Saturday, January 21, 2006

I hope this guy is wrong

Abstract: The proposed Iranian Oil Bourse will accelerate the fall of theAmerican Empire.I. Economics of EmpiresA nation-state taxes its own citizens, while an empire taxes othernation-states. The history of empires, from Greek and Roman, to Ottoman andBritish, teaches that the economic foundation of every single empire is thetaxation of other nations. The imperial ability to tax has always rested on abetter and stronger economy, and as a consequence, a better and strongermilitary. One part of the subject taxes went to improve the living standards ofthe empire; the other part went to strengthen the military dominance necessaryto enforce the collection of those taxes.Historically, taxing the subject state has been in various forms - usually goldand silver, where those were considered money, but also slaves, soldiers, crops,cattle, or other agricultural and natural resources, whatever economic goods theempire demanded and the subject-state could deliver. Historically, imperialtaxation has always been direct: the subject state handed over the economicgoods directly to the empire.For the first time in history, in the twentieth century, America was able to taxthe world indirectly, through inflation. It did not enforce the direct paymentof taxes like all of its predecessor empires did, but distributed instead itsown fiat currency, the U.S. Dollar, to other nations in exchange for goods withthe intended consequence of inflating and devaluing those dollars and payingback later each dollar with less economic goods - the difference capturing theU.S. imperial tax. Here is how this happened.Early in the 20th century, the U.S. economy began to dominate the world economy.The U.S. dollar was tied to gold, so that the value of the dollar neitherincreased, nor decreased, but remained the same amount of gold. The GreatDepression, with its preceding inflation from 1921 to 1929 and its subsequentballooning government deficits, had substantially increased the amount ofcurrency in circulation, and thus rendered the backing of U.S. dollars by goldimpossible. This led Roosevelt to decouple the dollar from gold in 1932. Up tothis point, the U.S. may have well dominated the world economy, but from aneconomic point of view, it was not an empire. The fixed value of the dollar didnot allow the Americans to extract economic benefits from other countries bysupplying them with dollars convertible to gold.Economically, the American Empire was born with Bretton Woods in 1945. The U.S.dollar was not fully convertible to gold, but was made convertible to gold onlyto foreign governments. This established the dollar as the reserve currency ofthe world. It was possible, because during WWII, the United States had suppliedits allies with provisions, demanding gold as payment, thus accumulatingsignificant portion of the world's gold. An Empire would not have been possibleif, following the Bretton Woods arrangement, the dollar supply was kept limitedand within the availability of gold, so as to fully exchange back dollars forgold. However, the guns-and-butter policy of the 1960's was an imperial one: thedollar supply was relentlessly increased to finance Vietnam and LBJ's GreatSociety. Most of those dollars were handed over to foreigners in exchange foreconomic goods, without the prospect of buying them back at the same value. Theincrease in dollar holdings of foreigners via persistent U.S. trade deficits wastantamount to a tax - the classical inflation tax that a country imposes on itsown citizens, this time around an inflation tax that U.S. imposed on rest of theworld.When in 1970-1971 foreigners demanded payment for their dollars in gold, TheU.S. Government defaulted on its payment on August 15, 1971. While the popularspin told the story of "severing the link between the dollar and gold", inreality the denial to pay back in gold was an act of bankruptcy by the U.S.Government. Essentially, the U.S. declared itself an Empire. It had extracted anenormous amount of economic goods from the rest of the world, with no intentionor ability to return those goods, and the world was powerless to respond - theworld was taxed and it could not do anything about it.From that point on, to sustain the American Empire and to continue to tax therest of the world, the United States had to force the world to continue toaccept ever-depreciating dollars in exchange for economic goods and to have theworld hold more and more of those depreciating dollars. It had to give the worldan economic reason to hold them, and that reason was oil.In 1971, as it became clearer and clearer that the U.S Government would not beable to buy back its dollars in gold, it made in 1972-73 an iron-cladarrangement with Saudi Arabia to support the power of the House of Saud inexchange for accepting only U.S. dollars for its oil. The rest of OPEC was tofollow suit and also accept only dollars. Because the world had to buy oil fromthe Arab oil countries, it had the reason to hold dollars as payment for oil.Because the world needed ever increasing quantities of oil at ever increasingoil prices, the world's demand for dollars could only increase. Even thoughdollars could no longer be exchanged for gold, they were now exchangeable foroil.The economic essence of this arrangement was that the dollar was now backed byoil. As long as that was the case, the world had to accumulate increasingamounts of dollars, because they needed