Nuking the Dollar Getting a Grip by Michael I. Niman

Hyperinflation is a nasty thing. I was in Nicaragua in the 1980s when that country experienced an inflation rate of 14,000 percent. Prices would regularly triple overnight, wiping out a family’s savings within a week. A trip to a grocery store would involve hauling a shopping bag of currency—money that the government printed on a daily basis, often adding new zeros every week. Coins disappeared, since, with one US penny buying, in theory, a wheelbarrow full of Nicaraguan nickels, scrappers quickly melted down the nation’s change. Lower denomination notes would end up in piles next to toilets, since they cost less then a sheet of bathroom tissue.

The problem in Nicaragua was that there was nothing to back up the money. A US economic embargo, coupled with the expenses associated with defending the country against the US-sponsored Contra war, bankrupted Nicaragua. They had no gold reserves and few commodities to sell on the international market. Their money was backed up by air and hence was worthless on the global currency exchange.

The Bank of Joe and Mike

So-called “hard currencies” are backed up by something tangible. Back when Nicaragua experienced hyperinflation, I used to joke with my friend Joe that we could introduce our own currency in Nicaragua. Issued by the “Banco de Joe and Mike,” the bills would sport a picture of our two decade-old cars. The cars had a tangible value and would back up the paper currency. By accepting the bills as legal tender, people, in essence, would be buying shares in two old Volkswagens. Had we done this, and limited the number of bills to an amount equaling the value of our cars, we would have theoretically introduced a more stable currency, albeit in limited numbers, to Nicaragua.

This is the idea behind a gold standard—pegging the value of paper currency to gold or silver and making the currency technically redeemable for gold or silver. The US abandoned the gold standard during Richard Nixon’s presidency, replacing faith in gold with faith in the almighty American economy. While this sounds arrogant, it worked. The dollar was more than numbers printed on paper. It was America, and America was invincible.

The dollar remains the dominant currency and the standard measure for international transactions. American paper currency circulates around the world, replacing the gold standard with the dollar standard, as folks in the Third World hoard US greenbacks as a hedge against the collapse of their own paper currencies. Even America’s ideological enemies adopted the dollar standard. Castro’s Cuba, for example, all but abandoned its own worthless pesos in the 1990s, switching over to US dollars for internal and external transactions. This global demand places American dollars into circulation in wallets on every continent, artificially inflating their value.

The dollar isn’t backed by gold, or even by my old car, but by the sheer belief in the supremacy of the US economy. In essence, it’s backed by fiscal smoke and mirrors—with an emphasis on the smoke.

MTV dollars

In the post-Vietnam War era, with the world drinking Coca Cola, tuning in to MTV and lining up for Big Macs, we were flying high. During the 34 years prior to Nixon’s trashing of the gold standard, the number of dollars in circulation had only doubled. In the 34-year period following Nixon’s move, by contrast, the number of dollars in circulation increased 13-fold. As economies around the world dollarized and grew, the US treasury printed more greenbacks—with nothing to back them up. Since those new bills left the country, theoretically never to return, with nations around the globe using them as a standard to trade with each other, our paper money maintained an artificially high value.

Fast-forward to George W. Bush’s America. Our national debt, financed mostly by foreign governments and banks, is at eight and a half trillion dollars—that’s spelled with 12 zeros. Our foreign trade imbalance sits at $800 billion per year. This means we buy $800 billion dollars’ worth more of stuff every year than we sell on the international market, paying for it all with worthless dollars which then circulate between other countries—with China holding the biggest pot of them.

In short, our high-rolling, debt-based, hedonistic, consumerist economy is financed by the good graces of the rest of the world, which we arrogantly tell to go to hell on an almost daily basis these days.

Our petro-euro doomsday

Here’s the doomsday scenario. What happens if nations around the world decided to follow the path of many large American investors and corporations and cash their dollar reserves in for foreign assets and currencies? What if they started hoarding euros under their beds instead of dollars? What if they pegged their “soft” currencies against the euro or the yen or the pound, instead of against US dollars? The answer is simple: All those soiled old bills that were in circulation for decades around the world would start coming home, with their value collapsing as foreigners flood the global currency market with dollars.

The collapsing dollar would plunge us deeper into debt as the cost of imports would increase exponentially. In order to protect the dollar, we’d need to consume less at home and export more. The problem with this plan is that our lust for cheap, imported, sweatshop goods has led us, over the last 20 years, to destroy almost all of our manufacturing capabilities—tearing our factories down and selling the metal for scrap.

We started buying Chinese goods because they were cheap. In the future, when they’re not so cheap, we’ll buy them because we won’t have the capacity to make anything ourselves.

Saddam had at least one WMD

There are, however, a few mechanisms around the world that prevent a total run on the dollar. Foremost among them is a 1970s decision by the oil cartel, OPEC, to price the world’s oil exchanges in dollars. Hence, in order to buy oil, nations need dollars. China, for example, hoards dollars so that they can buy OPEC oil. This keeps the demand for dollars artificially high. If oil markets convert to a harder currency, such as the euro, the reign of the dollar, and along with it the solvency of the US economy, would be over.

This was Saddam Hussein’s plan. After a decade of devastating sanctions and regular American bombing raids against his country, Saddam developed his real weapon of mass destruction—breaking with OPEC and introducing euro-based oil trading. We don’t know if this would have caught on, since the US invaded that nation before Iraq could make the petro-euro a reality.

Now it’s Iran’s turn. Starting in 2004, the Iranians began making noise about no longer floating the currency of a government that labeled them part of an “Axis of Evil.” Later this year, the Iranians plan not only to convert their oil sales to euros, which makes sense since European countries are the largest consumers of Middle East oil, but to introduce a euro-based market for international oil sales, breaking the dollar’s stranglehold on oil trading.

Let’s empathize for a moment so we can understand their motivation. Why should the Iranians prop up our soft dollar when all we do is talk about withdrawing from the human race and dropping nuclear bombs on them?

The Cluster Bomb Dollar

Now let’s look at the Bush junta’s rationale for unleashing the forces of hell on the Iranian population through an aerial bombing campaign, using the most sophisticated weapons of mass destruction ever made, including nuclear bombs. Our excuse for nuking Iran is that they might be making a nuclear bomb. Yet our own intelligence agencies argue that Iran does not possess the technology to build one and that they are at least a decade away from being able to make one. In short, there is no immediate nuclear threat from Iran that mandates our turning that country into a radioactive wasteland and reinforcing our position as a rogue state and a global pariah.

But there is an immediate economic threat—the real WMD—of a euro-based oil market. Bombing Iran would put a stop to that and serve as a warning to Venezuela, Bolivia or any other energy-exporting nation contemplating converting their energy markets to the euro.

In short, the US dollar isn’t backed up by gold or silver anymore. It’s backed up by cluster bombs, cruise missiles, landmines, depleted uranium and nuclear bombs. What a dollar.

Dr. Michael I. Niman’s previous Artvoice columns are archived at www.mediastudy.com. Niman is a Buffalo State College journalism professor and vice president of Niagara Independent Media (AM 1270).

BUSH'S DEEP REASONS FOR WAR ON IRAQ: OIL, PETRODOLLARS, AND THE OPEC EURO QUESTION

BUSH'S DEEP REASONS FOR WAR ON IRAQ: OIL, PETRODOLLARS, AND THE OPEC EURO QUESTION (Updated 5/27/03)

As the United States made preparations for war with Iraq, White House Press Secretary Ari Fleischer, on 2/6/03, again denied to US journalists that the projected war had "anything to do with oil." <1> He echoed Defense Minister Donald Rumsfeld, who on 11/14/02 told CBS News that "It has nothing to do with oil, literally nothing to do with oil."

Speaking to British MPs, Prime Minister Tony Blair was just as explicit: "Let me deal with the conspiracy theory idea that this is somehow to do with oil. There is no way whatever if oil were the issue that it would not be infinitely simpler to cut a deal with Saddam...." (London Times 1/15/03).

Nor did Bush's State of the Union Message, or Colin Powell's address to the United Nations Security Council, once mention the word "oil." Instead the talk was (in the president's words) of "Iraq's illegal weapons programs, its attempts to hide those weapons from inspectors, and its links to terrorist groups."

However our leaders are not being candid with us. Oil has been a major US concern about Iraq in internal and unpublicized documents, since the start of this Administration, and indeed earlier. As Michael Renner has written in Foreign Policy in Focus, February 14, 2003, "Washington's War on Iraq is the Lynchpin to Controlling Persian Gulf Oil."

But the need to dominate oil from Iraq is also deeply intertwined with the defense of the dollar. Its current strength is supported by OPEC's requirement (secured by a secret agreement between the US and Saudi Arabia) that all OPEC oil sales be denominated in dollars. This requirement is currently threatened by the desire of some OPEC countries to allow OPEC oil sales to be paid in euros.

