The Real Reasons for Iraq War

Addendum: Notable International monetary movements (late January 2003)

After completing my original 16-page essay, I began to read about some interesting international monetary developments and the related opinions of analysts. These recent developments warrant inclusion as an addendum.

The following two articles relate to the rapid devaluation of the dollar in late January relative to the euro. This occurred in the week immediately preceding President Bush’s State of the Union address. Both of these articles suggest Russia -a traditional holder of dollar reserves - may be linking “political overtones” to their exchanges of dollars for euros. The below article may illustrate things to come if President Bush continues on his present unilateral position on Iraq. ‘US dollar on shaky ground’ (January 24, 2003) (1)

“The dollar remained on the ropes on Thursday, buffeted by some hawkish remarks from the US administration about the standoff with Iraq. It was also stung by a pointed signal from Russia's central bank that the appeal of dollar-denominated assets is waning

Oleg Vyugin, first deputy chairman at the Russian central bank, said the bank plans to cut the share of US dollars in its foreign exchange reserves and increase the share of other currencies.

Some analysts questioned whether there may be political overtones to Vyugin's remarks, that could be related to the widening rift between the US and some other potential allies about how to persuade Iraq to comply with UN weapons' inspectors requirements.

Although Russia's own foreign exchange reserves are fairly small by comparison with the world's biggest central banks, the question is, "Will other central banks follow and what does this do to the ability of the US to finance its current account deficit?" said Marc Chandler, chief currency strategist with HSBC in New York.

That deficit is currently around 5% of gross domestic product and proving to be an increasingly heavy millstone around the dollar's neck.”

The next day (January 25, 2003) some analysts reiterated that these monetary movements may be related not only to the current geo-political tensions, but may also indicate political motivations. Is this perhaps a ‘warning shot over the bow’ for the Bush administration regarding their position on Iraq? The following are exerts from the article: ‘Dollar's Decline Starting To Accelerate, Rattling Nerves’ (2)

“All of a sudden, the dollar's supposedly slow and gradual decline isn't looking so slow, or gradual.

In fact the speed of the dollar's slide, against the euro in particular, has taken even the most seasoned analysts by surprise: a Dow Jones Newswires foreign exchange survey just ten days ago showed the major currency trading banks forecasting the euro climbing to $1.06 by the middle of February and not coming near $1.10 until the end of the year.

Instead, the euro has leaped to highs of around $1.0850 on Friday and has already gained 4% on the dollar this year, leaving strategists increasingly scrambling to update their forecasts. The Swiss franc keeps reaching fresh four-year highs, and the dollar is on the ropes against sterling and a host of other key rivals.

“Perhaps a more important barometer of broader confidence in U.S. markets is the Treasurys market. With the dollar falling, gold spiking and stocks under pressure, Treasurys continue to retain their safe haven appeal.

But there are warning signals here, too, that are beginning to get more attention. This week, the Russian central bank said it was lowering the U.S. asset portion of its foreign exchange reserves - in other words selling Treasurys- calling the dollar a low-yielding currency.”

Analysts believe some of the large Asian central banks - that between them hold the lion's share of the world's dollar reserves - are also considering rejigging their Treasury holdings. A U.S.-led war in Iraq could further accelerate that trend.”

Indeed, some political analysts believe that U.S. policy over Iraq may already be having a direct impact on holdings of U.S. assets, particularly with much of the rest of the world so opposed to war. "It's hard for me to believe that the flow of capital cannot help but be affected by how the U.S. is perceived around the world," said Larry Greenberg, an international economist at Ried Thunberg & Co. in Westport, Conn.

"Today if you have the U.S. acting (in Iraq) against world opinion, there could be an even faster pullback out of dollar-denominated assets," said Joseph Quinlan, global economist with Johns Hopkins University, in Washington. "How we go to war influences the rate of decline of the dollar," he said.

Furthermore, Mr. Will Hutton of the UK’s Observer wrote a forceful article against Bush’s unilaterism. This article further emphasizes the unfortunate economic imbalances of the U.S. economy, and suggests that the potential geo-political fallout of a unilaterist war in Iraq could create a devastating divestiture of U.S. dollar denominated assets. The article was entitled: ‘Why Bush is sunk without Europe.’ (3)

”The US's economic position is far too vulnerable to allow it to go war without cast-iron multilateral support that could underpin it economically as well as diplomatically and militarily. The multi-lateralism Bush scorns is, in truth, an economic necessity.”
“On latest estimates, its net liabilities to the rest the world are more than $2.7 trillion, nearly 30 per cent of GDP, a scale of indebtedness associated with basket-case economies in Latin America.”

Its industrial base is so uncompetitive that it consistently imports more than it exports; its current-account deficit, the gap between all its current foreign earnings and foreign spending, is now a stunning 5 per cent of GDP, continuing a trend that has lasted for more than 25 years and which is the cause of all that foreign debt. As a national community, it has virtually ceased to save so that government and individuals alike live on credit. To finance the current-account deficit, a reflection of the lack of saving, the US relies on foreigners supplying it with the foreign currency it can't earn itself.

