With last fall’s U.S. Congressional elections, the Barack Obama ‘era’ has entered its final phase. Shortly before coming to power, the new U.S. president had sparked a massive uproar when he proclaimed a new ‘Pacific century.’ Since then, roughly two years before the end of his term in office, we can see more clearly. First and foremost, the proclamation of an allegedly new orientation towards the Pacific served the purpose to put Europe, and particularly Germany, under pressure so that they fill the allegedly emerging security gap. In reality, however, it is not the Pacific that forms the epicenter of U.S. geostrategic interests, neither – despite the Crimea crisis – is it the ‘old (European) world,’ but it is still the Middle East. For the latter’s fate defines whether American hegemony stands or falls.
America’s interest in this region is as old as the discovery of enormous Mideast oil reserves – albeit not at the moment, as is generally but falsely suggested, because of her own domestic oil supply. Thanks to its immense domestic energy resources, historically the U.S. has since the dawn of the last century been independent from importing oil. And with the current widespread use of fracking technology, it is once again about to become self-sufficient. As the new hegemonic power in the wake of the Second World War, the U.S. quickly realized that it could make rivaling world powers dependent on it by way of controlling the Middle East with its tremendous reserves of oil – the global economy’s fuel. Originally, the U.S., together with Saudi Arabia – its main ally in the region – established a global oil supply regime that could provide the West, China, and all BRICS countries with energy security. In this regime, Saudi Arabia arranged for constant overproduction. Thanks to this system that was politically controlled by the U.S., both its Western allies and its rivals enjoyed unimpeded oil supply at low prices – and all this despite great political turbulence raging during the entire second half of the last century. At the same time, the U.S. dollar, pegged to the oil price, acted as the global reserve currency.
However, when at the beginning of the 21st century the new economic giants China and India, with their almost inexhaustible hunger for energy, started organizing their own supply, the U.S.-dominated oil regime collapsed. The oil markets henceforth followed the pricing laws for exhaustible goods; oil prices therefore rose drastically and have subsequently been guided by market mechanisms.
The irony of history: Albeit the U.S. has lost the ability to steer the oil price – one of its central political leverages –, it has in another way been able to drastically strengthen its hegemony via the new prices set by the global market. For the high oil prices have multiplied the percentage share of oil trade within global trade, which caused massively higher demand for dollars and U.S. government bonds. As a result, for the foreseeable future the U.S. dollar will thereby remain the indisputable reserve currency.
It is precisely here that we can identify the actual basis for U.S. dominance: By way of an unlimited creation of the dollar as the globe’s reserve currency, the U.S. constitutes the only economy in the world that can finance several mega-projects at once – such as the bailing-out of banks and gigantic defense spending – through public debt and the issuing of government bonds. After the 2008 crash, no other national economy could have managed the banking crisis on its own without suffering any severe consequences. The Federal Deposit Insurance Corporation (FDIC), whose financial basis is essentially formed by the U.S Treasury’s government bonds, provided the U.S. with the required capital. The FDIC is an institution specifically created by the U.S. Congress to promote “stability and public confidence in the nation’s financial system.” Thereby, in fact, in 2009 the United States successfully nationalized all ailing banks in order to dispose its debt, and subsequently privatized them again. Meanwhile, in the European Union the banking crisis turned into a sovereign debt crisis.
Nonetheless, the global economic figures for the U.S. are anything but rosy: Its trade balance has witnessed deficits uninterruptedly since 1987, which until 2013 had led to an accumulated deficit of $9,627 billion. This is caused by the fact that the U.S. economy in parts, for a long time now, is no longer competitive vis-à-vis its main competitors – the EU, China, and Japan. Moreover, the fiscal deficit has chronically been on the rise, as result of from drastically growing defense spending. For decades, various U.S. administrations have ‘solved’ both problems – the trade deficit and concomitantly the constantly rising fiscal deficit – by allocating government bonds and engaging in money creation.
Technically, both objectives are being realized as follows: In order to conduct current government expenditures, the U.S. Treasury swaps government bonds with the FED in exchange for the latter’s freshly printed dollars – in 2013 alone, $1,100 billion were thus brought into circulation. The FED in turn places those government bonds on the world market and thereby continuously channels new capital into the U.S. economy, which provides for the balancing of the trade deficit. The price for this policy of money creation is the gigantic U.S. public debt, which climbed from $6,731 billion in 2003 to $17,556 billion in 2013. In the same time period, the public spending ratio rose from 60% to 108% (in comparison that of the EU ‘only’ rose from 60% to 87%).
