US Economic Warfare #1: How we Got Here

For a while now, America has had the ability to impose unilateral sanctions. That means no UN or international consensus is needed, the US can cut off pretty much any country from international markets. How did that happen?

 

The knee-jerk response may be to say the powerful can do whatever they like. But the truth is a lot more interesting, as I found via this Jordan Schneider interview of Eddie Fishman.

 

As recently as 2003, America was finding even UN-authorized, naval blockade enforced sanctions on Iraq were not working. The other option the US had was to prevent American companies from trading with its enemies. This was crippling for many countries, but not say, Iran with who America had almost no trade anyway. Successive US Presidents found all this frustrating.

 

So what changed since then? Why is it now that the US is able to cut off anyone, from Iran to Russia, whenever it likes?

~~

 

It starts with how the US dollar stayed on as the international currency. Sure, after World War II, it became the international currency by merit – the US was after all the largest economy at the end of the war, Europe was destroyed, the USSR inconsequential economically and the rest were still colonies.

 

But by 1973, there were signs that the dollar’s supremacy was under threat. First, because the US decoupled the dollar from the gold standard, eroding a lot of global trust almost instantly. Second, the Arab oil embargo highlighted how critical oil supply was to the US.

 

Around this time, the US had a huge deficit (too much government loans). Bill Simon, the US Treasury Secretary, went to Saudi Arabia to try and achieve two goals – shore up the US dollar, and plug America’s deficit. The deal he struck was as follows: (1) The Saudis (and by extension, OPEC) would price and accept payment for oil only in US dollars; and (2) the Saudis would invest all those petrodollars into US bonds. What did the Saudis get in return? Two things: (1) Access to US military equipment; and (2) Ability to buy US bonds outside the normal auction system, i.e., a form of insider trading (the illegal was now legal).

 

Within years though, as the dollar’s exchange value started to fall, OPEC murmurings began – why price oil in dollars? Why not a basket of international currencies? The US killed this possibility by “bribing” the Saudis with extra voting shares at the IMF.

 

The US dollar was now “enshrined” in the oil market.

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