The historic rise of the US Greenback as a global currency started through the needs of the Second War and it's aftermath. It evolved then as the global currency as US sponsorship driving expanding economies world wide needed a global currency and the Greenback was already there.
The loss of the gold peg and the rise of OPEC then drove the present dispensation.
The BIG problem is that this is going to end in the next five years. The consequences can be horrific but also a day of new beginnings and an opportunity to get it right this time.
It is my contention that the solution lies in restructuring the economy to eliminate poverty. I will not go into the details here but it is sufficient to note that lifting the bottom third of the global population will easily double the Global Gross product.
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Preparing for the Collapse of the Petrodollar System
Preparing for the Collapse of the Petrodollar System, Part 1
http://ftmdaily.com/preparing-for-the-collapse-of-the-petrodollar-system/
Recently, there have been many news headlines containing the words “Iran”, “nuclear capability”, “Syria“, and “Islamic State“. If you listen closely, you can almost hear the drumbeats of a fresh war in the Middle East.
As an economist, I have been trained to view the world through the
lens of incentives. (I am a "bottom line" kind of guy.) And just as
every action is motivated by an underlying incentive, every decision has
a related consequence.
This brief article details the actions, incentives, and related consequences that the United States has created through its attempts to maintain global hegemony through something known as the petrodollar system.
This article will begin with a look back at the important events of the 1944 Bretton Woods Conference, which firmly established the U.S. Dollar as the global reserve currency. Then we will examine the events that led up to the 1971 Nixon Shock when the United States abandoned the international gold standard.
We will then consider what may be the most brilliant economic and
geopolitical strategy devised in recent memory, the petrodollar system.
Finally, we conclude by examining the latest challenges facing U.S.
economic policy around the globe and how the petrodollar system
influences our foreign policy efforts in oil-rich nations. The collapse
of the petrodollar system, which I believe will occur sometime within
this decade, will make the 1971 Nixon Shock look like a dress rehearsal.
If you have never heard of the petrodollar system,
it will not surprise me. It is certainly not a topic that makes it's way
out of Washington and Wall Street circles too often. The mainstream
media rarely, if ever, discusses the inner workings of the petrodollar system and how it has motivated, and even guided, America's foreign policy in the Middle East for the last several decades.
Personal Note: What I am going
to explain in this article is something that I believe is vitally
important for every American to understand. Since 2006, I have written
dozens of articles on the petrodollar system. I have appeared on
many major news media outlets talking about the petrodollar system. I
even wrote a best-selling book entitled Bankruptcy of our Nation
that spent an entire chapter exposing the petrodollar system. I have
spoken about this topic all over the world. Suffice it to say, I believe
that understanding the petrodollar system is very important to your
financial well being. I encourage you to print this article out and read
it carefully. When you are finished with it, I encourage you to share
it with your friends and neighbors. Share it on Facebook and Twitter.
Help us get the word out so that the American public can stir from its
slumber and begin preparing for what lies ahead.
A Brief Overview of this Article Series on the Petrodollar System
In the final days of World War II, 44 leaders from all of the Allied nations met in Bretton Woods, New Hampshire
in an effort to create a new global economic order. With much of the
global economy decimated by the war, the United States emerged as the
world's new economic leader. The relatively young and economically
nimble U.S. served as a refreshing replacement to the globe's former
hegemon: a debt-ridden and war-torn Great Britain.
In addition to introducing a number of global financial agencies, the
historic meeting also created an international gold-backed monetary
standard which relied heavily upon the U.S. Dollar.
Initially, this dollar system worked well. However, by the 1960's,
the weight of the system upon the United States became unbearable. On August 15, 1971, President Richard M. Nixon
shocked the global economy when he officially ended the international
convertibility from U.S. dollars into gold, thereby bringing an official
end to the Bretton Woods arrangement.
Two
years later, in an effort to maintain global demand for U.S. dollars,
another system was created called the petrodollar system. In 1973,
a deal was struck between Saudi Arabia and the United States in which
every barrel of oil purchased from the Saudis would be denominated in
U.S. dollars. Under this new arrangement, any country that sought to
purchase oil from Saudi Arabia would be required to first exchange their
own national currency for U.S. dollars. In exchange for Saudi Arabia's
willingness to denominate their oil sales exclusively in U.S. dollars,
the United States offered weapons and protection of their oil fields
from neighboring nations, including Israel.
