Showing posts with label EU. Show all posts
Showing posts with label EU. Show all posts

Monday, June 22, 2009

Eurasian Pipeline Calculus

The tragedy of the twentieth century was that nation based political elites were informed by the type of thinking outlined in this article. In a way, it was the rationale for Britain’s fateful decision to support French ambitions in Europe. The outcome of that bit of utter stupidity was the two great wars of the twentieth from which we are now almost recovered from.

We have entered a future in which the organizing power of the nation state must be come increasingly bound by transnational systems of governance. A huge part of this is that the key element is an educated human being who can today fit in anywhere, whatever the prevailing culture might be.

And if you do not feel like travelling, visit through the internet.

In my manuscript ‘Paradigms shift’ I introduce the concept of the communion of xanadu as a reformation of human governance that draws its power through democratic means in a far less historically bound manner. The role of the classically defined nation state is diminishing as the principal cause d’ĂȘtre of war making, as the nation state itself diminishes and is becoming less and less unique in its own right.

Again The EU is an initial template of the possibilities of the future. The expansion of the EU into the boundaries of the old USSR is desirable as that continues to settle down. It is easy to write of the ethnic conflicts exciting folks, but the expansion of economic interdependence makes convergence progressively more acceptable.

That part of it is easy actually. The problem with extending the EU south is much more troublesome and frustrating. To start with, Turkey has to acknowledge the Armenian genocide, or the EU must accept repudiation of the founding principal of the EU. This is a difficult moral issue and must be addressed or it will haunt relations forever.

The EU and the expanded EU is based on the acceptance of a principle of reconciliation between historic ethnic conflicts. There can be no compromise because political opportunists will always exploit these conflicts. It is happening again in Turkey with the Kurds. It all must end now.

The Eurasian Pipeline Calculus

By F. William Engdahl

URL of this article:
www.globalresearch.ca/index.php?context=va&aid=14007

Global Research, June 17, 2009

Calculus has two main variants—derivative and integral. The Eurasian energy pipeline geopolitics between Turkey Washington and Moscow today has elements of both. It is highly derivative in that the major actors across Central Asia from China, Russia to Turkey are very much engaged in a derived power game which has less to do with any specific state and more to do with maintaining Superpower hegemony for Washington. Integral as the de facto motion of various pipeline projects now underway or in discussion across Eurasia hold the potential to integrate the economic space of Eurasia in a way that poses a fundamental challenge to Washington's projection of Full Spectrum Dominance over the greatest land mass on earth.

Since at least the time of the Crimean War of 1853, Turkey has played a strategic role in modern Eurasian and European developments. In the 1850's Ottoman Turkey became a target of Great Power imperial ambitions as Britain and France sought to take advantage of tensions between Russia and the Ottoman Empire in order to weaken and ultimately take vital parts of that weakened empire.

The Great Powers of that time, the empires of Britain, France, Russia and Austria began plotting the dismemberment of the vast Ottoman Empire. Debt was their preferred instrument. The foreign debt situation in Ottoman Turkey had become so extreme that Sultan Abdul Hamid II was forced by his French and British creditors to put the entire finances of the realm under the control of a banker-run agency in 1881, the Ottoman Public Debt Administration (OPDA), controlled by the two largest creditors—France and Britain. By the late 1880's a new player on the Continent who was not part of this debt control, the German Reich, engaged the Ottoman Empire economically. That strategically challenged the vital imperial design of the most powerful empire of the day, Britain.

After Britain sank into a Great Depression after 1873, Germany's industrial colossus emerged as the fastest-developing economic power on earth with the possible exception of then fledgling United States. The political and economic fate of Germany and Ottoman Turkey were linked after 1899 with the decision by German industry, Deutsche Bank to build a railway connecting Berlin to the Ottoman Empire as far away as Baghdad in then-Mesopotamia. It was a land bridge for trade between Ottoman Turkey and Germany independent of British control of the seas.

A few Eurasian geopolitical basics

German industry had begun to look overseas for sources of raw materials as well as potential markets for German goods. In 1894 German Chancellor, von Caprivi, told the Reichstag, “Asia Minor is important to us as a market for German industry, a place for the investment of German capital and a source of supply, capable of considerable expansion, of such essential goods as we now buy from countries of which it may well sooner or later be in our interests to make ourselves independent.”
Caprivi was supported by German industry, especially the steel barons, and by the great banks such as Deutsche Bank.

That Berlin-Baghdad Railway linking the fate of Ottoman Turkey to that of Germany was a geopolitically strategic factor in the events which led Britain to the First World War in a failed bid to preserve her global hegemony. Turkey then as today was regarded by powerful Great Powers as a “pivot” state. The danger in being a pivot state is, of course, the question of who has their hands on it, who moves the pivot for their own geopolitical purposes.

