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
Comments (9)
Well, I can’t claim to know half of what you know regarding these issues. But your use of pergoratives sorta, again, undoes what are otherwise astute points. I mean, wow, in my world, I gues we just don’t run around calling names.
Regardless, I find your points interesting. I really don’t concern myself too much with currency as I am currently swimming in gold. Oh yes. Or not.
My take. It goes around it comes around, try to be on the better side if you can. If you can’t duck. Or try to make it better.
Posted by Brodie | June 16, 2005 5:49 PM
Posted on June 16, 2005 17:49
As for moonbat/wingnut, I kind of find those names funny. Using moonbat actually had very little to do with you brodie, and more to do with the sorts of sites I found when Googling “Iraq Euro”. They were all the sort of sites that think “capitalism bad, communism good”.
I found you pretty reasonable, but the problem is that the Iraq Euro theory sounds reasonable, it just has one small problem.
It isn’t true.
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June 16, 2005 6:28 PM
Posted on June 16, 2005 18:28
Published on Thursday, April 10, 2003 by the International Herald Tribune— “The Neoconservative Agenda: Which Country is Next on the List?” by William Pfaff:
“Deputy Defense Secretary Paul Wolfowitz is generally acknowledged as the man whose determination and bureaucratic skill turned President George W. Bush’s reaction to the Sept. 11 attacks into a decision to overturn Iraq’s regime. He calls the neoconservative crusade to change the Arab world an application of ‘the power o the democratic idea.’”
If there’s anything to this assertion, the question is: what does Wolfowitz, and those he’s in cahoots with, want?
Also, it’s “Evel Knievel.” Just watched a program about him on History Channel. Gads, I had friends who had that little Evel doll…
Posted by dean bonzani | June 16, 2005 7:56 PM
Posted on June 16, 2005 19:56
Yeah, I tried 3 times to get the spelling right.
I think Wolfowitz has delusions of granduer. He doesn’t have a cabinet post, so he wouldn’t be in cabinet meetings.
I think everyone against the war is trying to find one simple reason for the war, and the problem is the war was a lot of little reasons. Perhaps Wolfowitz was influential, perhaps not.
From reading Woodwards book, I got the impression that there just developed this sense in the White House that we had to do something about Saddam as a preventative thing, and it built from there.
Sometimes leaders have to make decisions from a lot of little intangilbe things, but that makes the decisions harder to make after the fact.
As a businessman, don’t you ever have situations where you know what the right decision is, but can’t articulate exactly why?
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June 17, 2005 8:50 AM
Posted on June 17, 2005 08:50
The difference with the decisions that I, as president of Inner Sanctum, Inc., make, is that I make these decisions with the advice and assistance of my vice-president, and sometimes my shoppe girl, at most. I have no cabinet, no constituency, and no debt to the “base.” Furthermore, I didn’t inherit any star chamber with long running plans…
So, in answer to your question, as a businessman, I do often shoot from the hip, or run on hunches, but my accountability is of any entirely different scale.
I have often felt that George would rather be doing other things than be President. I’ve felt this very strongly. He’s stuck in something. I’m sure of it.
I saw an excellent show on Reagan one time, and I distinctly recall that Ron was gungho to get in the office and call the shots. He was surprised to find that he didn’t get to do that. He was informed in no uncertain terms that this wasn’t his function. Buzzkill, for sure. So he wrote lots of speeches instead. Look it up, and you’ll see how it went for the Gipper.
It’s no different for George. The genuine power is behind him somewhere, and will function with or without him. That is the nature of such things.
The question remains— what are they after?
Rest assured, you and I are tiny, expendable parts of their plan. Have a snack. Would you like to watch a movie? Pay no attention to that man behind the curtain…
Posted by dean bonzani | June 17, 2005 11:24 PM
Posted on June 17, 2005 23:24
I find it interesting that your assertion that a strong dollar is not good for America very interesting because it means that peoples purchasing power within the United States should be weak, and that imports should be expensive as most imported goods are actually US firms reimporting exported captial. So in effect depressing the ability to consume, or create demand is good for neo-liberal economics? Interesting…Greenspan says there is no infaltion but look at the price of oil compared with the declining dollar. Look at stagnant wages in the USA and ballooning asset prices, especially in the real estate bubble. At some point a really weak dollar will hurt the ability for debt ridden american conumsers to keep this economy afloat. Also, what it the dollar drops uncontrollably, in that China decides that the USA has gone nuts because it rationalizes tax cuts while simultaneously launching a global war of many decades? I know the conservatives argue that USA is #1 thus the world must accept our rubber dollar standard, but i think it more plausible that at some point China will accumulate enough physical captial to where they believe the US dominated currency marekt is no longer worth upholding and that crashing it on the rocks by refusing to buy our debt will be rational policy. So when the US goes bankrupt, unable to pay for its liabilitiies, how much will gas cost in the USA with a dead dollar? 120$ a gallon?
