Debunking the Dumping-the-Dollar Conspiracy

On Monday, the Independent reported that a number of countries are conspiring to dump the dollar as the primary oil trade currency, spelling disaster for the U.S. economy. But the United States wouldn't need to fear -- even if it were true.

For at least the last decade, a persistent, recurring conspiracy theory has held that major oil exporters will stop pricing oil in dollars, which will then lead to a collapse in the U.S. economy as the dollar becomes worthless. According to some accounts, Iraq's decision to price its oil in euros rather than dollars precipitated the U.S. overthrow of Saddam Hussein, and Iran's threats to move away from the dollar is the real reason the U.S. government is raising the alarm over the country's nuclear program.

The latest item in this tradition was an article by Robert Fisk, a longtime Middle East correspondent, in the London-based Independent. The article warns of a grand conspiracy between the Arab oil states, China, Japan, Russia, and France to stop pricing oil in dollars by 2018. When this happens, Fisk says, the dollar will suffer a severe blow to its international standing and the United States might struggle to pay for its oil. The article apparently caused a shudder in the currency markets yesterday, as panicked investors unloaded dollars in reaction to the terrifying prospect of this alleged international oil conspiracy.

But they really shouldn't be concerned. Fisk's theory would make a good plot for a Hollywood movie, but it doesn't make much sense as economics. It is true that oil is priced in dollars and that most oil is traded in dollars, but these facts make relatively little difference for the status of the dollar as an international currency or the economic well-being of the United States.

With the United States' ascendancy as the pre-eminent economic power after World War II, the dollar became the world's reserve currency: Most countries held dollars in reserve in the event that they suddenly needed an asset other than their own currency to pay for imports, or to support their own currency. Much international trade, including trade not involving the United States, was carried through in dollars. In addition, most internationally traded commodities became priced in dollars on exchanges. However, the dollar was never universally used to carry through trade (even trade in oil), and the pricing of commodities in dollars is primarily just a convention.

Any market -- a stock market, a wheat market, or the oil market -- requires a unit of measure. The importance of the U.S. economy made the dollar the obvious choice for most markets. But there would be no real difference if the euro, the yen, or even bushels of wheat were selected as the unit of account for the oil market. It's simply an accounting issue.

Suppose that prices in the oil market were quoted in yen or bushels of wheat. Currently, oil is priced at about $70 a barrel. A dollar today is worth about 90 yen. A bushel of wheat sells for about $3.50. If oil were priced in yen, then the current price of a barrel of oil in yen would 6,300 yen. If oil were priced in wheat, then the price of a barrel of oil would be 20 bushels. If oil were priced in either yen or wheat it would have no direct consequence for the dollar. If the dollar were still the preferred asset among oil sellers, then they would ask for the dollar equivalents of the yen or wheat price of oil. The calculation would take a billionth of a second on modern computers, and business would proceed exactly as it does today.

It does matter slightly that the trade typically takes place in dollars. This means that those wishing to buy oil must acquire dollars to buy the oil, which increases the demand for dollars in world financial markets. However, the impact of the oil trade is likely to be a very small factor affecting the value of the dollar. Even today, not all oil is sold for dollars. Oil producers are free to construct whatever terms they wish for selling their oil, and many often agree to payment in other currencies. There is absolutely nothing to prevent Saudi Arabia, Venezuela, or any other oil producer -- whether a member of OPEC or not -- from signing contracts selling their oil for whatever currency is convenient for them to acquire.

Even if all oil were sold for dollars, it would be a very small factor in the international demand for dollars, as can be seen with a bit of simple arithmetic. World oil production is a bit under 90 million barrels a day. If two-thirds of this oil is sold across national borders, then it implies a daily oil trade of 60 million barrels. If all of this oil is sold in dollars, then it means that oil consumers would have to collectively hold $4.2 billion to cover their daily oil tab.

By comparison, China alone holds more than $1 trillion in currency reserves, more than 200 times the transaction demand for oil. In other words, if China reduced its holdings of dollars by just 0.5 percent, it would have more impact on the demand for dollars than if all oil exporters suddenly stopped accepting dollars for their oil.