In 1904 a British professor of geography, Sir Halford Mackinder, delivered a lecture before the Royal Geographical Society titled The Geographical Pivot of History, which was to shape a history of two world wars and subsequent wars and power relations. Mackinder, the father of geopolitics—the relation of geography and political economy and power—developed the systematic axiom of British imperial power. It was simple as it was fateful:

Who rules East Europe commands the Heartland:

Who rules the Heartland commands the World-Island:

Who rules the World-Island commands the World.

For Mackinder East Europe was Continental Europe from Germany to Poland, France and Austria. The Heartland was the vast Eurasian land power, Russia. The World-Island was Eurasia.

When the United States emerged to displace the British Empire in world affairs after 1945, she also took the lessons of Mackinder geopolitics. The leading postwar foreign policy strategists including Henry Kissinger, were schooled in Mackinders' ideas. One American disciple of Mackinder, Zbigniew Brzezinski, cited Mackinder's geopolitical axiom in a 1997 essay in Foreign Affairs magazine where he defined the American strategic priorities in the post-Soviet era:

Eurasia is home to most of the world's politically assertive and dynamic states...The world's most populous aspirants to regional hegemony, China and India, are in Eurasia, as are all the potential political or economic challengers to American primacy. After the United States, the next six largest economies and military spenders are there Eurasia accounts for 75 percent of the world's population; 60 percent of its GNP, and 75 percent of its energy resources. Collectively, Eurasia's potential power overshadows even America's.

Eurasia is the world's axial super-continent. A power that dominated Eurasia would exercise decisive influence over two of the world's three most economically productive regions, Western Europe and East Asia. A glance at the map also suggests that a country dominant in Eurasia would almost automatically control the Middle East and Africa. With Eurasia now serving as the decisive geopolitical chessboard the distribution of power on the Eurasian landmass will be of decisive importance to America's global primacy.
[1]

That has largely defined US foreign political and military relations with Turkey and the newly emerging former Soviet Republics of Eurasia since the dissolution of the Soviet Union in 1991. Unfortunately for Turkey and the republics of the Eurasian region, those relations have too often been determined by IMF conditionalities and by military alliances and actions more resembling the Cold War than an era of genuine peace and respect for national sovereignty. Until now the post-Soviet East-West relations have largely been based on a negative construct.

The two geopolitical statements—the one from Mackinder in 1919 during the Versailles talks to divide Europe after the First World War, the second by Mr Brzezinski in 1997 at the end of a bitter Cold War—have defined the principle relations of Turkey and the rest of Eurasia to the world for more than a century.

Eurasia's Opportunity today

What will define the future for the various nations of Eurasia, especially Turkey, two decades since the dissolution of the Soviet Union and Warsaw Pact Cold War structures?

The answer requires some clarity on basic issues. First and most essential is how Turkey and other Eurasian nations define their bilateral and regional relationships. Second, how do they define their relationship with the Atlantic alliance, the system of political, military and economic relations built after 1945 around the dominance of the United States.

What defines the situation today is a growing realization across all Eurasia from Beijing to Moscow, from Alma Ata to Ankara that the pillar of the postwar order, the United States has become an increasingly incalculable partner and force in world economic and political affairs. Some even within the US speak of a terminal decline in American influence over the coming decades, with terms such as ‘imperial overstretch.' It's essential to understand the extent and nature of the current economic and financial crisis of the Dollar System if we are to make any serious calculation of the future.

The crisis which broke in August 2007 as a crisis in the sub-prime or high-risk segment of US real estate credit was in fact a first manifestation of a process of debt destruction which is bringing the United States into a new Great Depression, one that will last at least a decade, perhaps several. In its severity it will be far worse than that of the 1930's. Today the USA is the world's greatest debtor economy. In 1929 it was the largest creditor. Today the USA public debt is over $11 trillion, growing at the fastest rate in history. The Federal deficit this year is estimated to exceed $1.8 trillion as the Treasury pours money into a bankrupt banking system to try to rescue a collapsing Dollar System. In 1929 US Public Debt was insignificant.

Since Washington abandoned the Bretton Woods Gold Exchange Standard convertibility in August 1971 it has been accepted wisdom in Washington that, as Dick Cheney put it, ‘deficits don't matter.' So long as the dollar was world reserve currency and the US was the greatest military power, the world would support the dollar. That era appears to have ended. The trade surplus economies of Asia, above all China are becoming increasingly concerned that the value of their dollar investments in US debt will depreciate as the volume of debt needed continues to soar.

In recent months China has begun exploring alternative investment avenues to replace their dollar investments. Russia and Brazil, seeking to reduce their dependence on the dollar, plan to buy $20billion of SDR bonds from the IMF and diversify foreign-currency reserves. Russia's central bank said it may cut investments in US Treasuries, currently estimated at $240billion, and China says it may reduce reliance on the dollar and US bonds. China today is America's largest foreign creditor.