The Internally Stated US Goal of Securing the Flow of Oil from the Middle East

As early as April 1997, a report from the James A. Baker Institute of Public Policy at Rice University addressed the problem of "energy security" for the United States, and noted that the US was increasingly threatened by oil shortages in the face of the inability of oil supplies to keep up with world demand. In particular the report addressed "The Threat of Iraq and Iran" to the free flow of oil out of the Middle East. It concluded that Saddam Hussein was still a threat to Middle Eastern security and still had the military capability to exercise force beyond Iraq's borders.

The Bush Administration returned to this theme as soon as it took office in 2001, by following the lead of a second report from the same Institute. <2> This Task Force Report was co-sponsored by the Council on Foreign Relations in New York, another group historically concerned about US access to overseas oil resources. The Report represented a consensus of thinking among energy experts of both political parties, and was signed by Democrats as well as Republicans. <3>

The report, Strategic Energy Policy Challenges for the 21st Century, concluded: "The United States remains a prisoner of its energy dilemma. Iraq remains a de-stabilizing influence to ... the flow of oil to international markets from the Middle East. Saddam Hussein has also demonstrated a willingness to threaten to use the oil weapon and to use his own export program to manipulate oil markets. Therefore the US should conduct an immediate policy review toward Iraq including military, energy, economic and political/ diplomatic assessments."

The Task Force meetings were attended by members of the new Bush Administration's Department of Energy, and the report was read by members of Vice-President Cheney's own Energy Task Force. When Cheney issued his own national energy plan, it too declared that "The [Persian] Gulf will be a primary focus of U.S. international energy policy." It agreed with the Baker report that the U.S. is increasingly dependent on imported oil and that it may be necessary to overcome foreign resistance in order to gain access to new supplies.

Later the point was made more bluntly by Anthony H. Cordesman, senior analyst at Washington's Center for Strategic and International Studies: "Regardless of whether we say so publicly, we will go to war, because Saddam sits at the center of a region with more than 60 percent of all the world's oil reserves."

The Unstated US Goals of Increasing the Flow of Oil from the Middle East, and US Dominance of the Area

Behind the acknowledged concern about the "free flow" of Persian Gulf oil are other motives. Following the recommendations of the Task Force Report, the Bush administration wishes to increase international (which may well turn out to mean US) investment in the under-developed Iraq oilfields. On 1/16/03 the Wall Street Journal reported that officials from the White House, State Department, and Department of Defense have been meeting informally with executives from Halliburton, Schlumberger, ExxonMobil, ChevronTexaco and ConocoPhillips to plan the post-war expansion of oil production from Iraq (whose oilfields were largely held by US companies prior to their nationalization). The Journal story has since been denied by Administration officials; but, as the Guardian noted on 1/27/03, "It stretches credulity somewhat to imagine that the subject has never been broached." <4>

It is worth pointing out that Saddam Hussein already has offered exploratory concessions (which remained inactive because of the UN sanctions) to France, China, Russia, Brazil, Italy, and Malaysia. If Saddam is replaced by a new client regime, it seems likely that these concessions will be superseded, although there are reports that the US has offered France, Russia and China a share of post-war Iraqi oil, as an inducement to get their support in the Security Council. <5> Last September former CIA Chief Woolsey threatened in the Washington Post (9/15/02) that the price for participation by France and Russia in the post-war Iraq oil bonanza should be their support for "regime change." <6> It would not take much of such menacing talk from official sources to turn the Bush campaign against Iraq into a campaign against Europe (see Postscript).

Iraq's proven oil reserves are 113 billion barrels, the second largest in the world after Saudi Arabia, and eleven percent of the world's total. The total reserves could be 200 million barrels or more, all of it relatively easy and cheap to extract. Thus increasing Iraqi oil production will diminish the market pressure on oil-importing countries like the US. It will also weaken the power of OPEC to influence oil markets by decisions to restrict output. Indeed, were Iraqi oil production to expand to near its capacity, the quotas established by OPEC would cease to be honored in today's market. <7>

But the US is not just interested in oil from Iraq, it is concerned to maintain political dominance over all the oil-producing countries of the region. Secretary of State Colin Powell gave a glimpse of US intentions when he told the Senate Foreign Relations Committee on February 6 that success in the Iraq war "could fundamentally reshape that region in a powerful, positive way that will enhance U.S. interests." In conceding that it will be necessary to station US troops in occupied Iraq for the foreseeable future, the US is serving notice to Iran and to Saudi Arabia (both of which were once secure bases for US troops but are so no longer) that the US will reassert its presence as the dominant military power in the region.

The Unstated US Goal of Preserving Dollar Hegemony Over the Global Oil Market

Dominance of Middle Eastern oil will mean in effect maintaining dollar hegemony over the world oil economy. Given its present strategies, the US is constrained to demand no less. As I explain in this extract from my book, Drugs, Oil, and War (pp. 41-42, 53-54), the present value of the US dollar, unjustified on purely economic grounds, is maintained by political arrangements, one of the chief of which is to ensure that all OPEC oil purchases will continue to be denominated in US dollars. (This commitment of OPEC to dollar oil sales was secured in the 1970s by a secret agreement between the US and Saudi Arabia, before the two countries began to drift apart over Israel and other issues.) <8>

The chief reason why dollars are more than pieces of green paper is that countries all over the world need them for purchases, principally of oil. This requires them in addition to maintain dollar reserves to protect their own currency; and these reserves, when invested, help maintain the current high levels of the US securities markets.

As Henry Liu has written vividly in the online Asian Times (4/11/02),

"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."

But central bankers around the world do not expect either the US dollar or the US stock markets to sustain their current levels. As William Greider in The Nation (9/23/02) has pointed out:

"US economy's net foreign indebtedness--the accumulation of two decades of running larger and larger trade deficits--will reach nearly 25 percent of US GDP this year, or roughly $2.5 trillion. Fifteen years ago, it was zero. Before America's net balance of foreign assets turned negative, in 1988, the United States was a creditor nation itself, investing and lending vast capital to others, always more than it borrowed. Now the trend line looks most alarming. If the deficits persist around the current level of $400 billion a year or grow larger, the total US indebtedness should reach $3.5 trillion in three years or so. Within a decade, it would total 50 percent of GDP."

There is also a major potential threat to the overpriced dollar in Japan's unresolved deflationary crisis. As observers like Lawrence A. Joyce have commented, the dollar would take a major pummeling if the Japanese government (as seems quite possible) were suddenly required to fulfil its legal obligations to bail out failed Japanese banks (which could easily happen if a sustained scarcity of oil were to keep oil prices at $40 a barrel or higher):

"There is only one place where the Japanese government can get enough money to bail out its banking system: The Japanese government owns about 15% of our U.S. Treasury securities. And it would have to start selling them if it found itself facing a major banking crisis.

"That would send the already ailing dollar down even further. And the initiation of a sale of our Treasury securities by Japan, of course, would immediately trigger a worldwide stampede to do the same before the securities become worth only a fraction of what they were purchased for. At the same time, interest rates in the U.S. would immediately go through the roof."

Washington is of course aware of these problems, and believes that overwhelming military strength and the will to use it supply the answer, persuading or forcing other countries to support the dollar at its artificial level as the key to their own security. In an article entitled "Asia: the Military-Market Link," and published by the U.S. Naval Institute in January 2002, Professor Thomas Barnett of the US Naval War College, wrote: "We trade little pieces of paper (our currency, in the form of a trade deficit) for Asia's amazing array of products and services. We are smart enough to know this is a patently unfair deal unless we offer something of great value along with those little pieces of paper. That product is a strong US Pacific Fleet, which squares the transaction nicely."

There is some merit to this argument with respect to friendly countries like Japan, whose defense costs have been lowered by the US presence in Asia. But of course the Islamic countries of the world are less likely to appreciate the "great value" of a threatening US presence. Instead they are more likely to follow the example of Malaysian Prime Minister Mahathir Mohamad, and turn to the Islamic gold dinar as a way to diminish dollar hegemony in world markets and increase the power of Islamic nations to challenge US policies.

The United States has at present little reason to fear a challenge to the dollar from Malaysia. But Malaysia is an Islamic country; and the US has every reason to fear a similar challenge from the Islamic nations in OPEC, were they to force OPEC to cease OPEC oil sales in dollars, and denominate them instead in euros.

