From: Rakesh Bhandari (bhandari@BERKELEY.EDU)
Date: Fri Mar 25 2005 - 19:58:12 EST
EPW Commentary
March 19, 2005
US Dollar Hegemony
The Soft Underbelly of Empire
The costs of sustaining the US's new 'Empire'
will become apparent to its public only when
these costs directly accrue to them. This will
happen, as this article suggests, only when (i)
other nations stop subsidising the US's imperial
adventures by colluding in them and (ii) the
dollar loses its role as the world's reserve
currency.
Rohini Hensman, Marinella Correggia
What we intend to argue below is that if the US's
ability to undertake imperial conquests like that
of Iraq depends on its obvious military
supremacy, this in turn is ultimately based on
the use of the US dollar as the world's reserve
currency. It is the dominance of the dollar that
underpins US financial dominance as a whole as
well as the apparently limitless spending power
that allows it to keep hundreds of thousands of
troops stationed all over the world. Destroy US
dollar hegemony, and 'Empire' will collapse.
David Ludden's article 'America's Invisible
Empire'1 sums up the problem of the world's most
recent empire with remarkable clarity.
Constituting itself at a time when decolonisation
was well under way and other empires were
disintegrating, US imperialism could never openly
speak its name. Initially, it disguised itself as
the defender of democracy against communism; when
the Soviet Union ceased to exist, the pretext
became the 'war against terror'. National
security and national interest were invoked as
the rationale for global dominance.
Ludden's description evokes the image of US
citizens (and a few others) living in a 'Truman
Show' world, a bubble of illusion created by
state deception and media complicity that
prevents them from being aware of the reality of
empire although everyone outside can see it only
too clearly. It sounds quite credible that 'the
empire will not be undone until its reality and
costs become visible to Americans' (Ludden:
4777). However Ludden's claim that 'US taxpayers
and voters pay the entire cost of the US empire'
(ibid: 4776) is less credible. If that were true,
many more Americans would see their empire and
oppose it; the Democrats would have put up a
principled anti-war, anti-occupation candidate at
the recent presidential elections, and the
overwhelming majority of the US electorate would
have voted for her or him. But it is the rest of
the world that has been paying for the US empire:
that is why it is almost invisible within the US.
As Emmanuel Todd wrote,2 an imperial economy
depends on drawing wealth from abroad, without
any reciprocity. The US is now more dependent on
the rest of the world than the rest of the world
on the US. This explains their behaviour: not
only their strategic need to get their hands on
the world's resources, but also their need for
hegemony. To counterbalance their economic
dependence, they must keep themselves - at least
symbolically - at the centre of the world. They
must demonstrate their 'omnipotence': that is why
they wage so many wars against militarily weak
enemies. At the same time they must appear as
benefactors - hence their whirlwind tour of the
countries devastated by the tsunami disaster in
order to make use of the photo opportunities it
provided.
History of Dollar Hegemony
The core advantage of the US economy, the source
of its financial dominance, is the peculiar role
of the US currency. It is because the dollar is
the world's reserve currency that the US is able
to maintain its twin deficits (fiscal and trade)
and depend on the world's generosity. It needs a
subsidy of at least 1.2 billion dollars per day
to keep up its level of spending. Its military
superiority is one reason why it it is unlikely
ever to face an embargo, but more importantly, it
can continue to live beyond its means because of
US dollar hegemony. But for long?
The dollar mechanism has been described
extensively elsewhere,3 so we will merely
summarise here. The strength of the US economy
after second world war enabled the US dollar,
backed by gold, to become the world's reserve
currency. When the US abandoned the gold standard
in 1971, the dollar remained supreme, and its
position was further boosted in 1974 when the US
came to an agreement with Saudi Arabia that the
oil trade would be denominated in dollars.4 Most
countries in the world import oil, and it made
sense for them to accumulate dollars in order to
guard against oil shocks. Third world countries
had even more reason to hoard dollars so as to
protect their fragile economies and currencies
from sudden collapse. With everyone clamouring
for dollars, all the US had to do was print fiat
dollars and other countries would accept them in
payment for their exports. These dollars then
flowed back into the US to be invested in
treasury bonds and similar
instruments, offsetting the outflow.
