INTRO

The article that follows was commissioned by Resurgence magazine but,
in view of its urgency and potential importance, the editor, Satish
Kumar, has decided that its publication cannot wait until the next
available issue appears. It is therefore being placed on the
Resurgence website,  http://resurgence.gn.apc.org/ and distributed on
several Internet lists. It may be reproduced freely provided
Resurgence is mentioned. Comments to the author are welcome.


How to stop the war

by Richard Douthwaite


So far, the main actions open to people keen to stop the United
States and Britain invading Iraq have been limited to street
protests, writing letters

to editors, signing petitions on the Internet or voting on a BBC
website. None of these seem likely to achieve very much but there's
another avenue to make one's views felt which, if enough people took
it up, could be very effective indeed.

The precedent is certainly promising. In 1956, after bombing Egyptian
airfields and destroying its airforce, British and French forces
began landing at Port Said and Port Fuad on November 4th in an
attempt to seize the Suez Canal which the Egyptian leader, Colonel
Nasser, had nationalised earlier in the year. The troops were making
good progress moving south down the waterway, occupying both banks,
and were only two or three days from reaching their objective, Port
Suez on the Red Sea, when, all of a sudden on November 6th, they
were ordered to halt. Less than four weeks later they began to
withdraw and by December 22nd, they were all gone.

So what happened? How was the invasion stopped so quickly? The answer
is that the Americans pulled the monetary plug - a technique that
can now be used on them.

Britain in 1956 was in a much healthier financial state than the US
is today when you consider that its exports exceeded its imports
whereas America's imports now exceed its exports by a massive 50%.
Nevertheless, the Bank of England was having to fight off currency
speculators the famous Gnomes of Zurich who were borrowing pounds
and using them to buy dollars. Their aim was to run down the
country's dollar reserves to such an extent that sterling would have
to be devalued from its fixed rate of $2.80 to the pound.

Such a devaluation would have been highly profitable for the Gnomes
because afterwards they could have used some of the dollars they had
bought to purchase enough of the now-cheaper pounds to repay their
loans and pocketed the difference. Even if the Bank of England was
able to resist their attack, they would not lose much because,
thanks to the fixed exchange rate, they could always buy sterling to
repay their pound debts at the price they had received for those
they had sold apart, that is, from the currency dealers'
commission. So the most they could lose was the commission plus the
difference between the interest rates they had to pay on their
sterling loans and the rate they had earned on their dollar
deposits. They were taking an almost riskless bet.

The Bank of England reckoned it could fight off the Gnomes'
speculative attacks if it had at least $2bn.in foreign exchange in
its war chest. By September 1956, however, as a result of the
speculation its dollar holdings were slipping uncomfortably close to
the danger level. The speculators knew this, of course, which caused
them to redouble their efforts. Accordingly, the British Chancellor
of the Exchequer, Harold Macmillan, decided that the country had to
borrow a sum so large that it was bound to cause the Gnomes to back
off. He asked the IMF for a $1.3bn. loan.

US approval was needed, however, as it would be the biggest loan the
IMF had ever made and far above Britain's automatic entitlement. But
when the attack on Egypt brought matters to a head by increasing the
speculative attack with the result that the reserves fell sharply,
the US Treasury Secretary, George Humphrey, made it clear he would
not give his approval unless Britain not only obeyed a UN resolution
calling for a cease fire but pulled its troops out as well.

The British Cabinet regarded giving in to the speculators and
devaluing the pound as a worse fate than losing the Suez Canal, so
the Prime Minister, Sir Anthony Eden, felt he had no option but
order the invasion to stop. On December 3rd, the British told the
Americans that all the troops would be withdrawn by December 22nd
and the full $1.3bn loan was approved the same day. The crisis was
over and the pound was saved.

So how can this technique be used to stop the Americans in their
tracks? The first thing to recognise is that the reason the US, a
country with 283 million people, is a superpower, able to spend more
on arms than the next 20 biggest arms spenders put together, because
it has been getting a massive subsidy for many years from the rest
of the world. The counties that it outspends have a total population
of over 3 billion people and include Russia, China, India, Iran,
Israel, Britain, France, and Germany.

The subsidy has come about because the rest of the world has allowed
the US to import very much more than it has exported since 1982. In
that period, countries receiving dollars for the goods and services
they have supplied have only spent a proportion of them on imports
from the US. Most of the remainder has been loaned back to America,
typically by being used for the purchase of US Treasury bills or
shares in companies quoted on the US stock exchange. $2,500 bn,
roughly half the rest of the world's total savings, have been
invested and lent in this way.

Amazingly, this huge inflow of funds has cost America nothing - so
far. True, interest has been paid on the loans and dividends on the
shares but both payments have been in dollars that have simply been
added to the outstanding debt. The US has not had to supply anything
that cost it real resources to make for the use of this massive
amount of capital. Moreover, the bigger its trade deficit has been,
the more dollars foreigners have had to invest and the higher they
have pushed Treasury Bond prices and the Dow Jones share price
index, making investment in America seem very attractive.

Even more foreigners have consequently been keen to get hold of
dollars to put their savings there.

Last year, the US spent. $379bn., almost exactly the amount of its
trade deficit the previous year, on its armed forces. In other
words, all the resources required to run the US military machine can
be considered to be coming from the rest of the world rather than
America itself. Some commentators realise this. In a revealing
article published by the U.S. Naval Institute in January 2002,
Professor Thomas Barnett of the US Naval War College, wrote: "We
trade little pieces of paper (our currency, in the form of a trade
deficit) for Asia's amazing array of products and services. We are
smart enough to know this is a patently unfair deal unless we offer
something of great value along with those little pieces of paper.
That product is a strong US Pacific Fleet, which squares the
transaction nicely."

