In a country where people of a certain political persuasion whine endlessly about privilege, it is remarkable that they overlook the greatest privilege of all. This is the privilege conferred upon them by dint of having – or having unique access to – the world’s reserve currency. In the 1960s, Jacques Rueff, economic advisor to De Gaulle, called it an:
“exorbitant privilege [to run a] deficit without tears, [to] lend without borrowing, and purchase without paying.”
Where the rest of the world had to generate a dollar’s worth of value with which to purchase a dollar bill, the US Treasury could simply print one for the cost of the paper and the ink. In those days, the US Dollar was supposed to be pegged to gold at a fixed exchange of $35 per ounce. Except of course, successive US administrations had played fast and loose with currency printing to fund wars abroad and the “great society” welfare program at home. The result was inflation… but not any old inflation. Because the rest of the world had to settle trade accounts in dollars, the USA effectively exported its inflation to its trading partners; notably the European economies that had been in relative decline since the end of the coal age.
In response, European governments insisted that America settle its trade deficit in gold – and briefly, destroyers loaded with gold from Fort Knox made the trip across the Atlantic to Europe. By 1971 though, two things were clear. First, there was not enough gold in the vaults to settle accounts. And second, that attempting to do so resulted in all of that inflation returning to American shores. And so, on August 15 1971, Nixon “temporarily” removed the dollar from the gold standard. Thereafter, the world’s currencies would be free to exchange for whatever nominal value they were considered worth.
In reality, however, Nixon arrived at a different means of ensuring that the dollar privilege would be maintained. In exchange for guaranteeing the rule of the House of Saud over Saudi Arabia, Saudi-led OPEC would ensure that the world’s oil would be traded in dollars. And so, the petrodollar was born and the western economies got to enjoy one last blowout before everything went belly-up.
The UK had long since established itself as the world’s money launderer, establishing its network of secret offshore havens where the Soviet Bloc states and other “undesirable” regimes could park their dollars without risking confiscation by the US authorities. Where these “Eurodollars” led, Petrodollars followed. Moreover, the UK even began to pump some oil and gas of its own, allowing its people to enjoy a standard of living far higher than its economic base could otherwise support. As Guardian writer Ian Jack reminisced a few years ago:
“I had the idea… when I was walking through a London square around the time of the City’s deregulatory ‘Big Bang’ and Peregrine Worsthorne coining the phrase ‘bourgeois triumphalism’ to describe the brash behaviour of the newly enriched: the boys who wore red braces and swore long and loud in restaurants. Champagne was becoming an unexceptional drink. The miners had been beaten. A little terraced house in an ordinary bit of London would buy 7.5 similar houses in Bradford. In the seven years since 1979, jobs in manufacturing had declined from about seven million to around five million, and more than nine in every 10 of all jobs lost were located north of the diagonal between the Bristol channel and the Wash . And yet it was also true that more people owned more things – tumble dryers and deep freezers – than ever before, and that the average household’s disposable income in 1985 was more than 10% higher than it had been in the last days of Jim Callaghan’s government.”
As a debt-based bubble floating on a raft of dodgy dollars upon a sea of oil and gas began to inflate, so Britons slowly recovered from the decay and division of the late 1970s and early 1980s. By the mid-1990s, with the Cold War behind us, with house prices rising faster than wages, and with Bill Clinton and Tony Blair ushering in a new version of militant neoliberalism, we could convince ourselves that we had entered an economic “Great Moderation” and a “new American century” in which the nations and peoples of the world would have to bow down before us.
So accustomed are western populations to this ability to use their supposed economic dominance to bring rogue states to heel, that your Russophobic friend on social media – who until a fortnight ago was a world-renowned epidemiologist, but now turns out to be an expert in geopolitics – has been baying for ever harsher sanctions irrespective of the damage they might do to the already weakened economies of Europe and the USA. As another observer of current events remarked this morning though:
“Warfare is not a game for children. It is time to stop Washington’s public opinion war in the troubled situation, as the opinion war does not serve any purpose other than to encourage new confrontations…
“It is important to see that both Russia and Ukraine have a certain degree of intention to negotiate, and the possibility of a political and diplomatic solution still exists. At the same time, the emerging powers, including India, Brazil and Argentina, did not follow the US ‘condemnation,’ but issued rational and pragmatic voices. These voices represent the views of a significant part of the international community, only simply ignored by Western media.”
That is part of an editorial from Global Times – the official English language journal of the Chinese government – and it should send a chill down the spine of any American or European who cares to read it. Because the sanctions that US and European States imposed upon Russia yesterday confirmed something that the wider world has feared for many years – that no country is safe so long as they remain within the dollar-based central bank system.
It is possible – although highly unlikely – that the sanctions imposed upon Russia will rapidly result in an economic collapse and a popular uprising to overthrow the Putin government. That, at least, is what your social media friend – egged on by the establishment media – thinks will happen. But when did sanctions ever work in the past? As Lee Jones, Professor of Political Economy and International Relations, writing for UnHerd noted on Monday:
“The fundamental problem is that sanctions are based on a dubious understanding of human behaviour. They are a quintessentially liberal instrument, resting on the assumption that every man has his price: if I impose economic costs on you, you will revise the cost-benefit analysis of your course of action, and change your behaviour accordingly.
“In the real world, however, many regimes and their supporters are willing to endure colossal economic costs to pursue their political and security goals. Saddam Hussein’s Ba’ath Party regime preferred to see Iraq’s economy and society destroyed rather than relinquish power. Fidel Castro’s regime withstood a punishing US embargo for decades. Iran has suffered serious economic harm under Western sanctions without relinquishing its nuclear programme…
“Classically, comprehensive embargoes seemed to be guided by a ‘naïve theory’ of sanctions, whereby economic suffering is expected to compel the population to rise up against their wicked leaders. But this rarely, if ever, happens. If anything, economic immiseration tends to fragment and weaken the population, who become absorbed by the struggle to subsist and more reliant on government help — as seen in Iraq.”
