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   Global Economy
     Jan 6, 2005
THE NAKED HEGEMON
PART 2: The center of the doughnut
By Andre Gunder Frank

     (PART 1: Why the emperor has no clothes )

All Ponzi schemes build a financial pyramid. Many who pay into them also live in a financial world themselves, but others need to derive their in-payment through earnings from production in the real world. In today's world of financial transactions that every day are a hundredfold more than all payments for real goods and services put together, the financial ones put the real ones into the shadow behind their brilliance.

Moreover, to oversimplify a very complex matter into more intelligible layperson's language, options, derivatives, swaps and other recent financial instruments have been ever much further compounding already compounded interest on the real properties in which their stake and debts are based, which has contributed to the spectacular growth of this financial world. Nonetheless, the financial pyramid that we see in all its splendor and brilliance, especially in its center at Uncle Sam's home, still sits on top of a real-world producer-merchant-consumer base, even if the financial one also provides credit for these real-world transactions.

Now, what if we look at the world as a doughnut, analogous to so many cities in the US rust belt. The center is derelict and hollowed out as production and consumption have moved to the surrounding suburbs (in automobile capital Detroit, the windows of the principal department store Hudson's have been boarded up for years, even as the city has built an expensive "Renaissance Center" to re-gentrify the center, a process that has "succeeded" in some other cities). General Motors' derelict Flint, Michigan, gave us Michael Moore, who featured it in Roger and Me (a reference to GM chief executive officer Roger Smith). We might look at the entire world in doughnut terms, with the whole of Uncle Sam in the empty hole in the middle that produces almost nothing it can sell abroad. The main exceptions are agricultural goods and military hardware that are heavily subsidized by the US government from its taxpayers and its dollar-printing press, and even so Uncle Sam runs a US$600-billion-plus budget deficit.

Should the dollar crash ...
The big difference in this US doughnut is that both the budget deficit and the $600-billion-plus trade deficit are financed by foreigners, as we have seen. Uncle Sam would exclude most of them as persons, but gladly receives the real goods they produce. As world consumer of last resort, as already suggested, Uncle Sam performs this important function in the present global political economic division of labor: everybody else produces and needs to export, and Uncle Sam consumes and needs to import. The crash of the dollar would (will?) crumble this entire world-embracing and -organizing political economic doughnut and throw hundreds of millions of people, not to mention zillions of dollars and their owners, into turmoil, with unforeseen and perhaps unforeseeable consequences.

Many people, high and low on the world totem pole, have a big stake in avoiding that, even if it requires continuing to blow an empty Uncle Sam up like a balloon. Or to refer to a well-know metaphor, to continue to pretend that the emperor with no clothes is dressed up. That still includes China, for which a financial showdown with Uncle Sam would be a blessing in disguise: it would oblige China to change its political economic course, and instead of giving its goods away for free to Uncle Sam, to turn production and consumption inward to its poor interior and outward to its neighbors in East Asia, all of which it could and should be doing already. (The latter China has recently begun to do, but not yet the former.)

Of course, crashing the dollar would finally also in one fell swoop wipe out, that is default, Uncle Sam's debt altogether. Thereby, it would simultaneously also make all foreigners and rich Americans lose the whole of their dollar-asset shirt, of which they are still desperately trying to save as much as possible by not so doing. In fact, this historically necessary transition out from under the US-run doughnut world could bring the entire world into the deepest depression ever - and in all of them the poorest suffer the most. Only East Asia could save itself with greatest ease, but also after paying a high cost for this transition - toward itself! Thus, the Uncle Sam Ponzi Scheme poses the world's biggest and craziest Catch-22 since MAD (mutually assured destruction).
However, even this would not be historically new. Recall how much the transition to Uncle Sam cost: another 30 Years' War from 1914 to 1945 with the intervening second Great Depression in a century that cost 100 million lives lost to war, more than in all of previous world history, not to mention the millions who suffered and died from unnecessary starvation and disease. Or the previous transition to Britain cost the Napoleonic Wars, the Great Depression of 1873-95, colonialism and semi-colonialism, to name a few, and their human costs, especially combined with the most pronounced El Nino climatic changes in two centuries, which ravaged Indians, Chinese and many others with famines. But these were in turn magnified by the imperial colonial powers and used in their own interests, eg increased export of wheat from India especially during years of famine.