This is no short-term impulse to dump dollars or a pressure tactic by the countries of Eurasia. It's the beginning of a global tectonic shift away from a sole financial center to many regional or ‘multipolar' centers over the next decade. As the trillions of dollars of US taxpayer bailouts have demonstrated, try as they might, Humpty Dumpty, the Dollar System can't be put together again, as it was even three years ago. Wrong economic policies, decisions taken more than four decades ago in Washington and Wall Street, have reached their relative limits. The world is in what Joseph Schumpeter once called ‘creative destruction.' The consequences for the future of Eurasia are enormous.

With the pillar of the US-centered Dollar System slowly collapsing, the choices for Eurasia begin to define themselves. At this point they can go one of two ways: Continue the status quo and subordinate national economic decisions to support the Dollar System. That means abiding by the rules of IMF and World Bank austerity. It means abiding by the trade rules of the G7-dominated WTO, even on issues such as GMO seeds which go against national health security. It means to subordinate national security interests to NATO, an institution created in the Cold War atmosphere of the Truman Doctrine in 1948. That, despite we are at a time the original purpose for NATO, defense against a Soviet military threat or Warsaw Pact aggression has long since become a relic of past history. Those four institutions are at the heart of the 1944 Bretton Woods Dollar System, as I have described in detail in a recent book.

The main problem for fast-emerging Eurasian nations with continuing this Atlantic status quo, sometimes referred to by Washington as ‘Globalization,' is that it now means going down with the Dollar Titanic over the longer term.

Emerging Eurasian Economic Space

On the other hand there is second dynamic economic perspective, still raw and unformed, but one containing everything necessary to build a vast zone of economic prosperity, a huge new market.

The catastrophic US military experience in Iraq and also in Pakistan and Afghanistan since 2001 has led to much rethinking across Eurasia.

The fact that the new Obama Administration to date, while making rhetorical gestures of a change, has done little of substance to shift US fundamental economic and military policy, suggests that the real options for maintaining the American Century are few at this point. That is clear from the fact that the key players in Obama economic policy were the same persons responsible for creating the conditions of the financial disaster in the first place. The military policies in the new Administration are represented by the same persons responsible for past military misadventures. They are representing an outmoded paradigm that is in fatal decline.

In this situation of a declining economic influence of the USA the various nations across Eurasia are clearly beginning to look to new regional arrangements which could secure export markets, in fact to build new markets.

A market in the end is a political decision. Markets, contrary to what Milton Friedman taught, do not exist free in nature. They are created. There is no abstract ‘world market.' Regional or local markets can be and are created peacefully.

In the past several years steps to build new markets have become visible across Eurasia. Notable is the Shanghai Cooperation Organization (SCO). According to Russian and to Chinese economists with whom I have discussed, the SCO is seen as an evolving framework to build a new Eurasian economic space.

It is very initial, but an important framework to economically weave the nations of China, Russia and Central Asia into closer cooperation. From the perspective of geopolitics, the SCO is a natural economic convergence of mutual interests of the republics of Central Asia. SCO founding members include Kazakhstan, China, Kyrgyzstan, Russia, Tajikistan and Uzbekistan. Mongolia, India, Pakistan and Iran are observers. They just concluded an annual meeting in Yekaterinburg, Russia where they discussed deeper economic, security and social cooperation. The background of the present deepening dollar crisis shaped the talks. As well the governments of Brazil and India joined after with Russia and China, to discuss mutual economic interests, including energy cooperation.

The Eurasian energy calculus

The future of any economic cooperation among the states of Eurasia, including Turkey, rests on the resolution of vital energy supply issues. Here Eurasia is fortunate to straddle some of the richest energy regions on our planet, in Russia as well as the Caspian Basin state of Kazakhstan and the contiguous Middle East Gulf region.

Following the ill-conceived decision by the G7 in June 1990 to place the economic reorganization of former economies of the Warsaw Pact including Russia under the mandate of IMF conditionalities, a role for which the IMF had never been intended, Russia today is struggling to regain a stable economic base.

It has a way to go. But Russia brings to the table huge positive resource advantages in terms of its wealth of oil and gas reserves and energy technology no Western country possesses. Given the rapid industrial expansion of China since the beginning of the decade, a natural partnership is emerging linking the economies of Russia, Kazakhstan and China increasingly around energy. The role of pipeline geopolitics in the economic future of Turkey and Eurasia generally is central.

Today the future of competing gas pipelines is at the heart of the Eurasian economic calculus. Here Turkey is in a position to play a central role given its geographic and historical role as a bridge between East and West, North and South—Europe and Eurasia.

