Internet Sea Cables Cut to stave off Oil Bourse?

On Wendsay, January 30, 2008; the first Two major sea cables linking Europe and Asia were cut near Alexendria, reducing internet capacity in Asia by 75%.

Then on Friday, Feb 1, 2008; Third undersea cable cut in Middle East

A third undersea Internet cable has been reported severed in the Mideast, this one at the opposite end of the Arabian Peninsula.

Indian network operator FLAG Telecom, which owns the cable, said the fiber-optic cable was cut United Arab Emirates and Oman, about 35 miles off Dubai. 2nd Article

Then on Sunday, Feb 3, 2008; Fourth cable cut in Mideast

Also reports comming that on shore video survelance evidence proves that the 2 main cables Cut on Wensday 01/30/08 were in fact not cut by boat anchors as originally mis-reported by the propaganda based mass-media. news reference link

Is the US Dollar backed by GOLD or OIL?

The Proposed Iranian Oil Bourse
by Krassimir Petrov

I. Economics of Empires

A nation-state taxes its own citizens, while an empire taxes other nation-states. The history of empires, from Greek and Roman, to Ottoman and British, teaches that the economic foundation of every single empire is the taxation of other nations. The imperial ability to tax has always rested on a better and stronger economy, and as a consequence, a better and stronger military. One part of the subject taxes went to improve the living standards of the empire; the other part went to strengthen the military dominance necessary to enforce the collection of those taxes.

Historically, taxing the subject state has been in various forms—usually gold and silver, where those were considered money, but also slaves, soldiers, crops, cattle, or other agricultural and natural resources, whatever economic goods the empire demanded and the subject-state could deliver. Historically, imperial taxation has always been direct: the subject state handed over the economic goods directly to the empire.

For the first time in history, in the twentieth century, America was able to tax the world indirectly, through inflation. It did not enforce the direct payment of taxes like all of its predecessor empires did, but distributed instead its own fiat currency, the U.S. Dollar, to other nations in exchange for goods with the intended consequence of inflating and devaluing those dollars and paying back later each dollar with less economic goods—the difference capturing the U.S. imperial tax. Here is how this happened.

Early in the 20th century, the U.S. economy began to dominate the world economy. The U.S. dollar was tied to gold, so that the value of the dollar neither increased, nor decreased, but remained the same amount of gold. The Great Depression, with its preceding inflation from 1921 to 1929 and its subsequent ballooning government deficits, had substantially increased the amount of currency in circulation, and thus rendered the backing of U.S. dollars by gold impossible. This led Roosevelt to decouple the dollar from gold in 1932. Up to this point, the U.S. may have well dominated the world economy, but from an economic point of view, it was not an empire. The fixed value of the dollar did not allow the Americans to extract economic benefits from other countries by supplying them with dollars convertible to gold.

Economically, the American Empire was born with Bretton Woods in 1945. The U.S. dollar was not fully convertible to gold, but was made convertible to gold only to foreign governments. This established the dollar as the reserve currency of the world. It was possible, because during WWII, the United States had supplied its allies with provisions, demanding gold as payment, thus accumulating significant portion of the world’s gold. An Empire would not have been possible if, following the Bretton Woods arrangement, the dollar supply was kept limited and within the availability of gold, so as to fully exchange back dollars for gold. However, the guns-and-butter policy of the 1960’s was an imperial one: the dollar supply was relentlessly increased to finance Vietnam and LBJ’s Great Society. Most of those dollars were handed over to foreigners in exchange for economic goods, without the prospect of buying them back at the same value. The increase in dollar holdings of foreigners via persistent U.S. trade deficits was tantamount to a tax—the classical inflation tax that a country imposes on its own citizens, this time around an inflation tax that U.S. imposed on rest of the world.

When in 1970-1971 foreigners demanded payment for their dollars in gold, The U.S. Government defaulted on its payment on August 15, 1971. While the popular spin told the story of “severing the link between the dollar and gold”, in reality the denial to pay back in gold was an act of bankruptcy by the U.S. Government. Essentially, the U.S. declared itself an Empire. It had extracted an enormous amount of economic goods from the rest of the world, with no intention or ability to return those goods, and the world was powerless to respond— the world was taxed and it could not do anything about it.

From that point on, to sustain the American Empire and to continue to tax the rest of the world, the United States had to force the world to continue to accept ever-depreciating dollars in exchange for economic goods and to have the world hold more and more of those depreciating dollars. It had to give the world an economic reason to hold them, and that reason was oil.

