Thursday, July 17, 2008

World Economic Crisis - Thanks America

We saw last week that our economic crisis is driven primarily by the global economic crisis that in turn is driven by the upward spiralling price of oil and the downward spiralling value of the dollar. The third crisis, which for us is at least as great, is the global food crisis. This last should suit America because it will make food dependent countries even more dependent while it will still retain enough strength to feed the vast majority of its own people. For us the food crisis should be much less acute than the oil and dollar crises because we are principally a food-growing country with the capacity to easily feed our own people, while the other two crises are totally out of our control. We are their helpless hostages.

When the world recession of the Nineties started, it used to be said that, “He who has cash is king.” Today, because cash is increasingly losing value (purchasing power) at an alarming rate, the wisdom is: “He who has land is king.” Or should be if he has any sense. This is true both for individuals and states. By that measure, we are a very lucky and wealthy country. The USSR with the world’s mightiest military machine laced with 32,000 nuclear warheads collapsed because it couldn’t feed its own people.

To simply accept the contention that the global food crisis is caused only by too much land being allocated to producing crops that produce the petroleum substitute biofuel ethanol is to be simplistic in the extreme. High food prices are also driven by high petroleum prices. Where do you think the farmer gets electricity from that runs his pump to water his fields? What do you think runs his tractors and harvesters, the trucks on which his produce is transported from farm to market? High oil prices mean higher electricity costs, or even inadequate electricity as we now have. What happens then? We end up with food too expensive to buy or even scarce, probably both, as we also now have. It all goes back to oil and its price, not to mention distribution and greed-driven hoarding. We have to make a doable plan immediately to use our energy resources in the most efficient and optimum manner to overcome energy shortfalls both in terms of quantity and price.Europe alone is sitting on proverbial “lakes of wine and mountains of butter.” Why not put all this food into the markets of the poor? It all has to do with Control without Responsibility, America’s latest doctrine. America knows what it is doing, not just regarding food but also oil. They had the decline of the dollar under control too, until China stepped in. The tragedy is that we do not know what they are doing and we do not know what we are doing.

The initial fall of the dollar was deliberately targeted to reduce the trade imbalance between America and China. America had the internal strength to withstand the fallout or so it assumed, forgetting how indebted it is and to whom and that it has neither the output levels nor the pricing of oil totally under its control. The US had been asking China for years to revalue the Yuan, which it thinks is artificially undervalued. When China did not the US decided to devalue the dollar instead, but it was a managed devaluation, nothing to go hysterical about. Then two things happened to make the US lose some control, enough to make a difference: China decided to sell some of the US debt that it holds and Iran set-up its Euro-denominated Iranian Oil Bourse (IOB) on May 5. This knocked the wind out of the dollar.America is the most indebted country in the world. On June 3, 2008 at 9:04:07 GMT its national debt stood at $9,477,171,636,632.85. That, I think, is just under $9.5 trillion! Which means that at the same time and date each US citizen was indebted to the tune of $30,890.69. Considering that the poverty line in America is $18,500 per annum, an American owes nearly twice as much as the income of the 10 percent Americans or over 30 million human beings that live in abject poverty in the richest country in history. These are the joys of market forces capitalism for you. The US national debt has been growing at the rate of $1.55 billion per day since September 28, 2007.

Gandhi was right: “There’s enough for everyone’s need but not enough for everyone’s greed.”

The US debt would still have been manageable if it had been indebted to itself. America forgot how indebted it is to China before needling it. China is the world’s largest investor in US Treasury bills, bonds and securities ($400 billion in US T-Bills alone) and holds more US debt than any other country (a staggering 40 percent) except Japan. In addition, it holds a huge reserve of US dollars because its currency, like ours, is tied to the dollar. When a country has you by where it hurts most, you do not needle it lightly. Around mid-April China fired a shot across America’s bow when Xiu Jian, Vice Director of the Bank of China, the country’s central bank, said that it is considering shifting a major portion of its national currency reserve of $1.4 trillion into “more stable” currencies. The dollar took a nosedive and fell to record lows the lowest ever against the Euro, the lowest in a generation against the Sterling and the lowest in 57 years against the Canadian dollar. China fired another shot across America’s bow by divesting 50 percent of its $400 billion US T-Bills to establish a $200 billion fund to help diversify its holdings in equities and stocks around the world. China wisely stopped because the USA is also its largest trading partner (that is where America has clout over it and most other countries) and killing the goose that lays golden eggs would have meant China killing itself.