The Unstated US Goal of Preserving Dollar Hegemony Against Competition from the Euro

As noted in a recent article by W. Clark, "The Real But Unspoken Reasons for the Iraq War", the OPEC underpinning for the US dollar has shown signs of erosion in recent years. Iraq was one of the first OPEC countries, in 2000, to convert its reserves from dollars to euros. At the time a commentator for Radio Free Europe/Radio Liberty predicted that Saddam's political act "will cost Iraq millions in lost revenue." In fact Iraq has profited handsomely from the 17 percent gain in the value of the euro against the dollar in that time. <9>

Other countries have gradually been climbing on to the euro bandwagon. An article in the Iran Financial News, 8/25/02, revealed that more than half of Iran's Forex Reserve Fund assets had been converted from dollars to euros. In 2002 China began diversifying its currency reserves away from dollars into euros. According to Business Week (2/17/03) Russia's Central Bank in the past year has doubled its euro holdings to 20 percent of its $48 billion foreign exchange reserves. And for a very good reason, according to its First Deputy Chairman Oleg Vyugin: "Returns on dollar instruments are very low now. Other currency instruments pay more."

Business Week continues:

`The story is the same across the globe. Money traders say that institutions as diverse as Bank of Canada, People's Bank of China, and Central Bank of Taiwan are giving more weight to the European currency. By the end of this year, they predict, the euro could account for 20% of global foreign currency reserves, which today amount to a cool $2.4 trillion. Little more than a year ago, the euro made up just 10%. "No one is saying that the euro's going to replace the dollar as the premier reserve currency," says Michael Klawitter, a currency strategist at WestLB Research in London. "But it will increase in importance for many central banks."...

`The shift to the euro has big implications for the foreign exchange markets and the U.S. and European economies. Currency specialists say the yawning U.S. current account deficit, now at 5%, is bound to drive the dollar down further, and the euro still higher, over the next two to four years. Although the greenback may stage a short-term recovery once the looming war with Iraq is over, predictions are that it will then continue its downward trend, and that central banks will play their part in the descent. "Even if central banks increase their euro holdings by just a few percent, it will have a major impact in the markets," says Klawitter. "We're talking many billions of dollars."'

If not deterred, OPEC could follow suit. Libya has been urging for some time that oil be priced in euros rather than dollars. Javad Yarjani, an Iranian senior OPEC official, told a European Union seminar in April 2002 that, despite the problems raised by such a conversion, "I believe that OPEC will not discount entirely the possibility of adopting euro pricing and payments in the future."

Meanwhile Hugo Chavez has been taking Venezuelan oil out of the petrodollar economy by bartering oil directly for commodities from thirteen other third world countries. Although this has not yet qualified Venezuela for official membership in Bush's "axis of evil," the heavy hand of the Bush Administration in the recent coup attempt against Chavez was only too obvious. (See "Venezuela Coup Linked to Bush Team," London Observer, 4/21/02, for details about the roles of US officials Elliot Abrams, Otto Reich, and John Negroponte.) <10>

Conclusion: How Should the US Be Addressing These Real Problems?

To conclude, the Bush administration is not threatening Iraq out of pique or whim. The recent policies of both parties have indeed made the US vulnerable to foreign oil and petrodollar pressures. But hopefully decent Americans will protest the notion that it is appropriate to rain missiles and bombs upon civilians of another country, who have had little or nothing to do with this crisis of America's own making.

Some in addition will continue to explore avenues whereby America's oil and financial vulnerabilities can be diminished without continuing down the road to Armageddon. These problems are serious, but economists have put forward proposals for diminishing them peacefully and multilaterally. With respect to oil, Ralph Nader has just written, "The demand is simple: Stop this war before it starts and immediately establish a sane national energy security strategy." In fact one key ingredient of such a strategy, restriction of demand, can be found in saner parts of the Baker Institute reports that the Bush administration has mostly chosen to ignore.

But an energy strategy for the United States must be addressed in the larger context of an economic and financial restructuring of global institutions and currency flows. With respect to the more esoteric financial problems of the dollar, the economist and futurist Hazel Henderson has written that "My recommendations for reforming current international institutions, revitalizing the UN and expanding civic society are summarized in Beyond Globalization (1999). A more balanced world order must center on reforming global finance, taxing currency exchange and reducing the dollar's unsustainable role as the world's de facto reserve currency (which is destructive for all countries -- even the US itself). I favor a global reserve currency regime based on the parity of the US dollar and the euro. The fundamentals in the USA and the EU suggest that the G-8 has an opportunity to peg the dollar and the euro into a trading band. This, together with the new issue of SDR's [Special Drawing Rights]. proposed by all the IMF country members, promoted by George Soros and opposed only by the USA, would lend to more stable currency markets."

Without endorsing these specific proposals, I wish to second two rather obvious principles:

1) The problems of global financial instability must be addressed. As George Soros, famed as the man who broke the British pound in 1992, wrote later in the Financial Times,” "To argue that financial markets in general, and international lending in particular, need to be regulated is likely to outrage the financial community. Yet the evidence for just that is overwhelming."

2) A multilateral approach to these core problems is the only way to proceed. The US is strong enough to dominate the world militarily. Economically it is in decline, less and less competitive, and increasingly in debt. The Bush peoples' intention appears to be to override economic realities with military ones, as if there were no risk of economic retribution. They should be mindful of Britain's humiliating retreat from Suez in 1956, a retreat forced on it by the United States as a condition for propping up the failing British pound.

America's influence in the world has up to now been based largely on good will generated by its willingness to resolve matters multilaterally. This legacy of good will should be acknowledged and consolidated by the Bush Administration, as it faces the difficult post-war challenge of restoring law and order in Iraq. US military might may be unchallenged, but the health of our economy and finance depends on peace and cooperation with our friends.

FOOTNOTES

<1> Ari Fleischer Press Briefing of February 6, 2003:

Q Since you speak for the President, we have no access to him, can you categorically deny that the United States will take over the oil fields when we win this war? Which is apparently obvious and you're on your way and I don't think you doubt your victory. Oil -- is it about oil?

MR. FLEISCHER: Helen, as I've told you many times, if this had anything to do with oil, the position of the United States would be to lift the sanctions so the oil could flow. This is not about that. This is about saving lives by protecting the American people....

Q There are reports that we've divided up the oil already, divvied it up with the Russians and French and so forth. Isn't that true?....

MR. FLEISCHER: No, there's no truth to that, that we would divide up the oil fields.

(Concerning Mr. Fleischer's second answer, see footnotes 4 and 5 -- PDS.)

For an exhaustive rebuttal of a similar statement by Ari Fleischer on 10/30/02, see Larry Chin, "The Deep Politics of Regime Removal in Iraq", onlinejournal.com.

<2> In an earlier draft of this essay I quoted extensively (as have many other writers) from a news story by Neil Mackay in the Scotland Sunday Herald (10/6/02). This story claimed that Vice-President Cheney himself commissioned the second Task Force Report, and that former US Secretary of State James Baker delivered the Report to Cheney. I now doubt that either claim is true.

<3> One of the Baker Task Force members was Kenneth Lay, the former chief executive of Enron, which went bankrupt after carrying out massive accountancy fraud. The Task Force Report begins with references to "recent energy price spikes" and "electricity outages in California," which we now know were engineered by Enron market manipulations for which two Enron energy traders have since pleaded guilty to conspiracy charges (Forbes, 2/5/03).

<4> An extremely interesting news item last October in Alexander's oilandgas.com revealed that the US was planning not only for the post-war exploitation of Iraq's oil reserves, but for Iraq's relationship to OPEC as well:

"30-10-02 The US State Department has pushed back its planned meeting with Iraqi opposition leaders on exploiting Iraq's oil and gas reserves after a US military offensive removes Saddam Hussein from power to early December. According to a source at the State Department, all the desired participants are not yet available.

"The Bush administration wants to have a working group of 12 to 20 people focused on Iraqi oil and gas to be able to recommend to an interim government ways of restoring the petroleum sector following a military attack in order to increase oil exports to partially pay for a possible US military occupation government -- further fuelling the view that controlling Iraqi oil is at the heart of the Bush campaign to replace Hussein with a more compliant regime. (Emphasis added -- PDS)....

"According to the source, the working group will not only prepare recommendations for the rehabilitation of the Iraqi petroleum sector post-Hussein, but will address questions regarding the country's continued membership in OPEC and whether it should be allowed to produce as much as possible or be limited by an OPEC quota, and it will consider whether to honour contracts made between the Hussein government and foreign oil companies, including the $ 3.5 b[illio]n project to be carried out by Russian interests to redevelop Iraq's oilfields, which, along with numerous other development projects, has been thwarted by United Nations sanctions.

<5> "Oil firms wait as Iraq crisis unfolds" by Robert Collier, San Francisco Chronicle,9/29/02:

`Iraqi opposition leaders suggest that unless France, Russia and China support the U.S. line in the Security Council, their oil companies may find themselves blacklisted.

`"We will examine all the contracts that Saddam Hussein has made, and we will cancel all those that are not in the interest of the Iraqi people and will reopen bidding on them," said Faisal Qaragholi, operations officer of the Iraqi National Congress, the opposition coalition based in London that plays a central role in the American anti-Hussein strategy.

