scgnews | The U.S. dollar is a unique currency. In fact its current design and
its relationship to geopolitics is unlike any other in history. Though
it has been the world reserve currency since 194 this is not what makes
it unique. Many currencies have held the reserve status off and on over
the centuries, but what makes the dollar unique is the fact that since
the early 1970s it has been, with a few notable exceptions, the only
currency used to buy and sell oil on the global market.
Prior to 1971 the U.S. dollar was bound to the gold standard, at
least officially. According to the IMF, by 1966, foreign central banks
held $14 billion U.S. dollars, however
the United States had only $3.2 billion in gold allocated to cover foreign holdings.
Translation: the Federal Reserve was printing more money than it could actually back.
The result was rampant inflation and a general flight from the dollar.
In 1971 in what later came to be called the "Nixon Shock" President Nixon removed the dollar from the gold standard completely.
At this point the dollar became a pure debt based currency. With debt based currencies money is literally loaned into existence.
Approximately 70% of the money in circulation is created by ordinary
banks which are allowed to loan out more than they actually have in
their accounts.
The rest is created by the Federal Reserve which loans money that they don't have, mostly to government.
Kind of like writing hot checks, except it's legal, for banks. This practice which is referred to as fractional reserve banking
is supposedly regulated by the Federal Reserve,
an institution which just happens to be owned and controlled by a
conglomerate of banks, and no agency or branch of government regulates
the Federal Reserve.
Now to make things even more interesting these fractional reserve
loans have interest attached, but the money to pay that interest doesn't
exist in the system. As a result there is always more total debt than
there is money in circulation, and in order to stay afloat the economy
must grow perpetually.
This is obviously not sustainable.
Now you might be wondering how the dollar has maintained such a
dominant position on the world stage for over forty years if it's really
little more than an elaborate ponzi scheme.
Well this is where the dollar meets geopolitics.
In 1973 under the shadow of the artificial OPEC oil crisis, the Nixon
administration began secret negotiations with the government of Saudi
Arabia to establish what came to be referred to as the petrodollar
recycling system. Under the arrangement the Saudis would only sell their
oil in U.S. dollars, and would invest the majority of their excess oil
profits into U.S. banks and Capital markets. The
IMF would then use this money to facilitate loans to oil importers
who were having difficulties covering the increase in oil prices. The
payments and interest on these loans would of course be denominated in
U.S. dollars.
In the United States, the oil shocks produced inflation, new concern about foreign investment from oil producing countries, and open speculation about the advisability and feasibility of militarily seizing oil fields in Saudi Arabia or other countries.
In the wake of the embargo, both Saudi and U.S. officials worked to
re-anchor the bilateral relationship on the basis of shared opposition
to Communism, renewed military cooperation, and through economic
initiatives that promoted the recycling of Saudi petrodollars to the
United States via Saudi investment in infrastructure, industrial
expansion, and U.S. securities.
The system was expanded to include the rest of OPEC by 1975.
Though presented as buffer to the recessionary effects of rising oil
prices, this arrangement had a hidden side effect. It removed the
traditional restraints on U.S. monetary policy.
The Federal Reserve was now free to increase the money supply at
will. The ever increasing demand for oil would would prevent a flight
from the dollar, while distributing the inflationary consequences across
the entire planet.
The dollar went from being a gold back currency to a oil backed currency. It also became America's primary export.
Did you ever wonder how the U.S. economy has been able to stay afloat
while running multibillion dollar trade deficits for decades?
Did you ever wonder how it is that the U.S. holds such a
disproportionate amount of the worlds wealth when 70% of the U.S.
economy is consumer based?
In the modern era, fossil fuels make the world go round. They have
become integrated into every aspect of civilization: agriculture,
transportation, plastics, heating, defense and medicine, and demand just
keeps growing and growing.
As long as the world needs oil, and as long as oil is only sold in
U.S. dollars, there will be a demand for dollars, and that demand is
what gives the dollar its value.
For the United States this is a great deal. Dollars go out, either as
paper or digits in a computer system, and real tangible products and
services come in. However for the rest of the world, it's a very sneaky
form of exploitation.
Having global trade predominately in dollars also provides the
Washington with a powerful financial weapon through sanctions. This is
due to the fact that most large scale dollar transactions are forced to
pass through the U.S.