…If we want to better understand the answer to the elusive question of “When will the fiat US dollar collapse?”, we have to watch the petrodollar system and the factors affecting it….This is critically important, because once the dollar loses this coveted status…the destruction of the dollar is going to wipe out the wealth of a lot people, and that will cause political and social consequences that will likely be worse than the financial consequences.
The above are edited excerpts by Nick Giambruno (InternationalMan.com) from his original article* entitled Timing the Collapse: Ron Paul Says Watch the Petrodollar and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]
Giambruno goes on to say in further edited excerpts:
The three points to understand here are:
- You absolutely must be internationalized before the U.S. dollar loses its status as the premier reserve currency. Internationalization is your ultimate insurance policy.
- The U.S. dollar’s status as the premier reserve currency is tied to the petrodollar system.
- The sustainability of the petrodollar system is linked to Middle East geopolitics….
The Rise & Fall of Bretton Woods
Being victorious in WWII and possessing the overwhelmingly largest gold reserves in the world (around 20,000 tonnes) allowed the U.S. to reconstruct the global monetary system with the dollar at its center in what was known as the Bretton Woods international monetary system. Simply put, the Bretton Woods system was an arrangement whereby a country’s currency was tied to the U.S. dollar through a fixed exchange rate, and the U.S. dollar itself was tied to gold at a fixed exchange rate. Countries accumulated dollars in their reserves to engage in international trade or to exchange them with the U.S. government at the official rate for gold ($35 an ounce).
By the late 1960s, exuberant spending from welfare and warfare, combined with the Federal Reserve monetizing the deficits, drastically increased the number of dollars in circulation in relation to the gold backing it and, naturally, this caused countries to accelerate their exchange of dollars for gold at the official price. The result was a serious drain in the U.S. gold supply (20,000 tonnes at the end of WWII to around 8,100 tonnes in 1971, a figure supposedly held constant to this day) so, on August 15, 1971, Nixon officially ended convertibility of the dollar for gold to halt the gold outflow. The U.S. defaulting on its promise to back the dollar with gold ended the Bretton Woods system.
The central justification that the gold–backed dollar had provided as to why countries held the dollar in their reserves and used it as a medium of international trade was now gone. With the dollar no longer convertible into gold, demand for dollars by foreign nations was sure to fall and with it, its purchasing power.
The Advent of the Petrodollar
OPEC passed numerous resolutions after the end of Bretton Woods, stating the need to retain the real value of its earnings (including discussions about accepting gold for oil), which resulted in the cartel significantly increasing the nominal dollar price of oil in the wake of August 15, 1971.
If the dollar was to sustain its status as the world’s reserve currency, a new arrangement would have to be constructed to give foreign countries a compelling reason to hold and use dollars and Nixon and Kissinger succeeded in retaining the dollar’s premier status by bridging the gap between the failed Bretton Woods system and the emerging petrodollar system.
Between the years of 1972 to 1974 the U.S. government completed a series of agreements with Saudi Arabia to create the petrodollar system. Saudi Arabia was chosen because of its vast petroleum reserves, its dominant influence in OPEC, and the (correct) perception that the Saudi royal family was corruptible.
In essence, the petrodollar system was an agreement that, in exchange for the U.S. guaranteeing the survival of the House of Saud regime by providing a total commitment to its political and security support, Saudi Arabia would:
- Use its dominant influence in OPEC to ensure that all oil transactions would be conducted only in U.S. dollars.
- Invest a large amount of its dollars from oil revenue in US Treasury securities and use the interest payments from those securities to pay U.S. companies to modernize the infrastructure of Saudi Arabia.
- Guarantee the price of oil within limits acceptable to the U.S. and act to prevent another oil embargo by other OPEC members.
The Importance of the Petrodollar System
The need to use dollars to transact in oil, the world’s most traded and most strategic commodity, provides a very compelling reason for foreign countries to keep dollars in their reserves. For example, if Italy wants to buy oil from Kuwait, it has to first purchase U.S. dollars on the foreign exchange market to pay for the oil, thus creating an artificial market for U.S. dollars that would not have otherwise naturally existed. This demand is artificial, since the U.S. dollar is just a middleman in a transaction that has nothing to do with a U.S. product or service. It ultimately translates into:
- increased purchasing power and a deeper, more liquid market for the U.S. dollar and Treasuries…and
- the unique privilege of the U.S. not having to use foreign currency but rather using its own currency, which it can print, to purchase its imports, including oil.
The benefits of the petrodollar system to the U.S. dollar are indeed difficult to overstate.
