Neo-Conned! Again

by D Liam O'Huallachain

  The free floating of the dollar, combined with the 400% rise in OPEC oil prices in 1973 after the Yom Kippur War, created the basis for a second phase of the “American Century,” the petro-dollar phase.

  Recycling Petro-dollars

  In the mid-1970s, the “American Century” system of global economic dominance underwent a dramatic change. An Anglo-American oil shock suddenly created enormous demand for the floating dollar. Oil importing countries from Germany to Argentina to Japan were all faced with how to export in dollars to pay their expensive new oil import bills. OPEC oil countries were flooded with new oil dollars. A major share of these oil dollars came to London and New York banks, where a new process was instituted. Henry Kissinger termed it “recycling petro-dollars.” The recycling strategy was discussed already in May 1971 at the Bilderberg meeting in Saltsjoebaden, Sweden. It was presented by American members of Bilderberg, as detailed in the book Mit der Ölwaffe zur Weltmacht.1

  OPEC suddenly was choking on dollars it could not use. U.S. and U.K. banks took the OPEC dollars and re-lent them as petro-dollar bonds or loans to countries of the third world desperate to borrow dollars to finance oil imports. The buildup of these petro-dollar debts by the late 1970s laid the basis for the third world debt crisis of the 1980s. Hundreds of billions of dollars were recycled between OPEC, the London and New York banks, and back to third world borrowing countries.

  By August 1982 the chain finally broke and Mexico announced it would likely default on repaying petro-dollar loans. The third world debt crisis began when Paul Volcker and the U.S. Federal Reserve had unilaterally hiked U.S. interest rates in late 1979 to try to save the failing dollar. After three years of record high U.S. interest rates, the dollar was “saved,” but the entire developing sector was choking economically under usurious U.S. interest rates on their petro-dollar loans. To enforce debt repayment to the London and New York banks, the banks brought in the IMF to act as the “debt policeman.” Public spending for health, education, and welfare was slashed on IMF orders to ensure the banks got timely debt service on their petro-dollars.

  The petro-dollar hegemony phase was an attempt by the United States establishment to slow down its geopolitical decline as the hegemonic center of the post-war system. The IMF “Washington Consensus” was developed to enforce draconian debt collection on third world countries, force them to repay dollar debts, prevent the economic independence of the nations of the south, and keep the U.S. banks and the dollar afloat. The Trilateral Commission was created by David Rockefeller and others in 1973 in order to take account of the emergence of Japan as an industrial giant, and to try to bring Japan into the system. Japan, as a major industrial nation, was a major importer of oil. Japanese trade surpluses from export of cars and other goods were used to buy oil in dollars. The remaining surplus was invested in U.S. Treasury bonds, to earn interest. The G-7 was founded to keep Japan and Western Europe inside the U.S. dollar system. From time to time into the 1980s, various voices in Japan would call for three currencies – dollar, German mark, and yen – to share the world reserve role. It never happened. The dollar remained dominant.

  From a narrow standpoint, the petro-dollar phase of hegemony seemed to work. Underneath, it was based on an ever-worsening decline in living standards across the world, as IMF policies destroyed national economic growth and broke open markets for globalizing multinationals seeking cheap production outsourcing in the 1980s and especially into the 1990s.

  Yet, even in the petro-dollar phase, American foreign economic policy and military policy were dominated by the voices of traditional liberal consensus. American power depended on negotiating periodic new arrangements in trade or other issues with its allies in Europe, Japan, and East Asia.

  A Petro-euro Rival?

  The end of the cold war and the emergence of a new “single Europe” and the European Monetary Union in the early 1990s began to present an entirely new challenge to the “American Century.” It took some years, more than a decade after the 1991 Gulf War, for this new challenge to emerge full-blown. The present Iraq war is only intelligible as a major battle in the new, third phase of securing American dominance. This phase has already been called “democratic imperialism,” a favorite term of Max Boot and other neoconservatives. As Iraq events suggest, it is not likely to be very democratic, but it is definitely likely to be imperialist.

