how to stop the war...

the article deserves a cut and paste job, imho..

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 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. [email protected]



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.