The Weakening of the Petrodollar System
The geopolitical sands of the Middle East have been rapidly shifting as evidenced by:
- The faltering strategic regional position of Saudi Arabia,
- the rise of Iran which is notably not part of the petrodollar system,
- failed U.S. interventions, and
- the emergence of the BRICS countries providing potential future alternative economic/security arrangements
and all affect the sustainability of the petrodollar system.
The relationship between the U.S. and Saudi Arabia is deteriorating. The Saudis are furious at what they perceive to be the U.S. not holding up its part of the petrodollar deal. They believe that, as part of the US commitment to keep the region safe for the monarchy, the U.S. should have attacked their regional rivals, Syria and Iran, by now. This would suggest that they may feel that they are no longer obliged to uphold their part of the deal, namely selling their oil only in U.S. dollars.
The Saudis have even gone so far as to suggest a “major shift” is underway in their relations with the U.S.. To date, though, they have yet to match actions to their words, which suggests it may just be a temper tantrum or a bluff. In any case, it is truly unprecedented language and merits further watching. A turning point may really be reached when you start hearing U.S. officials expounding on the need to transform the monarchy in Saudi Arabia into a “democracy” but don’t count on that happening as long as their oil is flowing only for US dollars.
It was evident long before Nixon closed the gold window and ended the Bretton Woods system on August 15, 1971, that a paradigm shift in the global monetary system was inevitable. Likewise today, a paradigm shift in the global monetary system also seems inevitable.
By considering Ron Paul’s words, “We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or euros” we will know when the dollar collapse is imminent.
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
Today, more than 60% of all foreign currency reserves in the world are in U.S. dollars – but there are big changes on the horizon…Some of the biggest economies on earth have been making agreements with each other to move away from using the U.S. dollar in international trade…[and this shift] is going to have massive implications for the U.S. economy. [Let me explain what is underway.] Words: 1583
The American dollar will be overthrown…in as short a period as 5 to 10 years says one analyst while another believes it will happen as early as 2015, 2016 latest. Here’s why.
Technically the U.S. left the gold standard in 1971 but, in reality, we abandoned it in 1913 with the creation of the Fed…setting the stage for the collapse of the dollar. [Given that this is] the 100th anniversary of the creation of the Federal Reserve, it seems only fitting that we should present a brief history of the U.S. dollar debasement since then.
We are on the precipice of enormous financial and economic change. It is not change for the good, especially for the United States. Excesses and mis-allocated resources of several generations are about to be exposed as modern industrial nations sink deeper into the economic hole they have dug for themselves. The purging of these economic mistakes will be painful, could create new wars as politicians attempt to deflect blame and may end up changing the political form of government in some countries. (Words: 364; Charts: 1)
A major portion of the U.S. dollar’s valuation stems from its lock on the oil industry and if it loses its position as the global reserve currency the value of the dollar will decline and gold will rise. Iran’s migration to a non-dollar based international trade system is the testing of the waters of a non-USD regime…transition to a world in which the U.S. Dollar suddenly finds itself irrelvant. [Let me explain.] Words: 1200
Conspiracy theory notwithstanding, claims that the reserve status of the U.S. dollar unfairly benefits the U.S. are no longer true. On the contrary, it has become a burden, both for America and the world. [Let me explain.] Words: 825
China and Russia have announced that they intend to stop using the U.S. dollar and begin to pay for trade between their two countries in renminbi and rubles, respectively, from now on. It begs the following question: Will the OPEC countries of the Middle East follow suit in abandoning the U.S. dollar? Words: 614
Those in the U.S. power structure know what the plan is if the U.S. dollar should fail. They are not admitting publically that there is even the remotest chance that it could happen but, rest assured, there is a plan. There is always a plan. To paraphrase Franklin Roosevelt, nothing happens by chance in government, so don’t be caught up in such a ‘surprise’ event – whatever it may be and whenever it occurs. Words: 1345
Within the recent retracement of the U.S. currency there has been endless speculation about the future role of the dollar as the world’s primary reserve currency. Moreover, there has even been conjecture that the dollar will no longer exist at some point in the near future but any case made for the vulnerability of the dollar falls short when it comes to naming alternatives. Words: 631
I came to the conclusion several years ago that it was just a matter of time before the world realized that the relative functionality of the U.S. dollar was about to go belly up – to collapse – and that that time happened… Words: 881
What would happen if someday the rest of the world decides to reject the U.S. dollar and that process suddenly reversed and a tsunami of U.S. dollars come flooding back to this country? It is frightening to think about. Just take a moment and think of the worst superstorm that you can possibly imagine, and then replace every drop of rain with a dollar bill. The giant currency superstorm that will eventually hit this nation will be far worse than that. Read More »