By 1975, all of the OPEC nations had agreed to price their own oil supplies exclusively in U.S. dollars in exchange for weapons and military protection.
This petrodollar system, or more simply known as an "oil for dollars"
system, created an immediate artificial demand for U.S. dollars around
the globe. And of course, as global oil demand increased, so did the
demand for U.S. dollars.
As the U.S. dollar continued to lose purchasing power, several
oil-producing countries began to question the wisdom of accepting
increasingly worthless paper currency for their oil supplies. Today,
several countries have attempted to move away, or already have moved
away, from the petrodollar system. Examples include Iran, Syria, Venezuela, and North Korea… or the “axis of evil,” if you prefer. (What
is happening in our world today makes a whole lot of sense if you
simply read between the lines and ignore the “official” reasons that are
given in the mainstream media.) Additionally, other nations are choosing to use their own currencies for oil like China, Russia, and India, among others.
As more countries continue to move away from the petrodollar system
which uses the U.S. dollar as payment for oil, we expect massive
inflationary pressures to strike the U.S. economy. In this article, we
will explain how this could be possible.
The Coming Collapse of the Petrodollar System
When historians write about the year 1944, it is often dominated with
references to the tragedies and triumphs of World War II. And while
1944 was truly a pivotal year in one of history's most devastating
conflicts of all time, it was also a significant year for the
international economic system. In July of that same year, the United
Nations Monetary and Financial Conference (more commonly known as the Bretton Woods conference)
was held in the Mount Washington hotel in Bretton Woods, New Hampshire.
The historic gathering included 730 delegates from 44 Allied nations.
The aim of the meeting was to regulate the war-torn international
economic system.
During the three-week conference, two new international bodies were established.
These included:
- The International Bank of Reconstruction and Development (IBRD, later known as the World Bank)
In addition, the delegates introduced the General Agreement on Tariffs and Trade (GATT, later known as the World Trade Organization, or WTO.)
More importantly, for our purposes here, another development that
emerged from the conference was a new fixed exchange rate regime with
the U.S. Dollar playing a central role. In essence, all global
currencies were pegged to the U.S. Dollar.
At this point, an appropriate question to be asking yourself is: ''Why would all of the nations be willing to allow the value of their currencies to be dependent upon the U.S. Dollar?"
The answer is quite simple.
The U.S. Dollar would be pegged at a fixed rate to gold. This made
the U.S. dollar completely convertible into gold at a fixed rate of $35
per ounce within the global economic community. This international
convertibility into gold allayed concerns about the fixed rate regime
and created a sense of financial security among nations in pegging their
currency's value to the dollar. After all, the Bretton Woods
arrangement provided an escape hatch: if a particular nation no longer
felt comfortable with the dollar, they could easily convert their
dollars holdings into gold. This arrangement helped restore a
much-needed stability in the financial system. But it also accomplished
one other very important thing. The Bretton Woods agreement instantly
created a strong global demand for U.S. dollars as the preferred medium
of exchange.
And along with this growing demand for U.S. Dollars came the need for… a larger supply of dollars.
Now, before we continue this discussion, stop for a moment and ask yourself this question: Are there any obvious benefits from creating more dollars? And if so, who benefits?
First, the creation of more dollars allows for the inflation of asset
prices. In other words, more dollars in existence allows for a rise in
overall prices.
For
example, imagine for a moment if the U.S. economy had a total money
supply of only $1 million dollars. What if, in this imaginary economy, I
attempted to sell you my home for $2 million dollars? While you may
like my home, and may even want to buy it, it would be physically
impossible for you to do so. And it would be completely absurd for me to
ask for $2 million because, in our imaginary economy, there is only $1
million in existence.
So an increase in the overall money supply allows asset prices to rise.
But that’s not all.
The United States government benefits from a global demand for U.S.
dollars. How? It’s because a global demand for dollars gives the Federal
government a “permission slip” to print more. After all, we can’t let
our global friends down, can we? If they "need" dollars, then let's
print some more dollars for them.
Is it a coincidence that printing dollars is the U.S. government's
preferred method of dealing with our nation's economic problems?
Remember, Washington only has four basic ways to solve its economic problems:
1. Increase income by raising taxes on the citizens
2. Cut spending by reducing benefits
3. Borrow money through the issuance of government bonds
4. Print money
Raising taxes and making meaningful spending cuts can be political
suicide. Borrowing money is a politically convenient option, but you can
only borrow so much. That leaves the final option of printing money.
