True Believers

When I was a child, I spoke as a child, I understood as a child, I thought as a child. But when I became a man, I put away childish things. 1Corinthians 13:11











Obama Signs the Patient Protection and Affordable Care Act

It was an historic moment, reminiscent of one that took place nearly 45 years earlier on July 30, 1965, when LBJ (D), in his proudest moment, signed legislation into law amending Social Security to create Medicare. This time, surrounded by the faithful, President Obama (D) used 20 signing pens to create mementos of the historic moment for each believer.

On the radio, news reporters spoke in hushed terms, describing exhultant Ds at the ceremony and reactionary Rs determined to overturn the historic measure. As I listened, I wondered what this must all seem like to children today. Do they wonder, as I had 45 years ago as a child, why politicians fight so much if making life better is as easy as passing a bill? Do the children also marvel at the President's magnificent ability to improve life with the stroke of a pen?

Would LBJ have believed when he created Medicare 45 years ago, that its $89 trillion in unfunded liabilities in 2010 would make it the greatest single threat to the financial health of the US government?[1] Now as an adult, I wonder how the believers surrounding President Obama could be so blind to the parallels. Do they really think their efforts will turn out any different than LBJ's Medicare?

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[1] "Social Security and Medicare Projections: 2009," Thursday, June 11, 2009, by Pamela Villarreal, (Accessed at http://www.ncpa.org/pub/ba662 on March 23, 2010).

One year before Villarreal's article was written, when Dallas Fed President Richard Fisher spoke of Medicare in San Francisco, the bill was $4 trillion less:

"Please sit tight while I walk you through the math of Medicare. As you may know, the program comes in three parts: Medicare Part A, which covers hospital stays; Medicare B, which covers doctor visits; and Medicare D, the drug benefit that went into effect just 29 months ago. The infinite-horizon present discounted value of the unfunded liability for Medicare A is $34.4 trillion. The unfunded liability of Medicare B is an additional $34 trillion. The shortfall for Medicare D adds another $17.2 trillion. The total? If you wanted to cover the unfunded liability of all three programs today, you would be stuck with an $85.6 trillion bill. That is more than six times as large as the bill for Social Security. It is more than six times the annual output of the entire U.S. economy."

Liars, Damned Liars, and Politicians (Part 2)

OBAMA: Now there are also those who claim that our reform efforts would insure illegal immigrants. This too is false. The reforms I'm proposing would not apply to those who are here illegally.

WILSON: You lie.

OBAMA: That's not true. From an exchange during President Obama's speech before a joint session of Congress September 9, 2009

Was Joe Wilson (R) right? Did Obama (D) lie? Decide for yourself.

"Raul Grijalva, an Arizona Democrat, said Hispanic lawmakers got a pledge from leaders to defeat any Republican attempt to insert language to bar undocumented immigrants from exchanges." From Bloomberg article "Democrats Seek Votes on Health-Care as Delay Possible (Update1)" the day before the US House passed healthcare "re-form" legislation HR 3962 by a vote of 210-205.

Representative Wilson's rudeness during President Obama's speech to Congress on healthcare "re-form" drew attention to the messenger. But what about Wilson's message? President Obama promised his healthcare "re-forms" wouldn't apply to illegal aliens, so why was it so important to Hispanic lawmakers that D-leaders pledge to defeat any language that barred illegal aliens from the health insurance exchanges?

On November 7, 2009, the House passed the largest expansion of the nation’s healthcare system since the 1965 creation of Medicare.[1] The Congressional Budget Office estimate for HR 3962 (CBO estimate pdf) predicted:

"According to CBO and JCT’s assessment, enacting H.R. 3962 would result in a net reduction in federal budget deficits of $109 billion over the 2010–2019 period (see Table 1). In the subsequent decade, the collective effect of its provisions would probably be slight reductions in federal budget deficits. Those estimates are all subject to substantial uncertainty.

"The estimate includes a projected net cost of $891 billion over 10 years for the proposed expansions in insurance coverage. That net cost itself reflects a gross total of $1,052 billion in subsidies provided through the exchanges (and related spending), increased net outlays for Medicaid and the Children’s Health Insurance Program (CHIP), and tax credits for small employers; those costs are partly offset by $167 billion in collections of penalties paid by individuals and employers."

