Dollar loses reserve status

Seignorage and Empire

Every era has a reserve currency. This reserve currency is the currency all trading partners accept as payment. The state that produces the reserve currency is said to possess seignorage. This is the profit associated with the ability to buy real things with money that was created out of nothing.

What happens if an empire loses the possession of seignorage?

The US Dollar empire

Between say 1713 and 1929 the Pound Sterling was the reserve currency. After 1945 the US Dollar was the global reserve currency, backed up by the vast productive power of US industry. The US Dollar had been pegged to gold at 35 US Dollar an ounce between 1934 and 1972. After 1972 the US Dollar along with all currencies in use were backed by trade flows. Currencies were floating up and down. Money could be created by central banks by expanding credit.

But the position of the US Dollar had weakened by unpegging it from gold. More and more international trades were done in currencies like the Deutschmark and the Yen. Despite the weakening position of the US Dollar commodities like oil, rubber, coffee and goods like airplanes and arms continued to be traded in US Dollars. A problem of an international trading system with floating currencies is the inherent insecurity of international merchants and traders. They never know what their returns will be, which hinders trade. This also disrupts the taxes that are levied on their trade, which fill the coffers of states that manage the international order.

The US milked the US Dollar for what it was worth, recklessly expanding the money supply with cheap credit. This way the elites could keep expanding an intrusive managerial state and a international empire with roughly 800 Army, Navy and Airforce bases around the world.

The beginning of the end of the US Dollar as a reserve currency

But expanding the money supply by easy credit led to a succession of boom bust cycles in the 1990ies and thereafter. After every bust the US flogged the economy back to life again by expanding credit. The biggest bust came in 2007. The political and monetary elites reacted by giving the same treatment again. The FED created the biggest expansion of credit thus far, to prop up their hollowed out financial institutions, vastly expanding government debt, adding to the household debt and showing up in a unbalanced trade balance with Asia.

The American public is eyeing the new debts warily. And the international trading partners of the US are increasingly wondering about the worth of the currency that is created so recklessly. The trading partners must worry about the ability of the US taxpayer to service the government debt burden in addition to their private debt burdens. Not to mention that the interest on the debts are choking off buying power of US households. Unless said households increase the rate at which they take on new debts, which they prudently seem unwilling to do.

What is the alternative?

There is no currency to take the place of the US Dollar in international trade. To set prices, act as a medium of exchange and a reliable unit of value. Now however a new currency is being worked on behind the scenes.

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil

No Dollars for oil, because the US Dollar is an increasingly unreliably unit of value.

moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency

This would provide a solution for the unit of value, pricing and exchange medium challenges a new currency would face. The Middle East, Russia as suppliers of raw materials plus Asia and Europe as suppliers of finished goods would possibly be able to manage their trade flows in this way.

The timeline

When will the new currency come about? It will take 9 years.

The current deadline for the currency transition is 2018

In the mean time gold will be used as a stop gap to fill the place of the US Dollar. Expect the gold price to rise against the US Dollar. It is now at more than 900 US Dollars for an ounce, up from 35 US Dollars per ounce between 1934 and 1972.

The consequenses for the US

If oil would be traded in a new currency, it would be a big hit for the US. The US Dollar would lose reserve currency status. The demand for US Dollars would fall and the exchange rate would fall. The central government of the US would lose the profits of seignorage. Prosperity for US citizens would drop as import prices rise. In the short term the shock to the US political and social system would be sharp. On the other hand US made goods would become cheaper and manufacturing and employment in the US would actually increase in the MEDIUM TERM at the expense of Europe and Asia.

Collapse of the Empire

Political conflict in the US will intensify if the government will not be able to create money at no cost. Politicians will have to cut budgets. This would break up the internal or external empire of the US. Possibly both.

The internal empire

The internal empire is the empire which the US proper has become. The territory of the US now contains in addition to the White core nation plus Blacks millions of Asians and dozens of millions of Mexicans plus significant numbers of other unimportant minorities. Without cheap money to pay for an expanding military, bureaucracies and welfare millions would be without jobs, status, income and access to healthcare in addition to the number who are already there. Politically it would cause all these groups to become more confrontational and to view politics like a zero sum game, a game were one party´s loss is the other parties gain. Especially the Mexicans and Whites are likely to collide over the possession of some of the Southern states of the US.

And this coincides with the rule of the nation´s first non-white President.

