Eco-Economy: How America Restores Credit Rating

"Western oil interests closely influence military and diplomatic policies, and it is no accident that while American companies are competing for access to oil in Central Asia, the U.S. is building up military bases across the region." – Anthony Sampson, author of “The Seven Sisters”

Talk of empire is everywhere, yet seldom has the word been applied in the context of American foreign policy. That is beginning to change. A recent essay in the New York Times Magazine by Michael Ignatieff makes the connection explicit: “Ever since George Washington warned his countrymen against foreign entanglements, empire abroad has been seen as the republic's permanent temptation and its potential nemesis. Yet what word but ‘empire’ describes the awesome thing that America is becoming? It is the only nation that polices the world through five global military commands; maintains more than a million men and women at arms on four continents; deploys carrier battle groups on watch in every ocean; guarantees the survival of countries from Israel to South Korea; drives the wheels of global trade and commerce; and fills the hearts and minds of an entire planet with its dreams and desires.” (“ The Burden”, Jan. 5, 2003”)

Whether one casts this dominance as a benign or malign force is a subject of active debate, but the reality of Ignatieff’s observation is unassailable. Ever since Wilson, there has in fact been a messianic imperial strain in US foreign policy while ''frantically avoiding recognition of the imperialism that we in fact exercise,'' as the theologian Reinhold Niebuhr said in 1960. Speaking before the House of Representatives Sub-Committee on National Security, Veteran Affairs and International Relations Committee on Government Reform last June, Pentagon strategist Franklin “Chuck” Spinney illustrated that US defence spending exceeded the next 20 largest defence budgets in aggregate. These are the needs typical of empire, not a republican nation state. The newly promulgated Bush defence doctrine suggests an attempt to retain this dominant position and ensure that American military power will be strong enough to dissuade potential adversaries from ever trying to challenge the military supremacy of the United States – again, a strategic doctrine which owes more to imperial antecedents, than the security requirements of the nation state.

Iraq lays bare the realities of America’s new role. As Ignatieff notes, this is essentially an imperial operation that would commit a reluctant republic to become the guarantor of peace, stability, democratization and oil supplies in a combustible region of Islamic peoples stretching from Egypt to Afghanistan.

Unstated is another motive: the mobilization against Iraq has given the United States a renewed opportunity to expand its power and influence in the region -- this time potentially to use its new Persian Gulf bases to establish even more bases in the ancient territories between the Tigris and Euphrates rivers in Iraq. More importantly, were the oil fields seized as a by-product of this invasion, it would give America a de facto seat in OPEC, with the control of a huge cash generating asset required to fund its massive domestic and overseas debt build-up.

American taxpayers face record-breaking debt, record-breaking trade deficits, reduced government services, a crumbling and under-funded infrastructure, and three major public-sector programs – Social Security, Medicare and Medicaid – expected to double as a share of the economy, putting unimaginable pressure on tax rates, the economy and the budget. And that’s before taking into account the financial burden of waging a faraway war. What empires lavish abroad, they cannot spend on good republican government at home: on hospitals or roads or schools. A distended military budget only aggravates America's continuing failure to uphold its liberal democratic principles at home.

So what has been the policy response to this?

On the tax front, the Bush Administration is planning to propose as the centrepiece of its “growth package” a large deduction on the taxes that they pay on dividends they receive from corporations. The Administration estimates that its fiscal proposals will reduce tax revenue and increase expenditures by $674 billion over the period 2003-2013. There have been rapid partisan debates centred around the ultimate cost and efficacy of these tax breaks, but what is clear from the magnitude of the proposal that any notion of fiscal rectitude or concerns about balanced budgets (much in evidence preceding the first Bush tax package) have gone out the window.

Similarly, from a monetary perspective, Federal Reserve Governor Ben Bernanke has already told us that in a fiat-based currency system underpinned by the US dollar, the US monetary authorities ultimately face no external constraint in their attempts to avoid deflation. All the central bank needs is a printing press. The Fed can be the marginal buyer of all the debt the Treasury can issue any time it so chooses at any interest rate it chooses. The Fed, as the monopoly supplier of fiat money, faces no budget constraint save its own sense of prudential balance sheet growth and composition. None whatsoever.

