JimBowie1958
Old Fogey
- Sep 25, 2011
- 63,590
- 16,797
- 2,220
The Saudis have us by the proverbial short hairs. If they end OPECs restriction to buy oil only with US dollars, then hyperinflation would destroy our economy. The Saudis are the main reason that hyperinflation has not hit us yet, and with the entire world dropping the USD reserves, hyperinflation is a certainty if the Saudis drop us.
Non-Dollar Trading Is Killing the Petrodollar -- And the Foundation of U.S.-Saudi Policy in the Middle East
The dollarâs role as the worldâs reserve currency was first established in 1944 with the Bretton Woods agreement. The U.S. was able assume this role by virtue of it then having the largest gold reserves in the world. The dollar was pegged at $35 an ounce â and freely exchangeable into gold at that rate. But by 1971, convertibility into gold was no longer viable as Americaâs gold resources drained away. Instead, the dollar became a pure fiat currency (decoupled from any physical store of value), until the petrodollar agreement was concluded by President Nixon in 1973.
The essence of the deal was that the U.S. would agree to military sales and defense of Saudi Arabia in return for all oil trade being denominated in U.S. dollars.
As a result of this agreement, the dollar then became the only medium in which energy exchange could be transacted. This underpinned its reserve currency status through the need for foreign governments to hold dollars; recirculated the dollar costs of oil back into the U.S. financial system and â crucially â made the dollar effectively convertible into barrels of oil. The dollar was moved from a gold standard onto a crude oil standard.
U.S. interest rates were then managed so that oil exporters (who formerly looked to gold as the basis of their reserves) would be indifferent to whether they stored their currency reserves, earned from oil exports, in U.S. treasuries, or in gold. The value was equivalent.....
The Fed consistently managed Fed funds rates to keep oil prices steady, even when it required mid-teens interest rates and back-to-back recessions in 1980-1982. Since U.S. Fed funds rates were managed to preserve U.S. creditorsâ and oil exportersâ purchasing power in oil terms, the system proved acceptable to most nations.
While the petrodollar arrangement worked well for nearly 30 years, the arrangement began to wobble around 2002-2004. . . Oil prices began steadily rising in 2002 and 2003 while Fed funds rates remained low to mitigate the fallout from the 2001 U.S. recession/tech bubble.
As a result, the number of barrels of oil that could be purchased for a face value U.S. Treasury bond declined sharply. . . After maintaining a range of 55-60 barrels of oil per U.S. Treasury from 1986-1999, a $1,000 face value U.S. Treasury went from buying 60 barrels of oil in 1999 to under 30 by early 2004.
....
But what may ultimately be seen to have proved fateful to the petrodollar system has been the policy of zero interest rate policy and âquantitative easingâ pursued so unrestrainedly since 2008. Effectively, energy producers saw that the U.S. economy had now become so dependent on low interest rates that it could never again manage to keep oil prices steady relative to U.S. treasuries without blowing up the global financial system. The U.S. economy had now become too âfinancializedâ to withstand anything more than a token interest rate hike.
The petrodollar system, which had allowed the U.S. dollar to supplant gold as the backing for the oil trade from 1973-2002, was broken.
Energy producers began to accumulate real assets (such as real estate), and returned to purchasing physical gold in lieu of U.S. treasuries. Finally this year, the long established re-circulation of petrodollars back into the U.S. financial system came to an end â according to BNP....
This then, is the backdrop to Putinâs remarks about the dollar monopoly and against which he is likely to craft his response to Saudi Arabiaâs decision to message the market into accepting that the Kingdom would not defend $100 oil, but will be content to see the price drop 30 percent. (And whatever the market circumstances â and other Saudi objectives â that may have contributed to the fall in price, there is little doubt thatââoil price warâ is the interpretation that President Putin will place on it).
This new oil price drop simply is crushing producersâ currencies in foreign exchange markets. The combination of the petrodollar losing its ability to act as a store of value, combined now with exchange rate blues, may be the straw that breaks the producer âcamelâs backâ in respect to OPEC and dollar denomination.
http://www.wallstreetdaily.com/2016/05/30/u-s-saudi-arabia-petrodollar/
There are, perhaps, fewer more importantâ or more delicate â relationships between countries than the one between the United States and Saudi Arabia.
The very reason the U.S. dollar is the worldâs reserve currency dates back to a deal struck in 1971 between Secretary of State Henry Kissinger and the Saudis, during which the petrodollar was brought into existence.
The U.S. promised to always protect the House of Saud â militarily. In exchange, the Saudis would only accept dollars for their oil. Under Saudi pressure, all of OPEC soon followed suit.
This meant every nation on the planet needed dollars if they wanted oil.
Currently, however, this crucial relationship is arguably at its least stable since the birth of the petrodollar.
This discontent was blatantly obvious during President Obamaâs recent visit to Saudi Arabia.
