[pistons92] FW: [m-86] Iraq war: It's about capital flight

Another persepective.

----- Forwarded by Firman Dharmawan/Person/World Bank on 04/01/2003 09:10 PM
-----
 

                      Rizal H. Rivai

                                               To:

                      04/01/2003 05:43         Eacifns

                      PM                       cc:

                         EAPCO                 Subject: Iraq war: It's about
capital flight(Document link: Firman Dharmawan)           
 

 

 




Iraq war: It's about capital flight
by Leslie Fong



STOPPING the exodus of capital from America to Europe is the real reason why
the
United States started the war against Iraq despite worldwide objection,
according to a Chinese think-tank chief with access to the leadership in
Beijing.

In an analysis said to have been read by President Hu Jintao and other top
leaders, Mr Wang Jian argues that the steady flow of money away from the US
and
into Europe over the past six months has raised the spectre of a financial
meltdown in America.

With a financial system sustained largely by incoming funds invested in
government bonds and other instruments, the US simply cannot afford to let
the
exodus continue.

It has to thrash the euro, which has been appreciating against the US
dollar,
and make Europe a risky place in which to park excess money, he says.

Mr Wang, who heads the government-linked Macroeconomics Society of China,
asserts that the US has decided that a war in the Middle East, from which
most
major European economies except Britain import almost all their oil, would
be
the most effective way to rattle fund managers.

Iraq, with the second largest oil reserves in the world after Saudi Arabia
but
few friends even in the Arab world, as good as offered itself as the target.

No doubt higher oil prices will hurt the American economy too, but the
impact
will be much less severe as the US depends on the Middle East for only 26
per
cent of its needs.

Further, he says, it has its own oil fields and holds in reserve enough to
meet
its needs for 150 days compared with just 90 days for Europe.

In any case, victory in Iraq will mean American control over the country's
oil
fields, however much the Bush administration may deny that it wants to do
that.
The US can then tighten the screws on Europe.

Mr Wang's paper has created a stir among the community of researchers and
analysts in Beijing, many of whom advise the Chinese government on foreign
policy and strategic issues.

It has sparked off deep discussions in such circles, which is hardly
surprising
as no one believes the reasons given by the US government for going to war.

In contrast, only a few accept that the US is really out to set up a kind of
model government in Iraq to show that Islam is not incompatible with
modernity
as the West defines it - the essence of regime change.

Opinion is divided among those who have read and debated Mr Wang's paper.

Most agree with his argument that war in Iraq, especially a prolonged one
that
will push oil prices up and up, will hurt Europe and the euro more than the
US.

But they see the likely collapse of the euro as a by-product of the war, not
the
reason for launching it in the first place.

'I think Wang Jian is being deliberately provocative. It was probably his
way of
drawing attention to some of the economic repercussions of the war,' says Dr
Yuan Gangming, Senior Fellow at the Chinese Academy of Social Sciences'
Institute of Economics.

Dr Tao Wengcao, deputy director of the academy's Institute of American
Studies,
thinks the economist is way off the mark.

However, a military analyst, whose writings are tracked by his American
counterparts, thinks Mr Wang is closer to the truth than many would give him
credit for. 'History will vindicate him,' he says.

At the heart of the economist's argument is the assertion that the US will
do
everything to defend its 'dollar hegemony' because it is now living off the
paper on which it prints its greenback.

With a withering manufacturing sector, whose share of the GDP is down to 18
per
cent last year from 24 per cent in the early 1990s, it has been relying on
financial transactions for growth.

Weighed down by a trade deficit nearing US$500 billion (S$885 billion) a
year,
the US needs an inflow of US$1.3 billion a day in foreign funds to help pay
the
bills for the shoes, clothes and other goods it imports.

To put it bluntly, Mr Wang says, the US is paying for merchandise from China
and
elsewhere with pieces of paper not backed by gold or anything more solid
than
faith in the greenback.

These dollars are then re-invested in US Treasury bills, bonds and other
'virtual' assets which are no better than promissory notes or digital
signals in
a computer.

Given this fragility, once international capital moves out of the US in
large
enough quantities, America will be staring at a huge financial crisis in the
face.

And the money is on the move.

Mr Wang says that between 1996 and 2000, US$2.3 trillion worth of
international
capital flowed into the US, 70 per cent from a Europe lacking faith in its
own
euro and mesmerised by the false dawn of the 'new economy' in America.

But with the collapse of the dot.com bubble, the discovery of massive
corporate
fraud, the Sept 11 disaster and an appreciating euro, the tables are being
turned on the US.

Since the fourth quarter of last year, the net inflow of international
capital
into Europe has been exceeding 15 billion euros each month.

What worries the US even more is that the money stays there, in European
long-term bonds and other securities.

Mr Wang says that it has not escaped the Americans that the war in Kosovo
spooked fund managers.

Within 10 days of the euro's launch in 1999, it rose 19 per cent against the
dollar. But once fighting in Kosovo started two months later, the exchange
rate
fell to as low as 0.8, a 40 per cent drop from peak to trough.

Noting that Iraq's peace-time oil production amounts to just two million
barrels
a day and Saudi Arabia alone can put three million a day more onto the
market,
he says the US can only keep up the pressure on the euro if it also moves
against other producers.

He thinks Iran and Libya, known to have been supporting terrorist groups,
will
be next. But European countries like France and Germany, once alerted to
what
the US is doing, are bound to respond.

And so may begin a 21st century replay of what the imperialist powers did
from
the 18th century; only this time, instead of fighting for territory, natural
resources and markets, the tussle will be for oil and investible funds.

'I hope my analysis is wrong because if it is not, then the consequences are
horrendous,' he says at the end of his paper.

The military analyst has this to say: 'Yes, he is wrong, but only because
Iran
and Libya are not next - well, not yet.

'Watch Venezuela. Its oil exports were disrupted recently because of strikes
and
disturbances. Can one be sure there was no American hand behind these?'


Your use of Yahoo! Groups is subject to http://docs.yahoo.com/info/terms/

Other related posts: