Analysis:
Currencies of War

The recent relative quiet among the nations of the West concerning Iran's on-going nuclear program should be no comfort to those hoping that a war with Iran will be averted. The United States is, to some extent, a peripheral player for the time being in the on-going negotiations, despite the public statements of Bush Administration officials trying to demonstrate the vital activity of the U.S. in the negotiations between the European Group of Three nations and Iran. The United States will play no small role in the coming months, but its most important function will be as the effective guarantor of military firepower. To this end, the United States has recently begun a typical propaganda campaign predicating war: it has released to the media descriptions of new weaponry, with the media's compliance intended to inform Iran of new destructive capabilities the U.S. will bring to bear in a war. Specifically, the Chicago Tribune and the Washington Post, among other media outlets, featured descriptions of an up-coming prototype test of a massive chemical bomb called "Divine Strake." As a conventional alternative to a nuclear "bunker buster," the purpose of releasing information about the bomb was to let Iran know that its underground research and development facilities are destructible even in the event that an attack on them uses no nuclear bombs, which might otherwise be the only means by which hardened, underground facilities could be severely compromised. This use of information to warn an actual or potential enemy has a long history, with an example from the recent past being the Massive Air Ordnance Blast (MOAB) bomb the Pentagon presented to the media on the eve of the U.S. attack on Iraq in mid-March of 2003. Neither MOAB nor the Divine Strake exists in isolation, of course, but rather within a vast arsenal inventory. Detonated above ground level, the Massive Air Ordnance Blast weapon is a hugely powerful bomb that creates destruction by depleting a large area beneath it of oxygen as it uses atmospheric resources within its detonation shell. Divine Strake is the ground penetrator complement, offering a conventional weapons option to destroy hardened facilities beneath the surface. The extent to which either of these two weapons is particularly effective is not as important as the extent to which an enemy believes they pose unacceptable risk of catastrophic damage in a military confrontation.

Each of these two weapons has been described publicly for a propaganda purpose; the descriptions of their destructive power are to the end of marketing a target audience: in the case of MOAB, the Iraqis were served notice of a weapon that would effectively and nearly instantaneously eliminate any concentrated defensive position of infantry and mechanized units; in the case now of Divine Strake, the Iranians are being served notice that the American (and, therefore, any alliance forces) arsenal now includes a weapon that can destroy their hardened, underground nuclear research and development facilities. To the latter audience, then, Divine Strake lowers the threshold at which attack becomes viable: up until now, it was presumed by many that an attack capable of degrading those facilities would necessarily entail the use of nuclear weapons to penetrate and destroy the underground bunkers, but the possible need to use nuclear weapons in the attack was, in itself, a deterrent to the attack. Now, however, the Pentagon is letting the Iranians know that nukes will not necessarily be required, which means the resistance by allied forces to an aggressive attack against Iran on the grounds that it would require the use of nuclear weapons is no longer a show-stopper.

Iran, for its own part, has engaged the same war of images and rhetoric. Just-completed war games by the Revolutionary Guards featured photos and glowing descriptions of the success of a number of new weapons ostensibly built in its own defense industry, which was developed as a result of its 1980s war with Iraq. Among the weapons featured during the games was a high-speed torpedo the Iranians call "Hoot": such a torpedo signals not only the West but the entire world that Iran intends to menace the vital oil tanker traffic in the Strait of Hormuz should war break out between Tehran and any Western alliance. This torpedo would complement the Iranian arsenal of Chinese-made Silkworm missiles already poised to destroy maritime traffic, military or civilian, in the Strait. Among other new weapons touted by the Iranians during the war games were the radar-evading, multiple-independently-targetable warhead Fajr-3, and the medium-range land-to-sea Kowsar missile, along with yet another apparently improved version of the Shahab 3, a delivery vehicle in developmental transition from a regional danger to a missile that could possibly throw nuclear payloads into European capitols, putting it into the Mark IV class and putting Iran on the map of only a handful of nations that could project destructive force extra-regionally.