As a reserve currency fulfils world needs in
addition to the functions of a domestic currency,
the favoured country can build up debt for a
protracted period on a scale that would wreck any
other country's currency. But this advantage is a
double-edged sword.5 It allowed the US economy to
decline unnoticed, its fiscal and trade deficits
to climb steeply: by 2004 the US trade deficit
had reached $503 billion, the current account
deficit $413 billion, the gross national debt
around $7 trillion. Globalisation destroyed the
US as a manufacturing nation; the outsourcing of
services means that even this sector is gradually
being shifted out of the US.6 Only its
pre-eminence in the global financial
services industry remains intact.7 And this is
underpinned by US dollar hegemony.
As Pierre Lecomte, a French financial analyst and
supporter of the campaign 'Dette et dollar' (to
reject the dollar as world currency) says, "while
the rest of the world must toil hard to earn
dollars which are needed to buy goods
internationally, or to pay off foreign debt, the
US just needs to print dollars".8 And as Frederic
Clairmont wrote in Le Monde Diplomatique (April
2003): "Living on credit is the credo of the
foremost power in the world".
Various campaigns around the world have asked
people to 'boycott Brand America,'9 but most
products with American brand-names are not made
in the US. Therefore refusing to buy such things
may reduce royalties to America, but will not
seriously undermine US economic power. On the
other hand, 'the longest-lived and most widely
seen American 'brand' in the rest of the world is
almost certainly not Coca-Cola nor McDonalds, but
rather the US dollar.'10 Taking this into
account, the secretariat of the international
'Boycott Bush campaign,' based at the Mother
Earth association in Belgium, recently asked
members if they were ready to open another front,
'to boycott the dollar'. Most of them have
responded 'yes'.
Dollar hegemony is what concealed the costs of
Empire, which were effectively being paid for by
the rest of the world, from US citizens. Other
countries were compelled to accept fiat dollars
because they had no choice. It was the world's
only reserve currency.
Choosing the Euro
UntilŠthe euro came into being. Even then, the
choice was only a potential one, as the euro
initially lost value, making it unattractively
risky as a reserve currency. The first
non-European countries that made a move in its
direction did so for political rather than
economic reasons. When Saddam Hussein switched to
the euro in late 2000 and converted Iraq's $10
billion reserve fund at the UN to euro, some
analysts commented that this political gesture
would have a heavy economic cost.11 But against
all expectations, he actually made a profit when
the euro staged a recovery.12 Iran is another
country which in 2002 converted more than half
its foreign exchange reserves to euros.13 Both
Iraq and Iran being oil-producing countries, the
impact of their shifting currency allegiances
would be significant. By contrast, North Korea's
official shift to the euro for trade in December
200214 was negligible from the standpoint of the
world economy, yet it signified a trend that US
imperialism had to stop at all costs. Suddenly
George Bush's diatribe against the 'Axis of
Evil', which seemed so arbitrary and laughable at
the time, does not appear quite so funny. Add to
this picture the fact that Hugo Chavez - against
whom the US supported a coup in April 2002, and
who continues to be under attack by the Bush
regime - has taken a large part of Venezuela's
oil trade out of the orbit of the US dollar,15
and the economic compulsions driving US foreign
policy become clearer. Military might alone does
not seem to be a sufficient basis for sustaining
an empire: economic power is crucial. And for the
declining US economy, US dollar supremacy is
essential for maintaining its economic clout.
This is no longer unchallenged. Before the Iraq
war, one Iranian economist and the Moroccan
magazine, L'Indépendant, suggested that Islamic
businessmen and countries should drop the dollar
as their foreign exchange reserve currency, in
order to weaken the US or at least deter them
from their aggressive foreign policy. Given the
deteriorating relations between the US and the
Arab world, quite a few west Asian oil-exporting
countries have begun to increase the proportion
of international settlements made in euros.
Reportedly, Russia may also follow suit. In 2003,
a senior Iranian oil representative suggested in
a speech in Europe that European oil purchases
might be increasingly traded in euros in future.
