The End of Dollar Hegemony, Part II

The Daily Reckoning PRESENTS: In a speech before the U.S. House of Representatives last week, Congressman Ron Paul stated that the United States’ dollar dominance is coming to an end…and when this paper money runs out, wealth and political stability is lost. You can read the second part of his speech, below…

by Hon. Ron Paul of Texas

In the short run, the issuer of a fiat reserve currency can accrue great economic benefits. In the long run, it poses a threat to the country issuing the world currency. In this case that’s the United States. As long as foreign countries take our dollars in return for real goods, we come out ahead. This is a benefit many in Congress fail to recognize, as they bash China for maintaining a positive trade balance with us. But this leads to a loss of manufacturing jobs to overseas markets, as we become more dependent on others and less self-sufficient.Foreign countries accumulate our dollars due to their high savings rates, and graciously loan them back to us at low interest rates to finance our excessive consumption.

It sounds like a great deal for everyone, except the time will come when our dollars – due to their depreciation – will be received less enthusiastically or even be rejected by foreign countries. That could create a whole new ballgame and force us to pay a price for living beyond our means and our production. The shift in sentiment regarding the dollar has already started, but the worst is yet to come.

The agreement with OPEC in the 1970s to price oil in dollars has provided tremendous artificial strength to the dollar as the preeminent reserve currency. This has created a universal demand for the dollar, and soaks up the huge number of new dollars generated each year. Last year alone M3 increased over $700 billion.

The artificial demand for our dollar, along with our military might, places us in the unique position to “rule” the world without productive work or savings, and without limits on consumer spending or deficits. The problem is, it can’t last.

Price inflation is raising its ugly head, and the NASDAQ bubble – generated by easy money – has burst. The housing bubble likewise created is deflating. Gold prices have doubled, and federal spending is out of sight with zero political will to rein it in. The trade deficit last year was over $728 billion. A $2 trillion war is raging, and plans are being laid to expand the war into Iran and possibly Syria. The only restraining force will be the world’s rejection of the dollar. It’s bound to come and create conditions worse than 1979-1980, which required 21% interest rates to correct. But everything possible will be done to protect the dollar in the meantime. We have a shared interest with those who hold our dollars to keep the whole charade going.

Greenspan, in his first speech after leaving the Fed, said that gold prices were up because of concern about terrorism, and not because of monetary concerns or because he created too many dollars during his tenure. Gold has to be discredited and the dollar propped up. Even when the dollar comes under serious attack by market forces, the central banks and the IMF surely will do everything conceivable to soak up the dollars in hope of restoring stability.Eventually they will fail.

Most importantly, the dollar/oil relationship has to be maintained to keep the dollar as a preeminent currency. Any attack on this relationship will be forcefully challenged – as it already has been.

In November 2000 Saddam Hussein demanded Euros for his oil. His arrogance was a threat to the dollar; his lack of any military might was never a threat. At the first cabinet meeting with the new administration in 2001, as reported by Treasury Secretary Paul O’Neill, the major topic was how we would get rid of Saddam Hussein – though there was no evidence whatsoever he posed a threat to us. This deep concern for Saddam Hussein surprised and shocked O’Neill.

It now is common knowledge that the immediate reaction of the administration after 9/11 revolved around how they could connect Saddam Hussein to the attacks, to justify an invasion and overthrow of his government. Even with no evidence of any connection to 9/11, or evidence of weapons of mass destruction, public and congressional support was generated through distortions and flat out misrepresentation of the facts to justify overthrowing Saddam Hussein.

There was no public talk of removing Saddam Hussein because of his attack on the integrity of the dollar as a reserve currency by selling oil in Euros. Many believe this was the real reason for our obsession with Iraq. I doubt it was the only reason, but it may well have played a significant role in our motivation to wage war. Within a very short period after the military victory, all Iraqi oil sales were carried out in dollars. The Euro was abandoned.

In 2001, Venezuela’s ambassador to Russia spoke of Venezuela switching to the Euro for all their oil sales. Within a year there was a coup attempt against Chavez, reportedly with assistance from our CIA.

After these attempts to nudge the Euro toward replacing the dollar as the world’s reserve currency were met with resistance, the sharp fall of the dollar against the Euro was reversed. These events may well have played a significant role in maintaining dollar dominance.

It’s become clear the U.S. administration was sympathetic to those who plotted the overthrow of Chavez, and was embarrassed by its failure. The fact that Chavez was democratically elected had little influence on which side we supported.

Now, a new attempt is being made against the petrodollar system. Iran, another member of the “axis of evil,” has announced her plans to initiate an oil bourse in March of this year. Guess what, the oil sales will be priced Euros, not dollars.