Europe, however, couldn’t avoid the fallout as high Euro and Sterling values started eroding its exports alarmingly while it becomes too expensive to breathe in. A lot of EU exports are shifting from Europe to China.However, don’t forget that if America was not the cleverest country in the world because of its knowledge bank, the largest there is, it would not be in the position of primacy that it is in. To imagine that China can destroy the dollar simply by selling its debt and holdings is to be naive. America is not going to take this lying down. It could demonetise. It could force the price of oil so high that China’s economy goes into reverse gear. Or it could simply revert to the gold standard that it left in 1971 and which is the source of much of the world currency crisis because it exposed the illusion of paper money backed by itself as the mirage that it really is not worth the paper it is printed on. If all currencies are worth so many dollars, what is the dollar worth? Hot air? It became oil, but that is de facto, therefore no total control. I wonder whether the price of gold has shot up only because people find it a safer investment bet in today’s uncertainty or because the US is also quietly busy buying up gold just in case it has to go back to the gold standard and leave the rest of the world in the lurch.

Next week the Iran Bourse will open to trade oil, not in dollars but in Euros. The Iranian Oil Bourse (OIB) was registered on May 5 this year. The consequences are horrendous: with the dollar no longer the sole currency with which to trade oil, its credibility as the benchmark has weakened gravely and thrown all world currencies into a tailspin either crashing in value making essential imports unsustainable or increasing in value reducing their exports drastically causing huge trade deficits, as with Europe. There has been a run on non-oil producing Third World currencies as capital flight continues unabated. That is why soft currencies are weakening against all hard currencies while non-dollar hard currencies are strengthening.The fall in the dollar’s value was one of the triggers of the oil price rise.