The external empire

The external empire are the network of military bases the US maintains around the globe, dominating the world militarily and politically. Without cheap funding the political elites could decide to withdraw in the manner of the Soviet Union withdrawing from Central Asia and Eastern Europe in 1989.

Withdrawing from the external empire would cause wars breaking out accross the globe, in Africa, the Middle East and Central Asia. Conflict which were hitherto surpressed by the US would come to the fore. Getting the situation under control requires a new empire or several new empires.

People will be nostalgic for the lost US empire, in the way they are nostalgic for the Soviet Union of the Yugoslav Federation.

US Forces withdraw from Urban Centres in Iraq

Operational redeployment

The US is withdrawing its troops from Iraq's urban centres. The troops are arrayed in "belts" around towns and cities. The question is whether this is a victory for the US or for its enemies. According to the NewYork Times:

Prime Minister Nuri Kamal al-Maliki has taken to calling the withdrawal of American combat troops from Iraq’s cities by next Tuesday a “great victory,” a repulsion of foreign occupiers he compares to the rebellion against British troops in 1920.

US political and military leadership is not challenging their supposed ally, Mr. Al-Maliki. (I wrote a post on November 24 2005 advising the strategy of withdrawing US Forces to locations outside the cities.)

The original strategy of the US

The strategy of the US after the attack by the Jihadists on 9-11 consisted of invading Iraq to turn it into a democratic model for the rest of the Middle East. A democratic Iraq would undermine autocratic Middle Eastern regimes and usher in an era of democracy. This democratic era would than take away the "root causes" of Middle Eastern discontent with the West.

Iraq becoming a newer, bigger Lebanon

Rather than becoming a haven for Freedom, Iraq became a violent tangle of sects and tribes. The US was never able to deal with it. After calming the country down after the surge the US military is now leaving the urban centres to the newly constituted Iraqi security forces under the control of Mr. Al-Maliki and the Shia.

Gaining legitimacy in the eyes of the majority sect

Mr. Al-Maliki and his government are now faced with a fight with the Sunni minority. The Sunnis allied themselves with the US during the surge in return for the US paying a tribute. On the other hand Mr. Al-Maliki faces competition for the hearts and minds of the Shia from even more radical elements. For PM Al-Maliki the alliance with the US is increasingly becoming a burden. He needs to divest from the US and strengthen other alliances with local powers. These will be shia Iran (never mind who wins the present power struggle there), the Kurds, Turkey, Jordan and if possible Saudi Arabia and the Gulf states.

The US is facing different set of problems now

Meanwhile in the US the state of California is so broke that it can not cover 25 percent of the budget. The Federal government is refusing to bail out the state. It the Federal government will not bail out California, will it be interested in continuing to pour treasure into Iraq?

This amounts to something bigger than the US defeat in Vietnam. It is like the USSR having to withdraw from its internationalist duty in Afghanistan.

Why did the strategy of democratization fail?

The US leaderhip are so in thrall of the equality dogma, that they failed to take into account that the Middle East belongs to a different Civilization than Eastern Europe, where democratization has proven more successful. The Islamic faith is extremely hostile to Western ideas of government. This makes it difficult to mobilize the population for an effort supporting a Western-led endeavor and easy to mobilize the population to those who are opposed to the West.

The Military Industrial Congressional Complex drives towards America's Defense Meltdown

When stepping down in 1961 President Eisenhower warned of the collusion between the U.S. military and the Defense Industry. This collaboration caused the U.S. to spend its budgets in a way that served the narrow interests of the Defense Industry and Military leadership. Rather than on the security needs of the nation.

Winslow Wheeler, editor of "America's Defense Meltdown" argues with 13 other Defense Procurement experts that the complex also includes U.S. Congress, which for decades has failed to effectively oversee Defense Contracting. The result is U.S. defense spending 50 percent of global defense budgets, yet failing to achieve decisive results against tiny opponenents. For instance Al-Qaida is estimated to number approximately 70.000 members.

A few weeks ago Mr. Wheeler gave a presentation on the how and why of the U.S. Army inventory of weapons systems aging and shrinking in a time of high spending. Mr Wheeler is accompanied by two contributors to the book: Pierre Sprey, co-designer of the F-16 and A-10 jets, and Thomas Christie, former adviser to the Secretary of Defense on weapons systems testing.

