Iraq, Iran and the end of petrodollar:
The waning influence of the USA in the Asian century
Dr. Bulent Gokay
05/17/06 "Pravda" -- -- Throughout history, empires and their civilisations have come and gone. During the first part of the
last century, the US quietly built its empire, first in the
North and Central Americas and in South America. Soon after the
Second World War, the US worked to maximise the advantages it
gained, and the power it assumed, between 1943 and 1945, from
its victory over Germany and Japan, and as a consequence of
massive Soviet casualties, and large British debt and financial
burden caused by the war. The USA assumed the leading role in
the Western world by, on one hand, containing the Soviet Union
and preventing the spread of communist revolution beyond the
borders of the Soviet bloc; and on the other hand, ensuring
uncontested American supremacy within the Western world.
During the Cold War years, there was little or no challenge to
the dominant position of the US in the Western world. However,
with the end of the Soviet Union in 1991, the knot tying the
basic objectives of the US global strategy together began to
come unraveled. Once the communist danger was off the table,
American supremacy ceased to be an automatic requirement of the
Western system.
Since 20 September 2002, the US government has abandoned its
former multilateral approach to global affairs, and adopted an
imperial posture known as the so-called Bush doctrine.
This new agenda is based on militarist and imperial values with
some theocratic overtones. This agenda looks much like what some
people see in US foreign policy at the end of the 19th century,
and the beginning of the 20th, when the US actively sought to
dominate the entire Caribbean basin, Central America and even
the western Pacific.
Six months after the Bush doctrine was announced, the new
American doctrine was applied as a justification for an
unprovoked war against Iraq by the neo-conservative
administration of the US. Toppling Saddam Hussein's regime
without the support of the UN, and in the face of strong
opposition from traditional US allies, was a clear presentation
of a new unilateralist American foreign policy. The 'regime
change' in Baghdad was not an isolated event, but only an
opening salvo in a much broader neo-conservative agenda. The
neo-conservatives 'advocate a paradigm shift in which the United
States spreads American values by asserting American power-by
force, if necessary'. This agenda seeks to reshape American
hegemonic practices according to old imperial doctrines, but
with new post-colonial political and military tools. This was
described most clearly by Irving Kristol, who is considered as
founder of the US neo-conservatism: 'it would be natural for the
United States to play a far more dominant role in world affairs,
to command and to give orders as to what is to be done. People
need that.'
Since 2005, there is a looming crisis brewing over Iran. In the
media the phantom of Iran 'threat' is being amplified across the
world. In order to justify a military operation against Iran,
the neo-conservative rulers of the US have started a
demonization campaign against this country, presenting the
latest incarnation of America's enemy, in much the same way
Saddam Hussein was in the run-up to the invasion of Iraq. They
have put a lot of effort into making people believe that Iran is
ruled by dangerously crazy people who are trying to make a
nuclear bomb, and that they would not hesitate to bomb one or
more US cities. In view of such a danger, the only answer is to
wage a preventive war. Speculations about possible U.S.-Israel
attacks on Iran have reached a stage of war propaganda by
Western media.
A recent report by the Oxford Research Group revealed that any
bombing of Iran by U.S. forces, or by their Israeli allies,
would result in the unnecessary death of many innocent lives. 'A
US military attack on Iranian nuclear infrastructure would be
the start of a protracted military confrontation that would
probably involve Iraq, Israel and Lebanon as well as the United
States and Iran, with the possibility of western Gulf States
being involved as well', says the report written by Paul Rogers.
The report also argues that Military deaths in. (the) first wave
of attacks against Iran would be expected to be in the
thousands, especially with attacks on air bases and
Revolutionary Guard facilities. Civilian deaths would be in the
many hundreds at least, particularly with the requirement to
target technical support for the Iranian nuclear and missile
infrastructure, with many of the factories being located in
urban areas. If the war evolved into a wider conflict, primarily
to pre-empt or counter Iranian responses, the casualties would
eventually be much higher.