The parallels with today, including even again taking advantage a century later of renewed stronger El Ninos, are too horrifying and guilt-generating for hardly anybody to make with Uncle Sam's International Monetary Fund-imposed "structural adjustment" that obliges Mexican peasants to have already eaten the belt that the IMF wants them to tighten still further. And that is not to mention 3 million dead in Rwanda and Burundi, and then some in neighboring Congo, first after IMF-imposed strictures and the cancellation primarily by Uncle Sam of the Coffee Agreement that had sustained its price for these producers. And then we get the scramble for and production and sale there of gold for Uncle Sam's Fort Knox, titanium so we can communicate by mobile telephone, diamonds forever, and so on.

Yet there are also others in the world who do not (yet) feel all caught in this trap. Just before the 2004 US election, one of them said so out loud in a video broadcast to the world. It seems to have been least publicly noted by its principal addressee, Uncle Sam, who should have been the most interested party, for it was none other than Osama bin Laden himself who announced that he was "going to bankrupt the Uncle Sam". In view of Uncle Sam's deliberate blindness to the shakiness of his real-world foundation abroad, so massive a collapse may not be more difficult to arrange than it was to topple its Twin Towers symbol.

How Uncle Sam spends your dollars
Meanwhile, back at the ranch, as the saying goes in Texas, what does Uncle Sam himself blithely do with the world's hard-earned savings and money? His consumers still over-consume it without 99.9% of them knowing what they are doing, since hardly anyone tells them. And Uncle Sam's government uses much if not all of its increased hundreds of billions of dollars for the Pentagon. It does not, however, spend it to pay its poor professional soldiers, who come mostly from small-town rural America and took the only job they could get, and even less to its hapless reservists. No, better increasingly to privatize war in Iraq as well as at home. The military-industrial complex against which General Dwight Eisenhower warned in his 1958 parting presidential address is alive and kicking, more than ever under the stewardship of Vice President Richard Cheney and Defense Secretary Donald Rumsfeld (with their jobs disastrously well done, both are being kept on for a second term. So is Douglas Feith, with Paul "Wolfowitz of Arabia" one of the duo at the Pentagon who went to Israel and who the commander of the Iraq invasion, Tommy Franks, has been quoted as calling "the greatest total idiot that there is on God's Earth, with whom I have to battle almost every day").

Between 1994 and mid-2003, Uncle Sam's Pentagon made more than 3,000 contracts valued at more than $300 billion with 12 US private military companies (PMCs) out of the 35 estimated by the New York Times, others of which are small and offer mercenary services. But more than 2,700 of those contracts were given to only two companies: Kellogg Brown & Root (KBR), a subsidiary of Cheney-connected Halliburton, and Booz Allen Hamilton, according to the Center for Public Integrity's International Consortium of Investigative Journalists. In Iraq these PMCs now have as many mercenaries as US and UK troops combined. But of course that is still "small" potatoes, since the bulk of Pentagon money is used to buy expensive weapons systems from only four major US "defense" contractors and the likes of Halliburton.

Uncle Sam then uses these arms unilaterally to twist others' arms by blackmail, to lord it over and invade the world that provided the money in the first place. After all, Uncle Sam has to do what it must to keep it coming. US unilateralism is not so much, as often mistakenly supposed, just going it alone. Yes, it is to proclaim fighting for "freedom" (whose, we may ask?) and "saving civilization", as President George W Bush and his even more eloquent British mouthpiece Tony Blair proclaim every day. The simplest way to "save" civilization was by simply abolishing in a day its most precious gift of the whole body of international law to keep the peace, which the West had taken centuries to develop, admittedly also in its own imperial interests. Still, it was the best and only international law we had, and at the very least better than nothing at all. Now the only "Law of the West" that remains is indeed "the law of the west": The spaghetti-western vigilante law of posses that, with or without a conniving judge, take the "law" into their own hands to form a lynch party and go after whomever and where and when they please, alas now on a much grander scale than any spaghetti western ever imagined.