Printing money requires no immediate sacrifice and no spending cuts.
It's a perfect solution for a growing country that wants to avoid making
any sacrifices. However, printing more money than is needed can lead to
inflation. Therefore, if a country can somehow generate a global demand
for its currency, it has a "permission slip" to print more money.
Understanding this "permission slip" concept will be important as we
continue.
Finally, the primary beneficiary of an increased global demand for the U.S. Dollar is America's central bank, the Federal Reserve.
If this does not make immediate sense, then pull out a dollar bill from
your wallet or purse and notice whose name is plastered right on the
top of it.
Have you ever asked yourself why the U.S. Dollar is called a Federal Reserve Note?
Once again, the answer is simple.
The U.S. Dollar is issued and loaned to the United States government by the Federal Reserve.
Because our dollars are loaned to our government by the Federal
Reserve, which is a private central banking cartel, the dollars must be
paid back. And not only must the dollars be paid back to the Federal
Reserve. They must be paid back with interest!
And who sets the interest rate targets on the loaned dollars? It’s the Federal Reserve, of course.
To put it simply, the Federal Reserve has a clear vested interest in
maintaining a stable and growing global demand for U.S. Dollars because
they create them and then earn profit from them with interest rates
which they set themselves. What a great system the Federal Reserve has
for itself. No wonder it hates oversight and intervention. No wonder the
private banking cartel that runs the Federal Reserve despises all
attempts to actually audit its books.
In summary, the American consumer, the Federal government, and
Federal Reserve all benefit to varying degrees from a global demand for
U.S. Dollars.
The Bretton Woods Breakdown: Vietnam, The Great Society, and Deficit Spending
There
is an old saying that goes, "He who holds the gold makes the rules."
This statement has never been truer than in the case of America in the
post–World War II era. By the end of the war, nearly 80 percent of the
world’s gold was sitting in U.S. vaults, and the U.S. Dollar had
officially become the world’s undisputed reserve currency.
As a result of the Bretton Woods arrangement, the dollar was considered to be “as safe as gold.”
A study of the United States economy in the post-World War II era
demonstrates that this was a time of dramatic economic growth and
expansion. This era gave rise to the baby boomer generation.
By the late 1960's, however, the American economy was under major
pressure. Deficit spending in Washington was uncontrollable as President
Lyndon B. Johnson began to realize his dream of a "Great Society." With the creation of Medicare and Medicaid, American citizens could now, for the first time, earn a living from their government.
Meanwhile, an expensive and unpopular war in Vietnam funded by record deficit spending led some nations to question the economic underpinnings of America.
After all, the entire global economic order had become dependent upon
a sound U.S. economy. Countries like Japan, Germany, and France, while
fully on the mend from the devastation of World War II, were still
largely dependent upon a financially stable American economy to maintain
their economic growth.
By 1971, as America's trade deficits increased and its domestic
spending soared, the perceived economic stability of Washington was
being publicly challenged by many nations around the globe. Foreign
nations could sense the severe economic difficulties mounting in
Washington as the United States was under financial pressure at home and
abroad. According to most estimates, the Vietnam War had a price tag in
excess of $200 billion. This mounting debt, plus other debts incurred
through a series of poor fiscal and monetary policies, was highly
problematic given America's global monetary role.
But it was not America’s financial issues that most concerned the
international economic community. Instead, it was the growing imbalance
of U.S. gold reserves to debt levels that was most alarming.
The United States had accumulated large amounts of new debt but did
not have the money to pay for them. Making matters worse, U.S. gold
reserves were at all-time lows as nation after nation began requesting
gold in exchange for their dollar holdings. It was almost as if foreign
nations could see the writing on the wall for the end of the Bretton
Woods arrangement.
As
1971 progressed, so did foreign demand for U.S. gold. Foreign central
banks began cashing in their excess dollars in exchange for the safety
of gold. As nations lined up to exchange their dollar holdings for
Washington's gold, the United States realized that the game was over.
Clearly, America had never intended to be the globe's gold warehouse. Instead, the convertibility of the dollar into gold was meant to generate a global trust in U.S. paper money.
Simply knowing that the U.S. dollar could be converted into gold if
necessary was good enough for some — but not for everyone. The nations
which began to doubt America’s ability to manage their own finances
decided to opt for the recognized safety of gold. (Historically, gold has been, and will likely remain, the beneficiary of poor fiscal and monetary policies, and 1971 was no different.)
