The article that
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but, in view of its urgency
and potential importance,
the editor, Satish Kumar,
has decided that its publication
cannot wait until the
next available issue appears.
It is therefore being
placed on the Resurgence
website, http://resurgence.gn.apc.org/
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Comments are welcome.
How to stop the war
Richard Douthwaite
So far, the main actions
open to people keen to
stop the United States
and Britain invading Iraq
have been limited to street
protests, writing letters
to editors, signing petitions
on the Internet or voting
on a BBC website. None
of these seem likely to
achieve very much but
there's another avenue
to make one's views felt
which, if enough people
took it up, could be very
effective indeed.
The precedent is certainly
promising. In 1956, after
bombing Egyptian airfields
and destroying its airforce,
British and French forces
began landing at Port
Said and Port Fuad on
November 4th in an attempt
to seize the Suez Canal
which the Egyptian leader,
Colonel Nasser, had nationalised
earlier in the year. The
troops were making good
progress moving south
down the waterway, occupying
both banks, and were only
two or three days from
reaching their objective,
Port Suez on the Red Sea,
when, all of a sudden
on November 6th, they
were ordered to halt.
Less than four weeks later
they began to withdraw
and by December 22nd,
they were all gone.
So what happened? How
was the invasion stopped
so quickly? The answer
is that the Americans
pulled the monetary plug
- a technique that can
now be used on them.
Britain in 1956 was in
a much healthier financial
state than the US is today
when you consider that
its exports exceeded its
imports whereas America's
imports now exceed its
exports by a massive 50%.
Nevertheless, the Bank
of England was having
to fight off currency
speculators - the famous
Gnomes of Zurich - who
were borrowing pounds
and using them to buy
dollars. Their aim was
to run down the country's
dollar reserves to such
an extent that sterling
would have to be devalued
from its fixed rate of
$2.80 to the pound.
Such a devaluation would
have been highly profitable
for the Gnomes because
afterwards they could
have used some of the
dollars they had bought
to purchase enough of
the now-cheaper pounds
to repay their loans and
pocketed the difference.
Even if the Bank of England
was able to resist their
attack, they would not
lose much because, thanks
to the fixed exchange
rate, they could always
buy sterling to repay
their pound debts at the
price they had received
for those they had sold
- apart, that is, from
the currency dealers'
commission. So the most
they could lose was the
commission plus the difference
between the interest rates
they had to pay on their
sterling loans and the
rate they had earned on
their dollar deposits.
They were taking an almost
riskless bet.
The Bank of England reckoned
it could fight off the
Gnomes' speculative attacks
if it had at least $2bn.in
foreign exchange in its
war chest. By September
1956, however, as a result
of the speculation its
dollar holdings were slipping
uncomfortably close to
the danger level. The
speculators knew this,
of course, which caused
them to redouble their
efforts. Accordingly,
the British Chancellor
of the Exchequer, Harold
Macmillan, decided that
the country had to borrow
a sum so large that it
was bound to cause the
Gnomes to back off. He
asked the IMF for a $1.3bn.
loan.
US approval was needed,
however, as it would be
the biggest loan the IMF
had ever made and far
above Britain's automatic
entitlement. But when
the attack on Egypt brought
matters to a head by increasing
the speculative attack
with the result that the
reserves fell sharply,
the US Treasury Secretary,
George Humphrey, made
it clear he would not
give his approval unless
Britain not only obeyed
a UN resolution calling
for a cease fire but pulled
its troops out as well.
The British Cabinet regarded
giving in to the speculators
and devaluing the pound
as a worse fate than losing
the Suez Canal, so the
Prime Minister, Sir Anthony
Eden, felt he had no option
but order the invasion
to stop. On December 3rd,
the British told the Americans
that all the troops would
be withdrawn by December
22nd and the full $1.3bn
loan was approved the
same day. The crisis was
over and the pound was
saved.
So how can this technique
be used to stop the Americans
in their tracks? The first
thing to recognise is
that the reason the US,
a country with 283 million
people, is a superpower,
able to spend more on
arms than the next 20
biggest arms spenders
put together because it
has been getting a massive
subsidy for many years
from the rest of the world.
