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www.ambiente.us  MAY / MAYO 2008

Stagflation, Pt. 2
by Carlos T. Mock, M.D.

STAGFLATION, Pt 2
by Carlos T. Mock

OPEC Nations are again discussing which currency
should be used to pay for petroleum.  The disagreement
was revealed when a ministerial meeting last November,
supposed to be in closed session, was accidentally
broadcasted live to reporters.

The Iranian and Venezuelan ministers called for measures
that are more radical and a specific mention of the effect
of the dollar to be added to the draft declaration: specifically
to change the OPEC currency from the dollar to the Euro.
This is very significant because petroleum based on the dollar has been the “flywheel� of our
economy, keeping it steadily moving through the world economy’s ups and downs.

But Saud Al-Faisal, the Saudi foreign affairs minister, warned the meeting: “The mere mention that OPEC
is studying the issue of the dollar is going to have an impact.â€�  He said a reference to the US currency in
the declaration could cause the dollar to “collapse�.

As the dollar continues its relentless six-year slide against the euro and other main currencies, the question
is being asked more and more: what would it mean if the dollar ceded its global dominance to the euro?

Now turn the clock backwards to 2001. After 9/11 and the collapse of the US economy, Iraq, Iran, and
Venezuela ministers wanted to change the OPEC’s currency from the dollar to the euro.  An intelligence
report came to the US administration that the Saudi minister was leaning towards the idea.

The main rationale for the Iraq Invasion and Occupation offered by U.S. President George W. Bush, former
Prime Minister of the United Kingdom Tony Blair, former Prime Minister of Spain José María Aznar and
their domestic and foreign supporters, was the allegation that Iraq possessed and was actively developing
weapons of mass destruction (WMD). Leaders and diplomats from countries on the U.N. Security Council
that opposed the war made statements that contested this view.  These weapons, it was argued, posed a
threat to the United States, its allies and interests.  In the 2003 State of the Union Address, Bush claimed that
the U.S. could not wait until the threat from Iraqi leader Saddam Hussein became imminent.  In January
2005, the Iraq Survey Group concluded that Iraq had ended its WMD programs in 1991 and had no WMD at
the time of the invasion; although some misplaced or abandoned remnants of pre-1991 production were
found, US Government spokespeople confirmed that these were not the weapons for which the US "went to
war".  The weapons for which the US and coalition partners invaded have not been found. Some U.S. officials
cited claims of a connection between Saddam Hussein and al-Qaeda. No evidence of any operational or
collaborative relationship with al-Qaeda has been found.

But all this was fine with President Bush.  The USA had delivered Saudi Arabia “a clear pictureâ€� of
what could happen in they abandoned the US Dollar for the Euro currency.  Even Iran, who in 11 years could
not destroy the Iraqi army, was suddenly mum on the dollar issue.

The dollar vs. Euro question is today a serious one because the US Federal Reserve has been pumping new
dollars into the global economy at an astounding pace.  A broad measure of US money supply growth was
increasing at a rate not seen since 1971 when President Richard Nixon imposed price controls and ended
the dollar’s convertibility into gold, which recently roared above $1,000 an ounce.  The result is consumer
prices having recently climbed 4 per cent from a year ago, and wholesale prices having soared 6.9 per cent.  
All of this leads to higher consumer price inflation around the corner. We are living witnesses to Milton
Friedman’s famous dictum that “inflation is always and everywhere a monetary phenomenon, in the
sense that it cannot occur without a more rapid increase in the quantity of money than in output�.

The Fed is acting with the best of intentions to head off a recession.  But in a rapidly globalizing financial
marketplace, it is in fact accelerating the demise of its own unique powers.  Virtually all national economies
show a positive link between currency depreciation and inflation and between depreciation and interest rates,
meaning that their central banks cannot use loose monetary policy to stimulate their economies – it only
fuels capital outflows and a rise in market interest rates to attract it back.  Not so the US, whose currency has
commanded a unique premium as the global store of value and the transaction vehicle for international trade.
But this may be changing. The dollar is looking increasingly like a typical developing country’s currency,
with long-term market interest rates, crucial to determining borrowing and investment behavior, climbing as
the Fed pushes hard in the other direction—Stagflation.

If international use of the euro were to continue to rise, the Fed would lose other important powers.  In a
financial crisis, central banks are supposed to act as “lenders of last resort�, printing money to prop
up banks and reassure their depositors.  This does not work in developing countries.  People withdraw
money anyway.  Their fear is not that the government will let the banks collapse but rather that printing money
brings inflation and depreciation.  So, they exchange their currency for “hard currencyâ€�, undermining
the putative powers of their central banks.

But what if Americans were to do the same, selling dollars for euros in a crisis? The Fed would become
impotent. This is not science fiction. American investors have lately been pouring money into foreign bond
funds at a record rate.

What about America’s political power in the world?  A continuing fall in the dollar means a fall in the
global purchasing power of all its foreign assistance, whether for humanitarian, economic, or military
purposes.

But it means much more than that. The US has exploited the unique role of the dollar in international trade
and investment to disrupt the financial flows of its adversaries, such as North Korea and Iran.  If such
transactions switched to euros and were funneled through institutions not doing business in the US, this
power would be neutered.  The US would likewise lose influence over both friends and enemies facing
financial problems, as they would be looking increasingly to Europe for euros, rather than to America for
dollars.

The irony of this is that the current administration has not learned from the Iraq fiasco: invading a country
does not protect your currency.  Fast forward to 2008 and now there’s talk of invading Iran.  You will hear
threats of nuclear proliferation being mentioned by the current President Bush.  But in the end, it is always
about money.  Iran would be the next easiest target to again influence “our friendsâ€� the Saudi's to â
€œstay the course of the dollar.â€�

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ABOUT THE AUTHOR

Carlos T. Mock, MD
773-561-6617
Uptown Chicago
Www.carlostmock.com
Author: Borrowing Time: A Latino Sexual Odyssey - Floricanto Press 2003.
Nominated for a Stonewall Award by the American Library Association GLBT
Round Table.
Author: The Mosaic Virus – Floricanto Press 2007.  Nominated for a Stonewall Award by the American
Library Association GLBT Round Table, and a Lammie from The Lambda Literary Foundation
Author: Author: Papi Chulo – Floricanto Press 2007.  Nominated for a Stonewall Award by the American
Library Association GLBT Round Table, and a Lammie from The Lambda Literary Foundation

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