I’m Sorry; We Don’t Accept U.S. Dollars – Have You Any Rupelyuans?

When they released, “For The Love of Money” in 1973, Philadelphia soul group The O’Jays probably were not thinking of anything but a catchy lyric (and what was probably the most infectious bass line of the 1970’s). But pretty much since money was developed as a medium of exchange for goods and services, there have been wars over it and desperate struggles for control of it. Because money is power, and control of it is more power still.

In the case of a couple of wars fought over it recently, money – or control of it – was not the obvious motive. However, it is an astonishing coincidence that in both cases, the national leaders of the countries which were razed announced their intention to make their nations independent of the world’s reserve currency. A campaign of demonization in the press followed, escalating quickly to military intervention which left both these nations in ruins. It hardly needs saying that there was no more talk about abandoning the reserve currency.

Let’s back up a bit, before we get into that, and do a quick review. Following World War II, the victorious allies got together at Bretton Woods, New Hampshire, for the United Nations Monetary and Financial Conference; 730 delegates from the 44 Allied nations hammered out over a period of days – and signed, on July 22nd, 1944 – an agreement for the rebuilding of the international financial system in which all parties agreed to maintain the exchange rate of their currencies by tying them to the value of the U.S. dollar, which was backed by the Gold Standard. Nixon unilaterally abandoned the Gold Standard in 1971, and the U.S. dollar became a fiat currency; which is to say, one that takes its value from government regulation. Although it remains the world’s reserve currency, other currencies were able to “float” in value against it, and the U.S. government sometimes became irritated at countries which pegged their value to the dollar, such as China.

The USA seems extremely keen on holding on to world reserve currency status for the U.S. dollar. Why? Are there advantages? Well, yes, there are, although this discussion paper by McKinsey & Co. downplays them and suggests they are really not much; MGI estimates that in a normal year, the USA reaps a benefit equal to about 0.3 to 0.5% of its GDP ($40 Billion to $70 billion), and in a “crisis year”, the benefit falls to perhaps $5 Billion to $20 Billion, owing to dollar appreciation as other countries flock to it as a safe haven. But there are other advantages. One is the effective interest-free loan the USA realizes from issuing currency to nonresidents, but that’s pretty puny by big-money standards; about $10 Billion. Another, though, is that the USA can raise capital cheaply by selling large blocks of U.S. Treasury securities to foreign governments and government agencies. While the cash realized from it isn’t huge, it has the effect of depressing the U.S. borrowing rate by 50 to 60 basis points or more.

What would happen, theoretically, if that wasn’t having enough of an effect, and you as the U.S. government started buying huge blocks of U.S. Treasury bonds and mortgage notes yourself, to the tune of about $85 Billion per month? What would result – and has resulted – would be a stock market at record highs on a tidal wave of cheap dollars, a rock-bottom interest rate and near-zero inflation. Some people believe that is automatically good, but it’s not and without some inflation it is very difficult to achieve growth; the U.S. economy desperately needs growth. The target inflation rate is about 2%. What do you think would happen if the government’s top money-man announced a forecast end to constant stimulus through this method – not now, but, say, a year from now? Well, I can tell you that, because it happened: the market tanked. A couple of days later, Bernanke reversed himself, because he had to. What happened? The market soared to a dangerous new high on his implied promise that the gravy train of cheap money would just keep on a’ rollin’, for at least as long as it can. But I don’t think I have to tell you the risks inherent in just continuing to print more and more of a fiat currency that, without trust, is just coloured paper.

The U.S. dollar continues to maintain its strength and preeminence – worldwide, really, but it is to Americans that its continued solvency remains the most important – based solely upon faith; on trust that those pieces of paper will be exchangeable for goods and services tomorrow at or close to the same rate they are today, and the dollar remains worth a dollar because the United States government says it is. And one of the ways the United States government protects the credibility of the greenback…is by stomping hard on anyone who tries to get a rival currency off the ground.

Let’s go back for a minute, back to Iraq, 2000. Saddam Hussein announced that Iraq would no longer accept U.S. dollars for oil purchases under the UN oil-for-food program. His reasoning was that Iraq did not want to deal “in the currency of the enemy”. Instead, Iraq would accept only Euros. It would have cost the UN what was described at the time as a small fortune in accounting and paperwork changes – but, more importantly, oil was something the west could not simply announce it would buy elsewhere, and boycott. Remember, this was almost a year before the attacks on the World Trade Center in September, 2001.

