Yves here. On the one hand, I’m a bit reluctant to link to a site that says it is part of the “liberty network.” On the other hand, libertarians and progressives teamed up successfully on Audit the Fed. Plus there are a few readers who describe themselves as libertarians, but when you press them to explain their views, they often differ from libertarian orthodoxy. So I am suspending my usual reservations on this issue, since this post has some merit, and we’ll see how this writer, who looks to be new to blogging, evolves.
Nevertheless, there are a couple of points to keep in mind. Being the reserve currency issuer is not the boon the author presents it to be. The issuer inevitably winds up being a net importer to keep currency in circulation abroad. Being a net importer means you are using your demand to employ people overseas. Other countries seek strongly to be a net exporter because they recognize that providing an adequate level of employment is key to social stability.
The burdens that go with being the reserve currency issues is a big reason why China is unlikely to be willing or able to step into that role any time soon. The government, more so than in other countries, depends on preserving employment and wage growth as key to its legitimacy. Running the needed trade deficits that go with being a reserve currency issuer is anathema to that prime directive.
By Séamusín Reilly. Originally published at Convergent Interests
On December 16th, 2015, Federal Reserve Officials announced that after 6 years of 0% interest, they would finally raise the Federal Fund Rate. The move was seen by many as an attempt to provide markets with a boost of confidence. Although markets initially sold off on the news, they have in fact rebounded back to normal levels. Still, the question of whether or not the US economy is strong enough to maintain levels of growth has yet to be answered. Washington’s privileged position as issuer of the global reserve currency has allowed for an unprecedented monetary expansion with relatively low impact on global financial markets. Instead of consuming its own inflation, it exports it to producing economies who seem happy enough to send their hard-earned wealth to US consumers for what many people consider mere pieces of paper. The result of a repeat US economic engine stall, yet another round of monetary injection, doesn’t seem likely to draw the ire of the international order that subsidizes US consumption. Any criticism of Fed monetary policy or speculation concerning its implications would be met with the usual bromides about how the dollar is still strongest among weak rival currencies.
The Dollar’s much coveted and seemingly unshakable position as global reserve currency has caused many to speculate on the true nature of its relationship to US foreign policy and global international affairs. Washington’s ability to run massive deficits in the face of minimal international pressure compel many to believe that the US is somehow holding the world hostage. Lending credibility to this view, US military interventionism in Iraq and Libya, as well as an aggressive posture towards Iran, all happened to coincide with the governments of those countries adopting anti-dollar policies. Ever a popular villain in conspiracy mythology, the Fed is said to be a front operating at the behest of an international cabal of bankers hell-bent on controlling the world through a one world currency. In this scenario, the US government is painted as simply the enforcement arm of its puppet masters on Wall St.
Just What Is A Petrodollar?
This shortsighted view of international politics comes equipped with some anecdotal evidence. On August 15th, 1971, then President Nixon closed the gold window. This move was precipitated by a negative balance of payments from twin deficits resulting in diminishing Fed specie holdings compared to a 3 fold increase of foreign exchange reserves in foreign vaults accumulated during the Bretton-Woods era. In an attempt to prop up the Dollar, Nixon entered into a series of arrangements with top oil producing nations to limit their sales to dollar transactions. The most egregious misconception about these agreements is that somehow the dollar became a sort of commodity currency, but with the adoption of global fiat, the US had no reason to protect the dollar’s value. It did, however, have an immense need to finance ever growing deficits.
With the adoption of dollar denominated sales, oil producing countries had surplus dollars that they used to invest in banks which in turn lent the petrodollars to the US to finance its budget deficits. This is the scheme, and it doesn’t get any more dramatic than that. The goal was never meant to create dollar demand by backing it with oil, but simply to ensure there was adequate demand for US debt by flooding Iranian and Saudi treasuries with so many dollars that they couldn’t be used in any other way. Leaders of the West realized that the economic system established by Bretton-Woods was no longer sustainable without close coordination by central banks. In 1975, the G7 forum, which was largely designed to organize Western efforts after the 1973 oil crisis, began using the forum to coordinate fiscal and monetary policy protecting the Bretton-Woods institutions that had become so valuable to western economic dominance.
