The Proposed Iranian Oil Bourse
Abstract: the Proposed Iranian Oil Bourse Will Accelerate the Fall of the
American Empire by Krassimir Petrov, Ph.D.
http://www.321gold.com/editorials/petrov/petrov011706.html

I	Economics of Empires
II	Iranian Oil Bourse

I Economics of Empires

01/19/06 "Gold Eagle" --

A nation-state taxes its own citizens, while an empire taxes other
nation-states. The history of empires, from Greek and Roman, to Ottoman and
British, teaches that the economic foundation of every single empire is the
taxation of other nations.

The imperial ability to tax has always rested on a better and stronger
economy, and as a consequence, a better and stronger military. One part of
the subject taxes goes to improve the living standards of the empire; the
other part went to strengthen the military dominance necessary to enforce
the collection of those taxes.

Historically, taxing the subject state has been in various forms -- usually
gold and silver, where those were considered money, but also slaves,
soldiers, crops, cattle, or other agricultural and natural resources,
whatever economic goods the empire demanded and the subject-state could
deliver. Historically, imperial taxation has always been direct: the subject
state handed over the economic goods directly to the empire.

For the first time in history, in the twentieth century, America was able to
tax the world indirectly, through inflation. It did not enforce the direct
payment of taxes like all of its predecessor empires did, but distributed
instead its own fiat currency, the U.S. Dollar, to other nations in exchange
for goods with the intended consequence of inflating and devaluing those
dollars and paying back later each dollar with less economic goods -- the
difference capturing the U.S. imperial tax.

Here is how this happened.

Early in the 20th century, the U.S. economy began to dominate the world
economy. The U.S. dollar was tied to gold, so that the value of the dollar
neither increased, nor decreased, but remained the same amount of gold.

However, the Great Depression, with its preceding inflation from 1921 to
1929 and its subsequent ballooning government deficits, substantially
increased the amount of currency in circulation, and thus rendered the
backing of U.S. dollars by gold impossible. This led president Franklin
Delano Roosevelt to de-couple the dollar from gold in 1932.

Up to this point, the U.S. may have well dominated the world economy, but
from an economic point of view, it was not an empire. The fixed value of the
dollar did not allow the Americans to extract economic benefits from other
countries by supplying them with dollars convertible to gold.

Economically, the American Empire was born with the Bretton Wood agreement
in 1945. The U.S. dollar was not fully convertible to gold, but was made
convertible to gold only to foreign governments. This established the dollar
as the reserve currency of the world.

This became possible because during WWII, the United States had supplied its
allies with provisions, demanding gold as payment, thus accumulating
significant portion of the world's gold. No Empire would have been possible
if, following the Bretton Woods arrangement, the dollar supply was kept
limited and within the availability of gold, so as to fully exchange back
dollars for gold. However, the guns-and-butter policy of the 1960's was an
imperial one: the dollar supply was relentlessly increased to finance
Vietnam and LBJ's Great Society. Most of those dollars were handed over to
foreigners in exchange for economic goods, without the prospect of buying
them back at the same value.

Thus the increase in dollar holdings of foreigners via persistent U.S. trade
deficits was tantamount to a tax-the classical inflation tax that a country
imposes on its own citizens, this time around an inflation tax that U.S.
imposed on rest of the world.

When in 1970-1971 foreigners demanded payment for their dollars in gold, The
U.S. Government defaulted on its payment on August 15, 1971. While the
popular spin told the story of "severing the link between the dollar and
gold", in reality the denial to pay back in gold was an act of bankruptcy by
the U.S. Government.

Yet in so doing, the USA essentially declared itself an Empire. It had
extracted an enormous amount of economic goods from the rest of the world,
with no intention or ability to return those goods, and the world was
powerless to respond -- the world was taxed, and could do nothing about it.

>From that point on, in order to sustain the American Empire and to continue
to tax the rest of the world, the United States had to force the world to
continue to accept ever-depreciating dollars in exchange for economic goods,
and to have the world hold more and more of those depreciating dollars. It
had to give the world an economic reason to hold them ...

... and that reason, of course, was oil. In 1971, as it became clearer and
clearer that the U.S Government would not be able to buy back its dollars in
gold, it made in 1972-73 an iron-clad arrangement with Saudi Arabia to
support the power of the House of Saud in exchange for accepting only U.S.
dollars for its oil. The rest of OPEC was to 'follow suit' and also accept
only dollars.

Thence, because the world had to buy oil from the Arab oil countries, it had
reason to accumulate dollars -- for payments for oil. Ergo, because the
world needed ever increasing quantities of oil at ever increasing oil
prices, the world's demand for dollars could only increase. Even though
dollars could no longer be exchanged for gold, they were now exchangeable
for oil.

The economic essence of this arrangement was that the dollar was now backed
by oil. As long as that was the case, the world had to accumulate increasing
amounts of dollars, because they needed those dollars to buy oil. As long as
the dollar was the only acceptable payment for oil, its dominance in the
world was assured, and the American Empire could thus continue to tax the
rest of the world.