View U.S. Defense Meltdown

The new Communists

A good piece by Paul Craig Roberts about the ongoing campaign of the Bush government and their propaganda machine to create havoc in the Middle East by threatening to invade Iran, while growing increasingly authoritarian at home as evidence by the Patriot Act and the war propaganda on TV. The US Forces have great difficulty to defeat the insurgency by the 5 million Sunni Muslim minority already. Why invade Iran with its 70 million inhabitants, 35 million of which are Persians and another 20 million are Azerbaidjanis with good relations with the Persian ethnics, so finding local allies will not be so easy.

The stated intention of Iran to acquire Nuclear weapons is used as a motive. However, Israeli Professor of Military history Martin van Creveld already foresaw in 2003 that invading Afghanistan and Iraq would cause the whole region, Syria, Turkey and even Greece to develop nuclear weapons, if not in defense against the USA, than in defense against its nuclear armed neighbours. That is because Nuclear weapons are the perfect deterrent against the US Armed forces. So the predicament that Bush finds himself in, an Iran working on its own Nuclear weapons, is caused by the VERY strategy of invasion that the US has been using so far.

There is no indication that the Sunni insurgency or Al-Queda in Iraq is being overcome by the US Army. The US Army is fighting the wrong kind of enemy in the wrong kind of battlefield. The enemy is a weak, lightly armed invisible force with good intelligence and reasonable or good understanding of local culture and the battle field is a cluttered, dirty city scape that defies the use of observation enhancing instruments, such as radar, infrared, night sights that is the strength of an army armed by a modern light industry production base.

Finally there is really little hope for victory even if the US had the right kind of military force and was fighting on a battle field more suited to the type of warfare that is its strong suit. A military victory has to be followed by political and social acceptance of the dominance of the victor. Because the West and the world of Islam are Ancient enemies a Western victory will never be seen as letigimate by a local population. In fact the only populations that will see US dominance as legitimate are the Middle Eastern Christians.

Snouck is not some peacenik pinko, I consider myself to the right of such light-weight, hippy jokers as Attila the Hun, Djengis Khan and Mohammed al Rasul, those women. But to create a new enemy and to fight them in a similarly unsuited battlefield for a goal that is impossible to attain is not a good idea. My prediction is that if the Bush Administration continues with its intention to make Iran comply to its will by using military force. A hand will appear out of nothing and in the Senate the writing will be on the wall:

MENE MENE TEKEL UFARSIN - Bush's Kingdom will be parcelled up and divided.

Iraq Sniper - Juba

Film from a cam scope of Juba, a Jihadi Sniper in Iraq, taking pot shots at well-equiped and uniformed American troops. The camera is intergrated into the sniper scope used by the marksman to aim his rifle. I know that these combined sniper scopes / cameras exist and are manufactured in Israel.

I wonder how much it would cost to equip and maintain such a sniper in relation to the contant worth of the troops and equipment facing him. Imagine the effect of this film on Islamic immigrant youth in Europe and North America! Great recruiting tool.

The way out in Iraq

How to win the war in Iraq

The war in Iraq is going badly for the USA. After having defeated the Iraqi Army quite easily the Americans have a hard time establishing peace and order in Iraq. A small number (about 20.000 to 30.000) of insurgents keep inflicting losses on American and coalition troops, on the new American sponsored and trained Iraqi Army and on the Iraqi population. What to do?

First we have to check what the goal is of the USA in Iraq. The cause of the war is clear, it is the attack by political Sunni Islam on the USA on 9/11. The Bush administration connected the attack on the twin towers first with the rulers in Afghanistan and then with the rulers of Iraq. Also the Bush administration alleged that Iraq had weapons of mass destruction which could be used to attack the USA again.

It is now clear to everyone that there were no WMD in Iraq. There have been elections both in Afghanistan and in Iraq so by democratic logic the problem should be over and the American Forces should be able to withdraw from the Middle East.

But nobody sees it quite so. Not the Americans who dare not to withdraw although they want to, not the new governments and not the Islamists who continue to attack and inflict losses on the American and pro American forces and terror on the population.

The American government has to find a way to convince everyone that they have won and resistance is futile. To do that at home in America is not so difficult, the Bush administration controls most of Mainstream Media there. But they have to convince the Islamists they have won.

I figured out a simple, step by step strategy that might just do it.