those dollars to buy oil. As long as thedollar was the only acceptable payment for oil, its dominance in the world wasassured, and the American Empire could continue to tax the rest of the world.If, for any reason, the dollar lost its oil backing, the American Empire wouldcease to exist. Thus, Imperial survival dictated that oil be sold only fordollars. It also dictated that oil reserves were spread around various sovereignstates that weren't strong enough, politically or militarily, to demand paymentfor oil in something else. If someone demanded a different payment, he had to beconvinced, either by political pressure or military means, to change his mind.The man that actually did demand Euro for his oil was Saddam Hussein in 2000. Atfirst, his demand was met with ridicule, later with neglect, but as it becameclearer that he meant business, political pressure was exerted to change hismind. When other countries, like Iran, wanted payment in other currencies, mostnotably Euro and Yen, the danger to the dollar was clear and present, and apunitive action was in order. Bush's Shock-and-Awe in Iraq was not aboutSaddam's nuclear capabilities, about defending human rights, about spreadingdemocracy, or even about seizing oil fields; it was about defending the dollar,ergo the American Empire. It was about setting an example that anyone whodemanded payment in currencies other than U.S. Dollars would be likewisepunished.Many have criticized Bush for staging the war in Iraq in order to seize Iraqioil fields. However, those critics can't explain why Bush would want to seizethose fields - he could simply print dollars for nothing and use them to get allthe oil in the world that he needs. He must have had some other reason to invadeIraq.History teaches that an empire should go to war for one of two reasons: (1) todefend itself or (2) benefit from war; if not, as Paul Kennedy illustrates inhis magisterial The Rise and Fall of the Great Powers, a military overstretchwill drain its economic resources and precipitate its collapse. Economicallyspeaking, in order for an empire to initiate and conduct a war, its benefitsmust outweigh its military and social costs. Benefits from Iraqi oil fields arehardly worth the long-term, multi-year military cost. Instead, Bush must havewent into Iraq to defend his Empire. Indeed, this is the case: two months afterthe United States invaded Iraq, the Oil for Food Program was terminated, theIraqi Euro accounts were switched back to dollars, and oil was sold once againonly for U.S. dollars. No longer could the world buy oil from Iraq with Euro.Global dollar supremacy was once again restored. Bush descended victoriouslyfrom a fighter jet and declared the mission accomplished - he had successfullydefended the U.S. dollar, and thus the American Empire.II. Iranian Oil BourseThe Iranian government has finally developed the ultimate "nuclear" weapon thatcan swiftly destroy the financial system underpinning the American Empire. Thatweapon is the Iranian Oil Bourse slated to open in March 2006. It will be basedon a euro-oil-trading mechanism that naturally implies payment for oil in Euro.In economic terms, this represents a much greater threat to the hegemony of thedollar than Saddam's, because it will allow anyone willing either to buy or tosell oil for Euro to transact on the exchange, thus circumventing the U.S.dollar altogether. If so, then it is likely that almost everyone will eagerlyadopt this euro oil system:The Europeans will not have to buy and hold dollars in order to secure theirpayment for oil, but would instead pay with their own currencies. The adoptionof the euro for oil transactions will provide the European currency with areserve status that will benefit the European at the expense of the Americans..The Chinese and the Japanese will be especially eager to adopt the new exchange,because it will allow them to drastically lower their enormous dollar reservesand diversify with Euros, thus protecting themselves against the depreciation ofthe dollar. One portion of their dollars they will still want to hold onto; asecond portion of their dollar holdings they may decide to dump outright; athird portion of their dollars they will decide to use up for future paymentswithout replenishing those dollar holdings, but building up instead their euroreserves..The Russians have inherent economic interest in adopting the Euro - the bulk oftheir trade is with European countries, with oil-exporting countries, withChina, and with Japan. Adoption of the Euro will immediately take care of thefirst two blocs, and will over time facilitate trade with China and Japan. Also,the Russians seemingly detest holding depreciating dollars, for they haverecently found a new religion with gold. Russians have also revived theirnationalism, and if embracing the Euro will stab the Americans, they will gladlydo it and smugly watch the Americans bleed..The Arab oil-exporting countries will eagerly adopt the Euro as a means ofdiversifying against rising mountains of depreciating dollars. Just like theRussians, their trade is mostly with European countries, and therefore willprefer the European currency both for its stability and for avoiding currencyrisk, not to mention their jihad against the Infidel Enemy. Only the Britishwill find themselves between a rock and a hard place. They have had a strategicpartnership with the U.S. forever, but have also had their natural pull fromEurope. So far, they