The counties that it outspends
have a total population
of over 3 billion people
and include Russia, China,
India, Iran, Israel, Britain,
France, and Germany.
The subsidy has come
about because the rest
of the world has allowed
the US to import very
much more than it has
exported since 1982. In
that period, countries
receiving dollars for
the goods and services
they have supplied have
only spent a proportion
of them on imports from
the US. Most of the remainder
has been loaned back to
America, typically by
being used for the purchase
of US Treasury bills or
shares in companies quoted
on the US stock exchange.
$2,500 bn, roughly half
the rest of the world's
total savings, have been
invested and lent in this
way.
Amazingly, this huge
inflow of funds has cost
America nothing - so far.
True, interest has been
paid on the loans and
dividends on the shares
but both payments have
been in dollars that have
simply been added to the
outstanding debt. The
US has not had to supply
anything that cost it
real resources to make
for the use of this massive
amount of capital. Moreover,
the bigger its trade deficit
has been, the more dollars
foreigners have had to
invest and the higher
they have pushed Treasury
Bond prices and the Dow
Jones share price index,
making investment in America
seem very attractive.
Even more foreigners have
consequently been keen
to get hold of dollars
to put their savings there.
Last year, the US spent.
$379bn., almost exactly
the amount of its trade
deficit the previous year,
on its armed forces. In
other words, all the resources
required to run the US
military machine can be
considered to be coming
from the rest of the world
rather than America itself.
Some commentators realise
this. In a revealing article
published by the U.S.
Naval Institute in January
2002, Professor Thomas
Barnett of the US Naval
War College, wrote: "We
trade little pieces of
paper (our currency, in
the form of a trade deficit)
for Asia's amazing array
of products and services.
We are smart enough to
know this is a patently
unfair deal unless we
offer something of great
value along with those
little pieces of paper.
That product is a strong
US Pacific Fleet, which
squares the transaction
nicely."
At the moment, the US
trade deficit is running
at much higher levels
and America is having
to borrow around $1.25bn
every single day. So the
way to stop George Bush's
war machine in its tracks
is not only to refuse
to lend it its daily bread
but for everyone with
savings invested in the
US to take their money
back. Very few of us have
direct investments in
America, of course, but
anyone who does should
sell them immediately
and repatriate the proceeds.
If they fail to do so
they will be complicit
in whatever happens.
People saving for their
retirement through a life
assurance company or some
other financial institution
will almost certainly
have indirect investments
in the US. The problem
is to get them out. All
they can do is to write
to the company urging
it to rapidly reduce the
share that transatlantic
investments make up in
its portfolio because
international outrage
over Iraq is likely to
cause a sharp fall in
the value of those investments
and of the dollar itself.
The fact that they are
personally against a war
and don't want to be invested
in it will cut little
ice.
They could add, however,
that several American
commentators expect the
value of the dollar to
fall by at least 25% when
the market makes its inevitable
adjustment to correct
the present trade gap.
For example, as long ago
as 1999, Catherine L.
Mann, a professor at Vanderbilt
University, investigated
current account corrections
in industrialised countries
in the previous two decades.
She concluded that a current
account deficit of over
4.2% of the Gross Domestic
Product (GDP) was unsustainable
and that a large and rapid
fall in the value of the
US currency was likely
within two or three years.
"The US cannot
live beyond its long-term
means forever, nor will
US assets always be so
favored by global investors"
she wrote in an article
'Is the US Current Account
Deficit Sustainable?'
published by the IMF in
March 2000. "When
a change in investor sentiment
comes, it could be dramatic.
What would happen if the
dollar depreciated by
a significant amount,
say 25 percent?"
Caroline Freund of the
Federal Reserve researched
the same ground as Mann
and also found that the
US deficit was unsustainable
except that she reckoned
that the markets normally
bring these corrections
about when the deficit
rises above 5% of GDP
rather than 4.2%. It is
now at the 5% level.
