Review, Mahmoud A. El-Gamal & Amy Myers Jaffe, Oil, Dollars, Debt, and Crises (2009)

(Originally published on Amazon)

The factual shortcomings of this book have been noted elsewhere, such as the claim that the United States "fully supported" the creation of al-Qaida to fight the USSR (p.66).¹ The book's use of sources is not convincing: for example (p.117), the authors mention that Britons disapproved of the Bretton Woods Agreement because it virtually restored the gold standard.² But to support this, the authors cite a work published in 1932! Needless to say, that work—a polemical pamphlet—reveals nothing about what most Britons thought even in 1932, let alone in 1944.

Arguments about economics are dismal. On p.5, they refer to the dollar price of gold as a measure of its "real value." This is just a bizarre ideological position (there is a chart showing the ratio of the price of oil to that of gold since 1973, which makes this point obvious).³ On p.13, they mention that a "shift to pricing exports in Euros would insulate [oil exporting countries of the Middle East] from effects of dollar depreciation." Two points here: the euro can also depreciate, and no, pricing in euros won't insulate oil from the effects of the US dollar losing value against other currencies since objective reality would be the same: US-pegged economies would continue to represent a large share of world demand for oil.

If the euro, US$1.4651 on the date of publication of this book, were to soar to $2.93/euro shortly afterward, then the fact that oil was priced in euros would merely mean that the price of oil—US$72.64 that particular day—would now be US$145.28 instead, or that EZ consumers would buy a larger share of output than American consumers. On p.19, the authors claim that a large depreciation of the US dollar would lead to a recession in the short term; the experience of other countries, such as Germany's de facto depreciation on adopting the euro, is one of immense increase in prosperity.⁴ There's lots of valid reasons to ignore basic economics, but at least acknowledge you're doing so.

A deeper problem is that the authors are chained to a view of the world in which nation-states are cohesive actors. "The USA" or other countries do not want, think, say, or do, anything; this makes as much sense as a serious discussion of the religious affinities of trees. It makes a bit more sense to talk of institutions like the IMF or the Federal Reserve System "wanting" or "doing" something, or the role of ideologies, or individual leaders. Even as a quick-n-dirty shortcut, this is a bad idea because one cannot check it. How do the authors know "the USA" enjoyed goodwill in the Middle East, especially after it was delinked from gold in 1971" (p.12)?⁵

Efforts by the authors to infer what motivates the populations of entire regions are markedly free of anything resembling evidence. On p.68, for instance, having just outlined 'Usama bin Laden's allegations that the USA was exploiting the Middle East by buying oil at below peak rates, the authors claim that "the general nature of his grievance was widely shared by large segments of Middle East populations, Muslims and Christians (the Egyptian-Orthodox Pope still forbids Christians from visiting Jerusalem under Israeli control)..." Think about this for a minute: how general is "general"? So general as to include any basis of disapproval between the Arab world and the USA whatever, even to the extent of US support for Israel?  But that is actually something else entirely. Even then, "widely shared" and "large segments" are weasel words par excellence.

By the way, to prepare this review I checked past and current results of surveys conducted by Pew Research on world perceptions of the USA. See, for example, "America's Image in the World: Findings from the Pew Global Attitudes Project" and a date for preferred years. Any of these reports are far more detailed and explicit than the contents of the book—despite the fact that the book revisits the subject many times.

In summary, the authors were not sufficiently confident of their readers' interest and prior knowledge to discuss the subjects raised in any advanced way; but they were not interested in explaining any of the technical issues, such as changes in financial and credit markets, or different markets for crude (West Texas Intermediate, Dubai/Oman, or Brent Blend). Their analysis of countries consistently ignores divisions of opinion, interests, technical constraints, and urgent needs felt by the different divisions within those countries. They aren't determined to deceive their readers with polemics, but they have no idea what sort of book they intended to write, and they produced something that is not up to the challenge of explaining either oil, dollars, debt, or crises—of any sort.

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NOTES

1. Steve Coll, Ghost Wars , Penguin Press (2004), p.255. Or see my review of Bruce Riedel's What We Won: America's Secret War in Afghanistan, 1979-89, Brookings Press (2014). The CIA had extremely limited access to members of the mujahidden and accepted this after 1979 as a natural result of its extreme unpopularity in the Muslim world.


2. The Bretton Woods Agreement (July 1944) provided for a fixed dollar price of gold ($35/oz), and fixed exchange rates for other currencies to the USD; changes in these rates would require a formal agreement from the IMF. This is called a "gold exchange standard," and was intended to preserve some flexibility of monetary policy for member states. If El-Gamal & Jaffe are talking about the differences of position between US negotiator Harry Dexter White and British negotiator John Maynard Keynes, then these differences were far more complex and definitely worth discussing—given the subject of the book. Sadly, none is given.


3. My opinion is that, after the price of gold was allowed to rise past $35, it was thereafter a random piece of trivia; and the price of oil was thereafter mostly random, although far from trivial. And indeed, the ratio of the two oscillates wildly. If my opinion is wrong, there should be some discernable pattern. The authors don't describe any.


4. One assumption made by the authors is that "the USA wants" an expensive dollar because it enables energy imports, and allows the country to borrow in its own currency. This was an "advantage" awarded to Greece when it adopted the euro (1 Jan 2002), which at the time of this book's publication (Dec 2009) had a substantial premium against the USD in purchasing power parities. Needless to say, remotely technical considerations such as purchasing power parities never come up in this book.
   
   More realistically, some parties benefit from this, and other parties do not. Americans who are concerned about their jobs will want a cheap dollar, since this makes them competitive as workers. Taxpayers will also favor a cheap dollar, since this reduces unemployment (lowers claims on the government) and increases the share of Americans who pay taxes (so the deficit shrinks even if tax rates remain the same). Americans whose income comes mainly from investments will tend to favor a higher dollar, since they can then buy more assets in other countries. This is a gross oversimplification, but it's still more nuanced than what appears in ODD&C.


5. The full sentence is: "The dominance of the U.S. Dollar as the global reserve currency , especially after it was delinked from gold in 1971, was built on two pillars. The first was international political and economic goodwill acquired over the first half of the twentieth century, as European colonialism came to an end, and the second was the absence of viable alternatives to the Dollar." The authors can accuse me of twisting their words, since they said the goodwill was from 1900-1950. But they are clearly emphasizing trends taking place at least 21 years later, since there's only one reason required to explain USD "hegemony" before 1971: before then, the USD was a direct substitute for physical gold.