If it has not been done yet, get serious about setting up a intelligence organisation in Iraq, concentrating on spying on the Sunni population. 20.000 spies should be enough, for 20-30,000 insurgents. Secondly get serious about training an Iraqi Army that can hold the population centres against Sunni Islamists. About 120.000 men should be enough to hold all cities and towns in Iraq. You can recruit them from the Shia and Kurd ethnic groups. With a 120.000 men one has got enough troops to hold out against the 20.000 – 30.000 Sunni Islamists. Selecting Shias and Kurds will ensure the loyalty of the troops in fighting Sunni Islamists. This will have been done already.

Select about 20.000 men from the 120.000 to become officers, sergeants and corporals, to lead the other 100.000. The soldiers can be taught to march, salute and shoot. That will not take more than 8 weeks and will have been done anyway, by now. Divide them in 13.500 squad sized groups of 7 or 8 men. Equip them lightly, with AK-47s, RPGs and Light Machine Guns (LMG).

Train the 20.000 to be Corporals, Sergeants and second Lieutenants. Select the men for leadership, high morals, perseverance and intelligence. This takes more time. After say four months let the Lieutenants and the NCOs take over the training of the squad men. Let the first 1.000 Iraqi squads go on patrol with American and British troops so they can learn on the job.

If things go well after two months pull out all Western troops out of all cities and towns apart from Baghdad, into deserts bases near the towns, cities AND the highways to the South where the ports are.

The Sunni Islamists are strong in the cities where they can attack the Americans from up close. The American Tanks, Armoured Vehicles, Helicopters, Communication Equipment and Artillery do not give the Americans any advantage in the cities. But in the desert with the free fire zones all around the conventional strength of the American is actually a great asset. Secondly it also means that the Americans are always menacingly nearby and can suddenly pounce on the Sunni insurgents, while the Islamists cannot hurt the Americans. Thirdly it means that the Americans are not hurting the civilian population. Right now a lot of civilians are hurt by American firepower when the Americans are responding to guerrilla pin pricks with their overwhelming but blind firepower. This translates in lots of recruits for the Islamists and has to be stopped. Finally with the Americans out in the deserts they are well poised to keep the Iranian Army from getting any funny ideas about meddling in Iraq.

Create an Iraqi Army Engineering Corps of about 20.000 men. Have them construct new roads, bridges and bypasses in those areas where the roads from the Southern ports are running through or nearby Sunni neighbourhoods and where there is a constant threat of ambush and mines against logistics convoys to the pro American forces in the rest of the country. Supplement the strength of the Iraqi Engineering Corps by letting local construction contractors in on lucrative contracts, to create jobs and a powerful pro American lobby.

Now recruit a second batch of 120.000 Kurds and Shia’s. Hey, throw in some Sunni’s too just to show YOU ARE NOT PREJUDICED.

With the Americans out in the desert and the Iraqi Army in squads in the cities and towns the Islamist cells will start attacking the Iraqi Army squads. In order to get an edge over the Army Squads they will band together in groups of 20-30 men and appoint sergeants and lieutenants to command these groups. To house them, feed them and equip them they will appoint kitchens, safe houses and armouries in neighbourhoods and streets friendly to them. This will be mostly in Sunni neighbourhoods. There will be a maximum of 1,200 of these groups. Make sure you have your spies in there by now, especially in the garages, markets, mosques and coffee houses.

If the Iraqi Army is not strong enough to police the Sunni Neighbourhoods, allow them to pull back into their own ethnic neighbourhoods, which they may defend.
Also make sure to set up funds administered by Kurdish tribal leaders and Shia clergy to pay out considerable amounts of money to the families of killed Iraqi Army personnel. Have community leaders collect money from their ethnic/religious base and add a dollar for every dollar contributed to the funds. Pay out sums of at least 10.000 -20.000 US dollars to the families of martyrs. Also have ethnic leaders and clergy establish funds for hospitals and such. Make available excellent medical and other care for Army wounded. Send American doctors to Iraq and attract the best Iraqi Medical staff to these show piece medical facilities.

Now you take the Iraqi army second Lieutenants that show exceptional ability and promote them to Lieutenant. Form 3 squads into platoons of about 20 men. If losses are heavy pull back out of the Sunni neighbourhoods and concentrate mostly on the Kurdish and Shia ethnic areas. If losses are light keep harassing all known groups of Islamist Insurgents.