China and Russia have hinted that they may begin
to hold more of their foreign currency assets in
euros instead of dollars. An article in China
Daily on September 28, 2004 by Jiang Ruiping, the
director of International Economics at the China
Foreign Affairs University, pointed out that
China is already losing due to the dollar slide
and would lose even more if it crashes, and
recommended moving out of dollars into euros and
possibly also yen, as well as using its dollar
reserves to stock up on oil.16 Other countries
like South Korea and Taiwan also plan to shift
some of their foreign currency assets out of
dollars.17
All this has weakened the US dollar, but this
does not necessarily mean that it will decline to
the point where it ceases to function as world
currency. There are contradictory pressures, both
from the US and from its major creditors. Within
the US, there could be hopes that a weaker dollar
would spur exports, but this now seems unlikely,
given how uncompetitive US industry has
become.18 More importantly, the US deficits
shrink as the dollar declines. Federal Reserve
chairman Alan Greenspan summed up the US dilemma
in November 2004, in a speech where he seemed to
accept the inevitability of the dollar decline in
order to help ease US deficits. This would be a
boon to the US so long as the dollar retained its
role as world currency, but it would inflict
enormous losses on countries that have amassed
large quantities of dollar reserves. China and
Japan alone hold about a trillion dollars, and
while countries like India (and smaller
economies) may hold much smaller quantities, the
devaluation of those reserves is already hitting
them, and would hit them even more if the dollar
crashes.19 These countries could therefore think
of selling dollars and moving their reserves to
some other currency, which in turn would
jeopardise the status of the dollar as the world
currency.20 An attempt to counteract this is
probably what was responsible for rumours in
January 2005 that the Federal Reserve might hike
interest rates. For countries exporting to the US
there is also a dilemma. Japan, for example,
bought billions of dollars in order to hold down
the value of the yen and keep its exports
competitive. In the short term, it may
benefit from propping up the dollar, even though
it would lose massively if the dollar crashes.
Debtor countries would gain from a dollar slide,
since their debt is denominated in dollars; but
if they have foreign exchange reserves in
dollars, these would be devalued, and they would
also suffer if they depend on exports to the US
which the US would no longer be able to afford.
Thus there are also powerful forces resisting the
displacement of the dollar as the world's reserve
currency.
This brings us back to the dilemma posed by David
Ludden. The costs of empire will become apparent
to the US public only when they have to pay those
costs, and this will happen only when (a) other
nations stop subsidising its imperial adventures
by colluding in them, and (b) the dollar loses
its role as the world's reserve currency. A
weakening of the dollar while it retains its role
as world currency, which is what has been
happening so far, could actually help US
imperialism by reducing the value of its fiscal
and trade deficits; only when there is a
large-scale shift away from dollar reserves will
the rest of the world stop paying for the US
empire. This may not happen in the near future if
it is left entirely to economic forces, and
meanwhile the occupation of Iraq and Palestine
will go on, Iran may be invaded (as Bush has
threatened repeatedly), and so on and so forth.
On the other hand, if currency speculators get
into the act and the dollar goes into free fall,
it could pull down the world economy with it!
Avoiding this, too, requires planning and
coordination.
Courses of Action
For citizens of the world who are opposed to US
imperialism, that suggests several possible
courses of action. The 'world's second
superpower', world public opinion, made a hugely
impressive showing prior to the invasion of Iraq,
yet it failed to stop the invasion itself;
stronger action is required. But the armed
struggle taking place in Iraq is killing and
maiming hundreds of thousands of Iraqis and
thousands of Americans, most of them from poor
families; surely this is not desirable. The
alternative we propose is non-violent
non-cooperation with the imperial monster.
For example:
(1) Putting pressure on all other governments not
to participate in the occupation of Iraq in any
way, and/or voting out of power governments which
are colluding in this enterprise and voting in
alternatives who promise to pull out of Iraq. In
Britain, for example, if the Liberal Democrats
are willing to make a commitment to withdraw
British troops from Iraq, all anti-war activists,
including those who would normally vote for
Labour or Left parties, should campaign for them
in the forthcoming elections. Similarly with
other governments backing the US like those in
Italy and Japan. This will leave the burden of
running their empire fairly and squarely on the
shoulders of the US administration.