Statistics and Illegal Alien Demographics

Only in Washington, D.C. can a bill projected to cost more than $1 trillion over 10 years be considered to reduce the budget deficit over the same time period by $109 billion. To do the equivalent on a small scale, you'd have to plan to buy a yacht while you're millions of dollars in debt, buy a speedboat instead, and then tell your family you're saving lots of money because you didn't buy the yacht.

Notice also how the CBO estimate (see Table 3 of estimate) counts $168 billion in penalties paid by individuals and employers as income. House Ways and Means Committee Member Dave Camp (R) released a letter (pdf) from the non-partisan Joint Committee on Taxation (JCT) confirming that failure to comply with the mandate in HR 3962 for individuals to buy health insurance would land people in jail. People who do not maintain “acceptable health insurance coverage” and do not to pay the bill’s new individual mandate tax (generally 2.5% of income), are subject to numerous civil and criminal penalties, including criminal fines of up to $250,000 and imprisonment of up to five years.

The CBO is so certain that this onerous bill will oppress people and that many will try to avoid complying with it, that its budget estimate includes future penalties. Adding penalties as income to the estimate lets the CBO pretend HR 3962 costs even less than everyone knows it will. Congress is depending on people breaking the law, so they made it painful enough to force many people to break it. This lets the CBO publicize that the inevitable penalties collected are not an increase in taxes.

If Congress makes it illegal to breathe and collects penalties when people do what it takes to survive, they could subsidize lots of programs while bragging that taxes were low.

Magic and misdirection while the crowd cheers for more.

Federal bureaucrats also plan for illegal aliens to help pay for the extra costs through FICA taxes. The 2009 Annual Report by the Board of Trustees for Social Security and Medicare uses illegal aliens in their estimates of the future costs of Social Security and Medicare.[2] The federal government has no incentive to stop illegal border crossings because it depends on enough people crossing the border illegally to help pay for Medicare and Social Security. Actuaries count illegal aliens favorably in their calculations of future program costs.[3]

Paying Off the AMA

Is Obama lying about anything else?

The AMA usually opposes changes in the status quo. But this time the AMA supports healthcare "re-form" because it was bought off (pdf) with promises of change to the Medicare Sustainable Growth Rate (SGR) payment system for physicians. Without a change to current law, SGR Medicare payments to doctors are scheduled to be cut 21.5 percent as of January 1, 2010, and by an additional 5.5 percent each year from 2011 through 2014, with another small reduction in 2015.[4] Typically, Congress--under both D and R leadership--routinely prevents the cuts from taking effect for a year or two at a time. But House and Senate leaders have always left intact the underlying requirement to keep doctor payment below the rate of GDP growth.[5]

To get AMA support, healthcare "re-formers" promised to end for the next ten years the annual question of whether the SGR Medicare payment cuts will go into effect . To do that, "re-formers" must commit to spending an additional $247 billion on healthcare. The problem for "re-formers" is this impacts the perceived cost of healthcare "re-form." President Obama had initially targeted the cost for "re-form" at $900 billion over 10 years. Adding the $247 billion to the healthcare "re-form" legislation obviously puts the cost at over trillion dollars.

Healthcare "re-formers" tried to hide the bribe to the AMA. They didn't want it tabulated in the CBO estimate for what healthcare "re-form" legislation would cost. A separate $247 billion Senate measure, S.1776, the Stabenow bill, would have imposed a 10-year freeze on mandated cuts in Medicare payments to doctors. Rs defeated S.1776 on October 21, 2009, signaling the House that it would have to bury some of that money in the House version of healthcare "re-form": HR 3962.

On November 7, 2009, the House passed an amendment to HR 3962, HR 3961, which did just that. HR 3961, the Medicare Physician Payment Reform Act of 2009, amends title XVIII of the Social Security Act to reform the Medicare SGR payment system. HR 3962 exceeds the $900 billion cost target by approximately $200 billion: the CBO estimates it will cost $1.1 trillion over 10 years.

