2ndlook

Nixon Chop And Bush Whack

Posted in Business, Current Affairs, European History, Gold Reserves, History, Indo Pak Relations by Anuraag Sanghi on September 24, 2008

The Bush Era Balanced Score Card

The Bush Era Balanced Score Card

The Dollar-Oil Tango

From the Nixon Chop to the Bush Whack, in the final months of Dubya’s Presidency, the Bush Family has been in the Presidency for 12 years of the 37 years. And in positions of lesser power for the entire period. George Bush Sr. was the US representative to the UN during the Nixon era – when Nixon made his infamous remarks to Kissinger about the ‘sanctimonious Indians’ who had pissed on us (the US) on the Vietnam War’. George Bush Sr. was also with the CIA and the US Vice President during the 8 years of Reagan Presidency.

During these 37 years – between the Nixon Chop (1971) and the Bush Whack (2008), the world has changed significantly.

Every Few Years

Every 10-25 years, the world seems to go from one financial crisis to another. Trucks full of economic analysis follow each crisis – and everyone agrees after each meltdown, that there will not be another catastrophe. What the poor (and not so poor) economists don’t see is that the Anglo Saxon bloc with 80% of the world’s gold production in a choke-hold does what it wants. And the second element – they also control and influence 80% of the Oil production.

Why has this system been such a failure? Simple!

Oil & Dollars

After the Nixon Chop, the OPEC went into a huddle. After all they were selling a limited resource against payment through pieces of paper. After the Nixon Chop, the chain of events, post 1970 developments were as follows: –

The international monetary developments as of 15 August 1971 prompted OPEC, in its meeting in Beirut on 22 September 1971, to call for negotiations with the oil companies holding concessions in member countries. By 14 January 1972 there was no progress in negotiations. OPEC, in spite of a total loss of more than 11.5%, was asking for a hike of only 8.57% –- which was the loss in value of the US dollar relative to gold. In fact, what OPEC was asking for was very close to what the International Maritime Conference had, at the time, announced: a minimum increase in the dollar freight rates of 8.6%. Finally, an agreement was reached in Geneva on 20 January 1972 that provided an immediate increase in the posted prices by 8.49%. The settlement also included provisions for further adjustments until 1975 based on an index that reflected changes in the dollar and other key currencies.

Concurrently, on October 17th 1973, OAPEC members (OAPEC, consisting of the Arab members of OPEC plus Egypt and Syria) announced embargo against shipping oil to all countries supporting Israel in the the ongoing Yom Kippur War against Syria, Egypt and Iraq – i.e. the United States, Western Europe, and Japan. Non Arab OPEC members decided to leverage their power to raise world oil prices, after the failure of negotiations with the Oil Companies (then popularly called “Seven Sisters”).

The targeted countries responded with a wide variety of new, and mostly permanent, initiatives to contain their further dependency. Europe tied with Russia for the trans-Europe gas pipeline. North Sea Oil production was ramped up. Norway and other countries also increased their output. Thus while not fully dependent on the OPEC, this served an important purpose – to demonstrate that the West and OPEC were on opposite sides, whereas the truth was opposite.

OPEC and West – Partners In Loot

Actually, the West saw a transfer of wealth, all over again from the Third World, via the OPEC Petro Dollars. The dollar regime was significantly beneficial to the Western World in general – and US in particular. The Oil dollar linkage allowed the US to create global reserves with other countries of US$6 trillion in just foreign exchange reserves. Other debt and trade add upto another US$14 trillion.

Approx US$20 trillion is the amount of dollars that the OPEC has managed to transfer from the Third World to the West. But the unhappy outcome of the Oil Crisis of the ’73 (for the West) was the riches and power of the Arab countries. What followed was a rising crescendo of Islamic Demonization for the last 37 years.

Oil output is currently over-valued as Western producers and OPEC jointly rig up prices. The Rest of the world pays (recently its is largely India and China) – and pays in dollars which again benefits the West.

The West limits its own output to keep up the prices. OPEC has the advantage of high oil prices. The petro dollars are reinvested back in the West. Finally, OPEC gained – and so did the West.

Who paid!

Mostly poor Indians and Chinese. And even poorer Africans.

