Why the U.S. can't leave Iraq

(TIME) With its oil increasingly in short supply, the U.S. will remain in control of Iraqi oil

Have you noticed that the U.S. anti-war debate has begun to resemble Congress’s attitude to Iraq and Iran? There’s mild criticism of the Bush administration’s devastation of Iraq but the president does whatever he wants in Iraq and makes absurd accusations against Iran unchallenged. Debate concentrates on mistakes made rather than asking why such immense costs are being expended in the first instance.

More than most Americans, the anti-war movement examines the Iraq war in detail and it is realizing consciously what the U.S. political class already know. There are no mistakes. The U.S. is staring over a cliff and is going to go over. It cannot leave Iraq. If he can find a plausible reason, President Bush will be allowed to invade Iran as well. Everyone will then pretend that it’s all another tragic mistake.

Two factors make up the cliff that America nears:

• Simple supply and demand: the depletion of oil reserves, the necessity for the oil producers to conserve supplies and the inevitable effects of oil price rises on the world’s most intensive oil user.

• The U.S. dollar’s status as the world’s reserve currency. This requires some explanation.

A reserve currency is one that all countries will accept for trade purposes. It is really a substitute for gold because there is not enough gold to underpin the world’s currencies. It is particularly useful for trading oil, which is normally priced in dollars. Most countries also hold much of their foreign currency reserves in dollars both for this purpose and because the U.S. has been regarded as a politically and financially stable country.

Unhappily, the U.S. is running a trade and current account deficit, that is, it pays other countries more dollars in trade and services than it receives. The U.S. is essentially a business running at a loss. You might wonder where it gets the dollars to pay for the difference between cash received and cash paid.

Firstly, it uses the capital inflows from foreign investors. This is like spending borrowed money because investors are entitled to take their money back. Secondly, it can print money. That’s right. To get a billion dollars cash, the government simply prints the banknotes or interest bearing treasury notes for any amount it needs. These are purchased both within the U.S. and by foreign investors and governments who can use them for trade generally, not necessarily with the U.S.

Now, it is not always a bad thing to print money; indeed, in an expanding economy it is essential to increase the “money supply”. Unfortunately, the U.S. economy is not expanding. The money supply increase is to support increased borrowing, both domestic and foreign. It is of concern to many that in March 2006 the U.S. Federal Reserve Bank ceased publishing M3 data, which is the broad measure of money supply. The fear is that this was to hide an inflationary borrowing.

Inflation in a reserve currency is a bad thing. Other governments’ reserves are devalued – they need more dollars to buy the same amount of oil and anything else priced in dollars. They might think it better to keep their foreign exchange reserves in euros, yen or a basket that corresponds more to their trade pattern. Investors don’t like inflation because both their capital investment and earnings are worth less. They will look for a more stable home for their investments.