Ok, so after writing my post debunking some of the cherished myths about Iraq of both the right and the left, I found out about a new moonbat theory floating around. This theory is that the US invasion of Iraq was in order to prop up the dollar, because in November 2000, Saddam insisted he was going to only sell his oil in Euros.
The theory goes something like this: US dollars function as an interchange currency for the world. In addition, there is a large amount of US currency floating around called Eurodollars or “Petrodollars”. If the world suddenly shifted to Euros, no one would want dollars anymore and this would suddenly be a terrible catastrophe for the US both economically and politically because only the US has the ability to “print” dollars. Therefore, we needed to invade Iraq.
Since I work in the financial industry, I suppose I should comment on this. Its just that this is just so wrong on so many levels I hardly know where to begin.
First off, a strong dollar is NOT good for the US economically. It makes imports cheap and our exports expensive. After World War II, the US agreed to go on the gold standard as part of the Bretton Woods agreement specifically in order to subsidize the rebuilding of Europe. That single agreement provided more aid to Europe then all other acts of Congress combined. So the idea that somehow a strong dollar is “good” for the US economically is silly. This argument was best refuted by Adam Smith in 1776, so I refer people who stubbornly want to cling to this belief to The Wealth of Nations. Adam Smith was a giant, most lefties associate him too much with laissez-faire capitalism to realize that he was one of the first liberals: It was Adam Smith who said 'everyone can be rich' and that the wealth of nations was not tied up in gold, but in the labour of its people. So if you're one of those people whose proud to call themselves a moonbat, go read Adam Smith.
Now its not all doom and gloom for the US. The strong dollar does make it easier for us to borrow money (things are rarely just bad or good in economics, they just cost more). So to some extent, a strong dollar supports the overly large Federal government we've all grown accustomed to. If the dollar weakened quite a bit, perhaps all those social programs the lefties like so much would face the chopping block.
Pretty much though the economic argument is just bunk and more bunk. Even the part about our ability to borrow versus our savings rate and such is nonsense. There was a good debunking of the whole deficit thing in Foreign Affairs a couple of months back, I refer you to that for the details. One tidbit though:
Quote: Capital gains on equities, 401(k) plans, and home values are excluded from measurements of personal saving; when they are added, total U.S. domestic saving is around 20 percent of GDP--about the same rate as in other developed economies.
So again, the moonbats have twisted the facts to suit their theories, or they didn't understand what the statistics they're citing were measuring.
The other problem with the argument is that the dollar somehow became the exchange currency because OPEC chose it as such. The reality is that OPEC chose it because it was already the exchange currency. Though two of the letters are correct, its not OPEC that makes the dollar “stable” is the SEC, that is our well-regulated financial markets are what make the dollar stable.
The political power argument is based on several mistaken assumptions. What bankers call “Eurodollars” have very little to do with oil. Interest rates are more powerful then oil.
What exactly are Eurodollars? Well, because the dollar functions as an “exchange” currency many banks in Europe started keeping some percentage of their deposits in dollars, and paying interest in dollars. This started in 1966 with a London bank. After awhile they noticed a curious thing: Bank loans made in dollars weren't regulated by their home countries, only loans made in their native currency. Economists started calling this money “Eurodollars” because neither the US or any other government's central bank really had any control over that money.
Which brings me to the second misconception that only the US government has the ability to “print” dollars. That's just not true. In reality, most dollars in the United States are actually electrons these days. One of the methods that the Federal Reserve has to control the US economy is by controlling the M1 money supply, which is really a multiplier. Banks are allowed to lend out more money then they actually have in assets, and the Federal Reserve controls the ratio of lent out money to actual money.
In essence, its not the government that prints money, its the banks that print money (or rather electrons), the government just gets to control how fast they can run them. By changing that number, the government changes the amount of money in the US Economy. They can also affect the amount of money
by adjusting the interest rate, which is the number you always see on the news. Here's a brief intro.
But the Federal Reserve only controls the US Economy, they don't control Eurodollars, but those banks aren't going to move to the Euro. The “Eurodollar” is attractive to those countries precisely because it is unregulated. If it was held in euros, it would become regulated, and the banks could no longer play those shenanigans. The only thing that prevents the European banks from “overprinting” US dollars is pretty much the threat of bankruptcy, and the fact that if they abuse the “Eurodollar loophole” too much, the various governments of the world will quickly close it.
So again, if you understand what “Eurodollars” really are, you can see how ridiculous this argument is.
One last thing to clean up. The articles talking about the Euro versus the dollar love to quote the exchange rate of the moment, somehow showing Saddam to be this big genius. That's nonsense. Currency traders are the Evil Knivels of the investment world. Here's a chart to look at. Here's another one showing the Euro vs. the Dollar and versus the stock market over the last two years. If you cherry pick the right point on that graph, you can make Saddam look like an idiot too...
Update: The Europeans are wondering if the Euro will even survive
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