The American Empire

Rising Oil, Sinking Empire
During the early stages of the creation of an empire, whether the empire-builder is a Republic, like Rome or the United States, or a kingdom or dictatorship like ancient Persia or Prussia, superior military power is essential to success.  However, initial military success must be followed by a successful occupation and integration into the imperial system.  A key element of the integration process is for the newly annexed territory to accept and use the currency of the empire.  Use of a single currency enhances the economic strength of the conquering nation by facilitating the movement of trade and financial transactions through the empire’s capital city or financial center.


For example, when the Persian King Cyrus the Great captured Mesopotamia (now known as Iraq and Syria) and the ancient lands of Judaea and Israel (now known as Israel and Jordan) in the 6th century B.C.E., the Persians had all of their conquered peoples use the gold coin known as the Darick and the less valuable silver coins known as the Shegel.  This was the first example of an empire being drawn together through a single currency, but the process has been repeated many times throughout history.


When the United States emerged as the single most powerful capitalist nation after World War II, American economic dominance was confirmed by the acceptance of the dollar as the basic unit of exchange throughout the world (outside of the Soviet/China bloc, which had very restricted connections with the world economy).  One dimension of this transformation from the British pound, symbol of the once-mighty British Empire, to the American dollar was the agreement that oil would be priced in dollars and oil-producing nations would only accept dollars in payment for shipment of their liquid energy.

The Dollar and the Deficit   With the world’s strongest military establishment and largest economy, the dollar’s position as the currency of world trade has allowed the United States to be largely unrestrained by the traditional economic rules that govern trade between nations.  All other national economies need to maintain a rough balance over time between money coming in from other countries and money going out.  For example, Country A receives money in payment for its export products like bananas or kitchen stoves.  Country also receives money when foreign companies purchase stock in Country A’s businesses or bonds issued by Country A’s government.  Money going out of Country A pays for imports like computers or automobiles, is used to purchase stock in companies in other countries, and is used to buy bonds issued by other governments.  This is a nation’s balance of trade and when a nation consistently sends more money out than is coming in, it is running a trade deficit.


Since the development of international financial markets in the 18th and 19th centuries, nations that run large deficits over a number of years make international financial actors – investment banks, currency traders, wealthy individuals, hedge funds, and trans-national corporations – nervous, because they hold large amounts of currency as part of their normal business activities.  Financial actors worry that if the value of a country’s currency goes down (because people won’t accept it as payment for goods or services when they have more than they want or can use), then the currency they hold will lose value, cutting into their profits.  As confidence in the value of a currency goes down, the danger of a run on the currency rises.



The Price of Oil and the Run on the Dollar   A run on a 

currency is similar to a run on a stock – people who own the currency believe its value will fall and therefore desperately sell it at lower and lower prices. When the value of a currency falls it takes many more units of the currency to purchase goods from other countries.  This usually leads to a sudden jump in inflation and a sharp fall in the debtor nation’s standard of living.  If unchecked, runs on a currency can lead to a collapse in its value, making it difficult to buy goods (like oil or farm machinery) from other countries and unlikely that international financial actors will invest in the country’s stocks and bonds.

To stop a run on its currency, a country usually has to jack up interest rates (making its government bonds more attractive to hold), restrict imports of consumer goods, and slash government spending on health care, education, and other social programs.  This combination of rising interest rates and cutbacks in spending frequently plunges the unfortunate nation into a nasty recession, which can last for years.

The dollar’s role as the prime world currency has given the U.S. immunity from the financial discipline required to maintain a rough balance of trade over time.  Since the late 1960s, the U.S. has run enormous trade deficits and frequently had large government deficits.  Each of these deficits has been financed by international financial actors who are willing to buy U.S. government treasury bonds to support the federal deficit and to accept dollars to pay for their oil, computers, and cars even though they did not have any interest in buying similar amounts of U.S. products.

The U.S. has not had to raise interest rates or cut government spending during this time because its role as the globe’s military superpower and largest economy has made non-U.S. financial actors and export-oriented nations like Japan, China, and Germany unwilling to anger U.S. civilian and military decision makers by selling their dollars and triggering a run on the currency.  Instead, many countries have designed their economic growth strategies around exporting to the U.S. and used their piles of U.S. cash to finance their own investments in transportation, manufacturing, and science.