  Unlike the earlier periods after 1945, in the new era U.S. freedom to grant concessions to other members of the G-7 is gone. Now raw power is the only vehicle to maintain American long-term dominance. The best expression of this argument comes from the neoconservative hawks around Paul Wolfowitz, Richard Perle, William Kristol, and others.

  The point to stress, however, is that the neoconservatives enjoy such influence since September 11 because a majority in the U.S. power establishment finds their views useful to advance a new aggressive U.S. role in the world.

  Rather than work out areas of agreement with European partners, Washington increasingly sees euro-land as the major strategic threat to American hegemony, especially the “old Europe” of Germany and France. Just as Britain in decline after 1870 resorted to increasingly desperate imperial wars in South Africa and elsewhere, so the United States is using its military might to try to advance what it can no longer achieve by economic means. Here the dollar is its Achilles heel.

  With the creation of the euro over the past five years, an entirely new element has been added to the global system, one which defines what we can call a third phase of the “American Century.” This phase, in which the latest Iraq war plays a major role, threatens to bring a new malignant or imperial phase to replace the earlier phases of American hegemony. The neoconser-vatives are open about their imperial agenda, while more traditional U.S. policy voices try to deny it. The economic reality faced by the dollar at the start of the new century defines this new phase in an ominous way.

  There is a qualitative difference emerging between the two initial phases of the “American Century” – those of 1945–1973 and 1973–1999 – and the new phase of continued domination in the wake of the September 11 attacks and the Iraq war. Post-1945 American power before now, was predominately that of a hegemon. While a hegemon is the dominant power in an unequal distribution of power, its power is not generated by coercion alone, but also by consent among its allied powers. This is because the hegemon is compelled to perform certain services to the allies such as military security or regulating world markets for the benefit of the larger group, itself included. An imperial power has neither obligations to allies nor the freedom to meet them; it has only the raw dictates of how to hold on to its declining power – what some call “imperial overstretch.” This is the world which neoconservative hawks around Rumsfeld and Cheney are suggesting America has to dominate with a policy of preemptive war.

  A hidden war between the dollar and the new euro currency for global hegemony is at the heart of this new phase.

  To understand the importance of this unspoken battle for currency hegemony, we first must understand that since the emergence of the United States as the dominant global superpower after 1945, U.S. hegemony has rested on two un-challengeable pillars. First, the overwhelming U.S. military superiority over all other rivals. The United States today spends on defense more than three times the total of all the members of the European Union, some $396 billion versus $118 billion in 2002, and more than the next 15 largest nations combined. Washington plans an added $2.1 trillion on defense over the next several years. No nation or group of nations can come close in defense spending. China is at least 30 years away from becoming a serious military threat. No one is serious about taking on U.S. military might.

  The second pillar of American dominance in the world is the dominant role of the U.S. dollar as reserve currency. Until the advent of the euro in late 1999, there was no potential challenge to this dollar hegemony in world trade. The petro-dollar has been at the heart of dollar hegemony since the 1970s. Dollar hegemony is strategic
to the future of American global pre-dominance, in many respects as important, if not more so, as overwhelming military power.

  Dollar Fiat Money

  The crucial shift took place when Nixon took the dollar off a fixed gold reserve to float against other currencies. This removed the restraints on printing new dollars. The limit was only how many dollars the rest of the world would take. By firm agreement with Saudi Arabia, as the largest OPEC oil producer (the “swing producer”), Washington guaranteed that the world's largest commodity, oil, essential for every nation's economy, the basis of all transport and much of the industrial economy, could only be purchased in world markets in dollars. The deal had been fixed in June 1974 by Secretary of State Henry Kissinger, establishing the U.S.-Saudi Arabian Joint Commission on Economic Cooperation. The U.S. Treasury and the New York Federal Reserve would “allow” the Saudi central bank, SAMA, to buy U.S. Treasury bonds with Saudi petro-dollars. In 1975 OPEC officially agreed to sell its oil only for dollars. A secret U.S. military agreement to arm Saudi Arabia was the quid pro quo.1