One key link through Turkey has been the oil and gas pipeline from Azerbaijan to the port of Ceyhan via Georgia. The Baku-Tbilisi-Ceyhan (BTC) oil pipeline and the Baku-Tbilisi-Erzurum gas pipeline are cited as part of Turkey's foreign policy strategy to become an energy conduit. BTC has also been a high priority US foreign policy goal to weaken Russian influence over Caspian energy corridors. By itself BTC has limited strategic effect on the regional geopolitical balance. Were it to be coupled with a second project, the much-discussed Nabucco project, the impact would definitely be a direct challenge to Russia's energy role. The EU knows this well, which is why several member states have been less than eager to invest serious sums in Nabucco.

Recent developments in discovery and development of new natural gas reserves in both Azerbaijan and most recently in Turkmenistan in South Yolotan-Osman and Yashlar gas fields, located in the eastern part of the Amudarya River basin, add significant new energy resources to the energy calculus of the emerging Eurasian economic space.

Turkey-Russia cooperation or Turkish-Washington Cooperation?

Turkish-Russian economic ties have greatly expanded over the past decade, with trade volume reaching $32 billion in 2008, making Russia Turkey's number one partner. Gas and oil imports from Russia account for most of the trade volume.

Turkey and Russia are already connected by the twin Blue Stream natural gas pipelines across the bottom of the Black Sea. Moscow and Ankara are talking about increasing deliveries through the network, which in 2008 carried 10 bn cm of Russian gas to Turkey.

More importantly, following a March meeting in Ankara between the Turkish Energy Minister and Gazprom chief Alexei Miller, discussions are underway about a Blue Stream-2 project. It would be a new gas pipeline parallel to Blue Stream, in addition to the construction of a gas transportation system in Turkey by expanding Blue Stream to interlink with the proposed Samsun-Ceyhan line, with a spur line under the Mediterranean to Ashkelon in Israel.

Russia's Prime Minister Putin has also said he was counting on the support of Israel in the construction of a new oil pipeline via Turkey and Israel. The pipeline would link to the Samsun-Ceyhan oil pipeline, to be constructed across the Red and Mediterranean seas.

For Turkey, which currently imports 90 % of its energy, the projects would provide increased energy security and, in the case of the Samsun-Ceyhan-Ashkelon pipeline, generate significant transit revenues.

Discussions are also underway on possible extending Turkey's gas lines across its Thracian territory to supply neighbouring Balkan nations Bulgaria, Serbia, Croatia and Hungary. In such an event, Moscow would have gained a prime goal of lessening its dependency on the Ukrainian pipeline network for transit.

Russia also won a tender for the construction of Turkey's first nuclear plant recently, though final resolution is unclear at this time. Russia's market also plays a major role for Turkish overseas investments and exports. Russia is one of the main customers for Turkish construction firms and a major destination for Turkish exports. Similarly, millions of Russian tourists bring significant revenues to Turkey every year. Importantly, Turkey and Russia may start to use the Turkish lira and the Russian ruble in foreign trade, which could increase Turkish exports to Russia.

In recent months both Turkey and Russia have taken steps to deepen economic and political cooperation. Cooperation between Russia and Turkey is seen by both now as essential to regional peace and stability.

In talk of revived ‘Great Games' in Eurasia during the 1990's it seemed Turkey was becoming once more Russia's geopolitical rival as in the 19th Century. Turkey's quasi-alliance with Ukraine, Azerbaijan, and Georgia led Moscow until recently to view Turkey as a formidable rival. That is changing significantly.

Russian President Dmitry Medvedev recently commended Turkey's actions during the Russian-Georgian war of last summer, and Turkey's subsequent proposal for the establishment of a Caucasus Stability and Cooperation Platform (CSCP). The Russian President said the Georgia crisis had shown their ability to deal with such problems on their own without the involvement of outside powers.

Russian's aim is clearly to use its economic resources to counter what it sees as a growing NATO encirclement, made dramatic by the Washington decision to place missile and radar bases in Poland and the Czech Republic, as they see it, aimed at Moscow. To date the Obama Administration has indicated it will continue the Bush ‘missile defense' policy. Washington also just agreed to place US Patriot missiles in Poland, clearly not aimed at Germany.

If Ankara moves towards closer collaboration with Russia, Georgia's position is precarious and Azerbaijan's natural gas pipeline route to Europe, the Nabucco Pipeline, is blocked. If it cooperates with the United States and manages to reach a stable treaty with Armenia under US auspices, the Russian position in the Caucasus is weakened.

The strategy for Washington to bring Germany into closer cooperation with the US is to weaken German dependence on Russian energy flows. With the recent Obama visit to Ankara, Washington is evidently attempting to win Turkish support for its troubled Nabucco alternative gas pipeline through Turkey from Azerbaijan which would potentially lessen EU dependence on Russian gas.