If, for any reason, the dollar lost its oil backing, the American Empire
would cease to exist. Thus, Imperial survival dictated that oil be sold only
for dollars. It also dictated that oil reserves were spread around various
sovereign states that weren't strong enough, politically or militarily, to
demand payment for oil in something else. If someone demanded a different
payment, he had to be convinced, either by political pressure or military
means, to change his mind.

One man that actually did demand euros for his oil was Saddam Hussein, in
2000. At first, his demand was met with ridicule, and later with neglect,
but as it became clearer that he meant business, political pressure was
exerted to change his mind. With other countries, including Iran,
subsequently wanting payment for oil in other currencies, most notably euros
and Japanese yen, the danger to the dollar became clear and present, and a
punitive action was in order.

Thus Bush's Shock-and-Awe in Iraq was not about Saddam's nuclear
capabilities, about defending human rights, about spreading democracy, or
even about seizing oil fields; it was about defending the dollar, ergo the
American Empire. It was about setting an example that anyone who demanded
payment in currencies other than U.S. dollars would be likewise punished.

Many have criticized Bush for staging the war in Iraq in order to seize
Iraqi oil fields. However, those critics can't explain why Bush would want
to seize those fields -- he could simply print dollars for nothing and use
them to get all the oil in the world that he needs. He must have had some
other reason to invade Iraq.

History teaches that an empire should go to war for one of two reasons: (1)
to defend itself or (2) benefit from war; if not, as Paul Kennedy
illustrates in his magisterial The Rise and Fall of the Great Powers, a
military overstretch will drain its economic resources and precipitate its
collapse. Thus, economically speaking, in order for an empire to initiate
and conduct a war, its benefits must outweigh its military and social costs.
The potential benefits from Iraqi oil fields could hardly be seen as worth
the long-term, multi-year military cost of the USA's attack. Instead, Bush
must have gone into Iraq to defend his Empire.

Indeed, this is the case: two months after the United States invaded Iraq,
the Oil for Food Program was terminated, the Iraqi Euro accounts were
switched back to dollars, and oil was sold once again only for U.S. dollars.
No longer could the world buy oil from Iraq with euros. Global dollar
supremacy was once again restored. 

Bush descended victoriously from a fighter jet and declared the mission 
accomplished -- he had successfully defended the U.S. dollar, and thus the
American Empire.

II. Iranian Oil Bourse

The Iranian government has finally developed the ultimate "nuclear" weapon
that can swiftly destroy the financial system underpinning the American
Empire.

That weapon is the Iranian Oil Bourse, slated to open in March 2006.

It will be based upon a euro-oil-trading mechanism that naturally implies
payment for oil in Euro.

In economic terms, this represents a much greater threat to the hegemony of
the dollar than Saddam's, because it will allow anyone willing either to buy
or to sell oil for Euro to transact on the exchange, thus circumventing the
U.S. dollar altogether.

 If so, then it is likely that almost everyone will
eagerly adopt this euro oil system:

-- the Europeans will not have to buy and hold dollars in order to secure
their payment for oil, but would instead pay with their own currencies. The
adoption of the euro for oil transactions will provide the European currency
with a reserve status that will benefit the European at the expense of the
Americans.

-- the Chinese and the Japanese will be especially eager to adopt the new
exchange, because it will allow them to drastically lower their enormous
dollar reserves and diversify with euros, thus protecting themselves against
the depreciation of the dollar. 

One portion of their dollars they will still want to hold onto; a second 
portion of their dollar holdings they may decide to dump outright; a third 
portion of their dollars they will decide to use up for future payments 
without replenishing those dollar holdings, but building up instead their 
euro reserves.

-- the Russians have inherent economic interest in adopting the Euro -- the
bulk of their trade is with European countries, with oil-exporting
countries, with China, and with Japan. Adoption of the Euro will immediately
take care of the first two blocs, and will over time facilitate trade with
China and Japan. Also, the Russians seemingly detest holding depreciating
dollars, for they have recently found a new 'religion' with gold. Russians
have also revived their nationalism, and if embracing the Euro will stab the
Americans, they will gladly do it and smugly watch the Americans bleed.

-- the Arab oil-exporting countries will eagerly adopt the Euro as a means
of diversifying against rising mountains of depreciating dollars. Just like
the Russians, their trade is mostly with European countries, and therefore
will prefer the European currency both for its stability and for avoiding
currency risk, not to mention their jihad against the Infidel Enemy.

Only the British will find themselves 'between a rock and a hard place'.
They have had a strategic partnership with the U.S. seemingly forever, but
have also had their natural 'pull' from Europe. So far, they have had many
reasons to 'stick with a winner'. However, when they see their century-old
partner falling, will they firmly stand behind him or will they deliver the
coup de grace?

Still, we should not forget that currently the two leading oil exchanges are
the New York's NYMEX and the London's International Petroleum Exchange
(IPE), even though both of them are effectively owned by the Americans. It
seems more likely that the British will have to go down with the sinking
ship, for otherwise they will be shooting themselves in the foot by hurting
their own London IPE interests.

