Iraq War and the Euro

[japgar]

This is my first post and I'm an avid reader at this forum. I just wanted to post some information that might not have been discussed regarding the Iraq war. I came across this write up from the Independent Media Center.

http://www.rense.com/general34/realre.htm.

Some of it makes sense and I think some people here might be interested. I'll copy some small excerpts.

If Iraq's WMD program truly possessed the threat level that President Bush has repeatedly purported, why is there no international coalition to militarily disarm Saddam? Secondly, despite over 300 unfettered U.N inspections to date, there has been no evidence reported of a reconstituted Iraqi WMD program.

The Federal Reserve's greatest nightmare is that OPEC will switch its international transactions from a dollar standard to a euro standard. Iraq actually made this switch in Nov. 2000 (when the euro was worth around 80 cents), and has actually made off like a bandit considering the dollar's steady depreciation against the euro." (Note: the dollar declined 15% against the euro in 2002.)

The real reason the Bush administration wants a puppet government in Iraq - or more importantly, the reason why the corporate-military-industrial network conglomerate wants a puppet government in Iraq - is so that it will revert back to a dollar standard and stay that way." (While also hoping to veto any wider OPEC momentum towards the euro, especially from Iran - the 2nd largest OPEC producer who is actively discussing a switch to euros for its oil exports).

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 seems likely that this could be a large motivating factor for this war and one that was definitely not discussed in the media. I don't know if anyone is a macroeconomics major, but it would be interesting to hear from your expertise on this subject and maybe shed some light on whether this argument is sound or not?

Thanks.

 

[Silent_One]

This has been discussed here in the past but I can't find it in my search. Currently the search only goes back to 19 Mar 2003, not counting Polls, and I believe the discussion was before the war. Anyone?

 

[DemoCoder]

Oh gawd, not again.

 

[Silent_One]

Oh gawd, not again.

Yeah, Id like to just link the previous post on the subject, give the man an answer, and be done with it.

 

[amk]

I don't have the link to the previous discussion, but I do have some more articles:

http://www.larouchepub.com/other/2003/3016glazyev.html

One of Glazyev's several media interviews during the Iraq war occurred on April 2 on Russian TV Channel 3. Glazyev rejected the notion, widely believed in Russia, that "cheap oil" was the goal of the Anglo-American attack on Iraq. Rather, he said, the fundamental issue is the crisis of the global financial system: In Glazyev's terms, "the war is being waged in order to preserve the dollar's role as world reserve currency."

A major caveat here is that this site is associated with crackpot Lyndon LaRouche. However, it is largely based on Glazyev's essay. It is perfectly possible to check on Glazyev's credentials.

I also have a quote from the Vice President of Venezuela:

http://news.bbc.co.uk/1/hi/world/americas/2877427.stm

The vice-president of Venezuela, Jose Vicente Rangel, has accused the United States and Britain of using the war against Iraq as a way of pressuring the oil producers' organisation, Opec.

No mention of what this pressure might be in aid of, and no mention of the Euro. I can't find a more in depth article.

Edit:

This is the link given in the previous thread.
http://www.ratical.org/ratville/CAH/RRiraqWar.html
It contains an addendum not given in the Rense mirror, a commentary, and links to other articles on the topic.

 

[Sxotty]

The euro is going up b/c people are dropping US investments thinking that we are a bunch of crazed maniacs. Money likes stability and the statusquo, it is safer there.

 

[Nagorak]

The euro is going up b/c people are dropping US investments thinking that we are a bunch of crazed maniacs. Money likes stability and the statusquo, it is safer there.

No, the reason the Euro is going up is because the US economy is a festering piece of shit. The mythical "economic recovery" is nowhere in sight, the only people who see it are those heavily speculating on Wallstreet. The level of optimism among investors is just ridiculous, it's like they're just putting their heads in the sand and assuming things will improve. Meanwhile weekly jobless claim numbers keep increasing, and economic reports all come in with extremely bad news.

While Bush was running around on his silly little crusade, the economy has been going down the tubes, and the only answer he has is a tax cut. That's a pretty pathetic solution since his last tax cut did only two things: jack and shit. Also, the funny thing about a tax cut is, you have to actually be employed to benefit from it. So, who exactly is it supposed to help?

