If the Petrodollar Fails, the United States Government Fails

The US last remaining export is security (i.e., "war'), and the security industry is funded exclusively by the petrodollar (i.e., reserve currency)

This is part two of a short series on the petrodollar and the American War Machine. Read Part One here.

“China and Russia want western sanctions removed from Iran precisely so that the latter nation can easily be admitted into the SCO.”

—Heinz Philby, Igniting the Battle Station’s Core: Torpedo’ing Petrodollar Hegemony As Means of Christening a Multipolar World Order, 2015

Why did the US kill Saddam Hussein and Moamar Qaddaffi?

The same reason the US mobilized the “Total War to Cancel Russia.”

The US hysteria over Ukraine has nothing to do with human rights, respecting borders, or “rule-based” civilization. It has everything to do with US financial solvency. Specifically, it has to do with how the US government is funded. And, no, it’s not through taxes.

Before we answer those questions more adequately, let’s look for just a moment at our incomprehensible debt.

The United States Cannot Pay Its Debts, and Everybody Knows

There’s an old saying: “If you owe the bank a thousand dollars, the bank owns you. If you owe the bank a million dollars, you own the bank.” The aphorism is based on the fact that money lent is as an asset, so the largest debtor is, thereby, the largest asset. If you fail to repay the $1,000 loan, you go bankrupt, but if you fail to repay the million-dollar loan, the bank goes bankrupt.

This argument is often used to defend a monumental federal debt, now standing at $30 trillion dollars, or $243,000 per taxpayer.

But the argument is a canard. Fractional reserve banking and “too big to fail” have made the aphorism meaningless. But so has something else. The “bank” figured out long ago (at least 13 years ago) that you would not repay your million-dollar loan. Wisely, the bank never made a collection call. Instead, it quietly found alternative assets to cover your shaky situation. Thus, you no longer own the bank.

Who’s the Bank?

The bank in this case is the consortium of countries who use the US dollar and invest their excess wealth in US treasuries, a process called “recycling.”

In the 1970s, the United States got Saudi Arabia to require the US dollar for all sales of its oil. No dollars, no oil.

Lots of countries needed Saudi oil, so they had to acquire USD. How did they do this? They sold their products and raw materials to the United States. Then, they used those dollars to buy Saudi oil.

What did Saudi Arabia get from the United States in this deal? Protection. The US promised to protect and defend the House of Saud against all enemies, foreign and domestic. The US—CIA, DOJ, DOD, Treasury, all of it—would do whatever it takes to keep the Saudi royal family in charge.

But you and I both knew all this. What’s new?

Maybe you already figured this out. If so, you can stop reading. But I woke up early this morning and started reading. And thinking. About this. About the Ukraine. About Russia and China and the Iran nuke deal.

There was something missing.

Reading a lot of highly technical financial papers is confusing. I’m not a high finance guy. But I read one 70-page paper from 2015 that gave me part of the answer. Then I saw a clip of Trump’s rally yesterday, and that provided the final piece in the puzzle.

Why Did We Ship All Our Manufacturing Jobs Overseas?

That 70-page paper spent a lot of time explaining the US dollar as the currency for all oil trades. It further explained how this worked.

1. Saudi Arabia invested all its oil profits in US treasuries. Those are loans to the US government.

2. Everybody else needed dollars from the US. So the US printed dollars and bought those countries’ goods and services.

It’s all a Ponzi scheme, of course, but it was a good Ponzi scheme. The scheme was designed to work at least until the end of the lives of the people who made the deal. William R. Clark wrote in his book Petrodollar Warfare:

the dollar’s unique role as a petrodollar has been the foundation of its supremacy since the mid 1970s. The process of petrodollar recycling underpins the US’ economic domination that funds its military supremacy. Dollar/petrodollar supremacy allows the US a unique ability to sustain yearly current account deficits, pass huge tax cuts, build a massive military empire of bases worldwide, and still have others accept its currency as medium of exchange for their imported good and services.

(Thanks to Heinz Philby)

Like all Ponzi schemes, the petrodollar Ponzi requires new players entering the game all the time. The US, to feed its voracious borrowing appetite, needed more countries to demand more freshly-minted US dollars every year.

Industrializing an agrarian economy burns a lot of oil. During the 1970s, a lot of countries were industrializing, so the US was in good shape. Those industrializing countries bought oil from Saudi Arabia, and the Saudis lent their profits to the United States in the form of treasuries.

But by the late 1970s and early 1980s, the law of diminishing returns was starting to hit. Plus, the US needed to borrow a lot to fund it rapidly-growing welfare programs and the newly created Departments of Education and Veterans Affairs.

Remember the inflation in that period? Inflation was no accident. The US needed inflation to increase both the demand for US dollars faster than the increase in global productivity. The world could produce only so many goods in a year, right? And emerging economies can increase production at a rather slow pace. But with inflation, demand for dollars would increase even while production and trade was flat. A television that cost $200 in 1979 was up to $210 in 1980 and $221 in 1981.

But inflation has a way of getting out of control, especially when the supply of money is increasing as fast as demand. Then as now, the “smart” people with lots of letters after their names (from schools with names you’d recognize) were unable to stop inflation once they’d started it. What happened then?

The Fed raised interests rates to kill inflation by killing the US economy. But that’s not the important part. The important part is what happened next.

What happened in the early 1980s was a move to ship US manufacturing and mining jobs overseas. Remember? It was in the early 1980s, in the trough of that interest-rate-induced recession, when we started hearing a lot about service jobs and the service economy.

At the same time, tariffs became the enemy of free market capitalism. (I’ve written before about reading an entire issue of National Review devoted to free trade vs. tariffs. That was 1982.) We reached a sort of national consensus by 1984: tariffs bad, and service economy good.

The Conception of NAFTA

In 1984, Congress laid the groundwork for NAFTA with the Trade and Tariff Act of 1984. That act gave US negotiators fast-track authority to create a free-trade zone with Canada and Mexico. Though it took until the Clinton Administration to finalize the deal, we started shipping jobs overseas right away.

A slew of other trade deals also occurred from the 1980s through the 2000s. And we invested mountains of US dollars in manufacturing plants overseas. You remember this, right?

Consumption went up dramatically while US manufacturing declined. That was thanks to imports purchased with US dollars. Exporting countries used those dollars to buy Saudi oil. The Saudis invested their huge profits in US treasuries. And Congress raised the debt ceiling every year.

The Petrodollar Funds Wars

It’s been a long time since I blogged about the book The Pentagon’s New Map by Thomas M. P. Barnett, but I learned a lot from that book in 2004. Mostly, I learned that a generation of Russian experts like Barnett expected to make a career out of studying the Soviet Union and advising US presidents what to do about it. When the USSR fell, so did their careers.