As he and his colleagues have recently hinted, the Greenspan Fed may have more instruments to keep the credit spigot open longer than most of us realise. That does not imply that private indebtedness can rise indefinitely; it only suggest that it may take a significant further rise in private indebtedness to lead to what Charles Kindleberger has termed “a credit revulsion”. At its most extreme, once "the logic of the printing press" is both exposed and engaged, if the Fed fails to bluff private foreign and domestic investors correctly, there is a very good chance that America could be well on the road to ruin of the dollar, and fiat currency systems in general would be exposed and perhaps critically undermined

Americans and the country’s foreign creditors are slowly awakening to the realization that the country is rushing toward a dangerous political future for which the nation and its allies appear perilously unprepared, accompanied by a well-founded suspicion that Washington’s finances also teeter on a precipice, as does the economy’s capacity to recover any semblance of robustness for anyone other than the long-favoured few.

Because foreigners with past euphoric expectations bought a huge volume of U.S. stocks in the Bubble period and have yet to sell, and because the unsustainable U.S. current account deficit makes the U.S. dollar vulnerable, the U.S. economy is now very vulnerable to cross border flows. Consequently, the risks of a derivative/speculative unwind dollar/financial crisis along the lines of that experienced in Mexico in 1994, emerging Asia and Russia in 1998, or Argentina in 2002 remains exceedingly high.

How to solve this problem? What are Bush’s real intentions? Simple: construct a military plan in Iraq which achieves the objective of “regime change” and disarmament whilst concomitantly becoming a self-financing proposition. Occupy the Iraqi oil fields. Forget about attacking Baghdad and dealing with the political fall-out of American soldiers being transported home in body bags. Enact the 21st century equivalent of a mediaeval siege.

A glance backward is the easiest way to see why oil and the dollar inevitably loom so large in any resolution of the Iraq crisis. The current configuration of the Middle East originates in the network of treaties and understandings that defined the post-World War I settlement of the broken Ottoman Empire. That settlement was premised on the Russian Revolution and the exclusion of Central Asia from the world market for oil. The UK was initially the dominant power in the Middle East, but its imperial ambitions and concomitant control of these oil fields was ultimately superseded by the Americans under FDR since Roosevelt met with Ibn Saud in 1945 and Truman recognized Ben-Gurion's Israel in 1948.

Until recently, this imperial guarantor role has taken the form of a tacit quid pro quo between the region’s lead producer, Saudi Arabia and America in which the former takes on the role of stabilizing the world oil market as the swing producer in OPEC, concurrently using its revenues (in part) to purchase American weapons (Saudi Arabia is the largest purchaser of American weapons, having bought some $39 billion worth in the 1990s). The US in turn has provided tacit guarantees to safeguard the Royal Family, whilst turning a blind eye to the country’s role in disseminating a radical form of Islam. However, in the aftermath of 9/11, the underlying tensions in this relationship, notably the Kingdom’s persistence in upholding the tenets of a radical Islam, has upset the status quo and perhaps catalyzed the move to a different strategic paradigm on the part of the Americans, one which may entail an occupation of the oil fields and a siege of Baghdad.

To be sure, from a military perspective, a 21st century siege is not optimal. Were American to end up besieging Baghdad, the American people may witness a massive human catastrophe in Technicolor on CNN. A siege is, by far, the oldest, most primitive and indiscriminate form of war. It is also the easiest form of defence in that the attacker is predictable and he depends on time to work his will. It is no accident that history is littered with tales of gallant sieges, where the besieged made all sorts of clever adaptations before finally be ground down in a defence that exhibited with the kind of honour, sacrifice, and pluck which even their adversaries sometimes came to admire.

But these sieges also show little in the way of military success. Were this to occur in a siege of Baghdad, despite overwhelming American superiority in men, machines, and money, the country’s alliances might weaken or even dissolve, the uncommitted might turn against the US, and America’s adversaries will be fuelled by increased hatred and be emboldened by our growing moral isolation. What such development might do to the solidarity of the American people on the home front is anyone's guess.

On the other hand, by controlling the oil fields, America also controls Saddam's source of profits, by which he continues to buy the loyalty of his Republican guard and Tikriti tribesmen. Absent this source of funding, Saddam might fall quickly. And even if he doesn’t, it matters less if the main objective is control of the oil fields.

Apart from pre-empting a North Korean-type problem, the Bush Administration could also use the occupation to break the trouble-making qualities of the other hangovers from the Cold War - Syria and Libya - as well as reducing the reliance on Saudi Arabian oil. There are signs that the smaller Arab states, particularly in the Gulf, will welcome such changes - hence their co-operation with American military preparations. Iran is another potential plum down the road. While waiting for the theocratic regime to fall, Washington could content itself by effectively becoming the 2nd largest producer in OPEC.