If OPEC changed over to the Euro standard it would just add insult to injury. It's really no wonder that no one wants dollars right now, and believe me it's all economical not political.

 

[MrsSkywalker]

While Bush was running around on his silly little crusade, the economy has been going down the tubes, and the only answer he has is a tax cut.

Wait a minute. You're blaming the current state of our economy on Bush? Do you not understand anything about economics? We're still paying for the garbage social programs Clinton dumped our money into. It takes between five and ten years for a new policy to have an impact on the economy. The economic boost this country received in Clinton's first term had nothing to do with Clinton, just as the slump we are in now has nothing to do with Bush. The tax cut is designed to give some imediate and much needed relief. What would you suggest?

Also, the funny thing about a tax cut is, you have to actually be employed to benefit from it.

Yes. That is correct. Unemployed people pay ZERO income tax. Are you saying that a reduced tax is better than no tax?

 

[pax]

Would be nice to know what garbage social prgrams he put so much money into... In fact Clinton oversaw massive cuts to welfare which are mostly creditable to the republican congress. He only did one effective major policy of note during his 8 years which was to cancel a tax cut and raise them in a few areas which led to the elimination of yearly deficits and reduce interest rates which made the market more attractive to investment. It was a double boon as technology also made the market more intersting than bonds...

The reverse is now true and soon % rates will have to increase no matter how bad the economy is so as to attract bond holders to cover the huge new yearly deficits. A double whammy of lost interest in computer technology and soon to be hgh rates for bonds the economy cant really take right now.


To me tax cuts are bandaids... Whether they are aimed at the poor (to encourage consumption) or the rich (to encourage investment). We really need demand based on healthy income increases based on healthy productivity increases... We have plenty of the latter and not much of the former...

If we had healthy demand there would be no problem for the investment economy...

As for the euro its too bad we have to get our references from less respectable web sites. There really is an issue there as many well repsected eocnomcist have said the problem with so much of the dollars value being based on third party oil sales (about 40%) is a serious issue for the US economy. Im befuddled as to why so many major media outlets have little or nothing to say as to why the dollar went from 85 cents on the euro to 1.20$ in 3 years... Its not a small move... not for an economy this size...

 

[epicstruggle]

facts:
-US economy>EU economy>German economy
-its better for the US economy that the dollar exchange is low, meaning exporting our goods will look more attractive(lower priced).

Although I am a big fan of tax cuts, I wish we could have targetted tax cuts to companies that invest in creating jobs here in the US. Instead of giving them whole sale.

just a few thoughts
epicstruggle

 

[DemoCoder]

The economy was well into recovery by the time Clinton took office. The tax hike wasn't what eliminated the deficit, remember, Clinton instituted a the tax hikes in combination with spending hikes. ("Stimulus" package) The Republicans ("Contract with America" remember) shutdown the government and forced Clinton to agree to some budget cuts.

But neither was responsible really. There's a flaw in trying to credit or blame the president for the state of the economy, anymore than he can be given credit for a sunny day or blame for a thunderstorm.

The economy was already crashing before Bush too office. From 2000-2002 there were a massive number of layoffs and bankruptcies in Silicon Vallery because of the dry up of investment capital (which financed the dot com spending binge, but really didn't deliver many products that people bought)


As for the claims of productivity vs income, #1 as I have shown in the past, income has grown, and #2 most of the gains in productivity have come in manufacturing, and as we all know, most of the manufacturing sector has been shipped overseas. The vast majority of people work in the service sector, and "service productivity" is a very nefarious concept. What's a 2.2% productivity increase mean for a person who manages the store front in a fashion store at shopping mall? Or 2.2% for someone who writes software? 2.2% more lines of code per day? 2.2% gain for a laywer or doctor? More cases and operations per day? Talk about trying to lie with statistics.

