6:   America’s Foes Prepare for Monetary Jihad

Janet Bush – from The New Statesman, Monday, October 4, 2004

“T he US dollar has long been the  currency of the oil industry.  But members of OPEC are contemplating ditching greenbacks. The  results could be catastrophic for the  American economy, reports Janet  Bush. However darkly terrifying  America’s Iraqi horror story, a small  voice of comfort has broken through  US night sweats. You are still the most  powerful and richest nation on earth.  You will get through this, it murmurs.  But that reassuring whisper comes  from a small devil on America’s  shoulder, speaking mischief that will  land the listener in deep trouble.

“A great many people – if not in the  White House – have grasped the  reality that America’s huge, all-conquering economy is genuinely vulnerable for the first time since the 1930s,  and that its fragility coincides with a  period of expanding and expensive  military exposure around the world.  US best-seller lists are stuffed with  books agonizing about whether the  American empire is finally coming to a  close; uncanny parallels are drawn  between the military and financial  overstretch of imperial Rome and  imperial Washington. George W  Bush’s pre-emptive doctrine in foreign  policy is enormously costly; on top of  billions of dollars’ worth of tax cuts,  largely for the rich, it is prohibitive. It  is predicted that the federal budget  deficit will reach $2.4 trillion over the  next ten years. To finance that deficit,  the US needs to persuade investors –  more often than not from overseas –  to lend it up to $4B net every day.

“Even without America’s apparently  infinite capacity for foreign military  adventurism (how much would  tackling Iran or North Korea cost?),  its fiscal outlook seems dire. Two  experts on the US budget position,  Niall Ferguson and Laurence Kotlikoff, estimate that the country faces a  $45 trillion gap between the money it  has and the money it needs to finance  existing social security, Medicare and  pensions commitments ahead.

“It is not just the federal government  that is in trouble. When adjusted for  inflation, the wage for the average  American male working full-time has  fallen over the past 30 years; and,  because of that, five times as many  mothers – even those with young  children – must now work to make a  decent living wage. Not since the  Depression have Americans saved so  little and, at the same time as running  down their rainy-day money, been so  neck-deep in debt. By 2003, total debt  had soared to $37 trillion; that’s  $128,560 for every man, woman and  child in the country. Some of that debt  has been racked up on mass retail  therapy (Americans love to say ‘when  the going gets tough, the tough go  shopping’), but a lot of it has been the  inevitable result of the Average  American Joe struggling to make ends  meet.”######The Deeper the Deficit, the  More Reckless the Administration.

“The richest nation on earth is living  way beyond its means, and yet the  Bush administration blithely continues  to spend. It takes no steps to rein in  the deficit – sometimes, indeed, it  seems that the deeper the deficit, the  more reckless the administration  becomes. No other nation on earth  can behave this way – in every other  case, governments know that if their  deficits run out of control, they will be  ‘punished’ by the market. Investors  will lose confidence, interest rates will  have to be raised to attract capital,  financing the deficit will become more  expensive, and a vicious spiral will be  in place. Why, then, can the US run a  deficit of more than 5 per cent of its  gross domestic product and still  manage to attract $4Bn a day at  interest rates of only 1.75 per cent?

“The US has been running a bubble  economy for decades; the recent  dotcom boom and bust was a minor  episode in a history of deficit-financing  since the 1960s. Then, as now, the US  borrowed with impunity; whereas  other countries have always had to  choose between guns and butter –  foreign policy expansionism or  domestic prosperity – the United  States has spent profligately on both.  President Kennedy spent freely on  New Deal social programs and the  Vietnam war; George W. Bush has  emptied the coffers on tax cuts and  Afghanistan and Iraq.

“There has never been a shortage of  people willing to lend to the US; after  all, as the richest nation on earth, it  has to be good for the money, doesn’t  it? Even when investors have become  nervous about its profligacy, there has  been plenty of credit because the US  economy is a crucial market for the  world’s producers. In living memory,  the United States has been the sole  engine powering the world economy;  there has been no alternative to  continually injecting it with fuel.

“But the US has a stick to add to the  carrot since the end of the Second  World War, it has had the unique  privilege of ‘owning’ the world’s  reserve currency – the notes and coins  used for trade and investment more  than any other currency for 60 years.  This confers unimaginable advantages.  America is able to ignore the discipline  of having to balance its books be- cause, if it runs out of money and  can’t find anyone to bail it out, it can  simply print dollars, inflating away the  value of its debt and destroying the  value of the assets held by its creditors. In other words, it can threaten  financial blackmail.”