But if foreigners got windy about the prospects for share and property prices and stopped buying, or began to withdraw some of the trillions they have invested in the US economy, then the dollar would collapse. Already, it has fallen nearly 10 per cent against the euro over the last six weeks, but that could just be the beginning. Economists at the Federal Reserve have estimated that the dollar needs to fall by 30 per cent to bring the flow of imports and exports into balance, but in today's markets such a fall doesn't happen gradually. It happens precipitately.

If America and Britain spurn a second UN Resolution and go to war with the active opposition of key members of the Security Council like France and Russia, be sure the flow of dollars into the US will slow down dramatically, and be sure there will be a stampede of foreigners trying to sell. Shares on Wall Street that Bush is so anxious to prop up are still massively overvalued. Against this background, there could be a devastating sell-off, with all the depressing knock-on consequences for American consumer confidence and business investment.

What the markets were signaling last week was that this is sufficiently within the bounds of possibility that it was worth taking precautionary action, hence the selling. If the war was over in a few weeks, the risks would be containable, and there will be some shares well worth buying at today's prices. But if the war was prolonged or the subsequent peace unstable, then the pressure on the dollar and Wall Street could become very severe indeed, reinforcing the depressive influences on an economy where the underlying imbalances are so extraordinary.

“The US approach has been unilateralist here as everywhere else: it does what it likes as it likes, a policy that is now showing its limits. Bush needs badly to change course, which Tony Blair should be urging on him. The UN process needs to be respected and reinforced, not least to reassure the markets, and better systems of economic governance need to be put in place. The US's military capacity may allow unilateralism; its soft economic underbelly, we are discovering, does not."
<<<end of exerts>>>

These articles indicate that the world community is reducing its reliance on dollars in their central banks, and thus quite possibly sending a message about their opposition to the U.S.’s position on Iraq.

European Commentary on the Essay: ‘The Real Reasons for the Upcoming War With Iraq’

In January 2003, Mr. Coílín Nunan reviewed a draft of my full 16-page essay on an Internet forum. He subsequently published an exceptional summary of my research on an Irish website (http://www.feasta.org). Hopefully my essay along with his article may create additional public awareness, and thus facilitate a real debate regarding the Iraq issues. Below are exerts from his article ‘Oil, Currency, and the War on Iraq’ (4)

<<<beginning of exerts>>>
“One of the stated economic objectives, and perhaps the primary objective, when setting up the euro was to turn it into a reserve currency to challenge the dollar so that Europe too could get something for nothing.

This however would be a disaster for the US. Not only would they lose a large part of their annual subsidy of effectively free goods and services, but countries switching to euro reserves from dollar reserves would bring down the value of the US currency. Imports would start to cost Americans a lot more and as increasing numbers of those holding dollars began to spend them, the US would have to start paying its debts by supplying in goods and services to foreign countries, thus reducing American living standards. As countries and businesses converted their dollar assets into euro assets, the US property and stock market bubbles would, without doubt, burst. The Federal Reserve would no longer be able to print more money to reflate the bubble, as it is currently openly considering doing, because, without lots of eager foreigners prepared to mop them up, a serious inflation would result which, in turn, would make foreigners even more reluctant to hold the US currency and thus heighten the crisis.

There is though one major obstacle to this happening: oil. Oil is not just by far the most important commodity traded internationally, it is the lifeblood of all modern industrialised economies. If you don’t have oil, you have to buy it. And if you want to buy oil on the international markets, you usually have to have dollars. Until recently all OPEC countries agreed to sell their oil for dollars only. So long as this remained the case, the euro was unlikely to become the major reserve currency: there is not a lot of point in stockpiling euros if every time you need to buy oil you have to change them into dollars. This arrangement also meant that the US effectively part-controlled the entire world oil market: you could only buy oil if you had dollars, and only one country had the right to print dollars - the US.

If on the other hand OPEC were to decide to accept euros only for its oil (assuming for a moment it were allowed to make this decision), then American economic dominance would be over. Not only would Europe not need as many dollars anymore, but Japan which imports over 80% of its oil from the Middle East would think it wise to convert a large portion of its dollar assets to euro assets (Japan is the major subsidizer of the US because it holds so many dollar investments). The US on the other hand, being the world's largest oil importer would have, to run a trade surplus to acquire euros. The conversion from trade deficit to trade surplus would have to be achieved at a time when its property and stock market prices were collapsing and its domestic supplies of oil and gas were contracting. It would be a very painful conversion.

The purely economic arguments for OPEC converting to the euro, at least for a while, seem very strong. The Euro-zone does not run a huge trade deficit nor is it heavily indebted to the rest of the world like the US and interest rates in the Euro-zone are also significantly higher. The Euro-zone has a larger share of world trade than the US and is the Middle East’s main trading partner. And nearly everything you can buy for dollars you can also buy for euros - apart, of course, from oil.”