ernie
Posted by ernie | June 18, 2005 1:29 PM
Posted on June 18, 2005 13:29
also, i agree with the first responder to this thread, the name calling kinda makes you sound uncertain about your arguments. i mean, i know “conservatives” whatever that means these days, like to call “liberals” names, implying that they are weak, or feminine or something, but really, those of us who think can sense the excretion of a lack of confidence in such portrayals.
ernie
Posted by ernie | June 18, 2005 1:33 PM
Posted on June 18, 2005 13:33
Ummm…
You’re missing a very basic point, which is that a weak dollar would only depress peoples ability to consume imported goods. A strong/weak dollar has no effect on 85% of the economy. Don’t believe me? How much of your income to you spend on cheap plastic crap from China, and how much do you spend on food, housing, etc. My food and housing is much larger then my “disposable” income, and all that is a 100% USA product.
Even in light of your assertion that most imported goods are US firms reimporting exported captital, only the ability to consume the “added value” portion of the good would matter.
In fact, your understanding is so confused that you seem to be arguing that deflation would be good. The last period of deflation in the US was called…The Great Depression…
Inflation actually helps people pay debts, because they get to borrow strong dollars and pay back in weak dollars.
As for China, go read the article in Foreign Affairs.
As for name calling, you guys must be pretty new to the blogosphere. There’s very little sting to the moonbat/wingnut names anymore. (Moonbat is the “liberal” name, “wingnut” is the “conservative” name.)
You should read some more of my commenters if you really want to see name calling.
Come to think of it, you’re complaining because a guy who posts under the name “Opinionated Bastard” was a little free with the nicknames?
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June 20, 2005 7:31 AM
Posted on June 20, 2005 07:31
Good reply.
Im not arguing that deflation would be good, but i do think it is inevitable. We live in an age of fiat currencies, the inability for the host nation (US) of the intl currency standard to balance govt budgets and trade imbalances. I argue that Bush Inc is purposely bankrputing the govt to finally put the nail in the coffin for socail security, medicare, public ed, vet benefits, food stamps, and AFDC all together. But like the illusion minded totalitraians in this era who gave us the Iraq disaster, this plan too will be a catching a tiger by the tail. Economies dont work so well while the cities are on fire.
The fact is the beggar thy neighbor policy of Bush Inc, artiificailly low interest rates which put pressure on holders of US debt can only go on so long before intl investors react by dumping US obligations. I know that US leadership believes that its global “reserve” position insulates the US dollar from such danger, but again, at some point everyone will know the US is insolvent and decide that USD isnt worth the fight anymore. The game is for China to import and collect as much physical capital as infrastructure as possible before the USD is finally .
I dont read foreign affairs because they are too predictable in ideological constraints. Kinda like CNBC propaganda…the economy could only be good, it could be no other way, for if they said so, they could hurt their owners, namely GE.
But im sure the article said that China and Japan were stuck into buying US debt because they wanted cheap exports. This is the way US elites see their position but with one distinction. People like Robert Rubin think the US needs to balance its accounts to dissuade negative investor reaction, while John Snow believes Almighty US power compels the intl community to buy worthless USDs which could never be paid back. This is a proposition i wouldnt count on and i think many people will be very surprised, very soon.
The main deflationary pressure in the US is stagnant wages and inflating asset prices. How many cars and real estate bubbled homes can a mcdonalds worker. or walmart worker buy? not many. Over production problems soon, and the spiral will begin after the collapse of the USD, real estate, stock and bond market (which will raise rates, smashing the US debt driven economy on the rocks.)
ernie
Posted by ernie | June 20, 2005 8:51 AM
Posted on June 20, 2005 08:51