuel a
more rapid global recovery; and Japan would also rise again alongside the
United States). In brief, I've compressed much of what's happened to Japan
over the course of this past decade's 'soft landing' into a very 'hard
landing' transposed to the unique circumstances of America.
As for where the geopolitical order should stand forty years following such
a sequence of events as that outlined, you'd probably have the European
Union in relative equivalence to the present United States, China roughly
equivalent to the Soviet Union of the 1960s, Japan returned to its 1990s
status sans malaise, and with the United States taking the place of
contemporary Europe in the global ordering. Of course, that's a rather
superficial & limited projection, but it'll suffice I think for the purpose
at hand. One of the dirty little secrets of today's international order is
that the rest of the globe could topple the United States from its hegemonic
status whenever they so choose with a concerted abandonment of the dollar
standard. This is America's preeminent, inescapable Achilles Heel for now
and the foreseeable future.
That such a course hasn't been pursued to date bears more relation to the
fact that other Westernized, highly developed nations haven't any interest
to undergo the great disruptions which would follow - but it could assuredly
take place in the event that the consensus view coalesces of the United
States as any sort of 'rogue' nation. In other words, if the dangers of
American global hegemony are ever perceived as a greater liability than the
dangers of toppling the international order (or, alternately, if an 'every
man for himself' crisis as discussed above spirals out of control and forces
their hand). The Bush administration and the neocon movement has set out on
a multiple-front course to ensure that this *cannot* take place, in brief by
a graduated assertion of military hegemony atop the existent economic
hegemony.
The paradox I've illustrated with this one narrow scenario is that the
quixotic course itself may very well bring about the feared outcome that it
means to preempt. We shall see!
WATSON’s question #2:
1) Realistically, how much could the dollar be driven down against (to stick
to a currency rate I follow almost daily) the euro? In other words, what are
you saying the dollar could reach compared to the euro? 75 cents? 50 cents?
25 cents? 5 cents? What's the conversion rate dollar to euro?
Reality Bytes’s response…
1) The dollar could easily get driven down to the 80-85 euro cent range,
indeed a number of currency analysts expects this to happen sometime over
the course of the next few years. In more severe scenarios involving such
things as a protracted U.S. recession with a comparably milder European
pullback, then I'd say the dollar could fall as low as the 55-65 euro cent
range - however, this would have long since placed intense pressure on its
reserve currency status. If the dollar standard were abruptly abandoned,
then without exchange controls the dollar would probably hyperinflate for a
time versus the euro and this comparison would be fairly meaningless
2) Hmm.. The initial benefit of a gradual, limited depreciation rests with
the competitive trade advantage for American exporters and the manufacturing
base. The foreign operations of U.S. multinational corporations also become
more profitable because their repatriated earnings gain in worth. The first
problem of a weakening dollar is that U.S. equities become steadily more
unattractive to foreign investors; conversely, European securities become
more appealing for non-European investors, including Americans. Furthermore,
with a weakening dollar you confront the danger of sparking broad price
inflation, particularly in the case of a disorderly depreciation.
The primary reasons why the United States must maintain a highly appreciated
dollar are twofold, and revisit the issues I broached above. (1) Steady
foreign investments in dollar-denominated equities and securities are
necessary in order to service the current account deficit; (2) an
exchange-rate advantage over the long run is necessary in order to justify
the dollar's reserve currency status. Over these past twenty years, the
Federal Reserve has engaged in a dramatic expansion of the money supply in
order to maintain the dollar's value (among other reasons), which steadily
increases the risks of hyperinflation in the event of a disorderly
correction; moreover, this drastically overvalues equities thus increasing
the risk of sudden market crashes.
East Asian competitors - particularly Japan - require a strong dollar in
order to maintain their own more heavily export-based economic structuring.
