Did you ever wonder how the U.S. stays so rich when we don’t do anything much anymore? Everything outsourced, a service economy sustaining American workers at home… Even IT jobs now largely outsourced…

Well, how the nation as a whole stays rich is, we make dollars.

And at least right now people need dollars.

As Henry Liu has written vividly in the online Asian Times (4/11/02),

“World trade is now a game in which the US produces dollars and the rest of the world produces things that dollars can buy. The world’s interlinked economies no longer trade to capture a comparative advantage; they compete in exports to capture needed dollars to service dollar-denominated foreign debts and to accumulate dollar reserves to sustain the exchange value of their domestic currencies. To prevent speculative and manipulative attacks on their currencies, the world’s central banks must acquire and hold dollar reserves in corresponding amounts to their currencies in circulation. The higher the market pressure to devalue a particular currency, the more dollar reserves its central bank must hold. This creates a built-in support for a strong dollar that in turn forces the world’s central banks to acquire and hold more dollar reserves, making it stronger. This phenomenon is known as dollar hegemony, which is created by the geopolitically constructed peculiarity that critical commodities, most notably oil, are denominated in dollars. Everyone accepts dollars because dollars can buy oil. The recycling of petro-dollars is the price the US has extracted from oil-producing countries for US tolerance of the oil-exporting cartel since 1973.

“By definition, dollar reserves must be invested in US assets, creating a capital-accounts surplus for the US economy. Even after a year of sharp correction, US stock valuation is still at a 25-year high and trading at a 56 percent premium compared with emerging markets.”

But central bankers around the world do not expect either the US dollar or the US stock markets to sustain their current levels. As William Greider in The Nation (9/23/02) has pointed out:

“US economy’s net foreign indebtedness–the accumulation of two decades of running larger and larger trade deficits–will reach nearly 25 percent of US GDP this year, or roughly $2.5 trillion. Fifteen years ago, it was zero. Before America’s net balance of foreign assets turned negative, in 1988, the United States was a creditor nation itself, investing and lending vast capital to others, always more than it borrowed. Now the trend line looks most alarming. If the deficits persist around the current level of $400 billion a year or grow larger, the total US indebtedness should reach $3.5 trillion in three years or so. Within a decade, it would total 50 percent of GDP.”

There is also a major potential threat to the overpriced dollar in Japan’s unresolved deflationary crisis. As observers like Lawrence A. Joyce have commented, the dollar would take a major pummeling if the Japanese government (as seems quite possible) were suddenly required to fulfil its legal obligations to bail out failed Japanese banks (which could easily happen if a sustained scarcity of oil were to keep oil prices at $40 a barrel or higher):

“There is only one place where the Japanese government can get enough money to bail out its banking system: The Japanese government owns about 15% of our U.S. Treasury securities. And it would have to start selling them if it found itself facing a major banking crisis.

“That would send the already ailing dollar down even further. And the initiation of a sale of our Treasury securities by Japan, of course, would immediately trigger a worldwide stampede to do the same before the securities become worth only a fraction of what they were purchased for. At the same time, interest rates in the U.S. would immediately go through the roof.”

Without the dollar hegemony we won’t be able to continue with the kind of economy we’ve moved towards — an economy of the elite, where a few rich people just own things and do very little, and have the power to own things because they have the good fortune to live in a world of dollars, and trade in an international context… and the rest of us are left more and more with crap jobs, because it is not in the interests of the elite to worry about actual American production and actually utilizing the human skills of our workforce — it’s easier to use the superpowerful dollar to outsource everything and get fat on the profits, and let American labor languish.

Well guess what happened in 2000.

Iraq stopped trading its oil in dollars and switched to euros.

Iran’s switching too.

From a 2003 paper, also the source for the above quote:

To conclude, the Bush administration is not threatening Iraq out of pique or whim. The recent policies of both parties have indeed made the US vulnerable to foreign oil and petrodollar pressures. But hopefully decent Americans will protest the notion that it is appropriate to rain missiles and bombs upon civilians of another country, who have had little or nothing to do with this crisis of America’s own making.

Yeah, well, it didn’t work out so well with the decent Americans this year.

Unfortunately for everyone Iraq isn’t turning into the quick and easy win that the neocon geniuses expected, so God knows how this will all play out.