What happened? You remember – mostly. You probably did not know at the time, but the clock was ticking on Saddam Hussein well before that, because of Iraq’s oil and Hussein’s unwillingness to do as he was told. Within hours after the attack on New York, Donald Rumsfeld and his merry men were already discussing how they might start a war with Iraq, and just 9 days after 9-11, the Project For A New American Century forwarded a letter to President Bush, in which it argued for “…a determined effort to remove Saddam Hussein from power in Iraq…even if evidence does not link Iraq directly to the attack…” Check out the list of signatories – a veritable who’s who of neoconservative movers and shakers. Father and son dream team Donald and Robert Kagan, of course. Richard Perle, urban planner and advocate of George Bush Square in Baghdad. Frank Gaffney. Krazy Kolumnist Charles Krauthammer. Mikheil Saakashvili adviser and Georgian government lobbyist Randy Scheunemann. As I live and breathe, our old Russophobic Rogue’s Gallery alumnus, Nicholas Eberstadt, author of the Russian tourist brochure, “Drunken Nation“. Arch-fiend William Kristol, and Norman Podhoretz. Anyway, cue demonization in the press, pounding of the war drum interspersed with weepy renditions of The Young Rascals “People Got to Be Free“, support to the Iraqi opposition, establishment of safe zones, and finally the lunge into full-on undeclared war. Saddam was eventually captured, tried (sort of) and summarily executed by the new hand-picked Iraqi government. The world was made safe again for the world’s reserve currency.

Fast-forward, now, to Libya, 2011. Gaddafi has been pushing for a common African currency, the gold dinar, which will become the only currency African nations will accept for oil purchases. As both a fairly serious, if inefficient oil producer and the owner state of 144 tons of gold, Libya is fairly well-placed to float and back its own currency. Quick as a flash, renouncer of nuclear weaponry and bad-guy-gone-straight Gaddafi is a demon once again, violent suppressor of a peaceful democratic movement of al-Qaeda thugs and flip-flop-wearing warlords who have set up shop in Benghazi. Before you can say, “stick this up your Jamahiriya”, NATO has a no-fly zone established and has embarked on a blur of mission creep that will see it acting as the de facto rebel air force of al Qaeda, Peaceful Benghazi Chapter. Ba-da-bing, ba-da-boom, Tripoli falls, Gaddafi is captured, murdered, and the greenback heaves another sigh of relief. Another crisis averted. Libya’s 144 tons of gold, incidentally, vanishes.

Iran, also, announced a move away from the U.S. dollar, and its intentions to open its own oil bourse, or stock exchange which would take direct payments in international currencies tied to the Euro, not the dollar. Although this site suggests the oil bourse went online in 2008, that’s not exactly correct; some sort of…ummm…accident severed the seabed cables which provided internet service to Iran just as the great day drew near. That couldn’t stall things forever, but in a more decisive move which was allegedly to punish Iran for its depredations against the perennial peaceful opposition, strategically-applied “international pressure” persuaded Brussels to cut Iran out of SWIFT, the Society for Worldwide Interbank Telecommunication, last year. This, should you wonder, is unprecedented. And while the west has not gone to war against Iran, I don’t think you would find much argument if you suggested it was a western goal, and that Syria was a turnstile on the road to Tehran.

But it must be difficult to start up your own currency, isn’t it?

Apparently not. Although I’m sure this guide is grossly oversimplified, there are – theoretically – only three steps. One, establish something of value to which this currency will be tied. The author suggests gold, and while he points out it could be anything of value, I’m going to say oil. I’m sure it hasn’t escaped your notice that several nations have already tried to do that, and been whacked like a stool pigeon for their efforts. But I’m pretty confident that wouldn’t happen in this case, because I’m talking about a group that is more or less immune from the threat of military comeuppance – the BRICS. Brazil, Russia, India, China and South Africa.

Step two, think of something to call your currency. I chose the Rupelyuan, an amalgamate of the Ruble, Rupee, Real, Rand and Yuan, but that was just off the top of my head, and I’m open to suggestion.

Three, convince what the author describes as a “critical mass” of people to adopt and trade in your currency. How about all the people who like to use oil, and things that are derived from oil, burn oil as a fuel or are shipped by vehicles which do?

Why now? Well, of course it doesn’t have to be now. But I notice, as I’m sure you did as well, that Russia has just moved into position as the world’s fifth largest economy, displacing Germany. I further notice that 3 of the BRICS are in the top 5, and a fourth is in the top 10; only South Africa has yet to reach that milestone, and China is forecast to move into top spot in the next couple of years.

The top 3 BRICS nations are all nuclear powers. I don’t think the group needs to worry unduly about a western direct military intervention, although at least one (Russia) has been subjected to a barrage of media demonization since…well, since the end of the Cold War, really, allowing only a brief caesura during the golden years when Boris Yeltsin sold the people’s wealth to the oilgarchs, thrashed around privatizing everything his Harvard advisers advised him to, and woke up with a terrible hangover, remembering nothing. The highest BRIC on the totem pole, China, has the world’s largest cash reserves. The Newly-Arrived Number Five has the world’s third-largest cash reserves, and is the world’s biggest oil producer.

This is not new; the BRICS have been talking among themselves for some time about establishing their own Bretton institutions to challenge – and perhaps edge out – the World Bank and the IMF. They have agreed in principle to establish a BRICS Development Bank, targeted at the developing world, with an initial capital startup of $50 Billion.

The next logical step would be the establishment of a common currency, like the Euro, which was also the result of a purely monetary rather than an inherently political union. Would they have any trouble getting people to use it. Gee…I don’t know. There would be resistance. But toward winter, when it started getting cold in Europe…

They might be just bluffing, gathering negotiating weight to argue, as an earlier-cited article suggested, for more say over global monetary policy and the practice of always selecting the leaders of existing global monetary institutions from the same countries.

But then again, they might not.