Much of the US dollar’s global hegemonic status as both perennial transnational reserve currency, most common means of value storage, means of exchange and even economic weapon, is based upon a nearly half-century old collusive political arrangement made between the Nixon administration and the Saudi Arabian government involving the necessary monetary means of pricing, trading, storing and investing with energy resources – The petrodollar standard, or petrodollar recycling, for shorthand. Said standard is increasingly under threat from various economic and political alignments globally, thereby begging significant questions not only about which institutions and old, private, hyper-wealthy families sit at the top of western political power structures, but what they’re threatened by, and who or what are doing the threatening.
History: Gold Standard Ends, Oil Standard Begins
Petrodollar recycling and its resulting standard in many critically functioning fiscal ways effectively replaced the U.S. gold standard as it had existed from a post-World War II-established Bretton Woods Agreement until August 15, 1971, when Nixon closed the nation’s gold window to exchanges for increasingly worthless dollars. The US government essentially defaulted on its obligations to deliver gold to foreign asking parties under Bretton Woods. Hence Nixon, under abiding orders from Wall Street and, in many respects, the City of London banking establishment, ordered the multi-decade linking of the dollar to gold at $35/oz. to cease ‘temporarily’ (hint: it became permanent, by longer term design). The gold standard had provided fiscal discipline in rebuilding the economy after WWII, yet excessively powerful domestic (I.E. President Johnson’s Great Society domestic spending program) and foreign (I.E. Vietnam War) spending needs, as perceived by Washington, required ultimately shifting the backing of the US dollar’s credibility from one commodity - gold (which is the core global money, rather than merely “commodity”) – to another, much more industrially vital one – oil. Hence the quiet agreements made between Henry Kissinger and the US Treasury Department on one side, and Saudi oil minister Yamani, finance ministers and, ultimately, the House of Saud itself, on the other. Saudi Arabia was then the largest OPEC oil producer and exporter, with the largest proven reserves, hence its price standard setting role within the group. Petrodollar recycling, then became the politically engineered means by which oil producers (OPEC and non-OPEC), Atlanticist banking institutions, the largest industrialized economies (the OECD), newly industrialized and less developed nations, would all rely upon the dollar as the sole global currency for, at core, purchasing oil and housing their monetary savings.
Legend
NICs = Newly Industrialized Countries
LDCs = Less Developed Countries [i]
The US Treasury would greatly benefit, as would NY and London banks, because earned billions in oil revenues would then be forced to purchase US Treasury Bonds. For the Saudis, said oil-for-Treasury paper arrangement guaranteed US military protection of the House of Saud. For Washington, said scheme practically ensured the ability to run hypothetically infinite debts and deficits … because significant global oil supplies could not be recalled by other nations like gold could, and was, in the late 1960s and very early 1970s. Petrodollar recycling was and remains, essentially, the largest institutionalized Ponzi Scheme in history because artificial demand for a currency (the dollar) “is created at the expense of the purchasing power of other currencies”.
The dollar gets to be debased in unprecedented fashion without solvency checks against it due to imperial military threats posed by noncompliant nations (I.E. Iraq and Libya, the maverick anti-Washington Consensus leaders of each of which sought immediate, direct petrodollar recycling circumvention), while the US Treasury bill becomes the de facto global investment to be held, not just by OPEC and OECD nations, but by any nation seeking oil and natural gas, other vital industrial resources, trade and general economic development.
Source: ZeroHedge.com
Long-term, Systemic Economic Risks Triggered
The mentioned sense of nonstop dollar printing and debasement has its long-term costs and consequences for its printers, as does the current state of predominantly Anglo-American financial alchemy, which involves inventions and usages of dollar-denominated, highly risky synthetic financial hedging and investment instruments such as derivatives. [ii] Globally combined, the anticipated volume of derivatives contracts number north of $1 quadrillion.
Most career, status and wage-beholden finance executives and Federal Reserve-tethered academia and punditry routinely claim that said collective volume is a notional (or “gross”) figure, and that most derivatives contracts thus essentially cancel each other out (hence, ‘worries are overblown by alarmists who do not understand what we do.’). Yet the definitively chaos-theory-like nature of how derivatives actually can, and sometimes do, avalanche under truly systemically dangerous events (a la the 2008 Global Financial Crisis, or the 1998 collapse of Long Term Capital Management) – where, as economist, banker and lawyer Jim Rickards reveals, seemingly innocuous “net” risks become “gross” fairly promptly, thus wiping out whole financial institutions - begs deeper questions over methodology, requisite opacity, and the truly desperate straits wildly over-leveraged global finance finds itself in today. [iii] We are bound for the dropping of the ‘second leg’ of the 2008 financial crisis, which Western-based global monetary authorities no less influential than the International Monetary Fund and secretively run, Swiss-based Bank for International Settlements have even warned about.
Graphical sizing up of the global derivatives market. Source: Jutia Group
The East Rises to the Challenge
Russia, China and their Eurasian, East, South and West Asian partners are starting to sustainably confront this unjust, profligate and played out arrangement in global finance. Per Andrew Brennan of The Asia Times, in 2012 and 2013, Iranians circumvented the US Treasury’s imposed sanctions, thereby providing a model for other economically targeted nations to follow. They did so by selling oil to India in exchange for gold, which was transferred to Turkey, the leading gold player in the MENA, [iv] which then gave Turkish gold to Iranian banks. The gold went to the Central Bank of Iran. This high-level barter arrangement avoided the SWIFT system and the increasingly digitized, trackable global banking system.