The timing might therefore
be right to try to prevent
the war by using a financial
strategy almost exactly
the same as that used
by the Gnomes of Zurich
half a century ago. Go
to your bank and tell
them that you want to
sell $5,000 (or $10,000
or as much as you can
afford) in three or six
months' time and that
you would like fix the
exchange rate now. The
bank will quote you the
rate at which it will
purchase those dollars
from you and give you
a contract to that effect.
This is a perfectly standard
banking arrangement. Businesses
expecting payments in
foreign currency do it
all the time. If your
credit record is good,
you won't have to pay
anything at all.
Should the bank be unable
to match your sale of
dollars in three months'
time with an order for
dollars from somebody
wanting to buy them then,
it will borrow the dollars
you intend to sell from
a bank with which it has
links in the US and sell
them now. It will then
lend out the proceeds
of the sale until it has
to pay them over to you
in exchange for your dollars,
which it will use to pay
off its American loan.
In other words, through
the agency of your bank
you will be doing exactly
what the Gnomes did in
1956 - borrowing dollars
in the US, selling them,
and hoping to repay the
loan at a profit if the
dollar falls in value.
You get the dollars you
need to hand over to the
bank in three month's
time by buying them from
the bank at whatever rate
is ruling on the day the
contract falls due. If
thousands upon thousands
of ordinary people join
you in protesting in this
way, the value of the
dollar will be forced
down over the next few
weeks as banks borrow
dollars in the US and
sell them on behalf of
their customers. So, when
the three months are up,
the chances are that you
will be able to buy the
dollars you need for less
than the price you agreed
with the bank for selling
them. In other words,
if this form of direct
action becomes wildly
popular or the dollar
falls for other reasons
you should end up with
a small profit. Of course,
if the dollar stays where
it is you will show a
small loss and in the
unlikely event that it
rises, a rather bigger
one. Your assessment of
how much of a loss you
can risk having to shoulder
will obviously determine
how many dollars you can
sell.
In 1956, two big battalions
stopped the British -
the US government and
professional speculators
employed by the Swiss
banks. This time, if the
strategy I've outlined
above is taken up, it
will be more of a guerrilla
action and the outcome
will depend largely on
the numbers of people
who get involved. But
we may just find that
we have powerful allies
fighting beside us. For
example, in order to minimise
their dependence on the
dollar a group of Islamic
countries led by Malaysia
is introducing the Islamic
gold dinar later this
year for trading amongst
themselves. Moreover,
several OPEC countries
are considering quoting
the price of oil in euros
rather than dollars. And
as long ago as last August,
the Financial Times reported
that the Saudis had sold
an estimated $200bn. of
their US assets. The Kuwaitis
have also withdrawn hundreds
of millions of dollars
from America having decided
that, despite the threat
of a war next door spilling
over the border, it is
better to invest at home
.
Within the past few months
the dollar has already
lost 26% of the maximum
value it held against
the euro in 2001 and a
smaller amount against
the pound. Our small gestures
coupled with the actions
of much bigger players
could continue this fall
which almost certainly
still has some way to
go. The Economist magazine
believes that a further
20% drop against the euro
is 'not unthinkable'.
Moreover, just as there
was a virtuous circle
on the way up, with the
increasing US trade deficit
providing foreign investors
with extra funds to push
the dollar and Wall Street
higher and higher, there
will be a similar effect
on the way down. Falling
stock markets and a depreciating
dollar caused by some
investors moving out will
panic others into getting
out too, thus accelerating
both markets' decline.
Consequently. the more
people you can persuade
to join you in becoming
a Gnome for Peace, the
better the chance there
is of weakening the dollar
and the American economy
by enough to prevent or
limit a war. That's the
real profit. Of course,
if investor sentiment
does really change - helped
in part by your actions
- virtue would not have
to make do with merely
being its own reward.
Besides peace, it would
bring something of a financial
bonus too.
Richard Douthwaite,
Cloona, Westport, Ireland
. richard@douthwaite.net
Richard Douthwaite is
an economist living in
Ireland. He is the author
of The Growth Illusion:
How Economic Growth has
Enriched the Few, Impoverished
the Many and Endangered
the Planet, The Ecology
of Money, and Short Circuit:
Strengthening Local Economies
for Security in an Unstable
World.
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