[OPE-L] Dollar Crisis and American Empire

From: Rakesh Bhandari (bhandari@BERKELEY.EDU)
Date: Thu Dec 02 2004 - 19:55:24 EST

ZNet | Economy

Dollar Crisis and American Empire
by Jeffrey Sommers; June 20, 2003

America has postponed the day of reckoning since the dollar crisis of
the early 1970s when the soaring cost of killing Vietnamese in order
to "save them," along with other expenses of empire, became too high.
The tab only rose when the US matched this imperial project with
efforts to buy off its own poor through social spending designed to
quell the democractic surge and rising expectations that followed
World War II. The world balked at America's spending and central
banks began cashing in dollars for the promised gold the American
currency was backed by.

So the US ditched the dollar-gold standard in exchange for a purely
fiat paper dollar standard.

The US managed a fantastic wealth transfer from the rest of the world
to itself with this ploy. America barely managed to escape the run on
its dollars, and the upsurge of democracy at home and abroad in the
1970s. But, the empire did strike back. The US jujitsued the crisis
to its advantage by using a combination of experimentation,
opportunism and planning. Rather than being sunk by high oil prices
in the 1970s, the US Treasury Department turned this challenge to its
advantage. It had no choice. By cutting a deal with the Saudis for
weapons and secure investments for their oil wealth, the Saudis gave
America a

monopoly: the paper dollar was elevated to the world's currency of
choice. This was not the market at work, but realpolitik statecraft
to ensure dollar dominance, even though it would no longer be backed
by gold. The nations of the world would have to pay dollars for Saudi
oil and have to pay the US real goods for these paper dollars. The
Saudis, in turn, and then other oil producers, would put their oil
wealth in US banks and T-bills. The US further benefited by lending
out this money to other nations and reaped huge interest payments
ever since from the world's poor countries.

Since the 1970s the US has merely prints dollars and T-bills and gets
oil, minerals, manufactured goods, etc., in return. The only problem
with this virtuous circle of paper for real goods is that at some
point the rest of the world might refuse to play along and the dollar
could collapse.

We are seeing the early signs of just that. The euro was designed to
cut in on America's action, and Europe's gamble appears to be
working. Indeed, one of Saddam Hussein's cardinal sins was pricing
oil in euros instead of dollars, for which if other oil producers
followed suit would have been a major blow to the US. More
menacingly, on Monday, Malaysian Prime Minister Mahathir Mohamad
declared that in principle oil should be priced in euros. Iran too
has made such noises in the past, but has cooled this rhetoric in
light of recent US moves in Iraq and saber rattling directed at North
Korea and Syria. Moreover, the Chinese, and other nations, are now
hedging their bets by holding more of their currency reserves in
euros, and not just dollars. That fiat money has to be paid for in
real goods, and the less dollars nations held, the smaller the
subsidy the US gets.

Rather than Weberian work ethics and other simple nostrums and
bromides used to explain the "success" of the American economy in the
1990s--and even still today among a few Strangelovian types who
declare the same even after the huge equity market losses of the new
millennium--the dollar-standard racket allows the US to float a
half-trillion dollar a year trade deficit with other countries, which
the rest of the world pays for! Figure something like a global
subsidy of 4k per year to every American. But of course, in this
welfare scheme the goods are not distributed equally. The rich take
the lion's share, while the rest can content themselves with
inexpensive electronic toys and cheap consumer goodies that the
global economy delivers to Americans as a substitute for quality
health-care, education, or decent housing.

There is a major restructuring ahead on the horizon.

Indeed, it is already visible. So far the US has covered its
prolifigate spending, in part, through the interest payments it
extracts from the rest of the world, even though many poor nations
have now already paid in interest many times the original amount of
the principle on their loans. The Japanese pay for some of it by
saving money and having it then invested in US T-bills. The
Europeans, especially the Germans, who have also kept the US afloat
by buying its government bonds, pay for another portion. And then the
Chinese also help fill the gap by holding massive dollar reserves.
Yet, all these states have their own problems and might need the
resources they currently use to prop up the US economy and to pay for
its massive deficit spending.

If this happens America's own leaders might administer
conditionality, austerity, and the countless poisons dispensed to the
rest of the world the past thirty years--largely with disastrous
results--to the US with renewed vigor. To be sure, you can count on
court intellectuals and pundits to tell us its all for the best and
blame the victims for any ills that befall them. The elite brain
trust at the US Treasury, and among the country clubs populated by
American manufactures, have warned since the 1970s that American
workers needed to get used to a lower living standards. Of course,
this same public has also had to get used to the top 1% of the
population ascending to heights of wealth and excess not scene since
the Gilded Age and the 1920s. As usual, there would be increased
socialism for the elite and capitalism for the rest.

Under this program the numbers of hours average Americans work has
dramatically risen--surpassing even the Japanese. They made most
Americans work harder and longer for less pay and benefits, and
eliminated job security for good measure. Yet, up to now, Americans
have only been gently going down hill in their decline. With a
deflationary spiral and the collapse of the dollar standard, they
will fall off a cliff as the global subsidy to the US is withdrawn if
global investors lose confidence in the dollar.

The one out for the US might be to continue threatening Japan,
Germany, and the Saudis with destruction of their US assets if they
withdraw T-bill investments, or if the euro is advanced too far as an
alternative currency to the US.

Yet, if global investors and central bank managers panic or if their
own internal economic crises require them to pull out of US
investments, Americans are in deep trouble.

This would be disastrous not only for Americans, of whom you can be
sure capital would export as much of this crisis as possible onto the
backs of average people in the US, but also for the rest of the
world. An America in economic crisis would place the world in even
greater danger of American military adventures by a government
seeking both diversions from its domestic ills while it also sought
means to shore up its empire.

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