  Until October 2000, no OPEC country dared violate the dollar price rule. So long as the dollar was the strongest currency, there was as well little reason to do so. But October was when French and other euro-land members finally convinced Saddam Hussein to defy the United States by demanding, for Iraq's “Oil-for-Food” oil, not dollars, “the enemy currency” as Iraq named it, but euros. On October 31, 2000, the UN Security Council Committee on relations between Iraq and Kuwait, which was charged with monitoring the “Oil-for-Food” Program, approved the request from Iraq earlier that month to denominate its oil sales in euros, beginning on November 6, 2000.2 The euros would be deposited in a special UN account of the leading French bank, BNP Paribas. The U.S. government's Radio Liberty ran a short wire on the news, and the story quickly faded.3

  This little-noted Iraqi move to defy the dollar in favor of the euro was, in itself, insignificant. Yet if it were to spread, especially at a point when the dollar was already weakening, it could create a panic sell-off of dollars by foreign central banks and OPEC oil producers. In the months before the latest Iraq war, hints in this direction were heard from Russia, Iran, Indonesia, and even Venezuela. An Iranian OPEC official, Javad Yarjani, delivered a detailed analysis of how OPEC at some future point might sell its oil to the E.U. for euros, not dollars. He spoke in April 2002 in Oviedo, Spain at the invitation of the E.U. All indications are that the Iraq war was seized on as the easiest way to deliver a deadly preemptive warning to OPEC and others not to flirt with abandoning the petro-dollar system in favor of one based on the euro.

  Informed banking circles in the City of London and elsewhere in Europe privately confirm the significance of the Iraqi move from the petro-dollar to the petro-euro. “The Iraq move was a declaration of war against the dollar,” one senior London banker told me recently. “As soon as it was clear that Britain and the U.S. had taken Iraq, a great sigh of relief was heard in London City banks. They said privately, 'now we don't have to worry about that damn euro threat.'”

  Why would something so small be such a strategic threat to London and New York, or to the United States, that an American President would apparently risk fifty years of global alliance relations, and more, to make a military attack whose justification could not even be proved to the world?

  The answer is the unique role of the petro-dollar in underpinning American economic hegemony.

  How does it work? So long as almost 70% of world trade is done in dollars, the dollar is the currency which central banks accumulate as reserves. But central banks, whether in China or Japan or Brazil or Russia, do not simply stack dollars in their vaults. Currencies have one advantage over gold. A central bank can use it to buy the state bonds of the issuer, the United States. Most countries around the world are forced to control trade deficits or face currency collapse. Not the United States. This is because of the dollar's reserve currency role, and the underpinning of that reserve role is the petro-dollar. Every nation needs to get dollars to import oil, some more than others. This means their trade targets dollar countries, above all the U.S.

  Because oil is an essential commodity for every nation, the petro-dollar system demands the build-up of huge trade surpluses in order to accumulate dollar surpluses. This is the case for every country but one – the United States, which controls the dollar and prints it at will or fiat. Because today the majority of all international trade is done in dollars, countries must go abroad to get the means of payment they cannot themselves issue. The entire global trade structure today works around this dynamic, from Russia to China, from Brazil to South Korea and Japan. Everyone aims to maximize dollar surpluses from their export trade.

  To keep this process going, the United States has agreed to be “importer of last resort,” because its entire monetary hegemony depends on this dollar recycling.

  The central banks of Japan, China, South Korea, Russia, and the rest all buy U.S. Treasury securities with their dollars. This in turn allows the United States to have a stable dollar, far lower interest rates, and run a well over $500 billion annual balance-of-payments (or current account) deficit with the rest of the world.1 The Federal Reserve controls the dollar printing presses, and the world needs its dollars. It is as simple as that.