`Ahmed Chalabi, the INC leader, has gone even further, proposing the creation of consortium of American companies to develop Iraq's oil fields.'

<6> As the Asia Times reported on 10/21/02,

`The war of positioning for a possible post-Saddam Iraqi environment is getting more ruthless by the minute. American oil conglomerates are openly courting representatives of the Iraqi National Congress (INC), the umbrella opposition. The darling of Exxon Mobil and Chevron Texaco is Ahmed Chalabi, US vice President Dick Cheney's pal and major contender for the title of Iraq's number one opposition figure. Chalabi, the INC leader, has already stressed on the record that he favors the creation of a "US-led consortium to develop Iraqi oil fields. American companies will have a big shot at Iraqi oil."

`To widespread doubts about how a pro-American post-Saddam government would respect contracts signed with non-American oil giants, the INC has reassured all players - mostly Russian and European - that the new post-Saddam administration will honor all its PSAs.

`The Future of Iraq Group, a State Department task force, officially is not talking about oil - which sounds like a joke. [Cf. footnote 4 -- PDS] And there's also no official confirmation that oil has been a key issue in the current hardcore Security Council negotiations between the US and Britain, on one side, and France, Russia and China on the other. But it is obviously not by historical accident that oil companies from these five permanent Security Council members are all positioning themselves for the post-Saddam environment.

`People like former CIA supremo James Woolsey are not even disguising Washington's plan to turn Iraq into an American protectorate with an Arab Hamid Karzai al-la Afghanistan eager to open the oil taps for American oil giants. Woolsey had been openly saying that if France and Russia contributed to "regime change", their oil companies would be able to "work together" with the new regime and with American companies. Otherwise, they would be left contemplating passing cargoes in the Gulf.'

<7> Note that the true issue here is not just access to Iraq oil, but control over it. As Michael Parenti reminds us, in 1998, when the UN allowed Iraq to increase its exports into an already over-supplied oil market, this was perceived as a threat to US interests:

`The San Francisco Chronicle (22 February 1998) headlined its story "IRAQ'S OIL POSES THREAT TO THE WEST." In fact, Iraqi crude poses no threat to "the West" only to Western oil investors. If Iraq were able to reenter the international oil market, the Chronicle reported, "it would devalue British North Sea oil, undermine American oil production and---much more important---it would destroy the huge profits which the United States [read, US oil companies] stands to gain from its massive investment in Caucasian oil production, especially in Azerbaijan."'

<8> "The US handled the quadrupling of oil prices in the 1970s by arranging, by means of secret agreements with the Saudis, for the recycling of petrodollars back into the US economy. The first of these deals assured a special and on-going Saudi stake in the health of the US dollar; the second secured continuing Saudi support for the pricing of all OPEC oil in dollars. See David E. Spiro, The Hidden Hand of American Hegemony: Petrodollar Recycling and International Markets (Ithaca: Cornell UP, 1999), x, 103-1a, 121). These two deals assured that the US economy would not be impoverished by OPEC oil price hikes. The heaviest burdens would be borne instead by the economies of less developed countries" (Peter Dale Scott, Drugs, Oil, and War: The United States in Afganistan, Colombia, and Indochina, (Lanham, MD: Rowman & Littlefield, 2003), 41-42; cf. 53-54).

<9> The 17 percent gain was calculated as of February 2003, when the euro was worth $1.08. Now, as of May 2003, the euro is worth $1.16.

<10> In August 2000 Chavez met with Saddam Hussein in Baghdad, the first head of state to visit him since the 1991 Gulf War. Chavez told the press later that "We spoke at length on how to boost the role of OPEC." This was part of an extended Chavez tour to bolster OPEC uni

Energy and the US Dollar by Bill Powers

Canadian Energy Viewpoint
March 1, 2004

Despite the recent rally in the US dollar against the Canadian dollar and nearly all major currencies, we are still in the early stages of a monumental decline in the value of the US dollar. The collapse of US dollar hegemony will be felt in nearly every corner of world over the next decade. Perhaps no other industry will be impacted more by the dollar’s decline than the energy industry.

Since the signing of the Maastricht Treaty, which created the Euro zone in 1992, there has been much speculation that the oil exporting world would one day consider pricing oil in euros. The world did not have to wait long after the birth of the euro in 1999 to witness Iraq’s pricing its oil in euros. Australian environmentalist Geoffrey Heard provided some unique insight into fellow OPEC members’ reaction to Iraq’s decision to price its oil for export in euros in a 2003 article entitled “Not Oil, but Dollars vs. Euros”:

“In 1999, Iraq, with the world's second largest oil reserves, switched to trading its oil in euros. American analysts fell about laughing; Iraq had just made a mistake that was going to beggar the nation. But two years on, alarm bells were sounding; the euro was rising against the dollar, Iraq had given itself a huge economic free kick by switching.

Iran started thinking about switching too; Venezuela, the 4th largest oil producer, began looking at it and has been cutting out the dollar by bartering oil with several nations including America's bete noir, Cuba. Russia is seeking to ramp up oil production with Europe (trading in euros) an obvious market.

The greenback's grip on oil trading and consequently on world trade in general, was under serious threat. If America did not stamp on this immediately, this economic brushfire could rapidly be fanned into a wildfire capable of consuming the US's economy and its dominance of world trade.”

After the US invasion of Iraq, the country’s oil exports were priced in US dollars. While Mr. Heard may have overestimated the role of the euro in the war in Iraq, there is no doubt that the falling US dollar has raised concerns over whether it is prudent for oil exporting countries to price a significant portion of their GDP in a depreciating currency.

While many have argued that pricing oil in euros will lead to higher oil prices, not much attention has been given to the possibility of oil being priced in gold. While this might seem like a fringe idea, those who have an appreciation for gold’s place in many Muslim oil exporting countries believe the pricing of oil in gold is inevitable.

The launch in late 2000 of the e-dinar, a Muslim currency that is backed by gold held in a vault in the Dubai International Airport, has allowed many Muslims an alternative to Western currencies. The e-dinar program is an electronic form of the historic Muslim gold dinar. The gold dinar dates back as far as 700 A.D. and was in circulation until 1924 A.D. when the Ottoman Empire collapsed.

One e-dinar is backed by 4.25 grams of 24K gold. E-dinars account holders can have their account balances exchanged into any major currency or take physical possession of an equivalent amount of gold. To learn more about the e-dinar program, visit website www.e-dinar.com. What I found most educational about the site is its extensive history of the dinar in Muslim society. The following was quoted from the website’s “history of the dinar” section:

“Since paper-money is a promise of payment, can it be permitted to trust the issuers while they hold the payment (our property) outside our jurisdiction? History has also demonstrated repeatedly that paper money has been a permanent instrument of default and cheating the Muslims. In addition, Islamic Law does not permit the use of a promise of payment as a medium of exchange.”

The use of e-dinars, while still very small at this time, is likely to grow rapidly as doubts over the US dollar’s value grow. Recently, Malaysia’s former Prime Minister Mahathir Mohamad visited Saudi Arabia and encouraged the country to begin pricing its oil in gold (dinars) since he felt the Saudi’s were being shortchanged due to the slide in the US dollar. (It should be noted that in 2003, Malaysia was the first country to introduce the dinar as a form of settlement for international trade.)

I am rather confident that several Muslim countries will price their oil in gold before the end of this decade. The simple reason behind this change is that the US dollar and the euro are going to steeply depreciate against the value of gold.

The oil market is not the only part of the energy complex that will be affected by the decline of the US dollar. The North American natural gas market is already witnessing the fallout from a devalued

US dollar. In limited instances, the weakening dollar is helping some energy consuming companies. For example, according to third quarter results of Agrium International (NYSE:AGU), North America’s largest producer of natural gas based fertilizers, the price of ammonia and urea are up 54% from Q3 2002 levels. High fertilizer prices, coupled with a weak US dollar, which has made imports more expensive, have allowed fertilizer producers to operate profitably despite historically high natural gas prices.

The falling US dollar will have many unforeseen consequences with regard to the increased US importation of liquefied natural gas (LNG). While a falling US dollar will certainly increase the price which LNG exporters demand for their product, the inevitable falloff in Russian natural gas exports to Europe will further boost prices. With Europe relying on Russia to provide 25% of its natural gas consumption, there is a strong likelihood that Russia's increased domestic demand and aging fields will not be able to meet Europe’s growing natural gas demand. Contrary to the widely held belief that increased reliance on LNG will allow the US to import vast amounts of cheap natural gas from overseas, I believe a combination of a falling US dollar and increased world demand will force the US into importing large amount of expensive natural gas.

It is clear that a falling US dollar contributes to higher energy prices. Astute investors should recognize this fact and adjust their portfolios accordingly.

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Run, Do Not Walk

Every now and then there comes a time when it really pays to take clear and decisive action. I believe we have reached one of those times with respect to the US dollar. The recent short-term strength in the US dollar offers investors another great opportunity to move into assets denominated in other currencies.

