Another perspective:
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Dollar down, time to buy real estate in San Francisco Bay Area
playground of the rich! London, Paris, it's all good!
Published on Wednesday, June 13, 2007 by The Nation Wall Street, Iraq
and the Declining Dollar by Ken Miller
The disastrous impact on the economy of George W. Bush's response to
the attacks of September 2001 is still being measured. On Friday of
last week the Bush Administration announced that it would not
renominate Gen. Peter Pace as chairman of the Joint Chiefs of Staff.
The Administration's decision to throw a loyal supporter overboard
avoids a messy confirmation hearing that would have further focused a
war-weary nation's attention on the past. But sometimes looking
backward can help us anticipate the future.
In February of this year, Rep. Henry Waxman's Committee on Oversight
and Government Reform revealed fresh details of how the Coalition
Provisional Authority dumped $12 billion in cash-in $100 bills-into
Iraq in 2004. Multiple flights of huge C-130 transport planes were
required to deliver 363 tons of greenbacks-a modest portion of the
$510 billion we have spent so far in Iraq and Afghanistan. By certain
measures, this may not be America's most expensive war. But the worst
economic effects are yet to come.
No matter how the Iraq War ends, it is clear that the United States is
incapable of militarily securing territory against the wishes of a
hostile population. And the Iraq War is at the heart of two alarming
trends that are likely to have a negative impact on America's position
in the world: The demand for oil is rising while the supply is
declining, and the demand for the US dollar is declining while the
supply of dollars is rising.
In the four years since the toppling of Saddam Hussein, the Iraqi
oilfields and associated infrastructure have sustained 400 attacks.
And because of the situation on the ground, Iraqi oil production, at
1.95 barrels per day during the first quarter of 2007, was far short
of the government's goal of 2.5 million barrels per day and the
previous peak of 3.7 million under Saddam. In this asymmetrical war,
our enemies are spending a fraction of our costs on improvised
explosive devices, chlorine gas and suicide bombers, while we invest
heavily in noneffective weapons systems and force structures.
US oil and gas production peaked in the early '70s, and we are now by
far the world's largest energy importer. The largest oilfields in
Saudi Arabia, Kuwait, Iran, Syria, Yemen and Oman are in decline, as
are most oilfields in the former Soviet Union, Canada, Central and
South America, and on-shore Africa. New fields will be discovered and
new technologies brought to bear, but costs of production will be
higher than in the past and will require more expensive investments in
equipment and technology.
Even as existing fields age, the new economies of India and China
require more and more oil to fuel their impressive growth. Although a
worldwide depression might result in a temporary drop in the price of
oil and other commodities, the long-term imbalance between growing
demand and declining supply will eventually reassert itself, creating
price increases over time.
Contemporaneously with the supply/demand imbalance in oil and other
hard commodities, the Bush Administration's response to 9/11 has
weakened the position of the dollar in the world. The President's
request that Americans continue to spend has struck an
all-too-sympathetic chord with the American people. The trade
deficits caused by that spending have created a current account
deficit equal to 6.2 percent of GDP, sending trillions of dollars into
the hands of foreigners.
While we continue to import goods of much greater value than those we
export, thus flooding the world with dollars, Bush has pursued a
policy of what some have dubbed "military Keynesianism"-that is, the
combination of low taxes and high military expenditures. This dynamic
forces the Federal Reserve to print money and foster easy credit
policies, which will eventually result in higher interest rates,
inflation or both.
So the printing presses are spewing out more dollars, which are being
collected by China, Japan and others. And those countries are showing
signs of concern that they have too much of their foreign exchange
reserves tied up in our currency. Likewise, certain other nations are
evidencing a declining interest in accepting the dollar as a medium of
exchange. It was in October 2000 that Saddam insisted that Iraq's oil
be paid for in euros. But now Russia wants payment for the energy it
exports in rubles. Venezuela and Iran insist on euros. Kuwait has
recently unpegged its dinar from the dollar in favor of a basket of
currencies.
The dollar has indeed shown symptoms of its decline in popularity
during the Bush years. The dollar has weakened against the euro,
gold, copper and other hard assets and currencies. When Bush came in
to office, for example, you could get .987 euros for every dollar.
Now you can only get .75. You could say that at $65 per barrel, oil
is getting more valuable... or you could say the value of the dollar
has declined as measured by oil.
Mainstream economists seem to agree that best-case, the dollar will
continue a stately decline, but in a world where the United States has
lost so much respect, where we continue to flood the world with
dollars and borrow to finance our consumer habit, we could find that
one of those sharp, depression-inducing discontinuities occurs-like,
say, a run on the dollar.
We are continuing to import 60 percent of the 20.6 million barrels of
oil we use daily. And though the size and stability of our economy is
likely to insure a demand for the dollar at some level, oil that
anyone can buy for hard currency may be getting scarcer. Governments
have begun to do deals aimed at taking oil off the market for their
own account-deals like the ones China has done with Angola, Brazil,
Iran, Nigeria, Venezuela and Sudan. South Korea has just announced it
will follow suit.
If our military cannot secure oil by force, and if oil is destined to
cost us more and more of a declining currency to buy what is
available, then "brand USA" is in trouble. When Bush leaves office,
this country will have to begin the difficult task of reversing some
very bad trends in the military, fiscal, monetary and energy areas.
The pollution of his legacy transcends mere politics.
Ken Miller is chairman and CEO of Ken Miller Capital LLC in New York.
© 2007 The Nation