Abstract: the proposed Iranian Oil Bourse will accelerate the fall of the American Empire.
January 15, 2006
I. Economics of Empires
A nation-state taxes its own citizens,
while an empire taxes other nation-states. The history of empires, from
Greek and Roman, to Ottoman and British, teaches that the economic
foundation of every single empire is the taxation of other nations. The
imperial ability to tax has always rested on a better and stronger
economy, and as a consequence, a better and stronger military. One part
of the subject taxes went to improve the living standards of the
empire; the other part went to strengthen the military dominance
necessary to enforce the collection of those taxes.
Historically, taxing the subject state has been
in various forms-usually gold and silver, where those were considered
money, but also slaves, soldiers, crops, cattle, or other agricultural
and natural resources, whatever economic goods the empire demanded and
the subject-state could deliver. Historically, imperial taxation has
always been direct: the subject state handed over the economic goods
directly to the empire.
For the first time in history, in the
twentieth century, America was able to tax the world indirectly,
through inflation. It did not enforce the direct payment of taxes like
all of its predecessor empires did, but distributed instead its own
fiat currency, the U.S. Dollar, to other nations in exchange for goods
with the intended consequence of inflating and devaluing those dollars
and paying back later each dollar with less economic goods-the
difference capturing the U.S. imperial tax. Here is how this happened.
Early in the 20th century, the U.S. economy began
to dominate the world economy. The U.S. dollar was tied to gold, so
that the value of the dollar neither increased, nor decreased, but
remained the same amount of gold. The Great Depression, with its
preceding inflation from 1921 to 1929 and its subsequent ballooning
government deficits, had substantially increased the amount of currency
in circulation, and thus rendered the backing of U.S. dollars by gold
impossible. This led Roosevelt to decouple the dollar from gold in
1932. Up to this point, the U.S. may have well dominated the world
economy, but from an economic point of view, it was not an empire. The
fixed value of the dollar did not allow the Americans to extract
economic benefits from other countries by supplying them with dollars
convertible to gold.
Economically, the American Empire was born with
Bretton Woods in 1945. The U.S. dollar was not fully convertible to
gold, but was made convertible to gold only to foreign governments.
This established the dollar as the reserve currency of the world. It
was possible, because during WWII, the United States had supplied its
allies with provisions, demanding gold as payment, thus accumulating
significant portion of the world's gold. An Empire would not have been
possible if, following the Bretton Woods arrangement, the dollar supply
was kept limited and within the availability of gold, so as to fully
exchange back dollars for gold. However, the guns-and-butter policy of
the 1960's was an imperial one: the dollar supply was relentlessly
increased to finance Vietnam and LBJ's Great Society. Most of those
dollars were handed over to foreigners in exchange for economic goods,
without the prospect of buying them back at the same value. The
increase in dollar holdings of foreigners via persistent U.S. trade
deficits was tantamount to a tax-the classical inflation tax that a
country imposes on its own citizens, this time around an inflation tax
that U.S. imposed on rest of the world.
When in 1970-1971 foreigners demanded payment for
their dollars in gold, The U.S. Government defaulted on its payment on
August 15, 1971. While the popular spin told the story of "severing the
link between the dollar and gold", in reality the denial to pay back in
gold was an act of bankruptcy by the U.S. Government. Essentially, the
U.S. declared itself an Empire. It had extracted an enormous amount of
economic goods from the rest of the world, with no intention or ability
to return those goods, and the world was powerless to respond- the
world was taxed and it could not do anything about it.
From that point on, to sustain the
American Empire and to continue to tax the rest of the world, the
United States had to force the world to continue to accept
ever-depreciating dollars in exchange for economic goods and to have
the world hold more and more of those depreciating dollars. It had to
give the world an economic reason to hold them, and that reason was oil.
In 1971, as it became clearer and clearer
that the U.S Government would not be able to buy back its dollars in
gold, it made in 1972-73 an iron-clad arrangement with Saudi Arabia to
support the power of the House of Saud in exchange for accepting only
U.S. dollars for its oil. The rest of OPEC was to follow suit and also
accept only dollars. Because the world had to buy oil from the Arab oil
countries, it had the reason to hold dollars as payment for oil.
Because the world needed ever increasing quantities of oil at ever
increasing oil prices, the world's demand for dollars could only
increase. Even though dollars could no longer be exchanged for gold,
they were now exchangeable for oil.
The economic essence of this arrangement
was that the dollar was now backed by oil. As long as that was the
case, the world had to accumulate increasing amounts of dollars,
because they needed those dollars to buy oil. As long as the dollar was
the only acceptable payment for oil, its dominance in the world was
assured, and the American Empire could continue to tax the rest of the
world. If, for any reason, the dollar lost its oil backing, the
American Empire would cease to exist. Thus, Imperial survival dictated
that oil be sold only for dollars. It also dictated that oil reserves
were spread around various sovereign states that weren't strong enough,
politically or militarily, to demand payment for oil in something else.