President Bush and the US Congress continue to grow the size of the US government and its debt

and budget deficit through various homeland security initiatives, prescription drug plans and visits to the moon and Mars. According to a recent Bloomberg article, the US Treasury plans on borrowing a record $177 billion from January to March in an effort to finance a part of a projected record $521 billion 2004 federal budget deficit.

As paper currencies continue to fall as nearly all nations attempt to devalue their currencies, I believe prudent investors should direct significant portions of their portfolios towards assets denominated in commodity currencies. The Australian, the New Zealand dollar and the Canadian dollar stand out as my three favorites. However, do not just take my word for it that these are going to be the best performing currencies for the remainder of the decade. Several of the most successful investors of our time, such as Sir John Templeton, Warren Buffet, George Soros, Jim Rogers and Fred Hickey, have all indicated that they have increased their exposure to the above mentioned commodity currencies. For investors who are interested in commodity currencies or bonds, I suggest visiting www.everbank.com for more information.

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Makings of an Energy Bull Market

If I were going to write a recipe for a bull market in energy shares or any investment class for that matter, I would start with three ingredients; fear, strong fundamentals and a catalyst. I believe all three are present in today’s energy market.

Fear
Investor fear over falling energy prices is the main ingredient for our energy bull market. Right now, there is tremendous fear that we have more than enough natural gas to get through the winter heating season without drawing US inventories down below the psychologically important one trillion cubic foot (tcf) mark. With the significant withdrawals we have witnessed since the last week of January, there is now substantial evidence that we will break the one tcf mark. With cold weather forecast for the US Midwest in early March, we are now nearly certain to see storage levels in the US approach the 900 billion cubic foot (bcf) mark by the end of this winter’s heating season. This should provide significant support for higher natural gas prices for the balance of 2004.

While I can understand the confusion over the equilibrium price for natural gas, based on the many conflicting data points, I am at a loss to explain the reason behind the fear that crude prices are headed lower. Despite the high prices of recent months, we have seen little to any supply response as inventories for crude and refined products remain at bottom-of-the-barrel levels.

Strong Fundamentals
Any bull market recipe must include a strong fundamental foundation. The fundamentals of the energy market (increasing demand/falling supply) are stronger now than at any time in recent memory. This has lead to a golden situation for the entire exploration and production industry. For example, until two years ago, the balance sheets of many of Canada’s junior E&P companies were highly leveraged. It was not uncommon to see debt to cash flow ratios of three or four to one. This made many investors very cautious about investing in the sector and rightfully so. A few dry holes or weak commodity prices could send a company into reorganization. Through a combination of strong commodity prices, capital discipline and low interest rates, the balance sheets of nearly every Canadian E&P firm are in excellent shape. In addition to great balance sheets, interest rates are likely to stay low and commodity prices are set to rise. This excellent situation has led to outstanding earnings and cash flow in 2003, and 2004 is shaping up to be more of the same.

Catalyst
The final ingredient for a successful energy bull market is a catalyst. On this front, we have several candidates. The most likely scenario that will form the catalyst is the continued tightening of world oil supplies as prices continue to spiral higher. With supplies at very low levels throughout the world and diminishing prospects for large new areas of production, it will soon become clear that world oil supplies will decline irrespective of price. As the calls for OPEC to increase production become deafening, the world will soon wake up to the fact that OPEC is already producing at maximum capacity and there is nothing that can be done to increase production or keep it from falling.

Another possible catalyst that is likely to set the energy bull running is the cessation of exports from Venezuela. In January, Venezuela’s embattled President Hugo Chavez devalued the country’s currency, the Bolivar, by 17% against the US dollar. This action is an unmasked attempt to support his outlandish spending programs aimed at currying votes with Venezuela’s lower income voters. Through the use of price controls, Chavez is able to temporarily hold down the pace of inflation. This has created a thriving black market for many items including US dollars. After watching the economy contract 11% in 2003, many citizens are loosing their patience with Chavez. The results of a signature drive by the opposition to force a presidential recall election are expected shortly.

The granddaddy of all catalysts would be the fall of Saudi Arabia. With growing disenchantment with the royal family and continued suppression of many freedoms, the likelihood of a change in power in Saudi Arabia is inevitable. Dr. Marc Faber has referred to Saudi Arabia as similar to France in the final days of Louis XVI. I could not agree more. One day in the not too distant future, everyone will wake up to CNN’s lead story -- the royal family has fled to London or Switzerland and the price of crude oil is trading over $100US on the NYMEX.

© 2004 Bill Powers, Editor
Canadian Energy Viewpoint

Not Oil, But Dollars vs. Euros

March, 2003

Why is George Bush so hell bent on war with Iraq? Why does his administration reject every positive Iraqi move? It all makes sense when you consider the economic implications for the USA of not going to war with Iraq. The war in Iraq is actually the US and Europe going head to head on economic leadership of the world.

America's Bush administration has been caught in outright lies, gross exaggerations and incredible inaccuracies as it trotted out its litany of paper thin excuses for making war on Iraq. Along with its two supporters, Britain and Australia, it has shifted its ground and reversed its position with a barefaced contempt for its audience. It has manipulated information, deceived by commission and omission and frantically "bought" UN votes with billion dollar bribes.

Faced with the failure of gaining UN Security Council support for invading Iraq, the USA has threatened to invade without authorisation. It would act in breach of the UN's very constitution to allegedly enforced UN resolutions.

It is plain bizarre. Where does this desperation for war come from?

There are many things driving President Bush and his administration to invade Iraq, unseat Saddam Hussein and take over the country. But the biggest one is hidden and very, very simple. It is about the currency used to trade oil and consequently, who will dominate the world economically, in the foreseeable future -- the USA or the European Union.

Iraq is a European Union beachhead in that confrontation. America had a monopoly on the oil trade, with the US dollar being the fiat currency, but Iraq broke ranks in 1999, started to trade oil in the EU's euros, and profited. If America invades Iraq and takes over, it will hurl the EU and its euro back into the sea and make America's position as the dominant economic power in the world all but impregnable.

It is the biggest grab for world power in modern times. America's allies in the invasion, Britain and Australia, are betting America will win and that they will get some trickle-down benefits for jumping on to the US bandwagon. France and Germany are the spearhead of the European force -- Russia would like to go European but possibly can still be bought off. Presumably, China would like to see the Europeans build a share of international trade currency ownership at this point while it continues to grow its international trading presence to the point where it, too, can share the leadership rewards.

DEBATE BUILDING ON THE INTERNET

Oddly, little or nothing is appearing in the general media about this issue, although key people are becoming aware of it -- note the recent slide in the value of the US dollar. Are traders afraid of war? They are more likely to be afraid there will not be war.

But despite the silence in the general media, a major world discussion is developing around this issue, particularly on the internet. Among the many articles: Henry Liu, in the 'Asia Times' last June, it has been a hot topic on the Feasta forum, an Irish-based group exploring sustainable economics, and W. Clark's "The Real Reasons for the Upcoming War with Iraq: A Macroeconomic and Geostrategic Analysis of the Unspoken Truth" has been published by the 'Sierra Times', 'Indymedia.org', and 'ratical.org'.

This debate is not about whether America would suffer from losing the US dollar monopoly on oil trading -- that is a given -- rather it is about exactly how hard the USA would be hit. The smart money seems to be saying the impact would be in the range from severe to catastrophic. The USA could collapse economically.

OIL DOLLARS

The key to it all is the fiat currency for trading oil. Under an OPEC agreement, all oil has been traded in US dollars since 1971 (after the dropping of the gold standard) which makes the US dollar the de facto major international trading currency. If other nations have to hoard dollars to buy oil, then they want to use that hoard for other trading too. This fact gives America a huge trading advantage and helps make it the dominant economy in the world.

As an economic bloc, the European Union is the only challenger to the USA's economic position, and it created the euro to challenge the dollar in international markets. However, the EU is not yet united behind the euro -- there is a lot of jingoistic national politics involved, not least in Britain -- and in any case, so long as nations throughout the world must hoard dollars to buy oil, the euro can make only very limited inroads into the dollar's dominance.

In 1999, Iraq, with the world's second largest oil reserves, switched to trading its oil in euros. American analysts fell about laughing; Iraq had just made a mistake that was going to beggar the nation. But two years on, alarm bells were sounding; the euro was rising against the dollar, Iraq had given itself a huge economic free kick by switching.

Iran started thinking about switching too; Venezuela, the 4th largest oil producer, began looking at it and has been cutting out the dollar by bartering oil with several nations including America's bete noir, Cuba. Russia is seeking to ramp up oil production with Europe (trading in euros) an obvious market.

The greenback's grip on oil trading and consequently on world trade in general, was under serious threat. If America did not stamp on this immediately, this economic brushfire could rapidly be fanned into a wildfire capable of consuming the US's economy and its dominance of world trade.

