Yesterday I mentioned in one tweet what we know as ‘currency’ or money has degenerated into a worthless, secretive ‘fiat’ currency that are in digital form in computers upon which the rulers ask citizens to rely and carry on their commodity transactions.
It started with Kublai Khan of China in 1260 and had now been corrupted into a two dimensional computer entry system throughout the world and perfected into law in India by the euphemistic ‘DEMONETIZATION’ creep. Let me explain more of this ‘fiat’ money & the ‘cryptocurrency’.
We all know that originally a medium of money was introduced to exchange bulky commodities that were previously exchanged through barter.
To eliminate the cumbersomeness of this barter exchange coins made of gold or silver were first introduced and then they were replaced by paper money that represented the gold coins and could be exanged for the precious metal by submitting to the paper to the bank.
As money got replaced by paper in place of gold or silver, those precious metals that were available in short supply owing to their being prone to hoarding and thus increasing in value in terms of commodity exchange, paper money took the wind out of it as ‘money’.
So unlike the metals the paper money could be printed at will by any govt and created havoc in commodity exchange. So as the World War II was still raging, 730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, U.S., concluded, for the United Nations Monetary and Financial Conference, also known as the Bretton Woods Conference. The delegates deliberated during 1–22 July 1944, and signed the Bretton Woods agreement on its final day.
It Set up a system of rules, institutions, and procedures to regulate the international monetary system, the accords established the International Monetary Fund (IMF) & International Bank for Reconstruction and Development (IBRD), which today is part of the World Bank Group.
The Bretton Woods system. Conference attendees had hoped that this new system would “ensure exchange rate stability, prevent competitive devaluations, and promote economic growth.” It became fully operational only in 1958.
Countries now settled their international accounts in dollars that could be converted to gold at a fixed exchange rate of $35 per ounce, which was redeemable by the U.S. government.Thus, the United States was committed to backing every dollar overseas with gold, and other currencies were pegged to the dollar. It is because U.S. owned over half the world’s official gold reserves—574 million ounces at the end of World War II—the system appeared secure.
For the first years after World War II, the Bretton Woods system worked well. With the Marshall Plan, Japan and Europe were rebuilding from the war, and countries outside the US wanted dollars to spend on American goods—cars, steel, machinery, etc.
Germany and Japan recovered, resulting in the US share of the world’s economic output dropped significantly, from 35% to 27%.A negative balance of payments, growing public debt incurred by the Vietnam War, and monetary inflation by the Federal Reserve caused the dollar to become increasingly overvalued in the 1960s.
It resulted in an “asymmetric financial system” where non-US citizens “see themselves supporting American living standards and subsidizing American multinationals” an accusation the Trump Administration is hurling at other countries now and resorted to imposing tariffs.
As American economist Barry Eichengreen summarized: “It costs only a few cents for the Bureau of Engraving and Printing to produce a $100 bill, but other countries had to pony up $100 of actual goods in order to obtain one” (!)
The resentment started. In February 1965 President Charles de Gaulle of France announced his intention to exchange its U.S. dollar reserves for gold at the official exchange rate.
By 1966, non-US central banks held $14 billion, while the United States had only $13.2 billion in gold reserve. Of those reserves, only $3.2 billion was able to cover foreign holdings as the rest was covering domestic holdings.
By 1971, the money supply had increased by 10%. In May 1971, West Germany left the Bretton Woods system, unwilling to revalue the Deutsche Mark. In the following 3 months, this move strengthened its economy. Simultaneously, the dollar dropped 7.5% against the Deutsche Mark.
Other nations began to demand redemption of their dollars for gold. Switzerland redeemed $50 million in July. France acquired $191 million in gold.
On August 5, 1971, the U.S. Congress suggested devaluation of the dollar, in an effort to protect the dollar against “foreign price-gougers”.
On August 9, 1971, as the dollar dropped in value against European currencies, Switzerland left the Bretton Woods system. The pressure began to intensify on the United States to leave Bretton Woods.
At the time, the U.S. also had an unemployment rate of 6.1% (August 1971) and an inflation rate of 5.84%. The then President Nixon rose to nullify the exchange of dollar to gold. He also order wage and price freeze for 3 months to counter inflation.
This effectively put a dent on the importation of foreign commodities such as cars. It was cheaper to buy made in America and this in turn increased the employment and availability of goods bringing down the prices.
This caused an economic mixed bag in bringing on the stagflation of the 1970s and leading to the instability of floating currencies. The dollar plunged by a third during the 1970s.