If someone demanded a different payment, he had to be convinced, either
by political pressure or military means, to change his mind.
The man that actually did demand Euro for
his oil was Saddam Hussein in 2000. At first, his demand was met with
ridicule, later with neglect, but as it became clearer that he meant
business, political pressure was exerted to change his mind. When other
countries, like Iran, wanted payment in other currencies, most notably
Euro and Yen, the danger to the dollar was clear and present, and a
punitive action was in order. Bush's Shock-and-Awe in Iraq was not
about Saddam's nuclear capabilities, about defending human rights,
about spreading democracy, or even about seizing oil fields; it was
about defending the dollar, ergo the American Empire. It was about
setting an example that anyone who demanded payment in currencies other
than U.S. Dollars would be likewise punished.
Many have criticized Bush for staging the war in
Iraq in order to seize Iraqi oil fields. However, those critics can't
explain why Bush would want to seize those fields-he could simply print
dollars for nothing and use them to get all the oil in the world that
he needs. He must have had some other reason to invade Iraq.
History teaches that an empire should go
to war for one of two reasons: (1) to defend itself or (2) benefit from
war; if not, as Paul Kennedy illustrates in his magisterial The Rise and Fall of the Great Powers,
a military overstretch will drain its economic resources and
precipitate its collapse. Economically speaking, in order for an empire
to initiate and conduct a war, its benefits must outweigh its military
and social costs. Benefits from Iraqi oil fields are hardly worth the
long-term, multi-year military cost. Instead, Bush must have gone into
Iraq to defend his Empire. Indeed, this is the case: two months after
the United States invaded Iraq, the Oil for Food Program was
terminated, the Iraqi Euro accounts were switched back to dollars, and
oil was sold once again only for U.S. dollars. No longer could the
world buy oil from Iraq with Euro. Global dollar supremacy was once
again restored. Bush descended victoriously from a fighter jet and
declared the mission accomplished-he had successfully defended the U.S.
dollar, and thus the American Empire.
II. Iranian Oil Bourse
The Iranian government has finally developed the
ultimate "nuclear" weapon that can swiftly destroy the financial system
underpinning the American Empire. That weapon is the Iranian Oil Bourse
slated to open in March 2006. It will be based on a euro-oil-trading
mechanism that naturally implies payment for oil in Euro. In economic
terms, this represents a much greater threat to the hegemony of the
dollar than Saddam's, because it will allow anyone willing either to
buy or to sell oil for Euro to transact on the exchange, thus
circumventing the U.S. dollar altogether. If so, then it is likely that
almost everyone will eagerly adopt this euro oil system:
- The Europeans will not have to buy and
hold dollars in order to secure their payment for oil, but would
instead pay with their own currencies. The adoption of the euro for oil
transactions will provide the European currency with a reserve status
that will benefit the European at the expense of the Americans.
- The Chinese and the Japanese will
be especially eager to adopt the new exchange, because it will allow
them to drastically lower their enormous dollar reserves and diversify
with Euros, thus protecting themselves against the depreciation of the
dollar. One portion of their dollars they will still want to hold onto;
a second portion of their dollar holdings they may decide to dump
outright; a third portion of their dollars they will decide to use up
for future payments without replenishing those dollar holdings, but
building up instead their euro reserves.
- The Russians
have inherent economic interest in adopting the Euro - the bulk of
their trade is with European countries, with oil-exporting countries,
with China, and with Japan. Adoption of the Euro will immediately take
care of the first two blocs, and will over time facilitate trade with
China and Japan. Also, the Russians seemingly detest holding
depreciating dollars, for they have recently found a new religion with
gold. Russians have also revived their nationalism, and if embracing
the Euro will stab the Americans, they will gladly do it and smugly
watch the Americans bleed.