This raises a more serious issue affecting the demand for dollars, which is the dollar's status as an international reserve currency. Currently the dollar is by far the preferred currency, but others, notably the euro, are gaining ground. A switch away from the dollar will lower its value, but this is hardly anything to fear: In actuality, it was and is an official policy goal of both the George W. Bush and Barack Obama administrations.

Both administrations are on record complaining about China's "manipulation" of its currency. China does this by buying up vast amounts of dollars to hold as foreign reserves, suppressing the value of the yuan against the dollar. This, in turn, makes Chinese goods cheaper in the United States and bolsters China's exports.

If China stopped buying up huge amounts of dollars, as the United States wishes, then the dollar would fall in value against the yuan, thereby making Chinese imports more expensive. The result would be that the United States would buy fewer imports from China, improving its trade balance. Not too many people would be frightened by this prospect.

To summarize, the dollars needed to finance the international oil trade are trivial compared with other sources of demand for dollars. The currency chosen for foreign reserve holdings can have an impact on demand for dollars, but this has nothing to do with the currency chosen to conduct the oil trade. If Saudi Arabia wanted to hold euros rather than dollars, it could almost instantly offload as many dollars as it desired. Plus, the White House wants the dollar to decline anyway because it would improve the United States' trade balance.

Thus, the conspiracy theory Fisk resurrected might have spooked the markets, but the reality is that there is nothing to fear. The dollar's value will likely fall over time (as it has been doing against the euro for the last nine years). But there is nothing in the cards to suggest a collapse, even if Saudi Arabia starts selling its oil for euros or yuan.



How (Not) to Spot a Terrorist

Catching al Qaeda's killers is about to become a whole lot harder. Why? Because their rank and file will soon look just like you and me.

Abu Laith al-Libi must have been feeling comfortable as he relaxed and had tea with his battle staff in a small hut inside Pakistan's North Waziristan region. A local commander of al Qaeda who had led terrorist operations for more than a decade, he dressed simply, with baggy salwar-kameez clothes, a cotton turban, and a Kalashnikov rifle not far from his side. When a Hellfire missile from a Predator drone tore through the building, his last thought surely must have been, "How did they spot me?"

Identifying terrorists on the battlefield is relatively simple. My scout-sniper school instructor always reminded us of a solid truism that applies perfectly both in Afghanistan and Iraq -- shoot the one with the gun. The same cannot be said of the world's most dangerous terrorists -- the ones operating covertly inside the United States and Europe. They are an entirely different matter. Hunting them down is more akin to finding Soviet spies during the Cold War. It requires an educated, deeply institutionalized counterintelligence apparatus that relies on experts to perform detailed groundwork intended to study, stalk, and expose enemy operations. Since the terrorist attacks of Sept. 11, 2001, however, the United States has taken the opposite approach. From securing airports and airliners with massive influxes of technology, to centralizing border and port security under the Department of Homeland Security, to the invasions of Afghanistan and Iraq, the current U.S. strategy prioritizes gizmos, bureaucracy, and bombing runs over the simple training of Arabic-speaking intelligence officers or targeting the forces that bind extremists together. And, by focusing on hard power, it has destroyed many chances to do it right.

Terrorist cells are already well ahead of our ability to detect them. They are being schooled in combat skills in Afghanistan, Iraq, Pakistan, Saudi Arabia, and Yemen. They are mastering the art of infiltration, of mixing into communities very different from their own. They are acquiring a wide range of internationalizing skills, including excellent command of the English language and proficiency in operating computers, mobile phones, and satellite Internet connections. This level of intelligence and sophistication makes them unprecedented in the history of terrorism. But, perhaps more importantly, they are "mission motivated" to the core -- they will gladly get close to their enemy and joyously die beside them.

The U.S. intelligence community has, in recent years, built a template of what this modern terrorist is supposed to look like. Unfortunately, it is fundamentally flawed. Developed immediately after 9/11, it is based on a poorly formed, racially biased stereotype known as the "military-aged Arab male," or "MAAM." It could be a foreigner or a U.S. citizen. For the past few years, South Asians have been added to the list. The profile seems logical. Most of the September 11 hijackers were young Arab men. But, to paraphrase Mao Zedong, a terrorist operative is only as fluid in evading detection as the seas in which he swims. Across all U.S. intelligence agencies, there is a lack of cultural respect and a poorly tuned attitude toward foreign peoples and cultures. This could be construed as what British Brigadier Nigel Aylwin-Foster called "institutional racism." It is not. It's simply an ignorance that reflects the fact that, though patriotic and well meaning, U.S. counterterrorism officers are presently not taught a dynamic, culturally focused approach that places a premium on understanding the core motivations of the enemy.