(2) Refusing to use the US dollar except within
the US itself. Even if this is done on an
individual basis, it will have the effect of
undermining the role of the dollar as the world
currency. Other economic actors, like the
international fair trade movement, should also
shift to other currencies for their international
trade: the movement is increasing, and it would
be an important gesture symbolically. Both
academics and activists should stop using dollar
equivalents to measure incomes in third world
countries, etc; for the moment, the euro can be
used as a standard. Mass action of this sort
played a major role in ending British rule in
India and thus the British empire. Employed on a
much wider scale, it can help to undermine the US
empire.
(3) Putting pressure on governments in third
world countries to shift foreign currency assets
out of dollars, and to create regional currencies
to strengthen regional commercial and economic
ties. This would not only be a gesture of
solidarity to the beleaguered peoples of Iraq,
Palestine and others oppressed by the US empire,
but would also make good economic sense. The
dollar is sliding, and developing countries which
hold all or most of their foreign exchange
reserves in dollars are losing money as it loses
value. If it crashes, their reserves could be
wiped out.
(4) Putting pressure on governments in
oil-producing countries not to denominate their
oil trade in US dollars. This does not
necessarily involve a wholesale shift to the
euro. Venezuela has concluded several barter
deals with other Latin American countries
including Cuba, giving them oil in exchange for
goods and services,21 and this is a pattern other
oil-producing countries could consider. For
example, tens of thousands of migrant workers
from south and south-east Asia work in Gulf
countries; if their remittances in dinars,
dirhams, etc, can be used directly for oil
imports, all parties would benefit. Barter deals
which do not involve oil could also be concluded
between developing countries.
(5) Changing world trading patterns. If the
dollar sinks drastically with world trade
unchanged, many countries which now rely on
exports to the US will be affected adversely by
its inability to import their goods with a
weakened dollar. A reorientation of trade away
from the US would therefore be necessary. For
example, plans to constitute SAFTA as a regional
bloc free of tariff and immigration barriers
should be pursued at greater speed, and trade
with other countries promoted at the same time.
The European Union and MERCOSUR in Latin America
provide examples that others could emulate. China
and Japan, the biggest creditors of the US,
suffer most from the decline of the dollar, and
would have to work out alternative trade patterns
to safeguard their economies.
(6) Campaigning nationally and internationally
for policies of employment creation, protection
of workers' rights, shorter working hours,
enforced payment of minimum wages that are
adequate to support a decent standard of living,
and so on. This will redirect resources from
hugely wasteful military expenditures into social
consumption (nutrition, health, education, etc)
and expand mass markets, especially in third
world countries but even in Japan, Europe and
North America.
(7) In addition to these economic measures,
ending US imperialism would require pressing for
the development and implementation of
international humanitarian law, international law
and multilateral treaties (such as the Geneva
Conventions, Rome Treaty of the International
Criminal Court, Chemical Weapons Convention,
Biological Weapons Convention, Comprehensive Test
Ban Treaty, Land Mine Treaty, ILO Core
Conventions, CEDAW and the Kyoto Protocol), and
the strengthening and democratisation of
multilateral institutions (like the UN, ILO and
WTO). A recent example of such action was the
open letter by eminent South Africans (including
former president Nelson Mandela and Archbishop
Desmond Tutu) protesting against US attempts to
oust Kofi Annan, which says, 'Those who call for
his resignation betray the objectivity his
position as secretary-general demands, and regard
the United Nations as a mouthpiece to extol and
exonerate the politics of the US, right or
wrong.'22 Also important are actions 'trying' the
US for violations of international law, as in the
world tribunal on Iraq which is being carried out
in various countries by hundreds of movements. Of
course the effectiveness of international law and
multilateral institutions is seriously undermined
by US non-participation and sabotage, yet if
other countries persist in working for global
democracy, the US will come under greater
pressure to comply.
Even if all possible adjustments are made, there
is no doubt that the decline and fall of the
dollar as world currency will cause pain, both
within and outside the US. But the alternative is
incomparably worse. The world order cannot much
longer survive having a heavily armed rogue state
on the rampage in violation of all international
law and multilateral treaties. The world economy
cannot afford to depend on the currency of a
bankrupt nation with a colossal military budget.
And the earth itself is put at risk by a country
which devours massive quantities of fossil fuels
and spews out greenhouse gases at a catastrophic
rate.
