A Brief Overview of this Article on the Petrodollar System
The Coming Collapse of the Petrodollar System
- The International Bank of Reconstruction and Development (IBRD, later known as the World Bank)
- The International Monetary Fund
The Bretton Woods Breakdown: Vietnam, The Great Society, and Deficit Spending
Goodbye, Yellow Brick Road
The Same Game with a New Name: "Dollars for Oil" Replaces "Dollars for Gold"
The Rise of the Petrodollar System
The Petrodollar System Encourages Cheap Exports to the United States
The Primary Benefits of the Petrodollar System
- It increases global demand for U.S. dollars
- It increases global demand for U.S. debt securities
- It gives the United States the ability to buy oil with a currency it can print at will
|HAMBURGERS, PERMISSION SLIPS, AND THE PETRODOLLAR|
To help illustrate this point, let's imagine that you decided to open a hamburger stand in a small town with a population of 50,000. Of course, not everyone likes hamburgers, so only a certain percentage of your town's population will actually ever be a potential customer. And since you are obviously not the only hamburger stand in town, your competitors will all be attempting to reach the same portion of your town's population as you are.
Now, as an owner of a hamburger stand in a very small town, would you prefer to have demand for hamburgers from your own town only… or would you like to have hamburger demand from other nearby towns and communities too? (My guess is that you would like to have more customers, as that potentially means more money in your pocket.)
Now, let's take it a step further with another questions…
Would you rather have demand for your burgers from your own town and nearby communities only… or would you prefer to have all of the hamburger demand in your entire state?
Once again, the answer should be obvious. Every good business understands that increasing consumer demand is a good thing for their company's bottom line.
To put it another way, if consumers all over your state are demanding your burgers, you have just been given a permission slip to hire more burger flippers so that you can produce more burgers. (This concept of a demand-based permission slip is important so keep it under your hat for a moment.)
Okay, now allow me to go even one ridiculous step further…
Imagine that Oprah Winfrey is driving through your state and just so happens to stop in at your growing hamburger stand. (I know… this is getting ridiculous… just bear with me. I really do have a point here.) After Oprah tries your hamburger, she expresses utter amazement at your culinary skills. Oprah is now a raving fan of your burger joint and invites you onto her show to tell the whole world about your hamburgers.
It doesn't take an economist to figure out what is going to happen to the demand for your burgers… it is going to skyrocket.
Your hamburger demand is now global. Congratulations!
As the demand for your hamburgers is increases dramatically, so too the supply must increase. Your newfound global hamburger demand has given you a "permission slip" to buy even more frozen patties and hire new fry cooks.
The important concept here is that a growing demand "permits" the producer to increase his supply.
Now, let's conclude our hamburger illustration by imagining that an up and coming rival hamburger company becomes a major competitor with your hamburger restaurant chain. As many of your customers begin visiting your new competitor, the demand for your hamburgers begins to wane. As the demand for your burgers drops, you no longer have a "permission slip" to buy as many frozen patties as you had before. As demand for your burgers continues to fall, it makes little sense to hire more workers. Instead, to remain competitive, you must lay off workers and buy fewer frozen patties just to keep your company afloat. Furthermore, you may even need to sell your existing burgers at a discount before they spoil.
If you decided to ignore the warning signs and continue hiring new employees and buying more patties than were actually demanded by your customers, you would soon find your company nearing bankruptcy.
At some point, logic would dictate that you must decrease your supply.
How it all applies to the U.S. Dollar: Now let's apply the same economic logic that we used to explain the increasing and decreasing demand for your hamburgers to the global demand for U.S. dollars.
If it is only Americans who "demand" U.S. dollars, then the supply of dollars that Washington and the Federal Reserve can "supply", or create, is limited to our own country's demand.
However, if Washington can somehow create a growing global demand for its paper dollars, then it has given itself a "permission slip" to continually increase the supply of dollars.
This is exactly the type of scenario that the petrodollar system created in the early 1970's.By creating incentives for all oil-exporting nations to denominate their oil sales in U.S. dollars, the Washington elites effectively assured an increasing global demand for their currency. As the world became increasingly dependent on oil, this system paid handsome dividends to the U.S. by creating a consistent global demand for U.S. dollars.
And, of course, the Federal Reserve's printing presses stood ready to meet this growing dollar demand with freshly printed U.S. dollars. After all, what kind of central bank would the Federal Reserve be if they were not ready to keep our dollar supply at a level consistent with the growing global demand?
FACT: 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 numbers 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.
(I will explain more about potential scenarios of the petrodollar collapse along with personal strategies that you can take in the fourth and final article in this series.)
For a very simplistic video explanation of the petrodollar system by Jerry Robinson, watch the video below…
How the Petrodollar System Has Affected U.S. Relations With Israel
The Iraq Petrodollar Connection
- Foreign nations would begin sending a flood of U.S. dollars back to the United States in exchange for the new currency needed for oil.