Turkey is one of the only routes energy from new sources can cross to Europe from the Middle East, Central Asia or the Caucasus. If Turkey decides to cooperate with Russia, Russia retains the initiative. Since it became clear in Moscow that US strategy was to extend NATO to Russia's front door via Ukraine and Georgia, Russia has moved to use its economic “carrot” its vast natural gas resources, to at the very least neutralize Western Europe, especially Germany, towards Russia.

A Washington Great Game?

However the question of Turkish-EU relations is linked with the issue of Turkish membership into the EU, a move vehemently opposed by France and also less openly so by Germany, and strongly backed by Washington.

Washington is clearly playing what some call ‘a deeper game.' Obama's backing for Turkey's application for EU membership comes with a heavy price. As the US is no member of the EU it was an attempt to try to curry favor with the Erdogan government. Since the April Obama visit, Ankara has begun to discuss an agreement with Armenia including diplomatic relations.

A Turkish accord with Armenia would change the balance of power in the entire region. Since the August 2008 Georgia-Russia conflict the Caucasus, a strategically vital area has been unstable. Russian troops remain in South Ossetia. Russia also has troops in Armenia meaning Russia has Georgia surrounded.

Turkey is the key link in this complex game of geopolitical balance of power between Washington and Moscow. If Turkey decides to collaborate with Russia Georgia's position becomes insecure and Azerbaijan's possible pipeline route to Europe is blocked. If Turkey decides to cooperate with Washington and at the same time reaches a stable agreement with Armenia under US nudging, Russia's entire position in the Caucasus is weakened and an alternative route for natural gas to Europe becomes available, reducing Russian leverage with Western Europe.

This past March a memorandum was signed between the Azerbaijan state oil company SOCAR and Russia's Gazprom for major deliveries of Azerbaijan natural gas to Russia by January 2010.

Azerbaijan is the only state outside Iran that would likely supply gas to the planned EU Nabucco pipeline from Azerbaijan through Turkey to south-eastern Europe. Russia has proposed South Stream as an alternative to the Nabucco project, also in need of Azerbaijan gas, so in effect Russia weakens the chances of realization of Nabucco.

In this Eurasian pipeline and economic diplomacy, clear is that Turkey and the other nations of Eurasia are grappling with new possible economic arrangements which will have profound impact on the future of the world economy. The EU as a body is at present clearly frozen in the dynamic of the old post-1945 Bretton Woods order. Initiative is unlikely to come from Brussels for a dynamic economic growth in Turkey or Eurasia generally. Interestingly, Eurasia is becoming the growth locomotive for the EU. Many Europeans find that a hard pill to swallow. It is however the reality, and a fascinating opportunity for the nations of Eurasia as well as for the economies of the EU. Ultimately, as well, a vibrant growing Eurasian economic space would be in the best long-term interest of the United States in a multi-polar world.

1. Brzezinski, Zbigniew, A Geostrategy for Eurasia, Foreign Affairs, 76:5, September/October 1997.

F. William Engdahl is author of Full Spectrum Dominance: Totalitarian Democracy in the New World Order. He may be reached via his website
www.engdahl.oilgeopolitics.net

Monday, June 15, 2009

Dedollarization at Yakaterinburg

This had to happen of course. Wall Street’s betrayal of US sovereign interests must have consequences. The damage was direct, though actually minor but clearly blamable on Wall Street taking complete advantage of fifty years of global confidence in the good sense of the US Federal Reserve.

I am saying that the damage was minor outside of the USA because the international credit system is still intact because governments stepped up to underwrite the capital losses immediately. They are now stimulating recovery trade to get it all working again. So this is a case in which the USA caught pneumonia while the rest of the world suffered a nasty flue. For fifty years, it has been the other way around and this is lost on no one.

What has changed is the size of US consumption. It has shrunk. It is easily replaced by a modest increase in global consumption which appears to have already happened. To put this in perspective, a ten percent drop in US consumption is easily repaired by a less than one percent increase globally. It really feels like this has happened and that global demand will support everything while the USA gets it act back together, however long they wish to spend on it.

The creation of a global currency has merit and needs to include the US dollar, the EU, and the Chinese and Indian Currencies in order to have the political weight to make it possible for everyone to fit in. The EU is a good example of the process itself.

Once the four major economies can create a working framework and get it out of the hands of the US political system, it will be easy for every one else to pile in. This is a good plan that must surely take years to implement. Thus Yakaterinburg is only the beginning of the beginning of a process that is both inevitable but also certain to limp along for years if not decades.