In 1971, as it became clearer and clearer that the U.S Government would not be able to buy back its dollars in gold, it made in 1972-73 an iron-clad arrangement with Saudi Arabia to support the power of the House of Saud in exchange for accepting only U.S. dollars for its oil. The rest of OPEC was to follow suit and also accept only dollars. Because the world had to buy oil from the Arab oil countries, it had the reason to hold dollars as payment for oil. Because the world needed ever increasing quantities of oil at ever increasing oil prices, the world’s demand for dollars could only increase. Even though dollars could no longer be exchanged for gold, they were now exchangeable for oil.

The economic essence of this arrangement was that the dollar was now backed by oil. As long as that was the case, the world had to accumulate increasing amounts of dollars, because they needed those dollars to buy oil. As long as the dollar was the only acceptable payment for oil, its dominance in the world was assured, and the American Empire could continue to tax the rest of the world. If, for any reason, the dollar lost its oil backing, the American Empire would cease to exist. Thus, Imperial survival dictated that oil be sold only for dollars. It also dictated that oil reserves were spread around various sovereign states that weren’t strong enough, politically or militarily, to demand payment for oil in something else. If someone demanded a different payment, he had to be convinced, either by political pressure or military means, to change his mind.

The man that actually did demand Euro for his oil was Saddam Hussein in 2000. At first, his demand was met with ridicule, later with neglect, but as it became clearer that he meant business, political pressure was exerted to change his mind. When other countries, like Iran, wanted payment in other currencies, most notably Euro and Yen, the danger to the dollar was clear and present, and a punitive action was in order. Bush’s Shock-and-Awe in Iraq was not about Saddam’s nuclear capabilities, about defending human rights, about spreading democracy, or even about seizing oil fields; it was about defending the dollar, ergo the American Empire. It was about setting an example that anyone who demanded payment in currencies other than U.S. Dollars would be likewise punished.

Many have criticized Bush for staging the war in Iraq in order to seize Iraqi oil fields. However, those critics can’t explain why Bush would want to seize those fields—he could simply print dollars for nothing and use them to get all the oil in the world that he needs. He must have had some other reason to invade Iraq.

History teaches that an empire should go to war for one of two reasons: (1) to defend itself or (2) benefit from war; if not, as Paul Kennedy illustrates in his magisterial The Rise and Fall of the Great Powers, a military overstretch will drain its economic resources and precipitate its collapse. Economically speaking, in order for an empire to initiate and conduct a war, its benefits must outweigh its military and social costs. Benefits from Iraqi oil fields are hardly worth the long-term, multi-year military cost. Instead, Bush must have went into Iraq to defend his Empire. Indeed, this is the case: two months after the United States invaded Iraq, the Oil for Food Program was terminated, the Iraqi Euro accounts were switched back to dollars, and oil was sold once again only for U.S. dollars. No longer could the world buy oil from Iraq with Euro. Global dollar supremacy was once again restored. Bush descended victoriously from a fighter jet and declared the mission accomplished—he had successfully defended the U.S. dollar, and thus the American Empire.


II. Iranian Oil Bourse

The Iranian government has finally developed the ultimate “nuclear” weapon that can swiftly destroy the financial system underpinning the American Empire. That weapon is the Iranian Oil Bourse slated to open in March 2006. It will be based on a euro-oil-trading mechanism that naturally implies payment for oil in Euro. In economic terms, this represents a much greater threat to the hegemony of the dollar than Saddam’s, because it will allow anyone willing either to buy or to sell oil for Euro to transact on the exchange, thus circumventing the U.S. dollar altogether. If so, then it is likely that almost everyone will eagerly adopt this euro oil system:

· The Europeans will not have to buy and hold dollars in order to secure their payment for oil, but would instead pay with their own currencies. The adoption of the euro for oil transactions will provide the European currency with a reserve status that will benefit the European at the expense of the Americans.

· The Chinese and the Japanese will be especially eager to adopt the new exchange, because it will allow them to drastically lower their enormous dollar reserves and diversify with Euros, thus protecting themselves against the depreciation of the dollar. One portion of their dollars they will still want to hold onto; a second portion of their dollar holdings they may decide to dump outright; a third portion of their dollars they will decide to use up for future payments without replenishing those dollar holdings, but building up instead their euro reserves.

