Wednesday :: Jul 28, 2004

Bush, Iraq, the economy, oil and the dollar

by soccerdad

I came across 3 articles today. All three are concerned with the economy and 2 propose a slightly different hypothesis for why Bush went to war in Iraq. Disclaimer, I am not an economist by training so I hope for constructive discussion.

The first is by W. Clark The Real Reasons for the Upcoming War With Iraq: A Macroeconomic and Geostrategic Analysis of the Unspoken Truth .
It initially appeared before the war started andhas been revised since.

His premise is that the Iraq war is an "oil currency" war. Thus,

The upcoming war in Iraq war is mostly about how the CIA, the Federal Reserve and the Bush/Cheney administration view hydrocarbons at the geo-strategic level, and the unspoken but overarching macroeconomic threats to the U.S. dollar from the euro. The Real Reasons for this upcoming war is this administration's goal of preventing further OPEC momentum towards the euro as an oil transaction currency standard, and to secure control of Iraq's oil before the onset of Peak Oil (predicted to occur around 2010). However, in order to pre-empt OPEC, they need to gain geo-strategic control of Iraq along with its 2nd largest proven oil reserves

"Peak Oil" refers to the fact that all countries will be pumping at peak capacity by 2010.

Iraq switched to the Euro in 2000. By establishing a puppet government in Iraq, the thinking goes that Iraq would the, switch back to the dollar as its standard and hopefully put itself in a position to keep OPEC from gradually transitioning to the Euro.

Some analysts believe civil unrest might unfold in Saudi Arabia, Iran and other Gulf states in the aftermath of an unpopular U.S. invasion and occupation of Iraq [3]. Undoubtedly, the Bush administration is acutely aware of these risks. Hence, the neo-conservative framework entails a large and permanent military presence in the Persian Gulf region in a post-Saddam era, just in case we need to surround and control Saudi's large Ghawar oil fields in the event of a Saudi coup by an anti-western group. .

This is at least consistent with reports that the US has wanted to build 14 bases in Iraq.

It was thought that Saddam changed to Euros as a political statement against the US even though he was projected to lose $270 million dollars as a result of the conversion. However, starting in late 2001 the dollar depreciated against the Euro and Saddam made a handsome profit.

What would the effect be if OPEC suddenly changed to dollars?

"Otherwise, the effect of an OPEC switch to the euro would be that oil-consuming nations would have to flush dollars out of their (central bank) reserve funds and replace these with euros. The dollar would crash anywhere from 20-40% in value and the consequences would be those one could expect from any currency collapse and massive inflation (think Argentina currency crisis, for example). You'd have foreign funds stream out of the U.S. stock markets and dollar denominated assets, there'd surely be a run on the banks much like the 1930s, the current account deficit would become unserviceable, the budget deficit would go into default, and so on. Your basic 3rd world economic crisis scenario.

It is further interesting that Iran was also swithcing a major chunk of its assests to the Euro.

After toppling Saddam, this administration may decide that Iran's disloyalty to the dollar qualifies them as the next target in the `war on terror.' Iran's interest in switching to the euro as their currency for oil exports is well documented. Perhaps U.S. operations against Iran will be mostly covert, but this MSNBC article alludes to ultimate objectives of the neo-conservatives.

"While still wrangling over how to overthrow Iraq's Saddam Hussein, the Bush administration is already looking for other targets. President Bush has called for the ouster of Palestinian leader Yasir Arafat. Now some in the administration -- and allies at D.C. think tanks -- are eyeing Iran and even Saudi Arabia. As one senior British official put it: `Everyone wants to go to Baghdad. Real men want to go to Tehran.'"

The author also cites evidence that other countries were in the 2002-2003 time frame diversifing their currency and using Euros. He thought it reflected a lack of confidence in the econonomic policies of the Bush administration as well as a way of exerting some control over the US is it became uncotrollable. In addition, shifting currency reserves away from dollars to euros would make it more difficult for the US to finance its deficits thereby limiting its ability to continue with its unilateral military policy.

The articl provides great detail about the economics, the history and the world politics related to the issue.

An article in todays Guardian The real reasons Bush went to war is written by John Chapman who served in the British Government for over 30 years and was involved in oil policy.

His premise is almost exactly the same as Clark's but without the detailed economic exposition. He does provide an interesting quote from Dick Cheney.

In 1990, the then oil man, Dick Cheney, wrote that: "Whoever controls the flow of Persian Gulf oil has a stranglehold not only on our economy but also on the other countries of the world as well."

Then there was this article in the Sunday Washington post Just As Scary As Terror - Anyone Seen Our Economic Policy? written by David Rothkopf who is a visiting scholar at the Carnegie Endowment for International Peace and chairman of Intellibridge Corp. He was also a member of the Clinton administration.

His is an assessment of the current economic situation and doesn't discuss the war in Iraq per se. He reports that the US is no longer the first destination of money for new investment . China and France have pulled ahead of the US.

While such numbers fluctuate and foreign direct investment is just one type of capital flow, this dramatic swing can be seen as further evidence that in the 21st century, America is going to have to fight hard for its piece of the global investment pie -- money that translates directly into new jobs and the industries of tomorrow. Clearly, the world economy is shifting around us and our place atop it is being challenged.

Yet the Bush administration's attention has seemingly been elsewhere

The possible consequences?

Failure to view these twin aspects of our security [ National security strategy and national economic strategy] as interlocking pieces of a single whole will hand our enemies around the world the kind of victories they can't achieve on their own; it will erode our strength, deplete our resources and undercut our way of life.

He is concerned that the investors who are currently buying Treasury bonds etc to finance the debt are no longer predominately individual investors but governements. This development puts more power in the governments to affect our economy.

The effect of their purchases was to prop up the value of the dollar and make U.S. exports less competitive with foreign products. Given their motivation and America 's growing dependence on such investors, this is an ominous turn of events.

Yet our economic leadership seems to be looking the other way. Two weeks after the OECD report came out, Treasury Secretary John Snow told a Cleveland audience, "There is no more serious threat to our economy than the threat of terrorist attacks on our soil."

The author strongly disagrees and lists a number of economic risks that he feels is as important.
1. record deficits, 2.the increasing trade deficit, 3. $72 trillion (yes with a t) in unfunded future retirement and health care obligations, 4. cost of fixing the dysfunctional healtcare and energy systems, 5. growing dissatisifaction of foreign investors with the US, 6, dependence on foreign investors, 7. dependence of foreign oil. and 8 tensions with emerging nations.

While girding ourselves for costly fights in places like Iraq, we have undertaken what amounts to unilateral economic disarmament by ignoring, exacerbating or failing to adequately address any of the real economic threats cited above

He then discusses some solutions.

Taken in isolation this latter article in isolation one could conclude that Bushco is asleep at the switch and/or incompetent. But if we look at all three articles isn't Bush working on his solution? If we install a puppet government in Iraq with military bases and a cut in the money made by selling Iraqi oil, doesn't most of the concerns stated in the last article become minimal to no-existant? The dollar will stay strong, there will be a revenue stream, and we will maintain leverage over other countries.

So the idea that we invaded Iraq to perserve our economy and oil supply certainly makes more sense than the WMD ploy. So our economy is now based on capitalism maintained by the military industrial complex.

The thought that crosses my mind is that if Bush uis re-elected and he loses this war in Iraq, we are really really screwed.

soccerdad :: 7:19 PM :: Comments (7) :: Digg It!