De-Dollarization: Dismantling America's Financial-Military Empire
The Yekaterinburg Turning Point


By Prof. Michael Hudson

URL of this article:
www.globalresearch.ca/index.php?context=va&aid=13969

Global Research, June 13, 2009

The city of Yakaterinburg, Russia's largest east of the Urals, may become known not only as the death place of the tsars but of American hegemony too – and not only where US U-2 pilot Gary Powers was shot down in 1960, but where the US-centered international financial order was brought to ground.

Challenging America will be the prime focus of extended meetings in Yekaterinburg, Russia (formerly Sverdlovsk) today and tomorrow (June 15-16) for Chinese President Hu Jintao, Russian President Dmitry Medvedev and other top officials of the six-nation Shanghai Cooperation Organization (SCO). The alliance is comprised of Russia, China, Kazakhstan, Tajikistan, Kyrghyzstan and Uzbekistan, with observer status for Iran, India, Pakistan and Mongolia. It will be joined on Tuesday by Brazil for trade discussions among the BRIC nations (Brazil, Russia, India and China).

The attendees have assured American diplomats that dismantling the US financial and military empire is not their aim. They simply want to discuss mutual aid – but in a way that has no role for the United States, NATO or the US dollar as a vehicle for trade. US diplomats may well ask what this really means, if not a move to make US hegemony obsolete. That is what a multipolar world means, after all. For starters, in 2005 the SCO asked Washington to set a timeline to withdraw from its military bases in Central Asia. Two years later the SCO countries formally aligned themselves with the former CIS republics belonging to the Collective Security Treaty Organization (CSTO), established in 2002 as a counterweight to NATO.

Yet the meeting has elicited only a collective yawn from the US and even European press despite its agenda is to replace the global dollar standard with a new financial and military defense system. A Council on Foreign Relations spokesman has said he hardly can imagine that Russia and China can overcome their geopolitical rivalry,1 suggesting that America can use the divide-and-conquer that Britain used so deftly for many centuries in fragmenting foreign opposition to its own empire. But George W. Bush (“I'm a uniter, not a divider”) built on the Clinton administration's legacy in driving Russia, China and their neighbors to find a common ground when it comes to finding an alternative to the dollar and hence to the US ability to run balance-of-payments deficits ad infinitum.

What may prove to be the last rites of American hegemony began already in April at the G-20 conference, and became even more explicit at the St. Petersburg International Economic Forum on June 5, when Mr. Medvedev called for China, Russia and India to “build an increasingly multipolar world order.” What this means in plain English is: We have reached our limit in subsidizing the United States' military encirclement of Eurasia while also allowing the US to appropriate our exports, companies, stocks and real estate in exchange for paper money of questionable worth.

"The artificially maintained unipolar system,” Mr. Medvedev spelled out, is based on “one big centre of consumption, financed by a growing deficit, and thus growing debts, one formerly strong reserve currency, and one dominant system of assessing assets and risks.”2 At the root of the global financial crisis, he concluded, is that the United States makes too little and spends too much. Especially upsetting is its military spending, such as the stepped-up US military aid to Georgia announced just last week, the NATO missile shield in Eastern Europe and the US buildup in the oil-rich Middle East and Central Asia.

The sticking point with all these countries is the US ability to print unlimited amounts of dollars. Overspending by US consumers on imports in excess of exports, US buy-outs of foreign companies and real estate, and the dollars that the Pentagon spends abroad all end up in foreign central banks. These agencies then face a hard choice: either to recycle these dollars back to the United States by purchasing US Treasury bills, or to let the “free market” force up their currency relative to the dollar – thereby pricing their exports out of world markets and hence creating domestic unemployment and business insolvency.

When China and other countries recycle their dollar inflows by buying US Treasury bills to “invest” in the United States, this buildup is not really voluntary. It does not reflect faith in the U.S. economy enriching foreign central banks for their savings, or any calculated investment preference, but simply a lack of alternatives. “Free markets” US-style hook countries into a system that forces them to accept dollars without limit. Now they want out.

This means creating a new alternative. Rather than making merely “cosmetic changes as some countries and perhaps the international financial organisations themselves might want,” Mr. Medvedev ended his St. Petersburg speech, “what we need are financial institutions of a completely new type, where particular political issues and motives, and particular countries will not dominate.”

When foreign military spending forced the US balance of payments into deficit and drove the United States off gold in 1971, central banks were left without the traditional asset used to settle payments imbalances. The alternative by default was to invest their subsequent payments inflows in US Treasury bonds, as if these still were “as good as gold.” Central banks now hold $4 trillion of these bonds in their international reserves – land these loans have financed most of the US Government's domestic budget deficits for over three decades now! Given the fact that about half of US Government discretionary spending is for military operations – including more than 750 foreign military bases and increasingly expensive operations in the oil-producing and transporting countries – the international financial system is organized in a way that finances the Pentagon, along with US buyouts of foreign assets expected to yield much more than the Treasury bonds that foreign central banks hold.