Most Americans forget how our policies have systematically and needlessly antagonized the Iranians over the years. In 1953 the CIA helped overthrow a democratically elected president, Mohammed Mossadeqh, and install the authoritarian Shah, who was friendly to the U.S. The Iranians were still fuming over this when the hostages were seized in 1979. Our alliance with Saddam Hussein in his invasion of Iran in the early 1980s did not help matters, and obviously did not do much for our relationship with Saddam Hussein. The administration announcement in 2001 that Iran was part of the axis of evil didn’t do much to improve the diplomatic relationship between our two countries.Recent threats over nuclear power, while ignoring the fact that they are surrounded by countries with nuclear weapons, doesn’t seem to register with those who continue to provoke Iran. With what most Muslims perceive as our war against Islam, and this recent history, there’s little wonder why Iran might choose to harm America by undermining the dollar. Iran, like Iraq, has zero capability to attack us. But that didn’t stop us from turning Saddam Hussein into a modern day Hitler ready to take over the world. Now Iran, especially since she’s made plans for pricing oil in Euros, has been on the receiving end of a propaganda war not unlike that waged against Iraq before our invasion.

It’s not likely that maintaining dollar supremacy was the only motivating factor for the war against Iraq, nor for agitating against Iran. Though the real reasons for going to war are complex, we now know the reasons given before the war started, like the presence of weapons of mass destruction and Saddam Hussein’s connection to 9/11, were false. The dollar’s importance is obvious, but this does not diminish the influence of the distinct plans laid out years ago by the neo-conservatives to remake the Middle East. Israel’s influence, as well as that of the Christian Zionists, likewise played a role in prosecuting this war.Protecting “our” oil supplies has influenced our Middle East policy for decades.

But the truth is that paying the bills for this aggressive intervention is impossible the old fashioned way, with more taxes, more savings, and more production by the American people. Much of the expense of the Persian Gulf War in 1991 was shouldered by many of our willing allies. That’s not so today. Now, more than ever, the dollar hegemony – it’s dominance as the world reserve currency – is required to finance our huge war expenditures. This $2 trillion never-ending war must be paid for, one way or another. Dollar hegemony provides the vehicle to do just that.

For the most part the true victims aren’t aware of how they pay the bills. The license to create money out of thin air allows the bills to be paid through price inflation. American citizens, as well as average citizens of Japan, China, and other countries suffer from price inflation, which represents the “tax” that pays the bills for our military adventures. That is until the fraud is discovered, and the foreign producers decide not to take dollars nor hold them very long in payment for their goods. Everything possible is done to prevent the fraud of the monetary system from being exposed to the masses who suffer from it. If oil markets replace dollars with Euros, it would in time curtail our ability to continue to print, without restraint, the world’s reserve currency.

It is an unbelievable benefit to us to import valuable goods and export depreciating dollars. The exporting countries have become addicted to our purchases for their economic growth. This dependency makes them allies in continuing the fraud, and their participation keeps the dollar’s value artificially high. If this system were workable long term, American citizens would never have to work again. We too could enjoy “bread and circuses” just as the Romans did, but their gold finally ran out and the inability of Rome to continue to plunder conquered nations brought an end to her empire.

The same thing will happen to us if we don’t change our ways. Though we don’t occupy foreign countries to directly plunder, we nevertheless have spread our troops across 130 nations of the world. Our intense effort to spread our power in the oil-rich Middle East is not a coincidence. But unlike the old days, we don’t declare direct ownership of the natural resources – we just insist that we can buy what we want and pay for it with our paper money. Any country that challenges our authority does so at great risk.

Once again Congress has bought into the war propaganda against Iran, just as it did against Iraq. Arguments are now made for attacking Iran economically, and militarily if necessary. These arguments are all based on the same false reasons given for the ill-fated and costly occupation of Iraq.

Our whole economic system depends on continuing the current monetary arrangement, which means recycling the dollar is crucial. Currently, we borrow over $700 billion every year from our gracious benefactors, who work hard and take our paper for their goods. Then we borrow all the money we need to secure the empire (DOD budget $450 billion) plus more.The military might we enjoy becomes the “backing” of our currency. There are no other countries that can challenge our military superiority, and therefore they have little choice but to accept the dollars we declare are today’s “gold.” This is why countries that challenge the system – like Iraq, Iran and Venezuela – become targets of our plans for regime change.

Ironically, dollar superiority depends on our strong military, and our strong military depends on the dollar. As long as foreign recipients take our dollars for real goods and are willing to finance our extravagant consumption and militarism, the status quo will continue regardless of how huge our foreign debt and current account deficit become.