I'll end with two points:

#1 A deflated dollar vallue
a) boosts the value of overseas assets for US firms
b) increases the cost of EU exports
c) decreases the cost of US exports for foreign consumers
d) attracts more foreign investment
e) reduces the trade deficit

(negatives)
f) raises cost of living/business for consumers and firms (purchasing foreign goods, traveling)
g) makes it hard for US investors to invest overseas (stock more expensive, etc)

#2 US is facing price deflation. Historically, weak dollar means higher inflation, and previous US deep recessions and depressions were rescued by a weak dollar.


#3 You don't want your currency to be too strong or too weak. Each and pros and cons. Any economist worth salt knows this. They also known that the gold standard and fixed exchange system was abolished because any attempt to fight against currency fluctuations ends up hurting the economy.

These fluctuations are happening because there is a natural imbalance. The US dollar has been too strong for too long and they has given the rest of the world a free ride. It heavily damaged the US manufacturing sector by causing US investment to flow to countries with weaker dollars, and simultaneously making US products too expensive on the world market.

This conspiracy theory is completely bogus because the US has been debating for years to let its currency devalue to fix the trade deficit. It is lobbying from Japan, China, and Europe that had prevented the Fed from doing this, because the US economy was proping up the EU and Japan's failing economies in the 90s, plus fueling China's growth.

You should know that the dollar conspiracy is a LAROUCHE/TRILATERAL/BILDERBERGER theory. It's nonsense and in fact, respected economists do not buy it. This iteration of the dollar conspiracy (Iraq war) was recycled by a Marxist Indian think-tank, and was picked up by all the Indy media cycles.


The dollar conspiracy is also frequently spread by gold standard nutcases who still think we were taken off the gold standard because of some wacko X-Files like plot.



The dollar is the defacto unit of trade in oil, gas, gold, and many many other commodities. This will not change overnight even if people wanted to, anymore than you could change everyone from Windows to Linux, or from TCP/IPv4 to something else. There are way too many people invested in using dollars as the linga franca.

This has somewhat helped prop up dollar demand, which has allowed the US to maintain a trade deficit for longer than it should. It was not the US that benefited from this most, it was the developing economies, instituting a massive transfer of wealth from US savings to buy cheap overseas goods. It is time for the dollar to fall and for EU and Japan to stop getting a free ride in international trade.

(and I will quote Paul Sameulson, Nobel prize in Economics, on this)

BTW, the Dollar weakened in 1991-92 and again in 1993-95. The result? A big cut in the trade deficit, boosted manufacturing sector, big flows funneling into US stock market, and one of the largest economic booms in our history.

 

[pax]

Obviously the fluctuations occuring are simply corrections for previous imbalances. Always is. But the larger the fluctuations in the shorter time span is something worth looking into. If this was comparing lets say the us vs the can$ I wouldnt be too concerned. But for an economy the size of the US for this much of a fluctuation to occur so fast with another major currency means there are unhealthy components in the economy that keep more modest corrections from taking place.

I dont know what the US will export unless a lot of factories come back to the US and the lastest figures still shows a huge trade deficit. In any case the comparison I last read (I think it was an article at the economist) of deflation as a good thing as long as its slow and modest as it was in the late 19th cent was quite convincing. Personal debt is too high and consumption too low. Something has to give.

If deflation however becomes radical like the changes in currency I think then a diff psychology will apply. I dont think anyone knows what the cut off rate of that will be. Id like to see modest deflation for 8-10 years of 1-2% a year with relatively low unemployment. With that I think healthy consumption will take hold again and personal debt more manageable...

Im not sure the dollar will remain de facto for that long. China is already looking at euros for the euro market that is nearly as large as the us's.. same for oil and other commodities. In fact the basis of the dollars weakness stems from changes from dollars to euros for oil sales by many opec countries. Only Iraq has seen its sales go back to dollars after the us invasion (it was in euros since 1999). But even then I dont think europe will stand to use dollars and will likely buy their oil form countries that accept euros. Considering europe's dependance on foreign oil is more important than the states its likely to happen.

Long term with Russian eventually joining the euro that market may exceed the us's. Unless it also adtopts a postion of extndting its currnecy to other nations. Its an ongoing debate in canada tho not very loud lately...