Spelling out such naked imperial ambitions may seem extreme, but there is a certain cynical elegance to the foregoing suggestion in that it both addresses the worrying issue of “imperial overstretch”, whilst accommodating the stated desire for regime change and disarmament in Iraq. It is also clear that, historically, in a clash between democracy and human rights on the one hand, versus the steady, profitable flow of goods and raw materials on the other, American power has come down heavily on the side of stability, for example, toppling democratically elected leaders from Mossadegh in Iran (when he threatened to nationalize American oil interests) or through its continued support of dictatorships throughout the Gulf.

Indeed, it is increasingly common to see analyses of America framed in the context of imperial, as opposed to nation-state analysis, both from the perspective of 19th century power politics, but also (somewhat surprisingly) in lots of “progressive” discourse from the left. The old European imperialism justified itself as a mission to civilize, to prepare tribes and so-called lesser breeds in the habits of self-discipline necessary for the exercise of self-rule. Not today: Robert Cooper, a British diplomat and advisor to Prime Minister Tony Blair, circulated a piece last April calling explicitly for a new “liberal” imperialism. Cooper’s model is the European Union, whose member states accept a degree of external interference from Brussels, thereby acceding to a “voluntary” or “co-operative” form of imperialism.

But Cooper’s scheme does also make allowance for more traditional forms of imperialism – misgovernment, ethnic violence, and crime in the Balkans, for example, posed a threat to Western Europe, so neighbourly imperialism did justify the deployment of NATO forces in Kosovo and bombers over the skies of Serbia. The reason, according to Ignatieff, is simply that, “however right these principles may be, the political form in which they are realized -- the nationalist nation-building project -- so often delivers liberated colonies straight to tyranny, as in the case of Ba-ath Party rule in Iraq, or straight to chaos, as in Bosnia or Afghanistan.” But this “progressive” form of imperialism is ultimately grounded in liberalism and humanitarianism.

We doubt this is what the hawks in the Bush administration have in mind, although such ideology does provide any naked exercise of imperial power with a respectable cover. A recent January 6th, 2003 New York Times article (“US is Completing a Plan to Promote a Democratic Iraq”) casts the occupation of Iraq in these humanitarian/liberal terms:

“President Bush's national security team is assembling final plans for administering and democratizing Iraq after the expected ouster of Saddam Hussein. Those plans call for a heavy American military presence in the country for at least 18 months, military trials of only the most senior Iraqi leaders and quick takeover of the country's oil fields to pay for reconstruction. (Our emphasis)

“The proposals, according to administration officials who have been developing them for several months, have been discussed informally with Mr. Bush in considerable detail. They would amount to the most ambitious American effort to administer a country since the occupations of Japan and Germany at the end of World War II. With Mr. Bush's return here this afternoon, his principal foreign policy advisers are expected to shape the final details in White House meetings and then formally present them to the president.”

In reality, the Bush Administration’s perspective is probably more aligned to the views expressed by Professor Stephen Peter Rosen. Writing in Harvard magazine, Rosen sheds all liberal euphemisms: Europe and Japan are ageing, and are unlikely rivals for global power. Today, the US “has no rival”, is “militarily dominant”. Rosen makes clear that the political strategy underlying US military strategy should be about “maintaining our imperial position, and maintaining imperial order.” The recently promulgated Bush defence doctrine reflects this reality. There is no appeal to Blairite values, voluntarism, or multilateral engagement. It’s pure power politics, even if not explicitly stated as such. Or, as Iganatieff puts it: “Multilateral solutions to the world's problems are all very well, but they have no teeth unless America bares its fangs.”

How much should America bare its fangs in regard to Iraq and how will it disperse the country’s natural assets, notably oil? However much a seizure of Iraqi oil fields is cast in humanitarian terms, it may be well the case that only a small proportion of oil the proceeds are used in fact "reconstruct Iraq". Obviously, there is no more delicate question for the administration than how to deal with Iraq's oil reserves — the world's second largest, behind Saudi Arabia's — and how to raise money from oil sales for rebuilding without prompting charges that control of oil, not disarming Iraq, is Mr. Bush's true aim. This is a particularly germane question to both the French and the Russians.

Iraq as the “51st state” is obviously not one designed to appease America’s allies. But one can readily see the advantages for the Americans, particularly in regard to the dollar. A major prop for the dollar has long been the simple fact that oil is priced in dollars. If the new Iraqi petroleum authorities announce that they will accept only checks in dollars, invest their surplus in dollars, and swell American exports by contracting principally with American firms for services and goods, both the long and short term prospects of the dollar will brighten. As pleased as Europeans have historically been to seize chances to export under the umbrella of a high dollar, and take advantage of the US consumer as global buyer of the last resort, US control over Iraqi oil fields this will not be what they had in mind when they supported recent UN resolution 1441. At a moment when the costs of empire are mounting for America, her rich European allies/creditors matter financially and Bush cannot choose to ignore that fact.

