By Hazel Henderson and - -
ST. AUGUSTINE, Apr 1 2003 (IPS)

In even the best-laid human plans, events rarely unfold as predicted, even by experts. One surprise scenario is rooted in the close relationship between oil, dollars, gold, and the euro, writes Hazel Henderson, author of \’\’Beyond Globalisation\’\’, \’\’Building a Win-Win World\’\’, and other books. In this article, the author writes that countries that formerly held mostly US dollars in their currency reserves have begun to diversify into euros, where they perceive less risky fundamentals. What happens if global investors continue pulling out of the US and the dollar keeps falling? What if OPEC decides to officially re-denominate their oil in euros, since most of the their customers are in Europe anyway? The US, heavily dependent on imported oil, benefits considerably from OPEC\’s US dollar pricing.

In even the best-laid human plans, events rarely unfold as predicted, even by experts. These surprises are mostly the result of ”blind spots”, or the fact that experts use different models or languages, making communication difficult.

One such surprise scenario is rooted in the close relationship between oil, dollars, gold, and the euro. In 1973, OPEC countries quadrupled the price of their oil, which was denominated in US dollars. The US dollar thus became the world’s defacto reserve currency. Over the years, the world was flooded with ”petro-dollars”, which were recycled through banks as loans.

In 1971, President Richard Nixon unpegged the dollar from gold. All currencies since that time are called ”fiat” currencies –backed only by the faith markets have in a country’s government and its economic fundamentals. Central banks since ”manage” their currencies by buying and selling them on the open market, raising or lowering interest rates, and other techniques.

The currency, oil, and gold markets have become very volatile, vulnerable to investors’ and speculators’ expectations about the future — from US foreign policy to the expansion of the European Union.

In the past year, the US dollar has lost about 20 percent of its value against the euro. The George W. Bush administration has played up the bright side: the cheaper dollar makes it easier for US exporters to sell abroad, and increasing exports is important because the US has imported its way into a whopping trade deficit — currently 5.2 percent of US GDP.

But global investors and currency speculators are wary of the size of this deficit, as well as the bursting of the US stock market bubble, accounting scandals, high corporate and consumer debt, a near-zero savings rate, rising budget deficits due to Bush’s tax cuts and jumping military spending, the Iraq war, and the new Bush doctrine of preemptive attacks. So they started unloading dollars and US assets — not surprising.

But the deeper scenario holds many surprises for the US. Countries that formerly held mostly US dollars in their currency reserves began to diversify into euros, where they perceived less risky fundamentals: Europe’s trade surplus, higher rates of savings, less risky foreign commitments, etc. There were other motives for moving into the euro: opposition of many countries to US military ”unilateralism” and the Iraq war (which many believe was always about oil and breaking OPEC’s grip), as well as US bully tactics at the United Nations, trashing treaties on the global warming, anti-ballistic missiles, chemical and biological weapons, the criminal court, etc. The best non-violent protest strategy for many countries was to shift some of their dollar reserves into euros.

Today, the euro has taken its place alongside the dollar as the world’s other global reserve currency, now accounting for some 35 percent of global trade and reserve holdings. This new reality makes for a more stable world and takes the unsustainable burden of acting as sole reserve currency off the US dollar.

[This new situation seems a surprise to the Bush Administration, which continues expanding US overseas commitments, re-building Iraq, offering aid packages to Turkey, Pakistan, and other countries whose support is sought, and pushing more tax cuts. While Bush tells the US population to continue shopping, travelling, and enjoying the American way of life, federal deficits grow, domestic programmes are cut, and half of the states aredeep in budget crises.]

What happens if global investors continue pulling out of the US and the dollar keeps falling –many market players expect it to drop another 20 percent– and if more countries that have lost money on the dollar’s fall continue buying more euros?

Even more important, what if OPEC decides to officially re-denominate their oil in euros, given that most of the their customers are in Europe? The US, heavily dependent on imported oil, benefits considerably from OPEC’s US dollar pricing.

Thwarting Bush’s global dollar diplomacy and its designs on breaking OPEC’s oil pricing power provide additional reasons for OPEC to switch to payment in euros. If this were to happen, the US would have to buy euros with dollars before it could buy OPEC oil. The dollar would fall further and the euro would rise more. The US economy would adjust to gasoline prices of five dollars a gallon, the average world price.

The bad news would be a deeper US recession. The good news would be that US exports would flourish, Detroit would accelerate its own fuel-efficient car production, the solar and renewable energy technologies would be fully capitalised as a new sustainability sector of the US economy, providing millions of new jobs. And the Bush administration would have to pull back from its over-commitment to the global war on evil and shift its priorities to funding education, homeland security, and federal grants to help states fund their new mandates. (END/COPYRIGHT IPS)

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