The economics behind the Iraqi invasion

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Discerning the real – unspoken – reasons behind the Bush administration’s rush to war with Iraq has provided hundreds of thousands of reporters, analysts and commentators with hundreds of thousands of hours of employment. Although many different conclusions have been drawn all would have to agree that the stated and constantly shifting aims failed to provide any satisfactory explanation. Oil is, of course, an obvious motivation and it certainly does factor highly in the administration and their corporate paymasters plans. Also the aggressively militant ideology of the Bush neo-conservatives needed, in the words of the Russian Interior Minister, Vyacheslav Pelhve “a small victorious war” to project United States military dominance to the world community. But none of the stated reasons, either individually or collectively can explain the administration’s rush to war at the cost of destroying its longstanding NATO or EU relationships. The reason therefore, must be of greater import than the long term damage this issue has caused.

The ultimate answer is rather obvious when revealed, but knowledge of the underlying cause is generally suppressed and censored, especially in the US. The US government is facing an economic crisis that, for political and ideological reasons, it is unable to resolve without recourse to military action. Because of an ideological adherence to ‘free market capitalism’ (that truly isn’t) and a pathological fear of the whole idea of socialism (or social responsibility) the US is impoverishing the majority of its people in order to further enrich the rich. The gap between rich and poor is growing ever wider and the administration is not helping by giving further tax cuts to the rich. Overall this means domestic consumption declines as average incomes decline. This sets off a spiral whereby US industry cannot find a domestic market for its products, closes its operations or moves offshore, putting people out of work and increasing the economic downturn further. This is what globalization is all about – a desperate search for alternative foreign markets in an effort to replace collapsing domestic markets. However, because the same principle is applied on the weaker economies of the 2nd & 3rd world, it ultimately only accelerates the process.

The economic health of the nation – as indicated by the stock market (which isn’t too healthy at the moment) – is a sham. The true indication of the health of the economy is in domestic spending – and that is on the way down.

But this isn’t the point about Iraq. I will come back to that.

The issue at stake is the US dollars’ role as the sole acceptable currency for international oil transactions. In 1972, the United States agreed not to oppose OPEC’s control of oil pricing and supply in exchange for an agreement that all oil transactions would be conducted in US dollars. As most countries are net importers of oil, they must maintain foreign currency reserves in US dollars. For other countries, demand for their currency is determined by their domestic economic growth. Over production of currency leads to hyperinflation as the value of the currency is reduced. The hyperinflation experienced by the German Weimar Republic in the 1920’s is a historical case in point. The US, however, prints currency far in excess of domestic economic requirements in the assurance that the surplus will be absorbed by foreign demand. It costs the US Treasury only US$0.035 to print bills of any denomination, but of course, buyers must pay the face value. The difference between the cost of production and the face value represents a direct profit to US Treasury. Effectively, the US economy receives continuous injections of foreign capital in exchange for nothing.

This inflow of foreign capital is critical to the United States as, for the reasons above, the US economy is hollow. On its own, the US cannot attract the necessary capital to support its massive US$6.47 TRILLION national debt.

In October 2000, as a political gesture, Saddam Hussein converted Iraq’s foreign currency reserves from US dollars to Euros and announced all Iraq’s future oil trades will be conducted in Euros. At the time, Iraq made a substantial loss on the conversion, but the continuing improvement of the Euro against the US dollar has recouped that loss and, in fact, made a profit of 25% on the overall transaction. It was a lesson that did not go unobserved internationally. At a recent OPEC meeting the cartel seriously considered trading oil in Euro contracts. There was enormous pressure from the US to prevent this and so the idea was shelved. However, Iraq, Iran, North Korea (all ‘axis of evil nations surprisingly), Venezuela, China and Russia have all recently stated an intention to conduct oil (and other international transactions) in Euros.

Over the past few years support for the UN sanctions regime against Iraq has been waning internationally. The double standards applied to Iraq in comparison to Israel, plus the obvious impact the sanctions had on ordinary civilians, as opposed to the regime had become obvious to everyone, except the US and UK. Even France, once a staunch supporter of sanctions against Iraq broke with the US and UK and began to call for a lifting of sanctions. By 1999, consensus amongst the inspectors indicated they were satisfied that at least 90% of Iraqi WPD capability had been destroyed. However, it was clear to Mr. Hussein that continued participation with the inspection process was only providing the US and UK with technical pretexts to maintain the sanctions. Mr. Hussein announced that the sanctions regime would simply collapse within the next few years of its own accord and that Iraq would no longer co-operate with UNSCOM and UNMOVIC.

US and UK belligerence towards Iraq ensured that all Iraq’s post-sanction oil contracts went to German, French, Russian and Chinese companies. US oil companies were excluded. This dominance of Iraqi oil reserves by ‘foreign’ companies was certainly of concern to US interests, but it also created a frightening prospect, that had nothing to do with oil supply. If the sanctions regime were to end Iraq would be conducting all its oil trade in Euros. Within 5 years that would mean approximately 20% of international oil transactions would be conducted in Euros, driving up the value of the Euro against the US dollar. The net value of the Euro over the unstable and declining dollar would in turn lead to other nations (both importers and producers) to increasingly turn towards the Euro as their international trade currency of choice.

