Petrodollar Rule Needs to End

The petrodollar has come under threat, and there is no reason why we should continue to defend it. We have waged many wars over it, and there might be more to come. For beginners, petrodollars is derived from the end of the Bretton Woods agreement in 1971. When the dollar was removed from the gold standard, the dollar had to find a different way to maintain its strength. So the stability of the US currency was then maintained by forcing all countries to buy and sell their oil in US dollars, such that whenever that transaction happens, the dollar is used, and no matter how many dollars the Federal Reserve prints, it will never lead to much inflation in the US. Quantitative Easing has made the petrodollar particularly useful, because all that injected cash is floating around outside the US, and does not produce much inflation within US borders, but very well outside of it. (Have you ever wondered why US customs officials are so adamant in not wanting you to bring in more than $10,000 in cash when entering the US?)

The US could also use its privileged dollar position to maintain the largest trade deficit in the world, because the printed dollars were used to purchase foreign commodities in exchange for IOUs, much of it sits in the central banks of China, Japan and Saudi Arabia. There will be absolutely no doubt that with all these accumulating dollars in the vaults of foreign central banks, that there will be a crisis of confidence after which the creditors will no longer want to accumulate anymore US dollars, and all that dollar printing won’t help and lead to inflation. But in the mean time, the stable dollar seems to let the US get away with trade deficits and money printing, and I think much of it is related with the petrodollar phenomenon. If the countries stopped selling the oil in US dollars, then the demand for dollars would fall, and all the new dollars the Fed printed would return to the US economy in the form of inflation. This is what happens to most Latin American countries, and really any other country that started the printing press, except the US, where the petrodollar had retained its extraordinary privilege.

But the petrodollar is not only an economic phenomenon, but also has a military and political component to it. The petrodollar is an important cause of war. The Iraq War has arguably been fought over maintaining the petrodollar. There really were no weapons of mass destruction in Iraq, and the fanfare about promoting freedom and democracy turned into sectarian violence and civil war, so not even that goal had been accomplished by the Bush administration. The Iraq War has been fought for economic reasons, because Saddam Hussein had switched currencies, selling his huge oil reserves in euros rather than dollars. The Bush administration understandably panicked and now called for regime change. The fearful environment surrounding 9/11 certainly made the public very willing to go into a stupid war that would risk American lives and taxpayer money. Iraq was really only one country, and would not have dramatically weakened the dollar and did not bring huge inflation, which would have happened if the petrodollar disappeared. But the fear was that other countries would copy Saddam’s actions if they happened to not like the US. And it was important to punish Saddam to warn other nations to never abandon the petrodollar. After the invasion in Iraq, the new Iraqi government awarded oil contracts to US oil corporations and returned to the petrodollar standard. This is well documented in William Clark’s (2005) study of the petrodollar.

Some would also argue that the petrodollar was also the cause for the US sanctions against Iran. There is this whole argument about US sanctions against Iran stemming from their possession or development of nuclear weapons. But this is all a hoax. Israel and Pakistan also possess nuclear weapons in very volatile and politically dangerous regions, and no one would have complained about them possessing nuclear weapons. Iran is a country of 60 million people, and stands pretty much alone politically, so it is questionable what kind of threat they could have posed to any nation by possessing these nuclear weapons, and given the aggressive US stance they might even be justified in building nuclear capabilities.

The real reason for US sanctions against Iran was its decision in 2008 to reject the dollar as a valid currency for the purchase of Iranian oil (Doran 2012). So they visibly moved away from the petrodollar, and the US saw itself again threatened, and pushed strongly for sanctions. The Europeans, being the US’ reliable lapdogs, also followed along with the sanctions, but Russia, India and China backed Iran, such that the trade embargo did not destroy their economy completely. Only recently, there has been some easing of economic sanctions against Iran, ostensibly due to their cooperation with western authorities with regard to nuclear weapons, but it could also be that there are other enemies looming around the corner, and the US needed to refocus its resources elsewhere, e.g. the pivot to Asia (read: China).

And here comes the next biggest threat on the radar of US policymakers, at least insofar as the stability of the petrodollar is concerned: Russia. Russia is another major oil and gas exporter, and has thus far obediently followed the petrodollar standard. But then the Ukraine crisis happened, in which the Americans played some part in it. Though the Americans were not the ones initiating the Maidan protests and the fall of pro-Russian president Viktor Janukovitch, they did provide the pro-western forces with financial backing. The EU hoped for an integration of Ukraine into the EU, which would mean new business opportunities, and the US hoped it could become part of NATO to further weaken Moscow’s hand. Putin subsequently ordered the occupation of Crimea and the arming of rebels in Eastern Ukraine with a Russian majority population. This was followed by Western sanctions against Russia, and that primarily means by US initiative, because the EU only reluctantly moved along since they have much stronger trade ties to Russia than the Americans. But the EU was a reliable lapdog for the US, and pulled along with the sanctions against Russia. Were these sanctions justified? With respect to preserving the petrodollar, the answer would be yes.

Putin now finding himself under severe pressure from the West has decided to sign agreements with Iran and China to sell oil and gas in different currencies other than the US dollar (Zero Hedge 2014; Schortgen 2014). With Russia now defecting from the petrodollar standard, there is now a serious threat to US dollar legitimacy, because these are not small and weak countries like Iran or Iraq. An invasion of Russia, which holds the second largest nuclear arsenal in the world- an old Soviet legacy, is out of the question for the Obama administration, and the only means they can resort to are economic sanctions. But it is also questionable how long they can preserve a sanctions policy against such a large country. Many western countries are reeling from a huge financial and economic crisis, and anemic growth really means that imposing trade barriers will further aggravate economic and unemployment crises, especially in Europe. It is really not wise to pursue sanctions against powerful Russia.

And now that China is quite clearly on the side of Russia, the US options have become even more limited. Since China is an important world producer of goods, applying economic sanctions against China would be even crazier than applying sanctions against Russia. The US is very dependent on China both for the production of basic commodities for import, but also for continuing to purchase US treasury securities without which further imports can not be financed.

Since I am not an adviser to the US administration, I do not have to speak up for the empire, and can simply call for the abandonment of the petrodollar standard and the dollar as a reserve currency. Jared Bernstein (2014) had recently argued in favor of repealing the dollar as reserve currency, because since it fosters cheap imports it weakens domestic production and job creation. There will soon probably be huge economic problems if the loss of reserve currency status were to happen, because the investors will take their time to find a new reserve currency other than the dollar. But what choice do we have? There is no hegemonic power that would stand ready to take over the US position. China is there, but they are still opposing a full opening of their capital markets, which means they have thus far seen some advantages in the strong US dollar regardless of the weak fundamentals of the US economy. The EU has a strong currency, but due to their internal economic divisions, especially between Germany and some surplus countries and everybody else, I don’t see a way for them to become the hegemon, and they feel rather comfortable under the protective US umbrella.

Many Americans are tired of fighting the wars against other country’s people, who can scarcely be considered our natural enemies (if we took the people that most Americans would voluntarily kill as a basis it would certainly not be Iraqis, Iranians or Russians, but rather other Americans- violence happens most often within neighborhoods and families). The media propaganda can still quite effectively blunt any efforts to inform the public about what is going on in the world, and what the US intentions really are. But if we really wanted to remove the need for military aggression, bloodshed and economic suffering, then we would also have to abandon the unilateral claim on an almighty currency. In the mean time, a fledgling empire never leaves silently, but always with a bang. Let us hope that bang should not mean the end of us all.

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