Wednesday, December 1, 2010

Geostrategy and the Future of Dollar Dominance

For the earth is full, and there is enough and to spare; yea, I prepared all things, and have given unto the children of men to be agents unto themselves.
Doctrine & Covenants 104:17
There is a global war at hand. It is primarily an economic war which has ramifications that run much deeper as we’ve witnessed over the last 10 years.  The genesis of the conflict began long ago and is coming to its fullest expression as we speak.

Very few believe, without qualification, the pure motives of the military campaign we’re currently prosecuting under the label “War on Terror”.  Put bluntly, we’re not fighting isolated bands of terrorists to ensure domestic safety and tranquility; we’re fighting the whole world to maintain economic dominance.

I don’t want to speculate about which parties are behind many of the unstated objectives of our aggressive geopolitical strategy, but instead define the objectives, their ramifications, and a possible prescription for returning to a more humble foreign policy with as little short-term pain as possible.

The Objectives
"Who controls the food supply controls the people; who controls the energy can control whole continents; who controls money can control the world."
Henry Kissinger
There is really only a singular overarching objective for the geopolitical strategist – secure, for the longest term possible, national economic superiority (not merely opportunity, freedom, or contentment), national security, and prosperity by whatever means necessary, not excepting the schadenfreude of base exploitation.  For the last forty years the United States has experienced the greatest degree of strategic success.  While the value or advisability of these strategic ends, in the context of a fallen world and consequent survivalist instinct, are a matter of conjecture, a study of the means employed should be closely examined as we consider a future course of action.

In 1971, the United States, under President Nixon, backed out of the 1944 Bretton Woods Agreement.  This agreement, made between the Allied Nations, following WWII set up a cascading currency standard for all nations to follow, pegged to gold (and by extension the US Dollar as a function of its huge trade surpluses and military strength), which they supposed, would provide for greater international stability and broad economic prosperity.[1]  Like most centrally planned economic protocols, it failed miserably beginning in the mid-50s when the US was forced to cure balance of trade surpluses by essentially giving money to Europe to rebuild their infrastructure, industry, and ostensibly “help them catch up”.  The Marshall Plan drew a line in the sand in the nascent battle of East/West powers and repaired Europe's ailing infrastructure, but the gesture would not be enough to save the Bretton Woods agreement and in the late 60s, primarily as a result of huge Vietnam War expenses, European members of the UN/IMF began demanding payment for trade imbalances in gold instead of dollars. Since we didn’t have enough dollars to make these payments at the $35/ounce price, we were forced to send our gold reserves overseas.  Gold flowed out of the US steadily for 20 years under a policy of “benign neglect”, reducing our stockpile to somewhere between $9B and $20B.[2]  The writing was on the wall and the Bretton Woods Agreement was formally broken unilaterally by the United States, to avoid further hemorrhaging of our gold reserves.

It was at this critical juncture that one of the great strategic geniuses (evil, pragmatic, or both?) of our time, Henry Kissinger, stepped in to engineer a partial replacement for Bretton Woods that would reestablish US Dollar world reserve status and consequent US economic dominance for decades to come.  He brokered a deal with the Saudis which extended to all of OPEC to make mandatory a new protocol for payment of international oil purchases in a single currency: the US Dollar. Demand for US Dollars instantly quadrupled.  Oil is unique in that it drives industrialization, production, and trade between nations (due to its volume and impact on current account balances).[3]  Without it, an economy cannot prosper, at least while utilizing the predominant fossil-fuel dependent technology.  This set up a de facto system where demand for the US Dollar was linked with the ever-increasing demand for oil.  Furthermore, New York and London banks became the depository of oil revenues, allowing them to take advantage of even more leverage.

One begins to see how the great economic booms we’ve experienced have come primarily as a result of trade and finance, not innovation and productivity.  Following the latest round of quantitative easing, Ben Bernanke’s announcement of $600B to keep the presses busy, there was an outcry from the rest of the world about the unfairness of such a move.  One has to wonder, if not informed about the real power of the US Dollar, why other countries’ central banks wouldn’t just match in earnest any monetary move we make, effectually nullifying its effects.  These central bankers know why, so they impotently bristle to anybody who will listen,
“[Our] exporting success is based on the increased competitiveness of our companies, not on some sort of currency sleight-of-hand”.[4]
The US Dollar has not been a purely fiat currency since PetroDollar recycling began.  Whether the PetroDollar protocol is still fully functional or not is irrelevant.  The US Dollar may be backed by oil, to an extent, but more importantly by F-16’s.[5]  Try to mess with profitable arrangements like the former and you get a visit from the latter.

The Ramifications

Understanding the global state of affairs without grasping the causes and history of economic warfare is like trying to do a 1000 piece puzzle without the box.  It is the underlying reason for the fall of Soviet communism, the liberalization of the Chinese economy towards a capitalist manufacturing hub, the “lost decade” in Japan, development of the Euro as a competing currency, the color revolutions, the growth (and subsequent gradual decline) in power of the OPEC oil cartel, the new axis of Iran/China/Venezuela/Russia - and all other global political and economic developments.