HOW DOES THE US GET ITS DOLLAR ADVANTAGE?

Imagine this: you are deep in debt but every day you write cheques for millions of dollars you don't have -- another luxury car, a holiday home at the beach, the world trip of a lifetime.

Your cheques should be worthless but they keep buying stuff because those cheques you write never reach the bank! You have an agreement with the owners of one thing everyone wants, call it petrol/gas, that they will accept only your cheques as payment. This means everyone must hoard your cheques so they can buy petrol/gas. Since they have to keep a stock of your cheques, they use them to buy other stuff too. You write a cheque to buy a TV, the TV shop owner swaps your cheque for petrol/gas, that seller buys some vegetables at the fruit shop, the fruiterer passes it on to buy bread, the baker buys some flour with it, and on it goes, round and round -- but never back to the bank.

You have a debt on your books, but so long as your cheque never reaches the bank, you don't have to pay. In effect, you have received your TV free.

This is the position the USA has enjoyed for 30 years -- it has been getting a free world trade ride for all that time. It has been receiving a huge subsidy from everyone else in the world. As it debt has been growing, it has printed more money (written more cheques) to keep trading. No wonder it is an economic powerhouse!

Then one day, one petrol seller says he is going to accept another person's cheques, a couple of others think that might be a good idea. If this spreads, people are going to stop hoarding your cheques and they will come flying home to the bank. Since you don't have enough in the bank to cover all the cheques, very nasty stuff is going to hit the fan!

But you are big, tough and very aggressive. You don't scare the other guy who can write cheques, he's pretty big too, but given a 'legitimate' excuse, you can beat the tripes out of the lone gas seller and scare him and his mates into submission.

And that, in a nutshell, is what the USA is doing right now with Iraq.

AMERICA'S PRECARIOUS ECONOMIC POSITION

America is so eager to attack Iraq now because of the speed with which the euro fire could spread. If Iran, Venezuela and Russia join Iraq and sell large quantities of oil for euros, the euro would have the leverage it needs to become a powerful force in general international trade. Other nations would have to start swapping some of their dollars for euros.

The dollars the USA has printed, the 'cheques' it has written, would start to fly home, stripping away the illusion of value behind them. The USA's real economic condition is about as bad as it could be; it is the most debt-ridden nation on earth, owing about US$12,000 for every single one of it's 280 million men, women and children. It is worse than the position of Indonesia when it imploded economically a few years ago, or more recently, that of Argentina.

Even if OPEC did not switch to euros wholesale (and that would make a very nice non-oil profit for the OPEC countries, including minimising the various contrived debts America has forced on some of them), the US's difficulties would build. Even if only a small part of the oil trade went euro, that would do two things immediately:

* Increase the attractiveness to EU members of joining the 'eurozone', which in turn would make the euro stronger and make it more attractive to oil nations as a trading currency and to other nations as a general trading currency.

* Start the US dollars flying home demanding value when there isn't enough in the bank to cover them.

* The markets would over-react as usual and in no time, the US dollar's value would be spiralling down.

THE US SOLUTION

America's response to the euro threat was predictable. It has come out fighting.

It aims to achieve four primary things by going to war with Iraq:

* Safeguard the American economy by returning Iraq to trading oil in US dollars, so the greenback is once again the exclusive oil currency.

* Send a very clear message to any other oil producers just what will happen to them if they do not stay in the dollar circle. Iran has already received one message -- remember how puzzled you were that in the midst of moderation and secularization, Iran was named as a member of the axis of evil?

* Place the second largest reserves of oil in the world under direct American control.

* Provide a secular, subject state where the US can maintain a huge force (perhaps with nominal elements from allies such as Britain and Australia) to dominate the Middle East and its vital oil. This would enable the US to avoid using what it sees as the unreliable Turkey, the politically impossible Israel and surely the next state in its sights, Saudi Arabia, the birthplace of al Qaeda and a hotbed of anti-American sentiment.

* Severe setback the European Union and its euro, the only trading bloc and currency strong enough to attack the USA's dominance of world trade through the dollar.

* Provide cover for the US to run a covert operation to overturn the democratically elected government of Venezuela and replace it with an America-friendly military supported junta -- and put Venezuala's oil into American hands.

Locking the world back into dollar oil trading would consolidate America's current position and make it all but impregnable as the dominant world power -- economically and militarily. A splintered Europe (the US is working hard to split Europe; Britain was easy, but other Europeans have offered support in terms of UN votes) and its euro would suffer a serious setback and might take decades to recover.

It is the boldest grab for absolute power the world has seen in modern times. America is hardly likely to allow the possible slaughter of a few hundred thousand Iraqis stand between it and world domination. President Bush did promise to protect the American way of life. This is what he meant.

JUSTIFYING WAR

Obviously, the US could not simply invade Iraq, so it began casting around for a 'legitimate' reason to attack. That search has been one of increasing desperation as each rationalization has crumbled. First Iraq was a threat because of alleged links to al Qaeda; then it was proposed Iraq might supply al Qaeda with weapons; then Iraq's military threat to its neighbours was raised; then the need to deliver Iraqis from Saddam Hussein's horrendously inhumane rule; finally there is the question of compliance with UN weapons inspection.

The USA's justifications for invading Iraq are looking less impressive by the day. The US's statements that it would invade Iraq unilaterally without UN support and in defiance of the UN make a total nonsense of any American claim that it is concerned about the world body's strength and standing.

The UN weapons inspectors have come up with minimal infringements of the UN weapons limitations -- the final one being low tech rockets which exceed the range allowed by about 20 percent. But there is no sign of the so-called weapons of mass destruction (WMD) the US has so confidently asserted are to be found. Colin Powell named a certain north Iraqi village as a threat. It was not. He later admitted it was the wrong village.

'Newsweek' (24/2) has reported that while Bush officials have been trumpeting the fact that key Iraqi defector, Lt. Gen. Hussein Kamel, told the US in 1995 that Iraq had manufactured tonnes of nerve gas and anthrax (Colin Powell's 5 February presentation to the UN was just one example) they neglected to mention that Kamel had also told the US that these weapons had been destroyed. Parts of the US and particularly the British secret 'evidence' have been shown to come from a student's masters thesis.

America's expressed concern about the Iraqi people's human rights and the country's lack of democracy are simply not supported by the USA's history of intervention in other states nor by its current actions. Think Guatemala, the Congo, Chile and Nicaragua as examples of a much larger pool of US actions to tear down legitimate, democratically elected governments and replace them with war, disruption, starvation, poverty, corruption, dictatorships, torture, rape and murder for its own economic ends. The most recent, Afghanistan, is not looking good; in fact that reinstalled a murderous group of warlords which America had earlier installed, then deposed, in favour of the now hated Taliban.

Saddam Hussein was just as repressive, corrupt and murderous 15 years ago when he used chemical weapons, supplied by the US, against the Kurds. The current US Secretary for Defence, Donald Rumsfeld, so vehement against Iraq now, was on hand personally to turn aside condemnation of Iraq and blame Iran. At that time, of course, the US thought Saddam Hussein was their man -- they were using him against the perceived threat of Iran's Islamic fundamentalism.

Right now, as 'The Independent' writer, Robert Fisk, has noted, the US's efforts to buy Algeria's UN vote includes promises of re-arming the military which has a decade long history of repression, torture, rape and murder Saddam Hussein himself would envy. It is estimated 200,000 people have died, and countless others been left maimed by the activities of these monsters. What price the US's humanitarian concerns for Iraqis? (Of course, the French are also wooing Algeria, their former north African territory, for all they are worth, but at least they are not pretending to be driven by humanitarian concerns.)

Indonesia is another nation with a vote and influence as the largest Muslim nation in the world. Its repressive, murderous military is regaining strength on the back of the US's so-called anti-terror campaign and is receiving promises of open and covert support -- including intelligence sharing.

AND VENEZUELA

While the world's attention is focused on Iraq, America is both openly and covertly supporting the "coup of the rich" in Venezuela, which grabbed power briefly in April last year before being intimidated by massive public displays of support by the poor for democratically-elected President Chavez Frias. The coup leaders continue to use their control of the private media, much of industry and the ear of the American Government and its oily intimates to cause disruption and disturbance.

Venezuela's state-owned oil resources would make rich pickings for American oil companies and provide the US with an important oil source in its own backyard.

Many writers have noted the contradiction between America's alleged desire to establish democracy in Iraq while at the same time, actively undermining the democratically-elected government in Venezuela. Above the line, America rushed to recognise the coup last April; more recently, President Bush has called for "early elections", ignoring the fact that President Chavez Frias has won three elections and two referendums and, in any case, early elections would be unconstitutional.

