Wednesday, November 29, 2006

Another nail in the "$ as reserve currency" coffin

One leading indicator which signaled the British Pound's removal as global reserve currency was Britain's loss of maritime dominance. When British ships could no longer make the world's seas safe for commerce, it just didn't make as much sense to pay them the "vig".

Today the United States earns the "vig" by keeping the world safe for commerce, although lately things haven't been so safe.

North Korea just tested a Nuclear Bomb, the Taliban are enjoying a resurgence in Afghanistan, oil exporting nations like Russia, Venezuela, and Iran are increasingly sidestepping the US to make direct non-market deals, mainly with China (which also happens to be side stepping the US left, right and center around the world making all kinds of bilateral deals), and Iraq edges ever closer to the taboo, "c"-word (no, not that c-word, "civil war").

If oil is the life blood of the modern global economy, it would seem that keeping that blood flowing would be as vital as it was for Britain to keep the seas safe for shipping.

So, as one who enjoys the perks of living in a nation collecting the "vig", I read Managing Director of the Saudi National Security Assessment Project, Nawaf Obaid's opinion piece in the Washington Post with some concern.

if a phased troop withdrawal [of US troops from Iraq] does begin, the violence will escalate dramatically.

In this case, remaining on the sidelines would be unacceptable to Saudi Arabia. To turn a blind eye to the massacre of Iraqi Sunnis would be to abandon the principles upon which the kingdom was founded. It would undermine Saudi Arabia's credibility in the Sunni world and would be a capitulation to Iran's militarist actions in the region.

To be sure, Saudi engagement in Iraq carries great risks -- it could spark a regional war. So be it: The consequences of inaction are far worse.

It seems to me that he is telling the US, if you can't fix the problem in Iraq, we will.

This would be a dramatic shift in Middle East politics, but consistent with the views of CFR Head Richard Haass, that the American era in the Middle East is ending.

In that event it won't be too much longer before national leaders begin to wonder if they are paying the "vig" to the wrong guys.


STS said...

I can't figure out what the Saudis think they're going to do about Iraq. Buy half a million mercenaries on the open market? They have enough trouble keeping the lid on their own population w/o wading in over their heads in Iraq.

We really should be doing some 'constructive engagement' (old Reagan-era term) in places like Iran to get them bought into the international economic system more. But if we can't get the Saudis interested in non-petroleum economic development, where to start with people like Ahmadinejad?

I agree reserve currency status is trending away from USD, but without some major fence mending on the post-WWII international institutions we're likely to have a multipolar reserve basket sloshing around on top of a multipolar geopolitical free for all. A pretty nasty cocktail of unpleasantness altogether.

Is some of the above behind your "view" and gold preference?