Dollar Hegemony

[Sphinxter]

Here's a very compelling and cogent article tracking the role of US Dollar Hegemony through the years culminating with the attack on Iraq.

 

A New American Century?

 

As we all know, should the Dollar lose it's reserve currency status, well, interest rates would have to skyrocket to prevent the Dollar from becoming worthless.

 

What I didn't understand very well, that is made clear herein, are the implications behind aggregate trade policy for any nation and its oil needs.

 

The answer is the unique role of the petro-dollar to underpin American economic hegemony.

 

How does it work? So long as almost 70% of world trade is done in dollars, the dollar is the currency which central banks accumulate as reserves. But central banks, whether China or Japan or Brazil or Russia, do not simply stack dollars in their vaults. Currencies have one advantage over gold. A central bank can use it to buy the state bonds of the issuer, the United States. Most countries around the world are forced to control trade deficits or face currency collapse. Not the United States. This is because of the dollar reserve currency role. And the underpinning of the reserve role is the petrodollar. Every nation needs to get dollars to import oil, some more than others. This means their trade targets dollar countries, above all the U.S.

 

Because oil is an essential commodity for every nation, the Petrodollar system, which exists to the present, demands the buildup of huge trade surpluses in order to accumulate dollar surpluses. This is the case for every country but one ? the United States which controls the dollar and prints it at will or fiat. Because today the majority of all international trade is done in dollars, countries must go abroad to get the means of payment they cannot themselves issue. The entire global trade structure today works around this dynamic, from Russia to China, from Brazil to South Korea and Japan. Everyone aims to maximize dollar surpluses from their export trade.

 

To keep this process going, the United States has agreed to be ?importer of last resort? because its entire monetary hegemony depends on this dollar recycling.

 

The central banks of Japan, China, South Korea, Russia and the rest all buy U.S. Treasury securities with their dollars. That in turn allows the United States to have a stable dollar, far lower interest rates, and run a $ 500 billion annual balance of payments deficit with the rest of the world. The Federal Reserve controls the dollar printing presses, and the world needs its dollars. It is as simple as that.

 

Further, this article points out that what's at stake here is literally everything. The entire mechansim of the US has depended, and continues to depend, on the free ride that this petro-dollar conveyor belt offers to the American continent.

 

But, not so simple perhaps. This is a highly unstable system, as U.S. trade deficits and net debt or liabilities to foreign accounts are now well over 22% of GDP as of 2000, and climbing rapidly. The net foreign indebtedness of the United States?public as well as private?is beginning to explode ominously. In the past three years since the U.S. stock collapse and the re-emergence of budget deficits in Washington, the net debt position, according to a recent study by the Pestel Institute in Hanover, has almost doubled. In 1999, the peak of the dot.com bubble fury, U.S. net debt to foreigners was some $ 1.4 trillions. By the end of this year, it will exceed an estimated $ 3.7 trillion! Before 1989, the United States had been a net creditor, gaining more from its foreign investments than it paid to them in interest on Treasury bonds or other U.S. assets. Since the end of the Cold War, the United States has become a net foreign debtor nation to the tune of $3.7 trillion! This is not what Hilmar Kopper could call ?peanuts?.

 

It does not require much foresight to see the strategic threat of these deficits to the role of the United States. With an annual current account (mainly trade) deficit of some $500 billion, some 5% of GDP, the United States must import or attract at least $1.4 billion every day, to avoid a dollar collapse and keep its interest rates low enough to support the debt-burdened corporate economy. That net debt is getting worse at a dramatic pace. Were France, Germany, Russia and a number of OPEC oil countries to now shift even a small portion of their dollar reserves into euro to buy bonds of Germany or France or the like, the United States would face a strategic crisis beyond any of the postwar period. To pre-empt this threat, was one of the most strategic hidden reasons for the decision to go for ?regime change? as it is known, in Iraq. It is as simple and as cold as this. The future of America?s sole superpower status depended on pre-empting the threat emerging from Eurasia and Euroland especially. Iraq was and is a chess piece in a far larger strategic game, one for the highest stakes.

 

And finally, one more snippet:

 

But Washington, leading New York banks and the higher echelons of the U.S. establishment clearly knew what was at stake. Iraq was not about ordinary chemical or even nuclear weapons of mass destruction. The ?weapon of mass destruction? was the threat that others would follow Iraq and shift to euros out of dollars, creating mass destruction of the United States? hegemonic economic role in the world. As one economist termed it, an end to the dollar reserve role would be a ?catastrophe? for the United States. Interest rates of the Federal Reserve would have to be pushed higher than in 1979 when Paul Volcker raised rates above 17% to try to stop the collapse of the dollar then. Few realize that 1979 dollar crisis was also a direct result of moves by Germany, and France, under Schmidt and Giscard, to defend Europe together with Saudi Arabia and others who began selling U.S. Treasury bonds to protest Carter Administration policy. It is also worth recalling that after the Volcker dollar rescue, the Reagan Administration, backed by many of today?s neo-conservative hawks, began a huge U.S. military defense spending to challenge the Soviet Union.

 

So some questions for discussion are:

 

1) Can the US succeed in defending the status of the Dollar as the one and only world reserve currency? Does our current militaristic approach offer a resonable chance of long-term success or not?

 

2) If not, what are the implications for US investments such as stocks, bonds, and real estate? What will happen if $1.5B/day does not recycle into our capital markets? How should we approach investing to protect ourselves?

 

3) It will clearly be painful for many international players if the US dollar loses reserve status. What 'straw' would finally compel them to bite the bullet and go a new direction? Will the trigger-event be economic, diplomatic, or political, in nature?

 

4) ???