Iraq and Dollar Hegemony: my analysis

Published online 28 January 2007.

This diary seeks to question: why haven’t we heard any more analysis about how the war against Iraq is being paid-for out of a situation called “dollar hegemony,” wherein the US manufactures dollars and the rest of the world manufactures the things dollars buy.  My guess is that if dollar hegemony ends, the war ends too, for the US will then no longer be able to pay for the war.  Am I right or wrong?  I’m not really a specialist in this stuff, but as someone who cares about the world, I’m obliged to guess at what is really going on here.  At any rate, I can no longer believe in the “merely political” analyses of this war, as the invasion and occupation of Iraq were based on economic and political rationales that use the US government as a conduit for the interests of fraction of global capital.

Dollar hegemony part:

Awhile back, I was perusing the news on Iraq and found this article in Business Week by Mark Weisbrot, predicting that eventually the US would be forced out of Iraq by its (eventual) inability to pay for the costs of the ongoing occupation.  The crucial paragraphs are here:

Then there’s the problem of the U.S. –- both the government and the private sector –- borrowing from foreign countries. Most government borrowing is now being financed from overseas — especially the central banks of China, Japan, and other countries. These institutions are deliberately buying dollars in order to keep their currencies from rising against the greenback. But they won’t keep doing this indefinitely. The U.S. is borrowing more than $600 billion a year from the rest of the world, and it can’t go on much longer.

THE BIG BANG.  Sometime within a decade, and most likely in the next couple of years, foreign investors will see that a steep decline of the dollar is unavoidable and will begin to unload them and U.S. Treasury securities. As with any bubble, it will be better if this one bursts sooner rather than later, when it would be even bigger. But adjustment and pain will still occur, including higher interest rates and consequently slower growth.

Now, the “National Priorities Project” has created a counter to estimate the cost of the Iraq engagement; at the time of this writing, it’s nearly $362 billion.  I suppose that’s a drop in the bucket when compared with the $8.677 trillion national debt, though it all adds up, you know.  Of course, Mark Weisbrot’s prediction of a crash hasn’t come true, at least not yet.

Sometimes I see diarists suggest that more debt will bankrupt the government.  Rather, I expect that, if worse came to worse, the US would default on all its debts, so the level of debt before the default might not be that meaningful.  Might as well be hung for a sheep as for a lamb, or so the saying goes.  They will keep piling up that debt while it still appears to be “okay.”  At any rate, I don’t expect the US to pay back its national debt in the end.

Now, this is the age of what Kees van der Pijl calls “virtual accumulation,” which means (among other things) that the global economy has taken on aspects of unreality.  The functioning of the neoliberal economic system is something I’ve tried to explain briefly, through the writings of Harry Shutt, in this diary.  At any rate, one of the main aspects of this unreality which we are stuck in is called “dollar hegemony.”  Dollar hegemony, as Liu points out, means that “world trade is now a game in which the US produces dollars and the rest of the world produces things that dollars can buy.”  The result of all of this is that the world has given the US a blank check to run whatever debt it wants, and buy whatever it wants, for the rest of the world will cover for US profligacy by holding the dollar reserves the US creates in the process of running this huge tab, and investing them back in the United States through the purchase of Treasury Bills.

My understanding of this is that none of the big dollar holders want to be accused of being the first ones to dump the dollar, which would ruin the dollar reserves of all involved and create an economic crisis.  So they’ve been selling off their dollar reserves bit by bit.  The economists in the White House have been calling this a “soft landing.”  But since under Bush the deficits keep coming and the debt (and thus the need for the world’s banks to accomodate growing US dollar reserves) keeps growing, none of it does anything to forestall the “hard landing” to come.  Meanwhile the value of the US Dollar as compared to the Euro and the Yen continues to slide.  Am I right or wrong?  DKos economists, speak up now.

War on Iraq part:

At any rate, the “merely political” analyses of this war do not make sense to me.  Political contingencies (mostly involving public pressure upon the government) may make the US withdraw from Iraq, but at this point it looks quite unlikely.  As I said in the Intro, the invasion and occupation of Iraq were based on economic and political rationales that use the US government as a conduit for the interests of a dominant fraction of global capital.  These rationales will not wither away simply because the American people want the troops out.

Anyone who’s listened to Scott Ritter’s narrative of how the US went from embargo-plus-inspections to invasion to occupation will recognize a certain sort of continuity between the various plans for Iraq.  The US never really gave up on its prosecution the “first Gulf War”; under Clinton the bombing of Iraq continued well after the first Bush retook Kuwait.  The goal of overthrowing Saddam Hussein was kept, too, although the Clinton administration went through that Chalabi fellow.  It would seem, then, that Bush hijo‘s invasion and occupation of Iraq achieved US foreign policy objectives that had been on the books for some time, yet had not been achieved because the elites (both as affiliated with Bush I and with Clinton) thought that the junior Bush’s direct invasion would be too risky.

The occupation itself survives through a different set of justifications.  The US troops which had been guarding the oil in Saudi Arabia were asked to leave, which they did do soon after the invasion; invading Iraq gave them a place to stay and to monitor the entire Middle East.  Thus the fourteen enduring bases in Iraq.  And, of course, the US hopes to sit on top of Iraq’s juicy oil reserves until such time as they can heedlessly exploited.  The insurgency’s interference with the oil-pumping operations is doubtless no problem — as long as the US sits atop that oil, its value is only likely to increase as the depletion of global oil reserves decreases supply.  If the US were to leave, the business deals it struck just after the invasion would no longer be guaranteed.  And, of course, Iraq serves as a neocon utopia for the optimists in the White House.

So, frankly, I don’t see the US leaving Iraq for “merely political” purposes.  The oil under its surface is just too valuable, and the US serves as the insurer-of-last-resort to all of the corporate deals which were struck.  A crash in the value of the US dollar might, however, provide an impetus to get out, as Weisbrot suggested back in 2004.

What do you think?  Does this analysis work for you?  What flaws does it contain?  I am only presenting this argument because I am eager to get at the truth.  Speak!

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