SRA Commentary: The American Imperial Dollar

"Gold is money. Anything else is merely credit."

- Ferdinand Lips, Freedom is Lost in Small Steps, Current Concerns, The Monthly Journal for Independent Thought, Ethical Standards and Moral Responsibility

"What do you want me to do? Stand up and beg like Fala?" (Roosevelt's dog)

- Winston Churchill to Franklin Roosevelt, quoted in Skidelsky, John Maynard Keynes, Fighting for Britain, MacMillan 2000, p.363.

Churchill was trying to negotiate better Lend Lease terms from the Americans.

Bread and circuses

President Bush rang in the New Year changes with a huge tax cut package that was vintage Grand Old Party, with the emphasis on party. The critics predictably slammed it, therefore, characterising it as a giveaway to the rich. This was especially true with respect to its repeal of taxes on dividends. This is too bad, because the tax cut package can be usefully criticised, but to do so by defending one of the greater absurdities of the American tax system does nothing to add to the credibility of the critics. Investors are owners, after all, and they have for years watched their profits taxed twice - once as a tax on corporate income, and another as a tax on personal income. This action could be a first step toward removing the pernicious bias in the American tax system against income, and will certainly do nothing to harm stock prices. Just because rich people own most of the stock is no reason to begrudge a matter of principle. And to do so on the basis that "ordinary" savers with 401-K plans already enjoy a tax break and therefore will not enjoy an immediate advantage in the form of increased disposable income is no better. Talk about looking a gift horse in the mouth.

Critics would do better, in our view, to quit carping about tax cuts and look to the giveaway to Wall Street that is in the works in the form of Social Security "reform." This is more in the way of organised theft, and the real scandal is that the administration has been able to get away with stacking the commission studying the matter with partisans of privatisation. There is a strong case to be made that this is nothing more than a diversion of cash from wages and salaries through the Wall Street cash register where the brokerage industry will levy its tribute at several multiples of the cost to the system of its current administration. This will come directly out of the public's capital irrespective of returns. We do not know how well the public understands this, but it probably makes little difference. A cursory examination of who contributes how much to Congress tells the story. The finance men are going to get their way.

All this is very likely to boost stock prices, or at least support them at levels higher than they would otherwise have been at. However, although reducing the tax system's bias against income is helpful, there is a long, long way to go before the prodigious mountain of American debt is reduced. The idea that government policy is pro "growth" and that this will somehow magically restore the public's coffers is simply nonsense. So is the so-called increase in productivity that the government's cheerleaders keep going on about. The leaders of a post-industrial economy that has to import over half of its machine tools do not deserve to boast about manufacturing productivity. That does not mean that they are stupid. After all, it is their income that is most highly geared to stock prices, either directly or indirectly.

Who pays, loses

With the dollar finally falling in earnest it may be useful to examine some of the premises behind the fall. From our periodic conversations with protagonists in the foreign exchange market, concerns about war in the Persian Gulf are behind the recent fall in the US currency. At first a little puzzling, this could be plausible if the cost of a war indeed turns out to be as big as some observers seem to think. A prolonged and costly war would put more pressure on the US external deficit. This is sensible, we think, but we are still puzzled about the markets' behaviour: this has been a problem for years and been ignored. Why worry now?

To begin with, the Americans won't be paying for it. If you doubt this, you are not reading your newspaper. The US has no intention of not getting paid, and has made clear that it intends to administer the Iraqi oil industry. At $25 per barrel and operating at maximum capacity, that works out to just over $18 billion per annum. Starved for investment now for years, the Iraqi oil industry's potential oil production capacity is certainly much higher than that, with conservative estimates in the neighbourhood of double current capacity. Even if a war cost $200 billion up front, is that a bad deal? Certainly not.

However, paying attention to the profits of oil is to miss the forest for the trees. The fact it is that the control of oil is what really confers power and ultimately the largest profits. Analysts are slowly waking up to the fact that occupation of Iraq's oil fields will in effect destroy OPEC. This is not to say that because of this oil will be cheap. It does mean that there will be a significant realignment of power within the cartel. Since 911 it has been customary to construe the US and Saudi positions as opposed. Certainly, on questions such as Palestine, this is true. But the Saudi Arabian monarchy needs to keep oil prices above $18 - $20 per barrel (as does, incidentally, the other large self-sufficient producer, Russia). The oilmen running the US are not opposed to higher prices. What they want is the ability to set prices. An independent Iraq run by a nationalist makes that more difficult. That cuts across Saudi interests too.

This little difficulty is compounded when there is more than one independent nationalist oil producer. Venezuela's Hugo Chavez is thus another thorn in the side of the oil industry establishment. The US is clearly determined to get rid of him, and the clumsy coup attempt last spring has given way to a protracted struggle to bring the Venezuelan government to its knees by cutting off its oil revenues. What is comically called a strike by the Anglo-American press is nothing other than a good old-fashioned 19th century lockout. The spectacle of management not coming to work and calling it labour action is ridiculous; the behaviour of the western news media is simply pathetic.

How do you organise an empire?