What do you guys think of a western world currency? It would certainly be a good thing I think to drop currency speculation as an irritant in relations amongst western world nations... I think sometimes its unhealthy for currencies to be so easily used to move wealth. The psychology behind the moves seem unrelated to real normal market evolution. Let real market investors move wealth I say.

 

[DemoCoder]

(quoting my edited message)
The Dollar weakened in 1991-92 and again in 1993-95. The result? A big cut in the trade deficit, boosted manufacturing sector, big flows funneling into US stock market, and one of the largest economic booms in our history.

Also, are you sure you didn't read that article correctly? The standard understanding of inflation theory is that it helps debtors, not deflation.

If I owe you $1000, and all of a sudden, $1 becomes $2, then I pay you $1000, but I really only paid you $500 in real value. Inflation can inflate debts away. On the contrary, a deflation causes debt to become more expensive. It may lower consumer prices, but as you point out, the real thing we need to do to boost consumption is lower debt and increase savings.

You should look into what happened in the early 80s when Reagan weakened the dollar on purpose. There as a huge drop (larger than the current one).

Another factor you have to take into account is that dollar weakness isn't neccessarily a reflection of weakness in the US economy, it is also a reflection of the the strength of the other economies or changes in interest rates (Germany for example singlehandled altered the US/EU exchange rate by imposing high interest rates) As the benefits of the EU single market continue to accrue, expect more "weakness" of the dollar vis-a-vis the Euro.

Again, it is natural. The EU economy was too weak for too long, and that imbalance is also being corrected.

 

[pax]

Ya we see such rates affect our own looney up here with it going from 62 to 74 cernts in about a week. Deflation maybe a double edge sword as you say but I mean low price price deflation. With (probably as was the case in the late 19th) continuing very low income increases. With debts so high we cant have wage deflation without serious probs. This would be even worse if deflation got serious in the 5-10% a year range some are predicting for the next few years... I dont see how we could avoid high unemployment with that.

The problem with evaluating productivity increase as you say is that the US shouldnt lose too much of its manufacturing base. I do think a lot of it should return. Its just not healthy to be only a services producer. If you cant evaluate some doctors productivity increase I dont see how you can export his service any easier...

I mean if we continue to lose our ability to produce any exportable product what will we base our currency on?

To me whats natural on large scale economies should also be a slower process... whats going on is a bit too radical for my taste... And Ill bet for many investors tastes as well.

 

[pax]

The was something natural about the high inflation and drop in us dollars value in the late 70's ealry 80's. It was easily understandbale back then and most thought that ocne the insane oil prices went back down thinsg would settle.

Not so today. We are having a bit of a harder time putting the finger down on the causes of the economic slowdowns today. Investors I know are more uncertain of what going on. We can tralk high bank rates of other countreis... Germany needing to borrow more to rebuild the east or some othr country needing to fight inflation (canada but not for long) but the fluctuations are still too strong. I mean we havent had any obvious thing like the huge oil boycott of the 70's. Some countries slight % diffs are also hard to accept.

If the mere creation of the euro (and its eventual move into international markets for the long run) is enough to make the us dollar go into a tailspin what will make the dollar bounce back? High us rates? We cant have that. Debts are too high and market will move into bonds and leave stocks. Factories move back into the us? Will undermine export based economies ability to buy us exports...

At every turn right now theres no easy answer... Its gotten too easy to show a ying for every yang of the us dollars potential return to past health. Dont wanna be too much a pessimist. But something should be done to manage deflation and I dont see tax cuts as the answer...

 

[Humus]

What do you guys think of a western world currency?

I would vote Yes on that.

 

[DemoCoder]

What do you guys think of a western world currency?

I would vote Yes on that.

It's unworkable without a "western world government". A single currency would be a return to the fixed exchange rate system that existed during Bretton Woods era. This failed for many reasons which are today studies in Econ 102, forcing the US to go to a floating exchange rate system.


If the EU and and North America were a single free trade zone and had a single federal reserve/central bank, it could work, but that posits a level of closeness that I think neither side is willing to accept at this moment.

 

[Humus]

Well, I'm all for make EU and North America a single free trade zone too. The closer we can bring EU and NA together the better. You're probably right that neither side is willing to accept that at this moment, but I'd love to see it happen some time in the future.

