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13 May 2021

Uncovering The Hidden Costs Of The Petrodollar

Uncovering The Hidden Costs Of The Petrodollar


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Regardless of the validity of these arguments, few critics stop to think comparatively about the negative externalities of the world’s current financial system of dollar hegemony.

It is a decentralized asset competing to be the new global reserve currency, aiming to inherit the role gold once had and the role the dollar holds today.

This special status that the dollar enjoys was born in the 1970s through a military pact between America and Saudi Arabia, leading the world to price oil in dollars and stockpile U.S.

The past few decades have seen a vast global rise in economic activity, population, democratic progress, technological advancement and living standards, but there are many flaws in this system that are rarely spoken about and that weigh heavily on billions of people across the globe?

This article explores the seldom discussed and staggering downsides of the current system in the hope that we can replace it with something more fair, free and decentralized.

This essay will explore the rarely discussed creation of the petrodollar and lay out how America has supported brutal dictators, compromised its national security, harmed its industrial base, propped up and protected the fossil fuel industry and even waged conflict abroad, all to bolster the dollar’s status as global reserve currency.

Governments still relied on gold as the underlying global reserve currency, but U.S.

policymakers were determined to create a more “flexible” system.

was trusted to custody and hold enough gold to prop up the whole system.

public sector deficits were negligible by today’s standards, but large enough to prompt complaints from France that Washington was exploiting its reserve currency status to collect seigniorage from America’s foreign creditors by printing dollars, much as medieval monarchs had exploited their monopoly on minting to debase the currency.”.

French economist Jacques Reuff called this the “monetary sin of the West,” and the French government coined the term “exorbitant privilege.” Poor British fiscal policy forced a devaluation of the pound in 1967, and the French, fearing that unsustainable American spending would result in similar negative results, wanted its gold back before a dollar devaluation.

That August, French President Pompidou sent a battleship to New York City to collect his nation’s gold holdings from the Federal Reserve, and the British asked the U.S.

would no longer redeem dollars for gold as part of a plan that included wage and price freezes and an import surcharge in an attempt to save the economy.

As a result, the dollar was devalued by more than 10%, and the Bretton Woods system ceased to exist.

Faced with double-digit inflation and declining global faith in the dollar, Nixon and his Secretary of State and National Security Advisor Henry Kissinger came up with an idea that would allow them to keep “guns and butter” going in the post-gold standard era and alter the fate of the world.

In return, the Saudis would plow billions of their petrodollar revenue back into Treasuries and finance America’s spending.” This was the moment that the U.S.

government confidentially enabled the Saudis topurchase treasuries “outside regular auctions and at preferential rates.” In early 1975, they purchased $2.5 billion of treasuries, beginning a spree that would later become hundreds of billions of petrodollars invested in U.S.

This created new demand for America’s currency at a time of global uncertainty and even at a time of continued inflation.

In hisresearch on the petrodollar, political economist David Spiro argues that OPEC dollar profits were “recycled” into U.S.

This system was created and held in place not by pure economics but by politics through the pact with Saudi Arabia.

treasuries replaced gold as the world’s reserve currency and ultimate store of value.

Since its creation in 1974, the petrodollar system has changed the world in many significant ways, including:.

Dean Baker from the Center for Economic and Policy Research has said that “while it is true that oil is priced in dollars and that most oil is traded in dollars, these facts make relatively little difference for the status of the dollar as an international currency for the economic well-being of the United States.”.

Critics point to the fact that the dollar was already the world reserve currency before 1973, and that the pricing of commodities in dollars is “just a convention,” and that “there would be no real difference if the euro, the yen, or even bushels of wheat were selected as the unit of account for the oil market.” They also say the dollars involved in the oil trade are “trivial” compared with other sources of demand.

debt was not a strict market decision, and not one of fortune or happenstance, but a political one, done in exchange for protection and weapons, and one that sparked countless additional network effects that over time solidified the dollar as the world’s reserve currency?

In October 2000, Saddam Hussein did attempt to alter the petrodollar system when heannounced that Iraq would sell oil in euros, not dollars.

Given that the ouster of Saddam, in retrospect, helped deter change and give the petrodollar system many more years of dominance, it seems like one of the more reasonable explanations for the most mysterious war in modern American history.

Last year, the journalist Robert Draper appeared on Ezra Klein’s show to discuss his new book, “To Start A War: How The Bush Administration Took America Into Iraq.” With a decade of hindsight, they covered many of the possible motives for the invasion, but ultimately called it a “war in search for a reason.” To this day, there is no consensus for why exactly the U.S.

This would not be unusual.