No surprise then that such an economy suffering from trade as well as budgetary balance deficits has transformed into a consumptive surplus economy – amassing the largest national debt of all time. Between 2001 and 2013 only, these consumption surpluses accounted for a total of $11,550 billion. To put it plainly, per year an average $962.5 billion – capital corresponding with real economic performance – flowed from the rest of the world to the United States, while the latter confined itself to printing new money and bringing it into circulation.
To make it even more clear: In 2012, the $1,250 billion that flowed into the U.S. made up 7.9% of the country’s gross domestic product (GDP). This additional capital stock flowing into the economy also explains why the saving rate in the U.S. had drastically sunk during that period. Americans consumed nearly the totality of the goods and services they produced, while the rest of the world paid for investments allowing the U.S. economy to keep going.
Essentially, the U.S. has become to resemble Arab rentier states. Instead of oil, the U.S. uses the dollar – the international reserve currency – as leverage for appropriating its global purchasing power. While Saudi Arabia at least exports oil in exchange for other countries’ goods and services, the U.S. merely pumps paper into the global cash cycle.
The dollar as leverage
Here is the reason why: The significantly largest part of world trade is still being processed in dollars. This is why international demand for dollars is enormous, and is rising in proportion to world trade. Therefore, with the assistance of FED, the U.S. can continuously inject dollars into circulation, thereby financing its trade balance and budgetary deficits (and ultimately its constantly growing government debt). Hence, Nobel economics laureate Roger B. Myerson does not bother too much about U.S. debt: “U.S. debts are in dollars and the U.S. can print dollars. […] We may have inflation. But we are sure we can pay back the debt.”
Yet, contrary to Myerson’s contention, in reality the U.S. will never pay back its debt, which has already been clear in the 1970s to U.S. economist Michael Hudson: “To the extent that these Treasury IOUs are being built into the world’s monetary base they will not have to be repaid, but are to be rolled over indefinitely. This feature is the essence of America’s free financial ride, a tax imposed at the entire globe’s expense.”
In truth, the U.S. can simply absorb the excess purchasing power that is created all over the world. All of this, however, only works as long as oil is being traded in dollars and the status of the U.S. currency is not being jeopardized by other potential reserve currencies, such as the euro or China’s renminbi. After the collapse of the Bretton Woods system in 1973, almost without anyone noticing, the gold standard got replaced by oil henceforth backing the dollar: oil was increasingly in demand by all countries – except for oil exporters; it is a homogeneous and scarce commodity with rising prices. As such, oil trade as a proportion of world trade continuously rose from 1.7% in 1970 to 6% in 2001, and to 12% in 2011 – resulting in a massively rising demand for dollars. Moreover, the ‘oil standard’ freed the U.S. from all shackles of the Bretton Woods agreement; it could henceforth accumulate new debt even more uninhibitedly than before.
The military as instrument
Yet, ensuring that the global oil trade will be carried out in dollars for decades to come requires a Middle East controlled by the U.S. as complete as possible. This can be done through regime changes wherever necessary in order to nip possible anti-dollar alliances in the bud. In this vein, the neoconservative Project for the New American Century (PNAC) was from the very start targeted towards such a direction, with its willingness to create a ‘Greater Middle East’ that ought to be subordinated to the U.S. to the greatest possible extent. In PNAC documents there is no mention of creating conditions for peace but instead for wars, for expanding military bases all around the world, for military superiority on land, in water and in the air, for nuclear defense shields in the earth’s atmosphere, and above all for further increases in defense spending.
Over the last decade, the U.S. with its annual defense budget of $500 billion to $800 billion has spent as much on armaments as the rest of the world combined. Any other national economy would have collapsed long ago under such tremendous unproductive spending. Indeed, the arms race during the Cold War did lead to the demise of the Soviet Union. In contrast, after the end of the bloc confrontation U.S. arms spending rose exponentially from $150 billion in 1990 to the astronomic sum of $739 billion in 2011. The share of military expenditure as a proportion of GDP is currently 4% in the U.S., more than twice that of other Western industrialized nations. The opposition, otherwise loudly opposing administration policies of increasing other budget items, refrains from criticizing military spending as a matter of principle, the exception being when an increase in military spending is deemed too low. Nor is this massive military spending subject to any substantial debate in the media or in society at large. But how can these enormous arms expenditures be explained and how are they justified to the people? Ultimately, this is done by the fact that the U.S. also covers its military spending by government debt and printing money. Instead, financing the costs of war via direct taxes would mobilize people against any war. Both World Wars were financed by public debt, not only by European but also all U.S. administrations. Through the continuity of wars, especially since the First World War, the U.S. public debt has continued to grow.