Douglas Irwin reported that for several months, U.S officials could not get other countries to agree to a formal revaluation of their currencies. The German Mark appreciated significantly after it was allowed to float in May 1971.Further, the Nixon Shock unleashed enormous speculation against the dollar. It forced Japan’s central bank to intervene significantly in the foreign exchange market to prevent the yen from increasing in value.Within two days August 16–17, 1971, Japan’s central bank had to buy $1.3 billion to support the dollar and keep the yen at the old rate of 360 Yen to the dollar.Japan’s foreign exchange reserves rapidly increased: $2.7 billion (30%) a week later and $4 billion the following week. Still, this large-scale intervention by Japan’s central bank could not prevent the depreciation of US dollar against the yen.
France also was willing to allow the dollar to depreciate against the franc, but not allow the franc to appreciate against gold.
Volcker said. “The Europeans couldn’t live with the uncertainty and made their own currency and now that’s in trouble.
The Federal Reserve had the duty to keep and guard gold reserve in support of the dollar and suddenly that role vanished. It is left to your imagination as to what would have happened to those gold reserves.
While a freely floating national money has advantages, however, it also has risks. For one thing, it can create uncertainties for international traders and investors. The currencies started shifting in exchange value minute by minute.
The costs of this volatility are hard to measure (partly because sophisticated financial markets allow businesses to hedge much of that risk), but they must be significant.
Furthermore, it is a system that leaves monetary managers free to do good also leaves them free to be irresponsible—and, in some countries, they have been quick to take the opportunity.
We will take up Petrodollar tomorrow.
What is Petrodollar?
The petrodollar is any U.S. dollar paid to oil-exporting countries in exchange for oil.
How did it begin?
The petrodollar system is tied to the history of the gold standard.
What is the history of gold standard?
Before World War II while the then developed countries made their wealth by plunder of their colonies and by trading with nations overseas, total anarchy reigned on the oceans with robbery, torpedoing, cannon bombing by enemy ships and even air raids.
Lots of vessels were sunk in this fashion and with them went down the waters thousands of soldiers, passengers, and the precious cargo.
When the war ended the need was felt that the sea-lanes are risk free so nations could trade with each other and prosper. The one country capable of policing the sea was the United States with its large armada of war-ships.
The U.S. was also the holder of more than half of world’s known gold. These two factors contributed to making the Americans the world’s policemen.
The 1944 Bretton Woods conference established the U.S. dollar as the world’s reserve currency because it could assure the backing of its dollar with gold.
Since the dollar is a global currency, all international transactions are priced in dollars. As a result, oil-exporting nations must receive dollars.
Most of the oil producing nations own their oil industries creating their primary revenue. That makes their national income dependent on the dollar’s value which was bacially strong then.
As a result, most of these oil exporters also peg their currencies to the dollar. That way, if the dollar’s value falls, so does the price of all their domestic goods and services. That helps these countries avoid wide swings in inflation or deflation.
The U.S. on its part agreed to redeem any U.S. dollar for its value in gold if the other countries pegged their currencies too to the dollar. When these countries increased their wealth the U.S. concurrently printed more dollars to match.
On February 14, 1945, President Franklin D. Roosevelt formalized an alliance with Saudi Arabia. He met with Saudi King Abd al-Aziz. The United States built an airfield at Dhahran in return for military and business training.
It also cemented the relationship between the dollar and oil. The petrodollar was born. This alliance was so critical that it survived differences of opinion over the Arab-Israeli conflict.
In 1971, U.S. stagflation (caused by its drain of dollars in Vietnam war) prompted the United Kingdom to redeem most of its U.S. dollars for gold. The return of the dollars and drain of their gold sparked what was known as stagflation – Stagnation and Inflation.
To stem the rot President Nixon removed the dollar from the gold standard to protect the remaining U.S. gold reserves.
As a result of huge amount of dollars returning to the U.S. the value of the dollar plummeted. The weaker dollar helped the U.S. economy as its export values also decreased, making them more competitive.
A falling dollar hurt oil-exporting countries because contracts were priced in U.S. dollars. Their oil revenue dropped along with the dollar. The cost of imports, denominated in other currencies, increased.In 1973, Nixon asked Congress for military aid to Israel in the Yom Kippur War. The newly-formed Organization of the Petroleum Exporting Countries halted oil exports to the United States and other Israeli allies.
The OPEC oil embargo quadrupled the price of oil in six months. Prices remained high even after the embargo ended. Thus the need arose to breakup the OPEC stronghold on oil prices.