Due largely to competing economic interests by the countries represented, their ability to stem an economic unraveling was initially ineffective. By 1978, US inflation had risen to 9% while inflation in the rest of the world slowed dramatically by comparison. Both the Carter administration and the Fed did everything in their power to control dollar devaluation, but it was clear by this time that without the assistance from foreign governments the dollar would not be able to survive. By fall of that year, assistance manifested itself in the form of Carter’s Dollar Defense Package (Page 101). Governments of Germany, Japan, and Switzerland assisted in the monetary intervention. IMF special drawing rights were reintroduced after an eight year hiatus and swap lines were created to bolster the US position.
Reagan’s Strong Dollar and the End of Petrodollar Importance
Over the course of the next six years the dollar experienced a meteoric rise in value. While it’s hard to fully attribute the causes of dollar appreciation in the early 80’s to any one particular factor, a convergence of fiscal and monetary policy decisions by the Reagan administration and Western leaders played a key role. A sharp rise in dollar interest rates, along with deregulation of financial markets and tightening fiscal policy abroad, gave the dollar the necessary juice to fuel its ascent. Efforts by Western financial officials were so successful that the dollar even became too strong. By late 1984 the dollar was considered to be highly overvalued and blame for budget and trade deficits were laid at its feet. The global reserve currency began a slight descent in the beginning of 1985, but there was little effect on US trade deficits which were still having a severe impact on US manufacturing. In the later part of the year, western financial heads met once again to closely coordinate their efforts to bring about an orderly depreciation and ease US political pressure.
Despite the best efforts of the world’s central banks, monetary intervention failed to shore up the US trade deficit and preceded a dramatic distortion in the structure of the global economy, culminating in the stock market crash of October 19th, 1987. As wealth evaporated around the world, all eyes turned towards the newly appointed Fed Chairman Alan Greenspan, who was all too eager to affirm the “readiness to serve as a source of liquidity to support the economic and financial system.” Notwithstanding his domestic interventions, it wasn’t until the G7 issued a combined statement in December of that year assuring that international policy intentions would indeed be synchronized, that markets began to stabilize. By 1988, instability in foreign exchange markets was dissipating. The crisis was essentially worked through. The result was the inception of a new, highly organized global financial system built around the almighty dollar, ensuring its hegemony. The financial power block known simply as The West had reached its maturity. From this point on, US debt would be subsidized by coordinated actions from the worlds central banks, rendering the petrodollar irrelevant.
The impact of Nixon’s petrodollar agreements on US foreign policy have been largely overblown and remain a distraction from the true nature of US imperialism. Dollar hegemony remains at the forefront of US international policy, but it isn’t through specific instances of US military action that this policy is manifested. Instead, it is the entrenchment of the global financial system in the developed world and the vested interest that Western leaders have in the status quo that keeps the system afloat. The US empire is one of Multi-National corporations and International Trade Deals. For these reasons, European central banks and foreign governments act in their best interest when they collude with the Federal Reserve to lend much needed support to the US dollar. This collusion, not the much misunderstood petrodollar, is dollar hegemony fully manifested, and remains a key aspect of western dominance of the global financial system to this very day.
Shortly after Washington began following through with a yearlong promise to reign in its latest quantitative easing program in December 2013, Belgian treasury holdings skyrocketed by 141 Billion dollars over the course of the next four months, giving the dollar the support it needed to wean itself off of the monetary injection. It is likely that the ECB was the covert buyer of these treasuries, using a Belgium based clearing house called Euroclear as a front. This quid pro quo is business as usual for Western central banks. In 2011, when the Greek sovereign debt crisis first made its way into the news, it was reported that the US central bank was engaging in its own covert bond buying program. In April of 2015, as a first quarter contraction in the US hinted at a possible recession, the ECB began a round of quantitative easing for themselves, once again shielding the rickety financial system from experiencing the type of turbulence that might knock the whole thing off its hinges. This type of coordinated behavior by western central banks has been routine throughout the modern era. The interconnectedness of the global financial system demands as much. Central banks all over the world; all using each other’s foreign reserves to back their own monetary expansion. The need for ever more financial support perpetuates itself.