The Russians and Chinese are also coordinating dollar reliance circumvention. The Russians take payments for their oil in their Chinese yuan currency, transfer said money to the Shanghai Gold Exchange (already the largest global physical gold market), then buy gold. The interplay of oil, nondollar currencies and physical gold will eventually evolve into a sophisticated countering – and eventually, replacement – monetary standard mechanism for petrodollar hegemony.
Much of general rising US antagonism toward the East, especially in the recent Trump Era, is due to such multilateral Eastern actions in the financial and currency war realms. Per banking veteran and economist Alasdair Macleod, “Beijing is convinced that America’s belligerency is driven by financial factors, and it is possible that Trump is stoking up American patriotism to force Congress to increase the debt limit. In short, China probably believes America has become desperate.” Note the calm, patient, culturally seasoned and thus superior sense of strategy from China, despite – or possibly because of – the wider global economic and political stakes.
Pointing out a more systematized strategy on the part of Russia alone, Macleod continues:
Before the failure of the gold pool in the late sixties, and the subsequent abandonment of the dollar-gold standard in 1971, oil, in common with all other commodities, was effectively priced in gold, the dollar being merely the settlement medium. Since 1971, the oil price measured in gold has varied in a 350% range, while in dollars the range has been many magnitudes greater. If the dollar is to be undermined, the dollar-oil price may rise, but the dollar’s purchasing power eliminates any benefit. Russia will almost certainly want to revert to the pre-1971 regime, of oil priced in gold, allowing her to accumulate monetary reserves that retain their value.
Recently, Russia’s central bank opened its first foreign office in Beijing, a step widely perceived as aiming to ally with China in averting dollar reliance en route to potentially re-implementing their own gold standard. Calculated bond issuance by Moscow, yet in China’s currency, is one of the most provocative moves in international finance in years. Per ZeroHedge.com, via the South China Morning Post,
Russia is preparing to issue its first federal loan bonds denominated in Chinese yuan. Officials from China’s central bank and financial regulatory commissions attended the ceremony at the Russian embassy in Beijing, which was set up in October 1959 in the heyday of Sino-Soviet relations. Financial regulators from the two countries agreed last May to issue home currency-denominated bonds in each other’s markets, a move that was widely viewed as intended to eventually test the global reserve status of the US dollar.
In turn, Beijing is establishing its own clearing bank in Moscow for handling transactions in yuan. This mutual experiment is aimed at, for one, servicing the fiscal needs of nations in the Eurasian Economic Union.
These dynamic moves by the spine nations of the Shanghai Cooperation Organization are coupled with their dumping record amounts of US Treasury bonds. China dumped $188 billion worth of US paper last year alone. Collectively, foreign central banks – including Japan’s - sold off over $300 billion of US bonds between 2015 and 2016. Eastern nations’ dumping bonds while buying gold, and planning how to provide a newer fiscal basin for energy pricing and trading, are at the core of Anglo-American finance’s concerns over what they consider acts of war.
Conclusion
‘Ending the petrodollar standard’ cannot, and will not, happen overnight. Especially as Washington/London have put on the full court press in all domains from selecting a purposefully intimidating – and seemingly even delirious – US Commander in Chief, to implementing a rushed tactic of attempting a separation of Russia, China and Iran from each other, to outright saber rattling against North Korea, which is actually serving as a proxy spar against China. However, the clear global economic momentum leans Eastward, due to the confluence of rich energy and mineral resources (Russia, Iran, Turkey, the central Asian ‘Stan states, et al.), productivity, savings and investment muscle (China alone), well-armed and agile military forces (Russia, China and their SCO allies), and simply better strategic coordination.
As Metternich-Machiavelli reincarnated, Henry Kissinger himself stated: “Control oil and you control nations.” Well, said “control” occurs through monetary and military means. The military means are difficult to implement against a rising, defensively alert, nuclear armed and routinely drill sharing Russia-China.
The monetary means, however, might prove to be even harder to deploy, especially considering that the collective West’s worst enemy … is itself.
*For an in-depth analysis of this article download the PDF attachment here.
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Pye Ian, Newsbud Senior Analyst & Commentator, is an independent economic and geopolitical researcher as well as a strategic planning and business development advisor. His articles and analyses on international affairs, economic trends and cultural topics have been published in various mainstream and alternative press sources. Mr. Ian’s wider intellectual interests are reflected in his writings on the convergence of foreign affairs, political philosophy, history, global finance and energy policy. He has undergraduate degrees in economics and political science from the University of California and a Master’s degree in finance from Cambridge University. In addition to English, Mr. Ian has proficiency in Farsi.
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[i] Source: Spiro, David. The Hidden Hand of American Hegemony: Petrodollar Recycling and International Markets. Ithaca, NY: Cornell University Press, 1999. Print. P. 75.
[ii] Financial derivatives come in four basic types: Forward, futures, and option contracts, and swaps. Included in their make-up are equity, interest rate and credit derivatives, over-the-counter (or “OTC”) swaps, on-exchange, interest rate swaps, et al. Sophisticated financial instruments, yet opaque enough in the “gross” calculation sense to where Warren Buffett once labelled them as financial “weapons of mass destruction”.
[iii] Jim Rickards lucidly explores such systemic risk issues, along with the abject need for a revised Economics academic discipline (let alone the finance profession and its methodologies for risk assessment), across his multiple texts, including most recently The Road to Ruin, The Death of Money and Currency Wars.
[iv] MENA being the “Middle East and North Africa”.