Many observers view the US neo-conservative clique and its
agenda as a conspiracy. This article, however, is based on the
premise that they are merely part of a larger equation of global
systemic structures. This view is rooted in an understanding
that vested interests representing the energy, electronics,
weapons, and influential segments of the media and
communications industries in the US are always entrenched in key
sectors of government. These interests are concerned with
maintaining their privileged position. And key elements of the
US economic and political elite are now responding directly to
changes in global conditions that have arisen since the end of
the Cold War. This is not a conspiracy. It is only business as
usual.
Since the end of the Cold War, the US has waged four wars - two
in Iraq, one in the former-Yugoslavia, and one in Afghanistan -
and is threatening more. All this aggression is not the result
of a paranoid theory, but simply a convergence of political and
economic interests, traveling under the rubric of 'war on
terror'. This argument is not based on the image of a few evil
people, conspiring in secret, against the people for their evil
aims. However, diverging from conspiracy theory does not ignore
the fact that indeed there are real conspiracies, criminal or
otherwise. In particular, the US political landscape is littered
with examples of illegal political, corporate and government
conspiracies, such as Watergate, and the Iran-Contra scandal.
Having said that the belief in conspiracy theories deflects
attention away from the real geopolitical grounds behind the
political-economic events. Conspiracy theories tend not to focus
on impersonal forces like political and economic structures,
geopolitical forces, market economics, globalisation, and other
such abstract explanations of human events. They are based on
notions that all of human history is shaped by secret societies.
While real conspiracies have existed throughout history, history
itself is not a conspiracy.
The economic power of the United States was in stagnation since
the 1970s and is in decline since the end of the Cold War.
Particularly its share of world trade and manufacturing is
substantially less than it was just prior to the end of the Cold
War, and its relative economic strength measured against the EU
and the East Asian economic group of Japan, China and other
Southeast Asian countries is similarly in retreat. The
persistent use of US military power can be viewed as a reaction
to its declining economic power and not merely as a response to
the post-Cold War geopolitical picture. The American
neo-conservative leaders see the military power of the USA's
trump card that can be employed to prevail over all its rivals',
and thus stop this decline. This is what the Bush administration
is trying to achieve: to create a militarised world in which the
strength of the US military forces can change and re-define the
rules of the game. This is a clear goal, a specific agenda,
which does not constitute a conspiracy. It is merely the way in
which the system currently works, and the US administration is
taking advantage of existing structural opportunities. This
article is an attempt to provide primarily a macroeconomic
explanation to the origins of and motivations behind the recent
US policies shaped by the neo-conservative Bush administration.
American "Dollar" Imperialism
"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."
Since the US emerged as the dominant global superpower at the
end of the Second World War, US hegemony rested on three
unchallengeable pillars: 1) overwhelming US military superiority
over all its rivals; 2) the superiority of American production
methods and the relative strength of the US economy; 3) control
over global economic markets, with the US dollar acting as the
global reserve currency.
Of these three, the role of the dollar may be the greatest among
equals. The US dollar is the world's reserve currency, meaning
that central banks all over the world hold huge amounts of
dollars in reserve. As a result of this situation, today America
borrows from practically the entire world without keeping the
reserves of any other currency. Because the dollar is the de
facto global reserve currency, US currency accounts for
approximately two-thirds of all official exchange reserves.
America does not have to compete with other currencies in
interest rates, and even at low interest rates capital flies to
the dollar. The more dollars are circulated outside the US, or
invested by foreign owners in American assets, the more the rest
of the world has had to provide the US with goods and services
in exchange for these dollars. The US even has the luxury of
having its debts denominated in its own currency.
How does this work?
The United States runs a balance of payments deficit by spending
more money in other countries (buying their products, investing
in them, or giving them dollars) than they spend in the United
States . - The extra dollars are held by the countries' central
banks. The banks do not ask the United States to redeem them for
gold or another currency. As long as foreign banks accept and
hold dollars as if they were gold, the dollars act as reserves.
