Foreign Policy in a Global Economy: Iran Stops Taking Dollars for Oil
In an increasingly global economy, economics and foreign policy are ever more closely entwined.
Foreign policy which contributes to our national debt makes us more vulnerable to the shifts in the global economy. And the relationship between foreign policy and economics goes both ways: a weakened economy makes us more vulnerable to foreign policies of potential adversaries.
Iran is responding to increasing tension with the US over their nuclear program by reducing their holdings of US dollars and requesting that Japan pay yen instead for oil.
A Case in Point: Only Yen Accepted
Iran is hoping to further weaken our currency by taking advantage of the laws of supply and demand in the international economy. The move takes advantage of the fact that we are already vulnerable as a consumer society in debt with very little individual and cumulative savings.
The United States is growing increasingly wary of Iran as it ignores U.N. sanctions for enriching uranium. In turn, Iran is asking its oil consumers to stop paying them in dollars.
As tensions rise between Iran and the U.S., Iran is both protecting themselves from being vulnerable to sanctions, and targeting what they see as our vulnerability: the weakening US dollar.
The move will further weaken the dollar and strengthen the yen – in fact the yen already rose in value because of speculation that it will be in greater demand.
What does it mean when the dollar weakens?
Why a weak dollar can be a bad thing
In addition to making your trip to Paris more expensive, a weak dollar keeps foreign investors from buying U.S. securities or, bonds.
Other countries’ central banks buy U.S. Treasury securities when the dollar is strong, a practice that finances our national debt. In essence, other countries are our creditors. We want and need our bonds to be bought and we compete with other nations for buyers: Euros are now more popular than dollars.
The U.S. must borrow from other countries because we are spending more than we have (which equals a debt of $7.5 trillion) and consuming more than we produce. Some economists say that the devaluation of the dollar will require the U.S. to be more responsible, meaning spend less and produce more.
Just as national debt puts the US economy at risk, consumer debt makes American consumers more vulnerable. As individual consumers, saving more decreases our economic vulnerability.
Why a weak dollar can be a good thing
When the value of the dollar drops, it becomes cheaper for foreign consumers to buy American goods, so U.S. production increases to meet the increased demand. This is good news for the relatively small number of American companies that sell goods and services overseas.
Conversely, when the dollar is strong, it is more expensive for foreigners to buy American exports. This causes a drop in U.S. production and exports.
The simple logic of this equation can be disrupted, however, when political opinions come into play. For example, European consumers have threatened to boycott American goods to protest the Iraq war. If this happens, the weak dollar may not cause increased foreign spending on American goods.
Weighing Security Risks in a Global Economy
In an increasingly global economy, legislators will need to weigh economic risks against more basic security risks more and more.
Iran claims that it has the right to develop nuclear power to take care of its energy needs, but U.S. officials doubt that Iran will limit their nuclear capacities to energy use.
After all, the US took the opposite strategy with India. However, the shift toward a partnership between India and the U.S. owes more to a shifting global economy.
While international strategic (read defense) concerns might seem abstract, the nuclear agreement is the centerpiece of a larger agenda for economic cooperation between the United States and India which will have real effects for the economies of both countries.
WomenMatter will continue to track the connections between these two of our Life Issues, Security and Jobs, taxes, and Benefits.
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