That also means disemboweling and paralyzing the institution of the United Nations that was established to guard the peace, except when Uncle Sam after its own wars always recycles the UN to pick up the pieces he shattered in Yugoslavia, Afghanistan and now Iraq. But in so doing, it also means to dupe, threaten, cajole and blackmail all others - friends and foes alike - to do his bidding on every issue, big and small. He has trained a whole civilian army of officials to do that. That way, Uncle Sam can "unilaterally" always throw around his still-apparent weight in all other international institutions that deal with endeavors from agriculture and aviation to zoology. But Uncle Sam extorts real unilateral favors for himself even more through his bilateral relations. That is why the World Trade Organization was dead on arrival. Indeed, Uncle Sam now prefers to use bilateral relations unilaterally, as he increasingly isolates himself internationally. Thus he can exercise even more military, political and economic bargaining power over his bilateral "partners" than he could over all or even many in international institutions.

And when bargaining is not enough, or even if it could be, Uncle Sam simply attacks when he feels like it, invading little Grenada (population all of 300,000), Nicaragua (with the help of arch-enemy Iran), Panama (7,000 civilians killed in one night to capture one man only, Daddy Bush's onetime friend and ally Manuel Noriega - there is an all-smiles photo of them shaking hands), Iraq (that was even a money-making venture as Uncle Sam extorted more dollars from his allies to pay for the war than it actually cost him), Somalia, and Yugoslavia, which was attacked in part to make an example out of what can happen when one is weak and yet in abject defiance of Uncle Sam and his IMF, maintaining some state ownership of important means of production and social-welfare state protection of the population, like Belarus today, where Uncle Sam also tried to get "regime change", but military action is more difficult on the border of Russia, unless it is an accord as against Afghanistan or bought off. Moreover, Yugoslavia gave up only when Russia withdrew support after Uncle Sam successfully blackmailed political economically and partly bought it off in Berlin. Then there is Afghanistan (again with the help of Iran and Russia), and now again Iraq. Who's next, Iran? Syria? Not Libya, it is now obediently making oil deals with Uncle Sam; and not North Korea, which made nukes to protect itself against precisely that.

Simple inspection of the facts on the ground reveals that, except for little Grenada, not a single one of these or any other US wars was ever won by military force, unless it be the Pacific one against Japan (World War II was won in Europe at Stalingrad in 1943 by Russian troops who would have reached Berlin even if Uncle Sam had not arrived later). Nonetheless, Uncle Sam has now already built 800 military bases around the world. Apart from that Bush has a new "Plan for the Middle East", which now stretches from Morocco beyond Pakistan - to Muslim Indonesia? Just what this plan involves is not yet clear, other than that Israel is to remain Uncle Sam's political and military stalking horse in the region as it has always been. Only now it's assigned its own reach and may also expand further. Bush himself went to Africa, especially West Africa, to look at its oil. In the Americas, his Plan Colombia (it has oil too) has been extended to the whole Andean region (Ecuador also exports oil), he has yet another plan for the Amazon (maybe some is to be found there and in the meantime he built a huge base there, allegedly for NASA, which is not unknown also to engage in military ventures), a plan to "take care of" with World Bank help the world's largest underground deposit of sweet water under Iguazu Falls, where Brazil, Argentina and Paraguay meet, and is already again training 40,000 Latin American military personnel at a time on US bases.

All this is a giant global military-political economic foundation on which to maintain Uncle Sam's financial Ponzi Scheme Confidence Racket, and cheap at twice the price for those that end up with the dollars and as long as he can pay for it all with the self-made paper dollars that so far also maintains the global Ponzi business. Well, to be honest, it's not only for the dollars. After all, they are only useful if you can actually buy something with them, especially the oil that keeps the foundation running.

