Quote: (01-21-2016 07:56 PM)NASA Test Pilot Wrote:
Recall that that the basis of US economic power (through the USD) was at one time based on the large gold hoard of the US after WWII and then after the closing of the gold window in 1971, it was tied primarily to oil (and other commodities). This was the Petro-Dollar.
My understanding of the Petrodollar system is admittedly limited, but I wanted to delve into this topic a bit more. Please correct me if I'm wrong.
My take is that Nixon took us off Bretton woods because European governments whose currencies were tied to the dollar didn't believe we could meet our obligations, and began exchanging their currencies for gold at a rate that would ultimately leave us bankrupt. Nixon had to take action.
We cut a deal primarily with the Saudis, where we guaranteed the survival of their regime (mainly through military protection and geopolitical clout) in return for them, as the major energy producer, to demand payment of oil in dollars. This forced every sovereign to hold dollars in order to pay for oil, which is necessary for them to grow an industrial economy. This led to large dollar reserves being held, and allowed the dollar to remain the primary world reserve currency.
The arrangement doesn't seem so concrete anymore. The decline of oil prices is forcing Saudi Arabia to run deficits and eat into their sovereign wealth fund. The oil producing areas are largely Shiite, and naturally aligned with Iran, geopolitical rivals of the Arabian gulf. The Saudi regime has been able to buy off the support of its citizens through generous social welfare, financed through oil profits. Now that they're eating into those funds, the future doesn't appear as guaranteed, and the actions of the regime seem more erratic.
Saudi has been launching a pre-emptive war into Yemen this past year. More visibly, ISIS, a radical Sunni sect, is getting financing and armament from somewhere. It is destabilizing the middle east, and causing dissension within the highest levels of US government. The joint chiefs of staff are now fighting with the executive branch over the most prudent course of action and undermining each other. Russia is actively defying the petrodollar agenda in the Middle East, and calling a bluff. Saudi Arabia may start getting the idea that its security patrons aren't as committed as they once were. And we are now stepping back from pressuring their Iranian rivals.
I don't know where this will lead, but it seems to me that there is greater volatility on the horizon.