The Petrodollar just died. Zero Hedge ran an obituary notice for the Petrodollar last week.
Reuters reports energy-exporting countries are set to pull their “Petrodollars” out of world markets this year. This shift is likely to cause global market liquidity to fall: “this year the oil producers will effectively import capital amounting to $7.6 billion. By comparison, they exported $60 billion in 2013 and $248 billion in 2012. This is according to BNP Paribas calculations. Petrodollar recycling peaked at $511 billion in 2006.”
The Petrodollar began with the Arab oil embargo during the 1973 Arab-Israeli war. Henry Kissinger devised a plan that allowed the US to finance foreign wars and to force colonized nations to pay for their own occupation. The US went off the Gold Exchange standard when President Nixon said on Sunday August 15, 1971 that the dollar would no longer be converted to gold on demand by foreign nations. He had to do that because America had over populated itself and had to begin importing natural resources. Over population meant wages were supposed to be lowered so we could compete with cheap overseas labor to earn cash from exports. And then there was the problem of paying for the Vietnam war and all those troops stationed overseas from Germany to Korea.
The immediate solution was to print more dollars. The Bretton Woods agreement in 1944 had made the US dollar the international reserve currency. Dollars were to be treated as if they were gold bullion. Nixon reneged on gold convertibility but Kissinger and the Arabs rescued the American voters from the harsh reality of the real world for four decades. Americans were allowed to live inside their Petrodollar Bubble.
Henry Kissinger’s plan was called the Petrodollar. The US would protect the Saudis and the Gulf oil states. In exchange for protection, the Arabs agreed to price oil only in dollars and to buy US Treasury bonds. This enabled America to run perpetual budget deficits. The Arabs also bought stocks which made the US balance of trade deficit look better than it was. This allowed the Federal Reserve’s Printing Press to continue Wall Street’s Empire of Debt policy.
So what happens next now that the Petrodollar has died?
The US Dollar is still holding on to the reserve currency title if only for just a little longer. Oil prices have dropped significantly. The Saudis could cut oil production to firm up prices. Some think the Saudi oil production boost and price cut was designed to hurt Russian oil income. If that is true, why give lower oil prices to the US than to the rest of the world? Some say that the Saudis want to keep prices low to bankrupt shale oil production in the US so America will be even more dependent on imported oil.
But we should stop being so America centric. There are other nations in the world. The Saudis saw Alan Greenspan on TV saying that gold will protect you against Central Bank manipulation. Maybe the Saudis are smart enough to figure out that the decline in the value of their Petrodollars can be remedied by finding new friends in Moscow and Beijing who can offer both protection and superior currency values.
Turkey, a NATO member, has accepted observer status at the Russo-Chinese Shanghai Cooperation Organization which is their version of NATO even if they seem to be far less belligerent. Turkey is helping Iran and Russia to beat US sanctions. Iran, Pakistan and India have joined the SCO alliance. They have also joined the BRICS alliance of nations (Brazil, Russia, India, China and South Africa.) They have combined together to establish an alternative to Dollar Hegemony and the Bretton Woods agreement.
The BRICS nations have created their own versions of the World Bank and the IMF. They are the New Development Bank and the “Contingent Reserve Arrangement” (CRA).
The US has refused to ratify an agreement made in 2010 to lessen the favoritism given to the West at the IMF. The BRICS nations have only 11% of the votes at the IMF. At their summit in Brazil, BRICS issued a warning to the US that they would give America until the end of 2014 for the US to reform the system.
Foreign countries have to work very hard to produce products that the US will buy. But America refuses to give value for value. All they give is I Owe You Nothing Federal Reserve Notes. Their politicians are not interested in reform.
China has said they would like to participate in the IMF’s Special Drawing Rights ( SDR) program and to be given a presence in the basket of currencies used to determine exchange values.