But despite the representations in the Iranian media that the nation's arsenal now includes weapons that can not only deliver considerable firepower but do so with sophisticated radar-evasion and counter-measures technology, there is no evidence that Tehran can test the capabilities of its devices with anything other than its own, possibly weak defenses, radar, and counter-measures, which leaves the nations planning attack with little reason to alter a course that might already be set for war despite any concessions Iran might make or that its supporters, Russia and China, might offer in guarantees on the Persian nation's behalf with regard to the non-weapons nature of its nuclear research and development program.

This is not to say that Iran will be as easy to overrun as Iraq turned out to be: Iran has a far more developed military capability that has been unhampered by the crippling sanctions imposed on Iraq after the first Persian Gulf War. Aside from the possibility of brutal infantry and artillery warfare, Iran's new weapons systems could very well cause significant damage to military assets of the attacking nations. The particular focus on missiles dedicated to maritime targets during demonstrations in Tehran's recent war games indicates that both military and civilian ships are at no small risk of destruction. Even the robust defense systems common on modern U.S. aircraft carriers and other warships can be overwhelmed by incoming fire, and this is particularly true if the advertised velocity of attacking torpedoes is in excess of 220 mph as Iran claims in the case of the Fajr-3. Moreover, whether or not land-to-land missiles in Tehran's arsenal are particularly accurate, using them against densely populated areas like the Green Zone in Baghdad or the center of Tel Aviv will result in large-scale property destruction and loss of life, even if—as could be the case—casualty rates among allied combatants remain relatively modest.

Having in the above exposition set forth a few of the many weaponry-related parameters facing the forces possibly preparing for an attack on Iran to the putative end of destroying its alleged nuclear weapons production program, this article finishes by addressing not why this war is so likely, but why it is not. The concern among some is that, because Iran has claimed that it will soon open an oil bourse of its own, and that contracts on this platform will be denominated in euros rather than dollars, the United States must necessarily attack Iran in order to prevent a major challenge to the pre-eminence of the American dollar as the denominating currency of choice in global trade. As a backdrop to this proposition, the fact that Saddam Hussein had made plans to start euro-denominating Iraqi oil contracts has led some to hold that the real reason the United States attacked Baghdad was to the end of preventing this from happening. Fueling current worries are articles such as one in late March published in Khaleej Times claiming that Arab nations like the United Arab Emirates and Saudi Arabia are already in the process of unloading American dollars in favor of euros.

In and of itself, news like this isn't particularly significant. Its primary purpose is to affect the political climate in the United States: Khaleej Times, cited above, is a quasi-governmental news media source to some extent known for the occasional story intended to stir up sentiments about this issue or that matter of concern to the rulers in the United Arab Emirates. However, the current situations, both with respect to the prospect of war with Iran and with respect to the matter of the currency that will denominate international commodity contracts in the years to come, call for some reconsideration of the events that led up to the on-going war in Iraq.

Such a re-assessment must begin with how the denominating currency matter played as a motive for invading Iraq. Saddam Hussein's plan to begin denominating Iraqi oil contracts in euros instead of dollars was transparent; but the impact would not have been significant because Baghdad was selling oil only through the UN-sanctioned oil-for-food program, so Iraq's contribution to the world supply of oil being extracted and refined into usable fuel products was minimal. Saddam's Iraq was no longer the major petroleum supplier on the world stage that it once had been, so any level of contracts suddenly switching away from dollar valuation would have been fairly insignificant in the large scheme of international trade.

The shift would, nevertheless, have had some notable impact insofar as it would have opened a door for wider consideration of the euro as a denominating currency, especially for those disinterested in allowing the United States to have a technical hegemony merely by virtue of the central importance of its currency in global commodity trading. Realistically speaking, some "market basket" of currencies might be an ideal endpoint for many countries and companies in their global buying and selling arrangements, but as the standardized, globally accepted replacement for the U.S. dollar as the denominator, such a market basket valuation mechanism is still at least a few years (and probably more) away.