· The Russians have inherent economic interest in adopting the Euro – the bulk of their trade is with European countries, with oil-exporting countries, with China, and with Japan. Adoption of the Euro will immediately take care of the first two blocs, and will over time facilitate trade with China and Japan. Also, the Russians seemingly detest holding depreciating dollars, for they have recently found a new religion with gold. Russians have also revived their nationalism, and if embracing the Euro will stab the Americans, they will gladly do it and smugly watch the Americans bleed.

· The Arab oil-exporting countries will eagerly adopt the Euro as a means of diversifying against rising mountains of depreciating dollars. Just like the Russians, their trade is mostly with European countries, and therefore will prefer the European currency both for its stability and for avoiding currency risk, not to mention their jihad against the Infidel Enemy.

Only the British will find themselves between a rock and a hard place. They have had a strategic partnership with the U.S. forever, but have also had their natural pull from Europe. So far, they have had many reasons to stick with the winner. However, when they see their century-old partner falling, will they firmly stand behind him or will they deliver the coup de grace? Still, we should not forget that currently the two leading oil exchanges are the New York’s NYMEX and the London’s International Petroleum Exchange (IPE), even though both of them are effectively owned by the Americans. It seems more likely that the British will have to go down with the sinking ship, for otherwise they will be shooting themselves in the foot by hurting their own London IPE interests. It is here noteworthy that for all the rhetoric about the reasons for the surviving British Pound, the British most likely did not adopt the Euro namely because the Americans must have pressured them not to: otherwise the London IPE would have had to switch to Euros, thus mortally wounding the dollar and their strategic partner.

At any rate, no matter what the British decide, should the Iranian Oil Bourse accelerate, the interests that matter—those of Europeans, Chinese, Japanese, Russians, and Arabs—will eagerly adopt the Euro, thus sealing the fate of the dollar. Americans cannot allow this to happen, and if necessary, will use a vast array of strategies to halt or hobble the operation’s exchange:

· Sabotaging the Exchange—this could be a computer virus, network, communications, or server attack, various server security breaches, or a 9-11-type attack on main and backup facilities.

· Coup d’état—this is by far the best long-term strategy available to the Americans.

· Negotiating Acceptable Terms & Limitations—this is another excellent solution to the Americans. Of course, a government coup is clearly the preferred strategy, for it will ensure that the exchange does not operate at all and does not threaten American interests. However, if an attempted sabotage or coup d’etat fails, then negotiation is clearly the second-best available option.

· Joint U.N. War Resolution—this will be, no doubt, hard to secure given the interests of all other member-states of the Security Council. Feverish rhetoric about Iranians developing nuclear weapons undoubtedly serves to prepare this course of action.

· Unilateral Nuclear Strike—this is a terrible strategic choice for all the reasons associated with the next strategy, the Unilateral Total War. The Americans will likely use Israel to do their dirty nuclear job.

· Unilateral Total War—this is obviously the worst strategic choice. First, the U.S. military resources have been already depleted with two wars. Secondly, the Americans will further alienate other powerful nations. Third, major dollar-holding countries may decide to quietly retaliate by dumping their own mountains of dollars, thus preventing the U.S. from further financing its militant ambitions. Finally, Iran has strategic alliances with other powerful nations that may trigger their involvement in war; Iran reputedly has such alliance with China, India, and Russia, known as the Shanghai Cooperative Group, a.k.a. Shanghai Coop and a separate pact with Syria.

Whatever the strategic choice, from a purely economic point of view, should the Iranian Oil Bourse gain momentum, it will be eagerly embraced by major economic powers and will precipitate the demise of the dollar. The collapsing dollar will dramatically accelerate U.S. inflation and will pressure upward U.S. long-term interest rates. At this point, the Fed will find itself between Scylla and Charybdis—between deflation and hyperinflation—it will be forced fast either to take its “classical medicine” by deflating, whereby it raises interest rates, thus inducing a major economic depression, a collapse in real estate, and an implosion in bond, stock, and derivative markets, with a total financial collapse, or alternatively, to take the Weimar way out by inflating, whereby it pegs the long-bond yield, raises the Helicopters and drowns the financial system in liquidity, bailing out numerous LTCMs and hyperinflating the economy.