“All of this is bad news for the US economy and the dollar. The fear for Washington will be that not only will the future price of oil not be right, but the currency might not be right either. Which perhaps helps explain why the US is increasingly turning to its second major tool for dominating world affairs: military force.”
<<<end of exerts>>>

It appears that Mr. Nunan concurs with my hypothesis with respect to the euro and this upcoming war. Tragically, President Bush and his administration do not appear willing to initiate the arduous structural changes that our economy must undertake if we are to adapt and compete with the euro. Instead, they intend to enforce U.S. dollar hegemony for oil transactions via the application of superior U.S. military force.

However, in my opinion, the Bush administration’s dangerous strategy will most likely result in failure, as monetary maneuvers against the U.S. dollar by the international community indicate they will not tolerate aggressive U.S. imperialism over Iraq’s oil and its choice of oil currency.

References:

(1) ‘US Dollar on Shaky Ground’ (January 24, 2003)
http://onebusiness.nzoom.com/onebusiness_detail/0,1245,163754-3-168,00.html

(2) McCarthy, Grainne , ‘Dollar's Decline Starting To Accelerate, Rattling Nerves’ (January 25, 2003)
http://sg.biz.yahoo.com/030124/15/36tiv.html

(3) Hutton, Will, ‘Why Bush is sunk without Europe’ Observer, (January 26, 2003) http://www.observer.co.uk/comment/story/0,6903,882358,00.html

(4) Nunan, Coílín, ‘Oil, Currency, and the War on Iraq’ (January 2003)
http://www.feasta.org/documents/papers/oil1.htm)

I bet that the thousands of Iraqis welcoming the U.S. forces coming into Bagdad will severely outway the thousands of anti-war protestors who don't have a clue and have too much time on their hands.

I agree with Mr. Normus. Look who is in favor of military action: most of eastern europe, countries with recent memories of what it is like to live under dictatorship and with intimate knowledge of what it takes to bring a dictatorship down. Also Kuwait obviously would like the constant threat of Iraqi invasion removed.

Against? A bunch of American and western European college students mostly, people who have never even visited the region in question.

If we wanted oil we would have it already. What we really want is a reliable trading partner. Someone who won't suddenly nationalize all our assets in their country.

We already have the support of a majority of EU countries, even without the further evidence due to be released.

"Look who is in favor of military action: most of eastern europe"

Only the governments of those countries favor war and many of those governments are the same people who ruled when the countries were Stalinist. The reason for the governmental support? US economic and military aid plus a desire to win US supportr during the expansion of NATO etc...

US to give 65 war planes to Poland? Is that right? US govt will sponser-- ie US tax payers will foot the construction bill.

Is that how we pump up the US economy--use tax money to pay for
the Poland airforce? One thing for certain, we get a buddy.

Be sure to tell your Polish friends that they would be willing to deliberately provoke a destructive war for nothing more than money. You must think they are that stupid. You must also think they know less history than you.

Sorry, there is a bigger picture and Poland knows it.

"POLAND

A TNS-OBOP survey showed 63 percent of Poles opposed sending troops to join any action against Iraq but 52 percent thought the country should give political backing to the United States for any such action.
"
http://www.alertnet.org/thenews/newsdesk/L30567527

To me this indicates two things:

1. (answering the second part of the poll) A majority of Poles are in favor of Bush's policies.

2. A majority of Poles do not believe their army is equipped to do this job.

WOJNIE NIE! WOJNIE NIE! WOJNIE NIE!

W sobotę 14 grudnia 300 - 400 osób uczestniczyło w demonstracji antywojennej w Warszawie

http://www.republika.pl/stopwojnie/

12 Listopada 2002
My, europejskie ruchy społeczne, walczymy o prawa, sprawiedliwość, demokrację i przeciwko
wszelkim formom ucisku. Popieramy i promujemy wizję świata zróżnicowanego, wolnego i opartego
na wzajemnym szacunku.
Wierzymy, że ta wojna (niezależnie czy ONZ popiera ją, czy nie), będzie katastrofą dla Irakijczyków,
którzy już teraz cierpią z powodu międzynarodowego embargo i reżimu Saddama Hussejna,
i dla całego Bliskiego Wschodu. Wojnie tej powinien przeciwstawić się każdy, kto wierzy
w demokratyczne, polityczne rozwiązania, gdyż ma ona potencjał, by doprowadzić do
światowego konfliktu.

Wzywamy do masowego sprzeciwu wobec wojny w każdym państwie Europy. Setki tysięcy ludzi
już teraz walczą o pokój.
Wzywamy organizacje i obywateli Europy, do rozpoczęcia sprzeciwu na kontynentalną skalę i do:
1) bezzwłocznego organizowania masowego sprzeciwu wobec wojny w Iraku
2) w wypadku rozpoczęcia wojny, do organizowania natychmiastowych działań
i ogólnokrajowych demonstracji w następną (po ataku) sobotę.
3) do rozpoczęcia przygotowań demonstracji antywojennych w każdej europejskiej stolicy
zaplanowanych na 15 lutego.
Możemy powstrzymać tę wojnę.

