The Petrodollar

Near the end of WW2, countries and leaders from all over the world assembled in New Hampshire to discuss a new global monetary system to be put in place after the war. The monetary system consisted of global trade dominated by the US dollar. The dollar was pegged to gold, but only for international payments between countries. The dollar had already been taken off the gold standard in 1932 by Roosevelt domestically to fight deflation. Because of the immense economic power of the United States following WW2, the dollar became the de facto world currency as we were the largest exporter of goods. Many currencies were pegged to the dollar. However, in 1971, Richard Nixon and the US decided to default on redeeming dollar reserves for gold. Since there were so many dollars out there with no intristic value except faith, the US had to find a way to put some commodity or resource pegged to the dollar to keep reserve demands high. The answer was oil.

in 1978-1979, the United States reached a deal with OPEC nations that all oil had to be dealt in dollars and dollars alone. This forced countries to accumulate mass amounts of dollars in order to buy oil so that their countries could function. Since only the US could print dollars at will, it forced these countries to open their markets and become exporting based economies. It is no coincidence that this occurred at nearly the same time the US switched from an industrial economy where we actually made things, to a service economy. The world economy became a system in which the US printed money out of nowhere, and the rest of the world made goods that dollars could buy. As long as American's could keep consuming and working, and countries needed oil for their economies and country's to function, the system worked.

The system, however, was extremely exploitative and imperialistic. Dollars were printed out of thin air to buy goods, real tangible assets, or wealth, at very cheap prices. Countries were competing to export as cheaply as they could to the US for dollars. Most of these countries had dollar reserves in a certain ratio with their own domestic currency to devalue it, so that they could compete for exporting. This meant that after a country purchased oil, and had the correct reserve ratio, they had an issue with what to do with excess dollars. Too high or too low of a ratio would either deflate or inflate the local currency. These countries had to spend their dollars, and what else can be bought with USD besides oil? US treasury notes of course. So these countries would spend their excess dollars on UST. This is one factor that helps explain how the United States was able to having a growing economy, despite the fact that we imported more than we exported. Essentially they were funding their own exploitation. Adam Smith taught in The Wealth of Nations that the wealth of a nation is determined by how much it produces and exports. The US found a way around this through dollar hegemony, petro dollar and reserve demands globally all around the world. As long as America, 4% of the world's population, consumed as much as they could, and oil was dealt in dollars, the system would work.

in 2000 Saddam Hussein, trying to break away from this dollar imperialism, announced that he wanted to deal his oil in other currencies, namely the euro and yen. The US would not have this, and invaded Iraq on the premise of "weapons of mass destruction". The oil fields were reclaimed, and were put back on the dollar. in 2006 Iran announced it was opening the Iranian Oil Bourse, and would deal oil in other currencies other than dollars.....catch my drift?

If the dollar is decoupled from oil, and with the amount of dollars out there, the dollar would hyperinflate to points never experienced in human history. Countries would no longer need to hold dollar reserves, and could simply dump their dollars and free themselves from dollar imperialism. This is the biggest and scariest bubble that faces America today, and no one EVER talks about it, at least in main stream media. It puts all of us in such an unimaginably vulnerable state. I just laugh when I hear the media saying China is artificially devaluing its currency and it is hurting America. Of course they are devauling their currency to compete in the global system America created, to compete with exporting to the US.

When you hear about China owning so much US debt, it's because they bought UST with their excess USD like I explained earlier. China and the USA are like two legos stuck together right now. China needs us to consume their exports while they are domesticating and internalizing their economy like crazy, hence them buying our debt, and the US needs to consume Chinese goods to keep petrodollar demand high. Recently, however, China has surpassed the US as the largest consumer of energy and oil....it will be interesting to see what China does, if they get strong enough domestically, and simply dump their US dollars and free themselves from dollar imperialism....it will be interesting to see what happens.......