 

[amk]

I have some more links:

http://www.cepr.org/PUBS/Eep/articles/Bigeuro.htm
Centre for Economic Policy Research, which seems to be a perfectly respectable organisation of economists.

Reserve currency status is not just an international status symbol. It brings international seigniorage, benefits for ‘home’ financial institutions, relaxation of the ‘external constraint’ on macroeconomic policy, a greater role for the issuer in international institutions, and the wider geopolitical consequences of exercising currency hegemony.
...
The consequence could be a welfare gain of as much as 0.4% of GDP (annually) for Europe (including seigniorage), with a smaller loss for the United States – as well as the other economic and geopolitical attributes of the ‘hegemonic’ world currency.

http://www.fff.org/comment/com0303a.asp

The world demand for dollars and the worldwide use of the dollar have served as an important cushion to maintain the value of the dollar on foreign-exchange markets, which has enabled the U.S. government to print money and run trade deficits that might otherwise have put downward pressure on the international exchange rate of the greenback.

The demand for dollars has also enabled Washington to fund the federal budget deficits of the past because foreigners have used the dollars they own to purchase U.S. Treasury securities.
...
If the euro were to increasingly become the alternative international currency of choice in competition with the dollar, the global demand for greenbacks would fall, the value of the dollar would decline, and the U.S. government would find it far more difficult both to export inflation and to finance its budget deficits. The financial clout and muscle of the American government would be dramatically undermined over time with the dollar increasingly no longer the only global reserve currency in town.
...
Richard Ebeling is the Ludwig von Mises Professor of Economics at Hillsdale College in Michigan and serves as vice president of academic affairs at The Future of Freedom Foundation in Fairfax, Va.

http://www.upenn.edu/researchatpenn/article.php?144&bus

According to finance professor N. Bulent Gultekin, the rise of the euro could reduce the cushion that U.S. consumers get from the dollar’s global stature. "People all around the world accept U.S. dollars and they cost us nothing to print. That allows us to have protracted deficits and an imbalance of trade. Basically we’re financing our consumption for nothing."

http://ist-socrates.berkeley.edu/~pdscott/opec.html

<21> "So long as OPEC oil was priced in U.S. dollars, and so long as OPEC invested the dollars in U.S. government instruments, the U.S. government enjoyed a double loan. The first part of the loan was for oil. The government could print dollars to pay for oil, and the American economy did not have to produce goods and services in exchange for the oil until OPEC used the dollars for goods and services. Obviously, the strategy could not work if dollars were not a means of exchange for oil. The second part of the loan was from all other economies that had to pay dollars for oil but could not print currency. Those economies had to trade their goods and services for dollars in order to pay OPEC" (Spiro, Hidden Hand, 121).

http://www.auswaertiges-amt.de/www/en/eu_politik/politikfelder/euro_html
The German Foreign Office

In the past the USA has profited considerably from the role of the dollar as a reserve currency as it has practically financed its current account deficits by handing out dollar bills.

http://econserv2.bess.tcd.ie/SER/1999/essay11.html

For this analysis, we must ask whether international currency status is important. This status offers two kinds of benefits: political and economic. Firstly, it is clear that a position of global monetary supremacy offers substantial political benefits. Since World War II, global monetary affairs have been dominated by the American dollar. This has allowed the US to insulate its policy-making process from outside influences. It has also enabled them to pursue foreign policy objectives with increased clout and fewer constraints. There are economic gains too. If a currency is held internationally, the issuer will benefit from seignorage gains. This refers essentially to the gains made by governments from printing money. Seignorage can also be derived from a liquidity discount on short-term government debt. High international demand for a currency has the effect of reducing the real yields that the government has to pay on its debt, thus providing that government with seignorage gains. The total gains from seignorage are of the order of 0.2 or 0.3% of GDP. However the benefits of becoming a major world currency cannot be quantified purely in terms of economic profit. Should the euro become a powerful currency, the eurozone will benefit from boosted economic and political credibility.

http://www.hinduonnet.com/thehindu/op/2003/04/22/stories/2003042200070200.htm

In a recent article titled "It's not about oil or Iraq; it's about the U.S. and Europe going head-to-head on world economic dominance," the Australian economist and columnist Geoffrey Heard wrote: "Why is George Bush so hell bent on war with Iraq? Why does his administration reject every positive Iraqi move? It all makes sense when you consider the economic implications for the USA of not going to war with Iraq. The war in Iraq is actually the U.S. and Europe going head to head on economic leadership of the world."