The de facto monopoly over world money explains how a national economy like that of the U.S., which in many areas is simply not competitive and shows chronic trade balance deficits, can finance not only such mega-projects as the military-industrial complex and various quite expensive wars, but also has a relatively stable financial sector and a currency that attracts magnet-like surplus capital from all over the world.
A world without order and chaos as opportunity – for the U.S.
To maintain its hegemony, the U.S. must by all means prevent the emergence of rival powers and impede possible current as well as future threats that could emanate from oil states. The ideal condition for enforcing its own goals at a low cost would be the fragmentation of antagonistic power centers through ethnic and religious strife, civil wars, chaos and deep-seated mistrust in the Middle East – always following the well-known premise of ‘divide and rule.’ In this way, for decades to come no other power would be able to even consider trading oil in a currency other than dollars. In addition, as all the opponents need petrodollars to purchase weapons, the oil wells gush merrily on – as they currently do in Iraq despite daily acts of terror and chaos paralyzing the country.
In fact, we are currently experiencing tremendous changes towards such a chaotic state of affairs. Meanwhile, there have been regime changes in Afghanistan, Iraq, and Libya. In all these countries, discord and distrust, tribal conflicts, territorial separations among ethnic lines and mutual terror have been raging – particularly from Sunnis against Shi’ites. However, the regime change project has not ended here. Now, Syria and Iran have been put in crosshairs: U.S. neo-cons have spared no efforts to torpedo the nuclear negotiations with Iran. And Al-Qaeda – officially the main reason for the U.S. ‘war on terror’ – has in the meanwhile attained unprecedented strength. This prowess provides, in turn, the best basis of legitimacy for the U.S. military-industrial complex.
The old military-industrial complex
This way all the strands of ‘dollar imperialism’ come together: oil, dollars, and the military. The military-industrial complex is the main beneficiary of the ‘new American century’ of New Wars. Especially in the Middle East both a nuclear and a conventional arms race is taking place, which is increasingly putting the arms race of the 1970s that had led to three Gulf Wars in the shade. While the recycling of petrodollars for weapons has resulted in a dangerous vicious circle which could at any time trigger a conflagration across the whole region, the U.S. defense sector can remain confident: All U.S. administrations, regardless of their political persuasion, will continue with impunity the policy of public debt and thus keep on financing the military budget. Thanks to the rising demand for dollars and the FED’s continued money printing (also under the new Board of Governors Chair, Janet Yellen), the U.S. banking system has such extensive money reserves that the politically dangerous U.S. military industry can be easily financed.
However, ‘dollar imperialism’ is fundamentally a highly unstable construction, producing absurdities difficult to imagine. On the one hand, it keeps alive a gigantic apparatus of violence in the U.S. – at the expense of (and ultimately financed by) the whole of humanity. On the other, this construction is based on chaos, violence, and civil wars, particularly in the oil-rich regions that may therefore collapse at any time, plunging the world into serious crises. In short, what could be more absurd than the fact that money belonging to all of us helps finance an industrial sector whose ultimate survival depends on there never being peace on the planet? Even the NSA scandal – revealed thanks to Edward Snowden – appears in a new, very particular light when seen against the background of the prevailing dollar imperialism. For, of course, this highly unstable construction generates a seemingly limitless greed for the widest possible control of all communication channels, including spying on the heads of all foreign administrations, even those of friendly states. Despite worldwide outrage, in his January 2014 speech, Barack Obama emphasized that “[o]ur intelligence agencies will continue to gather information about the intentions of governments [...] around the world.”