These states, note, were anything but economically independent. And sanctions were imposed at a time when western dominance was still unchallenged. Even so, each state could illegally bust sanctions by trading oil for food and consumer goods on the black market. But none could erect a trade barrier of their own and operate as an autocracy. Nor, of course, can the European states who are busily devising new sanctions to inflict hardship on Russia. The UK struggles to produce 50 percent of the food it consumes, while the Germans import 40 percent of their gas from Russia. Even the USA, which is more capable – with considerable hardship – of running an autarkic system continues to need Russian heavy oil to maintain its diesel production (although it could lift its sanctions on Venezuela).
Russia – in part as a consequence of its collapse and recovery – is far better placed to be autarkic. It is the world’s biggest exporter of wheat, timber, nitrate and phosphate fertiliser and of unfinished iron and steel. It is also a major exporter of critical metals like palladium which are essential to maintaining a high-tech industrial economy. Suffice to say that nobody in Russia is going to go cold or hungry as a result of western sanctions, even if the Russian metropolitan managerial class has to live without shopping trips to London and holidays in the Mediterranean. But the west must face up to a very real risk of shivering in the dark next winter in the event of countersanctions from Russia.
Nor is Russia in quite the desperate state financially that so much of the western establishment media is claiming. Russia is among the least indebted states in the world, and the debt which has just been sanctioned is not owed to other central banks, but to private institutions so that, in effect, we have forced Russia to default on its debts, causing hardship to western financial institutions rather than to Russia. Indeed, any sanction which prevents Russia continuing to pay western corporations – such as the European ban on Russian air travel – is in practice the west shooting itself in the foot.
It goes without saying that Russia has been preparing to face western sanctions for longer than the current crop of western leaders took to dream them up. In 2018, it exchanged almost all of its dollar holdings for gold. And it is not alone in doing so, as Darya Korsunskaya and Alexander Marrow at Reuters reported:
“This process of dedollarisation is taking place not only in our country, but in many countries around the world that have started to have concerns about the reliability of the world’s reserve currency.”
This is why China’s mention of Brazil, India and Argentina as opponents of the sanctions against Russia is so important. It has long been known that the BRICS countries have been working on a gold-backed alternative to the dollar as a medium of international trade. But the one thing which has prevented its adoption has been the perception that the USA and Europe follow the rule of law more than China, and that as such, having dollar holdings in the USA or Europe is safer. The sanctioning of the Russian central bank – and to a lesser degree the exclusion from the Swift system – against the advice of the Wall Street bankers, makes clear that this perception is in error. No country’s holdings are safe in the event that the US administration decides to turn on that country:
“Booting Russia from the critical global system – which handles 42 million messages a day and serves as a lifeline to some of the world’s biggest financial institutions – could backfire, sending inflation higher, pushing Russia closer to China and shielding financial transactions from scrutiny by the West. It might also encourage the development of a SWIFT alternative that could eventually damage the supremacy of the U.S. dollar.”
Whatever else has happened over the past week, the western technocracy’s dream of a unipolar global economy has come to an end. Despite years of lobbying by the US, India has turned toward Beijing, as have Latin American states like Argentina and Brazil, Gulf states like the United Arab Emirates, together with a large part of sub-Saharan Africa, raising the threat of an alternative, gold-backed trading system – including China’s CIPS alternative to Swift – encompassing the majority of the world’s production, which would render obsolete the “services” that countries like the UK provide within the dollar system.
Perhaps the more immediate threat to Europe is that Russia decides to retaliate by switching off the gas supply. This though is unlikely in the short-term. Indeed, it is a measure of the very different form of warfare currently occurring in Ukraine that despite the rehashing of the 108-year-old “plucky little Belgium” story, replete with the modern equivalent of bayonetted babies and mown-down nuns – the gas supply – along with water, electricity, internet, telephone and railways – has been maintained throughout. One reason for this is that even the current western leadership is not insane enough to sanction Russian oil and gas exports. And so, we will continue to pay for Russia’s intervention in Ukraine despite the other sanctions. But primarily it is because whatever else its motives might be, Russia has no interest in creating a NATO-style failed state on its southwestern border.
Longer-term though, things may not be so rosy. The response to the pandemic – and in the UK, the disruption from Brexit – has seriously weakened the western currencies. Inflation – which central banks spent more than a decade to rekindle – has finally returned in its most dangerous, supply-side variant (i.e., the type of inflation which cannot be combatted with higher interest rates without crashing the economy). This is already weakening the pound, dollar, euro and yen in international trade – thereby furthering the rise in the cost of imported energy and commodities. And as our economies weaken, Russia may well decide not to renew the various contracts it has to supply the west with everything from oil and gas to wheat, fertiliser and timber.
As Tim Morgan has shown, the energy cost at which the western economies are sustainable was passed long ago. The less complex economies of a new BRICS block may, in contrast, continue to grow for a few more years. And in that time, there is no universal law which says that the USA’s – and to a lesser extent Europe and the UK’s – exorbitant privilege of operating the world’s reserve currency must continue indefinitely.
Often in life there are things which you disapprove of but can do nothing about. For a generation of westerners who have grown up without the threat of war, Russia’s incursion into Ukraine may be one such. But in the haste of insisting that “something must be done,” our leaders raise the hubristic risk of an economic blowback that we are ill-prepared to cope with. As the old saying goes, “be careful what you wish for…”
As you made it to the end…
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