Iraq war: It's about capital flight
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?'
- The writer is Editor-at-Large of The Straits Times.