have had many reasons to stick with the winner. However,when they see their century-old partner falling, will they firmly stand behindhim or will they deliver the coup de grace? Still, we should not forget thatcurrently the two leading oil exchanges are the New York's NYMEX and theLondon's International Petroleum Exchange (IPE), even though both of them areeffectively owned by the Americans. It seems more likely that the British willhave to go down with the sinking ship, for otherwise they will be shootingthemselves in the foot by hurting their own London IPE interests. It is herenoteworthy that for all the rhetoric about the reasons for the surviving BritishPound, the British most likely did not adopt the Euro namely because theAmericans must have pressured them not to: otherwise the London IPE would havehad to switch to Euros, thus mortally wounding the dollar and their strategicpartner.At any rate, no matter what the British decide, should the Iranian Oil Bourseaccelerate, the interests that matter-those of Europeans, Chinese, Japanese,Russians, and Arabs-will eagerly adopt the Euro, thus sealing the fate of thedollar. Americans cannot allow this to happen, and if necessary, will use a vastarray of strategies to halt or hobble the operation's exchange:Sabotaging the Exchange - this could be a computer virus, network,communications, or server attack, various server security breaches, or a9-11-type attack on main and backup facilities..Coup d'├ętat - this is by far the best long-term strategy available to theAmericans..Negotiating Acceptable Terms & Limitations - this is another excellent solutionto the Americans. Of course, a government coup is clearly the preferredstrategy, for it will ensure that the exchange does not operate at all and doesnot threaten American interests. However, if an attempted sabotage or coupd'etat fails, then negotiation is clearly the second-best available option..Joint U.N. War Resolution - this will be, no doubt, hard to secure given theinterests of all other member-states of the Security Council. Feverish rhetoricabout Iranians developing nuclear weapons undoubtedly serves to prepare thiscourse of action..Unilateral Nuclear Strike - this is a terrible strategic choice for all thereasons associated with the next strategy, the Unilateral Total War. TheAmericans will likely use Israel to do their dirty nuclear job..Unilateral Total War - this is obviously the worst strategic choice. First, theU.S. military resources have been already depleted with two wars. Secondly, theAmericans will further alienate other powerful nations. Third, majordollar-holding countries may decide to quietly retaliate by dumping their ownmountains of dollars, thus preventing the U.S. from further financing itsmilitant ambitions. Finally, Iran has strategic alliances with other powerfulnations that may trigger their involvement in war; Iran reputedly has suchalliance with China, India, and Russia, known as the Shanghai Cooperative Group,a.k.a. Shanghai Coop and a separate pact with Syria. Whatever the strategicchoice, from a purely economic point of view, should the Iranian Oil Bourse gainmomentum, it will be eagerly embraced by major economic powers and willprecipitate the demise of the dollar. The collapsing dollar will dramaticallyaccelerate U.S. inflation and will pressure upward U.S. long-term interestrates. At this point, the Fed will find itself between Scylla and Charybdis -between deflation and hyperinflation - it will be forced fast either to take its"classical medicine" by deflating, whereby it raises interest rates, thusinducing a major economic depression, a collapse in real estate, and animplosion in bond, stock, and derivative markets, with a total financialcollapse, or alternatively, to take the Weimar way out by inflating, whereby itpegs the long-bond yield, raises the Helicopters and drowns the financial systemin liquidity, bailing out numerous LTCMs and hyperinflating the economy.The Austrian theory of money, credit, and business cycles teaches us that thereis no in-between Scylla and Charybdis. Sooner or later, the monetary system mustswing one way or the other, forcing the Fed to make its choice. No doubt,Commander-in-Chief Ben Bernanke, a renowned scholar of the Great Depression andan adept Black Hawk pilot, will choose inflation. Helicopter Ben, oblivious toRothbard's America's Great Depression, has nonetheless mastered the lessons ofthe Great Depression and the annihilating power of deflations. The Maestro hastaught him the panacea of every single financial problem-to inflate, come hellor high water. He has even taught the Japanese his own ingenious unconventionalways to battle the deflationary liquidity trap. Like his mentor, he has dreamedof battling a Kondratieff Winter. To avoid deflation, he will resort to theprinting presses; he will recall all helicopters from the 800 overseas U.S.military bases; and, if necessary, he will monetize everything in sight. Hisultimate accomplishment will be the hyperinflationary destruction of theAmerican currency and from its ashes will rise the next reserve currency of theworld-that barbarous relic called gold.-- Krassimir Petrov Petrov has received his Ph. D. in economics from the Ohio StateUniversity and currently teaches Macroeconomics, International Finance, andEconometrics at the American University in Bulgaria. He is looking for a career in Dubai or the U.A.E.


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