US imperialism would not be able to pursue its
destructive policies without the unlimited supply
of blank cheques extended to it by the rest of
the world, so it is the responsibility of the
rest of the world to withdraw that source of
funding. The beast has to be killed by attacking
it at the point where it is most vulnerable.
Meanwhile, if enough people in the US work to
ensure that the next elections (2008) install a
president and representatives who undertake to
abandon the pursuit of empire and instead seek to
reintegrate the US into the international
community as a law-abiding, fiscally-responsible,
non-polluting member, the result will be a far
safer and more stable global order, world economy
and environment.
email: rohinihensman@yahoo.co.uk
Notes
1 David Ludden, 'America's Invisible Empire,'
Economic and Political Weekly, Vol XXXIX, No 44,
Mumbai, October 30, 2004, pp 4776-77.
2 Emmanuel Todd, Dopo l'impero - la dissoluzione
dell'impero americano, Marco Tropea editore
(Italian translation, 2003).
3 William Clarke in particular makes an
impressive case, with a great deal of evidence,
in his web-based essay 'Revisited: The Real
Reasons for the Upcoming War with Iraq: A
Macroeconomic and Geostrategic Analysis of the
Unspoken Truth'
(www.ratical.org/ratville/CAH/RriraqWar.html
January 2004), which is a revised version, with
addenda, of his original essay of January 2003.
Many of the references in this article are taken
from him. See also Henry C K Liu, 'US Dollar
Hegemony Has Got to Go,' Asia Times, April 11,
2002 and Rohini Hensman, 'A Strategy to Stop the
War, Economic and Political Weekly, April 19,
2003.
4 David E Spiro, The Hidden Hand of American
Hegemony: Petrodollar Recycling and International
Markets, Cornell University Press, 1999.
5 Paul Craig Roberts, 'The Coming Currency
Shock,' Counterpunch, November 16, 2004,
www.counterpunch.org/roberts11162004.ht ml.
6 Paul Craig Roberts, op cit.
7 Lawrence G Franko, 'US Competitiveness in the
Global Financial Services Industry,'
www.financialforum.umb.edu/documents/Franko per
cent, 20 Fin per cent, 20 Svcs per cent, 20
Global per cent 20 Comp.pdf, October 2004.
8 Pierre Lecomte, Comment sortir du piège
américain? (ed), F X de Guibert, Paris 2003.
9 Such campaigns are coordinated by the network
'Boycott Bush', www. boycottbush.org
10 Lawrence G Franko, op cit.
11 See for example Charles Recknagel, 'Iraq:
Baghdad Moves to Euro,' Radio Free Europe,
November 1, 2000.
12 Faisal Islam, 'Iraq Nets Handsome Profit by
Dumping Dollar for Euro,' The Observer, February
16, 2003.
13 'Forex Fund Shifting to Euro', Iran Financial News, August 25, 2002.
14 Caroline Gluck, 'North Korea Embraces the Euro,' BBC News, December 1, 2002.
15 William Clark, op cit.
16 Gary North, 'Asian Doubts Regarding the
Dollar', www.LewRockwell.com/north/north308.html,
October 1, 2004.
17 Phillip Day and Hae Won Choi, 'Asian Central
Banks Consider Alternatives to Big Dollar
Holdings', Wall Street Journal, February 5, 2004.
18 Roberto Panizza, 'Movimenti Internazionali di
Capitali dal Rinascimento ai Nostri Giorni', in
Gli spazi della globalizzazione, edited by F M
Parenti, Diabasis, Reggio Emilia, 2004.
19 See, for example, Ila Patnaik, 'Day of the
Declining Dollar - How should India Be Responding
to This Trend?', The Indian Express, December 18,
2004.
20 Mike Dolan, 'Dollar Fall Will Come at a Price
for All,' Reuters, November 21, 2004
www.reuters.com/news Article.html? type = top
News and Story ID = 6876686
21 Hazel Henderson, 'Beyond Bush's Unilateralism:
Another Bipolar World or a New Era of Win-Win?'
InterPress Service, June 2002.
22 M P Muttiah, 'US Backs Out on Annan', Sunday
Observer, Colombo, December 12, 2004, p 9.
© Copyright 2001 The Economic and Political Weekly. All rights reserved.
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