The main political issue confronting the world's central banks is therefore how to avoid adding yet more dollars to their reserves and thereby financing yet further US deficit spending – including military spending on their borders?

For starters, the six SCO countries and BRIC countries intend to trade in their own currencies so as to get the benefit of mutual credit that the United States until now has monopolized for itself. Toward this end, China has struck bilateral deals with Argentina and Brazil to denominate their trade in renminbi rather than the dollar, sterling or euros,3 and two weeks ago China reached an agreement with Malaysia to denominate trade between the two countries in renminbi.
[4] Former Prime Minister Tun Dr. Mahathir Mohamad explained to me in January that as a Muslim country, Malaysia wants to avoid doing anything that would facilitate US military action against Islamic countries, including Palestine. The nation has too many dollar assets as it is, his colleagues explained. Central bank governor Zhou Xiaochuan of the People's Bank of China wrote an official statement on its website that the goal is now to create a reserve currency “that is disconnected from individual nations.”5 This is the aim of the discussions in Yekaterinburg.
In addition to avoiding financing the US buyout of their own industry and the US military encirclement of the globe, China, Russia and other countries no doubt would like to get the same kind of free ride that America has been getting. As matters stand, they see the United States as a lawless nation, financially as well as militarily. How else to characterize a nation that holds out a set of laws for others – on war, debt repayment and treatment of prisoners – but ignores them itself? The United States is now the world's largest debtor yet has avoided the pain of “structural adjustments” imposed on other debtor economies. US interest-rate and tax reductions in the face of exploding trade and budget deficits are seen as the height of hypocrisy in view of the austerity programs that Washington forces on other countries via the IMF and other Washington vehicles.

The United States tells debtor economies to sell off their public utilities and natural resources, raise their interest rates and increase taxes while gutting their social safety nets to squeeze out money to pay creditors. And at home, Congress blocked China's CNOOK from buying Unocal on grounds of national security, much as it blocked Dubai from buying US ports and other sovereign wealth funds from buying into key infrastructure. Foreigners are invited to emulate the Japanese purchase of white elephant trophies such as Rockefeller Center, on which investors quickly lost a billion dollars and ended up walking away.

In this respect the US has not really given China and other payments-surplus nations much alternative but to find a way to avoid further dollar buildups. To date, China's attempts to diversify its dollar holdings beyond Treasury bonds have not proved very successful. For starters, Hank Paulson of Goldman Sachs steered its central bank into higher-yielding Fannie Mae and Freddie Mac securities, explaining that these were de facto public obligations. They collapsed in 2008, but at least the US Government took these two mortgage-lending agencies over, formally adding their $5.2 trillion in obligations onto the national debt. In fact, it was largely foreign official investment that prompted the bailout. Imposing a loss for foreign official agencies would have broken the Treasury-bill standard then and there, not only by utterly destroying US credibility but because there simply are too few Government bonds to absorb the dollars being flooded into the world economy by the soaring US balance-of-payments deficits.

Seeking more of an equity position to protect the value of their dollar holdings as the Federal Reserve's credit bubble drove interest rates down China's sovereign wealth funds sought to diversify in late 2007. China bought stakes in the well-connected Blackstone equity fund and Morgan Stanley on Wall Street, Barclays in Britain South Africa's Standard Bank (once affiliated with Chase Manhattan back in the apartheid 1960s) and in the soon-to-collapse Belgian financial conglomerate Fortis. But the US financial sector was collapsing under the weight of its debt pyramiding, and prices for shares plunged for banks and investment firms across the globe.

Foreigners see the IMF, World Bank and World Trade Organization as Washington surrogates in a financial system backed by American military bases and aircraft carriers encircling the globe. But this military domination is a vestige of an American empire no longer able to rule by economic strength. US military power is muscle-bound, based more on atomic weaponry and long-distance air strikes than on ground operations, which have become too politically unpopular to mount on any large scale.

On the economic front there is no foreseeable way in which the United States can work off the $4 trillion it owes foreign governments, their central banks and the sovereign wealth funds set up to dispose of the global dollar glut. America has become a deadbeat – and indeed, a militarily aggressive one as it seeks to hold onto the unique power it once earned by economic means. The problem is how to constrain its behavior. Yu Yongding, a former Chinese central bank advisor now with China's Academy of Sciences, suggested that US Treasury Secretary Tim Geithner be advised that the United States should “save” first and foremost by cutting back its military budget. “U.S. tax revenue is not likely to increase in the short term because of low economic growth, inflexible expenditures and the cost of ‘fighting two wars.'”6

At present it is foreign savings, not those of Americans that are financing the US budget deficit by buying most Treasury bonds. The effect is taxation without representation for foreign voters as to how the US Government uses their forced savings. It therefore is necessary for financial diplomats to broaden the scope of their policy-making beyond the private-sector marketplace. Exchange rates are determined by many factors besides “consumers wielding credit cards,” the usual euphemism that the US media cite for America's balance-of-payments deficit. Since the 13th century, war has been a dominating factor in the balance of payments of leading nations – and of their national debts. Government bond financing consists mainly of war debts, as normal peacetime budgets tend to be balanced. This links the war budget directly to the balance of payments and exchange rates.