With equities struggling and bonds strong, the markets are discounting real trouble for the US and the world. But there is a possibility that the Americans might pull this off in spite of themselves. The US needs to do something after all. The release on Friday of November's trade statistics, with the monthly deficit rising to a stupefying $40 billion, simply drives home the point that a political economy that imports most of its consumer goods and productive machinery is simply not viable. Two choices confront it. Either reform, which to begin with would entail at a minimum raising the savings rate sufficiently to stabilise its external balance and offering workers an incentive to save, that is to say paying them a larger share of the economy's profits; or reinvent the boundaries of the political economy. It strikes us that the US has quite clearly chosen the latter.

1: Monopolise money

The basic outlines of this choice are clearly visible today, as indeed they have been for a number of years now. The first element of what we may term the "reinvention strategy" is financial. This has meant and still means using America's reserve currency monopoly and domination of the world's financial architecture to aggressively leverage in order to co-opt the surplus savings of the rest of the world. This has enabled the US to push the value of its corporate sector far higher than would have otherwise been possible, and to purchase domestic political tranquillity with a faux prosperity.

2: Make club membership mandatory

The second element has been institutional. The leverage strategy only works if all significant parties play the game. Hence, everyone who is anyone needs to become a member of the system, which is to say of the International Monetary Fund and the World Trade Organisation. In the former they formally eschew the sovereign right to issue their own currency by forswearing the use of gold as a currency anchor. In the latter they agree to open their economies to foreign goods and investment. When you think about it, it makes you wonder who has been courting whom in China's WTO negotiations. And leaving nothing to chance, the US now dominates what used to be a European institution, the BIS, which it has turned into a pretty fair approximation of a world central bank.

By agreeing to eschew the use of gold or anything other than dollars as a store of value, nations effectively cede monetary sovereignty to the US. This is no small thing. Switzerland, which for all its modern history had maintained a link to gold, dropped it within a few short years of the collapse of the Soviet Union. The Swiss had always maintained a policy of heavily armed neutrality, understanding all too well the links between sound money, the ability to defend oneself and self-determination. The timing of this historic surrender was no accident - there was no one left to play off against the Americans. Nor is it a coincidence that the chief of the Swiss armed forces now wants the military to get involved in international peacekeeping. With nothing left to defend, he is probably worried about his job.

3: Carry a big stick

The third element of US strategy is military. To read the newspapers, no one finds it remarkable that over ten years after the end of the Cold War the United States is still maintaining a globally capable order of battle. The reason is simple. To borrow from Donne, ask not towards whom the guns turn, they turn towards thee.

Clearly, no one even remotely nationalistic would accept the sort of deal on offer from the Americans without some sort of sanction. That sanction comes in the form of the Americans' power to blow them to smithereens if they don't comply, and the US has done just that over the years with little apparent compunction. Consider that last year the US issued, for example, a report on its covert complicity in the deaths of some 1 million (that is no typo) Indonesians in the 60s and the admission was simply not news. America's indiscriminate use of chemical and aerial weapons during the Second Indochina War resulted in a death toll estimated by some as high as 2 million. The Romans also understood the merits of the salutary lesson, as when they razed Carthage and Corinth, Jerusalem and Palmyra. Unfortunately, the Americans seem to have had no Scipio (pace Dwight Eisenhower), which is a great shame, and the idea of a literate president in the mould of a Marcus Aurelius is a joke.

4: Sell protection

What the Americans do understand, perhaps even better than the Romans, is Vespasian's admonition that money does not smell. And with all that leverage, it has plenty of that to buy off those who are less inclined to fight. Which brings us to the last element in American strategic thinking: control of the world's oil supplies.

As we said earlier, it is not so much the profit of oil but the power that control of oil confers that is important. The fact that you get rich too by controlling oil is almost incidental. None of the Far Eastern savings surplus countries that the US economy depends upon are self-sufficient in energy. All rely on imported hydrocarbons. Japan, easily the most important of them from the American point of view, relies totally on imported oil. The extent of Japan's dependence be measured by the fact that the Japanese are the most energy efficient users of oil of any of the major economies, and by the size of its nuclear energy program, which is one of the largest. Japan risked war with America to secure access to oil and her independence from American tutelage. Having lost, she now depends on the Americans to secure her supply.

It is interesting, as we have done in the past, to consider the similarity between the US - Japanese relationship today and the British - US relationship between the two world wars. Like the British before them, the US depends for its wealth and power on its expensive and far-flung military, which secures for it access to fuel. Like the British, who went deep into debt to the US India and Egypt to support their military machine, the Americans have gone deep into debt to the Japanese, the Germans and the Chinese to finance their enormous military budget. Unlike the British, however, the Americans have been able to fashion an international monetary system that brooks no alternatives. Britain had no means of coercing the Americans, and had to go cap in hand to get help and credit. America by contrast went to Japan and Germany, figuratively speaking, with fire and sword. Both countries fought tooth and nail because to lose meant to lose everything. Access to fuel was all then, and it is all now.

A few days ago during a Parliamentary session on Iraq, the man who sits in Churchill's seat on the front bench, Tony Blair, dismissed talk of oil being a casus belli as nothing more than "conspiracy theory." It was a tremendous performance, very sensitive and very believable. Indeed, it is hard to imagine anyone else playing the part of Fala so well.

ENDS

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