One element of the USA's covert action against Venezuela is the behaviour of American transnational businesses, which have locked out employees in support of "national strike" action. Imagine them doing that in the USA! There is no question that a covert operation is in process to overturn the legitimate Venezuelan government. Uruguayan congressman, Jose Nayardi, made it public when he revealed that the Bush administration had asked for Uruguay's support for Venezuelan white collar executives and trade union activists "to break down levels of intransigence within the Chavez Frias administration". The process, he noted, was a shocking reminder of the CIA's 1973 intervention in Chile which saw General Pinochet lead his military coup to take over President Allende's democratically elected government in a bloodbath.

President Chavez Frias is desperately clinging to government, but with the might of the USA aligned with his opponents, how long can he last?

THE COST OF WAR

Some have claimed that an American invasion of Iraq would cost so many billions of dollars that oil returns would never justify such an action. But when the invasion is placed in the context of the protection of the entire US economy for now and into the future, the balance of the argument changes.

Further, there are three other vital factors:

First, America will be asking others to help pay for the war because it is protecting their interests. Japan and Saudi Arabia made serious contributions to the cost of the 1991 Gulf war.

Second -- in reality, war will cost the USA very little -- or at least, very little over and above normal expenditure. This war is already paid for! All the munitions and equipment have been bought and paid for. The USA would have to spend hardly a cent on new hardware to prosecute this war -- the expenditure will come later when munitions and equipment have to be replaced after the war. But munitions, hardware and so on are being replaced all the time -- contracts are out. Some contracts will simply be brought forward and some others will be ramped up a bit, but spread over a few years, the cost will not be great. And what is the real extra cost of an army at war compared with maintaining the standing army around the world, running exercises and so on? It is there, but it is a relatively small sum.

Third -- lots of the extra costs involved in the war are dollars spent outside America, not least in the purchase of fuel. Guess how America will pay for these? By printing dollars it is going to war to protect. The same happens when production begins to replace hardware. components, minerals, etc. are bought in with dollars that go overseas and exploit America's trading advantage.

The cost of war is not nearly as big as it is made out to be. The cost of not going to war would be horrendous for the USA -- unless there were another way of protecting the greenback's world trade dominance.

AMERICA'S TWO ACTIVE ALLIES

Why are Australia and Britain supporting America in its transparent Iraqi war ploy?

Australia, of course, has significant US dollar reserves and trades widely in dollars and extensively with America. A fall in the US dollar would reduce Australia's debt, perhaps, but would do nothing for the Australian dollar's value against other currencies. John Howard, the Prime Minister, has long cherished the dream of a free trade agreement with the USA in the hope that Australia can jump on the back of the free ride America gets in trade through the dollar's position as the major trading medium. That would look much less attractive if the euro took over a significant part of the oil trade.

Britain has yet to adopt the euro. If the US takes over Iraq and blocks the euro's incursion into oil trading, Tony Blair will have given his French and German counterparts a bloody nose, and gained more room to manouevre on the issue -- perhaps years more room. Britain would be in a position to demand a better deal from its EU partners for entering the "eurozone" if the new currency could not make the huge value gains guaranteed by a significant role in world oil trading. It might even be in a position to withdraw from Europe and link with America against continental Europe.

On the other hand, if the US cannot maintain the oil trade dollar monopoly, the euro will rapidly go from strength to strength, and Britain could be left begging to be allowed into the club.

THE OPPOSITION

Some of the reasons for opposition to the American plan are obvious -- America is already the strongest nation on earth and dominates world trade through its dollar. If it had control of the Iraqi oil and a base for its forces in the Middle East, it would not add to, but would multiply its power.

The oil-producing nations, particularly the Arab ones, can see the writing on the wall and are quaking in their boots.

France and Germany are the EU leaders with the vision of a resurgent, united Europe taking its rightful place in the world and using its euro currency as a world trading reserve currency and thus gaining some of the free ride the United States enjoys now. They are the ones who initiated the euro oil trade with Iraq.

Russia is in deep economic trouble and knows it will get worse the day America starts exploiting its take-over of Afghanistan by running a pipeline southwards via Afghanistan from the giant southern Caspian oil fields. Currently, that oil is piped northwards -- where Russia has control.

Russia is in the process of ramping up oil production with the possibility of trading some of it for euros and selling some to the US itself. Russia already has enough problems with the fact that oil is traded in US dollars; if the US has control of Iraqi oil, it could distort the market to Russia's enormous disadvantage. In addition, Russia has interests in Iraqi oil; an American take over could see them lost. Already on its knees, Russia could be beggared before a mile of the Afghanistan pipeline is laid.

ANOTHER SOLUTION?

The scenario clarifies the seriousness of America's position and explains its frantic drive for war. It also suggests that solutions other than war are possible.

Could America agree to share the trading goodies by allowing Europe to have a negotiated part of it? Not very likely, but it is just possible Europe can stare down the USA and force such an outcome. Time will tell. What about Europe taking the statesmanlike, humanitarian and long view, and withdrawing, leaving the oil to the US, with appropriate safeguards for ordinary Iraqis and democracy in Venezuela?

Europe might then be forced to adopt a smarter approach -- perhaps accelerating the development of alternative energy technologies which would reduce the EU's reliance on oil for energy and produce goods it could trade for euros -- shifting the world trade balance.

Now that would be a very positive outcome for everyone.

Geoffrey Heard is a Melbourne, Australia, writer on the environment, sustainability and human rights.

Geoffrey Heard (c) 2003

More Information on Dollarization
More Information on Oil in Iraq
More Information on Nations and States

Why the Collapse of the Dollar Is Just a Myth By Allan H. Meltzer

Statements by European politicians and many others leave the impression that the dollar has "collapsed" against the euro and remains on the steep end of a roller-coaster ride heading south. Gerhard Schroder, the German chancellor, has hinted several times that the European Central Bank has been negligent, stubborn, or worse for not reducing interest rates to stop the euro's appreciation. This excitement was all based on a 5 to 10 percent appreciation of the euro above its price at launch in 1999. Of course, Mr Schroder prefers to take as his starting point the temporary floor reached two years ago, so he can claim the euro has appreciated as much as 50 percent against the dollar. That is true, but very misleading--like using the coldest day in January to dictate the clothing that you wear every day. The chancellor would be wise to take a longer-term perspective. I converted monthly average D-Mark/dollar exchange rates before the launch of the single European currency into euros at the official conversion rate of DM 1.95583 to the euro. The resulting series shows fluctuations around a monthly average value of Euros 0.83 per dollar from January 1990 to December 1998. This January and February the value was Euros 0.79 to the dollar, the equivalent of DM 1.55. This value is Euros 0.04 lower than the average exchange rate during the 1990s--and the euro has since declined. Current values are well within the range experienced in the 1990s--Euros 0.71 to Euros 0.94. The big change came with the appreciation of the dollar against all currencies that began in about 1999. By October 2000, euro holders had to pay Euros 1.17 per dollar. Between 1999 and 2002, the monthly average exchange rate was Euros 1.05, a 22 percent appreciation of the dollar from its average value in the 1990s. The dollar was overvalued, as the flood of imports and the big increase in the U.S. trade deficit suggest. The dollar has not collapsed against the euro, or any other currency. It has returned to the range it was in before 1999. I cannot recall either Mr Schroder or any other prominent eurozone politician complaining about the dollar/D-Mark exchange rate when it was at its current rate in the 1990s. The big change is not so much an appreciation of the euro as a reduction in the overvaluation of the dollar following the financial crises of the late 1990s. Other factors include replacement of the growing surplus in the U.S. budget by a large deficit. Differences in interest rates and expected inflation rates may also have contributed. Dollar assets were a safe haven in the late 1990s for foreigners who bought bonds, and seemed an attractive investment for those who bought equities to own a share of the new economy. When the dollar floated up to a peak early in 2002, Mr Schroder did not propose that the ECB should tighten policy to help the euro appreciate. Mercantilism lives on and is certainly not confined to Germany. In truth, the ECB may choose to lower its interest rate, but it has no more reason to ease policy now to manage its exchange rate than it did in the mid-1990s. What about the future? The U.S. presses China and Japan to stop buying its bills and bonds and to let their currencies float freely. Freely floating rates are desirable for many countries that have financial systems strong enough to absorb the fluctuations in asset values that accompany exchange rate changes. That certainly does not describe China or Japan. Japan's policy has at last allowed monetary expansion to support economic expansion and reduce deflation. The correct policy for Japan is to continue its long-delayed effort to end deflation. The correct policy for China is to prevent an increase in inflation. The correct policy for the U.S. is to let other countries decide on their preferred policy. The dollar has fallen, but it has not collapsed. Now that it is back in its former range, there are lots of willing buyers for its debt. If the U.S. continues to report some of the fastest productivity growth rates in its history, and profit rates remain high, there should be no shortage of buyers of U.S. assets and equities. The strong response to last Friday's U.S. jobs report also shows that the dollar remains attractive. Predicting exchange rates is no better than flipping a coin. It is hazardous to believe such forecasts or to act on them. That goes for governments and central banks that want to second-guess or "correct" the market's judgment. It also goes for those who predict the dollar will collapse. Allan H. Meltzer is visiting scholar at the American Enterprise Institute.

