Magazine article The American Conservative

Borrowed Empire

Magazine article The American Conservative

Borrowed Empire

Article excerpt

The dollar won't necessarily collapse if oil is billed in euros-but our crushing trade deficits might do the trick.

IN RECENT MONTHS a hot topic on Internet sites has been speculation that Iran will instigate a collapse of the dollar's value by billing its oil in euros. As the argument goes, Iran's desertion of the U.S. dollar would be followed by other oil producers, bringing to an end America's financial hegemony and severely affecting the living standards of most Americans. This Iranian threat is often said to be a main reason for Bush administration plans to attack Iran. Saddam Hussein is said to have provoked the Bush administration's attack on Iraq by harboring the same intention to switch oil bills to euros from dollars.

This argument assumes that the cost to the U.S. of oil being billed in euros is so great that it makes worthwhile wars of aggression that are illegal under international law, that turn most of the world against the U.S. and destroy its soft power, and that have massive financial costs running in the hundreds of billions of dollars-with no clear end in sight. Would abandonment of the dollar as oil currency impose costs greater than these on the U.S.?

The change, if it were to happen, would not be the catastrophe that some people believe. Saudi Arabia and the oil sheikdoms are too much in the American pocket to follow an Iranian move to euros, and the Europeans, faced with Asian competition, do not want a stronger euro. Moreover, the real question is not the currency in which oil is billed but whether foreigners find it desirable to continue to accumulate and to hold dollar-denominated assets-stocks, real estate, bonds, and U.S. companies. America's oil bill is dwarfed by the size of the U.S. trade and current account deficits. If the United States continues to run budget and trade deficits, foreigners' investment portfolios can become so loaded with dollar-based assets that they cease to acquire them. That is what would lead to a sharp fall in the dollar's value and, perhaps, to the end of the dollar's role as world reserve currency.

I am not saying that a move by Iran and other oil producers to euros would have no effect on the dollar. Such a development would result in a lower transaction demand for dollars as a means of payment. But the real question is: what do oil producers and the rest of the world do with the dollars associated with America's large trade and budget deficits?

The deficit in our trade imbalance due to mineral fuels is small compared to the deficit due to our imports of manufactured goods. In 2005, the U.S. trade deficit in manufactured goods was $506 billion, almost twice as large as the $260 billion deficit for mineral fuels. Those speculating about the currency of oil bills could paint a darker picture by worrying about the currency used to pay bills for manufactured goods.

The fundamental point overlooked by worries about an Iranian oil bourse is that oil is billed in dollars because the dollar is the reserve currency and, thereby, is acceptable as the means of international settlements. What is likely to dethrone the dollar is not Iran but Washington. Reveling in neocon hubris, not even Republicans any longer worry about deficits.

Deficits have different causes, and not all are equally worrisome. But the U.S. trade deficit is problematic for a variety of reasons. From 1990 through the first quarter of 2006, the U.S. trade deficit has accumulated to $4.7 trillion. For just the first quarter of 2006, the deficit is $208.7 billion-about twice the cost of one year's worth of war in Iraq. The trade deficit measures U.S. consumption that is not matched by U.S. production. In other words, Americans together are consuming $2.3 billion more per day or $1,610,000 more per minute than they are producing.

Free-trade economists, who seem to specialize in apologizing for red ink, say that our trade deficit is a very positive thing. …

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