It is not dollar hegemony that rules the world, but the global financial system which gives the dollar its place of privilege. Instead of sovereign states, these member nations of the G-7 are no more than special interest lobbies jockeying for use of the United States and NATO military machines. Not to suggest that they don’t exert a sizable amount of influence over US foreign policy, as demonstrated by the intervention in Mali, Libya, and Syria. The “West” often acts in concert and for shared economic goals. The clearest recent example of this is the deteriorating relationship between Russia and the West. During the winter of 2013, Ukrainian president Yanukovych backed out of a 15 billion dollar deal with the IMF in favor of a similar deal offered by Russia. Within a few months the US brazenly backed a coup to see his pro-Russian government overthrown. US deputy secretary Victoria Nuland handpicked former head of the National Bank of Ukraine Arseniy Yatsenyuk to assume the role as Prime Minister. A month later the IMF readied an 18 Billion dollar bailout package which the new Ukrainian government promptly agreed to. Russia responded by seizing the former Russian territory of Crimea which was met with harsh criticism and sanctions by Europe and the States. Although the policy was meant to be seen as a response to Russian aggression in Eastern Europe, the ironic truth was that the entire policy began an organized attack on the Russian economy by the west.
Facing pressure from Brussels, by the middle of 2014 the Bulgarian government halted construction on a Russian pipeline meant to bring billions of dollars in natural gas into Europe. When Russia responded by negotiating construction of the pipeline through Turkey, and then through the Balkans, US taxpayer-funded NGOs began fomenting what looked be another color revolution, this time in Macedonia. The citizenry responded en masse.
Over 100,000 anti-coup Macedonians took to the streets on May 18th, demonstrating their support for their current government. The Macedonian coup may have been defeated, but the event highlights the strategic partnership between the US and EU in shaping geopolitics of the region.
Still, the ability of the United States to influence global politics has declined dramatically over the years.
Until recently, the US intelligence and military machine could reliably persuade any foreign government of any policy seen to be in the interest of the US and its allies, but cracks in the foundation began to show during the Arab Spring, where US puppet states in the Middle East were pressured into reform by their civilian populations. The US backed opposition to the Syrian regime has had minimal successes, and the puppet government of Yemen has been ousted by a marginalized militia who has since maintained control of the capital city.
The most recent defection by western puppet states from the international order has been Turkey. While presumably disenchanted by US inability to secure a Middle Eastern oil pipeline from Qatar through Syria, the NATO member instead began to cozy up to Russia, who has doubled down on its resistance to Western pressure. Russian-Turkish relations have since deteriorated due to competing interests in Syria, but this turn hasn’t necessarily pressured Turkey back into its traditional role as Western puppet.
Instead, it has been reported that Turkey is exercising an independent foreign policy aimed at achieving its own geopolitical goals. Not surprisingly, Western media outlets have begun reporting that it may be time for the current regime to go. This turn is more substantial than it first appears. Turkey, a NATO ally and loyal Western ally is not a typical run of the mill western supported fascist dictatorship. The fact that after 50 years of US subservience the nation has begun to shake of the chains of Western control, demonstrates deeper cracks in the foundation of Western dominance.
Further east, former G-8 member Russia’s reluctance to concede Ukraine and its pipeline in the face of Western sanctions has been particularly burdensome to Western officials. Instead of compelling Russia to accept Western terms, Western policies have caused the Kremlin to warm relations with China, whom the Russian people see with increasing favor, and with whom Russian President Putin has recently entered into a security partnership, alongside Pakistan and India. Additionally, the opening of the BRICS New Development Bank is seen by many as a potential rival to the Bretton-Woods institutions and a threat to dollar hegemony. Russian Foreign Minister Sergei Lavrov says the multilateral organization “illustrates a new polycentric system of international relations”. This challenger to the financial status quo is very clearly meant to strip the West of global financial and political dominance.
While BRICS nations make up 40% of the world’s population, the G7 still controls over 40% of the global economy. It isn’t probable that this new polycentric political arena will have a tremendous impact on the position of the dollar in the immediate future. With 30% of the total US foreign treasury holdings being used as reserves for their own unsound monetary systems, it is unlikely that the BRICS are interested in seeing a dramatic shift in the dollar’s value. More importantly, multinational corporations capitalized in dollar denominated assets exercise a tremendous amount of political power, even in those countries furthest removed from the tip of the modern uni-polar world. There is no doubt, however, that the intention of this new power block is to liberate itself from dollar supremacy.