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Absurdity of Western Politics

By       Message mojmir Babacek     Permalink
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After the second world war the U.S. dollar replaced the British pound sterling as a world-reserve currency that is used in the international trade. The world bankers agreed to make this change in part because of the indebtedness of the British government due to war expenses. The U.S. dollar was based on gold with the exchange rate set at 35 $ per ounce. In consequence the other world currencies fixed their exchange rates relative to the U.S. dollar. For that matter demand for dollars was growing and as a result its value was rising and the USA could import goods and commodities for cheaper prices than before. The world central banks preferred as well to deposit their reserves in the U.S. treasuries and so the U.S. government could borrow money easier than other governments. But borrowing too much money by the U.S. governments would threaten the convertibility of dollar to gold. And this is what was happening. In 1971 president Richard Nixon terminated the dollar convertibility for gold.

In 1974 the National Security Advisor to president Richard Nixon, Henry Kissinger, conceived a brilliant idea for how to strengthen again the position of the U.S. dollar in the world economy. He convinced Saudi Arabia to sell oil exclusively for U.S. dollars in exchange for the U.S. guarantee of security to Saudi Arabia against military attacks including attack by Israel. In the following years the USA made similar deals with all Arabian oil-exporting countries. Since then all oil-importing countries had to look for dollars to be able to buy oil and  oil-exporting countries were depositing parts of their incomes in the U.S. treasuries. The greatest amounts of money in the world economy are spent for oil. So the demand for dollars in the world grew again, the U.S. imports became still cheaper, and U.S. production ceased to be the only source of prosperity of the country. Just an example -- while 80% of the GDP of the Czech Republic in Europe is generated by exports, 70% of the U.S. GDP comes from personal consumption.

In 2012 the U.S. GDP was $15.685 trillion and $11.119 trillion went toward household purchases. Out of that $7.336 trillion was produced in services and $3.783 was spent for goods. In the same year the USA imported goods for $2.7 trillion ( and U.S. exports were 2.2 trillion.  This means about $500 billion was the foreign-trade deficit. The U.S. trade deficit with China was $315 billion ( In this way imports, to a degree, make up for the American production (and Chinese work for Americans).

We should not leave out that 19.5% ($3.063 trillion) of the U.S. GDP in 2012 was added by the U.S. government spending. Out of those 3 trillion almost one trillion was borrowed by the U.S. government and U.S.-government debt reached $16.067 trillion or 102% of the GDP. All the same the lasting demand for U.S. dollars helps the USA keep the AAA ratings by credit-rating agencies. If the U.S. dollar would lose its status of a world-reserve currency, the demand for dollars would drop rapidly and the ratings would follow up, which would cause a rise in interest rates for the loans to the U.S. government. Consequently the interest rates in the USA would rise, which would slow down the U.S. economy ( Because of high interest rates the U.S. government could not borrow extensively to counter the recession. The demand for the redemption of the U.S. treasuries would rise, driving further down the exchange rate of the U.S. dollar and making imports more expensive. The U.S. economy would be hit by a rather deep crisis.

James G. Ricards, who has been the U.S. government agencies adviser since 2001 with 35 years of experience in Wall Street and who in 2006 predicted the financial crisis, warned recently that if the trust in U.S. dollar suffered a precipitous crisis, housing and stock markets could drop 50% or more and the USA could lose 50 or even 100 trillion of its wealth. This represents 3 to 6 years' work of the U.S. economy. Several U.S. economists warn that this could happen as a result of current extensive borrowing by the U.S. government. Its inflational printing of money makes foreign central banks wonder what losses they may suffer due to the weakening value of dollars in their reserves and they might decide to sell them, pushing the price of dollars further down. If such crash takes place, it will have positive results in the long run -- the price of consumer goods produced in the USA would go down and some part of the U.S. industrial production would return to the USA and U.S. exports would get cheaper, which would further strengthen the American economy. However, the positive developments could take place only after the crisis.

Although there is a good probability that the process of transfer to multitude of world-reserve currencies will take several years or even decades (euro has already become the second world-reserve currency) , the U.S. government is trying to prevent such transfer at all costs, as it is documented by the history of the past 12 years.

In the year 2000 the Iraqi government asked the United Nations for a permit to sell oil for euros instead of dollars, which it considered to be the currency of the enemy state ( Three years later Iraq was occupied by Western states led by the United States. In the year 2010 the Libyan leader, Muammar Gaddafi, convinced the majority of Arabian states to refuse the dollar and euro and, taking example from Europe, to use a common new currency -- the gold dinar, which would be used for payments for oil as well. Nicolas Sarkozy, the french president at this time, called Libya a threat to international financial security and Gaddafi's government was overthrown with the support of NATO ( Though today the gold dinar actually exists, its value is pegged to the U.S. dollar.