But real threats come from our political adversaries who are incapable of confronting us militarily, yet are not bashful about confronting us economically.That’s why we see the new challenge from Iran being taken so seriously. The urgent arguments about Iran posing a military threat to the security of the United States are no more plausible than the false charges levied against Iraq. Yet there is no effort to resist this march to confrontation by those who grandstand for political reasons against the Iraq war.

It seems that the people and Congress are easily persuaded by the jingoism of the preemptive war promoters. It’s only after the cost in human life and dollars are tallied up that the people object to unwise militarism.

The strange thing is that the failure in Iraq is now apparent to a large majority of American people, yet they and Congress are acquiescing to the call for a needless and dangerous confrontation with Iran.

But then again, our failure to find Osama bin Laden and destroy his network did not dissuade us from taking on the Iraqis in a war totally unrelated to 9/11.

Concern for pricing oil only in dollars helps explain our willingness to drop everything and teach Saddam Hussein a lesson for his defiance in demanding Euros for oil.

And once again there’s this urgent call for sanctions and threats of force against Iran at the precise time Iran is opening a new oil exchange with all transactions in Euros.

Using force to compel people to accept money without real value can only work in the short run. It ultimately leads to economic dislocation, both domestic and international, and always ends with a price to be paid.

The economic law that honest exchange demands only things of real value as currency cannot be repealed. The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or Euros.The sooner the better.


Congressman Ron Paul
for The Daily Reckoning
February 23, 2006

Editor’s Note: You can read the first part of Dr. Paul’s speech in Wednesday’s issue of The Daily Reckoning.

Congressman Ron Paul of Texas enjoys a national reputation as the premier advocate for liberty in politics today. Dr. Paul is the leading spokesman in Washington for limited constitutional government, low taxes, free markets, and a return to sound monetary policies based on commodity-backed currency. He is known among both his colleagues in Congress and his constituents for his consistent voting record in the House of Representatives: Dr. Paul never votes for legislation unless the proposed measure is expressly authorized by the Constitution. In the words of former Treasury Secretary William Simon, Dr. Paul is the “one exception to the Gang of 535” on Capitol Hill.

To learn more about Dr. Paul, see here:

Congressman Ron Paul

We have very little time this morning; we’re driving up to Normandy to check on that money pit…er…chateau we bought. We’re going to have to let others do much of the worrying this morning. And there seem to be enough experts around doing just that.

Richard Berner, for instance, worries about the rate of consumption.

“Consumers went on a spending spree over the past three months, ” he notes and adds, “I estimate that real outlays jumped at close to a 10% annual rate in the November-January span, the fastest 3-month clip since the spring of 1987. That surge occurred despite rising debt and interest rates, a negative saving rate, and apparently slowing home price gains. It’s hardly an understatement to say that the pace is unsustainable.”

Among consumers in America though, it looks like “what me worry” is still the prevailing mood.

Colleague Lila Rajiva offers a quote from Bishop Berkeley to explain this insouciance about the reckless spending: “Things are as they are, and their consequences will be what they will be. Why then should we seek to be deceived?”

Why indeed? That’s the rub. How about: because we love deception. Or, how about: because it is so much more fun than the truth. You see, we are a nation of romantics, of dreamers and of wishful thinkers. We read only the upbeat part of company reports – not the footnotes, the small print, or the legal disclaimer at the bottom. We like to see our women by candlelight or under pink shades, not in the hard light of the midday sun. And we imagine that we can bring liberty, freedom and ATM machines to desert tribes in Mesopotamia.

How could anyone help loving such trusting rubes? Americans have nary a trace of Gallic cynicism, the knowing superiority of the British or even the world-weariness of the Germans. It is not even as if they were born yesterday; it is as if they hadn’t been born at all.

In the American view, progress is unstoppable, inevitable, irreversible and always benign. Creative destruction happens – they say so all the time. But hardly a single one of them imagines that it is their own economy that is being destroyed.

Right now, Americans look upon globalization as if it were a government policy – like rural electrification. Surely, it brings them only good things, they believe; otherwise, the government wouldn’t allow it. And they are sure they know what it brings. After all, don’t they see all those goodies on the shelves of Wal-Mart? Who would imagine that the importation of cheap goods from poor Third World countries would undermine the most successful economy in history?

[Ed. Note: But it is happening…and it is happening now. And the Feds are allowing us to believe that we’re in a “recovery” – but this deception can’t last that much longer. And Dr. Richebächer is making sure that his readers are fully aware of the real numbers that completely blow the American prosperity and productivity myth out of the water. For the truth about America’s economy.