Having to oppose the Iraqi Army organised in squads and based on the Shia and Kurd areas and the US Army out there in the desert and on the border the Islamists have to select the most attractive target. Targeting the US Army in the desert will only bring occasional successes and regular losses. So the Islamist forces will concentrate on the Sunni areas and attack the Shia and Kurdish units especially the ones who venture onto Sunni turf. In order to take on the new platoons the Islamists will have to band together in bigger organisations for neighbourhood defence and for attacks on Army strongholds. So they will organise in company sized units and appoint captains to officer them. Also they will be looking for Iraqi and other Sunni Muslims with officer training to command such groups. The company sized Islamist forces will more and more look like regular army organisations. They will need training grounds, arms and munitions depots and hospitals, garages for vehicles, workshops for weapons, communication equipment and tools. There will be a maximum of about 170 of these groups. It will be easy to list them and to follow them. Unfortunately smaller groups will branch off them, which complicates things.

Basically what is happening is that you are dictating the shape that the enemy will take in order for him to be victorious. Because the enemy is not under strong central command there will be no way for him to oppose the shape that his forces are taking. By now there will also be conflicts of interests between company sized Islamist groups which can be used to gain information on the Islamist forces.

Select a company (150-200) sized unit in a particular Sunni neighbourhood in a particular town that is also partly Kurdish or Sunni, with a Iraqi army unit plus a intelligence gathering cell. Invite reporters from American and Iraqi television broadcasters. Make sure everything is known about the Islamist forces. All the names of the warriors. The location of the their houses and infrastructure. The names of their brothers and cousins, their wives and girlfriends. Know their habits. Where they eat and sleep and an exact weapons count. Surround the town using Americans in vehicles and establish roadblocks. Control all roads, paths and fields. Then attack them using both Iraqi Army units with American Special Forces Officers and units of US Army personnel. Do not use vehicles or helicopters but attack through the streets or alleys, the sewers or the roofs, just use any angle to quickly take care of the whole group. Avoiding to use vehicles will enable surprise.

Televise the victory on Iraqi and American national TV. Then do nothing for a while. Keep sending squad and platoon sized Iraqi Army units against the Islamists. Never mind if they are defeated again and again by the Islamists. Presenting a string of small successes to the Sunni Islamists is essential to the success of the strategy.

Now again take the promising Iraqi Army Lieutenants and send them to further officer training. Train about a 150 of these promising Lieutenants to become Captains and form 5 platoons into companies of about a 120 troops. Some of these companies can not be housed in Shia or Kurdish neighbourhoods but will be housed in former Iraqi Army barracks or US Army bases. Also other staff will have to be trained such as logistics, technical and maintenance specialists. For non-combat roles soldiers can be taken that were wounded and are not fit to return to combat duty.

Have the newly formed companies attack or threaten to attack Sunni Islamist’ strongholds. Equip them with some heavy arms, such as combat engineering equipment (Tank dozers, Armoured heavy howitzers, heavy engineers transporters, D-9 Armoured bulldozers). Some of the strongholds will band together and form battalion sized units (600 – 800 men). They will build up arms and munitions stockpiles and all kinds of military infrastructure and bases. Supposing that about 15 of these units will come into existence, comprising about 10,000 personnel it is now time to move in the US Army and have them crush these battalion sized units using heavy fire power and equipment. TV crews must be ready to show large amounts of weapons and men taken, killed or destroyed. This will be the time to declare a full victory and quickly pull out most of the American troops. It will be wise to retain a considerable training unit to train the Iraqi Army up to division levels and also to keep an US Army brigade (3.000) in the desert near Baghdad. The war will continue for a long time between the Iraqi Army and the Sunni Islamists. The main thing however is having declared a victory and gotten the bulk of the troops out without losing face.

The Western media will lose most of its interest. The regime in Iraq will be reasonably secure because it is based on the biggest ethnic and religious blocks in the country and they will have access to the world market for arms. Obviously the Sunni ethnic group will whither and eventually many of them will emigrate to Sunni Muslim countries such as Syria and Saudi Arabia. The latter is contrary to American interests but there will be little that can be done to prevent it. Also the political, cultural and military influence of Iran will increase and although something can be done by keeping strong ties to the Shia leadership and supporting the Iraqi media, this is basically something that American policy have to take in their stride and is food for thought in case of planning of further military adventures in the future.

Important goals for the USA, such as a reasonable stable and peaceful society in Iraq, run by people who are friendly towards the USA and also a little dependent on them (because of American arms and training) will be met by this policy. Also it is a way to get the USA out without losing too much face. It will be problematic that the Kurds and the Shias will form power blocks and perhaps even clash with each other. This may cause involvement of Turkey (Kurds) and Iran (Shias).