The Politics of Dollars, Oil and War - Playing with Fire


	Seed Newsvine

Discussing U.S. monetary policy is generally a snoozer for anyone who doesn't hold a degree in economics or run a multinational corporation. In fact, monetary policy is at the center of a controversy that threatens the very heart of the U.S. and the world economy. The main instigator of this policy is the current administration and the primary driver of this policy is oil!

A brief Primer on U.S. Monetary Policy

One of the amazing aspects of monetary policy is that it plays a crucial role in how the economies perform and who benefits, while remaining relatively invisible to the public in general. This proves very advantageous to governments because they can determine the direction of the economy without the populace realizing or understanding what they are doing. If the government raises taxes everyone knows it. A change in monetary policy goes generally unnoticed yet the results have an even greater impact on the wallet than a tax increase (or cut). Because the actual policy does not originate with the government itself (but by a quasi-independent organization called the Federal Reserve Bank), the policies can be distanced from government action. For instance: The government can profess a goal of a strong U.S. dollar while acting to weaken the value of the dollar in the background.

The value of the U.S. dollar is at the heart oil, war, and potential destruction. Clinton Administration policies sought to strengthen the U.S. dollar vis a vi foreign currencies. This strong dollar meant huge amounts of capital coming into the United States as foreign investors sought to capitalize on its high value. It also meant that the general populace would benefit from lower costs on imports and most importantly, low cost oil.

The Bush administration has reversed this policy, choosing to vamp up deficit spending in order to drive down the value of the dollar. (This is the only time in U.S. history that a government as instituted a tax cut while funding a war). It means that foreign banks are actually funding the war in Iraq and U.S. taxpayers are only responsible for paying the interest, not the principle. This, of course, assumes the United States will never pay down this deficit.

Oil and the Dollar

The lower value of the dollar has a number of important ramifications. First, crude oil prices go up. Because crude oil pricing is based on the U.S. dollar, everyone who produces or trades in oil must raise the price in order to compensate for the lower value of the currency. Because oil prices fluctuate more rapidly than the value of the dollar, oil companies tend to realized even higher profits on these fluctuations.

In addition to oil, U.S. exports are also cheaper when the dollar's value goes down. About a quarter of the sales of companies in the Standard & Poor's 500 stock index come from their foreign sales. Companies do not have to raise their export levels. They simply make more money selling the same goods. In essence, the American consumer pays for these higher corporate profits by paying more for imports.

AND NOW THE KICKER: Foreign governments know exactly what the Bush Administration is up to. In the past U.S. monetary policy has been subtle and incremental. The Bush Administration has forced a rapid devaluation of the dollar, cutting nearly 20% of its value in a year. Most significantly, the administration has done little to conceal its policy.

Foreign governments now have a means for combating U.S. monetary policy and they are beginning to drop the hammer on the U.S. Disgusted with American monetary manipulation, Europe is attempting to disconnect the price of oil from the U.S. dollar and take over its control. The European Union is pushing for the Euro as the international basis for oil pricing. The rejuvenated strength of the Euro and the EU's more stable and predictable monetary policy has finally made this alternative a distinct possibility. Cold U.S.- Russian relations as warmed the Russian government to this switch and closer ties between Europe and Arab countries is making the idea more palatable as well. Throw in the American/Israel relationship and it is not a difficult sell to send the U.S. dollar adrift.

If the price of oil is no longer valued on U.S. dollars the American economy loses its ability to manipulate the price. Even more significantly, the oil/dollar tie is the foundation for American economic dominance in the world. Oil, being the number one commodity, influences the performance of countless other industries. Disconnected from oil, the U.S. dollar will gradually be disconnected from other aspects of the world economy. This will push America into a more isolated position economically meaning it must use military might if it wants to maintain influence in the world.

The Bush administration has essentially used the same monetary policy as the Reagan administration did a decade earlier. In the 1980s the world economy had to accept this policy and its affect on commodity prices. Now there is a potential alternative and competitors to the United States are not willing to roll over any longer. If one wants to bet, America looks primed to come up short.

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