But perhaps the war was not waged for oil in a general sense, but specifically, to defend the petrodollar system?

His decision to stop using ‘the enemy’s currency,’ as he put it, was one in a back-and-forth series of hostile gestures that likely would have led to war in any event; what’s important here is that there were widespread rumors that this was one of the major contributing factors, and therefore, no policymaker in a position to make a similar switch can completely ignore the possibility.

Beyond the Iraq War, there are several other key and much more obvious negative externalities of the petrodollar system.

that it would drop the petrodollar system if they pursued the “NOPEC” Congressional bill that would enable the Justice Department to pursue OPEC governments under antitrust laws for manipulating oil prices.

On “NBC News” hesaid “I’m not like a fool that says, ‘we don’t want to do business with them.’” President Biden has also refused to penalize MBS directly, even though he has been presented with evidence from his own intelligence agencies showing that he ordered Khashoggi’s murder, saying it would betoo costly for America.

As the petrodollar system kept international demand for the dollar artificially strong throughout the decades, America’s manufacturing base became weak and uncompetitive and lost jobs overseas.

But, as investor Lyn Aldenpoints out in “The Fraying Of The US Global Currency Reserve System,” that has never happened with the U.S.

In 1960, the economist Robert Triffin identified this phenomenon, now known as the Triffin Dilemma: to remain the world’s reserve currency, the U.S.

In this way, Alden and other macroeconomic thinkers like Luke Gromen argue that dollar hegemony actually hurts the U.S.

As Reuters reported, “if dollar-denominated oil usage declines in favour of home-produced wind, solar or hydro energy sources, then the swelling pool of global petrodollars recycled and invested by the world’s big oil producers since the end of the gold standard in the 1970s may drain with it.” Simply put, a global shift to renewables would put a big dent in the demand for fossil fuels, which could deal a knockout blow to the petrodollar system and the ability for the U.S.

When the global reserve currency is literally reliant on the sale of oil, the world has a massive carbon emissions problem.

It is truly impossible for the petrodollar system to be green when it is based on black gold.

Beyond protecting the system against disruptions like the petroeuro, Gromen says that America extended the life of the system by launching NAFTA and helping China join the World Trade Organization in 2001.

But since then, China and other governments have been divesting treasuries and pushing us toward a new system, in expectation of that gold losing value.

continued to run higher debt-to-GDP ratios (up from 35% in the 1970s to more than 100% today), the price of oil would eventually skyrocket.

More and more countries are denominating oil trade in other currencies, like euros, yuan and rubles, partly because they fear reliance on a weakening system, and partly because the U.S.

This month, President Biden publicly denounced the Nord Stream2 Pipeline project, which would build on the momentum Russian President Vladimir Putin already has with Rosneft, pricing more than 5% of the world’s oil in euros by connecting Europe and Russia.

Team Biden reportedly wants to “kill” the project, and its officials have commented that dollar primacy remains “hugely important” to the administration and that “it’s in our national interest because of the funding cost advantage it provides, [because] it allows us to absorb shocks… and gives us enormous geopolitical leverage.” This is a striking indication of just how important the petrodollar system remains politically to the U.S., 50 years after its creation, despite critics who say the world uses dollars for pure market reasons.

Beyond a shift to a multipolar currency world, another threat to the petrodollar could be the SDR, or “Special Drawing Right,” employed by the IMF, which is based on the dollar, euro, pound, yen and yuan.

If countries had to pay their balance-of-payments deficit in gold, they would not be able to afford the balance-of-payments costs of going to war.’ That was pretty much accepted and that was why the United States basically responded, ‘That’s why we’re not going back to gold.

Born at a time when the previous world reserve currency had reached its apex, Bitcoin could introduce a new model, with more possibilities but also more restraint.

The big fear, of course, is that America will not be able to finance its exorbitant social programs and military spending if there is less global demand for the dollar.

This means no more reliance on dictators and secret pacts in the Middle East, no more need to threaten or invade other countries to preserve dollar primacy, and no more opposing nuclear or other renewable energy technology to protect the fossil fuel industry

This would be a dramatic net benefit for most people on earth, especially when considering that billions today live under high inflation, financial repression or economic isolation

This transition may not be so pleasant for authoritarian regimes, which are more closed, tyrannical, violently redistributionist and isolated than liberal democracies

But in this author’s view, that would be a good thing, and one that could force reforms where activism alone has failed

And they may compete in a new monetary system that moves away from the petrodollar and all of its costly externalities: a neutral Bitcoin standard that plays to the strengths of open societies, does not depend on dictators or fossil fuels, and is ultimately run by citizens, not the entrenched elite

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