One would have expected that the large and growing demand by foreign
nations for gold instead of dollars would have been a strong indicator
to the United States to get its fiscal house in order. Instead, America
did exactly the opposite. As Washington continued racking up enormous
debts to fund its imperial pursuits and its over-consumption, foreign
nations sped up their demand for more U.S. gold and fewer U.S. dollars. Washington was caught in its own trap and was required to supply real money (gold) in return for the inflows of their fake paper money (U.S. dollars).
They had been hamstrung by their own imperialistic policies.
Soon the United States was bleeding gold. Washington knew that the
system was no longer viable, and certainly not sustainable. But what
could they do to stem the crisis? There were only two options.
The first option would require that Washington immediately reduce its
massive spending and dramatically reduce its existing debts. This
option could possibly restore confidence in the long-term viability of
the U.S. economy. The second option would be to increase the dollar
price of gold to accurately reflect the new economic realities. There
was an inherent flaw in both of these options that made them
unacceptable to the United States at the time… they both required fiscal
restraint and economic responsibility. Then, as now, there was very
little appetite for reducing consumption in the beleaguered name of
“sacrifice” or “responsibility.”
Goodbye, Yellow Brick Road
The Bretton Woods system created an international gold standard with
the U.S. dollar as the ultimate beneficiary. But in an ironic twist of
fate, the system that was designed to bring stability to a war-torn
global economy was threatening to plunge the world back into financial
chaos. The gold standard created by Bretton Woods simply could not bear
the financial excesses, coupled with the imperialistic pursuits, of the
American economic empire.
On August 15, 1971, under the leadership of
President Richard M. Nixon, Washington chose to maintain its reckless
consumption and debt patterns by detaching the U.S. Dollar from its
convertibility into gold. By "closing the gold window," Nixon destroyed
the final vestiges of the international gold standard. Nixon’s decision
effectively ended the practice of exchanging dollars for gold, as
directed under the Bretton Woods agreement. It was in this year, 1971,
that the U.S. dollar officially abandoned the gold standard and was
declared a purely "fiat" currency. (A "fiat" currency is one that derives it value from its sponsoring government. It is a currency issued and accepted by decree.)
Here's a brief 2-minute excerpt of the actual televised speech
delivered by President Nixon on August 15, 1971 in which he ended the
U.S. Dollar's convertibility into gold.
As all other fiat empires before it, Washington had come to view gold
as a constraint to their colossal spending urges. A gold standard, as
provided by the Bretton Woods system, meant that America had to attempt
to publicly demonstrate fiscal restraint by maintaining holistic
economic balance.
By “closing the gold window,” Washington had affected not only
American economic policy — it also affected global economic policy. Under the international gold standard of Bretton Woods, all currencies derived their value from the value of the dollar. And the dollar derived its value from the fixed price of its gold reserves. But when the dollar’s value was detached from gold, it became what economists call a “floating” currency. (By “floating,” it is meant that the currency is not attached, nor does it derive its value, from anything externally.) Put simply, a “floating” currency is a currency that is not fixed in value.
Like any commodity, the dollar could be affected by the market forces of supply and demand. When
the dollar became a “floating” currency, the rest of the world’s
currencies, which had been previously fixed to the dollar, suddenly
became “floating” currencies as well. (Note: It did
not take long for this new system of floating currencies with floating
exchange rates to attract manipulation by speculators and hedge funds.
Currency speculation is and remains, a threat to floating currencies.
Proponents of a single global currency use the current manipulation of
currency speculators to promote their agenda.)
In this new era of floating currencies, the U.S. Federal Reserve,
America’s central bank, had finally freed itself from the constraint of
a gold standard. Now, the U.S. dollar could be printed at will —
without the fear of not having enough gold reserves to back up new
currency production. And while this new-found monetary freedom would
alleviate pressure on America’s gold reserves, there were other
concerns.
One major concern that Washington had was regarding the potential shift in global demand for the U.S. dollar. With
the dollar no longer convertible into gold, would demand for the dollar
by foreign nations remain the same, or would it fall?
The second concern had to do with America’s extravagant
spending habits. Under the international gold standard of Bretton Woods,
foreign nations gladly held U.S. debt securities, as they were
denominated in gold-backed U.S. dollars. Would foreign
nations still be eager to hold America’s debts despite the fact that
these debts were denominated in a fiat debt-based currency that was
backed by nothing?
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