The US currency, like its Australian counterpart, is merely a certificate that can be rendered to the government as settlement for taxes due. It is an IOU, no longer convertible for bullion, etc.
The central banks of China and Japan don’t pay tax in the US. Yet they hold great troves of dollar reserves. This allows the US to afford massive quantities of imported manufactured goods and oil, far beyond its ability to export, and provides virtually unlimited funding for the international activities of the US armed forces.
Why is this? One reason lies in the wish of these exporting countries to keep their currency exchange rates competitively low.
But the deeper answer comes from the protection racket Washington runs with the rulers of Saudi Arabia, Kuwait, Bahrain, Qatar, Yemen, Iraq, Jordan etc. Military control over many of the world’s great oilfields, refineries, export terminals and shipping lanes is what secures the dollar’s status as global reserve currency.
It is widely known that, in the 1970s, officials from the US Treasury and State Department pressured the central banks and finance ministries of oil-exporting states (chiefly Saudi Arabia) to become massive holders of US Treasury securities.
OPEC governments were informed that oil prices could rise as much as desired (they had cheapened relative to grain) so long as they were denominated in US dollars, and so long as the revenues were disbursed in an agreeable manner. Oil funds were not to be converted into US corporate acquisitions, real estate or any hard assets. Instead, the Saudi government was to buy US-made military hardware: weaponry, armoured vehicles, fighter jets, helicopters, etc.
The result, four decades on, is that military expenditure makes up around 10% of Saudi GDP, a proportion easily among the highest in the world. Secondly, and above all, funds were to be invested in US government paper. David Spiro explains:
So long as OPEC oil was priced in US dollars, and so long as OPEC invested the dollars in US government instruments, the US government enjoyed a double loan. The first part of the loan was for oil. The government could print dollars to pay for oil, and the American economy did not have to produce goods and services in exchange for the oil until OPEC used the dollars for goods and services. Obviously, the strategy could not work if dollars were not a means of exchange for oil.
The second part of the loan was from all other economies that had to pay dollars for oil but could not print currency. Those economies had to trade their goods and services for dollars in order to pay OPEC. Again, so long as OPEC held the dollars rather than spending them, the US received a loan. It was therefore important to keep OPEC oil priced in dollars at the same time that the government officials continued to recruit Arab funds…
The Saudis…had the greatest proportion of dollar-denominated reserves in OPEC…In an attempt to continue the recruitment of Saudi funds, and in competition with other industrial powers, the State and Treasury Departments went to extraordinary lengths to prevent the Congress from gathering information. The Secretary of the Treasury even went to the trouble of making sure the CIA remained secretive. It was this secrecy, not accorded the investments of any other nation, that led the Commerce Department to complain that it was unable to compile accurate data on either foreign investment in the US or its balance of payments.
The friendly landlord regime in Riyadh, more than Washington’s subcontractors in Tel Aviv, or the beachheads in London or Tokyo, is the keystone in the arch of US imperial power.
Saudi rulers were quick this week to announce that the KSA stood ‘with all its capabilities’ behind ‘the restoration of calm and stability to Bahrain under its wise leadership.’ Bahrain lies within spitting distance of Saudi Aramco facilities at Ghawar, Safaniya, Abqaiq and Ras Tanura.
The Gulf Cooperation Council’s so-called Peninusla Shield is feeble, and the various branches of the Saudi armed forces are operationally dependent on their US counterparts. By design, neither can guarantee regional security without US assistance. But they can put down a civilian rebellion against the Al Khalifa family, should one arise.
The Chairman of the Joint Chiefs of Staff, on a well-timed tour of the Persian Gulf and Red Sea region, planned to ‘reassure our friends and just listen to what’s on their minds’, claiming that ‘stability is in everyone’s best interest’. Bahrain’s role in hosting the Fifth Fleet, said Admiral Mullen, ‘continues to be very strong, and I look forward to that being the case in the future.’
Funnily enough, the dollar’s special status has helped to bring about Washington’s current strategic problems. The Fed’s liquidity injection (QE2) in November 2010 mostly found its way to “emerging markets” via a dollar carry trade. This created the spike in food, currency, raw material and other asset prices that has so destabilised the satrap regimes in North Africa and West Asia.