The transition from the gold standard to the petrodollar. Thank you, US military.
Good morning I’m Austerity Jones and I’m here with C Thomas Printer to discuss the transition of America from the gold standard to the petrodollar.
C Thomas: Good morning Austerity. We have already looked at how most countries go off the gold standard and lose their ability to be the world’s reserve currency, but the United States of America are an especially devious brand of banker. Their oily black handed brand of politics would have done Don Fanucci proud in Godfather II.
Austerity: C Thomas! America isn’t the mafia.
C Thomas: Are you sure, Austerity? Once we sold our soul and closed the gold window, we got into the protection racket no different than the mafia. Let me explain. Since Israel first became a nation state and America was the first nation to recognize them, America has had the Jews back in Israel. This has rubbed people the wrong way (see Kanye West and Dave Chappelle most recently) but in the early 1970’s it was the Arab countries who were upset that America involved itself in the Arab Israel war by helping to resupply the Israeli military. They were also still sore from Nixon unpegging gold to the US dollar since they sold their oil for dollars and saw their dollars lose value afterward. OPEC responded by imposing an embargo on the US. Now America had just gone off the gold standard and they were fighting inflation and then this embargo hit us when we were the largest importer of oil in the world. Gas prices doubled and then doubled again and that was when you could get any gas at all as the lines were miles long at times. As the writers of the Doomberg sub stack like to write “Energy is life” and America was on life support as inflation kept rising averaging 8.7% after averaging 3.3% for the previous decades. Stop me at any time if you think this bears any resemblance to today.
President Nixon, a savvy and underrated politician who just happened to be a terrible burglar and economist, and Kissinger devised a plan to stabilize the US dollar using the Don Fanucci method, the black hand. Saudi Arabia would price their oil in US Dollars only and America would buy their oil. The Saudis would then kick back some of that money into US treasuries or another instrument and for this privilege America would provide a security guarantee to Saudi Arabia enforced by the military and their weapons. Now, if Saudi Arabia had bothered to check on how the US government kept its word with the American Indian, they might have not made the deal, but when the world’s biggest superpower is strongly arming you, I guess they had no choice. The US had its energy source secured, and had managed to have the US dollar backed by a tangible commodity. America had again preserved its reserve currency standard with the help of the US military. This brings us to the word of the week.
Word of the week: petrodollar – a notional unit of currency earned by a country from the export of petroleum.
Other countries would have to buy dollars and use them to buy their energy and the dollar could once again expand its influence beyond the American borders and there wasn’t anything French President Charles De Gaulle could do about it. France, and their leader who had served under De Gaulle Pierre Messmer announced the Messmer plan. Realizing way ahead of their time, what a poor deal it was for the rest of the world, took their country down the path to be one of the leading nuclear power generating countries long before it was carbon chic.
This wasn’t as direct a relationship as the gold standard, but it was important because everyone needed energy and it created a market for the US dollars that the US was printing faster than America could absorb. It was a good thing too because gold that had been $35/oz in 1971 had exploded in price to over $800/oz by the end of the decade. Or so they say… If you truly understand money, that’s the wrong way to look at it. That’s the lesson we also need to learn today. The oz of gold didn’t change, the US dollar changed. It had been devalued. Just as FDR did when he confiscated gold, Nixon devalued the dollar to the point that it took over 20 times more dollars to buy an oz of gold less than 10 years later. This was driven by Nixon’s bone headed economic decision that he needed lower interest rates for the economy to avoid a recession so he fired the Fed chair and installed a man he could handle, Arthur Burns. Nixon did this for political reasons and it was a disaster. Paul Volcker would then step in and crush the economy and inflation later in the decade after Nixon was long gone in disgrace, but that isn’t our focus here today.
At that time, America was the biggest importer of oil, we had a positive trade surplus and strong manufacturing base, and very little debt. Things have changed in the last 50 years. China is now the world’s biggest energy importer, and they have the world’s strongest industrial base, or at least when they aren’t under lockdowns. We don’t have a little debt anymore either, we have the largest debt in the history of the world. Saudi Arabia sells 3 times as much oil to China as they do to the US. So when it was announced that Saudi Arabia was in talks to sell oil to the Chinese in yuan after the US had frozen the Russian foreign reserves, the world took notice. However, it seems reticent,since the American military still supplied them with much of the military technology they use to defend themselves within the historically unstable region.
While the petrodollar and dollar hegemony still exists for the moment, another country announced this week that it will not buy oil with dollars but would use gold instead. Ghana, Africa’s largest gold producer, has felt their country crushed by the strong dollar in the last year. Ghana produces their own crude oil but had an explosion in 2017(another explosion Austerity! What is going on?). This has made the country importers of refined products. Meanwhile over the weekend, EU officials are outraged that the US seems to be profiting off the war in Ukraine claiming that they are selling weapons and conveniently serving to fill the void of Russian gas. “The United States sells us its gas with a multiplier effect of four when it crosses the Atlantic.” European Commissioner for the Internal Market Thierry Breton said. The Biden administration said that higher energy prices were solely due to Putin’s invasion of the Ukraine. Lastly, Biden’s Inflation Reduction Act incentivizes Americans into buying domestic products, especially energy efficient ones. Another EU official said “America needs to realize that public opinion is shifting in many EU countries.” A Biden official responded “This is not a zero sum game. The IRA (meaning Inflation Reduction Act) will grow the pie for clean energy investments, not split it.”
They are calling this the IRA. If you know your history, the Irish Republican Army is the real IRA. They were a paramilitary organization responsible for a large series of bombings throughout the 20th century including the Grand Hotel in Brighton in 1984 in an attempt to assassinate Margaret Thatcher who was staying there. Mystery bombings are back and the world’s economy and reserve currency is the prize. The Petro dollar is hanging in there and still leading but the hyenas are circling and they are getting louder and louder.
Sincerely Yours,
C Thomas Printer
(News article mentioned in the episode: EU accuses US of PROFITEERING from Ukraine war by selling higher price gas and weapons | Daily Mail Online)
This week’s financial tip
Build yourself a budget to find out where your money goes. If you can track your expenses, you can control your expenses. While you are saving, look at your expenses and find and organize your spending. It will allow you to make a better decision when you have some money to invest and it can help you decide how much saving is appropriate for your situation.
On this date in history
489 years ago to be exact, the three year old that would grow up to be Ivan the Terrible was proclaimed Prince of Moscow following his father Vasily III’s death. I thought they were the terrible twos, but it seems I have been misinformed.
Also born on this date
Francisco Franco, the Spanish General that triumphed in the Spanish Civil War and led his country as a dictator from 1939-1975.