The effect of this would be catastrophic for the US. The loss of inflowing foreign capital would leave the US insolvent – unable to repay the interest on its national debt – but it would also initiate a hyperinflationary spiral as the international money market began dumping hundreds of trillions of US dollars without any market for buyers. As the US dollar is not backed by anything tangible (i.e., gold), its value would plummet as all nations would begin dumping their US dollar foreign reserves in an effort to transfer to a firmer currency. No amount of US Treasury intervention would be sufficient to stem the decline as the US does not have the economic resources to buy back all its circulating currency.#

For this reason, the US and UK could not afford to allow the UN weapons inspection program to succeed. From the outset, the US attempted to sabotage and stymie the unilateral return of inspectors. Once inspectors were in Iraq, the administration constantly undermined their efforts, climaxing in Colin Powell’s desperate ‘light and sound show’ in the Security Council. When it became clear that the US’ former NATO allies were not going to cooperate, NATO, in its current structure became expendable.

The relief the US will receive from this action, however, will be limited and short lived. Companies like Halliburton and the Carlyle Group, which are close to the administration will profit from the venture, but this must be factored against the huge cost of the war and then the ongoing costs of occupation. By this point, other economic factors will begin to come into play.

Since the Second Palestinian Intifada, consumers in the middle east have been boycotting US business interests in the region. With 15 million protesters on the streets worldwide voicing their opposition to US foreign policy, this boycott is likely to be intensified and extended in response to the occupation of Iraq. Worldwide avoidance of US products and companies will seriously impact US economic recovery.

The uncertainty of war historically drives investors out of the stock market (whose voodoo trading provides the smokescreen to hide US economic weakness) as they seek more stable investments, such as gold. The 1991 Gulf War substantially boosted gold prices, as investors fled the stock market. This has not occurred this time. The reason again lies with the Euro. The Euro has gold backing up to 15% of its face value. The European Central Bank has a policy to purchase gold when it is available. Any increase in the gold price naturally increases the value of the Euro. The US, UK and Japan, who are reliant on maintaining US dollar supremacy, must keep the market oversupplied with gold to ensure gold prices do not rise above approx US$300. This is done by selling off parts of their own strategic reserves and sales of gold futures, which are little more than advance requests to purchase gold that has not been discovered yet. It has been theorized that most of the gold trade between the world’s central banks is in futures. A collapse in the futures market, say in response to a serious economic crisis such as a jump in the price of oil, who send the price of gold skyrocketing. A jump to US$500 an ounce would almost double the value of the Euro and would probably be sufficient to start the migration from dollars to Euros as described above.

Iran is still keen to conduct its oil trade in Euros. This makes sense as the US has a trade embargo against Iran and Europe is Iran’s main trading partner. The self evident benefit of conducting trade in Euros will have the same inevitable effect if not stopped. As an ‘Axis of Evil’ nation, the US administration is likely to attempt to overthrow, attack or destabilize Iran once it has completed the subjugation of Iraq. The US however will have to face much stiffer opposition from the EU, Russia and China before taking any action against Iran (for reasons below).

US belligerence towards ‘old Europe’ and Russia may hasten the inevitable merging of the interests of those two entities, especially if the US cancels pre-existing non-US oil contracts. As Zbigniew Brzezinski noted in his 1997 book “The Grand Chessboard”, ‘Russia’s only real geo-strategic option [after its collapse as a superpower] …. is [a closer association with] Europe.’

But Russia is no longer the economic basket case it was under Yeltsin in 1997. President Vladimir Putin has helped manage Russia back into economic stability. The Russian Government has recently announced it will repay all its IMF loans next year, one year early. This has been achieved via the careful management of Russia’s oil exports, which is has begun tailoring to the EU market as a viable alternative to middle east oil.

The EU remains a net oil importer. Russia was the worlds second largest exporter. Combining EU economic strength with Russian oil resources would create a Eurasian superpower against which the US could not compete economically. This threat to US geopolitical and economic interests wasn’t anticipated for another 20 years but US belligerence and diplomatic mismanagement may have substantially accelerated the process.

Already the Bush administration is laying the groundwork for action against Syria. Iran is likely to be next. I would anticipate a much firmer response from Europe and Russia if the US tries to pursue military action a second time. France, Germany and Russia ultimately had to have recognized Iraq was a hopeless case. They made the appropriate diplomatic noises and made their opposition known, but allowed the war to take its course. This won’t happen again. As we speak, Russia, the EU, Iran and China will be busily solidifying their arrangements to ensure their interests in the Middle East are protected. The Russian, French and German leaders were meeting in St Petersburg only this week to discuss post-war Iraq. Clearly their association together smacks of strategic interest. And if US belligerence pushes them into an even closer alliance – even a preferred trading agreement and a mutual defense pact – it will be all over for the American Empire. The US, despite its apparent dominance has become a house of cards because of the policies of a generation of corrupt, self interested corporate criminals.

Paul Markham is a project manager for a bank and a student of Middle East history and international politics. He contributed above article to Media Monitors Network (MMN) from Australia.

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