At the moment, the US trade deficit is running at much higher levels
and America is having to borrow around $1.25bn every single day. So
the way to stop George Bush's war machine in its tracks is not only
to refuse to lend it its daily bread but for everyone with savings
invested in the US to take their money back. Very few of us have
direct investments in America, of course, but anyone who does should
sell them immediately and repatriate the proceeds. If they fail to do
so they will be complicit in whatever happens.

People saving for their retirement through a life assurance company
or some other financial institution will almost certainly have
indirect investments in the US. The problem is to get them out. All
they can do is to write to the company urging it to rapidly reduce
the share that transatlantic investments make up in its portfolio
because international outrage over Iraq is likely to cause a sharp
fall in the value of those investments and of the dollar itself. The
fact that they are personally against a war and don't want to be
invested in it will cut little ice.

They could add, however, that several American commentators expect
the value of the dollar to fall by at least 25% when the market
makes its inevitable adjustment to correct the present trade gap.
For example, as long ago as 1999, Catherine L. Mann, a professor at
Vanderbilt University, investigated current account corrections in
industrialised countries in the previous two decades. She concluded
that a current account deficit of over 4.2% of the Gross Domestic
Product (GDP) was unsustainable and that a large and rapid fall in
the value of the US currency was likely within two or three years.

"The US cannot live beyond its long-term means forever, nor will US
assets always be so favored by global investors" she wrote in an
article 'Is the US Current Account Deficit Sustainable?' published
by the IMF in March 2000. "When a change in investor sentiment
comes, it could be dramatic. What would happen if the dollar
depreciated by a significant amount, say 25 percent?"

Caroline Freund of the Federal Reserve researched the same ground as
Mann and also found that the US deficit was unsustainable except
that she reckoned that the markets normally bring these corrections
about when the deficit rises above 5% of GDP rather than 4.2%. It is
now at the 5% level.

The timing might therefore be right to try to prevent the war by
using a financial strategy almost exactly the same as that used by
the Gnomes of Zurich half a century ago. Go to your bank and tell
them that you want to sell $5,000 (or $10,000 or as much as you can
afford) in three or six months' time and that you would like fix the
exchange rate now. The bank will quote you the rate at which it will
purchase those dollars from you and give you a contract to that
effect. This is a perfectly standard banking arrangement. Businesses
expecting payments in foreign currency do it all the time. If your
credit record is good, you won't have to pay anything at all.

Should the bank be unable to match your sale of dollars in three
months' time with an order for dollars from somebody wanting to buy
them then, it will borrow the dollars you intend to sell from a bank
with which it has links in the US and sell them now. It will then
lend out the proceeds of the sale until it has to pay them over to
you in exchange for your dollars, which it will use to pay off its
American loan. In other words, through the agency of your bank you
will be doing exactly what the Gnomes did in 1956 - borrowing dollars
in the US, selling them, and hoping to repay the loan at a profit if
the dollar falls in value.

You get the dollars you need to hand over to the bank in three
month's time by buying them from the bank at whatever rate is ruling
on the day the contract falls due. If thousands upon thousands of
ordinary people join you in protesting in this way, the value of the
dollar will be forced down over the next few weeks as banks borrow
dollars in the US and sell them on behalf of their customers. So,
when the three months are up, the chances are that you will be able
to buy the dollars you need for less than the price you agreed with
the bank for selling them. In other words, if this form of direct
action becomes wildly popular or the dollar falls for other reasons
you should end up with a small profit. Of course, if the dollar
stays where it is you will show a small loss and in the unlikely
event that it rises, a rather bigger one. Your assessment of how much
of a loss you can risk having to shoulder will obviously determine
how many dollars you can sell.

In 1956, two big battalions stopped the British - the US government
and professional speculators employed by the Swiss banks. This time,
if the strategy I've outlined above is taken up, it will be more of
a guerrilla action and the outcome will depend largely on the
numbers of people who get involved. But we may just find that we have
powerful allies fighting beside us. For example, in order to minimise
their dependence on the dollar a group of Islamic countries led by
Malaysia is introducing the Islamic gold dinar later this year for
trading amongst themselves. Moreover, several OPEC countries are
considering quoting the price of oil in euros rather than dollars.
And as long ago as last August, the Financial Times reported that
the Saudis had sold an estimated $200bn. of their US assets. The
Kuwaitis have also withdrawn hundreds of millions of dollars from
America having decided that, despite the threat of a war next door
spilling over the border, it is better to invest at home.

Within the past few months the dollar has already lost 26% of the
maximum value it held against the euro in 2001 and a smaller amount
against the pound. Our small gestures coupled with the actions of
much bigger players could continue this fall which, almost
certainly, still has some way to go.

The Economist magazine believes that a further 20% drop against the
euro is 'not unthinkable'. Moreover, just as there was a virtuous
circle on the way up, with the increasing US trade deficit providing
foreign investors with extra funds to push the dollar and Wall
Street higher and higher, there will be a similar effect on the way
down. Falling stock markets and a depreciating dollar caused by
investors moving out will panic others into getting out too, thus
accelerating both markets' decline.

Consequently. the more people you can persuade to join you in
becoming a Gnome for Peace, the better the chance there is of
weakening the dollar and the American economy by enough to prevent or
limit a war. That's the real profit. Of course, if investor
sentiment does really change - helped in part by your actions -
virtue would not have to make do with merely being its own reward.
Besides peace, it would bring something of a financial bonus too.

Richard Douthwaite, Cloona, Westport, Ireland.  richard@douthwaite.net



Richard Douthwaite is an economist living in Ireland. He is the
author of The Growth Illusion: How Economic Growth has Enriched the
Few, Impoverished the Many and Endangered the Planet, The Ecology of
Money, and Short Circuit: Strengthening Local Economies for
Security in an Unstable World.