The Austrian theory of money, credit, and business cycles teaches us that there is no in-between Scylla and Charybdis. Sooner or later, the monetary system must swing one way or the other, forcing the Fed to make its choice. No doubt, Commander-in-Chief Ben Bernanke, a renowned scholar of the Great Depression and an adept Black Hawk pilot, will choose inflation. Helicopter Ben, oblivious to Rothbard’s America’s Great Depression, has nonetheless mastered the lessons of the Great Depression and the annihilating power of deflations. The Maestro has taught him the panacea of every single financial problem—to inflate, come hell or high water. He has even taught the Japanese his own ingenious unconventional ways to battle the deflationary liquidity trap. Like his mentor, he has dreamed of battling a Kondratieff Winter. To avoid deflation, he will resort to the printing presses; he will recall all helicopters from the 800 overseas U.S. military bases; and, if necessary, he will monetize everything in sight. His ultimate accomplishment will be the hyperinflationary destruction of the American currency and from its ashes will rise the next reserve currency of the world—that barbarous relic called gold.

On the Eve of Depression, Some Historical Perspective

"The popular view of the Great Depression is that of Ben Bernanke. This camp believes the Fed did not provide sufficient liquidity (e.g. freshly minted credit and money) to inoculate the economy from the Great Depression. If only the policy makers of that age had properly acted, disaster would have been averted, or so the theory goes."


Our camp, on the other hand, views the [1st] Great Depression as the consequence of compounding errors on top of previously made errors – all instigated by sloppy policy action at the Fed. That’s because it was the Fed itself that had ginned-up irrational exuberance during the roaring 20’s by briskly expanding money supply and credit.

This was partially done in response to World War I in order to restore fiscal order for its allies. At the time, Britain was functionally bankrupt and had destroyed the pound as it financed its war efforts any way it could – heavily through inflation. With precious metal still backing its currency, after the War the British Treasury was in trouble, as was its banking system. (Such are, after all, the just deserts of such a stupid, ego fueled war.)

In response to a deteriorating British Pound, the Fed — itself a banking cartel sharing many private interests with Great Britain’s bankers — along with bedfellows in the U.S. and British Governments, all thought it made sense to devalue the U.S. dollar to strengthen Britain’s situation.

Consequently, along with the flood of liquidity during the late teens and early 20’s came a Tsunami of confidence in the economy and the impression of newfound wealth as players mistook monetary expansion for genuine production-based growth, as they are always prone to do with any inflationary environment. Errors began to compound and cluster, and soon enough, Florida Real Estate boomed, bubbled, and burst. The equity markets joined in the hoorah as it rocketed into the sky.

But, as is always the case, the high tide of credit and easy money can only last so long before the consequences are exposed when the tide goes back out. The trigger then, as it has been recently, was the requisite retrenchment of easy-money policy. In the 1920s this phenomenon was held further in check by the fact that the U.S. dollar was entirely redeemable in gold at $20 to the ounce. In other words, bank insolvency would be exposed as dollar holders would redeem their notes for the gold they expected to be held in reserve.

Since much of the activity taking place in the economy in such environments is only viable so long as the easy money is forthcoming, as the easy money pace plateaus or recedes, the activity that grew on the back of the expansion collapses on itself. And in 1929 boy, did it ever! Unfortunately, today we suffer a more distended fate with the dollar having absolutely nothing backing it to anchor monetary authorities or the economy to a healthy reality!

With boom comes bust, and usually in proportion to the distention of the boom. And so it was in 1929, with the economy suffering from massive misallocation of resources away from productive activity, the stock market was exposed for being irrationally priced. In other words, it had been driven largely by easy-money circulating through the system, not genuine, rational production.
Ironically, that is where the relevance to our story today begins.

At any rate, while few have bothered to listen to our camp’s warnings about the consequences to the credit and business-cycle from monkeying with credit and money, our line of reasoning (classical / Austrian based economic thought) provides the most rational explanation for how and why we got where we are, and where we are heading. (Feel free to peruse Vigilant Investor archives for evidence or our rational thinking dating back to April 2005.)

As such, when we look back to Hoover and FDR, we see a government intervening and compounding the errors that caused the market to plunge in 1929. What should have been a poignant recession as consequence of the previous compounded errors during the 1920s was instead extended.

How so?
The inherent nature of credit and money manipulation is to confiscate wealth from the productive sector and reallocate it to the go-go sectors that are by themselves unneeded and unsustainable (e.g. what’s bubbling). That’s what is exposed during any economic bust; hence the natural corrective action is to — believe it or not — do NOTHING. The best thing is to simply let the dust settle, to let the losses cleanse themselves from the marketplace, and to let productivity-oriented order reassert itself in the economy. This directs all actors on the micro level to the most economically rational use of their limited and valuable resources – to where they were needed all along, and away from where they had been redirected into unsustainable ventures. Simply, failing and idle assets are efficiently freed up to be returned towards their most productive uses, thus ending their drag on the economy.

