Currency-Central.com -- 3/10/2024 -- The Petro Dollar was a brilliant structure implemented by Nixon + Kissinger in the early 1970s, and was one of the key legs maintaining the table holding up the US Dollar and it's Global Hegemony. Modern politicians rarely grasp the brilliance of the Petro Dollar and are ungrateful regarding the value this created establishing the US as a sole- Monopoly Superpower in the world. In the book Splitting Pennies we explain that the US Dollar is in fact backed by the US Military, and the US Government. It's not as some claim 'backed by nothing' - their argument is what is known in logic as 'slippery slope' - its contrasting the fact that there is no Gold that's redeemable for USD which 'backs' the currency (fact) with the false assumption that there is nothing but 'vapor' underlying the asset, which couldn't be further from the truth. The US Dollar has remained a Global Currency which has been traditionally accepted in any country ranging to G8 nations and third world countries. Even US enemies have used the US Dollar, such as Cuba, have black markets where local shops will accept USD in favor of the local currency because it's usually inflated down to nothing.
The Petro Dollar mechanism is a political agreement that the Arab countries agree to sell Oil to us and price it in US Dollars. This means that other countries who produce Oil, like Russia, have a constant supply of USD because it became the standard for Oil sales. The US has plenty of Oil in reserves, the point is that why should we deplete our reserves which can only be used once, when we can print paper and have the Arabs send us Oil for free? As part of the agreement, they also invest in US markets, and we supply them with weapons. Forget the individual agreements that were signed, this is a system that works and the US forces (i.e. the banks, the CIA, the White House) support it. It works until this day. Among other benefits to the US, it provides natural support for the US Dollar. For those who want to purchase Oil, they must first purchase US Dollars, so there is a consistent demand in the market, where you have billions of US Dollar purchases per day.
Combined with this backed by nothing argument, many claim that foreigners are buying up US Debt and could collapse the US economy by dumping the debt en-masse in the market (selling). This is another ridiculous notion because a) the US can simply print more money and pay off the debt, buy it back, this is called "Monetization" b) The US Government does not need foreigners to buy Government debt, because it has a mechanism with the Fed that they have an unlimited supply of debt based money as needed. Or in other words, the Fed is a guaranteed buyer of Government debt, and they have unlimited pockets. So there doesn't need to be actual buyers of the debt.
But there is a greater issue that's been percolating since 2022 and that's the US has started importing inflation. As an FX analyst, the War in Ukraine seems like a ruse to sell weapons and destroy the US currency. When the US imposed sanctions on Russia, these sanctions were actually much more than that, it was a total blockade of Russia and their allies. FX brokers removed the Russian Ruble from their trading platforms. Payment providers like Western Union stopped sending money to Russia. The Iron Curtain was back. Before Sanctions, Russia's purchase of Chinese Yuan was about 2% of GDP, now it's about 40%. Russians have a natural neighbor in China and are happy to shift the business there, but it's strange that the US forced them to do so.
This shift away from the US Dollar went far beyond Russia, and has even become prominent in US trading partner Mexico. What this means for US consumers is more expensive products in the store, because inflation is not being absorbed by the Commodity countries (the BRICs, OPEC, etc.). As noted by Zoltan Posar, who has emerged as the only public figure that understands the math behind Currencies (or who is willing to admit it publicly), the US Dollar Global Regime has been fragmented into an East/West paradigm with the Western G8 Currencies being inflationary while the Eastern currencies and BRICS are mostly commodity based. The West can't inflate their way out of the Oil trap UNLESS we open up all the US Domestic reserves and Drill Drill Drill, which isn't happening. The result of these policies is extreme inflation on commodities and in the real economy, bolstered by the fact that US infrastructure is designed that an average Tomato travels 1500 miles by truck before reaching it's dinner table - all powered by Oil.
US Oligarchs are happy with this arrangement because inflation always bubbles up their balance sheets. On paper, sales are higher, markets are generally higher, and growth is positive. But in reality, those paper gains are just a measure of inflation - it isn't their net worth going up it's the US Dollar going down. The test is, how much does the US Dollar buy you? What's the buying power of US Dollars domestically?
The argument about a strong or weak US Dollar has never been one sided. Importers want a strong US dollar and Exporters want a weak US Dollar, and both sides make arguments to cater to their own interests - but what's happening now is toxic to both, because it's not markets that are making prices higher, it's inflation. Or in other words, that value is being sucked up by the inflation it isn't being passed on to the Oligarchs - it's being vaporized. Whether you are looking at housing, groceries, or buying a business - you are getting less for your money than you did 2 years ago, and we can't say a number because there's not enough data to calculate (and based on what method?). Some will say 10%, some will say 50%, but we all agree that the last 2 years have been more inflationary than any other period in recent history.
Traditionally the issue with the USD is that since 90% of other currencies use the USD to 'back' their currencies (meaning they keep USD in reserve), for SWAP agreements, and to value their Currencies - the US system exports inflation to those Currencies. Russia is not the only country that uses USD reserves, in fact many central banks keep US Dollars in their reserves to shore up their balance sheets. Many major Currencies are priced in USD, such as USD/JPY (Dollar / Yen) - and so their value is often quoted as how they are doing against the other. Because the USD is the most commonly used Currency in the world, the absorbing of this inflation due to Blacklisting the Commodity Currencies is having a uniquely toxic effect on the USD. Foreigners have stopped buying it, and that's causing the price to go down, which means the net effect is the purchasing power of the USD is going down.
Of course there's a simple cure for this, end the Sanctions and raise rates, but that's not likely to happen in this Administration.
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