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The Real Reasons for the Upcoming War With Iraq: A Macroeconomic and Geostrategic Analysis of the Unspoken Truth by William Clark Original Essay January 2003 William Clark's The Real Reasons for the Upcoming War With Iraq: A Macroeconomic and Geostrategic Analysis of the Unspoken Truth, written in January 2003, quoted me on dollar hegemony as follows: The following excerpts from an Asia Times article discusses the virtues of our petrodollar hegemony (or vices from the perspective of developing nations, whose debt is denominated in dollars). "Ever since 1971, when US president Richard Nixon took the dollar off the gold standard (at $35 per ounce) that had been agreed to at the Bretton Woods Conference at the end of World War II, the dollar has been a global monetary instrument that the United States, and only the United States, can produce by fiat. The dollar, now a fiat currency, is at a 16-year trade-weighted high despite record US current-account deficits and the status of the US as the leading debtor nation. The US national debt as of April 4 was $6.021 trillion against a gross domestic product (GDP) of $9 trillion. "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. ". . . 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." [19 <http://www.ratical.org/ratville/CAH/RRiraqWar.html#fn19>] 19 Liu, Henry C K, "US dollar hegemony has got to go <http://www.atimes.com/global-econ/DD11Dj01.html>," Asia Times, April 11, 2002 My view on dollar hegemony is more fundamental than oil being denominated in dollars. Oil is only one of the major commodities; and all commodities are denominated in dollars, from metals to agricultural produce. The importance of oil, though not minor, is often over emphasized in global economics and finance. The world consumes about 30 billion barrels of oil annually. At $60 per barrel, the oil bill comes to $1.8 trillion per year. World GDP is about $56 trillion in 2004. World oil consumption constitutes about 3.3% of world GDP. The GDP of France alone is $2 trillion. The dollar repo market alone trades over $5 trillion daily. During the first quarter of 2005, the notional amount of derivatives in insured commercial bank portfolios increased by $3.2 trillion to $91.1 trillion. The notional amount of interest-rate contracts increased (by $2.5 trillion) to $78 trillion. The notional value of foreign-exchange contracts decreased (by $94 billion) to $8.5 trillion. This figure excludes spot foreign-exchange contracts, which increased (by $319 billion) to $738 billion. Credit derivatives increased (by $777 billion) to $3.1 trillion. Equity, commodity and other contracts increased (by $87 billion) to $1.5 trillion. Total debt in the US economy now runs to $40 trillion as of March 2005, of which $31 trillion is private-sector debt, 66% ($21 trillion) of which has been added since 1990 under Greenspan's watch. That is 20% of 2004 GDP and more than a decade of world oil consumption cost at current prices. This figure is consistent with the fact that it now takes 25% more money in the money supply to support a given GDP than 25 years ago. The euro in its current form can never replace the dollar. With the exception of some minor African states, there is no precedent in history where a monetary union preceded a political union. Already in Italy cries to restore the lira are increasingly vocal. But the main reason is that there is not enough euro in circulation to replace the dollar and the ECB is not about to print more euro than its inflation-aversed ideology would permit. As of July 28, 2005, dollar M3 was $9.7 trillion against a $11 trillion GDP. But the amount of euro-dollar is huge, and with derivative contracts the amount of notional value in dollars is several hundred trillions. No one knows for sure how much. Dollar hegemony is more than oil. The prospect of the dollar going up or down against other major currencies poses no threat dollar hegemony. The threat can only come from changes in the terms of trade. It is to the advantage of exporting economies to be paid in their own currencies and it is to the advantage of importing economies to pay in their own currencies. The US can pay for its imports and deficits in dollars because of dollar hegemony. OPEC countries cannot demand payment in their own currencies because there is no OPEC currency and the component currencies are all tied to the dollar and not gold. There is talk about a gold dinar but, like the euro, there is not enough gold to replace the dollar unless gold goes to $30K per ounce. All the talk of a dollar crashing is only Chicken Little indication of lack of clear thinking. The dollar has in fact fallen more than 30% from its peak against some currencies, but US asset prices have risen dramatically while the current account deficit keeps rising. A rising dollar is no longer in the US national interest, because it will bring on domestic deflation. As for Iraq, the US went into Iraq with a host of policy delusions, and protection US control of Iraqi oil is one of the delusions. The fact is that oil is not good to Saddam unless it is sold (and whether for dollar or ouro makes no difference) and the talk about taking euro for oil is just chest-pounding street propaganda. The US, through dollar hegemony, already controls the world's oil financially; there is no need to invade any country merely to control its oil. Under the current international finance architecture, the euro is nothing more than a derivative currency of the dollar, like the yen. Diversification from dollar holding by foreign central banks is a value enhancement tactic, not a fundamental challenge to dollar hegemony. Henry C.K. Liu Sharefin wrote: > > > >http://www.opednews.com/articles/opedne_mike_whi_051229_doomsday_for_the_gre.htm > > > >You are subscribed to the SafeHaven Longwaves Forum > >To Unsubscribe, send a blank email to with the word Unsubscribe in the subject line. > > > > > > > >
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