Heard then goes on to explain how Iraq has become the unwitting battleground — "beachhead" in Heard's terminology — in this economic war following Iraq's decision to switch from dollar to euro in its oil sales. In his words: "It is about the currency used to trade oil and consequently, who will dominate the world economically, in the foreseeable future — the USA or the European Union. ...Iraq is a European Union beachhead in that confrontation. America had a monopoly on the oil trade, with the U.S. dollar being the fiat currency, but Iraq broke ranks in 1999, started to trade oil in the EU's euros, and profited. If America invades Iraq and takes over, it will hurl the EU and its euro back into the sea and make America's position as the dominant economic power in the world all but impregnable. America's allies in the invasion, Britain and Australia, are betting America will win and that they will get some trickle-down benefits for jumping on to the U.S. bandwagon." This has now come home to roost, but it calls for some appreciation of the history leading up to it.

http://www.smh.com.au/text/articles/2003/04/21/1050777210439.htm

Using currency to wage economic warfare against the US "has been talked about, off and on, since the Arab oil embargo in the 1970s", said Robert Lynch, senior currency strategist in the New York office of BNP Paribas.

"It is mostly a threat" rather than a real possibility, Mr Lynch said, because switching from dollars could economically harm many Muslim countries that already hold lots of US dollars - notably Saudi Arabia. Still, given the level of Muslim anger directed at the US following the war, "anything is possible", he said. "If oil trading shifted from dollars to euros, it would be a hugely significant event and certainly a negative one" for the US economy, he said.

The US benefits from the global use of "petrodollars" because countries that import oil must have dollars on hand. This global demand for dollars helps keep the US currency strong.

Having a strong dollar lets US consumers buy imported goods for less, which helps hold down inflation.

At the same time, countries that export oil receive dollars, which they in turn invest directly in US securities to avoid currency fluctuation risks. Because these oil exporters are willing to purchase huge amounts of US Treasuries, interest rates also are kept low.

Some of the sites I have found summarise the effect of the vast sums of US$ held by non-US institutions and individuals as an interest-free loan.

http://www.mindfully.org/WTO/2003/Indonesia-Dump-Dollar17apr03.htm

Tokyo—Pertamina, Indonesia's state oil company, dropped a bombshell recently. It's considering dropping the U.S. dollar for the euro in its oil and gas trades.
...
Even so, there's no ignoring Asia's desire to reduce U.S. influence in the region. Leaders here wonder if scrapping the dollar might expedite the process. Last September, Asian and European leaders formed a task force to help Asia boost euro currency reserves, issue more euro-denominated debt and use the single currency to settle trade bills.

So that's Iran, Russia, Venezuela, Indonesia at least who are considering selling oil in Euros.

If this particular conspiracy theory is to work, there has to be enough movement in the direction of the euro for there to be a credible challenge to the US$ position as reserve currency, but not so much that in invasion here or there cannot stem the tide.

It is also perfectly possible to be paranoid about Venezuela too:
http://www.observer.co.uk/international/story/0,6903,688071,00.html

The failed coup in Venezuela was closely tied to senior officials in the US government, The Observer has established. They have long histories in the 'dirty wars' of the 1980s, and links to death squads working in Central America at that time.

Washington's involvement in the turbulent events that briefly removed left-wing leader Hugo Chavez from power last weekend resurrects fears about US ambitions in the hemisphere.

IIRC Iraqi oil is now sold in US$ again. I have, however, spent quite long enough at this, and I can't be bothered with any more Googleing.

Ooh, long post.

 

[amk]

If the EU and and North America were a single free trade zone and had a single federal reserve/central bank, it could work, but that posits a level of closeness that I think neither side is willing to accept at this moment.

Agreed.

Short post