As international trade now stands in the here and now, the U.S. dollar is not the currency of choice because the United States is some big, nasty, schoolyard bully; it is instead the attractive currency because it is the powerhouse: the amount of dollar-valued contracts (and therefore, assets) across the globe is simply staggering. Both as a stock of value and as a medium of exchange, the greenback is light-years beyond any other currency on planet Earth. That's the reality, not some speculative claim.

The U.S. dollar is implicitly backed by a staggeringly massive, deep, long-standing government and a military umbrella second to none. The dollar is also backed by a nearly incalculable present value of future expected cash flows from American enterprise and labor; and of no insignificant importance, that dollar is backed by the indisputably most powerful engine of internal tax revenue generation and external war-making power the world has ever seen. The greenback has been around as a sign and symbol of the continuity of the United States in its sovereign status for scores of years. No currency on Earth can compare to it—not in level, not in depth of markets, not in assuredness that claims it represents on the central bank of the United States will be satisfied.

All of the above is not to wave some "We're Number One" flag. It's simply the reality, and it's a reality that the United States government is not alone in grasping fully. Any nation that would fancy otherwise does so at its own peril and at great threat to the currency it would pretend to the summit.

The Europeans are not stupid. Their halls of finance are staffed by some of the most brilliant, some of the savviest, some of the most cultured men and women the world has ever known. As great as the United States is in its fine moments, Europe is a continent of nations whose peoples have continuous legacies going back thousands of years. These are people who understand the great experiment now underway in the union of the European nations. The 21st Century will be better for a great counterbalancing force against the twin dynamics of the U.S. and China, as well as against and with the lesser but still important dynamics of emerging nations and economic trading regions. The series, "The 21st Century," sets forth some of the perils the European Union faces from the designs of the American neo-conservatives and the planners in the Pentagon. It remains the case that this union of the European nations can meet the challenges of dispiriting forces from abroad, but perhaps recent thoughts and concerns will in the end overwhelm optimism about and hope for Europe.

That caution being noted, with respect to their full understanding of how to conduct their respective and integrated portfolio of finance, though, the Europeans know very well that their new currency, the euro, is in no way, shape, or form up to handling the enormous, constant, day-in-day-out, year-in-year-out task of being the denominator in any large-scale global market: the euro hasn't been around nearly long enough; the understanding of what it really is will continue to evolve, particularly as new nations are added to the European Union and as the central bank more fully defines and asserts its role; and the sheer depth of value carried in the amounts of it in circulation just doesn't exist yet. And those factors will remain possibly for years if not a decade or more the combined and profound deterrent to using the euro as a perfect or even preferred substitute for the greenback in international trade. The euro just cannot of its own sovereign backing handle the massive currents of modern trading. It simply can't.

Neither, of course, can the yuan; and part of this is because the yuan has been used by the Communist Chinese Party as a toy for internal growth at the expense of other nations, most particularly the United States. Pumping yuan out in staggering amounts for years has done nothing to increase the depth of the yuan; in fact, it has had the opposite effect, and it's only a matter of time until that "miracle growth" of the Chinese economy (nearly 10% by some estimates) evaporates into a spiraling, destructive inflation that only the most draconian of Chinese central bank monetary policy regimes could bring under control. Astute analysts must be as unimpressed by China the miracle economy as by China the nascent bastion of Asian freedom: sustainable real growth and sustainable civil freedom remain illusions in China, despite hopes of naïve, post-Communist Era internationalists. The sinophiles of the West may very well come to be sorely disappointed by the outcomes of the great Chinese experiment in market reforms shallowly cast as the precursors to political and human rights reforms. In the final analysis, even setting aside the wasted prayer of burgeoning, democratic processes and open, liberal society in China, no international trading regime worth its salt would be interested in denominating anything important in yuan.