Tłumaczył Jarek Kuczyński

http://www.republika.pl/stopwojnie/

http://poland.indymedia.org/pl/2003/01/289.shtml

But why would I trust people who carry swastikas?

http://www.republika.pl/stopwojnie/

You might be offended if I produced a cartoon referencing Neville Chamberlain.

Then I would be censored.

If any country remembers the dangers of power hungry leaders with expansionist foreign policy goals its Poland. Looking at pictures of Polish antiwar demos one notices a lot of people recognizing signs of Hitler in G W Bush.

The Iraqi government poses no threat to anyone except its own people. The US on the other hand has shown its willingness to invade countries from Afghanistan to Panama to Nicaragua to Iraq. The US has weapons of mass destruction (and is the only country to have ever used nuclear weapons, and that was against a civilian population) UN inspectors have admitted that almost all of what Iraq bought from the US and Europe (and they never really produced anything on their own) was destroyed before the inspectors were pulled out due to US actions that troubled the UN (not Iraq)

"You might be offended if I produced a cartoon referencing Neville Chamberlain."

no, asdf. we'd laugh derisively, reminded once again what a small arsenal of arguments pro-war pin-heads like you have at your disposal.

btw, having been to eastern europe twice (once before and once after the stalinist regimes collapsed), my two cents is that pro-US sentiment ain't terribly high in that part of the world these days.

epithets and straw:
You spin my comment about the funding of war jets
and skepticism of govt. alliances as a slam on the people of
Poland? You essentially attack me by saying
I must think Polish people are stupid--
but you insist that you have tact?

Stoop?
So, the strategy is to attack the individual online,
but when your outgunned, you cry for rules?

All rise, the prophet asdf has taken the stage.
He predicts the future,as have all the fools before him.

he-he.

..at this link. Most people find it shocking, but quite enligtening...

http://www.indymedia.org/front.php3?article_id=232701&group=webcast

Great story. You've laid out the best argument for war. Economic security and stability. Who the hell is going to need oil when the USA's economy tanks. There will be no work for the Chinese if the Americans can't buy the crap they make because our economy is bankrupt because the world has euroized instead of dollarized. Nice try but this will not happen. Besides we keep all that pretty stuff in Fort Knox for a reason. A currency backed by gold, and the vastness of gov't owned land would more than suffice to protect our currency. Not to mention the backing of a rather formidable military. So Yes, war for oil, and how nice to eliminate a despot in the process while also scaring the shit out of the other whackos around the world.

Absolute truth: it will not happen. the euro is not competing with the dollar, and the EU is not an economical force to be considered equal to or even as remotely influencial as the US. As we all know, China is a place where US gets goods made cheaply. China would never survive without our economy- nor will we surive without a need to be secure. Fear is best served on 14k platters. security is best had if you don't negotiate.

It's funny how pro-warriors, having failed to mount a convincing argument for attacking Iraq (fighting terror, combatting WMD's, liberating Iraqi's--strike one, two, and three), are now embracing the idea that it is in fact all about oil. The opportunism and cynicism is stunning: America's economic livelihood necessitates the coming slaughter, our two-bit imperialists now argue. Talk about making a virtue of necessity.

The reality is that capitalism is in crisis and America is a nation in decline. Grabbing Iraq's oil may help the dollar and boost american assets, but it ain't a panacea. In fact, the whole plan is frought with danger for the American ruling class.

Of course, our erstwhile rightist proponents of war are so addled by Rush's bubblology that they don't see the extent of the present crisis.

Thanks, rightists, for being so fucking stupid.

You're slipping, and I just love it.

I just wish I could get this pro war shills to ingest the dust from depleted uranium that American soldiers will ingest (and have ingested from Gulf War I), as well as the Iraqi civilians, especially the infants.

Then again, I believe that I have a clear picture of their mentality and loyalty. They are anti humans, and their only concern is Eratz Y'srael, and it is because they believe that Iraq is a threat to Israel, they beat the drums of war. No one is a human, in their eyes, save the members of their tribe.

<<I usually reserve this essay for those those who think an Iraq war is great, and it will somewhow help the economy, but I'll go ahead and disabuse individuals of that flawed and dangerous logic>>>

'Iraq and the Potential Macropolitical Outlook for 2004 & beyond'
(Exerts from an Internet essay on political strategy – Dec 2002)

…So turning now to the macropolitical situation, which in near certainty will prove more decisive toward ’04, ’06, and ’08 than any other factor. First and foremost, I don't think anyone will disagree that the state of the economy should exercise a preeminent role in deciding the 2004 outcome on every level. How's this for a plausible, quite ominous extreme-case scenario?