The United States' current counterterrorism strategy lacks any efforts to break the terrorists' ties to the communities that conceal them and the culture of martyrdom that inspires them. A singular focus on stopping the "ticking time bomb" scenario blinds U.S. efforts to the possibility of destroying the network's very social support structure. "Soft power" tools -- giving small cash gifts; donating trucks, tractors, and animals to communities; and granting requests for immigration, education, and healthcare --  can be vastly more effective than a show of force. This alternative approach, often derided after 9/11 as a "hearts and minds" campaign, can oblige a potential terrorist not just to his family, which benefits from the relationship, but to the American agent handling him. When an agent shows empathy for a target and establishes a relationship with him, it offers opportunities for infiltration of the network. This "old school" tactic of turning terrorist operatives into assets, instead of killing them, may sound quaint, but the current "guns first" strategy misses the fluid diversity of the enemy.

Today, newly minted American intelligence personnel study the methods, means, and motivations of al Qaeda terrorists. But they fundamentally lack respect for them as strategically intelligent opponents, and as human beings. It is a grave mistake that the only profile U.S. agents still seem to know is MAAM, because it may eventually render all their efforts useless by allowing terrorist opponents simply to alter their profile to infiltrate the United States. We've seen this happen before. The attacks of September 11 were made possible, in part, by the fact that U.S. law enforcement had a bias that "rich Saudis are safe Arabs." Al Qaeda understood that bias and relied on it to operate freely in the United States for years, even when the terrorists were engaged in activities that the authorities considered suspicious.

Al Qaeda is a racially diverse organization that is well aware of its dependence on a labor pool dominated by Arab Muslim men. It also has an adaptable and fluid counterintelligence mind-set. In fact, U.S. reliance on the MAAM profile has already benefited al Qaeda in Iraq, which has successfully experimented with using women, children, husband-and-wife teams, families, and Caucasian Westerners as suicide bombers. The need to cross borders legally and clandestinely is exactly why they are recruiting heavily from within the West, particularly in Europe. More cleverly, the necessity to strike in ways not seen before has led to the creation of al Qaeda's "self-starting jihad," a continuing Internet-based inspiration and education campaign. Reversing course on 20 years of hands-on training in terrorist camps, this network of Internet sites allows anyone who wants to be a jihadist, from an uneducated Italian pizza cook to a British doctor or a disillusioned kid from California, to join the campaign. This school isn't limited to Islamist extremists.

So what will the next wave of terrorists look like? In short, a lot like you and me. Al Qaeda in Iraq has already pioneered the use of Caucasians and Africans. European passport holders, mostly immigrants and the children of immigrants, are a fast-growing part of the terrorist rank and file. From Baghdad to Glasgow, Madrid, and Mumbai, trend lines indicate that "clean-skin" operatives -- both men and women with no history of trouble or violence -- will serve as the new terrorist foot soldiers. And, most frighteningly, many will probably be Americans. They presently live like sleeper agents, operating and planning independently like serial killers. Finding inspiration online, they stay virtual until they find like-minded supporters to meet in the real world. They are most likely to be angry young people who have mastered their Xbox 360s. They may seek the advice of a mentor, a counterintelligence-savvy combat veteran of the jihad, who will listen to their plans and provide a password to a Web site where they will find access to money, tools, and training in abundance. Rooting out these dangerous individuals will require a new focus on intent, skills, capability, and tradecraft.

Terrorism is derived from grievance, vengeance, and a calling to a higher honor. These are real and powerful motivations that must be targeted on every level. The U.S. intelligence community should start afresh, pursuing strategies to isolate and infiltrate these recruits and separate them from the terrorist community. Until the United States focuses on street-level counterterrorism operations, its citizens will remain vulnerable to those who send their children to die in a jihad born of animosity, ignorance, and fear.