- The Arab oil-exporting
countries will eagerly adopt the Euro as a means of diversifying
against rising mountains of depreciating dollars. Just like the
Russians, their trade is mostly with European countries, and therefore
will prefer the European currency both for its stability and for
avoiding currency risk, not to mention their jihad against the Infidel
Only the British will find themselves between a
rock and a hard place. They have had a strategic partnership with the
U.S. forever, but have also had their natural pull from Europe. So far,
they have had many reasons to stick with the winner. However, when they
see their century-old partner falling, will they firmly stand behind
him or will they deliver the coup de grace? Still, we should not forget
that currently the two leading oil exchanges are the New York's NYMEX
and the London's International Petroleum Exchange (IPE), even though
both of them are effectively owned by the Americans. It seems more
likely that the British will have to go down with the sinking ship, for
otherwise they will be shooting themselves in the foot by hurting their
own London IPE interests. It is here noteworthy that for all the
rhetoric about the reasons for the surviving British Pound, the British
most likely did not adopt the Euro namely because the Americans must
have pressured them not to: otherwise the London IPE would have had to
switch to Euros, thus mortally wounding the dollar and their strategic
At any rate, no matter what the British
decide, should the Iranian Oil Bourse accelerate, the interests that
matter-those of Europeans, Chinese, Japanese, Russians, and Arabs-will
eagerly adopt the Euro, thus sealing the fate of the dollar. Americans
cannot allow this to happen, and if necessary, will use a vast array of
strategies to halt or hobble the operation's exchange:
- Sabotaging the Exchange-this could be a
computer virus, network, communications, or server attack, various
server security breaches, or a 9-11-type attack on main and backup
- Coup d'Útat-this is by far the best long-term strategy available to the Americans.
- Negotiating Acceptable Terms & Limitations-this
is another excellent solution to the Americans. Of course, a government
coup is clearly the preferred strategy, for it will ensure that the
exchange does not operate at all and does not threaten American
interests. However, if an attempted sabotage or coup d'etat fails, then
negotiation is clearly the second-best available option.
- Joint U.N. War Resolution-this
will be, no doubt, hard to secure given the interests of all other
member-states of the Security Council. Feverish rhetoric about Iranians
developing nuclear weapons undoubtedly serves to prepare this course of
- Unilateral Nuclear Strike-this is a terrible
strategic choice for all the reasons associated with the next strategy,
the Unilateral Total War. The Americans will likely use Israel to do
their dirty nuclear job.
- Unilateral Total War-this
is obviously the worst strategic choice. First, the U.S. military
resources have been already depleted with two wars. Secondly, the
Americans will further alienate other powerful nations. Third, major
dollar-holding countries may decide to quietly retaliate by dumping
their own mountains of dollars, thus preventing the U.S. from further
financing its militant ambitions. Finally, Iran has strategic alliances
with other powerful nations that may trigger their involvement in war;
Iran reputedly has such alliance with China, India, and Russia, known
as the Shanghai Cooperative Group, a.k.a. Shanghai Coop and a separate
pact with Syria.
Whatever the strategic choice, from a purely
economic point of view, should the Iranian Oil Bourse gain momentum, it
will be eagerly embraced by major economic powers and will precipitate
the demise of the dollar. The collapsing dollar will dramatically
accelerate U.S. inflation and will pressure upward U.S. long-term
interest rates. At this point, the Fed will find itself between Scylla
and Charybdis-between deflation and hyperinflation-it will be forced
fast either to take its "classical medicine" by deflating, whereby it
raises interest rates, thus inducing a major economic depression, a
collapse in real estate, and an implosion in bond, stock, and
derivative markets, with a total financial collapse, or alternatively,
to take the Weimar way out by inflating, whereby it pegs the long-bond
yield, raises the Helicopters and drowns the financial system in
liquidity, bailing out numerous LTCMs and hyperinflating the economy.
The Austrian theory of money, credit, and
business cycles teaches us that there is no in-between Scylla and
Charybdis. Sooner or later, the monetary system must swing one way or
the other, forcing the Fed to make its choice. No doubt,
Commander-in-Chief Ben Bernanke, a renowned scholar of the Great
Depression and an adept Black Hawk pilot, will choose inflation.
Helicopter Ben, oblivious to Rothbard's America's Great Depression,
has nonetheless mastered the lessons of the Great Depression and the
annihilating power of deflations. The Maestro has taught him the
panacea of every single financial problem-to inflate, come hell or high
water. He has even taught the Japanese his own ingenious unconventional
ways to battle the deflationary liquidity trap. Like his mentor, he has
dreamed of battling a Kondratieff Winter. To avoid deflation, he will
resort to the printing presses; he will recall all helicopters from the
800 overseas U.S. military bases; and, if necessary, he will monetize
everything in sight. His ultimate accomplishment will be the
hyperinflationary destruction of the American currency and from its
ashes will rise the next reserve currency of the world-that barbarous
relic called gold.
William Clark "The Real Reasons for the Upcoming War in Iraq"
William Clark "The Real Reasons Why Iran is the Next Target"
About the Author
Krassimir Petrov (Krassimir_Petrov@hotmail.com)
has received his Ph. D. in economics from the Ohio State University and
currently teaches Macroeconomics, International Finance, and
Econometrics at the American University in Bulgaria. He is looking for
a career in Dubai or the U. A. E.
Also by this author
"China's Great Depression"
"Masters of Austrian Investment Analysis"
"Austrian Analysis of U.S. Inflation"
"Oil Performance in a Worldwide Depression"