Petrodollar – The Untold Story Part 2

The artificial dollar demand created by the petrodollar system returned to Washington the “permission slip” to supply the global economy with freshly printed dollars that it lost after the demise of the Bretton Woods agreement.

The artificial dollar demand created by the petrodollar system has “permitted” Washington to go on multiple spending sprees to further create their “welfare and warfare” state.

And with so many dollars floating around the globe, America’s asset prices (including houses, stocks, etc.) naturally rose. After all, as we have already demonstrated, prices are directly related to the available money supply.

With this in mind, it is easy to see why maintaining a global demand for dollars is vital to our national “illusion of prosperity” and our “national security.” (The lengths at which America has already gone to protect the petrodollar system will be explained in our third article of this series.)

When, not if, the petrodollar system collapses, America will lose its “permission slip” to print excessive amounts of U.S. dollars.

When this occurs, the amount of dollars in existence will far exceed the actual demand. This is the classical definition of hyperinflation. Since 2006, I have been teaching that America’s bout with hyperinflation will be tied in some way with a breakdown of the petrodollar system and the artificial dollar demand that it has created.

When hyperinflation strikes America, it will be very difficult to stop without drastic measures. One possible measure will be a quick and massive reduction in the overall supply of U.S. dollars. However, with a reduction of the supply of dollars will come a massive reduction in the value of assets currently denominated in U.S. dollars.

 

2. The petrodollar system increases demand for U.S. debt securities

One of the most brilliant aspects of the petrodollar system was requesting that oil producing nations take their excess oil profits and place them into U.S. debt securities in Western banks. This system would later become known as “petrodollar recycling” as coined by Henry Kissinger. Through their exclusive use of dollars for oil transactions, and then depositing their excess profits into American debt securities, the petrodollar system is a “dream come true” for a spendthrift government like the United States.

Despite its obvious benefits, the petrodollar recycling process is both unusual and unsustainable. It has served to distort the true demand for government debt which has “permitted” the U.S. government to maintain artificially low interest rates. Washington has become dependent upon these artificially low interest rates and, therefore, have a vested interest in maintaining them through any means necessary. The massive economic distortions and imbalances generated by the petrodollar system will eventually self-correct when the artificial dollar and U.S. debt demand is removed.

That day is coming.

3. The petrodollar system allows the U.S. to buy oil with a currency it can print at will

A third major benefit of the petrodollar system for the U.S. has to do with the actual purchase of oil itself.

Like all modern developed economies, the United States has built most of its infrastructure around the use of petroleum-based energy supplies. And like many nations, the U.S. consumes more oil each year than it is able to produce on its own. Therefore, it has become dependent upon foreign nations to fill the supply gap. What makes America different, however, is that it can pay for 100% of its oil imports with its own currency.

Again, it does not take much economic knowledge to figure out that this is a great deal.

Let’s use another quick example.

Imagine that you and I both live in a unusual city where the only method of payment for gasoline for our automobiles is carrots.

Now, imagine that I own the exclusive rights in our town to grow carrots and I have the only existing carrot farm in our town. For you, this means that in order to buy any gasoline, you must first deal with me. You can come and attempt to barter with me, or you can buy carrots from me. But regardless, it is an inconvenient fact of life for you.

However, it is exactly the opposite for me. Since I can create carrots out of the ground, I just plant a seed, water the seed, and then exchange the carrot for gasoline.

America has managed to create a similar place for itself in an oil-dependent global economy. With oil priced in U.S. dollars, America can literally print money to buy oil… and then have the oil producers hold the debt that was created by printing the money in the first place.

What other nation, besides America, can print money to buy oil and then have the oil producers hold the debt for the printed money?

Obviously, the creation of the petrodollar system was a brilliant political and economic move. Washington was acutely aware in the early 1970’s that the demand curve for oil would increase dramatically with time. Therefore, they positioned the dollar as the primary medium of exchange for all global oil transactions through the petrodollar system. This single political move created a growing international demand for both the U.S. dollar and U.S. debt — all at the expense of oil-producing nations.

The Petrodollar System

This Petrodollar System was the brainchild of Henry Kissinger and was given birth in the 1970s. It was a clever and diabolical system that enslaved everyone that needed asphalt for their roads and gasoline in their cars.

The reason for that, is… if you wanted oil, you needed US dollars. The Arabs weren’t going to sell you any oil, if you didn’t have dollars. And the only way that you were going to get US dollars was to sell stuff to Americans. Otherwise, you didn’t get oil.

Without oil, your country couldn’t develop. You couldn’t produce enough food for the workers, teachers, engineers, medical doctors and scientists (and so much more) to provide what every developed country desperately needs – educated, healthy manpower. To put it another way:

Without oil, most of your population needed to be farmers.

Without oil, you also became vulnerable to the military power of anyone who had lots of it – because they could have an advanced economy that produced enough money to buy weapons and training.

Without oil, you became vulnerable, poor, uneducated and sick. And, THAT meant everyone in the world willingly became slaves to the Petrodollar System. Those who didn’t, quickly collapsed. Even the Soviet Union found itself unable to survive outside of the Petrodollar System, and fell apart.

America Overreaches Again

Today, the Petrodollar System reaches into the home of virtually every man, woman and child on Earth. But, the American Princes of the Petrodollar reached too far. And, that overreach has caused the Petrodollar to begin to slip from their grasp.

Unfortunately, the rich and powerful do not take kindly to the weakening of their riches and power, and history shows us the one thing that they always do when that happens:

They take us to war.

There is no way that we are going to escape war. None. So, maybe we should start to ask what KIND of war we will have.

Soon it will collapse then new currency will emerge and it will be called electronic money.