“In the 1970s, European and Asian  governments started complaining  about lending America the money to  finance the Vietnam war; the US  simply responded by engineering a  catastrophic fall in the dollar, which  erased its deficit over time but also  crucified the economies of its trading  partners in the process. Now, with the  deficit soaring again to finance foreign  wars, the US is repeating the trick. It  has encouraged the dollar to fall;  exporters to the US such as China and  Japan have had no choice but to try to  arrest that decline to protect their  trade. How? By buying dollars, which  they invest in US treasury bonds, thus  financing the deficit. How very neat.  But the United States cannot count in  perpetuity on winning this game of  financial chicken, based on the  pre-eminence of the dollar. Its angriest  political enemies have worked out the  game and have been mulling over their  counter-moves. Al-Qaeda has already  targeted the soaring symbols of US  economic power, from the twin  towers to the New York Stock  Exchange; now Muslim fundamentalists are trying to topple the dollar. A  plan being pushed in particular by  Mahathir Mohamed, former prime  minister of Malaysia, for a new  gold-backed Islamic currency – the  dinar – is a rallying point. ‘Stealth  Bomb to Dollar Islamic gold dinar!’  one website proclaims, describing the  currency as ‘the second prong to  planned Muslim terrorist attacks on  the United States, intended to annihilate US economic power in a world of  rising gold prices and a persistently  declining dollar.’ The dinar, it says, is  the tool of ‘monetary jihad.’

“Rejection of the dollar is increasingly  being used as an act of political  aggression, and nowhere more acutely  than in oil-producing countries. The  trailblazer was none other than  Saddam Hussein who, in 2000,  announced that Iraq would henceforth  make all its oil trades in euros, a  decision that conspiracy theorists –  and not a few eminent Middle Eastern  experts – say triggered the US invasion. The United States derives  substantial benefits from the dollar  being the established currency of the  oil industry. Because most countries  import oil, they must maintain reserves in dollars to pay for it –  two-thirds of the world’s currency  reserves are kept in dollars. This is a  major factor upholding the dollar’s  position as the world’s reserve currency; a switch out of dollars in the oil  industry would be a major assault on  the currency’s pre-eminence.

“In April 2003, Indonesia’s state oil  company, Pertamina, said it was  considering using the euro for its oil  and gas trades. Even more significantly, in October last year President  Vladimir Putin hinted that Russia, the  world’s second-largest oil exporter,  might switch to euros. A Russian  move would be enough to tip the  balance for other major oil producers.  As Arab disapproval of the US war in  Iraq has mounted, so a consensus for  switching out of dollars has been  building; OPEC has openly discussed  the option and even Saudi Arabia,  once America’s staunchest Middle  Eastern ally, is reported to be considering rejecting the dollar. For now, the  euro is the most viable alternative; in  future, it could be the Islamic dinar or,  far more likely, a new Asian currency.  Western storytellers would relate the  tale of the emperor, his new clothes  and the little boy who saw his naked- ness; perhaps Arab fablers might talk  about desert mirages. America’s  economic dominance was once real; it  is now a receding reality, a confidence  trick. Washington might ponder that  before scattering its dollars and  daisy-cutters next time around.”

Janet Bush

[ER] Editorial Comment

The situation is indeed grave, not only  for the US, but for the rest of the  world. So, grave, indeed, that before  panicking over all that gold that we  have been led to believe that society as  such owes, we must realize that what  it owes is credit essentially owed to  itself. And to meet that challenge the  first step is to introduce some serious  accountancy to replace the hysteria  that bankers and conventional politicians whip up to hide the facts. The  first step in that direction is to make a  clear distinction, as all accountants in  the private sector do, between  spending on current items like floor- wax or fuel, and long-term investments, like buildings, or in the case of  governments, roads, buildings,  schools, jails, hospitals that will last for  years. The latter should not be treated  as a current debt, but depreciated over  their useful lives. Few governments, if  any, do that. Until they do, all the  hand-wringing about the debt that we  are handing down to our children and  grand children is honest ignorance, or  a cunning decoy. Your next step for  your mental detoxification on such  matters is to turn to “The Dead Rat  Under the Floor Boards” on page one  of this issue.1

Another point of importance: the  article mentions the US attracting  foreign money at 1.75%. That is a  common error. The then 1.75%  benchmark “fund rate” was strictly for  overnight loans between American  banks under the Federal Reserve to  help them meet their cheque clear- ances. Though longer term rates – as  for example credit card rates at 18%  and higher – were affected by that  benchmark rate in their movements up  or down, they were at nowhere near  1.75%. To pretend they were is to  misread the whole record of debt  slavery.

The Editor

1. In its February 1994 issue, for  example (reproduced in Meltdown on  page 123) you can read: “Our banks  are well on the way to becoming  government pensioners. According to  Bank of Canada figures, the amount  of bonds issued or guaranteed by the  federal government and held by the  BoC have dropped by 37% between  1987 and the same month in 1993  (when the reserves had finally been  phased out). But over the same period  similar securities in the portfolios of  the chartered banks had risen by  768%.

“The fly in this balm is that when the  economy starts recovering and prices  point up, the BoC will raise interest  rates ‘to lick inflation.’ That will  collapse the value of the banks’ fully  leveraged bond holdings and their  capital will go up the chimney. We  have tried alerting the government and  the media to this. To no avail.

“Now The Wall Street Journal (‘The Fed  Can’t Control Interest Rates’ by  Martin Mayer of the Brookings  Institute) offers a similar warning.”

– from Economic Reform, December 2004

[SustEc] Editorial comment

Worldwide application of the ‘Plain  Money’ proposal of Joseph Huber and  James Robertson, and adoption of a  neutral international currency, in  addition to use of accrual accountancy,  would go far toward resolving these  problems, and many more!