We as Americans need to stop for a moment and think something through, until it sinks in and each one of us understands fully the perils at hand to the United States, the U.S. economy, our standing in the world as a superpower, and our ability to conduct business in todays world and continue to trade in the global market. A short time ago, I read about something I had heard about, but didnt exactly know how it tied into our dollars value. Im talking about the petrodollar. The Bretton Woods system, set up near the end of WWII, obliged participating countries to keep an exchange rate by tying their currencies to the U.S. dollar. The dollar became the primary reserve currency. Global commercial transactions were conducted in dollars and settled through the U.S. banking system. Other countries could redeem their dollars for gold at a fixed price of $35/ounce. Over time, U.S. government officials began to see that strong foreign demand for their currency meant they could print more dollars (run deficits) than they had gold to back up those dollars. Soon, foreigners caught on too. Losing confidence in the dollar’s value, they began demanding gold in exchange. The gold outflow became so pronounced that in 1971, President Nixon closed “the gold window,” ending dollar/gold convertibility. Other currencies began to float in value, but the dollar (now a fiat currency since it was no longer backed by gold) remained a reserve currency. Nixon’s Secretary of State, Henry Kissinger, hastened to persuade the House of Saud to price Middle Eastern oil sales in dollars going forward. (In return, the U.S. would provide the Saudi princes with military backing if needed.) Thereon, any country wishing to purchase oil would have to exchange their currency for dollars beforehand and, for practical purposes, would need to hold large piles of U.S. dollars in reserve. These dollars, which do not circulate inside the U.S. and are not considered part of our domestic monetary supply, were given the name petrodollars. In a sense, we traded away a gold standard of what exists for an oil standard of what was in the pipeline, and also what will be produced. It’s now 2014, and the U.S. has massively expanded it its currency base, much of it held in debt instruments by foreigners. We export some of our inflation, weakening the value (purchasing power) of the petrodollar. That causes foreign interests to doubt the wisdom of holding so much of an untrustworthy asset. Add to this the rise of the BRICs (a coalition of Brazil, Russia, India and China), who actively question the wisdom of relying solely on the U.S. dollar, and who now use their own currencies in transactions whenever possible. Finally, throw in a large dose of geopolitical conflict, Middle East brushfire warfare, and continued NSA spying around the globe. Add it all up and you’ve got the petrodollar sitting perilously on its perch, in a position likely – at the very least – to be knocked down a peg or two. The trend towards owning fewer U.S. dollars (and dollar equivalents like T-Bonds and Bills) is well underway around the globe. Dollars no longer form the exclusive basis for international lending. Dollars are being used less to purchase American-produced goods, most notably from China. According to calculations by the Bureau of Labor Statistics, the dollar has lost over 80% of its purchasing power since 1973. In other words, what cost you a dollar to buy in 1973 now costs you $5. In just the last 10 years, the U.S. dollar’s purchasing power has lost 30%. During that time, gold has risen 400%. Are you willing to bet this trend won’t continue? Compliments of the U.S. dollar’s reserve currency status, we have been able to live wildly beyond our means – taking for granted our position as top dog. Like the diner who gets a poor meal at a once well-respected restaurant and stops going back, our profligate monetary policies are creating more and more dissatisfied customers. The time when America could run up debts in excess of 100% of its GDP – which is currently the case – is a chapter that’s rapidly coming to a close. Whether the dollar dies a slow death over a number of years, or one day just falls off a cliff as foreigners desert it en masse, the effects on our economy and the largely unsuspecting public will be severe and long-lasting - but theres more to consider!
Posted on: Thu, 04 Sep 2014 04:14:04 +0000
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