A broadly weakening dollar steadily moves Japan closer to general insolvency
and the devaluation crisis scenario which I've described above. The more the
dollar falls, the harder it becomes for Japan to enact the necessary
structural reforms, and the longer that Japan cannot enact these reforms,
the more unavoidable its ultimate collapse. As I tried to vividly explain
above, Japan is obviously the weakest link in the current global economic
order; there's rather little reason to believe this structure can stand in
the event that one of its three pillars suddenly crumbles away.
WATSON’s question #3:
2) If the dollar gets low, why is that bad? I don't what this to get
confused, but after you answer my last post, take a look at this. You say:
<<The Russian people are without parallel the greatest holders of hard
dollars outside the Americans themselves – estimated at upward of $300
billion.>>
and
<<easily exceeding $500 billion – would naturally collapse the U.S. bond
markets and crash U.S. stock exchanges (well, equities would already be
crashing hard by this point).>>
These are actually pretty small numbers compared to a $10 trillion annual
GDP and our national net worth. I don't see how either of those things leads
to a Dow of 400. Or a depression that would last a generation.
Reality Bytes:
Well, lemme address your initial questions in reverse order:
1) Japan: The annual GDP of the United States slightly exceeds $10 trillion
dollars, but the American GDP of the average fortnight wherein this Japanese
withdrawal would take place is roughly $385 billion. Moreover, an abrupt
Japanese rotation out of U.S. Treasuries would not halt at $500 billion in
such a meltdown scenario, but rather extend both in the sense of continuing
withdrawals as well as sharply reduced (i.e. nonexistent) reinvestment.
Finally, what you'd have is a global financial crisis panic which would
hardly stop at simply Japanese withdrawals, but accelerate into a
generalized washout of U.S. equities & securities.
2) Russia: First of all, under normal circumstances, a random Russian dollar
panic could (a) get mitigated by a coordinated central bank currency market
intervention; (b) get absorbed by the global economy within a few months
time. Aside from the fact that the Federal Reserve & European Central Bank
would hardly be in a position to intervene in this scenario (much less the
suddenly insolvent Bank of Japan), the key matter at hand involves exchange
rate pressures. A sudden spike of tens of billions of dollars exchanged for
euros would ignite a disorderly, generalized currency market depreciation of
the dollar which should well exceed the 10% or so impact of just the
Russians alone. The Kremlin could of course attempt to intervene by shutting
down the exchanges, although they would risk large-scale rioting & potential
mutiny of the armed forces (their savings are mostly in dollars too..)
<<I don't see how either of those things leads to a Dow of 400.>>
It's a combination of many things which essentially add up to a global
financial panic. I suppose I could go down the list of the 30 Dow components
to project how each of them would likely fare through our little doomsday
scenario, but it seems that J.P. Morgan and Citigroup in liquidation with
several other Dow companies (e.g. AT&T, Intel) insolvent should suffice.
Let's just say it'd be a good time to invest in some R.J. Reynolds stock....
<<Or a depression that would last a generation.>>
Japan's slow-motion collapse has already lasted half a generation, and the
United States could very well follow a quite similar course. The comparisons
between the U.S. of 2002 and the Japan of 1991 have been tossed about here
before, and there's plenty of business journal commentary in that respect.
The dissolution of $25-45 trillion worth of bond, stock, and real estate
value may sound extraordinary, but perhaps it seems more realistic (as it
should) once mentioning that Japan's economy has lost about $18 trillion in
value during the past 12 years. A depressionary cycle would certainly follow
in the wake of such a development, probably much deeper & more extended than
Japan's in the case of disorderly overcorrection such as that hypothesized
above. Japan has had the benefit of white-hot American consumer spending and
a spectacular U.S. bull market run to soften its landing thus far; the
United States would probably find no equivalent crutch.
Let's just hope we don't have to find out..."
**Again, I would like to reiterate that this brillant essay was not written
by me, but another individual whose knowledge about macroeconomics is
profound - Reality Bytes (and he is one hell of a writer to boot!)**
 |  | |
| Closed Thread
Results 1 to 5 of 5
Thread: Euros VS. Dollar
| ||
.
Now we expect footnotes and a bibliography. And for extra points for taking up fencing.net space...throw in a historiography. 