As for the Senate, Alexander Bolton writes in The Hill:

"A senior Democratic senator who spoke on condition of anonymity said the defeat of Stabenow’s bill could have reverberations, but only if Democratic leaders fail to assure doctors groups that that they will find another way to avert cuts in their Medicare reimbursements, which are mandated by a 1997 budget law."

Candidate Obama vowed he'd be open with the American people (video). President Obama has not kept his promise, making backroom deals with the AMA and planning for continued use of taxpayer resources for illegal aliens.

Wilson told Obama: "You lie."

Is it true? You decide.

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[1] HR 3962 was 1990 pages (pdf) before amendments were added. The Senate is considering a similar bill.

[2] The Social Security Act requires that the Board, among other duties, report annually to the Congress on the actuarial (financial) status of the OASI and DI Trust Funds. The 2009 annual report, "THE 2009 ANNUAL REPORT OF THE BOARD OF TRUSTEES OF THE FEDERAL OLD-AGE AND SURVIVORS INSURANCE AND FEDERAL DISABILITY INSURANCE TRUST FUNDS" is the 69th such report.

The Board of Trustees was established under the Social Security Act to oversee the financial operations of the OASI and DI Trust Funds. The Deputy Commissioner of the Social Security Administration (SSA) is designated as Secretary of the Board. The Board is composed of six members:

• Four members serve by virtue of their positions in the Federal Government: the Secretary of the Treasury, who is the Managing Trustee; the Secretary of Labor; the Secretary of Health and Human Services; and the Commissioner of Social Security.
• The other two positions, which are currently vacant, are for members of the public, to be appointed by the President, subject to confirmation by the Senate.

[3] THE 2009 ANNUAL REPORT OF THE BOARD OF TRUSTEES OF THE FEDERAL OLD-AGE AND SURVIVORS INSURANCE AND FEDERAL DISABILITY INSURANCE TRUST FUNDS, V. ASSUMPTIONS AND METHODS UNDERLYING ACTUARIAL ESTIMATES, at http://www.ssa.gov/OACT/TR/2009/trTOC.html (November 10, 2009)

In the "2009 OASDI Trustees Report," illegal immigration is considered as "Other Immigration," in contrast to legal immigration. In Section V ASSUMPTIONS AND METHODS UNDERLYING ACTUARIAL ESTIMATES, Part 3 Immigration Assumptions, illegal immigration helps the calculation by adding to the number of taxpayers paying Social Security and Medicare taxes:

"Other immigration consists of immigrants who enter the Social Security area in a given year and stay to the end of that year without having LPR status, such as undocumented immigrants and temporary foreign workers and students.

...

"Combining the annual legal immigration and emigration assumptions results in ultimate net legal immigration of 750,000 persons per year under the intermediate alternative. For the low-cost and high-cost scenarios, ultimate annual net legal immigration is 960,000 persons and 560,000 persons, respectively.

"The number of other immigrants residing in the Social Security area population is estimated to have been about 9.7 million persons as of January 1, 2000, increasing to about 12.8 million persons as of January 1, 2006. This other-immigrant population is highly mobile and far more likely to leave the Social Security area than is the native-born or legal-immigrant population. The average number of persons entering the other-immigrant population in the period 2000 through 2006 is estimated to have been about 1.5 million per year. During the same period, the number of other immigrants who left the Social Security area or adjusted status to become LPRs is estimated to have averaged about 960,000 per year. Thus, annual net other immigration during this time period is estimated to have averaged approximately 540,000 persons.

"For the intermediate assumptions, annual other immigration is assumed to continue at the level of 1.5 million persons throughout the projection period. For the low- and high-cost scenarios, future annual other immigration is assumed to average 1.8 million persons and 1.2 million persons, respectively.

"Emigration from the other-immigrant population includes those who leave the Social Security area and those who adjust status to become LPRs. The annual number of other immigrants who leave the Social Security area is estimated based on modeled departures, disaggregated into two groups, for the period 2000-06. The first departing group is set at fixed annual numbers of departures, by age and sex, which remain constant throughout the projection period. This first group is directly related to the number of other immigrants that are assumed to have recently entered the Social Security area. The second departing group is calculated by applying a set of annual departure rates, by age and sex, to the other-immigrant population in the Social Security area. In addition, the annual number of other immigrants who adjust status to become LPRs is assumed to ultimately be 500,000 for the intermediate assumptions. This level is one third of the annual number of other immigrants assumed to enter the Social Security area. For the low- and high-cost scenarios, ultimate annual numbers adjusting status to LPR are assumed to average 600,000 persons and 400,000 persons, respectively.