And no European finance minister in his or her right mind would be interested in having any major global commodity market use the euro as the denominating currency, either. Germany—the 800 hundred pound gorilla of finance in the EU—is rumored to have already told the Iranians to lay off this idea of a Tehran oil bourse running its show in euros; and this is no mere result of idle European aversion to the limelight or fear of offending the Americans: the euro in an Iranian oil bourse would put the European central bank front and center in a world well beyond its current capacity. The market for euros just isn't deep enough, and an entire oil trading circuit jumping up and down on such a fragile platform would put the European currency structure (and therefore the emerging, unified European economy) at great and unnecessary risk of effectively becoming a financial derivative hedging a wildly price-volatile commodity.

This does not mean some Arab nations will not make aggressive moves to switch from dollars to euros for at least some of their reserves and transactions. Following in the footsteps of Iran, which switched from dollars to euros in 2002, Syria recently announced that it was moving from denominating foreign currency transactions in dollars to euros, largely as a reaction to recent pressures placed upon it by the United Nations concerning political meddling in the affairs of Lebanon, pressures the leadership in Syria believe are the work of the United States acting on orders from regime-change advocates in Israel. Such moves to euros are in some ways symbolic, but even to the extent that they represent real change in the covenants of international contracts, they are minor when measured against the total value of all contracts forming and outstanding.

The Iranians are planning to do something no one wants them to do, just like Saddam before them. Although not the principal reason the American neo-conservatives are interested in the war, to the end of preventing a wholesale flight to euro denomination of inordinate numbers of commodity contracts, the Europeans are going to be on the bandwagon to bomb Iran back to Hell.

And they really are on that bandwagon. They have recently rejected without even summary consideration a six-point proposal passed by Tehran through the Russians, and they've been a willing conduit for "intelligence" information out of Tehran that has the heavy-handed smell of an Iranian dissident group (possibly connected in some way to the family of the former Shah) operating out of Paris.

This whole complicated situation raises the entirely disturbing possibility that the American neo-conservative warhawks who still infect the halls of power in Washington were not so all alone in their desire to invade Iraq back in 2003. It is entirely possible that there were forces within the European Union that were willing to tacitly go along with the invasion while presenting an exterior appearance of moral outrage for the consumption of domestic constituencies.

Worse, there is no reason to believe that the Europeans and their central bank are any more excited now about having the euro take the stage than they were three years ago.

Concerns deepen even more, though, as the long-standing power of the dollar becomes subject to more and more erosion, both materially and in the perception of the world at large. The new Chairman, Ben Bernanke, of the Federal Reserve behaves like some political shill with not a clue as to how to command respect in either global or domestic financial markets. Already, his official documents are getting well-deserved derision for their transparent political bias, and he appears to be unconcerned about the high-stakes danger his weakness of independent will could create for the international confidence in the dollar.

Should the global markets, because of the combination of inadequate individuals in the government and a Fed Chairman too much a political hack to do what needs to be done, truly lose confidence in the power, endurance, and long-term stability of the U.S. dollar, all bets are off—at least in the long run—on the dollar as the global denominating currency for the 21st Century; and should the dollar be abandoned, the alternatives will offer the safety of an illusion right before they, too, collapse just like the greenback from which traders jumped in absolute desperation.

Fortunately, wholesale abandonment of the dollar is a remote possibility. A war against Iran will ensure that remains the case, and this will not be because the American neo-conservatives are particularly concerned about such an event: they—the architects of this era of degraded American status in the world, huge and persistent federal budget deficits at home, and a progressively more menacing presence to both peoples of other countries and citizens of the United States—care only about control of resources, land, and ideas across the globe. Money is an incidental concern to those driven to power by the frightful demon of some sense of destiny. For the Europeans collaborating to agitate to yet another war, alliance with these neo-conservatives is a matter not of ideological compatibility so much as it is a situation of necessity if the EU is to emerge strong in both sovereignty and currency to confront both the United States and China on the battlefield of resource, land, and ideological control in the decades to come.

But although the motives may be different, the alliance of the United States and the European Union in this coming moment will nonetheless serve to bring more bloodshed and destruction to a century already born from the womb of nearly incalculable catastrophe and wholly wanton war.



The Dark Wraith has spoken.

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This article is cross-posted from The Dark Wraith Forums.