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The Dollar and The Axis Of Evil|
31 July 2014.
On August 15, 1971, President Richard M. Nixon shocked the global economy when he officially announced the ending of the system of international convertibility from U.S. dollars into gold.
Thereby bringing an official end to the Bretton Woods agreement of 1944
Two years later, in an effort to maintain global demand for U.S. dollars, another system was created called "the petrodollar system."
In 1973, a deal was struck between Saudi Arabia and the United States in which every barrel of oil purchased from the Saudis would be denominated in U.S. dollars.
Under this new arrangement, any country that sought to purchase oil from Saudi Arabia would be required to first exchange their own national currency for U.S. dollars.
In exchange for Saudi Arabia's willingness to denominate their oil sales exclusively in U.S. dollars, the United States offered weapons and protection of their oil fields from neighboring nations, including Israel.
This petrodollar system, or more simply known as an "oil for dollars" system, created an immediate artificial demand for U.S. dollars around the globe.
And of course, as global oil demand increased, so did the demand for U.S. dollars
According to the agreement, the United States offered military protection for Saudi Arabia's oil fields, and agreed to provide the Saudis with weapons, and perhaps most importantly, guaranteed protection from Israel.
The Saudi Royal Family knew a good deal when they saw one.
They were more than happy to accept American weapons and a U.S. guarantee to restrain attacks from neighboring Israel.
Naturally, the Saudis wondered how much was all of this U.S. military muscle was going to cost.
What exactly did the United States want in exchange for their weapons and military protection?
The Americans laid out their terms. They were simple, and two-fold.
The Saudis must agree to price and sell all of their oil for U.S. dollars only.
In other words, the Saudis were to refuse all other currencies, except the U.S. dollar, as payment for their oil exports.
The Saudis would be open to investing their surplus oil proceeds in U.S. debt securities.
You can almost hear one of the Saudi officials in a meeting saying: "Really? That's all? You don't want any of our money or our oil? You just want to tell us how to price our oil and then you will give us weapons, military support, and guaranteed protection from our enemy, Israel? You've got a deal!"
However, the U.S. had done its economic homework.
If they could get the Saudis to buy into this deal, it would be enough to launch them into the economic stratosphere in the coming decades.
By 1974 and the petrodollar system was fully operational in Saudi Arabia.
And just as the United States had cleverly calculated, it did not take long before other oil-producing nations wanted in.
By 1975, all of the oil-producing nations of OPEC had agreed to price their oil in dollars and to hold their surplus oil proceeds in U.S. government securities in exchange for the generous offers by the U.S.
Nixon and Kissinger had successfully bridged the gap between the failed Bretton Woods arrangement and the new Petrodollar system.
The global artificial demand for U.S. dollars would not only remain intact, it would soar due to the increasing demand for oil around the world.
And from the perspective of empire, this new "dollars for oil" system was much more preferred over the former "dollars for gold" system as its economic requirements were much less stringent.
Without the constraints imposed by a rigid gold standard, the U.S. monetary base could be grown at exponential rates.
Today, virtually all global oil transactions are settled in U.S. dollars. (There are a few exceptions)
The easiest way to obtain U.S. dollars is through the foreign exchange markets.
This is not, however, a viable long-term solution as it is cost-prohibitive.
Therefore, many countries have opted instead to develop an export-led strategy with the United States in order to exchange their goods and services for the U.S. dollars that they need to purchase oil in the global markets.
Japan, for example, is an island nation with very few natural resources. It must import large amounts of commodities, including oil, which requires U.S. dollars.
So Japan manufactures motor vehicles etc. and ships them to the United States, and immediately receives payment in U.S. dollars.
The Primary Benefits of the Petrodollar System
The Petrodollar system has proven tremendously beneficial to the U.S. economy.
In addition to creating a marketplace for affordable imported goods from countries who need U.S. dollars, there are more benefits.
In essence, America receives a double loan out of every global oil transaction.
First, oil consumers are required to purchase oil in U.S. dollars.
Second, the excess profits of the oil-producing nations are then placed into U.S. government debt securities held in Western banks.
The petrodollar system increases global demand for U.S. dollars.
It increases global demand for U.S. securities.
It gives the United States the ability to buy oil with a currency it can print at will.
It should come as no surprise that the United States maintains a military presence in much of the Persian Gulf region, including the following countries: Bahrain, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates, Egypt, Israel, Jordan, and Yemen.
As the U.S. dollar loses purchasing power, several oil-producing countries have begun to question the wisdom of accepting a depreciating paper currency for their oil supplies.
Today, several countries have attempted to move away, or already have moved away, from the petrodollar system.
Examples include Iran, Syria, Venezuela, and North Korea or "The Axis Of Evil".