"Under the assumptions and methods described above, the size of the other-immigrant population is projected to grow substantially. This growth reflects the excess of annual other immigration over the combined annual numbers of emigrants and deaths that occur within the other-immigrant population.

"Net other immigration decreased from a level averaging over 590,000 per year in the period 2000 through 2003, to about 465,000 in 2006, reflecting an increase in the number of other immigrants adjusting to LPR status as a result of the effort to reduce the backlog of applications for LPR status. By 2010, when the backlog of applications is expected to be eliminated, net other immigration is projected to be about 440,000 persons per year. After 2010, net other immigration is projected to decline steadily to about 275,000 in 2063 and to remain fairly stable thereafter. The decline in net other immigration is attributable to the increasing number of other immigrants residing in the Social Security area. This results in an increase in the numbers who emigrate out of the area based on the rates of departure described above. All other components of other immigration and emigration are set at fixed levels after 2010, and thus do not contribute toward any change in net other immigration. The average annual level of net other immigration over the 75-year projection period is about 315,000 persons. Net other immigration is estimated to average about 410,000 persons per year under the low-cost assumptions and 220,000 persons per year under the high-cost assumptions.

"The total level of net immigration (legal and other combined) is estimated to average 1,065,000 persons per year during the 75-year projection period under the intermediate assumptions. For the low-cost assumptions, total net immigration is estimated to average 1,370,000 persons per year. Under the high-cost assumptions, total net immigration is estimated to average 785,000 persons per year.

"Demographers express a wide range of views about the future course of immigration for the United States. Some, like the 2007 Technical Panel mentioned in the previous section, believe that immigration will increase substantially in the future. Others believe that potential immigrants may be attracted to other countries or that the U.S. borders could be tightened in the future."

[4] 2009 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, May 12, 2009, p. 22, at http://www.cms.hhs.gov/reportstrustfunds/downloads/tr2009.pdf (September 24, 2009).

[5] The Baucus Health Bill: A Medicare Physician Payment Shell Game, by Dennis G Smith, September 25, 2009, at http://www.heritage.org/Research/healthcare/wm2629.cfm (November 10, 2009)

The Limits of Power (Part 3)

Today another President wants to "give" Americans both guns and butter as LBJ did over 40 years ago. President Obama wants to re-form America while fighting two foreign wars. The financial system is collapsing, and yet many Americans still haven't looked behind the curtain, many still believe the magic of something for nothing.

Ironically Moyers, who was a part of LBJ's administration, still doesn't get it: he still believes the magic. Now a journalist, Moyers still believes the federal government can re-form society. In an August 28, 2009 interview on HBO's "Real Time With Bill Maher", Moyers said he wants the Obama administration to battle Rs for healthcare "reform":

"I think if Obama fought, instead of finessed so much, he stood up and declared for what is really the right thing to do and what is really needed instead of negotiating the corners away, instead of talking about bending the curve, and talking about actuarial rates, if he were to stand up and say, 'We need this because we're a decent country', I think it would change the atmosphere."

Moyers misleads in a manner common to "Great Society" advocates: they ignore the reality of scarce resources and pretend the government really has magical powers. Economist Thomas Sowell warns against this in his book, Basic Economics: A Citizen's Guide to the Economy:

"Too often a false contrast is made between the impersonal marketplace and the compassionate policies of various government programs. But both systems face the same scarcity of resources and both systems make choices within the constraints of that scarcity. The difference is that one system involves each individual making choices for himself or herself, while the other system involves a smaller number of people making choices for others."[1]

Finding the Right Metaphor: Uncle Sam as the Candy Man

Moyers hasn't learned from his past nor has he applied the lessons of the "limits of power" to the current situation as he encourages Obama to be profligate with other people's money. Ever the press secretary, Moyers believes Obama has to "find the right metaphor" to sell Americans on another government encroachment into healthcare:

"He didn't find the right metaphors ... and he didn't speak in simple powerful moral language."

