Let's imagine that one morning you awake to find that gasoline is $10 a litre at the pumps. The Canadian dollar is worth half the U.S. dollar, which itself has been seriously devalued against other currencies. Any product that requires gas to transport to market now goes for 10 times its previous value””$12 for a head of lettuce, for example. Absurd? Consider the following.

The U.S. economy is in terrible shape, thanks to the Bush administration racking up a greater debt than the 42 previous presidencies combined. The national debt is at US$8.4 trillion, with US$1.6 trillion held by foreign governments. The trade deficit is US$750 billion and rising. And due to the Bush tax cuts, federal tax revenues as a percentage of the gross domestic product are at their lowest since 1950, according to the U.S. General Accounting Office.

The world's oil is bought and paid for in American dollars. This constant demand for the U.S. dollar stabilizes the currency. Oil is the single most important factor dictating the value of the U.S. dollar. (U.S. currency hasn't been linked to the price of gold since 1971.)

When the Bush administration invaded Iraq three years ago, many assumed it was about seizing the oil. As it turns out, this was a valid assumption, just not in the manner originally stated.

Six months before the invasion, Iraq became the first OPEC (Organization of Petroleum Exporting Countries) nation to begin selling oil for euros. Had it continued for a significant period of time, this would have driven down demand for the U.S. dollar, resulting in its devaluation. A pretext was concocted to terminate this threat, and the rest is history. The U.S. seized most of Iraq's cash reserves and coerced the United Nations Security Council into passing Resolution 1483, which granted the United States and Britain control over Iraqi oil- production revenues. The threat to the dollar appeared to be contained.

But on March 23 of this year, another nation, Iran, began selling oil for euros. The Iranian Oil Bourse, which is in effect a commodities exchange, will compete directly with the London Petroleum Exchange and New York Mercantile Exchange, both largely owned by American investors.

If even a small number of nations switch from petro dollars to petro euros, this will drive down the value of the U.S. dollar, possibly making America unable to finance its massive national debt. As a December 2004 article in the Economist pointed out, the U.S. cannot take its current position for granted as the dominant player in global currency markets.

This is especially true at a time when the U.S. is forced to spend over $65 billion a year simply to maintain its military presence in Iraq. As Michael Klare, author of Blood and Oil: The Dangers and Consequences of America's Growing Dependency on Imported Petroleum (Owl Books, 2004), has noted: “It is getting harder to distinguish U.S. military operations designed to fight terrorism from those designed to protect energy supplies....The American military is increasingly being converted into a global oil-protection service.” 

There is also speculation that China and Japan””which provide a large share of the daily $2 billion of foreign investment upon which the U.S. now depends””have begun to buy up euros.

The long-term effects of a successful Iranian Oil Bourse could be devastating. If the U.S. Federal Reserve raises interest rates to increase demand for a falling dollar, the stock market could crash, precipitating a depression. However, if the fed prints more money to ensure bondholders are repaid, this will cause hyperinflation, like what occurred in the Weimar Republic in the 1920s. The situation is very precarious. Former U.S. Federal Reserve chairman Paul Volcker has predicted a 75 percent chance of a dollar crash in the next five years.

Conveniently for the Bush administration, ongoing events have provided yet another pretext for military operations. Iran is accused of developing a nuclear-weapons program and has made several inflammatory statements about the U.S. and Israel. However, the latest National Intelligence Estimate report and the CIA put the time frame for Iran developing nuclear weapons in the five-to-10-year range.

Whatever one believes about Iran's intentions, one thing is certain. The preparations to invade Iran have been under development for at least two years. In 2004, we learned that the Pentagon, the CIA, and the Defense Intelligence Agency had all been conducting computerized war games on Iranian nuclear facilities. The results were not encouraging. Ex–air force colonel and war-gaming expert Sam Gardiner told Atlantic Monthly in December 2004, “I am left with two simple sentences for the policy makers. You have no military solution for the issues of Iran. And you have to make diplomacy work.” 

However, the Bush administration's actions indicate, as with Iraq, that diplomacy has been predetermined to fail. In response to a question about Iran in 2005, Bush replied, “You know, we have used force in the recent past to secure our country.” 

Or at least its dollar.

The so-called Cheney doctrine”  and the National Security Strategy of the United States of America both allow for preemptive strikes on nations deemed to be a potential threat to the U.S. More frightening is the mounting evidence that the Bush administration appears to be seriously considering first use of nuclear weapons. The B61-11 earth-penetrating weapon is apparently being considered for a strike against the hardened underground targets of Natanz and Isfahan. Various media reports have said that the U.S. military is set to conduct a June 2 test in the Nevada desert””code-named Divine Strake””designed to simulate the effects of a nuclear bunker–buster.

Of course, any attack against Iran, nuclear or otherwise, would have far-reaching consequences. Russia has already stated that a nuclear attack on Iran, no matter how small, would force them to regard the U.S. as a direct threat. Moscow is already deeply cynical about U.S. motives in the Middle East, if a March 2005 interview in Vremya Novostei is anything to go by. In it, Leonid Shebarshin, head of Russia's National Economic Intelligence Service, suggested the Americans are exploiting a fear of terrorism: “The fight against that almighty ubiquitous [terrorist] myth deliberately linked to Islam is of great advantage for the Americans as it targets the oil-rich Muslim regions.” 

China, too, would regard military action against Iran with the utmost seriousness, as Beijing is negotiating fuel contracts with Tehran. And naturally, Iran itself would not be a replay of Iraq. Iran's economy hasn't been crippled by 10 years of sanctions. It also has a 540,000-man army right across the border from 130,000 U.S. soldiers in Iraq, plus more than 400 medium-range ballistic missiles, Chinese cruise missiles, and Russian sea mines.

More than 90 percent of all Persian Gulf oil passes through the Gulf of Hormuz. Although Hormuz is over 55 kilometres wide, the navigable portion measures only eight kilometres. Sinking a single freighter would temporarily cut off oil exports to the West.

If this scenario seems like merely a U.S. problem, think again. Does anyone seriously believe that there would be no effect on the Canadian dollar if the U.S. dollar collapsed?

Canada is the largest oil exporter to the U.S., meeting 14.3 percent of American demand. When then–prime minister Brian Mulroney signed the North American Free Trade Agreement, he agreed to a provision (which Mexico refused) that stipulates we cannot cut back on oil and natural-gas exports. This means we can't reduce export levels even in times of national emergency.

Through ill-considered treaties and laziness, we have chained our economy to a large, rich neighbour. Unfortunately, that neighbour has tied the value of its currency to a finite resource””oil””that is maintained either by force or the threat of force.

We have created a fool's economy. And in the near future we may find ourselves in a position where it will be impossible to win, only to lose as slowly as possible.