AEI Print Index No. 16574

Gold ... On Hold?

by Alex Wallenwein, Editor & Publisher
http://www.financialsense.com/editorials/wallenwein/2005/0119.html
January 19, 2005

Is the $60.3 billion November trade deficit now "paid for" as recent foreign capital-inflow numbers ($81 billion) suggest? Is the dollar's bear market over? Are we in a gold-holding pattern again?

The Dollar: Turning on a Dime

Without any change in fundamentals or even news about exchange rates the dollar turned on a dime as soon as the new year hit. On Friday, December 31, the dollar still fell to an all time low of 1.36 to the euro. On Monday, January 3, the rebound started without any advance notice whatsoever.

What caused that?

Manipulation? Investor psychology? A technical rebound? An "oversold condition"? Which is it?

Forex news reports cited all of the above in one instance or another, but what was the real reason? Are there any "real reasons" for anything anymore in financial-land?

We got a sudden repeat performance of the 2003 dollar collapse during September last year without any fundamental change in financial news or economic outlook from the earlier month dollar rebound and gold stagnation period. Now we get a sudden change back to the dollar-upside without any fundamental change in outlook. Fed rates had been rising and had been expected to rise further throughout the September-December dollar collapse, but as soon as New Years Eve revelers had slept off their hangovers, the dollar began to climb again.

Where are these things coming from? What is happening?

Who cares anymore? There's only one thing that seems to be certain: when the dollar is falling, the Dow goes up. When the dollar stabilizes, the Dow stagnates. When the dollar rises, the Dow falls.

Such has been the case since September 2003 with mind-boggling accuracy - and such is still the case now. The dollar-Dow inversion is alive and well, and is best depicted by looking at a chart showing the Dow and the dollar's main "foe": the euro:

Why does this happen?

The ordinary thinking goes that a low dollar is good for US exporting companies because their products become less expensive abroad. But the effects of this usually lag by at least a matter of months, if not an entire year or longer. So, how come there is this uncanny, almost instantaneous inverse relationship? What accounts for that?

There are no textbooks on this subject. You will find nothing online or in your local library. Ask your College economics professor, and he will be stumped for an answer. So, what's up?

Since September 2003, it almost appears as if the dollar now has the same adverse relationship to the Dow as it has to gold itself. Why is that so? What changed from before 9/03?

If so, what does that say about the current stock rebound? Is it just a reflection of the falling dollar, and no more? If this is so, then investors in US stocks should take note: if they are still skeptical of gold because the current gold-bull is "just the shadow of the falling dollar", then their cherished Dow Jones average has recently fared no better.

Here is another thought: what does that say about the confidence foreign investors have in US stocks? If they only buy them when the cheaper dollar makes them more affordable, then a stronger dollar becomes an economic no-no for US policy makers. If this is the perception of US markets, the US cannot afford a strong dollar policy any longer, any comments from the administration through it's snowy mouthpiece notwithstanding.

If this is true, then the situation we face also instructs us that the dollar has become adverse to even the confounded, rigged, and artificial representation of economic value we all call "the US stock markets." In short: the dollar is now absolutely value-adverse. An increase in the price of anything that has any kind of value to Americans now has to be purchased at the expense of a falling dollar!

The evidence appears striking. There seem to be no two ways about it. It's not so much that a strong dollar is bad for US assets, as it is that only a weak dollar can induce foreign investment in US or dollar-denominated assets anymore.

Or, seen the other way around: if higher prices for US assets can only be bought at the expense of a lower dollar, then we simply have a wash. We are treading water. We are going nowhere. The only thing we have is an illusion of an increase in the value of US assets tailor made for the domestic US population.

At least one thing still remains of the old pillars of economic reality: There is at least that one perception of "value" left in investors' minds. At least they still do buy US assets (or dollar-denominated assets) when the dollar tanks. If and when that ever stops, if and when the international estimation of the value of US assets sinks so low that they won't even consider buying them when they are cheap, that is going to be the day when US economic supremacy is simply over.

How does all of this jibe with today's report of the huge November rise in net foreign investment?

It jibes perfectly.

Even if the figures are correct and not skewed at all, the dollar-Dow scenario explains perfectly why foreign investment has increased so much. Look how the Dow shot up after the election. Look how the dollar dived during the same time. If foreigners are simply scavenging for cheap US assets, then this points to one sad but undeniable truth: they will only continue to do so when the dollar is falling, making US assets cheaper for them.

At this point, it's time to make a prediction: If this explanation is correct, then the December TIC figures to be released in February should show a far lower net increase in foreign capital inflows. And if the dollar keeps climbing during January and boasts a significant increase at the end of the month, then we should see a reversal of net inflows during January when those figures are released in March.

Now, if this scenario holds true, then how far can the dollar rise?

Better question: how far can the dollar-faction afford to let the Dow to fall (as a result of the rising dollar) before foreigners will jump off the train and look elsewhere for bargains? A rebounding dollar will act like insect-repellant for foreign investors. They simply won't go anywhere near US assets if a rising dollar makes these assets ‘smell bad' (more expensive) to them.

And that means that the trade deficit will continue to loom large on the investment horizon, no matter what these (now no longer so surprising) capital inflow figures showed in November. Only a seriously falling dollar can attract enough foreign investment to "pay" for the US trade deficit. That means a rising dollar will simply crush the US equities markets.

There is another possible explanation for this upward explosion in foreign asset inflows:

I have seen people talking about covert US Fed buying of longer term treasuries to keep long rates manageable so that consumers won't get scared out of their pants by the two-prong pinchers of rising US prices and the rising cost of debt-repayments. Some astute analysts have observed that there is a lot of activity in the bond market coming out of the Caribbean money centers. These same traders have observed that an unidentified but huge entity acting through the Caribbean money centers keeps coming in to buy treasuries as soon as a sell-off begins to develop. Could that be the Fed?

Is it possible that the Fed is making good on Bernanke's threat and is buying long term treasuries? Are those the "foreign investment inflows" we have been told about today so boisterously? Here is a snippet from a Reuters article of today:

Michael Woolfolk, senior currency strategist at Bank of New York, reckoned however that much of November's asset inflow was speculative, given an increase in investments from Caribbean money center banks. These banks are known to be financing channels for most hedge funds, which have become major players in the daily $1.3 trillion turnover of the global foreign exchange market.

Looks like they may also be financing channels for the US Fed.

A rising dollar's seemingly inevitable negative effect on the Dow will force US insiders to do whatever they need to do to prop up their beloved stock-market con game. As the Dow goes, so goes investor psychology. When the Dow finally folds, we will get Prechter's predicted (but so far not occurring) deflation scenario. Individuals and businesses will pull in their horns. Credit will contract, not because rates are high but because everybody gets scared. Then, the Fed may be forced to reverse course and drop its interest-rate pants again, exposing the nakedness underneath for all the world to see.

But the above still doesn't explain why the dollar turned on a dime in the new year.

What we have witnessed so far does not appear to be a major dollar support action by anyone - unless it's an act of covert dollar-buying by the ECB and/or euro-zone member nations. If I were to go way out on a limb I'd say that, just as the US is trying to undermine the euro by dropping the dollar too far too fast, the euro-members may have figured out they can "mess" with the US by covert dollar-support. In doing so, they can apply a fair amount of pressure on the Dow, as is evident from this chart:

Funny world, isn't it, where nations and power-blocs now appear to try and hurt each other by supporting the opponent's currency?!!!

But it doesn't have to be covert EU dollar-support that drove this reversal. It may very well be that Japan is finally acquiescing to longstanding EU demands to stop selling yen to buy dollars, which in the past forced the euro to take the brunt of the ongoing dollar-depreciation.

It is too early to tell whether this represents a definitive policy shift by the Japanese, but it is interesting to note that, although the dollar bounced against both the euro and the yen in early January, its bounce against the euro has been sustained and continues, while it fell back against the yen to levels that are now lower than they were at the beginning of the bounce. And that despite the lift it got from the foreign capital inflows data.

So, is gold "on hold" again? Yes, for the time being - but that's a good thing if you are consistently buying and saving gold (as the Chinese and other Asians do) to align yourself with the coming changes in the world monetary system. Those changes are detailed only in the Euro vs Dollar Currency War Monitor.

If you are only trading gold or gold shares for paper-profits, your long-term priorities may be a bit off. If you end up selling gold in the face of a sustained rise in the dollar, you will be doing those who truly save gold a huge favor. They'll be glad to buy it from you - for even less paper cash than it takes to do that now!