Holding the status quo together has been a momentous challenge.  We’re seeing it unravel as I write this; a trend that will surely continue.  Just this week, China and Russia signed a pact to trade in their own currencies.  Experts say this is not an attempt by the developing Sino-Russian alliance to provoke a global currency battle with the US Dollar, but it nevertheless weakens the US dollar's virtual monopoly on foreign trade payments.  The US unofficially said today it would back an IMF European bailout that would cost American taxpayers something in the neighborhood of $250Bn.

In 2000, Iraq decided it would no longer abide the PetroDollar protocol. It deposited its Oil for Food revenues, $10B, in a French bank, effectively sidestepping PetroDollar recycling.[6]  The US made plans for war (without the support of the French predictably) and invaded to protect our national security (even if the cited claims of WMD didn’t pan out, this was nevertheless true since demand for dollars is the cornerstone of our economic security and any threat to that had to be dealt with in order to avoid very severe economic consequences).

Once he took office and was “briefed”, Pres. Obama tempered his anti-war stance, taking the same pragmatic approach the last 6 presidents have taken; namely expanding our military influence to “protect our national interests”.  War is, unfortunately, the only way to ensure the survival of the current protocol.  We are admittedly unequal beneficiaries and other nations and groups of nations don’t think it’s fair.  Do we care?  Not so much.  We protect the golden goose with Machiavellian zeal.

Arguments about the morality or even advisability of such arrangements notwithstanding, we as a nation are on the downside of world domination.  Agreements are being struck almost daily between individual nations to weaken our position.  China is buying oil from Nigeria, Venezuela, Iran, and other American antagonists to avoid PetroDollar recycling back to the US. Proposals are being made for replacement of the dollar as world currency standard with a basket of currencies.  The chorus of calls for uniform global monetary control is widening.  All of these actions will cumulatively weaken demand for our largest and most important export (dollar inflation) and lead to a severe correction based not on loss of manufacturing, decreased productivity, or domestic natural resource availability, but solely on reduced demand for the dollar.  The inertia of four decades of militant economic warfare is extremely difficult to unwind but it is happening, largely against our will.  It is clear that, for the United States, this will be a painful process.

We must understand the results of this changing economic paradigm:

1. Continued and magnified susceptibility to increased volatility in resource prices as a result of cartel pricing of exports to the US and political manipulations aimed at further damaging our world dominance.

2. Shifting to a defensive domestic security posture rather than our current preemptive military posture will surely reduce our bargaining power in many political and trade agreements as the credible threat of attack or promise of a protective presence abroad is, out of necessity, weakened.

3. We will no longer be able to rely on the sweat and natural resources of other nations for our prosperity.  In order to regain our place as a formidable world power while turning away from aggressive militarism and economic warfare, we will need to exploit what domestic resources are available to us, including: cumulative technological advantages, natural resources, consumer demand for goods, and competitive free markets.

Even with a comprehensive market transition to greater domestic resource exploitation and alternative energy development, we will likely still experience a severe stagflation (inflationary interest rates as a result of crippling debt payments, hefty entitlement payments, and fewer foreign treasury purchases; coupled with negative consumption sentiment and diminished liquidity).

A Prescription for Change

The only way to reduce the pain of contraction of demand for US Dollars is to produce, exploit, and develop domestically enough goods, services, and natural resources to equal the margin (exported inflation, imported prosperity) we currently make from foreign oil contracts; in combination with decreasing the size and scope of government along with future entitlement spending.  This presupposes the ability to provide for our own as well as foreign demand.  Currently our stripped-down manufacturing base, while highly productive (efficient), does not produce enough goods to make up the difference for decreasing dollar demand, as our current account deficit today clearly attests.  We’ve become primarily a service-based economy (even though much of it has been outsourced) with little opportunity for importing a profit margin against our material exports.  We not only need to recognize what’s coming, but we need to move towards what’s next.

The American tradition of innovation and foresight needs to be rekindled towards a more positive future.  This needs to begin with getting “our own house in order”.
The Lord works from the inside out.  The world works from the outside in.  The world would take people out of the slums.  Christ takes the slums out of people, and then they take themselves out of the slums.  The world would mold men, who then change their environment.  The world would shape human behavior, but Christ can change human nature.
Ezra Taft Benson, “Born of God”, Ensign 1985
Our “nature” for the last forty years or more has been to look “outside in” for our prosperity.  This has made us susceptible to forces outside of our direct control absent the deployment of military muscle to secure “national interests”.  It is time to scale back the empire and capitalize on our native strengths to rebuild a healthy republic and domestic economy from the “inside out”; the hope being that, in time, our greatest export will be freedom – not by coercion, but through the medium of economic prosperity and peace.