Despite tradition dictating that government leaders show their respect for visiting foreign diplomats â with the U.S. President being the most revered in the world â Obama was not greeted at the airport by Saudi Arabiaâs King Salman.
Further, Saudi TV and media pretty much ignored his visit which would, anywhere else, have been great cause for publicity and excitement.
This diplomatic slight was likely the result of the President having referred to the Saudis as âfree-ridersâ in an interview with The Atlanticin March.
Dangerous Politics
The tension between the two countries further increased recently, thanks to the passing of a bill by the Senate â the Justice Against Sponsors of Terrorism Act (JASTA) â which would allows the families of the victims of 9/11 to sue Saudi Arabia, pending the verdict as to whether any of the countryâs officials were involved in the 2001 terrorist attacks.
This means, if even a single low-ranking government clerk is found to have been involved, Saudi Arabia could be sued by each and every American family that lost someone that day.
While there is a loophole that the Secretary of State may only engage âin good faith discussionsâ with the defendant concerning the resolution of claims to satisfy the law, Saudi Arabia stands to lose a significant sum of money in compensation for pain and suffering â not to mention the stain on the countryâs reputation on an international scale.
The Saudis are fuming hotter than the sands in the Arabian Desert on a sultry summer day.
Between Obamaâs remarks and the potential legal trouble, Saudi Arabia is losing its faith in its bond with the U.S.A.
Another key part of that distrust stems from the U.S. lifting sanctions against its rival, Iran.
Further, Saudi Arabian bigwigs feel that the U.S. did virtually nothing to save its long-time Sunni partner, Hosni Mubarak â the former President of Egypt who was forcibly removed from office and subsequently convicted of corruption in 2015. This has given the Saudis cause to wonder whether theyâre the next Sunni regime to be dumped by the U.S.
It is, however, the 9/11 bill that has been causing the most turmoil lately.
As soon as it became international news, the Saudi media had a field day. One daily Saudi newspaper, Okaz, blared the headline: âCongressâ Satanic Deed Opens the Gates of Hell for the Worldâs Largest Country.â You donât even have to read between the lines to see how the nation feels about the United States.
If the Saudis abandon the USD, it is a one time kick in the balls that they can never repeat, but why wait until it is too late to stop them from doing it?
Let us return the USD to being the value of a commodity, in this case a basket of commodities that we get to decide which is used at the time the USD is redeemed. We could use a combination of precious metals (gold silver, platinum, palladium, copper, nickel) along with along with every other metal mined.
So if France pulls some nonsense demanding redemption, we shop them 2,000 barges loaded with lead, etc.
We must do something to prevent the Saudis from destroying our economy by destroying the US dollar.
Non-Dollar Trading Is Killing the Petrodollar -- And the Foundation of U.S.-Saudi Policy in the Middle East
The dollarâs role as the worldâs reserve currency was first established in 1944 with the Bretton Woods agreement. The U.S. was able assume this role by virtue of it then having the largest gold reserves in the world. The dollar was pegged at $35 an ounce â and freely exchangeable into gold at that rate. But by 1971, convertibility into gold was no longer viable as Americaâs gold resources drained away. Instead, the dollar became a pure fiat currency (decoupled from any physical store of value), until the petrodollar agreement was concluded by President Nixon in 1973.
The essence of the deal was that the U.S. would agree to military sales and defense of Saudi Arabia in return for all oil trade being denominated in U.S. dollars.
As a result of this agreement, the dollar then became the only medium in which energy exchange could be transacted. This underpinned its reserve currency status through the need for foreign governments to hold dollars; recirculated the dollar costs of oil back into the U.S. financial system and â crucially â made the dollar effectively convertible into barrels of oil. The dollar was moved from a gold standard onto a crude oil standard.
U.S. interest rates were then managed so that oil exporters (who formerly looked to gold as the basis of their reserves) would be indifferent to whether they stored their currency reserves, earned from oil exports, in U.S. treasuries, or in gold. The value was equivalent.....
The Fed consistently managed Fed funds rates to keep oil prices steady, even when it required mid-teens interest rates and back-to-back recessions in 1980-1982. Since U.S. Fed funds rates were managed to preserve U.S. creditorsâ and oil exportersâ purchasing power in oil terms, the system proved acceptable to most nations.
While the petrodollar arrangement worked well for nearly 30 years, the arrangement began to wobble around 2002-2004. . . Oil prices began steadily rising in 2002 and 2003 while Fed funds rates remained low to mitigate the fallout from the 2001 U.S. recession/tech bubble.
As a result, the number of barrels of oil that could be purchased for a face value U.S. Treasury bond declined sharply. . . After maintaining a range of 55-60 barrels of oil per U.S. Treasury from 1986-1999, a $1,000 face value U.S. Treasury went from buying 60 barrels of oil in 1999 to under 30 by early 2004.
....