Moyers was "intrigued" by Bacevich's metaphor of the federal government engaging in a "de facto Ponzi scheme," but not enough to convince himself that more meddling in healthcare by the federal government is doomed to failure:

BILL MOYERS: And you use this metaphor that is intriguing. American policy makers, quote, "have been engaged in a de facto Ponzi scheme, intended to extend indefinitely, the American line of credit." What's going on that resembles a Ponzi scheme?

ANDREW BACEVICH: This continuing tendency to borrow and to assume that the bills are never going to come due. I testified before a House committee six weeks ago now, on the future of U.S grand strategy. I was struck by the questions coming from members that showed an awareness, a sensitivity, and a deep concern, about some of the issues that I tried to raise in the book.

"How are we gonna pay the bills? How are we gonna pay for the commitment of entitlements that is going to increase year by year for the next couple of decades, especially as baby boomers retire?" Nobody has answers to those questions. So, I was pleased that these members of Congress understood the problem. I was absolutely taken aback when they said, "Professor, what can we do about this?" And their candid admission that they didn't have any answers, that they were perplexed, that this problem of learning to live within our means seemed to have no politically plausible solution.

Obama may not have found the right metaphor, but Tim Hawkins has. Watch his three-minute video. Even Moyers might understand this one.

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[1] Basic Economics: A Citizen's Guide to the Economy, Thomas Sowell, Basic Books, New York, N.Y., 2000, pp. 49-50

The Limits of Power (Part 2)

When it comes to bailouts and government programs, doesn't money seem to appear by magic? Congress and the President, and their well-paid magician's helpers think they can solve any problem. Those in the audience just have to reach out a hand and grab what they need. Do any of those with their hands out ever wonder what’s going on behind the curtain?

The Tipping Point

In 1964 LBJ (D) announced his vision of the "Great Society," a continuation of FDR's socialization of America.[1] LBJ wanted to "re-form" America using the magical power of the federal government. He signed legislation to end racial injustice and poverty, create a permanent food stamp program, protect the environment, supply federal aid to public schools, fund the arts, create public television, create consumer protection laws, create the Department of Housing and Urban Development, create the Department of Transportation, fund mass transit, and create Medicare and Medicaid. If it was possible to legislate utopia, why hadn't anyone done all of this before?

The Social Security Act of 1965 created Medicare and Medicaid, America's first public health "insurance" and LBJ's proudest moment. Today out of control Medicare spending is one of the Obama (D) administration's excuses to "re-form" healthcare again. The chart shows federal healthcare spending as a percentage of GDP. The percentage starts increasing after 1965. This also marks the start of Bacevich's tipping point, when the US government started spending more dollars than it was taxing, Americans demanded services they couldn't afford, and the magical ability of the federal government to create wealth out of nothing started to go out of control.

Federal Government Spending in inflated dollars as a percent of GDP, source www.usgovernmentspending.com

While massively increasing spending at home for his "Great Society," LBJ was also busy escalating spending on a foreign war. To work his magic, LBJ wanted lots of guns and lots of butter.[2] He left his successor a bloated federal bureaucracy, a war in Vietnam, and the seeds of a bad economy. Americans picked a new magician and substituted an R for a D. Nixon (R) continued LBJ's policies, just as today Obama continues Bush's (R) policies.

Tipped Over

On August 15, 1971, Nixon halted US Treasury payouts of gold for foreign central bank dollars, preventing the French and the Swiss from depleting the US Treasury by redeeming their dollars for gold. In 1944, the Bretton-Woods agreement of fixed currency exchange rates based on a gold-backed dollar had created a system of US dollar hegemony. The almighty US dollar was the preeminent currency--as good as the US Treasury gold that backed it. The French and Swiss central banks must not have believed the magic of all those dollars the US government created for its "Great Society" and the war in Vietnam.

Unhindered by foreign central bank redemptions of dollars for the limited supply of US-held gold, the federal government could continue to inflate the US money supply at an even faster rate. The politicians began to truly create wealth from nothing. That was really magical!

