From over-capacity to war

A RUN on the dollar appears imminent. The United States threatens action against Syria for its alleged supply of night-vision equipment to Iraq. A split in the leading bodies of the United Nations and the North Atlantic Treaty Organisation threatens their very existence. American automobile firms have been doling out loans to customers at zero per cent interest.

What links these seemingly unconnected facts to the invasion of Iraq? It is widely acknowledged, by all but the U.S. and the U.K. Governments and their media empires, that this war is about seizing Iraq's oil. But Iraq is not the only target: the target is the seizure of the bulk of the world's cheap oil. And the objective is not merely to seize oil: it is to shore up and expand U.S. global hegemony at a time when the American economy is on the brink of a potentially devastating crisis.

The roots of the crisis lie in that characteristic feature of advanced industrial economies — giant over-capacities throughout a range of important industries. The world can make 20 million cars more every year than can be sold and telecom networks are operating at just three per cent of their capacity after a great splurge of investment in the late 1990s. By December 2002, 26.5 per cent of America's manufacturing capacity was idle — 3.5 percentage points more than it was during the 1990-91 recession.

It is a peculiar feature of market economies that they are thrown into crisis by the ability to produce too much — that is, given the existing distribution of income. No doubt the demand for goods would pick up if income was widely redistributed, but that would be anathema to private capital. The current glut of capacity narrows profit margins and deters corporations from making investments or hiring workers; this, in turn, further weakens demand. Even as it was claimed that the U.S. was emerging from the recession, unemployment continued to climb.

Indeed, over-capacities today plague all the major developed economies — the U.S., Europe and Japan. For the first time since the 1970s, the three are in recession at the same time. Japan has been in this state since the start of the 1990s, while the U.S. economy has acted as the global motor of demand, taking in the world's goods and pumping out dollars. Now that motor is sputtering, and there is no sign of a powerful demand-impulse from any other quarter. The International Labour Organisation says in its latest Global Employment Trends that "the world employment situation is deteriorating dramatically", with 20 million added to the ranks of the unemployed last year, and vast numbers of underemployed or "working poor".

The Mumbai-based Research Unit for Political Economy's paper "Behind the Invasion of Iraq" (Monthly Review Press, New York) argues that there is a connection between these over-capacities and the current U.S. drive to occupy the Middle East. In order to stave off recession, the U.S. central bank has been boosting demand by pumping in unprecedented amounts of credit. Indeed, the U.S. economy's remarkable boom of the 1990s occurred even as corporate profits were falling sharply. Demand and investment were only sustained by an explosion of cheap debt.

The U.S. has the funds to do this because foreigners put their savings in dollar assets. Since the dollar is used for most international payments, the U.S. can pay for its huge trade deficit — now running at $500 billion — by merely printing more dollars. It is the U.S.' superpower status and in particular its control over the world's oil that have sustained its status as the safest harbour for international capital. However, the U.S.' ability to soak up the world's savings is a double-edged sword. If foreigners, who hold half or more of the entire U.S. currency, should decide to dump the dollar, its value would plummet, leading to yet more capital flying from the country. In order to prevent that, and to get foreign capital to return, the U.S. would have to raise its interest rates steeply. But given the vast addition to U.S. debt in the last two decades, a steep interest rate hike could have far more disastrous consequences for its economy than it did in 1980 — the severest American recession since World War II. Debt-laden U.S. corporations and consumers would be unable to service their debts, and their assets would flood the market; asset prices would collapse, and banks — swamped with worthless assets instead of income — would, in turn, collapse.

If it is to continue to boost domestic demand with debt, then, the U.S. must prevent the flight of the dollar. That task is made vastly more difficult by the emergence of the euro. Europe's economy is comparable in size and character to that of the U.S. As a matter of sheer prudence, countries would wish to shift a portion of their foreign exchange reserves from the currency of an economy which has a runaway national debt. Moreover, a number of economies, which have been at the receiving end of U.S.' bullying, may demand payment in euros and shift their reserves to that currency in a deliberate attempt to harm the U.S. economy.

At some immediate cost to itself, Iraq has, since November 2000, insisted on being paid in euros. Iran has recently displayed interest in following suit. Venezuela, a similar victim of American intimidation, is a good candidate, and Russia is being wooed by the European Union to make the switch. The dollar's fall is prompting even those with good relations with the U.S. to reconsider. A major oil economy in euros is in the offing. As the demand for euros grows rapidly, demand for the dollar would drop equally rapidly, threatening the American economy with devastating consequences.

In the last five or six years, an important change has taken place in the international oil scene. In the late 1990s, several large oil producers such as Iraq, Iran and Venezuela opened up development of their oil resources to foreign investment. Even Saudi Arabia invited bids for development of its natural gas. The contracts that Iraq signed with the French, Russian, Chinese and Italian firms were stalled, thanks to the sanctions regime. Iran, however, concluded deals with the French, Russian and Malaysian firms even as American firms — barred by U.S. sanctions against that country — gnashed their teeth. Venezuela's increasing assertiveness and consequent alienation from the U.S. did not bode well for the future of American firms there. The sanctions kept the American firms out of Libya and Sudan as well, and Chinese firms have been negotiating huge deals for Indonesian oil.

So before September 11, 2001, the U.S.' oil supremacy stood threatened, and with it the dollar's supremacy, and the ability of the U.S. to contract limitless debt. The invasion of Iraq, it is now widely acknowledged, is merely the first chapter in a wider adventure by the U.S. Not only are regimes unfriendly to the U.S. — such as Iran, Syria, Lebanon, Venezuela and Libya — being targeted. Amazingly, scenarios are being discussed at the top level for invasion of even client states such as Saudi Arabia.Only the physical possession of the bulk of the world's dwindling oil resources and their denial to other powers would allow the U.S. to maintain its oil supremacy as well as dictate terms on a variety of issues — economic and strategic — to countries such as France and Germany, which are entirely dependent on oil imports, as well as to China, the import dependence of which is rapidly increasing.