But what may ultimately be seen to have proved fateful to the petrodollar system has been the policy of zero interest rate policy and âquantitative easingâ pursued so unrestrainedly since 2008. Effectively, energy producers saw that the U.S. economy had now become so dependent on low interest rates that it could never again manage to keep oil prices steady relative to U.S. treasuries without blowing up the global financial system. The U.S. economy had now become too âfinancializedâ to withstand anything more than a token interest rate hike.
The petrodollar system, which had allowed the U.S. dollar to supplant gold as the backing for the oil trade from 1973-2002, was broken.
Energy producers began to accumulate real assets (such as real estate), and returned to purchasing physical gold in lieu of U.S. treasuries. Finally this year, the long established re-circulation of petrodollars back into the U.S. financial system came to an end â according to BNP....
This then, is the backdrop to Putinâs remarks about the dollar monopoly and against which he is likely to craft his response to Saudi Arabiaâs decision to message the market into accepting that the Kingdom would not defend $100 oil, but will be content to see the price drop 30 percent. (And whatever the market circumstances â and other Saudi objectives â that may have contributed to the fall in price, there is little doubt thatââoil price warâ is the interpretation that President Putin will place on it).
This new oil price drop simply is crushing producersâ currencies in foreign exchange markets. The combination of the petrodollar losing its ability to act as a store of value, combined now with exchange rate blues, may be the straw that breaks the producer âcamelâs backâ in respect to OPEC and dollar denomination.
http://www.wallstreetdaily.com/2016/05/30/u-s-saudi-arabia-petrodollar/
There are, perhaps, fewer more importantâ or more delicate â relationships between countries than the one between the United States and Saudi Arabia.
The very reason the U.S. dollar is the worldâs reserve currency dates back to a deal struck in 1971 between Secretary of State Henry Kissinger and the Saudis, during which the petrodollar was brought into existence.
The U.S. promised to always protect the House of Saud â militarily. In exchange, the Saudis would only accept dollars for their oil. Under Saudi pressure, all of OPEC soon followed suit.
This meant every nation on the planet needed dollars if they wanted oil.
Currently, however, this crucial relationship is arguably at its least stable since the birth of the petrodollar.
This discontent was blatantly obvious during President Obamaâs recent visit to Saudi Arabia.
Despite tradition dictating that government leaders show their respect for visiting foreign diplomats â with the U.S. President being the most revered in the world â Obama was not greeted at the airport by Saudi Arabiaâs King Salman.
Further, Saudi TV and media pretty much ignored his visit which would, anywhere else, have been great cause for publicity and excitement.
This diplomatic slight was likely the result of the President having referred to the Saudis as âfree-ridersâ in an interview with The Atlanticin March.
Dangerous Politics
The tension between the two countries further increased recently, thanks to the passing of a bill by the Senate â the Justice Against Sponsors of Terrorism Act (JASTA) â which would allows the families of the victims of 9/11 to sue Saudi Arabia, pending the verdict as to whether any of the countryâs officials were involved in the 2001 terrorist attacks.
This means, if even a single low-ranking government clerk is found to have been involved, Saudi Arabia could be sued by each and every American family that lost someone that day.
While there is a loophole that the Secretary of State may only engage âin good faith discussionsâ with the defendant concerning the resolution of claims to satisfy the law, Saudi Arabia stands to lose a significant sum of money in compensation for pain and suffering â not to mention the stain on the countryâs reputation on an international scale.
The Saudis are fuming hotter than the sands in the Arabian Desert on a sultry summer day.
Between Obamaâs remarks and the potential legal trouble, Saudi Arabia is losing its faith in its bond with the U.S.A.
Another key part of that distrust stems from the U.S. lifting sanctions against its rival, Iran.
Further, Saudi Arabian bigwigs feel that the U.S. did virtually nothing to save its long-time Sunni partner, Hosni Mubarak â the former President of Egypt who was forcibly removed from office and subsequently convicted of corruption in 2015. This has given the Saudis cause to wonder whether theyâre the next Sunni regime to be dumped by the U.S.
It is, however, the 9/11 bill that has been causing the most turmoil lately.
As soon as it became international news, the Saudi media had a field day. One daily Saudi newspaper, Okaz, blared the headline: âCongressâ Satanic Deed Opens the Gates of Hell for the Worldâs Largest Country.â You donât even have to read between the lines to see how the nation feels about the United States.
If the Saudis abandon the USD, it is a one time kick in the balls that they can never repeat, but why wait until it is too late to stop them from doing it?
Let us return the USD to being the value of a commodity, in this case a basket of commodities that we get to decide which is used at the time the USD is redeemed. We could use a combination of precious metals (gold silver, platinum, palladium, copper, nickel) along with along with every other metal mined.
So if France pulls some nonsense demanding redemption, we shop them 2,000 barges loaded with lead, etc.
We must do something to prevent the Saudis from destroying our economy by destroying the US dollar.