Foreign nations see themselves stuck with unpayable IOUs – under conditions where, if they move to stop the US free lunch, the dollar will plunge and their dollar holdings will fall in value relative to their own domestic currencies and other currencies. If China's currency rises by 10% against the dollar, its central bank will show the equivalent of a $200 million loss on its $2 trillion of dollar holdings as denominated in yuan. This explains why, when bond ratings agencies talk of the US Treasury securities losing their AAA rating, they don't mean that the government cannot simply print the paper dollars to “make good” on these bonds. They mean that dollars will depreciate in international value. And that is just what is now occurring. When Mr. Geithner put on his serious face and told an audience at Peking University in early June that he believed in a “strong dollar” and China's US investments therefore were safe and sound, he was greeted with derisive laughter.7

Anticipation of a rise in China's exchange rate provides an incentive for speculators to seek to borrow in dollars to buy renminbi and benefit from the appreciation. For China, the problem is that this speculative inflow would become a self-fulfilling prophecy by forcing up its currency. So the problem of international reserves is inherently linked to that of capital controls. Why should China see its profitable companies sold for yet more freely-created US dollars, which the central bank must use to buy low-yielding US Treasury bills or lose yet further money on Wall Street?

To avoid this quandary it is necessary to reverse the philosophy of open capital markets that the world has held ever since Bretton Woods in 1944. On the occasion of Mr. Geithner's visit to China, “Zhou Xiaochuan, minister of the Peoples Bank of China, the country's central bank, said pointedly that this was the first time since the semiannual talks began in 2006 that China needed to learn from American mistakes as well as its successes” when it came to deregulating capital markets and dismantling controls.8

An era therefore is coming to an end. In the face of continued US overspending, de-dollarization threatens to force countries to return to the kind of dual exchange rates common between World Wars I and II: one exchange rate for commodity trade, another for capital movements and investments, at least from dollar-area economies.

Even without capital controls, the nations meeting at Yekaterinburg are taking steps to avoid being the unwilling recipients of yet more dollars. Seeing that US global hegemony cannot continue without spending power that they themselves supply, governments are attempting to hasten what Chalmers Johnson has called “the sorrows of empire” in his book by that name – the bankruptcy of the US financial-military world order. If China, Russia and their non-aligned allies have their way, the United States will no longer live off the savings of others (in the form of its own recycled dollars) nor have the money for unlimited military expenditures and adventures.

US officials wanted to attend the Yekaterinburg meeting as observers. They were told No. It is a word that Americans will hear much more in the future.

Notes

1 Andrew Scheineson, “The Shanghai Cooperation Organization,” Council on Foreign Relations,
Updated: March 24, 2009: “While some experts say the organization has emerged as a powerful anti-U.S. bulwark in Central Asia, others believe frictions between its two largest members, Russia and China, effectively preclude a strong, unified SCO.”

2 Kremlin.ru, June 5, 2009, in Johnson's Russia List, June 8, 2009, #8.

3 Jamil Anderlini and Javier Blas, “China reveals big rise in gold reserves,” Financial Times, April 24, 2009. See also “Chinese political advisors propose making yuan an int'l currency.” Beijing, March 7, 2009 (Xinhua). “The key to financial reform is to make the yuan an international currency, said [Peter Kwong Ching] Woo [chairman of the Hong Kong-based Wharf (Holdings) Limited] in a speech to the Second Session of the 11th National Committee of the Chinese People's Political Consultative Conference (CPPCC), the country's top political advisory body. That means using the Chinese currency to settle international trade payments ...”

4 Shai Oster, “Malaysia, China Consider Ending Trade in Dollars,” Wall Street Journal, June 4, 2009.

5 Jonathan Wheatley, “Brazil and China in plan to axe dollar,” Financial Times, May 19, 2009.

6 “Another Dollar Crisis inevitable unless U.S. starts Saving - China central bank adviser. Global Crisis ‘Inevitable' Unless U.S. Starts Saving, Yu Says,” Bloomberg News, June 1, 2009.
http://www.bloomberg.com/apps/news?pid=20601080&sid=aCV0pFcAFyZw&refer=asia

7 Kathrin Hille, “Lesson in friendship draws blushes,” Financial Times, June 2, 2009.

8 Steven R. Weisman, “U.S. Tells China Subprime Woes Are No Reason to Keep Markets Closed,” The New York Times, June 18, 2008.