One of several reasons why the Iraq adventure is fraught with peril obviously relates to the potential for oil price shock – almost certain in the event of any prolonged Gulf conflict. Indeed, it's this fear of economic disruption that has compelled the administration to build up military forces in such an incremental, almost invisible fashion. Similarly, this desire to avoid sudden fluctuations in oil prices is why they’ve entertained such ridiculous notions as paratrooping a quick-strike force into Baghdad as opposed to a full-frontal attack with overwhelming force. Aside from the historical reference of the ’91 recession following Gulf War I, it’s no secret that the anemic U.S. economic ‘recovery’ presently stands ill equipped to handle significant economic tensions.

At first glance this wouldn’t appear too daunting a prospect; the $10 trillion American economic powerhouse could absorb a relatively brief rise in oil prices without too great dislocation – in part with the assistance of the National Petroleum Reserve. Granted, even a ’91 style recession with 7.5% unemployment and so on wouldn’t exactly suggest a promising political setting for Dubya's 2004 campaign, but even so there’s the parallel war on terrorism, military affairs, and domestic security issues to ride back into office.

However, the nightmare economic scenario which may well unfold in the aftermath of a Gulf War Part Deux doesn’t originate with America, but rather the greatest danger appears within: Japan.

To begin with, here’s a recent MSNBC overview regarding the alarming state of Japan’s moribund economy as well as the persistent inability of that nation to confront its structural impediments:

‘Japan’s Economy at Risk of Collapse’ (December 11, 2002)
http://www.msnbc.com/news/845708.asp?0cl=cR

Japan’s banking system has been teetering on the verge of collapse for years now. Even having discharged over $1 trillion of nonperforming loans during this past decade, that nation’s financial houses are still carrying at least another $1 trillion of dead weight on the books. Once accounting for several hundreds of billions in various assets, you’re still left with a system deep in red ink negative worth.

Indeed, the implosion of the world’s second largest economy is now seemingly inevitable, within at most 4-6 years national debt service – already at 140% of national GDP – will rise high enough to crash its bond markets forcing the banks to divert sufficient reserves to service their institutional debt which would drive their equity capital below operational levels.

In fact, it’s this imminent specter of Japan Inc.’s ultimate liquidation that likely more than any other factor drives the administration’s Mideast policies. The hope is that dropping oil prices can both jumpstart a renewed American boom cycle and give the Japanese industrial/consumer base some breathing room in which to eventually enact imperative reforms. In theory, American consumers would once again propel their buying power to an altogether unprecedented level which coupled with the American worker’s unmatched productivity would fuel a resurgence in the European & Japanese export sectors. This would encourage a renewed round of investment in developing Latin American, Eastern European, and Asian economies which would consequently set the stage for the next expansion in global consumer demand.

Toward these broad ends, the U.S. establishment views (and rightly so) a combination of stable Persian Gulf oil production & orderly shipping lanes as critical – which in turn according to the neocon geostrategic framework requires American hegemonic direction of the region. To go way back and finally clarify my comments regarding the significance of the dollar/euro international transaction & reserve standard toward this present conflict, it is not directly *because* of Iraq’s switch (to the euros in November 2000) but rather to *prevent* any future moves toward a general OPEC transition. It is toward this foremost end, among other less compelling factors, that the U.S. desires to finally seize control of OPEC’s decision-making process – and Saddam Hussein currently stands directly in the path of that juggernaut. The reasons should become clearer in a moment, but first, back to Japan.

Japan’s import dependence on oil is extreme – far and away when compared to other developed nations – with its frail economy acutely susceptible to even minor fluctuations in the oil supply. There’s good reason to believe that $45 a barrel oil (such as that seen during the *buildup* to Gulf War I) would convulse its economy back over the precipice, a sustained period of such price hikes or anything approaching the $80 to $100 a barrel some have speculated would plunge the Japanese economy into death throes.

The immediate effect would include a run on the banks and the yen, which would make the Argentine debacle of this past spring resemble a sunny day at the beach. A Japanese meltdown would spark a predictable chain reaction that should prove nothing short of Armageddon for the post-war capitalist economic order.

The immediate effect on the global economy would be seen with an instantaneous devaluation of the Chinese yuan followed by comparable markdowns of the won, the baht, and other Far East currencies which would reverberate onward to the Indian rupee, the South African rand, the Brazilian real, and then permeate throughout the developing world. Meanwhile, the Japanese maelstrom would soon begin sucking in America’s financial institutions, with Japan forced to withdraw its funds invested here to cover the domestic fiscal collapse. Japan remains the largest foreign investor in U.S. Treasuries, and this enormous capital flight – easily exceeding $500 billion – would naturally collapse the U.S. bond markets and crash U.S. stock exchanges (well, equities would already be crashing hard by this point).