All about oil
Not only does Uncle Sam have to buy ever more oil, today with self-printed dollars, but perhaps tomorrow with euros or yuan, he also has to try to make sure to have his hand on every spigot so he can control who else can, and especially who cannot, buy it. So that is why we now find him attempting political and financial control of the oil spigots, wherever he still can, and going in also for military presence as in Central Asia, or using military power to go in, as Iraq. That is both to use it as a lever of control and/or to warn its neighbors what may happen to them if they fail to continue to play along with Uncle Sam. Fortunately for him, most of East Asia and especially China also seem to be obliged to buy foreign oil, even if tomorrow perhaps no longer with dollars but with yuan/yen. On the other hand, sad but true, the world's biggest seller of oil is Russia, whose spigots remain beyond Uncle Sam's control. But how could Uncle Sam continue to pay for and maintain all these bold ventures in defense of freedom with those self-made paper dollars if nobody accepts them anymore?

The December 10 Financial Times (FT) offered some additional tip-of-the-iceberg examples of Uncle Sam's Defense of Freedom in Iraq. Though poor Iraq sits on top of the world's largest still-unexploited pool of ever-more-precious oil, it remains in the background or only at the bottom of this story that barely mentions it and, like the present essay, focuses instead on dollars. In two different reports, it relates how three helicopters flew 14 tons of $100 bills in to the Kurds. The money, much of the $1.8 billion US payoff to the Kurds, was part of Iraq's earnings under the UN "oil for food" program. Initially, of course, the bills simply were the product of the self-same US printing press, for which Iraq had exported real oil. It did not come from the $18 billion that Uncle Sam's Congress appropriated for "reconstruction" of Iraq. As an FT graph graphically shows, no more than $388 million - or 2.15% - of that US money had yet been spent, and only $5 billion of it having even been budgeted by Uncle Sam in Iraq by the time US proconsul L Paul Bremer went home from a job well done. No, instead in his wisdom the Good Uncle had thought it best to spend $13 billion of the $20 billion of Iraqi funds. That was 65% of the Iraqi money compared with the still only 2% of the nearly equivalent amount of original US money.

By the time the new Iraqi government took over some tasks from Uncle Sam, it discovered that a full $20 billion of their funds had been spent, $11 billion from sales of oil, according to the International Herald Tribune. Why? Simple, is the answer of the "responsible" finance officer, Admiral David Oliver, "I know we spent some money from [the Iraqi] fund. It was purely the matter that we'd run out of US money" - of which there was only another $17.5 billion-plus unspent. We might wonder whether the good admiral was schooled in Clausewitz and happened also to discover his good advice about making the conquered victim pay for his own military occupation, in this case by Uncle Sam.

The Iraqi representative on the funding disbursement and oversight committee attended all of one out of its 43 meetings; but then why bother with more, when most expenditures were authorized without any meeting at all. So although US funds were budgeted for all sorts of projects, they were nonetheless paid out of Iraqi funds. Of these, many disbursements were even made without any contract whatsoever, in one case a mere $1.4 billion. Most others occurred without any multiple competitive, nor even any previously vetted or subsequently evaluated, bids. The US funds, on the other hand, remained virtually unspent in Iraq. Maybe Admiral Oliver had "run out of US money" in Iraq because it remained at home in Washington; and if disbursed at all, it simply changed hands and bank accounts right there. After all, that is much more efficient than it would have been to send it back and forth, and a bit of it might not even get back. After all, it has long since been standard practice for the bulk of the dollars that Uncle Sam lends or even "gives" to Third World countries to stay at home, where it belongs and would return to anyway. No matter; Congress has already appropriated another $30 billion to "prepare for transition to elections" in Iraq this month.

