BY MARIN KATUSA
Rumors are swirling that India and Iran are at the negotiating table right now, hammering out a deal to trade oil for gold. Why does that matter, you ask? Only because it strikes at the heart of both the value of the US dollar and today’s high-tension standoff with Iran.
Tehran Pushes to Ditch the US Dollar
The official line from the United States and the European Union is that Tehran must be punished for continuing its efforts to develop a nuclear weapon. The punishment: sanctions on Iran’s oil exports, which are meant to isolate Iran and depress the value of its currency to such a point that the country crumbles.
But that line doesn’t make sense, and the sanctions will not achieve their goals. Iran is far from isolated and its friends – like India – will stand by the oil-producing nation until the US either backs down or acknowledges the real matter at hand. That matter is the American dollar and its role as the global reserve currency.
The short version of the story is that a 1970s deal cemented the US dollar as the only currency to buy and sell crude oil, and from that monopoly on the all-important oil trade the US dollar slowly but surely became the reserve currency for global trades in most commodities and goods. Massive demand for US dollars ensued, pushing the dollar’s value up, up, and away. In addition, countries stored their excess US dollars savings in US Treasuries, giving the US government a vast pool of credit from which to draw.
We know where that situation led – to a US government suffocating in debt while its citizens face stubbornly high unemployment (due in part to the high value of the dollar); a failed real estate market; record personal-debt burdens; a bloated banking system; and a teetering economy. That is not the picture of a world superpower worthy of the privileges gained from having its currency back global trade. Other countries are starting to see that and are slowly but surely moving away from US dollars in their transactions, starting with oil.
If the US dollar loses its position as the global reserve currency, the consequences for America are dire. A major portion of the dollar’s valuation stems from its lock on the oil industry – if that monopoly fades, so too will the value of the dollar. Such a major transition in global fiat currency relationships will bode well for some currencies and not so well for others, and the outcomes will be challenging to predict. But there is one outcome that we foresee with certainty: Gold will rise. Uncertainty around paper money always bodes well for gold, and these are uncertain days indeed.
The Petrodollar System
To explain this situation properly, we have to start in 1973. That’s when President Nixon asked King Faisal of Saudi Arabia to accept only US dollars as payment for oil and to invest any excess profits in US Treasury bonds, notes, and bills. In exchange, Nixon pledged to protect Saudi Arabian oil fields from the Soviet Union and other interested nations, such as Iran and Iraq. It was the start of something great for the US, even if the outcome was as artificial as the US real-estate bubble and yet constitutes the foundation for the valuation of the US dollar.
By 1975 all of the members of OPEC agreed to sell their oil only in US dollars. Every oil-importing nation in the world started saving their surplus in US dollars so as to be able to buy oil; with such high demand for dollars the currency strengthened. On top of that, many oil-exporting nations like Saudi Arabia spent their US dollar surpluses on Treasury securities, providing a new, deep pool of lenders to support US government spending.
The “petrodollar” system was a brilliant political and economic move. It forced the world’s oil money to flow through the US Federal Reserve, creating ever-growing international demand for both US dollars and US debt, while essentially letting the US pretty much own the world’s oil for free, since oil’s value is denominated in a currency that America controls and prints. The petrodollar system spread beyond oil: the majority of international trade is done in US dollars. That means that from Russia to China, Brazil to South Korea, every country aims to maximize the US-dollar surplus garnered from its export trade to buy oil.
The US has reaped many rewards. As oil usage increased in the 1980s, demand for the US dollar rose with it, lifting the US economy to new heights. But even without economic success at home the US dollar would have soared, because the petrodollar system created consistent international demand for US dollars, which in turn gained in value. A strong US dollar allowed Americans to buy imported goods at a massive discount – the petrodollar system essentially creating a subsidy for US consumers at the expense of the rest of the world. Here, finally, the US hit on a downside: The availability of cheap imports hit the US manufacturing industry hard, and the disappearance of manufacturing jobs remains one of the biggest challenges in resurrecting the US economy today.
It’s Not Just Oil, It’s The Dollar, Stupid!
I learned something new today. I seem to continue to do that the more I look.
Why does the US wage war at the slightest ripple, anywhere in the world, and we just sit up here and take it?
Do you hear the sabers rattling onIran?
A very similar rattling sound to Iraq. And you may say, “well, Iraq was responsible for the terrorist attacks on the World Trade Center… weapons of mass destruction right?
You should know better and I won’t even go there, because there is enough very valid data on-line and in your favorite bookstore to debunk such quite easily.
But why did we really invade Iraq and what does that have to do with Iran?
We all say, “OIL,” right? Right, but there’s more to it. (It’s the dollar stupid.)
After the war in 1944 at a big meeting in Breton Woods N.H. USA, the big bankers put the world on the dollar as its reserve currency, replacing the British pound.
That means, that everybody trades in dollars, to keep it simple.
We had enough military muscle and ample gold in our reserves, so the world readily accepted our dollar—as good as gold. So, of course, with that “confidence” in place the door was opened to printing more money with no gold to back it. Yet, the idea remained—a dollar is as good as gold.
Then the French and a few others threw a slight monkey wrench in the vault in the late 1960s. They demanded the US pay up in gold—the real stuff. Damn near drained Fort Knox – and put an end to the fake “gold standard.”
So, deep the night in 1971, tricky Dick, the then president, at the behest of the bankers that be, took the US off what partial gold standard that existed, to save the vault from being drained… Whether you realize it or not, that was in essence the admission of our insolvency as a country. We can’t pay our obligations and won’t.
This didn’t cause much alarm to most if not all nations who still believed the dollar was as good as gold.
But, the printing presses (and the Federal Reserve computers) revved up and started really printing the greenbacks … and part of the manipulation up of the dollar was an agreement made with the OPEC crew, whereby they made everyone pay for oil in dollars worldwide.
The dollar sort of became an oil-based currency. That’s a new one… didn’t know that before.
In return, the U.S. promised to protect the various oil-rich kingdoms (the OPEC crew) in the Persian Gulf against threat of invasion or domestic coup. This helped inginite the radical Islamic movement among those who resented our influence in the region.
Are the dots connecting yet?