I just read this article by William Engdahl explaining the petro-dollar. I think I get it but I'm still fuzzy on the subject and would like to bounce my comprehension off of you guys to see if I'm really getting it. In this article, Hans Hoppe explains how the dollar reserve system, originally architected in the Bretton-Woods agreement, allowed the US to export its inflation onto subject nations. I think Engdahl is making the case that the US has been doing something similar since the 1970's through oil reserves.
Oil is a lot like gold; it is even called black gold. Its primary differences, as regards its capacity to act as a currency, is that it is of too low a value to be used in individual transactions and it is more difficult (and costly) to store. But, in bulk quantities - like those used by central banks and national governments in manipulating the price of gold - oil is very much like gold.
In 1934, the US government statutorily banned gold ownership and orchestrated the largest single gold heist in history, seizing the gold of US citizens giving them paper exchangeable at a little more than 60% of the market value of the stolen gold. The purpose was to force Americans to use the Federal Reserve's paper money exclusively which could not be inflated very rapidly so long as it was redeemable in gold and gold was allowed to circulate alongside of it. Once the government and central bank held all the gold, the internal checks on inflation were removed. The only limitation now was the dollar's convertibility into gold by foreign central banks.
Basically, if the commodity which acts as a "reserve" or "settlement of accounts" between central banks or nations is out of reach of the populace, then the populace is at the mercy of the printing press which can be used to devalue the paper they are forced to hold in lieu of real commodity reserves. But this is as true of vassal central banks as it is of the populace - central banks under the umbrella of American power must submit to using dollars instead of gold as a reserve, depositing their gold for "safekeeping" by the Federal Reserve which then forces the subject economy to bear American inflation proportionally to the size of dollar reserves held by their ruling central bank. The essence of monetary imperialism is to force the subjects to use the substitute instead of the backing commodity in exchanges, reserving the commodity for balance of payments between the "big boys", that is, between ruling central banks.
To translate this to oil, if oil is (almost) only sold in dollars, the oil itself is acting as a kind of commodity reserve backing for dollars. You can exchange dollars for oil (instead of gold) at any time. This makes dollars valuable like being able to exchange dollars for gold used to make dollars valuable. But since dollars are still fiat, no subject central bank or American can bring their dollars into the US government or Federal Reserve and ask for payment in gold or oil or anything else. Hence, the Federal Reserve is still free to print as many dollars as it likes without fear of a central bank run - as it did in 1968-1971 by the French and British - yet it is forcing the nations with oil reserves to act as commodity backers for dollars. It's almost like we've forced Saudi Arabia and other subject nations to pump their oil, store it in tankers at the Federal Reserve vault in exchange for dollar reserves, and then allowed oil purchasing nations to "redeem" their dollars in oil. In the process, we've exported our inflation onto the petrodollar nations.
So, the war in Iraq keeps oil from being denominated in other currencies - that is, it keeps other central banks from being able to use Iraqi oil as de facto commodity backing - just as the 1934 gold heist kept gold out of the hands of Americans.
Am I close to the mark or way off?
Clayton -
ClaytonB:... how does this spread the burden of dollar inflation, how does it help the central bank (Fed) inflate more rapidly?
Mandating payment in US dollars for oil raises the demand for US dollars above the free market rate. This artificial increase in demand allows an increase in the money supply to occur with a less noticeable decrease in the purchasing power of the dollar.
This disguises the effects of inflation and allows the central bank to inflate in a covert manner so as not to anger the market actors too quickly.
We are the soldiers for righteousnessAnd we are not sent here by the politicians you drink with - L. Dube, rip
ClaytonB: To translate this to oil, if oil is (almost) only sold in dollars, the oil itself is acting as a kind of commodity reserve backing for dollars.
To translate this to oil, if oil is (almost) only sold in dollars, the oil itself is acting as a kind of commodity reserve backing for dollars.
ClaytonB: So, the war in Iraq keeps oil from being denominated in other currencies - that is, it keeps other central banks from being able to use Iraqi oil as de facto commodity backing - just as the 1934 gold heist kept gold out of the hands of Americans.