Eventually, this would render the huge current account deficit unsustainable and also lead to a government default on the Federal debt, however, as ugly a portrait as we have already, much of the economic devastation is still fairly containable to this point – now, add to this equation: the Russians.

The Russian people are without parallel the greatest holders of hard dollars outside the Americans themselves – estimated at upward of $300 billion. As Japanese capital streamed out of the U.S., you’d have a situation with the dollar spiking mightily against the yen (because domestic hyperinflation in Japan should far outstrip the devaluing impact of liquidating U.S. assets – which if nothing else would bring Japan’s deflationary spiral to a spectacular close...) while the dollar should be sinking against the euro. This would place immediate exchange cost pressures on European investors to withdraw funds from the United States, but again, this could perhaps get contained.

However, with most of their life savings held in dollars stuffed inside mattresses, the Russians would storm the currency exchanges at the snap of two fingers the moment they saw the numbers scrolling wildly on the local obmen valyutyi... In brief, the United States and the European Union have a number of mechanisms by which they can strive to keep the dollar/euro exchange rate stable enough to contain much of the economic fallout to the Pacific Rim, however they can’t control the Russian man on the street. The risk of a general Russian bolt to the exchanges is quite genuine, leading the Kremlin for example to coordinate a public confidence campaign this past summer when fears grew of such a development. A Russian dollar panic could alone easily drive the dollar down 10 cents or more against the euro, which in turn would have European investors facing an exchange rate sinkhole of losses in their U.S. assets.

In very short order – especially combined with all the turmoil already described above – the exchange costs would drive the Europeans to abruptly repatriate funds back to Europe, further driving up the euro against the dollar. It’s at this critical juncture that both OPEC and Russia would come under intense pressure to switch their international oil transaction currency standard from the dollar to the euro or face severe losses in their own finances.

Such a development would strike a dagger in the heart of the American economic order – already reeling with the aftermath of the Japanese dissolution. Citigroup and J.P. Morgan should have by now burst apart at the seams, taking out a few other flagship corporations and the finance industry as a whole right along with them. Several economic sectors, such as telecommunications, would near certainly have to get nationalized, at least for the intermediate term. General price/wage controls & rationing would probably follow as well; after a run on the banks which would make 1932 look like a picnic...

Hard as it might be to believe in the midst of all this economic, political, (and probably societal) chaos, the U.S. economy of its own accord still would possess most of the necessary elements to pull itself back out of the gutter – particularly in light of the dollar as international reserve currency. That's America's ace in the hole.

The problem here, though, is that in such a close-to-worst-case sequence as outlined above, the dollar’s leverage to preserve its standing as a reserve currency would require that it remain the international transaction currency which by extension requires that it remain the OPEC standard. As various nations, including Europe and China which for very different reasons would relatively best weather the crisis (even with their own major dislocations) moved to reorganize their economic houses, the use of the dollar in reserves (even if on an inferior basis to the euro) would offer one key pivot on which to rebuild the American economy as well.

Otherwise, should the dollar get comprehensively flushed out of every nation’s reserves, the U.S. could become an economic backwater for a generation or more, easily eclipsed by an ascendant Europe & China.
This is the potential scenario which awaits whenever (if ever) Japan finally plunges into the crucible, dragging the rest of the globe right along in its wake. Granted, there are some alternatives which may stanch the bleeding well short of this outline, or even some that could plumb darker depths (Chinese civil warfare & the European Union spinning apart) magnifying the impact even further. So this is just my latest shot across the bow of idle speculation regarding Jeb Bush’s 2008 campaign, by example.

To paraphrase Watson, exactly 5 years, 11 months, 4 days, and 19 ½ hours separated the panzerkreuzer Schleswig-Holstein opening fire on Danzig’s Westerplatte and ‘Little Boy’ reaching critical mass as the Enola Gay streaked away from Hiroshima. And, with a little twist on the proverbial Chinese curse: May you not live through interesting times...

WATSON’s question #1 - "Let's assume that you are right, and the U.S. dollar is significantly weakened. So what? Why is that going to lead to another great depression?"

Hmmm.. I'm not completely certain what you're asking; in the scenario I've described above, you would have far more taking place than just a weakening dollar (in itself a mixed bag). The loss of wealth from collapsing bond, equity, and real estate values would probably stand somewhere between $25 trillion to $45 trillion once that cycle had run its course. We wouldn't be talking about a 4000 Dow but something closer to a 400 Dow (actually, the New York Stock Exchange would probably have to get shut down for some while). I've outlined a fairly disastrous scenario in which the weakness of the dollar is just one of several key components.

The greater relevance to the scenario above is that contemporary American economic dominance is based almost entirely on two factors: (1) the dollar's leverage as international reserve & transaction currency standard; (2) the U.S. financial markets acting as global 'safe haven' which permits the servicing of a massive current account deficit. Toward the end of this scenario, I've removed both these overarching factors upon which America vaulted to global economic hegemony since the Second World War ended.

