Friday, October 01, 2004

America's foes prepare for a monetary jihad

The New Statesman argues that American economic dominance may be about to be sabotaged.

An Extract:

...There has never been a shortage of people willing to lend to the US; after all, as the richest nation on earth, it has to be good for the money, doesn't it? Even when investors have become nervous about its profligacy, there has been plenty of credit because the US economy is a crucial market for the world's producers. In living memory, the United States has been the sole engine powering the world economy: there has been no alternative to continually injecting it with fuel.

But the US has a stick to add to the carrot: since the end of the Second World War, it has had the unique privilege of "owning" the world's reserve currency - the notes and coins used for trade and investment more than any other currency for 60 years. This confers unimaginable advantages. America is able to ignore the discipline of having to balance its books because, if it runs out of money and can't find anyone to bail it out, it can simply print dollars, inflating away the value of its debt and destroying the value of the assets held by its creditors. In other words, it can threaten financial blackmail.

In the 1970s, European and Asian governments started complaining about lending America the money to finance the Vietnam war; the US simply responded by engineering a catastrophic fall in the dollar, which erased its deficit over time but also crucified the economies of its trading partners in the process. Now, with the deficit soaring again to finance foreign wars, the US is repeating the trick. It has encouraged the dollar to fall; exporters to the US such as China and Japan have had no choice but to try to arrest that decline to protect their trade. How? By buying dollars, which they invest in US treasury bonds, thus financing the deficit. How very neat.

But the United States cannot count in perpetuity on winning this game of financial chicken, based on the pre-eminence of the dollar. Its angriest political enemies have worked out the game and have been mulling over their counter-moves. Al-Qaeda has already targeted the soaring symbols of US economic power, from the twin towers to the New York Stock Exchange; now Muslim fundamentalists are trying to topple the dollar. A plan being pushed in particular by Mahathir Mohamed, former prime minister of Malaysia, for a new gold-backed Islamic currency - the dinar - is a rallying point. "Stealth Bomb to Dollar: Islamic gold dinar!" one website proclaims, describing the currency as "the second prong to planned Muslim terrorist attacks on the United States, intended to annihilate US economic power in a world of rising gold prices and a persistently declining dollar". The dinar, it says, is the tool of "monetary jihad".

Rejection of the dollar is increasingly being used as an act of political aggression, and nowhere more acutely than in oil-producing countries. The trailblazer was none other than Saddam Hussein who, in 2000, announced that Iraq would henceforth make all its oil trades in euros, a decision that conspiracy theorists - and not a few eminent Middle Eastern experts - say triggered the US invasion. The United States derives substantial benefits from the dollar being the established currency of the oil industry. Because most countries import oil, they must maintain reserves in dollars to pay for it - two-thirds of the world's currency reserves are kept in dollars. This is a major factor upholding the dollar's position as the world's reserve currency; a switch out of dollars in the oil industry would be a major assault on the currency's pre-eminence.

In April 2003, Indonesia's state oil company, Pertamina, said it was considering using the euro for its oil and gas trades. Even more significantly, in October last year President Vladimir Putin hinted that Russia, the world's second-largest oil exporter, might switch to euros. A Russian move would be enough to tip the balance for other major oil producers. As Arab disapproval of the US war in Iraq has mounted, so a consensus for switching out of dollars has been building; Opec has openly discussed the option and even Saudi Arabia, once America's staunchest Middle Eastern ally, is reported to be considering rejecting the dollar. For now, the euro is the most viable alternative; in future, it could be the Islamic dinar or, far more likely, a new Asian currency.

Western storytellers would relate the tale of the emperor, his new clothes and the little boy who saw his nakedness; perhaps Arab fablers might talk about desert mirages. America's economic dominance was once real; it is now a receding reality, a confidence trick. Washington might ponder that before scattering its dollars and daisy-cutters next time around.

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