  The U.S. Foreign-Debt Threat

  But, perhaps it's not so simple. It is a highly unstable system, as U.S. trade deficits and net debt or liabilities to foreign accounts are now well over 22% of GDP as of 2000, and climbing rapidly. The net foreign indebtedness of the United States – public as well as private – is beginning to explode ominously. In the past three years since the U.S. stock collapse and the re-emergence of budget deficits in Washington, the net debt position, according to a recent study by the Pestel Institute in Hanover, has almost doubled. In 1999, the peak of the dot.com bubble fury, U.S. net debt to foreigners was some $1.4 trillion. By the end of this year, it will exceed an estimated $3.7 trillion!2 Before 1989, the United States had been a net creditor, gaining more from its foreign investments than it paid to them in interest on Treasury bonds or other U.S. assets. Since the end of the cold war, the United States has become a net foreign debtor nation to the tune of $3.7 trillion! This is not what Hilmar Kopper would call “peanuts.”

  It does not require much foresight to see the strategic threat of these deficits to the role of the United States. With an annual current account (mainly trade) deficit of $500 or $600 billion, some 5°% of GDP, the United States must import or attract at least $1.4 billion3 every day to avoid a dollar collapse and keep its interest rates low enough to support the debt-burdened corporate economy. That net debt is getting worse at a dramatic pace. Were France, Germany, Russia, and a number of OPEC oil countries now to shift even a small portion of their dollar reserves into euros to buy bonds from Germany, France, or the like, the United States would face a strategic crisis beyond any other of the post-war period. It would seem reasonable and accurate to conclude that one of the most hidden strategic reasons for the decision to go for “regime change” in Iraq was to preempt this financial and economic threat to the dollar and to the United States. It is as simple and as cold as that. The future of America's sole superpower status depended on preempting the threat emerging from Eurasia and euro-land especially. Iraq was and is a chess piece in a far larger strategic game, one for the highest stakes.

  The Euro Threatens American Hegemony

  When the euro was launched at the end of the last decade, leading E.U. government figures, bankers from Deutsche Bank's Norbert Walter, and French President, Jacques Chirac, went to major holders of dollar reserves – China, Japan, Russia – and tried to convince them to shift out of dollars and into euros, at least a part of their reserves. However, that proposed move clashed with the need to devalue the too-high euro so that German exports could stabilize euro-land growth. The euro therefore fell until 2002.

  With the debacle of the bursting U.S. dot.com bubble, the Enron and World.com finance sca
ndals, and the recession in the U.S., the dollar began to lose its attraction for foreign investors. The euro gained steadily until the end of 2002. Then, as France and Germany prepared their secret diplomatic strategy in the UN Security Council to block war, rumors surfaced that the central banks of Russia and China had quietly begun to dump dollars and buy euros. The result was a dollar free-fall on the eve of war. The stage was set should Washington lose the Iraq war, or should it turn into a long, bloody debacle.

  But Washington, leading New York banks, and the higher echelons of the U.S. establishment clearly knew what was at stake. Iraq was not about ordinary chemical or even nuclear weapons of mass destruction. The “weapon of mass destruction” was the threat that others would follow Iraq and shift to euros out of dollars, creating a mass destruction of the United States' hegemonic economic role in the world. As one economist termed it, an end to the dollar reserve role would be a “catastrophe” for the United States. Interest rates of the Federal Reserve would have to be pushed higher than in 1979 when Paul Volcker raised rates above 17% to try to stop the collapse of the dollar then. Few realize that the 1979 dollar crisis was also a direct result of moves by Germany and France under Schmidt and Giscard to defend Europe, along with the selling of U.S. Treasury bonds by Saudi Arabia and others to protest Carter administration policy. It is also worth recalling that after the Volcker dollar rescue, the Reagan administration, backed by many of today's neoconservative hawks, began huge U.S. military defense spending in order to challenge the Soviet Union.