Iraq and the U.S. Dollar

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This may be old news to some, but I don’t recall seeing it discussed previously on the Boards.

Everyone has heard the theory that the U.S. invaded Iraq for its oil. Well, there is another theory that the U.S. invasion was done to protect the value of the U.S. dollar.

First, some background:

For some time, as the largest consumer of oil in the world, the U.S. has been able to pressure oil-producing countries to accept only U.S. dollars as payment for oil. So if Japan wants to buy oil from Saudi Arabia, it can’t use yen; it must purchase U.S. dollars, and use those to buy the oil. This has ensured that there is a high demand for the U.S. dollar, and since currency value is based on supply and demand, the U.S. dollar has a higher value relative to other currencies than it would have if oil could be bought with any currency.

However, since the EU was formed, it is now rivaling the U.S. in oil consumption, and there is pressure to have the euro accepted as well as, or even instead of, the U.S. dollar. In fact, Iraq accepted euros in late 2000. If this were to happen on a wider scale, demand for the U.S. dollar would drop substantially, which would in turn cause the U.S. dollar to decline in value (estimates range from 20% to 40%), which in turn would lead to huge inflation rates due to the higher cost of imports.

Obviously, the U.S. would like to ensure this doesn’t happen, and the argument is that the Iraq invasion was done in order to force Iraq to again accept only U.S. dollars. Iran has indicated that it might want to switch to the euro and, lo and behold, Iran is now a threat.

It’s an interesting theory, and while I’m not convinced that it is valid, it does make me wonder.

Full article is here

As always, comments are welcome.

 

The economic theories underpinning this hypothesis are sound enough. As to whether an expensive war would be waged to that end is another thing.

The value of the US dollar does indeed appear to be artificially suspended by such mechanisms as the oil transaction restrictions mentioned by Splunge. Over the last 10-15 years, the USA has become such a consumer that it's foreign debt has skyrocketed to record levels. Much of that debt servicing seems to have been covered by increases in the domestic money supply. This would normally lead to inflation and a fall in the value of the dollar but this has not happened yet due to:
- so many countries holding their national reserves in US dollars rather than gold or Euros
- one of USA's biggest creditors, China, not floating its exchange rate
- other articifial mechanisms like Splunge's oil transaction comment.

This is a major issue for the USA but I would have thought that fixing such an economic situation was a job for Greenspan and the Federal Reserve, not the Army.

 

I do not think it is a sole deciding factor but it probably pays its part.

One of the reason for introducing the euro was to compete with the dollar one the world scene as the major currency and thus reaping all the benefits it brings for example if oil would be paid in € as well as $.

 

More often than not a successful war tends to strengthen a country's economy.

 

Only if the economic activity required to support the war occurs domestically. If a nation still imports more than it exports during a war then its economic position is unlikely to be strengthened much (unless there is some loot to be recovered from the vanquished enemy).