But if the dollar was no longer backed by gold and the US was flooding the world with it, why would anyone accept it for real goods?

Behind the Curtain: Black Gold and the Petrodollar

The dollar is still accepted because the U.S. government made a deal. In exchange for US military protection for some of the oil-rich kingdoms in the Middle East, particularly Saudi Arabia, OPEC agreed to price oil in US dollars. Since 1972, OPEC oil has been priced in US dollars. Oil--black gold--backed the dollar. Now everyone in the world would need dollars to purchase oil. Dollar hegemony was saved. The world would still use dollars, but instead of gold-backed dollars, they would be oil-backed petrodollars.[3][4] The artificial demand for the dollar, due solely to US military might, put the US in a position to “rule” the world.[5][6] The global dollar flood could continue.

The oil price shock of the mid-70s marks the end of Bacevich's tipping point and the beginning of the full-scale slide to the destruction of the American financial system. The price of a barrel of oil tripled in 1973-4 and doubled in 1979-80 when OPEC reduced production in reaction to both US support of Israel and continuing US government dollar inflation.[7] The Nixon administration figured the price shock would hurt their trading partners, and now economic rivals in Europe and Japan, worse than it would hurt the US. In his memoirs, Henry Kissinger confirmed the view that the US government welcomed the oil price rise in 1973 as an economic blow to the strengthening economies of Europe and Japan.[8] It didn't matter to Kissinger that everyday Americans suffered the consequences of the 1970s stagflation.

From 1972 on, oil had to continue to be priced in dollars to maintain the magic of dollar hegemony: any threats to this arrangement were forcefully suppressed by the US military. Recognizing where the magic for the fiat dollar came from, then President Carter (D) created the Rapid Deployment Force in 1977. The US military had to be available for police work wherever the oil was. The Iraq invasion, US saber rattling against Iran, and a coup attempt in Venezuela are the most recent examples of the US government using force to maintain dollar hegemony.[9]

Of course dollar hegemony isn't really magic, and we can't continue to expect to flood the world with worthless paper forever. But the US government and many people continue to believe we can: for the last four years, the trade deficit, Bacevich's symptom of America's unhealthy financial system, has averaged over $700 billion. The national debt of the US government is $11.8 trillion and growing. Instead of the French dumping dollars, today our largest trading partner, the Chinese, don't want to hold dollars; they're converting theirs to gold. Because there is no longer a gold standard, they're buying gold on the open market. If they dump all of their dollars at once, the US economy will collapse. The petroeuro is now challenging the dying petrodollar to be the new exchange currency.[10]

Soon the dollar will be worthless and everyday Americans will suffer. The magic show is over, most just don't know it yet.

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[1] "No Good Choices LBJ and the Vietnam/Great Society Connection," (pdf) Francis Bator, expanded version of a Presidents’ Week Lecture given at the American Academy of Arts and Sciences on February 28, 2006, p.14.

Bator was a deputy national security adviser to Johnson.

[2] Bator, Ibid., p.12.

[3] "The End of Dollar Hegemony," Speech by Congressman Ron Paul, February 16, 2006.

According to Paul:

"...elite money managers, with especially strong support from U.S. authorities, struck an agreement with OPEC to price oil in U.S. dollars exclusively for all worldwide transactions. This gave the dollar a special place among world currencies and in essence 'backed' the dollar with oil. In return, the U.S. promised to protect the various oil-rich kingdoms in the Persian Gulf against threat of invasion or domestic coup. This arrangement helped ignite the radical Islamic movement among those who resented our influence in the region. The arrangement gave the dollar artificial strength, with tremendous financial benefits for the United States. It allowed us to export our monetary inflation by buying oil and other goods at a great discount as dollar influence flourished."

[4] The Hidden Hand of American Hegemony, David E. Spiro, Cornell University, 1999, p. 121.

William Clark summarizes:

"In 1974 the Nixon administration negotiated assurances from Saudi Arabia to price oil in dollars only, and invest their surplus oil proceeds in U.S. Treasury Bills. In return the U.S. would protect the Saudi regime. The purchases were done in relative secrecy and created the phenomenon known as 'petrodollar recycling.' "

[5] Petrodollar definition:

"A petrodollar is a dollar earned by a country through the sale of oil. In 1972-74 the US government concluded a series of agreements with Saudi Arabia to support the power of the House of Saud in exchange for accepting only US dollars for its oil. Saudi Arabia has been the largest oil producer and the leader of OPEC."

