The proposed Iranian Oil Bourse will accelerate the fall of the American Empire.

The Proposed Iranian Oil Bourse --

Abstract: By Krassimir Petrov, Ph.D.--

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 went 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. The Great Depression, with its preceding inflation from 1921
to 1929 and its subsequent ballooning government deficits, had
substantially increased the amount of currency in circulation, and thus
rendered the backing of U.S. dollars by gold impossible. This led
Roosevelt to decouple 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 Bretton Woods 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. It was 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. An Empire would not 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. 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. Essentially, the U.S. 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 it could not do anything about it.

From that point on, 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 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.
Because the world had to buy oil from the Arab oil countries, it had
the reason to hold dollars as payment for oil. 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 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.

The man that actually did demand Euro for his oil was Saddam Hussein in
2000. At first, his demand was met with ridicule, later with neglect,
but as it became clearer that he meant business, political pressure was
exerted to change his mind. When other countries, like Iran, wanted
payment in other currencies, most notably Euro and Yen, the danger to
the dollar was clear and present, and a punitive action was in order.
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. Economically speaking, in order for an empire to initiate
and conduct a war, its benefits must outweigh its military and social
costs. Benefits from Iraqi oil fields are hardly worth the long-term,
multi-year military cost. 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 Euro. 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 on 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. forever, but have
also had their natural pull from Europe. So far, they have had many
reasons to stick with the 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 here 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 must
have 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'état-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
this 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.

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About the Author: Krassimir Petrov (Krassimir_Petrov@xxxxxxxxxxx) 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 U. A. E.

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