This is the interesting part. To do that China will have to allow the IMF’s observers to see just exactly how much gold they do have. The Chinese have said their goal is to surpass America’s gold supply which is something of a joke. China several years ago said they had 1,054.1 metric tonnes of gold. Sun Tzu warned the Chinese many centuries ago ‘when you are many, pretend to be few. When you are near, pretend to be far.’ In other words nobody knows how much gold they have until they are ready to show us.
And according to Sun Tzu, the war should be won before the first battle has been fought.
Contrast this with the United States which is supposed to have 8,133.5 metric tonnes of gold. The US could barely scrape together 5 tons of gold that Germany had asked to be returned from their deposits in New York. The US has been letting bullion banks lease our gold reserves which they have sold five times or more as paper certificates of gold deposits. It has been alleged that Robert Rubin and Bill Clinton substituted gold plated tungsten bars for bullion. Though some say the US gold supply was first looted during the Johnson era. America had been taken over by a coup when President Kennedy was assassinated.
We do not have to assay the bars at Fort Know or to audit the reserves at the NY FED. All we have to do is to let the Chinese open their vaults in 2015 so foreign observers count and verify their bullion supply. The lowest estimate I have seen is 4,500 metric tonnes of gold. I have seen estimates of 8,000 tonnes and even more. One financial writer has a source who works for the Chinese in their bullion acquisition program who says the real number is a lot higher than most believe. He says over 8,0000 tonnes. If the Chinese have anywhere near 8,000 tonnes, then the world will know America has no gold and China bought it all for pennies on the dollar. at that point even the dimmest bulb will figure out that America is run by psychopathic Bankers.
Perception is everything in Bubbles and even more so when they burst. People were willing to pay one billion dollars for the stock of an IPO that went bankrupt six months later. That is perception on the upside and on the downside in half a year. That company was not around long enough for me to even remember their name. America’s Dollar was on the upside for a long time but it could drop very quickly.
The Petrodollar’s death has done great harm in the Third World. This will come back to haunt America. The Reuters article said that the oil exporting countries are net importers of money. That means the lack of liquidity will take down stock and bond markets all over the world. The US has such large markets that people fleeing one part of the world will seriously consider parking their billions in America however briefly.
The stock market crash in October 1929 did not get serious until liquidity dried up in 1931. That is what is happening now around the world. This current Depression began in 2007. There has been no recovery. If you deflate America’s cooked GDP numbers with real inflation numbers from Dr John Williams at Shadow Stats, then GDP has contracted steadily for the past six years.
Japan responded to this current Depression initially with their 2-2-2 plan. Double the money supply in 2 years and hope for a 2% increase in inflation. They have now said they will respond with an accelerated money printing program and buy all Japanese Treasury debt.
This US is in the same position as Japan now that the Petrodollar has collapsed. NAFTA sent 56,000 manufacturing plants and 12 million jobs overseas. America has been in a constant state of war. The US has no means of earning foreign cash to pay for its Treasury deficit and for the imports the country needs to survive. The only source of American liquidity is Money Printing. Once the world sees the results, they will look for the exits.
Former FED Chair Alan Greenspan said the exit is gold bullion. That is for the rich. For the middle class it is silver. When China opens its gold vaults to inspection to the IMF in 2015, the Dollar will Die. Of course it could die before the IMF ever gets to China to count their gold.
We will have, according to Jim Rickards, an 80% dollar devaluation when the Dollar Dies. This means imported goods will increase 500% in price. We can expect to enter the Hard Phase of this current Depression sooner rather than later. We have more Unpayable Debt to cancel than anytime in 500 years. That means we are entering the worst Depression in five centuries.
This need not be. Arrest the Bankers. Seize their assets. Use that money to fund worldwide Debt Cancellation. Issue a debt free, non-interest bearing currency like Lincoln’s Greenbacks. And ban fractional reserve banking.
We can either choose to resist or we can choose to die.
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The article below is Zero Hedge’s obituary for the Petrodollar.