A December 2006 NY Fed article: "Recycling Petrodollars" explains how it works:

"A look at how oil exporters 'recycle' their revenues reveals that roughly half of the petrodollar windfall has gone to purchase foreign goods, especially from Europe and China, while the remainder has been invested in foreign assets. Although it is difficult to determine where the funds are first invested, the evidence suggests that the bulk are ending up, directly or indirectly, in the United States."

A pre-Iraq invasion article in The Observer, "When will we buy oil in euros?", explains the motivation of US government to use the military to pay for its profligacy:

"Oil trading, whether from Norway to the Netherlands, Britain to Bermuda, or Bahrain to Bangladesh, operates through the US greenback.

"The oil-dollar nexus is one of the foundations of the world economy that inevitably filters through to geopolitics. Recycling so-called petrodollars, the proceeds of these high oil prices, has helped the United States run its colossal trade deficits. But the past year has seen the quiet emergence of the 'petroeuro'.

"Effectively, the normal standards of economics have not applied to the US, because of the international role of the dollar. Some $3 trillion (£1,880 billion) are in circulation around the world helping the US to run virtually permanent trade deficits. Two-thirds of world trade is dollar-denominated. Two-thirds of central banks' official foreign exchange reserves are also dollar-denominated.

"Dollarisation of the oil markets is one of the key drivers for this, alongside, in recent years, the performance of the US economy. The majority of countries that require oil imports require dollars to pay for their fuel. Oil exporters similarly hold, as their currency reserve, billions in the currency in which they are paid. Investing these petrodollars straight back into the US economy is possible at zero currency risk.

"So the US can carry on printing money - effectively IOUs - to fund tax cuts, increased military spending, and consumer spending on imports without fear of inflation or that these loans will be called in. As keeper of the global currency there is always the last-ditch resort to devaluation, which forces other countries' exporters to pay for US economic distress. It's probably the nearest thing to a 'free lunch' in global economics."

The Saudis are the staunchest allies of the US government in OPEC:

" 'The Saudis are holding the line on oil prices in Opec and should they, for example, go along with the rest of the Opec people in demanding that oil be priced in euros, that would deal a very heavy blow to the American economy,' Youssef Ibrahim, of the influential US Council on Foreign Relations, told CNN.

"Last year the former US Ambassador to Saudi Arabia told a committee of the US Congress: 'One of the major things the Saudis have historically done, in part out of friendship with the United States, is to insist that oil continues to be priced in dollars. Therefore, the US Treasury can print money and buy oil, which is an advantage no other country has. With the emergence of other currencies and with strains in the relationship, I wonder whether there will not again be, as there have been in the past, people in Saudi Arabia who raise the question of why they should be so kind to the United States.' "

[6] "The End of Dollar Hegemony," Ibid.

Congressman Paul makes Bacevich's point, connecting the money system to its domestic effect--enabling businesses and everyday Americans to get something for nothing:

"Since printing paper money is nothing short of counterfeiting, the issuer of the international currency must always be the country with the military might to guarantee control over the system. This magnificent scheme seems the perfect system for obtaining perpetual wealth for the country that issues the de facto world currency. The one problem, however, is that such a system destroys the character of the counterfeiting nation’s people-- just as was the case when gold was the currency and it was obtained by conquering other nations. And this destroys the incentive to save and produce, while encouraging debt and runaway welfare.

"The pressure at home to inflate the currency comes from the corporate welfare recipients, as well as those who demand handouts as compensation for their needs and perceived injuries by others. In both cases personal responsibility for one’s actions is rejected."

[7] "Petrodollar Recycling And Global Imbalances," Presentation by Saleh M. Nsouli, Director, Offices in Europe International Monetary Fund, At the CESifo's International Spring Conference, Berlin, March 23-24, 2006.

Chart 7 from the presentation shows two sharp increases in the oil price of approximately 250% and 125% in the 1970s.

