Friday, March 17, 2006

Economic Warfare

U.S. Debt Ceiling Increased
The U.S. Senate voted yesterday to increase the debt "ceiling" by some $800 billion dollars, setting the new ceiling level at 9trillion dollars. (The old limit had been $8.2 trillion.) The move was necessary to prevent a U.S. default on U.S. Treasury notes, particularly those held by foreign investors. The vote was 52-48. The vote came just hours before votes scheduled to appropriate funds for the war in Iraq and continued recovery costs from last summer's hurricanes, especially Katrina. According to the report by ABC-News, the increase in the debt level allows the increased expenditures without making it necessary to raise taxes. The increase in the debt ceiling equals about $30,000 for each man, woman, and child living in the United States.

Comments:Let me see if I have this right. I'm spending more money than I'm earning; and I want -- no, need -- to spend more. Rather than cut back on any discretionary expenses, or finding a way to oncrease my income, I call all my credit card companies and ask them to increase my credit limits. Not only do they all agree to let me spend even more (as I am approaching the point where I've maxed out my existing credit limits) -- they are relieved to do so, because it means I won't default (today, anyway) on my debt. Huh??? No doubt about it, Rocky -- there's something about this I don't comprehend...

Economic Warfare, Iraq, and Iran
An interesting theory is floating around about the reasons for the war in Iraq which have nothing to do with the al-Qaeda form of terrorism, or weapons of mass destruction. According to this theory, the war in Iraq is, in part, a preemptive strike against Iran, which may be thinking of attempting something Saddam Hussein tried in the 1990's in Iraq: namely, establishing an exchange ("bourse") for oil that would be tied to euros, rather than the U.S. dollar. The bottom line on this argument is that the transfer for the dollar to the euro would constitute an attack on the dollar, leading to an economic panic as the dollar is displaced as the "benchmark" for the world economy.

There are several articles that offer more details: one by William Clark, entitled, "The Real Reasons Why Iran is the Next Target"; "The Approaching War with Iran"; and an interesting consideration of the parallels between the Roman Empire and the American "empire" as each, the only "superpower" of its time, extended its influence in the Middle East, "Empire," by Cyril Capdevielle. Here's an excerpt from one that sums it all up quite clearly, entitled "The Proposed Iranian Oil Bourse," by Krassimir Petrov:
A nation-state taxes its own citizens, while an empire taxes other nation-states. The history of empires, from Greek and Roman, to Ottoman and British, teaches that the economic foundation of every single empire is the taxation of other nations. The imperial ability to tax has always rested on a better and stronger economy, and as a consequence, a better and stronger military. One part of the subject taxes went to improve the living standards of the empire; the other part went to strengthen the military dominance necessary to enforce the collection of those taxes.

Historically, taxing the subject state has been in various forms—usually gold and silver, where those were considered money, but also slaves, soldiers, crops, cattle, or other agricultural and natural resources, whatever economic goods the empire demanded and the subject-state could deliver. Historically, imperial taxation has always been direct: the subject state handed over the economic goods directly to the empire.

For the first time in history, in the twentieth century, America was able to tax the world indirectly, through inflation. It did not enforce the direct payment of taxes like all of its predecessor empires did, but distributed instead its own fiat currency, the U.S. Dollar, to other nations in exchange for goods with the intended consequence of inflating and devaluing those dollars and paying back later each dollar with less economic goods—the difference capturing the U.S. imperial tax. Here is how this happened.

Early in the 20th century, the U.S. economy began to dominate the world economy. The U.S. dollar was tied to gold, so that the value of the dollar neither increased, nor decreased, but remained the same amount of gold. The Great Depression, with its preceding inflation from 1921 to 1929 and its subsequent ballooning government deficits, had substantially increased the amount of currency in circulation, and thus rendered the backing of U.S. dollars by gold impossible. This led Roosevelt to decouple the dollar from gold in 1932. Up to this point, the U.S. may have well dominated the world economy, but from an economic point of view, it was not an empire. The fixed value of the dollar did not allow the Americans to extract economic benefits from other countries by supplying them with dollars convertible to gold.

Economically, the American Empire was born with Bretton Woods in 1945. The U.S. dollar was not fully convertible to gold, but was made convertible to gold only to foreign governments. This established the dollar as the reserve currency of the world. It was possible, because during WWII, the United States had supplied its allies with provisions, demanding gold as payment, thus accumulating significant portion of the world’s gold. An Empire would not have been possible if, following the Bretton Woods arrangement, the dollar supply was kept limited and within the availability of gold, so as to fully exchange back dollars for gold. However, the guns-and-butter policy of the 1960’s was an imperial one: the dollar supply was relentlessly increased to finance Vietnam and LBJ’s Great Society. Most of those dollars were handed over to foreigners in exchange for economic goods, without the prospect of buying them back at the same value. The increase in dollar holdings of foreigners via persistent U.S. trade deficits was tantamount to a tax—the classical inflation tax that a country imposes on its own citizens, this time around an inflation tax that U.S. imposed on rest of the world.

When in 1970-1971 foreigners demanded payment for their dollars in gold, The U.S. Government defaulted on its payment on August 15, 1971. While the popular spin told the story of “severing the link between the dollar and gold”, in reality the denial to pay back in gold was an act of bankruptcy by the U.S. Government. Essentially, the U.S. declared itself an Empire. It had extracted an enormous amount of economic goods from the rest of the world, with no intention or ability to return those goods, and the world was powerless to respond— the world was taxed and it could not do anything about it.

From that point on, to sustain the American Empire and to continue to tax the rest of the world, the United States had to force the world to continue to accept ever-depreciating dollars in exchange for economic goods and to have the world hold more and more of those depreciating dollars. It had to give the world an economic reason to hold them, and that reason was oil.

In 1971, as it became clearer and clearer that the U.S Government would not be able to buy back its dollars in gold, it made in 1972-73 an iron-clad arrangement with Saudi Arabia to support the power of the House of Saud in exchange for accepting only U.S. dollars for its oil. The rest of OPEC was to follow suit and also accept only dollars. Because the world had to buy oil from the Arab oil countries, it had the reason to hold dollars as payment for oil. Because the world needed ever increasing quantities of oil at ever increasing oil prices, the world’s demand for dollars could only increase. Even though dollars could no longer be exchanged for gold, they were now exchangeable for oil.

The economic essence of this arrangement was that the dollar was now backed by oil. As long as that was the case, the world had to accumulate increasing amounts of dollars, because they needed those dollars to buy oil. As long as the dollar was the only acceptable payment for oil, its dominance in the world was assured, and the American Empire could continue to tax the rest of the world. If, for any reason, the dollar lost its oil backing, the American Empire would cease to exist. Thus, Imperial survival dictated that oil be sold only for dollars. It also dictated that oil reserves were spread around various sovereign states that weren’t strong enough, politically or militarily, to demand payment for oil in something else. If someone demanded a different payment, he had to be convinced, either by political pressure or military means, to change his mind.

Food for thought...