Of course, nobody will dare express these strategic disagreements in such crass terms. Being an empire doesn't always mean being omnipotent, but it is equally hard to envisage the US has not at least implicitly threatened French and Russian economic interests in Iraq that if they don't fall in line. France has consequently begun to hedge its bets. Well aware of the likelihood of allied action or an internal coup before the Ides of March, Jacques Chirac does not want his country out in the cold as oil-rich New Iraq is put on its feet by the U.S. and Britain.

In his New Year’s message, Chirac suddenly took to threatening Saddam with "war of unimaginable consequences" unless he disarmed right away. France has also announced that it would soon dispatch an aircraft carrier to the gulf. But still straddling, Chirac insists that the Security Council, and not what Bush calls "a coalition of the willing," make the decision about whether Iraq has failed to prove it has disarmed.

On the matter of how the objective is achieved, there are many possibilities. There is still talk of marching straight to Baghdad, but this might be part of an elaborate disinformation campaign. One can equally imagine the US forces going after the fields first, all the while saying they were going to march all the way to Baghdad, but then taking their sweet time about the 2nd half of it so as to minimize casualties and hope that the "one-bullet" solution for Saddam would manifest itself at last. So the practical effect would in effect be an occupation of the oil fields.

If this strategy ultimately is pursued, it may be that the US would "magnanimously" agree to put all revenues from Iraqi petroleum production into some sort of a grand reconstruction fund to be administered by the UN or something. That way, no one could claim that it was a giant oil grab all along. However, where would those funds be invested? Why not in Treasuries, or other dollar denominated assets for the most part or exclusively? After all, oil revenues are denominated in dollars, aren't they? So the effect would be to generate a large new buyer of $ assets, which would offset a large portion of the current account deficit even though it wouldn't reduce that deficit from an accounting perspective -- the market effects would be the same.

Whether this serves as a long term solution is another matter. An American operation in Iraq will not face a competing nationalist project, but across the Islamic world it will rouse the nationalist passions of people and thereby feed as potential recruiting fodder for organisations such as Al Qaeda. There is the not so trivial possibility that seizures of foreign assets by the US could be read as setting a very poor precedent for any foreign holder of US assets, as it implies a willingness to break the rules of property ownership at the whim of the imperial power.

More significantly is that the US dollar-denominated assets the US authorities want foreigners to keep holding have a decidedly private sector cast to them, so private sector profitability and creditworthiness is more the issue than balance of payments per se, even if one assesses the latter from an imperial, as opposed to national, perspective. The contemporary constraints facing the US today have much more to do with a collapse in the exchange rate when large quantities of private (and public) liabilities are held abroad, largely unhedged. The constraint is still a financing constraint, and even an external one at that, but it works through currencies and portfolio preferences reducing US financial asset prices and financing availability. The US government may indeed believe it must appear to make its self more creditworthy in the eyes of misinformed creditors to the US by seizing foreign income generating assets in order to continue on the path of imperial overstretch, but this might ultimately prove an unsuccessful strategy, particularly amongst the Asian and European rentier classes.

The war build-up, coupled with detailed US-contingency planning for a post-Saddam Iraq has created the momentum for a vast, if uncertain commitment by the US in the region. How to pay for it at a time of unprecedented financial fragility and economic imbalances? In our view, the inexorable effects of imperial overstretch are clearly driving the US toward occupation of the Iraqi oil fields. We happen to agree with the assessment of Jay Bookman, an editor of the Atlanta Journal-Constitution, when he asks, “Why does the administration seem unconcerned about an exit strategy from Iraq once Saddam is toppled? Because we won't be leaving. Having conquered Iraq, the United States will create permanent military bases in that country from which to dominate the Middle East, including neighbouring Iran.”

No doubt some figures in the State Department or the Treasury have tried to bolster somebody's innovative invasion plan from the Pentagon by arguing that by executing a medieval style siege of foreign assets, one could hope to reap the additional benefit that the invading government will appear more creditworthy (given current misunderstandings of foreign creditors about public finance), and so demand for the dollar will improve or at least be stabilized. Acquiring a big “cash generating asset” like the Iraqi oil fields temporarily minimizes the prospects of credit revulsion amongst foreign creditors, keeps the oil flowing, and the chance to preclude the emergence of rivals to America’s dominant global military position. But is it a viable long term solution to the country’s ongoing problems, or the last gasp of a dying empire?

ENDS

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