Mate, you seem to be in a bit of a contradiction here. If all the oil would need to be sold in dollars for it to be able to act as a sort of backing for dollars, then it would be impossible for a minority of oil (the Iraqi oil) to act as a backing for the euro.
In reality it is not about commodity backing. It is about the legal tender effect. All currencies have monopolies on something. The only way to buy a bag of dates in Tehran is with rial, they are only denominated in rial. Iranian government forcing a date selling market vendor to only accept rial is exactly the same thing as the US pressuring oil exporting Kuwait to only accept dollar.
"Washington guaranteed that the world’s largest commodity, oil, the essential for every nation’s economy, the basis of all transport and much of the industrial economy, that oil could only be purchased in world markets in dollars. The deal had been fixed in June 1974 by Secretary of State Henry Kissinger, establishing the U.S.-Saudi Arabian Joint Commission on Economic Cooperation. The U.S. Treasury and the New York Federal Reserve would ‘allow’ the Saudi central bank, SAMA, to buy U.S. Treasury bonds with Saudi petrodollars. In 1975 OPEC officially agreed to sell its oil only for dollars. A secret U.S. military agreement to arm Saudi Arabia was the quid pro quo."
if the article isnt more "babies pulled from incubators" lies that squished out of bush's mouth in the 1990s it sounds like the us govts agreement to specify some dollars for saudi oil purchases are indeed backed by saudi oil, and or oil futures.
this article (or what ever it is) is old though.
"Until November 2000, no OPEC country dared violate the dollar price rule. So long as the dollar was the strongest currency, there was little reason to as well. But November was when French and other Euroland members finally convinced Saddam Hussein to defy the United States by selling Iraq’s oil-for-food not in dollars, ‘the enemy currency’ as Iraq named it, but only in euros...."
i was asking if it was true years ago and never got an honest reply back. you may not be able to get much understanding from lies.
contact your senator perhaps...if you really dont understand.
Marko: ClaytonB: To translate this to oil, if oil is (almost) only sold in dollars, the oil itself is acting as a kind of commodity reserve backing for dollars. ClaytonB: So, the war in Iraq keeps oil from being denominated in other currencies - that is, it keeps other central banks from being able to use Iraqi oil as de facto commodity backing - just as the 1934 gold heist kept gold out of the hands of Americans. Mate, you seem to be in a bit of a contradiction here. If all the oil would need to be sold in dollars for it to be able to act as a sort of backing for dollars, then it would be impossible for a minority of oil (the Iraqi oil) to act as a backing for the euro. In reality it is not about commodity backing. It is about the legal tender effect. All currencies have monopolies on something. The only way to buy a bag of dates in Tehran is with rial, they are only denominated in rial. Iranian government forcing a date selling market vendor to only accept rial is exactly the same thing as the US pressuring oil exporting Kuwait to only accept dollar.
Hmm, OK. So, it's not commodity backing so much as trying to extend the dollar's reach to as large a market as possible? I guess what I'm missing is how does this spread the burden of dollar inflation, how does it help the central bank (Fed) inflate more rapidly? This is the sole motivation for creating a fiat currency in the first place: inflation. Every action the central bank takes, or which the government takes on behalf of the central bank, is intended to enable it to inflate more rapidly.
Everybody is holding their FX reserves mostly in $. That removes $ from circulation. Foreign central banks have to inflate their currencies also to prevent devaluation of $ which would hurt their exports. So everybody is inflating at the same pace. US is able to run big trade deficit without $ sinking, which would happen with basically every other currency.
However, what currency the oil is traded is irrelevant. You can always exchange currencies before you buy oil. It's not the reason dollar is the reserve currency.
bbnet: ClaytonB:... how does this spread the burden of dollar inflation, how does it help the central bank (Fed) inflate more rapidly? Mandating payment in US dollars for oil raises the demand for US dollars above the free market rate. This artificial increase in demand allows an increase in the money supply to occur with a less noticeable decrease in the purchasing power of the dollar. This disguises the effects of inflation and allows the central bank to inflate in a covert manner so as not to anger the market actors too quickly.
Thank you!