- The Federal Reserve would lose their ability to print more dollars to solve America’s economic problems.
- The Treasury Secretary and the Federal Reserve Chairman would meet to determine the best course of action.
- That action would involve an immediate and dramatic increase in interest rates to reduce America’s money supply.
- Hyperinflation would ensue temporarily while the interest rates took time to take full effect.
- All oil-related prices, including gas prices, would reach outrageous levels.
- Washington would soon realize that the total amount of money in the system would have to be dramatically slashed even further, leading to an even higher increase in interest rates.
- The clueless American public would demand answers. Those on the left would blame the right. The right would blame the left. And both political parties would seek to blame the Federal Reserve.
- People with adjustable rate debts would be crushed and massive layoffs would occur as businesses would be suffering from the high interest rates.
- Asset prices across the board would plummet in value.
- Amid the financial carnage, an economic recovery eventually would begin to take place. But this new American economy would be tremendously smaller due to a drastically reduced money supply.
“The president in a very intimidating way left us, me and my staff, with the clear indication that he wanted us to come back with the word there was an Iraqi hand behind 9/11 because they had been planning to do something about Iraq from before the time they came into office. I think they had a plan from day one they wanted to do something about Iraq. While the World Trade Center was still smoldering, while they were still digging bodies out, people in the White House were thinking: ‘Ah! This gives us the opportunity we have been looking for to go after Iraq.’”
“Government is not reason; it is not eloquent; it is force. Like fire, it is a dangerous servant and a fearful master.” (President George Washington)
“On September 24, 2000, Saddam Hussein allegedly “emerged from a meeting of his government and proclaimed that Iraq would soon transition its oil export transactions to the euro currency.”
“CNN ran a very short article on its website on October 30, 2000, but after this one-day news cycle, the issue of Iraq’s switch to a petroeuro essentially disappeared from all five of the corporate-owned media outlets.”
“The idea that the United States covets Iraqi oil fields is a wrong impression. I have a deep desire for peace. That’s what I have a desire for. And freedom for the Iraqi people. See, I don’t like a system where people are repressed through torture and murder in order to keep a dictator in place. It troubles me deeply. And so the Iraqi people must hear this loud and clear, that this country never has any intention to conquer anybody.”(U.S. President George W. Bush)
“This is not about oil; this is about a tyrant, a dictator, who is developing weapons of mass destruction to use against the Arab populations.”(U.S. Secretary of State Colin Powell)
“It’s not about oil and it’s not about religion.”(U.S. Secretary of Defense Donald Rumsfeld)
“I have heard that allegation (of oil motives) and I simply reject it.”(Coalition Provisional Authority Paul Bremer)
“It’s not about oil.”(General John Abizaid, Combatant Commander, Central Command)
“It was not about oil.”(Energy Secretary Spencer Abraham)
“It’s not about the oil.”(the Financial Times reported Richard Perle shouting at a parking attendant in frustration.)
“This is not about oil.”(Australian Treasurer Peter Costello)
“The only thing I can tell you is this war is not about oil.”(Former Secretary of State Lawrence Eagleburger)
“This is not about oil. This is about international peace and security.”(Jack Straw, British Foreign Secretary)
“This is not about oil. That was very clear. This is about America, and America’s position in the world, as the upholder of liberty for the oppressed.”(Utah Republican Senator Bob Bennett)
“There’s just nothing to it.”(White House spokesperson Ari Fleischer on the U.S. desire to access Iraqi oil fields.)
“This cannot be further from the truth. He is a threat to his neighbors. He’s a threat to American security interest. That is what the president has in mind.” She continued: “This is not about oil.”
“Let’s look at it simply. The most important difference between North Korea and Iraq is that economically, we just had no choice in Iraq. The country swims on a sea of oil.”
“We are a nation at war and in many [ways] the reasons for war are fights over energy sources, which is nonsensical when you consider that domestically we have the supplies ready to go.”
“My friends, I will have an energy policy which will eliminate our dependence on oil from the Middle East and will then prevent us from having ever to send our young men and women into conflict again in the Middle East.”
“I am saddened that it is politically inconvenient to acknowledge what everyoneknows: the Iraq war is largely about oil.”
“I have been a member of four (Presidential) administrations. And in every one of those administrations we had written as a national security policy that we would go to war to protect the national energy reserves of the Persian Gulf, if necessary.”
“Of course (the Iraq war) is about oil, we can’t deny that.”
“The critical oil and natural gas producing region that we fought so many wars to try and protect our economy from the adverse impact of losing that supply or having it available only at very high prices.”
