Ending the Dollar's Tyranny
by Mike Whitney Information Clearing House
“The real rulers in Washington are invisible and exercise power from behind the scenes.” Felix Frankfurter, United States Supreme Court Justice
The U.S. dollar is the very heart of the empire. The military, the media and the political establishment are merely the tributaries which flow away from the center. Any plan to restore America’s democratic values and end our foreign wars must focus on the dollars’ dominant role in the global economy and its adverse affects on the people at home.
Presently the dollar is underwritten by $8.3 trillion of debt. The US trade deficit is running at $800 billion per year which is 6.4% of GDP. The trade deficit is large enough to cover the yearly costs of the war in Iraq, the defense budget, and Bush’s lavish tax cuts. In other words, America’s war machine is lubricated with money borrowed from the developing world.
Despite the enormity of America’s debt, foreign nations still accept our fiat money in exchange for their resources and manufactured goods. That’s because the American consumer market has been the main engine for global growth for more than 25 years. Only recently have other countries started to shy-away from the dollar, recognizing the tell-tale signs that the over-leveraged American consumer is nearing the end of his spending spree. As consumer spending gradually slows, recession will set in, and investors will shift capital to foreign markets. These developments will make it more difficult for the dollar to maintain its supremacy.
Typically, foreign-owned US dollars are used to purchase American securities or US Treasuries. It takes roughly $2.5 billion per day of foreign net-inflows to cover the burgeoning deficit. These infusions help to keep interest rates low in the short term, but they come at a hefty price. America is placing its future in the hands of its creditors who now own more than $3 trillion of American assets and securities. We saw how explosive this situation can be in the case of the Dubai Port deal. Middle Eastern businessmen wanted to purchase American seaports with US dollars. The transaction set off a political firestorm even though the Dubai businessmen were operating entirely within the legal confines of current international trade law. As more of America’s wealth is transferred to foreigners, we can expect similar situations will arise.
The massive trade deficit serves the narrow interests of western elites and the Federal Reserve, but is destructive to the working class. It allows the shifting of wealth from one class to another via tax cuts, “no-bid” contracts, and other contrivances which escape public notice behind the smokescreen of low interest rates. It also allows the Fed to keep increasing the money supply (which has doubled in the last 7 years) to meet the requirements of expanding foreign trade.
It's no wonder Washington politicians and banking giants plan to prolong this system as long as possible. Their power and personal wealth are only enhanced by the process. The exchange of paper scrip for valuable commodities, resources and manufactured goods is the best deal around. It is the equivalent of having a mint in one’s own backyard. Last year’s trade deficit with China alone (which was $200 billion) would have paid for 2 full years of the war in Iraq!
War is considerably less painful when someone else is paying the bill.
Although the current deficits are “unsustainable,” (according to former Fed-chief Alan Greenspan) foreign countries continue to accept greenbacks in exchange for their goods; sucking hundreds of billions of dollars from the poorest countries on the planet to sustain the living standards of people in the world’s biggest “debtor nation”. The brisk pace of international trade keeps trillions of dollars in circulation preventing the hyper-inflation it would cause if the money was returned to America.
As America’s debt has continued to balloon, there are signs that nation’s around the world are beginning to diversify their stockpiles of US dollars. If they reduce their holdings too quickly, the dollar could free-fall and precipitate a widespread sell-off.
According to Arab News, nearly $4 trillion in US dollars is currently held in central banks around the world; nearly 70% of all their holdings. This is as close to a monopoly as it gets. If even a fraction of those greenbacks are traded for euros or some other currency, the effects on the American economy would be catastrophic.
To a large extent, the supremacy of the dollar depends on the oil trade. Oil is the largest commodity in the world and its trade is almost exclusively denominated in dollars through the New York Mercantile Exchange (NYMEX) or London’s International Petroleum Exchange (IPE). Foreign countries must maintain large stockpiles of US Dollars in order to meet their energy needs. It is estimated that approximately $2.6 trillion is circulating in the oil trade alone.
This vice-like grip on the oil market is now being challenged by a number of countries including Russia, Venezuela and Iran. These three nations produce 25% of daily global output and pose a direct challenge to the dollar’s continued dominance. This explains why these three have fallen out of grace with Washington. The US cannot maintain its superpower status unless it can control the lion’s-share of world’s oil and force the world to use its currency. By 2030 60% of the world’s oil will come from the Middle East. The US will have to assert control over the resources of the entire Caspian Basin if it intends to keep the dollar as the de-facto international currency.
Imperial rule requires a “coin of the realm”. Even as the American consumer market loses steam; western elites are planning to preserve US dollar hegemony in order to continue their control of the global economic system. Their objectives foreshadow even greater reliance on military force and intimidation.
America is now engaged in a transition that has never before been attempted. It has hollowed out its manufacturing sector (more than 3 million manufacturing jobs have been lost since Bush took office) looted its treasury, and plunged the country into irreversible debt. Its major corporations and banks have disconnected from the mainland and operate as sovereign islands protected by the US military and international trade law. They have no allegiance to America and are unaccountable to anyone except their own shareholders.
Dollar-hegemony is critical to their ongoing success as it keeps the basic unit of exchange; paper money, in the control of fellow-elites at Federal Reserve. Absent that power, American plutocrats would be unable to perpetuate the system of trading debt (US dollars) for resources and manufactured goods. If Bush succeeds in his global resource war, then countries will be forced to use the dollar regardless of how much debt it has accumulated.
The most effective strategy for bringing the dollar into balance with the other currencies is to “democratize” the system and allow the free exchange of goods and resources in one’s own currency. This would eliminate the dependence on a reserve currency and make the United States accountable for its own prodigious debt. This, in turn, would force American leaders to revitalize the manufacturing sector as a way of restoring economic solvency.
The dependence on a “reserve currency” inevitably creates winners and losers. It is an invitation to massive account imbalances as well as corruption and exploitation. Greater parity among the currencies should be encouraged as a way of strengthening democracies and invigorating markets. It promises to breathe new life into international trade by allowing other political models to flourish without fear of being subsumed into the capitalist prototype.
The dominance of the greenback has created a global empire which is controlled by a small group of corporatists and autocrats who depend on bullying and brute force to maintain their supremacy. The only way to restore the republic is to topple the empire, dislodge the dollar from its lofty perch, and even the playing field with the other currencies.