It’s been appropriately stated that “he who holds the gold makes the guidelines.”
After World War 2, the United States had the biggest gold reserves worldwide, without a doubt. Along with winning the war, this let the United States reconstruct the global financial system around the dollar.
The new system, created at the Bretton Woods Conference in 1944, connected the currencies of virtually every country worldwide to the United States dollar through a fixed currency exchange rate. It likewise tied the US dollar to gold at a fixed rate of $35 per ounce.
The dollar was said to be “as great as gold.”
The Bretton Woods system made the US dollar the world’s premier reserve currency. It required other nations to store dollars for worldwide trade or to exchange with the United States federal government for gold.
Nevertheless, it was doomed to stop working.
Runaway costs on warfare and welfare triggered the US federal government to print more dollars than it could back with gold at the assured price.
By the late 1960s, the number of dollars circulating had considerably increased relative to the quantity of gold backing them. This encouraged foreign countries to exchange their dollars for gold, draining pipes the United States gold supply at an alarming rate.
To plug the drain, President Nixon “briefly” suspended the dollar’s convertibility into gold in 1971. This ended the Bretton Woods system and severed the dollar’s last tie to gold.
The “short-lived” suspension is still in effect today. And it’s had profound geopolitical effects.
The majority of critically, it removed the primary factor foreign nations kept large amounts of United States dollars and used the US dollar for worldwide trade. As a result, oil-producing nations started to require payment in gold rather of quickly diminishing dollars.
It was clear the US would have to produce a new financial system to support the dollar. So it created a new plan … and chose Saudi Arabia as its ally. This agreement came to be referred to as the “petrodollar system.”
The United States handpicked Saudi Arabia due to the fact that of the kingdom’s huge petroleum reserves and its dominant position in the worldwide oil market.
In essence, the petrodollar system was an agreement that the US would ensure your home of Saud’s survival. In exchange, Saudi Arabia would do three things.
First, it would utilize its dominant position in OPEC to make sure that all oil deals would just take place in United States dollars.
Second, it would recycle hundreds of billions of US dollars from yearly oil profits into United States Treasuries. This lets the United States problem more debt and financing formerly inconceivable deficit spending.
Third, it would ensure the price of oil within limits acceptable to the US and avoid another oil embargo.
The petrodollar system gave foreign nations another compelling factor to hold and use the dollar. And it maintained the dollar’s special status as the world’s top reserve currency.
However … why oil?
Unmatched Geopolitical Power
Oil is the biggest and most tactical product market in the world.
As you can see in the chart below, it dwarfs all other major product markets combined. The annual production worth of the oil market is 10 times larger than the gold market for instance.
International Commodity Markets (Billions)
Every country requires oil. And if foreign nations require United States dollars to buy oil, they have a compelling reason to hold US dollars.
Consider it … If Italy wants to purchase oil from Kuwait, it needs to buy US dollars on the foreign exchange market to spend for the oil very first.
This creates a big artificial market for US dollars.
This is what differentiates the United States dollar from a simply regional currency, like the Mexican peso.
The dollar is just an intermediary. It’s used in countless transactions, amounting to trillions of dollars that have absolutely nothing to do with United States product and services.
Since the oil market is enormous, it serves as a standard for global trade. If foreign countries are already utilizing dollars for oil, it’s simply simpler to use the dollar for other global trade.
In addition to almost all oil sales, the United States dollar is utilized for about 80% of all global transactions.
This provides the United States unrivaled geopolitical power.
The US can sanction or exclude essentially any country from the US dollar-based financial system at the flip of a switch.
By extension, it can also cut off any nation from a lot of worldwide trade. And that would be a financial kiss of death. This produces a powerful incentive for governments to remain in Washington’s great beautifies.
The petrodollar system is why individuals and organizations worldwide take US dollars. They have actually had little choice but to accept this.
Today, the biggest US exports are dollars and federal government financial obligation. The United States government can create limitless amounts of both … from absolutely nothing.
It needs no effort to produce United States dollars, which can then be exchanged genuine things like French wine, Italian cars and trucks, electronic devices from Korea, or Chinese made products.
Eventually, the petrodollar improves the United States dollar’s purchasing power. This is due to the fact that it entices immigrants to take in a number of the new currency units the Fed creates.
The system has actually assisted produce a much deeper, more liquid market for the dollar and United States Treasuries. It also assists the US keep rate of interest artificially low. This enables the US federal government to fund massive deficits it otherwise would be unable to.
This kind of costs would otherwise be impossible without destroying the currency through money printing.
It’s hard to overemphasize just how much the petrodollar system benefits the United States. It’s the bedrock of the US monetary system.
China, the Saudis, and a Paradigm Shift
For nearly 50 years, the Saudis had actually always firmly insisted anyone wanting their oil would require to pay with United States dollars, upholding their end of the petrodollar system.
However that might all alter quickly …
China is the world’s biggest importer of oil and Saudi Arabia’s leading consumer. Beijing buys over 25% of Saudi oil exports.
The Wall Street Journal recently reported that the Chinese and the Saudis had entered into serious conversations to rate Saudi oil exports to China in yuan rather of dollars.
The WSJ article claims the Saudis are upset at the United States for not supporting it enough in its war versus Yemen. They were further dismayed by the United States withdrawal from Afghanistan and the nuclear negotiations with Iran.
In short, the Saudis don’t believe the US is holding up its end of the deal. So they don’t feel like they need to hold up their part. In this context, the Saudis have actually entered major talks with China to offer oil in yuan.
Even the WSJ admits such a move would be dreadful for the United States dollar.
“The Saudi move might chip away at the supremacy of the US dollar in the worldwide financial system, which Washington has counted on for years to print Treasury bills it uses to finance its deficit spending.”
Here’s the bottom line.
Saudi Arabia is flirting in the open with China about prices oil in yuan. It signifies an impending and huge change for anybody holding United States dollars. It would be exceptionally foolish to neglect this huge red indication.
We are likely on the cusp of a historical monetary earthquake …
One that might modify that instructions of the United States forever and mark the biggest economic event of our lifetimes.
Editor’s Note: The Fed has actually currently pumped massive distortions into the economy and pumped up an “whatever bubble.” The next round of cash printing is most likely to bring the scenario to a breaking point.
If you wish to browse the complex economic and political situation that is unfolding, then you require to see this newly released video from Doug Casey and his group.
In it, Doug reveals what you need to know, and how these hazardous times could impact your wealth.