Three other triggers contributed heavily too:
the greed-driven speculation of oil brokers and hedge funds,
the Iraq war and
the new Iranian oil bourse that caused a further decline in the dollar, raising oil prices even more, like a self-sustaining upward spiral.
Now add a fourth trigger: the increasing probability of some kind of strike against Iran.
Estimates are that the Iraq war alone trebled the cost of oil. By May the world had spent an extra $6 trillion on higher energy prices alone since the Iraq war. Else the price would have been $40 even less but for greedy speculators and hedge funds. Oil has been trading on two dollar-denominated oil bourses, NYMEX and IPE, both privately owned by US citizens. They play a huge role in determining crude oil prices. The New York Mercantile Exchange Inc (NYMEX) was established more than 135 years ago. London’s International Petroleum Exchange (IPE), now Intercontinental Exchange (ICE), was established in 1980. NYMEX “pioneered the development of energy futures and options contracts in 1978 as [a] means of bringing price transparency and risk management to this vital market.”
This is precisely what opened the door to greed-driven speculation that has driven the price of crude unnaturally high. “IPE is one of the world’s largest energy futures and options exchanges. Its flagship commodity, Brent Crude, is a world benchmark for oil prices…” Brent is British North Sea, not OPEC.This kept the demand for the dollar high as oil producers were paid in dollars that they invested in western, particularly American, banks, stocks, bonds, real estate, in bailing out US corporations (like Saudi Prince Al Waleed once did Citibank and recently the UAE did) and buying billions of dollars worth of useless armaments. It was also necessary for oil-importing countries to have huge dollar reserves to buy oil. But when on May 5 Iran registered its Euro-denominated IOB in competition with the dollar-denominated NYMEX and IPE, and many countries supported it, the dollar took more beating.This requires some explaining. Iran did this to break free from the tyranny of the dollar. Russia and Europe welcomed the Iranian oil bourse because 70 percent of Europe’s oil is imported from Iran. The two most oil-hungry nations growing hungrier by the day, China and India, also said that they were very interested. Now you see why Iran’s president is “the most dangerous man in the world?” It has nothing to do with the damned nuclear bomb. It has to do with the detonation of the oil bomb that has detonated the dollar bomb.
For America this is war, literally, because having left the Gold Standard in 1971 it had, de facto, made oil the commodity on which the dollar is based by ensuring that oil is sold mostly in dollars. (When Saddam said in April 2002 that he was considering selling some Iraqi oil in Euros he signed his death warrant). Came the decline in the dollar came the decline in the value (purchasing power) of oil revenues as well as OPEC’s dollar-based assets. Oil-exporting countries started thinking in terms of selling some oil in Euros. This would put the dollar even more on the skids. President Bush’s first Middle East trip this year, ostensibly a “peace mission”, was actually to deliver what Mike Whitney calls “the horse’s head” (as in the film, The Godfather). “Bush went to the trouble of travelling half-way around the world to tell the Saudis and their friends in the Gulf States that they were going to continue linking their oil to the dollar or they were going to “sleep with the fishes.”Why did the Arab countries say that they might shift partly to Euro? With the fall in the dollar’s value, OPEC saw the real value of its oil, its dollar surpluses and dollar holdings decline too. Since oil has largely been sold in dollars through NYMEX and IPE, oil sellers put their hordes of surplus “petrodollars” in US banks, real estate and other investments. But now the dollar’s decline has made selling in dollars no longer as valuable as it was. While buying in dollars means that oil-importing countries have to have many more dollars to buy the same amount of oil because not only has the oil price kept rising, its price has also gone up with the erosion of Third World currencies (as has their foreign debt). Oil import bills have doubled and trebled since the oil price rise started, making a mess of national trade balances.
When recently Saudi Arabia announced a small increase in oil output, crude prices should have fallen. Contrarily, they went up instead, underlining the influence of greedy speculators and manipulative hedge funds. Plus the probable attack on Iran. However, Saudi Arabia didn’t say it would increase oil output because of US pressure but for the obvious reason that, like China, its doesn’t wish to kill the geese that lay golden eggs for the oil-producing countries. There is more. Saudi Arabia has not forgotten the lesson from the famous oil price hike of 1973: don’t take the price of oil so high that alternative energy sources become viable. When oil goes beyond $150, American shale oil, heavy crude and Canada’s Calgary oil sands will variously become viable. So will solar power. Once they tap these resources, what then? Plus one cannot rule out the bizarre possibility that Saudi Arabia has been told that Iran will soon be attacked. That would leave Goldman Sachs’ prediction of oil at $200 by year’s end far behind and drive its price up beyond imagination, leading to a global economic meltdown. Better to start reducing prices now by increasing output than wait for the possible fallout.
However, this last is only conjecture and will always sound fanciful until it actually happens.
The only way America can strengthen the dollar is by creating a trade surplus. IMPOSSIBLE.
That would mean reducing their workers to near-slavery to compete with Chinese wages and other inputs. What will happen in the US? Chaos for sure. Maybe a workers revolution, but looking at the situation as it is now, it is more likely to be a re-run of Germany post-1929, and some form of an extreme right wing movement will emerge.
The romantic socialist notion of a “workers revolution” aside, there is a point here. The Great Depression of the 1930s caused a rightward swing in Germany and led to the emergence of the Nazis. Yes, America is a democracy because its system works for it, but democracy is fragile. It doesn’t take much adversity to derail it.Before you get too excited, let me caution you that the assumption that that America will suddenly collapse is wishful thinking. It is we who are more likely to collapse, at least before America does.
Sure history is witness to the fall of many civilisations, empires and superpowers. They all collapsed because they ran out of intellectual steam that led to decadence and internal contradictions. Only Britain’s was a managed withdrawal from empire. But America is not the Soviet Union. It is a country crafted by consensus, not force. Its people are proud to be Americans, not sullen like the Soviets were. It is based on the ideals of “life, liberty and the pursuit of happiness.” The USSR was based on an unworkable and increasingly inhuman Leninist-Stalinist totalitarianism. America is dynamic, not decadent. The American Declaration of Independence is one of the greatest pieces of writings by man.
In contrast, Lenin’s voluminous works read like a dirge. The first three words of The Declaration of Independence “We the people” bring a lump to the throat because they say it all. Today America is so far ahead in knowledge of all kinds, especially in the sciences, that no country has a chance of catching up unless America loses its great ideals. The problem with America is that it does not accept the right of others to practice those same ideals if it does not consider the outcome to be in its interest or if it threatens its hegemony. Yes, China, Russia and Germany will soon acquire polarity too, but the magnetism of the American pole will still be the greatest because America has primacy over all fours sources of global power -- knowledge, communications, finance and military. China, Russia and Germany have strengths in only one or two, not all four. That’s the difference

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