Bush Whacked

Bush Whacked

War, Oil , Dollars & The Middle East

The justifications for invading Iraq given by the USA, were finally found to be false. The invasion was finally not related to 9/11. Iraq did not have any WMDs either. So, what was were the reasons for Iraqi invasion?

A ring side observer, former Indian Ambassador to Iraq, Ranjit Singh Kalha’s book, ‘The Ultimate Prize’ makes some interesting observations on the genesis of the Iraq invasion.

“The first mistake Saddam made was when he decided in October 2000 to move away from using US dollars as the currency for oil exports, …under the UN ‘oil-for-food’ programme.” Saddam also converted Iraq’s USD 10 billion reserve fund from US dollars to Euros. “Although this act of Saddam was not of very great economic significance in overall terms, it represented for the United States a direct challenge to the use of the dollar as a currency for transactions,” … in his just-released book, “The Ultimate Prize”. Iran followed Saddam’s move and Venezuela started initiating barter deals outside the dollar system. “If most other Organisation of Petroleum Exporting Countries (OPEC) followed the Iraqi and Iranian example, the stability of the US dollar would be at stake,” Kalha, who was posted in Baghdad during the tumultuous 1992-94 period, says.

Sidelined to the (Indian) National Human Rights Commission, Kalha’s book was also buried under a mound of silence, not reviewed and made no impression in the popular media. One press release by PTI was recycled by The Economic Times, Outlook, Sahara Samay, The Hindu, India Today, and NDTV. Google and Live Search hardly turned up anything. Yahoo.co.in showed some these links.

Bush Whacking Iraq

Bush Whacking Iraq

Iran and Venezuela followed Iraq and also moved away from designating oil sales in US dollars. After the Bretton Woods-I collapse, instead of gold, it was oil that anchored the US currency. West Asian Oil producers agreed to denominate oil in dollars after the Nixon Chop – and in turn there was no real resistance by the West to OPEC oil cartel increase oil prices by a factor of 10.

Western Oil companies also acted in concert with OPEC by limiting their own oil production. From around 4 dollars a barrel to US$40. The West was relatively unscathed – as these petro-dollars were re-invested back in the West. Europe managed to insulate itself with the North Sea Oil (Britain, Norway were the main producers along with Germany and Denmark. Europe also concluded a deal with Russia for a pipeline into Europe. North Sea Oil Production peaked in 1999-2000 with a 6 million barrels per day.

India was also not highly impacted as Bombay High started production in 1974. It was the rest of the Third World which paid this bill.

Bretton Woods – I & II

As Ron Paul noted,

“The agreement with OPEC in the 1970s to price oil in dollars has provided tremendous artificial strength to the dollar as the preeminent reserve currency. This has created a universal demand for the dollar, and soaks up the huge number of new dollars generated each year.”

The Bretton Woods-I system worked for from 1945-1971 (26 years) years because Indians were not allowed to buy gold. India’s finance minster during that crucial period, Morarji Desai, (allegedly on CIA payroll during Lyndon Johnson’s Presidency 1963-1968), presented a record 10 budgets, between February 1958, up to 1967.

Bretton Woods-II, based on oil-dollar anchor, worked for another 35 years (1973-2008) till now. Oil exploration is a 5-10 year investment. Oil should be made another commodity. An easy option is to create a Republic of Pacific Islands – Haiti, Cuba, Grenada, and other West Indies. These islands can become vast oil production centres – that will help them raise their economies and can feed Asia with oil, peacefully.

The third currency bloc is essential – and it can happen only if India and South Africa decide to make it happen.

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14 Responses

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  1. Galeo Rhinus said, on September 24, 2008 at 5:08 pm

    You hit the nail right on the head.

  2. Dsylexic said, on September 25, 2008 at 4:10 am

    Well, we can be critical of the politicians – we do it all the time.But what about the intellectual dishonesty of the academics that provides sanctity to such a system?. The Galbraiths and Keynes to our own PC Mahalanobis and Amartya Sens -all those who use statistics and mathematics as the predominant tool to “model” economic behaviour of humanity are all culpable .
    Models all based on the assumption that the immediate future will look like the immediate past.Mandelbrot and Taleb,among others, have exposed the fallacy of these charlatans .
    They have created this frankenstein and it just happens that it is to the advantage of those in power(why just anglo saxons -even Chacha Nehru was enthralled by these pseudo scientists).