In 1979, the United States and Saudi Arabia negotiated the United States-Saudi Arabian Joint Commission on Economic Cooperation. They agreed to use U.S. dollars for oil contracts. The U.S. dollars would be recycled back to America through contracts with the U.S. companies.
This agreement was possible only by the U.S. agreeing to protect the Saudi’s from any enemy attack. The OPEC countries felt the hurt.
Since then, oil-exporting countries have become more sophisticated. They now recycle their petrodollars through sovereign wealth funds. They use these funds to invest in non-oil related businesses.
The profits from these businesses make them less dependent on oil prices. Here are the world’s largest petrodollar recyclers ranked by assets:Norway Government Pension Fund –$1.073 trillion.
U.A.E. Abu Dhabi Investment Authority–$696 billion.
Kuwait Investment Authority–$592 billion.
Saudi Arabia SAMA–$494 billion.
Qatar Investment Authority–$320 billion.
Saudi Arabia Public Investment Fund–$223.9 billion.UAE Abu Dhabi Mubadala Investment Company–$125 billion.
UAE Abu Dhabi Investment Council–$123 billion.
National Development Fund of Iran–$91 billion.
Russia National Welfare Fund–$66.3 billion.
Libyan Investment Authority–$66 billion.Alaska Permanent Fund–$61.5 billion.
Kazakhstan Samruk-Kazyna JSC–$60.9 billion.
Kazakhstan National Fund–$57.9 billion.
Brunei Investment Agency–$40 billion.
Texas Permanent School Fund–$37.7 billion.UAE Emirates Investment Authority–$34 billion.
Azerbaijan State Oil Fund–$33.1 billion.
A 2006 U.S. Treasury Report indicated that increased oil prices generated an extra $1.3 trillion in revenue for OPEC countries since 1998. Oil revenue was spent on increased imports, higher wages for government employees, increasing reserves, and retiring debt.
The oil-producing countries used these funds to provide a cushion to fall back on. They also learned from the recession of 1998 when demand for oil fell and prices declined. These actions helped to lower volatility in their economies and in the global economy.
Up to 70% of the $700 billion in OPEC’s investable reserve funds could not be accounted for by the Bureau of International Settlements.
The BIS only reported OPEC members, so non-OPEC funds were unaccounted for. The Treasury said that oil exporting countries purchased about $270 million in U.S. securities.
Based on other information, they suspected that the unaccounted-for funds were invested in construction loans, regional stock markets, private equity funds, and hedge funds.
An unknown amount of funds could have been invested in U.S. assets through foreign intermediaries, which are untraceable.
These hidden petrodollars increase global volatility. That’s due to their sheer size of $400 billion. If it is in U.S. Treasurys, a withdrawal of that size could trigger both a decline in the dollar and higher interest rates.
That probably will not happen, since the United States is also one of OPEC’s best oil customers.
The United States uses the power of petrodollars to enforce its foreign policy. But many countries don’t fight back. They are afraid it would mean the collapse of the petrodollar. For example, the United States sanctioned Iran for refusing to halt its development of potential nuclear weapons. Similarly, it hit Russia with trade embargoes for invading Crimea and creating a crisis in Ukraine.
As a result, these countries signed a five-year trade deal with each other that is worth $20 billion. Critically, it is not priced in dollars, and it includes the sale of Iran’s oil.
Venezuela and Iran also signed oil contracts in their currencies instead of petrodollars. China called for a replacement of the U.S. dollar as a global currency. Ironically, it is one of the largest foreign holders of the dollar.
China influences the U.S. dollar by pegging its currency, the yuan, to it.
Will these rogue attacks cause a dollar collapse? No, at least not for the near future. That is because there is no good alternative. The euro is the second-most circulated currency. It has undergone attack from within, thanks to the Eurozone crisis.
But there is a threat to the petrodollar as the world shifts from oil to renewable energy.
Nations are limiting greenhouse gas emissions to fight global warming. As they shift to electric vehicles and solar or wind power generation, it threatens the profitability of oil-producing nations.
The United States has lost its competitive edge in these technologies to China and the European Union. As a result, the petrodollar may lose its role as the world’s dominant currency.
The U.S. is now devising ways to protect itself from its vulnerability to economic decline from foreign countries selling their goods cheap in the U.S. thus making the U.S. industries to decline and flight of capital to other foreign destinations.
They elected Donald Trump as their President who uses the imposition of tariffs to make foreign goods expensive and to force foreign nations that profit by exporting to the U.S. to devalue their currencies.
Tomorrow I will talk about Cashless Society.
The Myth of Capitalism and its asuric Aura 