Looking to today as an example, we can clearly see a massive clustering of errors in all things related to housing, mortgages, and even banking, each exposed as naked to one and all! (I expect a great deal more are to come, with revolving credit and commercial / retail real estate heading off the same cliff as housing, followed by trouble in default-related derivatives!) This is virtually no different than what was exposed after the boom of the 1920s as the economy collapsed, with the exception that our situation today is far more complex and dramatically more distended.

How did we get here? We can thank a free-floating, unbacked credit and currency expansion colliding with modern financial technology. This lead many pundits to promote a belief that risk was sufficiently intermediated in ways that inoculated the economy like never before, a new era justifying all sorts of valuations and leverage.

But our situation had become a fiction no different from what transpired in the 1920s. If our readers have doubts about such harsh sentiments, I encourage you to run those doubts across the context of what’s transpired in the credit markets over the last 12 months - - all of which blindsided the conventional wisdom dominating popular economic theory. How many $ trillions will have to vanish before we conclude certain assumptions were exceptionally wrong, and that perhaps we’ve fallen victim to believing in a false paradigm? Indeed, all reports suggest our economy’s ability to sustain misallocations into the stratosphere are being exposed as unsustainable – and in our opinion, predictably so.

The question today is as it was at the start of the Great Depression (at least as it was articulated by Austrians such as Hayek and Mises): Should the authorities be confiscating yet more wealth from our productive sectors in order to support other sectors of the economy that were never sustainable from the start without the subsidy of monetary redistribution? Is a .75% cut and more monetary easing the answer, as many demand? Are President Bush’s proposals for fiscal stimulus too little compared to what’s needed, as many have suggested from the moment they were proposed?

The answer lies in what followed the bust of 1929-1939 as the Great Depression deepened. The Hoover administration, contrary to popular belief, did not sit idle, nor did the Federal Reserve of its day. Murray Rothbard’s seminal work, America’s Great Depression, clearly notates how Fed liquidity was dramatically forthcoming as the situation unfolded, and also that much of the action was as useless as pushing on a string. Whatever leaked through to the economy actually served only to sustain and compound previous errors. He was further critical of Hoover’s administration for magnifying the duration, breadth, and intensity of what followed. Rothbard provides no policy panacea for fixing the depression, other than letting it clear as a valuable lesson against having intervened in the first place, which set the whole mess in motion.

As such, Rothbard’s book ends before FDR, making the dramatic statement that the actual Depression had arrived and all FDR contributed was a compounding of Hoover’s errors. Functionally, Hoover’s folly was sufficient to make the point that command, state-run economies are doomed to fail for their own reasons, and therefore such policies only to prolong depressionary busts. FDR’s massive intervention into the economy exponentially exacerbated Hoover’s errors, as evidenced by the ultimate severity of the Great Depression.

We don’t need to recount history of FDR’s policy intervention, although our previous post “Give a man a job! Stupid policy begets lousy results” provides valuable detail. Let it suffice to say, any stimulation packages that confiscate more wealth from the productive sector in order to reallocate it for the purpose of lessening the pain are doomed to create exactly what they purports to fix – more pain. Redirecting productive wealth away from productive activity is the problem, not the solution!

And that lies at the core of where we’re likely heading today. We hold that “the other camp” fails to fully understand what productive growth is and how it comes to be. We’ll save that discussion for later, but as a play on Bill Clinton’s pivotal 1992 election slogan, well summarize it as “Its the Savings, Stupid”.
Unfortunately our policy makers fear savings as the antithesis to “consumption”, their Holy Grail of economic objectives. No doubt, they’ve converted the economies of many major nations to place emphasis on consumption as the primary growth driver to the extent they’ve justified unsustainable debt loads, as well as ridiculous credit and money supply creation, all of which are now imploding. As if we could have ever “spent our way to wealth” and “indebted ourselves to riches!”

As this high bubble tide continues recede and expose all the consequent naked economic activity that is inherent to such sloppy thinking, remember what we’ve just pointed out. Consider the consequences of the prevailing wisdom and what it implies.

-- January 2008 [Text copied from linked article for non-profit historial documentary purposes only, under the fair-use and historical archive doctrine]