    History will judge these liars very poorly.

  3. Anuraag Sanghi said, on September 25, 2008 at 6:42 am

    I would agree entirely with you about blaming only politicians – at least in the Indian context (linked to my post on Indian caricatures of politicians). This habit of tarring politicians is a vestige of our colonial era.

    Regarding Nehru’s socialism, it is more complex, than criticism from the comfort of today’s more secure India.

    Post-colonial India was a very difficult time – and Nehru had to plough a lonely furrow. Nehru had no precedents – and many critics. Gandhiji was no more. So, I would look at Nehru’s legacy with greater consideration – as my post outlines.

    Regarding these “intellectual dishonesty of the academics that provides sanctity to such a system” – methinks, skepticism as a religion can be adequate defense.

  4. Dsylexicus Indicus said, on September 25, 2008 at 8:04 am

    Nehru indeed had many critics -but his critics wanted more socialism and not less -so it hardly counts as genuine opposition(except for Rajaji).BR Shenoy was the only dissenting voice in the group of economists who (under PC M)forced our nation down the soviet style planning. PC Mahalanobis was a charming man with great powers of persuasion that appealed to Nehru’s ‘western’ intelligence.It is precisely this intelligence of ‘Pandit’ji that is the sad part.If he had been a bumbling politician,he wouldnt have been able to lead the nation down the wrong path of lower freedoms.Indeed he was a ‘Chacha’ Nehru- a paternalistic karta of the country. The one who knew exactly how the big country should be planned.We have no dearth of world improvers -the intelligentsia is full of such megalomaniacs.

    Skepticism is a good idea.But to persist with a bad idea(dollar fiat) after so many years of persistent failure shows a lack of honesty amongst economists and their adoring fans-the media.

  5. Anuraag Sanghi said, on September 25, 2008 at 9:59 am

    If the fiat dollar was restricted to the US, I would not be so bothered. What bothers me is the ‘imposition of the dollar’ on the rest of the hapless world – by military force. Witness Iraq and Iran.

    India’s own counterfeit currency problem cannot be restricted to just Pakistan. There is more to it than meets the eye.

    Regarding Nehru, India’s socialism, et al.

    I think the general Indian has made this country more than we understand – or imagine.

    Indian film makers have great contempt for their own output – “but what to do, the public wants this” is their rationale. It is the public which has given the Indian film industry its distinctive narrative style and ideology. Not the film makers.

    Similarly, it was the 1956 election which stampeded Nehru into ‘socialism’ – and possibly what was needed in India at that time was a ‘caring state.’

    Regarding Nehru’s critics within India – he had critics within the Congress itself. Outside the Congress, the most famous were the socialists – because the 1956 election saw them gaining nearly 20% vote. The socialists never got that much vote share again. Rajapopalchari, Piloo Mody, (represented by the Swatantra Party, who defined themselves in the Western Capitalist, pro-West mold) and the Jana Sangh (who defined themselves in the pro-West, right-of-centre European mould).

    These were all staunch critics of Nehru – who, in modern terms, are no longer recognized as important figures. While most of these critics were not significant vote-catching machines, they were held in high esteem. However, they were all again different from the Western equivalents, due to the different political and social backgrounds.

    So, to say that Nehru did not have critics is off the mark. I have not even started on the hostile international (read as Western) opinion.

    However, Western political constructs like feudalism, capitalism, socialism are systems that were born out of the distinctly European social evolution from serfs-feudal lords to slavery-capitalist owners to the current workers-management socialism.

    Hence, to view India through the prism of these political terms is fruitless – as India has not progressed in that direction at all.

  6. Dsylexicus Indicus said, on September 28, 2008 at 6:01 am

    The anglosaxon bloc owns 80% of the gold mines.But does that necessarily create a problem?. The biggest consumers of gold are Indians and to an extent the Chinese and arabs. Gold cant be created out of thin air unlike fiat dollar. So,ownership of the gold production source is not a problem since increase or decrease in gold supply cant be really manipulated .

  7. Anuraag Sanghi said, on September 28, 2008 at 7:16 am

    The entire Bretton Woods was created and monopolized by the Anglo Saxon Bloc because they ‘owned’ the gold!

    And we have seen how they manipulated that.