[8] "The Global Minotaur Or how the voracious US deficit causes wars, economic domination, and pushes ‘old’ Europe into an embrace with Peace activists," by Joseph Halevi and Yanis Varoufakis.

"The American quagmire in Indochina was giving rise to two antagonistic effects. On the one hand it was generating the quantitative conditions for global growth but, on the other hand, it was creating acute rivalries between the US and its two major protégés (Europe and Japan) in the context of the former’s balance of payments deficit and the ensuing pressure on the dollar.

"In his 1982 memoirs Henry Kissinger said quite categorically that the push to increase oil prices came from the US. It is now well accepted (see Oppenheim, 1976/7) that Kissinger’s memoirs impart quite accurately the manner in which US decision makers seized upon the OPEC-imposed embargo to push for a sharp increase in oil prices, well beyond OPEC’s planned price rises. The aim was to redress the balance of payments situation between the three major zones: the US, Europe and Japan. The basic assumption here was that, in the estimation of the US authorities, both Japan and Western Europe would find it much harder than the US to deal with a significant increase in oil prices."

[9] "The End of Dollar Hegemony," Ibid.

Congressman Paul gives examples of military intervention to defend dollar hegemony:

"In November 2000 Saddam Hussein demanded Euros for his oil. His arrogance was a threat to the dollar; his lack of any military might was never a threat. At the first cabinet meeting with the new administration in 2001, as reported by Treasury Secretary Paul O’Neill, the major topic was how we would get rid of Saddam Hussein-- though there was no evidence whatsoever he posed a threat to us. This deep concern for Saddam Hussein surprised and shocked O’Neill.

"It now is common knowledge that the immediate reaction of the administration after 9/11 revolved around how they could connect Saddam Hussein to the attacks, to justify an invasion and overthrow of his government. Even with no evidence of any connection to 9/11, or evidence of weapons of mass destruction, public and congressional support was generated through distortions and flat out misrepresentation of the facts to justify overthrowing Saddam Hussein.

"There was no public talk of removing Saddam Hussein because of his attack on the integrity of the dollar as a reserve currency by selling oil in Euros. Many believe this was the real reason for our obsession with Iraq. I doubt it was the only reason, but it may well have played a significant role in our motivation to wage war. Within a very short period after the military victory, all Iraqi oil sales were carried out in dollars. The Euro was abandoned.

"In 2001, Venezuela’s ambassador to Russia spoke of Venezuela switching to the Euro for all their oil sales. Within a year there was a coup attempt against Chavez, reportedly with assistance from our CIA.

"The military might we enjoy becomes the “backing” of our currency. There are no other countries that can challenge our military superiority, and therefore they have little choice but to accept the dollars we declare are today’s “gold.” This is why countries that challenge the system-- like Iraq, Iran and Venezuela-- become targets of our plans for regime change.

"Ironically, dollar superiority depends on our strong military, and our strong military depends on the dollar. As long as foreign recipients take our dollars for real goods and are willing to finance our extravagant consumption and militarism, the status quo will continue regardless of how huge our foreign debt and current account deficit become."

[10] "Petrodollar or Petroeuro? A new source of global conflict," Cóilín Nunan, from November 2004 Feasta Review online.

"Were the euro to become a reserve currency equal to, or perhaps even instead of, the dollar, countries would reduce their dollar holdings while building up their euro savings. Another way of putting this would be to say that Eurozone countries would be able to reduce their subsidy to American consumption and would find that other countries were now subsidising Eurozone consumption instead.

"A move away from the dollar towards the euro could, on the other hand, have a disastrous effect on the US economy as the US would no longer be able to spend beyond its means. Worse still, the US would have to become a net currency importer as foreigners would probably seek to spend back in the US a large proportion of the estimated three trillion dollars which they currently own. In other words, the US would have to run a trade surplus, providing the rest of the world with more goods and services than it was receiving in return. A rapid and wholesale move to the euro might even lead to a dollar crash as everyone sought to get rid of some, or all, of their dollars at the same time. But that is an outcome that no-one, not even France or Germany, is seeking because of the huge effect it would have on the world economy. Europe would much prefer to see a gradual move to a euro-dollar world, or even a euro-dominated one."