Dan Azzi
February 2019


Exorbitant Privilege

Dan AzziDan Azzi

[This article was originally published in An-Nahar on February 2, 2019]

The United States buys a Japanese Toyota, German BMW, Korean Kia, or Chinese Dongfeng, made of steel, leather, glass, computer chips, engines, and significant workmanship and design. They pay using pieces of paper (water-proof cotton, to be precise); with “In God We Trust” printed on them and a picture of a dead guy with long grey hair, which costs a few cents to make. The Japanese, Chinese, Koreans, and Europeans hold on to these pieces of paper in the form of US treasury bonds, which generate more pieces of paper in the form of interest. If you hold cash, like the $100 bill in your wallet, that’s actually an interest-free loan that you’re providing to the US Treasury. Remember, when you watched a crowd of Turks on TV burning dollars after President Trump imposed sanctions on Turkey? That’s actually Turkey graciously forgiving a loan to the US. In fact, if they want to hurt the US, they should have burned Turkish Lira.

The central banks of the countries holding these dollars call them reserves. This is a great deal for Americans, frankly. People work hard all over the world to manufacture stuff that Americans buy, thus sustaining a fantastic consumption-based lifestyle for the average American, whose government just prints these pieces of paper, which everyone all over the world accepts as legal tender.

In the 1960’s, the French finance minister (later president) Valéry Giscard d’Estaing, caught on to this racket, rightly calling it an “exorbitant privilege.” In 1944, per the treaty of Breton Woods, every dollar was convertible into gold, at the fixed rate of $35 per ounce. In 1965, French president Charles de Gaulle tried to break this privilege by sending his naval fleet to exchange all French dollar reserves into gold. For a while, De Gaulle was onto something, and the US gold stockpiles were reduced considerably, until 1971, when US President Nixon unilaterally ended this convertibility, thereby turning US dollars into pieces of paper again. From 1971 on, when someone like De Gaulle asked for his money back, the US would tell him “Have a seat, Mon Général, while we print your money.” However, instead of losing faith in the dollar, people everywhere kept treating these pieces of paper as if they were still gold, and the dollar continued, until now, to be the world’s reserve currency.

After the September 11 terrorist attacks, the US turned up this exorbitant privilege a notch or two, weaponizing the dollar. For example, many people analyze the Syria situation in terms of boots on the ground, declaring Russia the winner there. However, what they miss is that both the Russian Ruble and Iranian Rial have lost some 50% of their value, through unilateral sanctions imposed by the US, that work precisely because of the dollar’s world stature. That means that the price of any imported product has doubled for every Russian and Iranian citizen.

Many in the anti-American camp ask themselves why the US is allowed to do this. This is a complex question and a whole PhD dissertation could be written on it, so I will oversimplify things, by giving only three reasons, otherwise my chief editor, who’s pretty nasty about word count, will have a cow.

First, you need a trustworthy, alternative currency, and I can’t imagine any of you converting all your savings into Euros, Sterling, Yen, or Chinese Renminbi anytime soon, no matter how much you may hate US foreign policy. Even terrorist organizations pay their fighters in the Great Satan’s currency.

Second, and this reason is logistical; for a currency to work as a reserve currency, its issuing country must run a trade deficit, i.e. it must purchase more stuff from the rest of the world than it sells, and the rest of the world must be willing to lend it the difference, which they hold as reserves. Thus, before the Euro can become a reserve currency, Europeans must buy more Fords and Chevrolets from Americans than they sell them BMWs. This would wreak havoc on the German economy, sharply increasing their unemployment rate, and, ironically, might even benefit the US, at least according to President Trump, who made reducing the trade deficit a campaign promise.

The third reason is the “Wall Test.” You’ve probably never heard of it, because I just made it up. If every country in the world constructed a Trump-type wall (except it’s sealed both ways) and prevented any trading in or out with other countries, which country is viable on its own?

Before we go on, let’s take a detour and formalize something that we all instinctively understand but have not thought about much. What is money? The dictionary definition is that it is something of value which is generally accepted as a medium of exchange. Thus, a currency would be a specific country’s money. At the very least, it’s a claim on that country’s Gross Domestic Product (GDP); giving you the ability to hire a gardener, buy a car, or whatever the country produces intrinsically. If you want to buy an import from another country, either you have to buy the currency of that country, which means that they have to be willing to take yours, or you need to sell them something, or they just send you the money for free (remittances from expats).

Now back to the third reason. The US has most raw materials and the technical know-how to construct cars, planes, phones, electronics, televisions, computers, and to feed itself. Sure, for a while they’ll be more expensive than now, but eventually, they’ll adjust. Canada might probably pull it off, too. Japan? They don’t even have steel, and they’d have to go back to breeding and riding horses. Lebanon? We would probably starve, because we don’t produce enough food to feed ourselves, just like the Great Famine of 1915-1918. Very few countries would survive the Wall Test, certainly not with the current level of prosperity, and, in fact, many would literally die of starvation, just like us in 1915. By the way, let’s assume there’s one indispensable piece of raw material that the US doesn’t have. That’s when it can dispatch a few divisions of its formidable military, all the way up or down North or South America, and forcefully take what it needs, with nothing to deter it, as the whole of the Americas is nuclear-free. In other words, in this scenario, if every country asked for its dollars back, they would get worthless pieces of paper that they can’t spend anywhere (because the US is now walled off).

Now back to Lebanon. We’re living essentially the same exorbitant privilege, with one major difference. We can’t print dollars like the US does nor can we pass the Wall Test. We basically print Lira, which nobody else outside (or even within) Lebanon, wants (unless they’re forced, like the recent BDL circular last month). Lira is given to our banks in the form of artificial profits, in return for dollars from you or the expat living outside, a transaction commonly referred to as “financial engineering.”

At this point, you might be wondering what they’re doing with your dollars, that you think are safely deposited in our banks, earning exorbitant amounts of interest.

They’re depleting them on Electricité du Liban’s deficit, public sector wages, and binging on imports.

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