All that being the case, it would of course be altogether undesirable for Iraqi, let alone Uncle Sam's, funds to be squandered on any Iraqi service of old foreign debt to others. So it was only logical to strong-arm "allies" who can't help already losing US debt to them also to forgive the Iraqi debt. This, as we may recall from above, while Uncle Sam still insists that the rest of the Third World must continue servicing their debts to him. For God forbid that any repayment of Iraqi debt should go instead to those ungodly Russians, traitorous Frenchmen or even to the Chinese best friend indeed, who most invested in Iraq, a dastardly thing to do in the first place, when Uncle Sam has much more worthy causes for the Iraqi money.

And what were and still are these grander, worthy causes? The largest single payment of $1.4 billion was to whom else but the self-same Vice President Cheney's Halliburton. Yet we now know that at the same time it was also cheating even its generous benefactor Uncle Sam out of hundreds of millions more dollars on the side, buying petrol for $X in Kuwait and selling it in Iraq for $5-10X and other shenanigans. Altogether, Halliburton got Iraq contracts for a cool $10 billion plus change, according to the IHT.

Without the shadow of a doubt, most of the other Iraqi and US dollars went to other crony US - and some crumbs off the table for the UK - corporations and even to private and military individuals who have their fingers in the till. But alas, we will never know who they all are, since as per Uncle Sam's inspector general, "I was, candidly, not interested in having army auditors because I thought we had to slide into the Iraqi system as quickly as possible."

Rewards of conquest
Frankly, being both non- and anti-military, I have not myself read Clausewitz. So I do not know what, if any, good advice he gives about relying on corruption as the first principle in cutting and dividing up the conquered pie.

All of the above speculation was written before the UN International Advisory and Monitoring Board for Development in Iraq (IAMBDI) issued a report on its findings about US stewardship. Before we get to the report, we should keep in mind that the FT observes diplomatically that "the UN has been reluctant to take the US to task publicly over its spending of Iraqi funds". The FT quotes directly from the report: "There were control weaknesses ... inadequate accounting systems, uneven application of agreed-upon contracting procedures and inadequate record keeping." The IHT also makes its own summary of the same report: "There had been widespread irregularities, including financial mismanagement, a failure to cut smuggling [outward of oil and other Iraqi physical property; nobody knows at what price and to whose benefit] and over-dependence on no-bid contracts." The FT, for its part, offers a few more specifics from the report: "Of particular concern ... were contracts with sometimes billions of dollars that were awarded to US companies such as Halliburton from Iraqi funds without competitive tender."

Last month Bush gave Uncle Sam's highest civilian award, the Medal of Freedom, to L Paul Bremer III, the US civilian proconsul who oversaw it all, and to General Tommy Franks, who led the invasion that made it all possible in the first place. George Tenet, the director of the Central Intelligence Agency (CIA) that provided all the bogus information to "legitimate" the whole enterprise to begin with and has since been discredited and forced to resign was not forgotten either and received the third award. The IHT published a ceremonial photograph of the three, all smiles with George W, who was smiling too. We may rest pretty well assured that of the recipients of their beneficence and service to "freedom" (for whom and what, we may ask?), 99.99% were among the ones at whom the US Federal Reserve's Alan Greenspan had already pointed his finger as the most privileged over-consumers who are totally responsible for US under-saving and whom he labeled simply as the upper 20% of US income earners. It is also they, he said, who are the most responsible also for the growing trade deficit about which the Doctor recently complained in Berlin. If we examine US income distribution, we may well learn also that among these 20%, the lion's share of this money, like most of that from the Pentagon, ended up in the pockets or accounts of the upper 2% most super-privileged, so they can over-consume yet still more of the fat of the whole Earth. Who would deny that this is a worthy cause?

But as Bush himself told the world, it is only right that "we" exclude other countries from the trough and till in Iraq. After all, he explained, when the Iraqis accepted his invitation, it was "our boys who put their lives on the line". Alas, the personification of Uncle Sam neglected also to explain for what and for whom.

(Copyright 2005 Andre Gunder Frank. All rights reserved.)

 


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Ominous: The deficit vs the dollar 
(Oct 14, '04)

US complicit in its own decline (Mar 31, '04)

Why the US economy leads the world (Mar 6, '04)

America's selective strong dollar policy
(Aug 14, '03)

 
 

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