Global Reserve Currency Status | PETRODOLLAR
For the last several decades, the U.S. Dollar has held reserve currency status among the world. This means that it is the most widely held currency among all nations and is often the medium of exchange in the global economy. The role it has as ‘Petrodollar’ is currently the biggest factor in it’s relevance.
This however, has enabled the U.S. to spend way beyond its means and engage in deficit spending (spending beyond revenues) since there has been someone willing to buy our bonds.
The Problem is that this irresponsibility can’t go on without repercussion. As of late, Russia, China, and some Gulf States have been making moves to no longer recognize the ‘reserve currency’ status of the dollar. If foreign countries no longer need to hold US dollars, or they begin unloading US dollar assets, the US currency would essentially crash.
Petrodollars are the dollars earned by the sale of petroleum, notably by exporters in the Middle East.
Shortly after the dollar lost its gold backing in 1971, international confidence was all but lost in the currency. With a need to restore or supplement that confidence, agreements were reached with the House of Saud. The United States would lend support (militarily and politically) to Saudi Arabia, in exchange for the assurance that the sale of oil would be conducted in US dollars. Once again, the world had a reason to possess and invest in the Unites States currency. The Petrodollar is THE reason the US dollar still holds global reserve currency status.
Oil runs economies all over the world. If they don’t have oil, they need to buy it. If they need to buy it, they need to have US dollars. Saudi Arabia, being the largest oil producer and leader of OPEC, has honored this system for decades.
The US could essentially pay for oil with dollars of which they control the value! Meanwhile, other countries had to come into the possession of dollars of which they had NO control.
The Petrodollar may go far in explaining the United States’ perpetual involvement in foreign affairs, especially in the Middle East. Sure, there are Islamic Fundamentalists that render legitimate consideration. As well as the military industrial complex, of which President Eisenhower warned, that has an unquenching thirst for money and control. However, looking at the even bigger picture, it is of the United States’ utmost interest to ensure that petroleum is traded in US dollars. The solvency of the US literally depends on it.
So naturally, anytime a nation hints at accepting other payments for their oil, the United States steps in and flexes its muscle to show its relevance. Life in the US would be turned upside down if they lost reserve currency status.
To put this in perspective for you, here a very important hypothesis. It is that US involvement in Iraq and Libya was about protecting the US dollar.
Was the Iraq invasion in 2003 primarily a retaliation act? In 2000, Saddam Hussein switched to Euros as payment for Iraqi oil. Plans were then put into place for his removal. The world was put on notice that the thought of not using US dollars would be met with consequences.
Again, in 2009, Moammar Gaddafi introduced plans to have Africa adopt the Gold Dinar as a currency. Unsuccessful, he then tried to persuade Middle Eastern leaders to demand gold as payment for their oil. By 2011, Gaddafi was overthrown and soon killed. The United States interest in ousting Gaddafi even went so far as to lend support to questionable rebel fighters. Some of these rebel fighters were the very agents who were found to be fighting with the insurgency in Iraq and against American troops. But protecting the US dollar makes strange bedfellows.
Also in 2009, Iran announced that it would hold foreign reserves in Euros instead of dollars. Now, in 2012, we see Iran and India agree to use gold as payment for oil. Have you noticed an increase of coverage on Iran in the media outlets? Has the topic of military action surfaced?
Are these all coincidences, or do you notice a theme here? Keep in mind key allies of Iran include Venezuela, Russia, and China. You will see that this situation can get pretty dicey.
You’ve heard the term ‘war for oil.’ Well, how about ‘war for standard of living,’ because without the dollars’ reserve currency status, you would be debating on how to get your next meal instead of where you will get your next big screen TV.
While the petrodollar system was a brilliant endeavor and saw unparalleled results within America, it has ultimately left the nation’s fate resting upon the dollars’ status as the world’s reserve currency.
If not for the fact that so many nations have their national wealth tied up in dollar denominated assets, the boiling point would have been reached already. You now have evidence to reason that because of the US government’s irresponsibly both at home and abroad, the road to this boiling point is now paved, and we are speeding down it.
Due in part to the previously aforementioned Petrodollar system, you can now understand that foreign nations need to sell products to redeem US dollars. They then use those dollars to purchase oil in order to keep their economies churning. This has seen the transformation of America into a consumer and service based economy and away from a manufacturing based economy. The US has been living well beyond its means for decades both nationally and personally.
As of now, the U.S. national government debt is over 15,000,000,000,000 dollars!! (that’s 15 trillion…. or 15 thousand billions) Add to that, unfunded liabilities like Social Security, Medicare, and Medicaid, and that total arguably balloons to well over 100,000,000,000,000 dollars!!
Unfunded liabilities are payments that the government has promised to pay out, but has not yet raised the revenue to do so.
What does this mean for you? Well, simply put, using the 15 trillion number, every man, woman, and child in America would have to pay the Federal government over $48,000.00 and the nation would still be in debt! How will this all be paid for if the global reserve currency status is ever lost?
The U.S. is essentially bankrupt and depends on creating money or foreigners buying our debt to finance our out of control spending. But worst yet, as those abroad phase out the financing of our spending, the Fed will just buy its own debt. Then, just to salt the would, they’ll charge you interest on it too.
As you see from the FIAT sections of this site, creating money is the same as devaluing the currency and it is how your wealth is stolen from you.
The United States has gone from the largest creditor nation in the world to the largest debtor nation in the world.
The conclusion to all of this will not be good. Thankfully, there are many institutions out there (like the Heritage Foundation and CATO) that write policy for dealing with this problem. The goal is to get lawmakers into power that agree with these policies. Then hold them accountable in fixing the problem and making sure they have the will to implement the policies. Because there is lots of money and power involved, it in no way will be easy for them, and may even be life threatening.
In the meantime, Procinctu encourages shifting your dollar holdings and savings to tangible assets. Gold and silver are great preservers of wealth with (in our opinion) silver having more upside as explained in the GOLD and SILVER section. But beware when buying these metals. Buy from reputable companies and buy the physical product. If you are going to buy and hold for long term to weather the financial storm, DO NOT buy paper gold or silver (MF Global, SLV, GLD). In most cases, the institution through which you buy paper market silver, does not actually have the product in their possession. If you feel that the gold and silver market is for you, buy physical and take possession of the metal.
You may also find it beneficial to consider international diversification. If you have an abundance of wealth, it would be asinine to keep it all in one jurisdiction. It’s cliche, but that’s because it’s true, don’t put all your eggs into one basket.
The author is long physical gold and silver. 01/17/12