Q: Do you think the U.S., or U.N. forces, should have moved into Baghdad?A: No.Q: Why not?A: Because if we’d gone to Baghdad we would have been all alone. There wouldn’t have been anybody else with us. There would have been a U.S. occupation of Iraq. None of the Arab forces that were willing to fight with us in Kuwait were willing to invade Iraq. Once you got to Iraq and took it over, took down Saddam Hussein’s government, then what are you going to put in its place? That’s a very volatile part of the world, and if you take down the central government of Iraq, you could very easily end up seeing pieces of Iraq fly off: part of it, the Syrians would like to have to the west, part of it — eastern Iraq — the Iranians would like to claim, they fought over it for eight years. In the north you’ve got the Kurds, and if the Kurds spin loose and join with the Kurds in Turkey, then you threaten the territorial integrity of Turkey. It’s a quagmire if you go that far and try to take over Iraq. The other thing was casualties. Everyone was impressed with the fact we were able to do our job with as few casualties as we had. But for the 146 Americans killed in action, and for their families — it wasn’t a cheap war. And the question for the president, in terms of whether or not we went on to Baghdad, took additional casualties in an effort to get Saddam Hussein, was how many additional dead Americans is Saddam worth? Our judgment was, not very many, and I think we got it right.”
“The concern of my government is that the concessions agreed between Baghdad and numerous enterprises will be reneged upon, and that U.S. companies will enter to take the greatest share of those existing contracts. . . . Yes, if you could say it that way — an oil grab by Washington.”
“Russia, China, France have the highest stakes in the Iraqi oil industry. Once Saddam is out, everything becomes null and void and there is no legal authority to enforce those claims.”
“Iraq on Thursday stepped back into the international oil market for the first time since the war, offering 10m barrels of oil from its storage tanks for sale to the highest bidder. For some international companies it will be the first time in more than a year that they will do business directly with Iraq… The tender, for which bids are due by June 10, switches the transaction back to dollars – the international currency of oil sales – despite the greenback’s recent fall in value. Saddam Hussein in 2000 insisted Iraq’s oil be sold for euros, a political move, but one that improved Iraq’s recent earnings thanks to the rise in the value of the euro against the dollar.”
“People say we’re not fighting for oil. Of course we are. They talk about America’s national interest. What the hell do you think they’re talking about? We’re not there for figs.”
“This system of the U.S. dollar acting as global reserve currency in oil trade keeps the demand for the dollar ‘artificially’ high. This enables the U.S. to carry out printing dollars at the price of next to nothing to fund increased military spending and consumer spending on imports. There is no theoretical limit to the amount of dollars that can be printed. As long as the U.S. has no serious challengers, and the other states have confidence in the U.S. dollar, the system functions.”
The War in Afghanistan and the New Great Game
Why is the United States in Afghanistan?
The Bush Years: Bold Lies About Iraq and 9/11
“I have also determined that the use of armed force against Iraq is consistent with the United States and other countries continuing to take the necessary actions against international terrorists and terrorist organizations, including those nations, organizations, or persons who planned, authorized, committed, or aided the terrorist attacks that occurred on September 11, 2001.”
Al Qaeda: Just Another CIA Creation
Perhaps even more damning is that Operation Cyclone may have provided necessary financing for the rise of a man by the name of Osama Bin Laden. In the wake of the tragic London bombing on 7/7/2005, former British Foreign Secretary, Robin Cook penned a piecein the London Guardian publicly admittingthat the CIA and the Saudis had created, armed, and funded Osama Bin Laden and Al Qaeda.
“Bin Laden was, though, a product of a monumental miscalculation by western security agencies. Throughout the 80′s he wasarmed by the CIA and funded by the Saudis to wage jihad against the Russian occupation of Afghanistan. Al-Qaida, literally “the database”, was originally the computer file of the thousands of mujahideen who were recruited and trained with help from the CIA to defeat the Russians. Inexplicably, and with disastrous consequences, it never appears to have occurred to Washington that once Russia was out of the way, Bin Laden’s organisation would turn its attention to the west.”
The Afghanistan War: Follow the Money
The New Great Game: The Real Reasons Behind the Afghanistan War
A Working Timeline of the New Great Game
The Trillion Dollar Graveyard… of Empires
“When I was living in Kabul in the early 1970’s the [U.S. government], the Russians, the World Bank, the UN and others were all highly focused on the wide range of Afghan mineral deposits. Cheap ways of moving the ore to ocean ports has always been the limiting factor.”
“…the Eurasian Balkans are infinitely more important as a potential economic prize: an enormous concentration of natural gas and oil reserves is located in the region, in addition to important minerals, including gold” (page 124)
“America’s global primacy is directly dependent on how long and how effectively its preponderance on the Euraisian continent is sustained… A power that dominates Eurasia would control two of the world’s three most advanced and economically productive regions…most of the world’s physical wealth is there as well, both in its enterprises and underneath its soil.” (page 30-31)
“China’s growing economic presence in the region and its political stake in the area’s independence are also congruent with America’s interests.” (page 148)
“prevent collusion and maintain security dependence among the vassals, to keep tributaries pliant and protected, and to keep the barbarians from coming together.” (page 40)