It's not so much a problem of natural resources, worker productivity, education levels, infrastructure development, or technological advancement (most of the typical guideposts of a nation's economic potential); it's a problem (at least in the sense discussed here) that the United States dominated economic order is premised on and structured about those two prime factors above.

In short, the United States economy would have to get restructured in some fashion to account for the absence of those two pivotal advantages. Incidentally, this would follow a necessary government default on the national debt in accordance to the scenario I've outlined above, with its associated dislocations as well. You would have other major dislocations follow in addition: much of the current military superstructure would become financially unsustainable, you'd probably have some "brain drain" from the U.S. to at least Europe, the financial reserves of several economic sectors would fall below operating levels - they'd have to get nationalized for a time. I'm not saying that the United States would not reemerge from such a debacle, but that it would take a generation or two which would include a significant depressionary cycle (worse than the 1930s in this scenario).

I suspect a good comparison would be either the post-Versailles Weimar Republic before the rise of Hitler or perhaps the post-Cold War remnants of the Soviet Union, without the additional burden of transition from a command economy toward a market economy. As I stated in my original scenario, I've constructed close to a worse case scenario (it's not worst-case, because I've preserved China & Europe with sufficient economic stability to fuel a more rapid global recovery; and Japan would also rise again alongside the United States). In brief, I've compressed much of what's happened to Japan over the course of this past decade's 'soft landing' into a very 'hard landing' transposed to the unique circumstances of America.

As for where the geopolitical order should stand forty years following such a sequence of events as that outlined, you'd probably have the European Union in relative equivalence to the present United States, China roughly equivalent to the Soviet Union of the 1960s, Japan returned to its 1990s status sans malaise, and with the United States taking the place of contemporary Europe in the global ordering. Of course, that's a rather superficial & limited projection, but it'll suffice I think for the purpose at hand.

<<<note: Right wingers should pay attention to this statement and analyze the current monetary movements by several nations (Hint: even Canada has reduced its reserves of dollars by 20%, it now has only 55% of its reserves in dollars, with 42% in euros, 3% yen..)>>>

**One of the dirty little secrets of today's international order is that the rest of the globe could topple the United States from its hegemonic status whenever they so choose with a concerted abandonment of the dollar standard. This is America's preeminent, inescapable Achilles Heel for now and the foreseeable future.

That such a course hasn't been pursued to date bears more relation to the fact that other Westernized, highly developed nations haven't any interest to undergo the great disruptions which would follow - but it could assuredly take place in the event that the consensus view coalesces of the United States as any sort of 'rogue' nation. In other words, if the dangers of American global hegemony are ever perceived as a greater liability than the dangers of toppling the international order (or, alternately, if an 'every man for himself' crisis as discussed above spirals out of control and forces their hand).

The Bush administration and the neocon movement has set out on a multiple-front course to ensure that this *cannot* take place, in brief by a graduated assertion of military hegemony atop the existent economic hegemony.

The paradox I've illustrated with this one narrow scenario is that the quixotic course itself may very well bring about the feared outcome that it means to preempt. We shall see! ***

WATSON’s question #2:
1) Realistically, how much could the dollar be driven down against (to stick to a currency rate I follow almost daily) the euro? In other words, what are you saying the dollar could reach compared to the euro? 75 cents? 50 cents? 25 cents? 5 cents? What's the conversion rate dollar to euro?

response…
1) The dollar could easily get driven down to the 80-85 euro cent range, indeed a number of currency analysts expects this to happen sometime over the course of the next few years. In more severe scenarios involving such things as a protracted U.S. recession with a comparably milder European pullback, then I'd say the dollar could fall as low as the 55-65 euro cent range - however, this would have long since placed intense pressure on its reserve currency status. If the dollar standard were abruptly abandoned, then without exchange controls the dollar would probably hyperinflate for a time versus the euro and this comparison would be fairly meaningless
2) Hmm.. The initial benefit of a gradual, limited depreciation rests with the competitive trade advantage for American exporters and the manufacturing base. The foreign operations of U.S. multinational corporations also become more profitable because their repatriated earnings gain in worth. The first problem of a weakening dollar is that U.S. equities become steadily more unattractive to foreign investors; conversely, European securities become more appealing for non-European investors, including Americans. Furthermore, with a weakening dollar you confront the danger of sparking broad price inflation, particularly in the case of a disorderly depreciation.
The primary reasons why the United States must maintain a highly appreciated dollar are twofold, and revisit the issues I broached above. (1) Steady foreign investments in dollar-denominated equities and securities are necessary in order to service the current account deficit; (2) an exchange-rate advantage over the long run is necessary in order to justify the dollar's reserve currency status. Over these past twenty years, the Federal Reserve has engaged in a dramatic expansion of the money supply in order to maintain the dollar's value (among other reasons), which steadily increases the risks of hyperinflation in the event of a disorderly correction; moreover, this drastically overvalues equities thus increasing the risk of sudden market crashes.
East Asian competitors - particularly Japan - require a strong dollar in order to maintain their own more heavily export-based economic structuring. A broadly weakening dollar steadily moves Japan closer to general insolvency and the devaluation crisis scenario which I've described above. The more the dollar falls, the harder it becomes for Japan to enact the necessary structural reforms, and the longer that Japan cannot enact these reforms, the more unavoidable its ultimate collapse. As I tried to vividly explain above, Japan is obviously the weakest link in the current global economic order; there's rather little reason to believe this structure can stand in the event that one of its three pillars suddenly crumbles away.


