The Guardian 4 April, 2007

The proposed Iranian oil bourse will
accelerate the fall of the US Empire


Krassimir Petrov, PhD

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.


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.

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 US dollar.

Here is how it worked. Early in the 20th century, the US economy began to dominate the world economy. The US 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, substantially increased the amount of currency in circulation, and thus rendered the backing of US dollars by gold impossible.

The dollar and gold

This led Roosevelt to decouple the dollar from gold in 1932. Up to this point, the US 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 US 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 a significant portion of the world’s gold.

In the 1960s, the guns-and-butter policy 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 US trade deficits was tantamount to a tax — the classical inflation tax that a country imposes on its own citizens. But this time around [it was] an inflation tax that the US imposed on the rest of the world.

When in 1970-1971 foreigners demanded payment for their dollars in gold the US 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 US Government. Essentially, the US 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.

Dollars for 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 US 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.

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. 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 Euros 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 Euros and Yen, the danger to the dollar was clear and 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, therefore, the American Empire. It was about setting an example that anyone who demanded payment in currencies other than US dollars would be likewise punished.

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, military cost. Instead, Bush must have gone into Iraq to defend his Empire. 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 US 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 US dollar, and thus, the American Empire.

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 [proposed] Iranian Oil Bourse. (Note: it was to have been opened in March 2006 but has been delayed and is even now not open. Its opening would almost certainly result in immediate bombing and invasion by US and Israeli forces).

In economic terms an Iranian oil market would represent a much greater threat to the hegemony of the dollar than Saddam’s, because it would allow anyone willing either to buy or to sell oil for Euros, thus circumventing the US dollar altogether. It is likely that almost everyone would eagerly adopt this euro oil system.

The Europeans would not have to buy and hold dollars in order to secure their payments 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 Europeans at the expense of the Americans.

The Chinese and the Japanese would 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.

The Russians have inherent economic interests in adopting the Euro — the bulk of their trade is with European countries, with oil-exporting countries, with China, and with Japan. The Russians seemingly detest holding depreciating dollars. 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 they 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. So far, they have had many reasons to stick with the winner. When they see their century-old US partner falling, will they firmly stand behind him or will they deliver the coup de grace? 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.

[For all these reasons] the Americans cannot allow an Iranian oil bourse to happen, and if necessary, will use a vast array of strategies to halt or hobble the operation.

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. Feverish rhetoric about Iranians developing nuclear weapons undoubtedly serves to prepare this course of action. A nuclear strike is a terrible strategic choice [and] the Americans will likely use Israel to do their dirty nuclear job.

Unilateral Total War is obviously the worst strategic choice. The US military resources have been already depleted with two wars [and] the Americans would further alienate other powerful nations. Major dollar-holding countries may decide to quietly retaliate by dumping their own mountains of dollars, thus preventing the US from further financing its military ambitions.

From a purely economic point of view, should the Iranian Oil Bourse gain momentum, it would be eagerly embraced by major economic powers and will precipitate the demise of the dollar. The collapsing dollar will dramatically accelerate US inflation and will pressure upward US long-term interest rates. At this point, the Fed will find itself between deflation and hyperinflation. Deflation 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.

Alternatively, it could take the course of inflation which would drown the financial system in liquidity. Sooner or later, the monetary system must swing one way or the other, forcing the Fed to make its choice. No doubt the chairman of the Fed Reserve Bank Ben Bernanke, who is a renowned scholar of the Great Depression, will choose inflation.

To avoid deflation, he will resort to the printing presses and monetise everything in sight. His ultimate accomplishment will be the hyperinflationary destruction of the American currency and from its ashes will arise the next reserve currency of the world — that barbarous relic called gold.

The author Krassimir Petrov has received his PhD in economics from the Ohio State University and currently teaches Macroeconomics, International Finance, and Econometrics at the American University in Bulgaria. He is looking for a career in Dubai or the United Arab Emirates.

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