More news from Aussie Joel and The Rude Awakening…


Addison Wiggin, reporting from Baltimore:

“The American economy may or may not have ‘grown’ in 2005. But if traditional, time tested theories about how wealth and poverty are correct, thank God it is not growing more…”

For the rest of this story, and for more market insights, see today’s issue of The Rude Awakening.


Bill Bonner, back in France more views…

*** And continuing the discussion that we began yesterday about the port deal, Chris Mayer had this to say:

“America’s trade deficit hit an all-time high for 2005, and the country is not in the position to start dictating where foreigners can invest,” says he. “The only way the United States is able to sustain such a deficit is by getting money from abroad, by attracting investment dollars.”

“It is short-sighted protectionist measures – like the ones being pursued by the members of Congress – that helped precipitate the Great Depression,” says Mayer. “The more difficult politicians make it to do business in the United States, the more they risk triggering global depression and economic stagnation.”

The protectionists measures mean that dollar assets are not going to be as attractive to investors abroad – and that means bad things for the US dollar and the health of the economy.

“For those who say they don’t want a foreign government running our ports; well, here’s an interesting fact,” continued Mayer. “China already runs a terminal at the Port of Los Angeles. Singapore runs terminals in Oakland. The fact is, around the world this is commonplace. If the U.S. government is going to exclude foreign companies (even government-owned ones) from running its ports, it will only slip back further in the global competitive race, isolating it from the biggest and most efficient port operators in the world.”

Among emerging markets, the UAB – of which Dubai is a part – was the second largest purchaser of US companies last year, with over $1 billion dollars invested. That’s a small fraction of the Middle East’s buying power. Currently, the Middle East holds over $120 billion in US securities, excluding trillions of dollars held by foreigners in other parts of the world.

“America can either encourage the open markets it so often trumpets,” says Mayer, “or it can retreat into the ugly cocoon of protectionism – with racist overtones to boot.”

*** As we explained yesterday, we are no longer thinking after lunch. If we’re going to have any thoughts, they will have to show up before 1:00 p.m. That is all there is to it.

That doesn’t mean our brain goes completely dark after we have our soup. It just means that it switches to another mode of activity. In fact, that is probably what most people do most of the time. Gone out of our heads is any thought about the Five Big Es, the deficits, the way markets work, the past tense subjunctive form of Spanish verbs or any of the other weighty subjects that have been making us toss and turn. Instead, we put on our work clothes, pick up our trowel and go outside for a delightful afternoon of miserable manual labor.

We say“miserable” because that is how Edward and Henry see it…and how it must look to the passersby. The temperature is barely above freezing. And it is raining most of the time, which means that the work area has turned into a mud puddle worthy of a Verdun trench in 1916.

Everything is wet.

And everything hurts.

Our back hurts when we pick up rocks…so we kneel on the ground. And then, our knees hurt. Our arms and shoulders hurt from lifting the heavy rocks, and also from pushing the wheelbarrow, full of “mud,” through the mud. But most of all, it is our hands that hurt. They are not used to such rough work. The lime and water burn them and then the sharp stones cut them. They get banged up on stones and tools. By the end of the day, they are so tender we can barely wash them.

But it is amazing how this kind of work focuses the mind. When we are laying up stone, our entire attention is concentrated on the stones, the “mud,” and the wall taking shape before us. Each stone requires a kind of structural analysis: does it have a face that can be left exposed? Is it humped to the left or to the right? Is it slopped towards the inside or the outside? Is it rectangular or triangular? Where have we seen a hole that it might fit?

Socrates was a stonemason. It must have sharpened his wits to a knifepoint.

Next to laying stone, much of the work people do is a waste of time. Imagine the poor imbeciles patting down grandmothers at airports. That must be miserable work. On our last trip to the United States, one of these homeland security jacks-in-office confiscated Henry’s nail clippers. He must have known that the clippers posed a danger only to cuticles. But rules are rules, and there is never any shortage of people willing to do blockhead work for minimum wage. Still, even blockheads must know perfectly well that their work is worthless. Even jacks-in-office must at least suspect sometimes that grandmothers and nail clippers are harmless.

Or think about all the millions of people who work for government. The Feds have hundreds or thousands of agencies, departments and forgotten sinecures. Last time we checked, there was even a “Screw Thread” commission, devoted to making sure nuts and bolts go together as they should. Most of the people who work in these jobs must realize that their work is not only worthless, but also counterproductive. Still, they go through the motions. They show up on time. They try to do a good job. They deceive themselves that their work means something. But even in air-conditioned offices – with no lime on your hands – such work must be painful to the spirit.

What is surprising is that so many people put up with it without murdering their bosses or co-workers.

At least, putting up stonewalls – however hard it may be on the body – does no damage to your soul.

The Daily Reckoning