WATSON’s question #3:
2) If the dollar gets low, why is that bad? I don't what this to get confused, but after you answer my last post, take a look at this. You say:
<<The Russian people are without parallel the greatest holders of hard dollars outside the Americans themselves – estimated at upward of $300 billion.>>
and
<<easily exceeding $500 billion – would naturally collapse the U.S. bond markets and crash U.S. stock exchanges (well, equities would already be crashing hard by this point).>>
These are actually pretty small numbers compared to a $10 trillion annual GDP and our national net worth. I don't see how either of those things leads to a Dow of 400. Or a depression that would last a generation.
Well, lemme address your initial questions in reverse order:
1) Japan: The annual GDP of the United States slightly exceeds $10 trillion dollars, but the American GDP of the average fortnight wherein this Japanese withdrawal would take place is roughly $385 billion. Moreover, an abrupt Japanese rotation out of U.S. Treasuries would not halt at $500 billion in such a meltdown scenario, but rather extend both in the sense of continuing withdrawals as well as sharply reduced (i.e. nonexistent) reinvestment. Finally, what you'd have is a global financial crisis panic which would hardly stop at simply Japanese withdrawals, but accelerate into a generalized washout of U.S. equities & securities.
2) Russia: First of all, under normal circumstances, a random Russian dollar panic could (a) get mitigated by a coordinated central bank currency market intervention; (b) get absorbed by the global economy within a few months time. Aside from the fact that the Federal Reserve & European Central Bank would hardly be in a position to intervene in this scenario (much less the suddenly insolvent Bank of Japan), the key matter at hand involves exchange rate pressures. A sudden spike of tens of billions of dollars exchanged for euros would ignite a disorderly, generalized currency market depreciation of the dollar which should well exceed the 10% or so impact of just the Russians alone. The Kremlin could of course attempt to intervene by shutting down the exchanges, although they would risk large-scale rioting & potential mutiny of the armed forces (their savings are mostly in dollars too..)

<<I don't see how either of those things leads to a Dow of 400.>>

It's a combination of many things which essentially add up to a global financial panic. I suppose I could go down the list of the 30 Dow components to project how each of them would likely fare through our little doomsday scenario, but it seems that J.P. Morgan and Citigroup in liquidation with several other Dow companies (e.g. AT&T, Intel) insolvent should suffice. Let's just say it'd be a good time to invest in some R.J. Reynolds stock....

<<Or a depression that would last a generation.>>

Japan's slow-motion collapse has already lasted half a generation, and the United States could very well follow a quite similar course. The comparisons between the U.S. of 2002 and the Japan of 1991 have been tossed about here before, and there's plenty of business journal commentary in that respect. The dissolution of $25-45 trillion worth of bond, stock, and real estate value may sound extraordinary, but perhaps it seems more realistic (as it should) once mentioning that Japan's economy has lost about $18 trillion in value during the past 12 years.

A depressionary cycle would certainly follow in the wake of such a development, probably much deeper & more extended than Japan's in the case of disorderly overcorrection such as that hypothesized above. Japan has had the benefit of white-hot American consumer spending and a spectacular U.S. bull market run to soften its landing thus far; the United States would probably find no equivalent crutch.

Let's just hope we don't have to find out...

<<<and let's just pray Bush doesn't ruin our economy for the next 20 years..>>>

I signed it, Tarquinius S.-- get it?
(i.e. Tarquinius Superbus.)


explain reasoning, please.

For those not familiar. And for those remotely interested, get an
encyclopedia. I thought the name Tarquin/ Tarquinious was a dead give away.

The Tarquin family, if you are unaware were generally considered
tyrannical kings in pre-republic rome. My position was sarcastic
intent on baiting the infamous c.campbell into exposing some of the
undercurrents in his writing.

The tyrannical king, Tarquiniuos Superbus was overthrown and exiled from rome--directly afterwhich the republic was formed. Some have criticized Bush as a Roman emperor, and a US-led military state in Iraq would produce a J. Caesar. Do you not see the humor in my post? It was a setup.

Look at my earlier post “fear served on a 14k platter.” come on! that is a slap in the face. Mockery, get it?

I am sorry if my strategy was misread as hateful, or bigoted. It instead was, (if you are aware of Superbus), intent on setting a snare for a few "post-ers" seriously, be critical.

god save the king-er queen.