The Geopolitics of the Financial Crisis

[RJ Connors]

(gm). Cuban gangster Tony Montana provided an acute geo-economic description of world affairs today. He said, ‘first you get the money, then you get the power, and then you get the woman’. If the history of the Spanish Empire is anything to go by, Montana is certainly correct. Besides the great wealth extracted from South America, the Hispanic legacy is proof that they also ‘got the woman’... This process is exemplified currently by the United States which benefits enormously from issuing the worlds reserve currency; the dollar. Yet recent developments indicate that the strategic asset the U.S. issues can be used against them by contending states, and that a timely solution to this problem is unfolding as a result of the current “Financial Crisis”.

Dollar Diplomacy

When we speak about the power of the United States, we tend to sum up the U.S. as a sovereign geographic area comprising a political structure overseeing a powerful military, as well as productive economic units and the world’s largest capital markets, acting as a cohesive unit and conducting imperial wars in its self-interest. The reality is a bit different with the devil being in the details as the Chinese say. Upon close inspection we find that 20% of all U.S. assets are owned by foreigners. So to add some humour to the ‘War on Terror’, we can say that the United States, plus a bit of China, a bit of Saudi Arabia and Kuwait, a little Russia and some of Germany, invaded Iraq. ‘China and Russia bought the debt the United States issued to finance the war in Iraq even though they voted against the United States in the UN’ says a report by the prestigious Council on Foreign Relations. This “buying of debt” has become an integral element in the power potential of the United States. If money is debt, then the world’s largest debtor nation is providing the world with a valuable service; providing us with dollars to trade and finance national development. If money is the step to power, then things start getting ugly. Judging by the foreign exchange holdings of the world’s largest trade surplus nations, including the active arm of this accumulated capital, Sovereign Wealth Funds, such as the Abu Dhabi Investment Council, sitting with a hefty $875 billion and China’s SAFE investment corporation with $311.6 billion, the ability of these concentrations of capital to win friends and influence people seems unlimited. What also seems unlimited is the United States’ indifference to its burgeoning current account deficit. The more dollars it pumps out into the global economy in exchange for goods and services, the more goods and services it is expected to return to those who trustingly accepted paper for goods. With a withering industrial base and relatively high costs, U.S. exports are not what they were during the first half of the 20th century, and this brings the significance of Sovereign Wealth Funds into focus. But first the dollar.

The U.S. dollar entered into worldwide use after the Second World War. Its strength and safety rooted in the massive economic base of the United States which towered over its war torn allies in Europe. Dollar loans were extended to Europe through the Marshall Plan, and were needed in order to purchase industrial exports from the U.S. into Europe, including oil from the infamous ‘Seven Sisters’, at the time the seven largest British-Dutch and American oil companies controlling significant amounts of the resource from around the world. The Bretton Woods system established a dollar-exchange monetary regime in which all currencies concerned were pegged to the dollar, in turn pegged to gold at $35 per ounce, making the dollar ‘as good as gold’. Confidence in the dollar was lost however after the strategically irrational Vietnam War as the U.S. printed vast quantities of the paper to fund its war effort, similar to the massive budget increases today as a result of the ‘War on Terror’. De Gaul led the charge in demanding gold in exchange for France’s accumulated dollar reserves and was followed by other nations fearing a future dollar devaluation, which meant less gold for paper. Nixon decided to keep what gold was left by 1971 when be unilaterally broke with the Bretton Woods system, refusing to redeem dollars for gold. The dollar was now a ‘floating’ currency, its value determined by ‘market forces’ and helped by the 400% increase in the price of oil in 1973 as international demand for dollars surged to cover the higher oil prices. A few years later the dollars medium-term future was secured when it became ‘backed by oil’. In 1974 Treasury Secretary Michael Blumenthal “cut a secret deal with the Saudi’s so that OPEC would continue to price oil in dollars”, and only dollars. This gave the world a definitive need to accumulate dollars since in the event of another oil shock such as occurred in 1973; countries without sufficient dollar reserves would run out of the foreign exchange needed to guarantee energy security. One way to acquire dollars was for a state to gain market access in the U.S., receiving dollars for their exports. With a host of states competing for the same market to acquire dollars, goods became favourably priced to American consumers, making the American dream so much easier. This situation also allowed the United States to pursue a kind of ‘dollar diplomacy’, exploiting the world’s dollar needs for political and economic concessions, such as preferential trade agreements and political support in the United Nations. The IMF and World Bank also extended the majority of their loans in dollars, expecting to be paid back in dollars as well, plus interest.


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