Here’s what I recommend (lowest hanging fruit first):

1) Bring home foreign military forces and reduce military budgets.  Redeploy a modest percentage of these forces to defending our own shores and borders.  Be the strongest, best defended nation in the world.  Stay humble and commited to just war doctrine as outlined in the Book of Mormon[7].  Stop meddling in the internal affairs of sovereign nations.
“It will not be by sword or gun that this kingdom will roll on.”
Joseph Smith
2) Appraise and formulate a plan for responsibly utilizing our native natural resources to reduce our dependence on foreign oil.  This is largely a short-term stop-gap, but it is well-established that the US is one of the most resource-rich nations in the world and it is a matter of genuine national security that we not only have a strategic reserve of oil, but the infrastructure to support its replenishment.  To be economically sustainable, these measures would need to be accompanied by development of alternative energy sources.  Our dependence on fossil fuels has been artificially encouraged and subsidized by the above trading protocols and their many vested interests.  As these disappear, we’ll likely see price inflation in oil.  This will be a market signal and impetus for private industry to aggressively pursue alternative energy sources and utilization methods such as tidal, solar, wind, geothermal, shale oil extraction, fuel cells, nano-biological, electromagnetic, etc.

3) Dramatically decrease the size and scope of the federal government through elimination of services and departments that do not provide directly for the protection of life, liberty, and property.  To avoid massive human casualty as a result of being weaned from our current level of state dependence, we’ll need to phase out gradually, particularly in the case of entitlement spending, while at the same time shifting to local resource utilization (family, churches, civic organizations, charities).  The very idea of Christian charity has taken a beating due to its being thoroughly, and rather poorly, co-opted by government.  It won’t be resurrected overnight.

4) Eliminate the income tax and institute a consumption tax which at least respects our right to choose whether to spend.  I know…it’s not ideal.  Many times in the Book of Mormon the subject of taxation is broached[8] and it’s always cast negatively.  I’m the last person to advocate “just a little bit of evil”, but just as Adam and Eve were faced with choosing the lesser of two evils (partaking of the fruit with its consequent physical and spiritual death, or disobeying the commandment to multiply), it has to be acknowledged that we live in a fallen world and as long as we are given a roadmap for redemption, we can put up with a little injustice (see: Declaration of Independence).  The very relevancy of taxation has been called into question given the Federal Reserve Bank’s power to print money at will, but with the US Dollars decline as the currency standard of the world, the power to continue printing will be diminished and we’ll still need a source of income during the transition period to provide for basic services (see also #6 below).  The elimination of direct taxation altogether should certainly be pursued later.

5) Eliminate all tariffs immediately.  While some damage may be done temporarily to domestic manufacturing, the elimination of direct taxation should help to dissipate the effect of uneven trade arrangements or eliminate foreign import tariffs altogether.  Further, the cost of consumer goods will decrease for the large majority of Americans helping them weather economic turmoil and giving them more money to spend.  Profit margins for retailers could conceivably increase leading to more workers being hired.  A necessary corollary to such an action is the elimination of all subsidies to farmers, industries, and special interests, licensure requirements, value-added taxes, and other barriers to entry & consumption.

6) Eliminate the Federal Reserve Bank and the FDIC stop loss for commercial banking. Doing so will force consumers to evaluate banks in the same light as they would any investment advisor/broker. Banks will be forced to compete for a limited pool of resource capital instead of having a compliant printing press in the Fed supply them with whatever funds they needed to support their ultra-risky bets.  This will eliminate the systemic risks of having highly leveraged institutions rely upon the “too big to fail” doctrine of this and prior administrations.  They’re on their own and so are we.  Caveat emptor.  Choose wisely where you put your money.  Embarking upon new ventures and investments with more skin in the game can only mean better outcomes for banks, entrepreneurs, and taxpayers.

The concept of "peak oil" has been avoided in this essay as it's not entirely germane or even subjective.  However, we can learn something from the dialogue surrounding peak oil.  A definition of the concept is the point of highest output after which further extraction requires greater marginal input of energy.  The United States passed "peak power" long ago and has been on a desperately escalating warpath to consolidate what is left ever since.  We've followed the example of prior empires - increasing and flexing our military might in the hopes of procrastinating an unavoidable judgment.  Our power is depleting rapidly.

Making the transition to a more honest, humble, independent economic system from our current exploitative posture can either be accepted willingly or forced upon us by processes already well under way.  The world will not abide it much longer.  In the interest of lessening the economic pain associated with this transition, I suggest we adopt the above recommendations.  There will come a tipping point where the benefits and feasibility of doing so will diminish.  The time to act is now.

[2] What Has Government Done To Our Money, IV. The Monetary Breakdown of the West, Murray N. Rothbard,
[3] For further information on recent flow of PetroDollars back to the United States, see: Recycling PetroDollars, Matthew Higgins, Thomas Klitgaard, and Robert Lerman, Fed. Res. Bank of NY Publications, June 2006
[4] German Finance Minister, Wolfgang Schäuble, Nov. 2010
[6] PetroDollar Warfare, William R. Clark, 2005
[7] D&C 98:16, 23-48; Alma 43 & 48; “First Presidency Message” April & Oct. 1942
[8] Mosiah 2, 11, 19; Ether 10;

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