Archive for May, 2011

Bailouts, hyperinflation, and the “petrodollar put”

Nothing has been done to fix what caused the financial calamity that started in 2008 and brought on TARP and QE.  Since crony capitalists manage Congress, this means more bailouts, money printing, and deficit spending in the future.  If things are headed the wrong direction in so many ways, why doesn’t the dollar go “full Zimbabwe” as Chairman Ben runs the printing press 24/7? How can he do that without destroying the dollar?

Well, don’t focus purely on the economics. Factor in geopolitics if you want to get a clearer picture.  One must understand the “petrodollar” and the hegemony of the U.S. military to see why the dollar hasn’t been mangled in a hyper-inflationary crunch by now.  The petrodollar is a critical strut supporting the “value” of the U.S. dollar. 

If you view the dollar solely through the lens of government debt and deficits you’re apt to miss what big a factor this is.  You see, unlike any other nation’s currency,  the dollar is backed by more than just the U.S. economy and the U.S. government.  Let me explain.

Did you know that the purchase of oil is allowed in one and only one currency? That currency is the U.S. dollar.  Here’s how this came about.

Back in the 70s, when Nixon detached the dollar from gold to pay for the Vietnam War, a deal was struck with the major oil producer countries.  Oil would only be sold exclusively in dollars.  The U.S. would get gobs of oil in exchange for technical assistance, infrastructure development, and weapons for Saudi Arabia and other big oil producers.

So today, if you’re the president of a country, or the CEO of a big, multinational corporation, you need to buy oil, correct?  But you can’t buy oil in Yen, Yuan, Krona, Francs, Pounds, Pesos, Lira or even gold. You have to convert whatever currency you have to U.S. dollars before you can even get started.   Thus, in a perverted sort of way, the dollar is backed by oil.   If this wasn’t the case, the demand for dollars would plummet. And we all know that low demand means a lower price, right?

Since the Nixon days, anyone who doesn’t play by the petrodollar rules gets a visit: first from strong arm financiers, second from the CIA, and third from the U.S. military.  The threat of sanctions, assassination, and war  insure the perpetuation of this “arrangement”.  If anyone tries to sell oil for something other than dollars, for example,  the CIA jackals and the U.S. military go in for the jugular.  To wit, Saddam Hussein tried to sell oil in Euros, and recently Gaddafi attempted to sell it for Gold Dinars.  Anywhere there’s oil, you will find the U.S. forces, convert and overt.

As you would surmise, without the petrodollar/CIA/U.S. military “put”, the dollar would have been toast long ago, but because the U.S. military and secret police have their hands around the throats of anyone needing oil (and who doesn’t), those predicting the dollar’s sudden collapse are likely to be wrong.  Yes, Russia and China recently worked out a deal to bypass the dollar in their trade, but until the U.S. military and CIA are forced to loosen their grip on the oil producers, there will always be a floor below which the dollar will not fall.

Because of these factors, a rapid, sudden, permanent decline in the dollar, while not impossible, isn’t very probable.   A slow, steady decline is more likely.  After all, as long as someone has a gun held at your head and is willing to pull the trigger, you’re likely to do what they say. That’s in the short term anyway.

In spite of the forces (pun intended) supporting the dollar, it won’t last forever.  In the long run, despite the “petrodollar put”, eventually,  rampant debt, economic hubris, Wall Street greed, poor leadership, military misadventures, and financial somnambulism will weaken the dollar to the point of being worthless.  Some day, there will be a tipping point – perhaps when interest payments on the national debt exceed defense spending?

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