However, the Bush administration has sorely tested the loyalty of foreign financial actors by running enormous budget and trade deficits and angering many people around the world with its belligerent foreign policy.  In addition to a chronic yearly deficit of $150 to 200 billion in government spending created by the let’s-give-money-to-the-rich tax cuts of 2001 and 2002, the Bush administration and the Republican-controlled Congress have refused to pay for the expensive wars in Iraq and Afghanistan with tax money – almost all of the $200 billion per year spent on these wars has been borrowed from foreign financial actors through the sale of treasury bonds.

As a result of these repeated deficits and of the creation of a rival currency, the Euro, which is the collective currency for many European countries, the value of the dollar has slowly declined during the Bush administration.  In 2001, one Euro was worth about $0.90.  Its value gradually rose to about $1.20 in January of 2006.  Since then, the Euro has steadily risen to reach about $1.55 in June of 2008, a decline in the dollar’s purchasing power of 29% in a little over two years.  Usually, this accelerating decline in the value of a country’s money would lead to more and more foreign financial actors dumping the currency for other types of money.  Until last fall, non-U.S. banks and financial companies had held off because of nervousness about the hard-to-calculate impact that a run on the dollar would have on the world economy.

All of that began to change in September of 2007, as the U.S. housing crisis began shaking the foundations of leading Wall Street banks and brokerage houses.  With billions of dollars in mortgage securities losing value each day, many banks literally stopped lending money and the stock market plunged.  Wealthy investors, corporate economists, and financial journalists raised a hue and cry for help.  The U.S. Federal Reserve Bank reacted by lowering the federal funds interest rate (the rate it charges banks to borrow money over night) by half a percentage point, from 5.25% to 4.75%.

When the credit crisis and housing slump continued to shake the stock market, the Federal Reserve lowered rates ¼ point in November and ¼ point in December.  Then, reports began circulating in January that many banks and large investment firms were teetering on the verge of bankruptcy because of the massive losses they were suffering in the packaged mortgage loan market.  The Fed panicked, lowering the federal funds rate by ¾ of a point on January 22 and another ½ point on January 30.  Even at the time, the Fed was widely criticized for these unprecedented cuts.

In reaction, the price of oil, which had risen from $70 per barrel in September of 2007 to $99 at the end of November, began rising again to a peak of $110.20 on March 12, 2008.  This rise of 57% between September and March was not accompanied by a 57% rise in the demand for oil; on the contrary, as the U.S. economy fell into recession, demand was level during this period.

I believe that the oil price increases we are seeing are the result of a back-door run on the dollar.  International financial actors, including firms based in the U.S., concluded last fall that interest rates in the United States were going to decline for the indefinite future and their U.S. dollars were going to continue to decline in value as well.  Since oil is always traded in dollars, they began to speculate against the dollar by purchasing futures in the oil market.  Buying futures in a commodities market is a bet that in the future the price of that commodity will be higher.  With the Federal Reserve intent on bailing out the big banks, that bet was as close as you could get to a sure thing.

After the Fed’s dramatic reduction in U.S. interest rates in January, the shift from dollars into oil futures accelerated.  A number of countries, especially China and Japan, have vast reserves of dollars that they are unwilling to dump because of the hostile political and possibly even military reaction of the U.S. government.  Blocked from starting a successful run on the dollar, international financial actors purchased oil futures contracts at higher and higher prices. A number of people claim that 70% of the money currently invested in oil futures is controlled by financial actors with no interest in actually buying oil.  The number just one year ago was around 30%.

The run on the dollar became a stampede in March of 2008 when the Fed dumped huge amounts of cash into the money supply while it was helping J.P. Morgan purchase the tottering investment firm known as Bear Stearns.  In addition to dropping interest rates another half a point, the Fed announced that it was making $200 billion available at discounted interest rates for banks and investment firms in shaky financial health.  On April 14, the price of oil jumped over $114 per barrel, went to $119 on April 22, then to $125 on May 9 after the Feds lowered the prime rate to 2%.  The price rose to $130 on May 21, and then to $135 on May 22, an 18% price leap in just five weeks.