It is noteworthy that for all the rhetoric about the reasons for the
surviving British Pound, the British most likely did not adopt the euro
namely because the Americans pressured them not to: otherwise the London IPE
would have had to switch to Euros, thus mortally wounding the dollar and
their strategic partner.

At any rate, no matter what the British decide, should the Iranian Oil
Bourse accelerate, the interests that matter -- those of Europeans, Chinese,
Japanese, Russians, and Arabs -- will eagerly adopt the Euro, thus sealing
the fate of the dollar. Americans cannot allow this to happen, and if
necessary, will use a vast array of strategies to halt or hobble the
operation's exchange:

-- Sabotaging the Exchange: this could be a computer virus, network,
communications, or server attack, various server security breaches, or a
9/11-type attack on main and backup facilities.

-- Coup d'etat -- this is by far the best long-term strategy available to
the Americans.

-- Negotiating Acceptable Terms & Limitations -- this is another excellent
solution to the Americans. Of course, a government coup is clearly the
preferred strategy, for it will ensure that the exchange does not operate at
all, and does not threaten American interests. However, if an attempted
sabotage or coup d'etat fails, then negotiation is clearly the second-best
available option.

-- Joint U.N. War Resolution -- this will be, no doubt, hard to secure given
the interests of all other member-states of the Security Council. Feverish
rhetoric about Iranians developing nuclear weapons undoubtedly serves to
prepare this course of action.

-- Unilateral Nuclear Strike -- this is a terrible strategic choice, for all
the reasons associated with the next strategy, the Unilateral Total War. The
Americans will likely use Israel to do their dirty nuclear job.

-- Unilateral Total War -- this is obviously the worst strategic choice.
First, the U.S. military resources have been already depleted with two wars.
Secondly, the Americans will further alienate other powerful nations. Third,
major dollar-holding countries may decide to quietly retaliate by dumping
their own mountains of dollars, thus preventing the U.S. from further
financing its militant ambitions. Finally, Iran has strategic alliances with
other powerful nations that may trigger their involvement in war; Iran
reputedly has such alliance with China, India, and Russia, known as the
Shanghai Cooperative Group, (a.k.a. Shanghai Coop), and a separate pact with
Syria.

Whatever the strategic choice, from a purely economic point of view, should
the Iranian Oil Bourse gain momentum, it will be eagerly embraced by major
economic powers and will precipitate the demise of the dollar. The
collapsing dollar will dramatically accelerate U.S. inflation and will
pressure upward U.S. long-term interest rates. At that point, the Fed will
find itself between Scylla and Charybdis -- between deflation and
hyperinflation -- it will be forced fast either to take its "classical
medicine" by deflating, whereby it raises interest rates, thus inducing a
major economic depression, a collapse in real estate, and an implosion in
bond, stock, and derivative markets, with a total financial collapse, or
alternatively, to take the 'Weimar' way out by inflating, whereby it pegs
the long-bond yield, raises the Helicopters and drowns the financial system
in liquidity, bailing out numerous LTCMs and hyperinflating the economy.

The Austrian theory of money, credit, and business cycles teaches us that
there is no in-between Scylla and Charybdis. Sooner or later, the monetary
system must swing one way or the other, forcing the Fed to make its choice.
No doubt, Commander-in-Chief Ben Bernanke, a renowned scholar of the Great
Depression and an adept Black Hawk pilot, will choose inflation. Helicopter
Ben, oblivious to Rothbard's America's Great Depression, has nonetheless
mastered the lessons of the Great Depression and the annihilating power of
deflations. The Maestro has taught him the panacea of every single financial
problem-to inflate, come hell or high water. He has even taught the Japanese
his own ingenious unconventional ways to battle the deflationary liquidity
trap. Like his mentor, he has dreamed of battling a Kondratieff Winter. To
avoid deflation, he will resort to the printing presses; he will recall all
helicopters from the 800 overseas U.S. military bases; and, if necessary, he
will monetize everything in sight. His ultimate accomplishment will be the
hyperinflationary destruction of the American currency, and from its ashes
will rise the next reserve currency of the world -- that barbarous relic
called gold.

<...>

About the Author: Krassimir Petrov ( Krassimir_Petrov@hotmail.com) has
received his Ph. D. in economics from the Ohio State University and
currently teaches Macroeconomics, International Finance, and Econometrics at
the American University in Bulgaria.  He is looking for a career in Dubai or
the United Arab Emirates.

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Warning: "Back the dollar with gold, and it's a solid currency. Back the
dollar with a solid manufacturing economy, and it's a stable currency. Back
the dollar with petroleum trading and military force, and you're o.k. - so
long as you've got enough military force to prevent oil-rich countries from
selling their oil outside the dollar. Because if that happens, then the
dollar is backed with nothing but propaganda and it will collapse." -- Stan
Goff
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Revised: S: 17:58 Fri 2006/02/10 44 TW12 3HD
F: 18:45 Fri 2006/02/10 44 TW12 3HD
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