    Most of the above-the-ground gold is locked and not in circulation. Hence, annual production of gold does play a major role in the real economy – and creates distortions in the price discovery mechanism.

    The legitimacy of ‘ownership’ by the Anglo Saxon Bloc, of these gold mines itself is suspect.

    The world has seen relative peace and stability for the last 60 years – and hence, it may seem innocuous. But let there be any other collapse, and you will see how these claws come out, to rip and tear the poor.

    We must remove the Western concept of gold standard itself as it creates a mechanism of monopolistic ownership of gold – which is again misused.

    The simple expedient would be to spread the ownership of gold widely across societies – which can happen only through minimizing concentration of production capacity.

    As for currencies, again let a 1000 currencies bloom. The market and the consumer are smart – when there is no monopoly over currency.

  8. Dsylexic said, on September 28, 2008 at 11:24 am

    I dont see any reason to spread the ownership of gold across societies to begin a gold standard. Classical gold standard (unlike the gold dollar exchange) wasnt artificially based on gold reserves and the London gold pool agreement (gold exchange) .The real producers of goods and services will determine the wealth of nations – mere asset shuffling a la wall st will not create wealth.No dollar hegemoy,so competition will be honestt.

    I share your fear of desperate action from the west if they realize their power will vanish in a true gold standard(precisely why it isnt on the horizon).
    Competing currencies are a good idea -the one backed by gold is likely to win.

  9. Anuraag Sanghi said, on September 28, 2008 at 12:06 pm

    Ok … a clarification!

    The ‘spread the ownership of gold widely across societies’ should be taken to mean creation of access and mechanisms for trade and ownership of gold. I don’t mean re-distribution in any Socialist or Marxist sense of the word. Most Governments do not wish that individuals have free access to gold. Gold ownership which is dispersed will become a very tough target for looters and invaders! But gold reserves, hoards, reserves can be easily captured, looted, expropriated, etc.

    Currencies by their very nature can be controlled, legalized, made illegal, de-monetized, inflated, corrupted, printed, deflated. I am sure unethical state practices will find newer ways to cheat their populations – sooner rather than later.

    Hence, it may actually be a great idea to de-link currency and gold. I would actually think that the current forex trading systems can be modified with little pain to deliver growth and protect users. Note how Ben Bernanke decided to hide M3 data.

    And to insure populations against fraud of the Bretton Woods type, gold ownership should be legalized and non-taxable.

    Regarding the Western imperative due to loss of power, it has nothing to do with gold standard. It has a lot to do with the slavery, exploitation of the poor – and the loss of exploitative power.

    People like Alan Greenspan (and from the Austrian School, to a much lesser degree) have conveniently white washed large parts of Western history – like slavery and its contribution to Western well being. And also how the loss of slaves has led to the loss of Western power!

    They have also not cared to examine alternate economic models (based on history as a Hegelian construct) – like the Indian economic models in the past. Anyway, why blame only them – even Indians dont study non-Western economic models.

    Their propaganda for a ‘pure gold standard’ has another ‘unspoken agenda’ of Western dominance. To that extent, Keynes was more honest – when he computed the value of compounding.

    He wrote: –

    I trace the beginnings of British foreign investment to the treasure which Drake stole from Spain in 1580. In that year he returned to England bringing with him the prodigious spoils of the Golden Hind. Queen Elizabeth was a considerable shareholder in the syndicate which had financed the expedition. Out of her share she paid off the whole of England’s foreign debt, balanced her Budget, and found herself with about £40,000 in hand. This she invested in the Levant Company –which prospered. Out of the profits of the Levant Company, the East India Company was founded; and the profits of this great enterprise were the foundation of England’s subsequent foreign investment. Now it happens that £40,ooo accumulating at 3f per cent compound interest approximately corresponds to the actual volume of England’s foreign investments at various dates, and would actually amount to-day to the total of £4,000,000,000 which I have already quoted as being what our foreign investments now are. Thus, every £1 which Drake brought home in 1580 has now become £100,000. Such is the power of compound interest!

    Now we all know where the Spaniards got their gold from!

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  11. […] statism became unfashionable – and the Petro-Dollar alternative became available. Shortly, after Petro-Dollars, a new source of enthusiastic cheap funding became […]

  12. […] post laid out the position of the world economic structures and developments in the last few years, rather well – and the way […]

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