The US economy began to dominate the world economy in the early
20th century. The US dollar was then tied to gold, so that the
value of the dollar neither increased nor decreased, but
remained the same amount of gold. Most money was paper, as it is
now, but governments were required, if requested, to redeem that
paper for gold. This 'convertibility' put an upper limit on the
amount of paper currency governments could print in order to
prevent inflation. This link between paper money and gold was a
product of law as well as custom. The Federal Reserve, which was
established in 1913, had to ensure that every dollar of paper
money was backed by at least forty cents of gold. There was no
tradition (as there is today) of continuous inflation. The large
levels of inflation and astronomic levels of government deficits
during the Great Depression, 1929-1931, rendered the support of
US dollars by gold impossible. By the early 1930s, this led the
US President Roosevelt to adjust the dollar/ gold ratio as he
saw fit. Until this point, the US may well have been a dominant
power in the world economy, but from an economics point of view,
it was not an empire. The fixed value of the dollar did not
allow the US government to extract economic benefits from other
countries by supplying them with dollars convertible to gold.
The American Empire was born, in a real economics sense of the
term, with Bretton Woods in 1945. After 1945, the dollar was not
fully convertible to gold, but was made convertible to gold only
to foreign governments. As a result of this, the dollar
established itself as the global reserve currency. No one
planned this development. It came directly from the fact that
the US was the dominant world power: well over half of all
international money transactions were financed in terms of
dollar; the US produced more than half the world output; the US
also owned a large section of the gold reserves in the world.
This became possible because during the Second World War, the US
had supplied its allies with provisions, demanding gold as
payment, thus accumulating significant portions of the world's
gold reserves. By 1945, the US had accumulated 80 percent of the
world's gold, and 40 percent of the world's production.
The aggressive policies of the 1960s, however, put an increasing
pressure on the US dollar. The US economy experienced a
cumulative reserve deficit. In particular, the dollar supply was
relentlessly increased to finance America's war in Vietnam.
Financially the Vietnam War was a real mess. The US printed and
spent more money than their gold reserves allowed. By 1963, the
US gold reserve at Manhattan had fallen to alarmingly low levels
-- it barely covered liabilities to foreign central banks. By
1970 the gold coverage had fallen to 55%, by 1971 22%. Before
the Vietnam War, the US had $30 billion in gold reserves, but it
spent more than $500 billion on the war alone. By this time, the
post-war reconstruction period had come to an end, and the
European and Japanese economies had improved their economic
position relative to the US, which had increased pressure on the
US dollar. The strain on the US financial system became evident
in 1965, when French President de Gaulle demanded gold from the
US in exchange for $300 million in debt.
The situation reached a crisis point in 1970-71 when more
foreign central banks tried to convert their dollar reserves
into gold. In response to a massive flight from the dollar, the
US government defaulted on its payment on 15 August 1971 by
cutting the link between the dollar and gold. This was because
it seems that there was no other choice - the US government
would not be able to buy back its dollars in gold. If
governments and foreign central banks tried to convert even a
quarter of their holdings at one time, the United States would
not be able to honour its obligations. Hence the Bretton Woods
system was ended. This was a serious crisis inspired by a
significant loss of confidence in dollar. As a result, the
dollar was left 'floated' in the international monetary market,
which weakened the position of the dollar as the hegemonic
currency. Now the dollar had no firm backing other than the
'full faith and credit' of the US government. From that point
on, the US had to find a way convincing the rest of the world to
continue to accept every devalued dollars in exchange for
economic goods and services the US needed to get from others. It
had to find an economic reason for the rest of the world to hold
US dollars: oil provided that reason, and the term petrodollar
became the crucial link in this.
Bulent Gokay
To be continued
Dr. Bulent Gokay is a Senior Lecturer in International
Relations, School of Politics, International Relations and
philosophy, Keele University, United Kingdom. He can be
contacted by e-mail at
b.gokay@intr.keele.ac.uk
http://www.keele.ac.uk/depts/spire/Staff/Pages/Gokay/gokay.htm
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