Mainstream economists and spokesmen for international financial firms claim that rising prices only reflect supply and demand.  They say that, as demand for oil continues to grow and supply worries associated with the coming of “peak” oil add up, it is only natural for prices to increase.  They are counting on laypeople continuing to believe in the hoary myth that the “invisible hand” of free markets is what sets oil prices.  On June 22, the President of the Federal Reserve Bank of Boston chimed in by telling the New York Times that there was “little correlation between the dollar and oil prices over the last 30 years.”

However, as I pointed out earlier, runs on a currency are driven not by day-to-day demand for a country’s money, but decisions by dozens of international financial actors that it is time to get out.  Thus, the rising price of oil – and gasoline at the pump – is a vote of no confidence in the people who manage U.S. economic policy, a group that includes the Federal Reserve Bank.  Of course, the vote of no confidence is more attractive when enormous profits can be had by investing in other opportunities.

The elaborate excuses (guerrilla attacks on Nigerian oil rigs! who knew that Nigerian oil was the key to the world’s oil markets?) concocted by economists and journalists should be seen as what they are – “spin.”  This spin justifies enormous profits for oil companies, for hedge funds and investment banks, and even for some of the investment firms the Fed is rescuing with low interest rates and expensive bail outs.

The question remains, who is coming up with the cash that rewards all of this speculation on oil futures?  It is American consumers, pouring money into the pockets of international financial actors every time they fill up their gas tanks.

The noise you hear on the news about Chinese oil purchases, OPEC meetings, and Venezuelan oil rigs is primarily designed to obscure this basic fact.  Oil cost around $3 per gallon in the U.S. a year ago and now is over $4.  This extra dollar is the cost American consumers are paying to rescue banks, mortgage insurance companies, and Wall Street brokerage houses from the spectacular debts they incurred when the housing bubble burst.  The Federal Reserve views this transfer of money from consumers to speculators as the price that needs to be paid in order to keep interest rates low and provide cheap loans to struggling bankers.

In my new book, Perils of Empire: The Roman Republic and the American Republic (Algora Publishing), I point out that the small number of Americans who are benefiting from the economic madhouse known as globalization are blocking any attempts to reverse the trend toward growing inequality in the United States.  The current crisis, where the Federal Reserve and most political leaders are willing to put saving major banks and investment firms ahead of the welfare of the average consumer, is another example of how the American empire provides fewer and fewer benefits to its residents.

Notes on the Cold War: Supporting a Dictatorship in Indonesia

During the Cold War, the United States used the “communist threat” to justify support of military and civilian dictatorships that were willing to allow free reign to American businesses.  These governments often used violence to crush socialist or nationalist movements that advocated for economic policies that were unfavorable to American business interests.

The U.S. also supported the military dictatorship that came to power in Indonesia in 1965. Until that time, Indonesia was a parliamentary democracy with regular elections. However, the unsolved murder of several generals in September of 1965 triggered a military coup and a brutal bloodbath, with up to a million unarmed members of the election-oriented Indonesian Communist Party rounded up and shot.  Mel Gibson starred in the movie, The Year of Living Dangerously that captures the spirit of that tumultuous period.Less well known are the extreme free market policies followed by the military junta in the following two decades, with large portions of the Indonesian economy ending up in the hands of foreign companies.

Recently declassified documents show that President Ford and Secretary of State Kissinger visited their Indonesian allies in 1975 and gave personal approval for the military junta’s invasion of East Timor, an act that led to the deaths of more than 200,000 East Timorese.  A state department cable declassified in 2002 quoted the following conversation:

“We want your understanding if we deem it necessary to take rapid or drastic action,” said Suharto.

“We will understand and will not press you on the issue. We understand the problem you have and the intentions you have,” replied President Ford.

“It is important that whatever you do succeeds quickly, we would be able to influence the reaction in America if whatever happens, happens after we return,” said Secretary of State Kissinger.

With such conversations are the deaths of thousands approved. The invasion took place on December 7, 1975 the day after the meeting.


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