Iraq Invasion

Let's start with something provocative. Project Censored's Top 25 Censored Media Stories of 2002-2003 includes U.S. Dollar vs. the Euro: Another Reason for the Invasion of Iraq. In November 2000, Iraq began selling its oil in euros. Their thesis is that the US invasion of Iraq was at least in part motivated by the need to force Iraq back to the dollar -- to prevent movement away from the dollar by Iraq's trading partners and to dissuade other OPEC countries from switching to the euro for their oil sales (especially Iran).

Now why would this matter so much? The US dollar is the world's reserve currency, meaning that central banks all over the world hold huge amounts of dollars in reserve. In the post-WWII world this was a sound bet because the US dollar was backed up by gold. Since 1971 it has not been convertible to gold, and since 1973 the US has been off the gold standard entirely. The US dollar, like other currencies, is a fiat currency, backed up by nothing more (or less) than the word of the US government. The bottom line is that the value of the US dollar, the euro, and other fiat currencies, is entirely determined by market rates, government action, or some combination, to the extent that they are not backed up by some valuable reserve.

Oil makes up a significant part of international trade. If countries have to start converting some of their reserve dollars to euros in order to balance their oil trading accounts, and at the same time the euro is gaining against the dollar in foreign exchange markets (up approx. 20% in the last year alone), there is a real concern that central banks will start converting their ongoing reserves in greater quantities from dollars to euros (or a mixture of dollars and euros). If this were to happen precipitously it could trigger a massive sell-off of dollars. An overabundance of dollars in the market is, I believe, by definition inflation, but this is where my understanding of macroeconomics starts to get on very shaky ground....

The long and the short of it is that Iraq switched to the euro for oil sales, the US invaded, and the US immediately moved Iraq back to the dollar. Most of the talk in OPEC of switching to the euro stopped for a while. How much of this is coincidence, and how much conspiracy?

Comments

[Eileen Brophy]

Is this true or just another rumour?

So many things have been said and how are we to know what is right and what is not?

[Bob Woodard]

Deep Throat: Follow the money.
Bob Woodward: What do you mean? Where?
Deep Throat: Oh, I can't tell you that.
Bob Woodward: But you could tell me that.
Deep Throat: No, I have to do this my way. You tell me what you know, and I'll confirm. I'll keep you in the right direction if I can, but that's all. Just... follow the money.