After Nixon slammed the gold exchange window shut—on a Sunday morning in August 1971, a “what’s he talking about, Margo?” moment for most clueless Americans, the vast tectonic plates of global capitalism were forced to have a bowel movement.
It seemed the oil producing nations, not just formerly war-ravaged-Europe, liked to buy American gold too. Buying paper promises like bonds & stocks, was no real substitute-exchange for their tangible national product [oil], so they raised the price of their product. Less than 5 years later oil per barrel would cost 400% more; inflation in America soared.
Part A (“Bretton Woods”) was now over; Part B of the Petrodollar Imperium had begun. The ‘Imperium’ part; it would be based on a whole new paradigm.
With this 1 act, Nixon engineered an entirely new fiat-based, global currency system, who’s only real reference standard was dollar-specific. Via America’s control of the “swing producer”, KSA, the price of oil was now directly linked to a vaporous, non-oil, ephemeral quality: trust in Uncle Sam’s war-making abilities.
And to remind folks of the consequences of leaving the US dollar oil-carry-trade, there’d be Hell to pay. Iraq’s Saddam Hussein and Libya’s Col. Muammar al-Gaddafi were absent from school that day.
That’s all that backs the US Dollar. It’s directly tied to our credibility for, and willingness to use, a can of American military Whoop-Ass.
But a lot of folks were getting a great ride on this arrangement (as always), who don’t want it to end. Especially the military-industrial complex. Mr. Trump has tried to disabuse them of that continued idea. Endless wars for a pluralistic democracy, and more importantly, emerging warfare technologies, make it even more dangerous.
We still have the problem of the “Petrodollar”; serious trading partners have said this cannot go on. They produce, or purchase between them, large quantities of O&G (oil & gas). And they refuse to buy & sell US dollars for it.
There are also some bitter historic resentments we need to pay attention to that just won’t go away. It’s the “big narrative” for both China and Russia.
Anything today that happens with oil invariably gets back to the oil-carry-trade between these two. It’s gigantic, and will only continue to grow.
In the Gilded Age, Mark Twain once said, “put all your eggs in 1 basket and watch that basket!”; as for Part B of the Petrodollar Imperium, now almost 50 years old, it’s coming to an end. The emergence of hypersonic weaponry changes everything.
If one $25 million hypersonic missile takes out a $60 billion US supercarrier with men & material, you’ll want to run to the store and buy as much booze as possible. Within days, it will be worth more than all your ‘paper investments’.
It just might be the Greek philosopher Heraclitus was right, “War is the father of all things”.
Sellers is a South Park Republican who lives in incorporated Oro Valley. His background is federal tech-transfer commercialization.