Tuesday, November 7, 2017

First Shots Fired In The Currency Wars - 2

"Truth is never the fault of the messenger." - Dredd
This series, which began in 2009, is about a little-watched, but incessantly developing,  situation in international monetary dynamics.

One that threatens the economy of the United States.

National debt and taxes are watched closely because they can impact individuals.

The subject of this series is more dangerous than those issues, because it encompasses them and many others.

The subject I am talking about is the "petrodollar."

 Here is a brief historical look at the issue:
"After the collapse of the Bretton Woods gold standard in the early 1970s, the U.S. struck a deal with Saudi Arabia to standardize oil prices in dollar terms. Through this deal, the petrodollar system was born, along with a paradigm shift away from pegged exchanged rates and gold-backed currencies to non-backed, floating rate regimes.

The petrodollar system elevated the U.S. dollar to the world's reserve currency and through this status, the U.S. is able to enjoy persistent trade deficits, and become a global economic hegemony. The petrodollar system also provides the United States’ financial markets with a source of liquidity and foreign capital inflows through petrodollar "recycling."
Faced with mounting inflation, debt from the Vietnam War, profligate domestic spending habits and a persistent balance of payments deficit , the Nixon administration decided to suddenly (and shockingly) end the convertibility of U.S. dollar into gold. In the wake of this “Nixon Shock,” the world saw the end of the gold era and a free fall of the U.S. dollar amidst soaring inflation. According to, Dr. Bessma Moomani in the article, " GCC Oil Exporters and the Future of the Dollar," through a series of carefully crafted bilateral agreements with Saudi Arabia beginning in 1974, the U.S. was able to promote bilateral political and commercial relations, market imported U.S. goods and services, and help recycle Saudi petrodollars ...

Through this framework of economic cooperation, and more importantly, petrodollar recycling, the U.S. managed to influence Saudi Arabia to persuade the other members of Organization of the Petroleum Exporting Countries (OPEC) to standardize the sale of oil in dollars. In return for invoicing oil in dollar denominations, Saudi Arabia and other Arab states were able to secure U.S. influence in the Israeli-Palestinian conflict, along with U.S. military assistance amidst an increasingly worrisome political climate that saw the Soviet Invasion of Afghanistan, the fall of the Iranian Shah and the Iran-Iraq War. Out of this mutually beneficial agreement, the petrodollar system was born.
Since the most sought after commodity in the world--oil--is priced in U.S. dollars, the petrodollar ... elevated the greenback as the world's dominant currency. In fact, according to the Bank for International Settlements (BIS) triennial survey, 87 percent of all foreign exchanges deals initiated in April 2013, involved the USD on one side. With this status, the U.S. dollar was able to enjoy, what some have asserted to be an "exorbitant privilege" of perpetually financing its current account deficit by issuing dollar denominated assets at very low rates of interest, as well as, becoming a global economic hegemony."
(How Petrodollars Affect The U.S. Dollar, emphasis added). Naturally the competitors and some of the "enemies" of the U.S.A. were not comfortable with this situation which they saw as a disadvantage to them.

Dredd Blog has been concerned about the other side of this coin, which is of course a potential vulnerability (First Shots Fired In The Currency Wars, see also Economic War Of The Pacific - 3, Economic War Of The Pacific - 6).

Recently, we have seen "adjustments" in our relationship with the nation of Saudi Arabia (an original petrodollar player), and in its own traditional way of governing (Congress overrides Obama's veto of 9/11 bill letting families sue Saudi Arabia, Saudi Arabia Arrests 11 Princes, Including Billionaire Alwaleed bin Talal).

In addition to that, increasing attacks are being made on the petrodollar by China, Russia, and other countries:
China will "compel" Saudi Arabia to trade oil in yuan and, when this happens, the rest of the oil market will follow suit and abandon the U.S. dollar as the world's reserve currency, a leading economist told CNBC on Monday.

Carl Weinberg, chief economist and managing director at High Frequency Economics, said Beijing stands to become the most dominant global player in oil demand since China usurped the U.S. as the "biggest oil importer on the planet."

Saudi Arabia has "to pay attention to this because even as much as one or two years from now, Chinese demand will dwarf U.S. demand," Weinberg said.

"I believe that yuan pricing of oil is coming and as soon as the Saudis move to accept it — as the Chinese will compel them to do — then the rest of the oil market will move along with them."
(China will 'compel' Saudi Arabia to trade oil in yuan — and that's going to affect the US dollar). Other nations have increasingly joined the bandwagon (e.g. Russia, Iran, Venezuela).

Some economists and petrodollar observers are preparing for what they see as the inevitable, and so are the warmongers:
"So… What Would Happen If The Petrodollar System Ended Tomorrow

Allow me to briefly explain the impact that a sudden loss of the petrodollar system would have upon the United States of America.

  • Foreign nations would begin sending a flood of U.S. dollars back to the United States in exchange for the new currency needed for oil.
  • The Federal Reserve would lose their ability to print more dollars to solve America’s economic problems.
  • The Treasury Secretary and the Federal Reserve Chairman would meet to determine the best course of action.
  • That action would involve an immediate and dramatic increase in interest rates to reduce America’s money supply.
  • Hyperinflation would ensue temporarily while the interest rates took time to take full effect.
  • All oil-related prices, including gas prices, would reach outrageous levels.
  • Washington would soon realize that the total amount of money in the system would have to be dramatically slashed even further, leading to an even higher increase in interest rates.
  • The clueless American public would demand answers. Those on the left would blame the right. The right would blame the left. And both political parties would seek to blame the Federal Reserve.
  • People with adjustable rate debts would be crushed and massive layoffs would occur as businesses suffered from the high interest rates.
  • Asset prices across the board would plummet in value.
  • Amid the financial carnage, an economic recovery eventually would begin to take place. But this new American economy would be tremendously smaller due to a drastically reduced money supply.
This brief scenario is far from exhaustive and is probably very incomplete. But I provide it to help you understand the great economic damage that you and I, and our nation in general, would sustain if the petrodollar system were to collapse suddenly.

The Washington elites are intimately aware of how serious the economic situation could become if the petrodollar system collapsed. After all, they were the architects and masterminds of the entire system. And if one considers Washington’s policies since the mid-1970’s, it is evident that they have no intention of allowing the petrodollar system to fail.
(Follow The Money, emphasis added). That means war (Is War An Art or Is War A Disease?, 2, 3; War is the Highway 61 of the 1%).

Here are some other related articles (CNBC, The Peak Of The Oil Wars - 12, Iran says ditch the petrodollar, Economics of Petrodollars, Definition of Petrodollars,
Preparing for the Collapse of the Petrodollar System).

So, buckle-up and hunker-down, because the current U.S. government is isolating the U.S. from the rest of the world in many ways.

That error plays into the hands of those seeking to take the petrodollar to new places (As Syria embraces Paris climate deal, it’s the United States against the world).

The next post in this series is here, the previous post in this series is here.

1 comment:

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