The massive U.S. security apparatus is being legitimized – today as in the past – exclusively on the grounds of national interests. When the NSA was founded in 1952, there was no talk of Al-Qaeda and ‘9/11,’ rather of the benefits and interests of a then aspiring hegemonic power. Today, the NSA is above all concerned with recognizing in due time all the steps and movements in the world that could endanger the current status of the U.S. currency, and nipping them in the bud by any means necessary. It thus functions in the interest of the influential alliance between the military-industrial complex and the U.S. financial sector, which is dependent on such knowledge for its own survival.
On the other hand, it has become clear that the NSA poses the biggest threat to democracy in the U.S. and in the West as a whole – and in a way in which President Dwight Eisenhower could not even imagine when he warned about the military-industrial complex in his farewell address on January 17, 1961: “This conjunction of an immense military establishment and a large arms industry is new in the American experience. […] In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist. We must never let the weight of this combination endanger our liberties or democratic processes.”
Roughly 50 years after Eisenhower’s warning, the U.S. has taken a major step ‘forward.’ This powerful complex has been struggling for its continued existence since the end of the bloc confrontation and has done everything possible to permanently consolidate American hegemony. It is indeed not the case, as was eagerly anticipated, that the world has become safer and more peaceful since 1989. On the contrary, it has become more insecure and warlike – as was the case at the dawn of the last century. This makes it even more urgent that the international community finally – and still perhaps just in time – defends itself against this highly dangerous development.
The alternative: The global energy transition and the diversification of reserve currencies
The question of democratizing the global economy by abolishing the U.S. monopoly over world money must definitely be placed on the global political agenda. In the long term, this goal can be most effectively attained by a global energy revolution – away from fossils and towards extensively expanding renewable energies. In the short term, a range of reserve currencies can and ought to be established, which would finally account for the real economic balance of forces.
One such alternative would also serve the long-term interests of American citizens and would contribute to the U.S. finally offloading the parasitic and ultimately unproductive parts of its economy – namely, the alliance between finance and the military. On the other hand, the example of Barack Obama, who had to move away from nearly all his positive reform initiatives, shows that America on her own and using her own abilities is barely capable of pushing back this all-powerful alliance including the political forces sustaining it.
This leads to Europe and Asia assuming responsibility: Only a new reserve currency – pushed forward by the EU and China – can help the U.S. leave its previous path of increasing prosperity through imperialist methods, to the benefit of its own immeasurable productive potentials. The BRICS countries’ establishment in Brazil in July 2014 of an international development bank and a monetary fund could evolve into a serious competitor to the Bretton Woods system. You could imagine the dollar being no longer the only world currency, and necessarily losing its stability in a lively international competition involving the euro and renminbi. International excess capital would then be withdrawn, to a considerable extent, from the U.S. and invested in the euro or renminbi zone. The previous U.S. policy of public debt by issuing government bonds would stall, and the bipartisan taboo on tackling military spending would lose its validity. In order to reduce chronic budget deficits, U.S. administrations would then have no other choice but to drastically cut the disproportionately high military budget.
How would such a new situation impact American hegemony? Inside the U.S. there would – finally – emerge a fierce debate over the sense and non-sense of military spending as well as its global military capacities (including over 800 bases) – with the prospect of the U.S. demilitarizing to a level corresponding to its actual economic weight. As such, the U.S. would no longer be the ‘only remaining superpower,’ but merely one among several world powers. Wholly new global power structures and balances of power would then become conceivable: Asia but also the Middle East, South America, Africa, and even Europe would have real opportunities to come together in cooperative and common-security regional architectures. At the same time, nationalistic and racist resentments and conflicts would strongly lose traction. Perhaps international cooperation would also finally shrink the financial sector to a reasonable level – in so doing also significantly increasing the possibility of an equitable distribution of income.
In short, we would finally have the prospect of a world with more justice and less financial speculation – a more democratic and peaceful world. Yet, the losers of such a scenario would be the military-industrial complex, the financial sector and its beneficiaries, and above all the neoconservatives. This is why we must expect fierce resistance. However, in the interest of a more just and peaceful world, this fight is nothing less than inevitable.
Dr. Mohssen Massarrat is professor emeritus for politics and economics at the University of Osnabrück (Germany). He has published almost 20 books in the fields of political economy, democracy theory, U.S. hegemony, globalization, peace and conflict research, and the Middle East.
The article is a slightly updated translation from German to English by Ali Fathollah-Nejad. The original article was published by the renowned German political monthly Blätter für deutsche und internationale Politik (Berlin).