In the course of the year 2007 Iran asked its customers to pay for oil in other currencies than dollars and euros and in December of the same year announced that it has no more customers paying in dollars and that it does not accept dollar payments any more. At the turn of the year 2011 the USA, Great Britain, and Israel were getting ready for military attack on Iran and only the threat made by Russia and China that their armies would take sides with Iran, made them retreat (

In the year 2008 the U.S. government reacted to financial crisis by bailing out some of the greatest U.S. banks for $700 billion. Doing so, it took advantage of the privileged position of the U.S. dollar in the world and actually just printed more money, which was not backed by gold. In this way the dollar found itself under inflational pressure and the reserves saved by foreign states as well as the U.S. treasuries (in the year 2011 46% of the U.S. treasuries were owned by foreigners ( began to lose its value. James Rickards, who warned already in 2006 that financial crisis is imminent, started warning the U.S. government that the world governments will strive to defend themselves against the devaluation of their savings by applying countermeasures, which could result in a crash of the U.S.-financial system. In his opinion the U.S. government tries to devalue the U.S. dollar in an attempt to boost U.S. exports while undermining the competitiveness of China   and other U.S. trading partners (

At the beginning of the year 2012 the U.S. government announced that it will move a larger part of its navy to the Pacific Ocean ( In September 2012 China declared that its banking system and all of its communication systems and transfer systems are ready to enable any nation in the world that wishes it, from this point on, to buy, sell, or trade crude oil for the Chinese currency. A day later, on September 7, Russia agreed to sell to China any amount of oil it will need not asking for payments in dollars ( Before this happened, oil-producing Nigeria had already agreed to swap a major portion of its dollar reserves for yuan reserves and China signed a $5 billion deal with the United Arab Emirates to buy oil in yuan. After the Western sanctions cut off Iran from dollar transactions, China was buying the Iranian oil for yuans, India for rupees, and Turkey for gold. With Brazil China signed an agreement to use in half of their mutual trade ($ 30 billion) their own currencies and it signed currency-swap agreements as well with Japan, South Korea, Philippines,  and Australia ( . With Saudi Arabia China signed a deal to build an oil refinery for $ 8.5 billion ( . So the prospects are growing that China might in the future buy oil from Saudi Arabia for yuans.

There is no doubt that China is using its position of the world's second-largest factory (the USA represent nearly 25% of the world domestic product and China 13.3%) to promote its currency to the world reserve-currency status. But there is a long way ahead for China to reach this goal. Currently more than 60% of the world financial reserves are deposited in U.S. dollars (during the past 13 years the share of the U.S. dollars dropped by almost 10%) and about 25% in euros. As well the Chinese currency is not freely convertible and China's domestic markets are mostly closed to foreigners. China could hardly change this situation without becoming a democratic country. However, this June, before travelling to Europe, the Chinese president Xi Jinping told a Swiss newspaper that China is getting ready for liberalisation of interest and exchange rates and opening its state-run sectors such as finance, energy, and telecoms to private investors  ( ) . If this happens, the yuan could eventually become one of the world-reserve currencies.

The fastest-developing states keep looking for ways to prevent losses caused by declining value of the U.S. dollar and get out of the hold of the U.S. banks, which caused the last worldwide economic crisis. The BRICS states' production represents nowadays 20% of the world"s GDP and between the years 2000 and 2008 their economic growth accounted for almost one-half of the world's economic growth. At their last summit they decided to form their own development bank and they are working towards a creation of their own foreign-trade currency.

The American government reacts to this evolution by surrounding Russia and China by military bases and sending the U.S. navy to the Chinese coast, and until recently its military spending was almost equal to the second world-war levels. In this way the West, led by the USA, began to rely more on its military strength than on its economic ability and abandoned the principles that paved the way for its success in the past. The idea that the U.S. military will stop the world's economy development is absurd. But this makes it much more difficult to understand the strategy of the U.S. government, which is undermining the dollar position on the world's currency market by rising its debt by excessive military spending. Out of three trillion spent by the U.S. government in 2011, $ 809 billion was spent on defense (almost all the money the U.S. government had borrowed in th at year)  ( ) .  

Foreign policy of the U.S. government and western world thrives to cut off China from sources of raw materials and oil in the African and Arabian world by military support of friendly politicians and military occupation of disobedient states. Since the USA, in occupied states like Iraq or Afghanistan, has no other option than to promote democracy, they have no means to force the elected governments   to stop exports to China and other fast-developing countries. In Iraq and Libya Chinese and Russian companies are extracting oil as well as western companies. No democratically elected government can accord to limit their exports to only one country, which could then try to get lower prices. It could only lose the support of its citizens in this way. However the U.S. expenses for the wars in the past decade reached trillions of dollars and helped to jeopardize the position of the U.S. dollar as a world-reserve currency.

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I graduated in 1972 at Charles University in Prag in philosophy and economy. In 1978 I signed in with the human rights organization in the communist Czechoslovakia and in 1981 I emigrated to the USA. In 1988 I came back to Czechoslovakia. I am (more...)

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