It is a popular belief in some quarters that the United States invaded Iraq because they began trading oil in euros instead of dollars and that we are on the verge of invading Iran for the very same reason — to defend the dominance of the dollar as the medium of exchange for buying and selling oil.
This belief goes hand-in-hand with the theory that the dollar is effectively indexed to the price of petroleum in the way it once had a value based on gold and silver. Under this theory, as the oil trade moves away from the dollar it will put the currency into free-fall, with devastating effects on the US economy. The paranoid fringe believes that the need to defend the dollar as the international reserve currency of choice is behind coups and wars all over the world, including in Venezuela and Iraq and now Iran.
Iran has indeed been moving away from the dollar, but contrary to the exclamations of alarmists, it isn't exactly a recent development. Iran has been considering the move since 2004 and actually stopped trading in dollars and started trading in euros in April of 2008. Last month they went a step further to begin to convert their $54 billion cash reserve from dollars to euros as well, an amount which is relatively insignificant compared to the $300 billion or more of oil which they pump every year and which they have been selling for euros for eighteen months.
The predicted outcome of Iran converting from dollars to euros is a falling dollar, and it's certainly true that the dollar is down significantly. In the last 6 months it has dropped 10% and is approaching the point where its value is half what it was in 2000. Yet it is hardly all Iran's doing and wouldn't be reversed just by taking Iran out of the picture, because important though oil is, given the enormous size of the world's economy, a few hundred billion dollars in oil revenue switching from one currency to another really isn't that significant.
In reality many other forces are driving the dollar down, including a perception that it is relatively stable compared to other currencies and what appears to be a recovering trend in the US economy. Many investors are moving away from dollars to more volatile investments because the dollar is not offering the high returns which come from riskier investments.
The weakness of the dollar is also beneficial to other sectors of the US economy. As was demonstrated during the Bush administration, keeping the dollar weak can create liquidity for the government by attracting investors in government debt. Similarly, a weak dollar stimulates the economy and the stock market by attracting foreign investors to the United States looking for bargains. Stimulating economic growth and maintaining government solvency are a lot more important to the Obama administration in its desperate quest for economic recovery than Iran's largely symbolic decision to trade in euros rather than dollars.
The real danger in the economy and for the government is not what currency Iran is trading in, but the high level of unemployment, which reached a 26 year high of 9.8% this week. More unemployment means smaller payrolls, which means less tax revenue for a government that is desperately overextended in debt. Raising taxes will just lead to more problems for business, more layoff and ultimately even less government revenue. This also drags the value of the dollar down, because despite the claims of some theorists on the fringe, whatever real value the dollar has derives from GDP — not oil — and lower employment and fewer operating businesses means a lower GDP.
The solution to the decline of the dollar is not to invade Iran, but to address the problems with the domestic economy. Just attracting more foreign investment with a weak dollar is insufficient for real recovery because it does not create a significant growth in employment or the domestic economy. The key to real economic recovery is ending the flight of businesses and their operations to other countries. This can only be done by making it more profitable to do business in America than to do it elsewhere. This can most easily be accomplished by reducing overhead. The obvious way for the government to achieve that is by lowering corporate taxes.
Right now the US has the second highest overall corporate tax rate in the world at an average of 39.3%, varying somewhat on a state by state basis. That high rate of tax drives companies overseas, but if that corporate tax were reduced substantially or even eliminated it would make companies want to operate in this country rather than in other ones, creating jobs, expanding the economy and ultimately leading to more tax revenue for the government. This would do far more to improve the economy and strengthen the dollar than any action taken against Iran could ever have.
Sadly this does not seem to be in the administration's game plan as it searches desperately for more revenue. They are looking at ideas like a Value Added Tax which would take money directly out of the pockets of consumers or a carbon tax which would essentially act like another corporate tax on the most vulnerable businesses, or confiscatory tax rates on the rich whose fortunes finance the businesses which create jobs. Any of these approaches will lead to more unemployment and less money in the pockets of those who don't lose their jobs. More so-called stimulus also isn't the answer. All it does is move money around without creating anything new except pork projects to get Democrats reelected.
If you don't like a low dollar and high unemployment, don't blame Iran. The real villain is the government, which sits like a bloated leech on top of our economy, sucking it dry.Powered by Sidelines