Furthest Right

What’s A Petrodollar And Where Did It Come From?

Money. It makes the world go ’round. It’s the root of all evil (but mostly after 10:30 PM (and primarily on the wrong side of town)). Yeah, yeah. Actually, a functional money is supposed to be three things.

  1. A store of value: Every dollar bill can be thought of as a share of Amerika.
  2. A unit of account: Those prices on items at Dollar General are denominated in dollars and can be interpreted as a measure of how valuable each piece of merchandise is against a commonly understood gage.
  3. A medium of exchange: If you live in Amerika, you will conduct your trade in dollars.

This brings us to a tale of good, evil, and currency skullduggery dating back to the late 1960s and early 1970s. We start our clandestine international game of thrones in the ancient and renowned nation of France. France was ruled by Charles De Gaulle. Many unschooled observers believe that the French think all Americans suck. A more accurate statement would read that the French would like it and find it more amusing if all Americans really did suck. They see Amerika do things well, that the French used to do better, and they start to secretly hate us the way the Iranian Theocrats hate the Jews. This held particularly true of Charles De Gaulle. As Amerika became a sprawling, anti-communist empire, France became peripheral. Chuckles found this galling.

Here’s where money enters the story. The United States still issued a Commodity-Backed money. Every dollar bill had a theoretical redemption ratio in gold that the US Treasury was required to provide upon demand. The James Bond Villain Goldfinger posed an existential threat to the value of the US Dollar when he broke into The National Depository at Ft. Knox, Kentucky.

The theoretical pile of gold that people could exchange dollars for served as a peg to measure exactly how much you could buy for a dollar. Take the size of your dollar pile and divide it by the market price assigned to 1 oz of gold. This gave the holder of an old-school US Dollar an exact measure of how much swag they held in the bag. The value of gold served as a gage that made the US Dollar a more accurate unit of account than most other currencies in the world.

Charles De Gaulle saw this and was pissed; not chuffed. He gathered his minions around his infernal black keep. Rather than yelling out “Build me an army worthy of Mordor!” De Gaulle demanded instead. “Stack me up dollars to the height of The Eiffel Tower!” Once De Gaulle had his giant mound of US currency, he presented this to the UST for conversion into gold and thereby attempted to emulate Goldfinger via non-kinetic operations.

This dropped a hot turd-potato into the lap of Evil Amerikan Emperor, Richard Milhous Nixon. Say what you want about Nixon, the man had strong Kung-Fu. He immediately broke the peg between the US Dollar and the gold stored in The National Repository. De Gaulle was now holding a big pile of what was essentially now a full-on Fiat Currency.

Fiat currencies are based on the full faith and credit of the issuing nation’s National Treasury. In plain English, this made Charles De Gaulle have to be nice to Amerika. He had to be very nice Amerika, even if this caused him to experience pharmacological side-effects such as severe constipation. It was that, or he could leave France holding the largest assembled pile of dog excrement in the history of Capitalism (1). You could imagine that proud Fleur De Lis going flaccid and limp.

Yet Richard Nixon’s ninja move came with its very own set of negative externalities. When the dollar peg broke, the USD inflated independently of the actions and policies of the UST. See my previous remark regarding piles of dog excrement in the history of Capitalism. Emperor Nixon now had to disassemble the dog crap or magically turn it into fertilizer. Disassembly was not on the table. Our Early American era of competitive scripts was not renewable. Nixon had the Post-Bretton Woods Dollar and had to make the most of it.

Nixon was wise about his evil. Like Roman Emperor Augustus, Nixon knew the power of a bright and shining lie. Augustus wisely announced that he “restored The Roman Republic” while purposively taking a dysfunctional demotism out back and decapitating it with an axe. Nixon spoke fondly of the strength of the dollar as a fiat currency while subtly procuring another commodity to effectively backstop the limp-lily USD. Here’s how a great Nixonian dope deal went down in the parking lot.

Nixon secured an agreement in which the US would buy oil from Saudi Arabia and provide the kingdom military aid and equipment as well. In return, the Saudis would use their dollars to purchase US Treasurys and help finance US budget deficits. From a public finance point of view, this appeared to be a win-win. The Saudis would receive protection from geopolitical enemies, and the US would get a new place to unload large amounts of government debt. Moreover, the Saudis could park their dollars in relatively safe and reliable investments in the United States. This became known as “petrodollar recycling.” By spending on oil, the US was creating new demand for US debt and US dollars.

This worked so well that it ultimately led to the economic demise of Russian Communism. It also led many foolish economists to suggest policies reminiscent of a stoned Caribbean witch-doctor’s ritual sacrifice of poultry. One extreme form of Economic Santeria involved the Modern Monetary Theory. This delusion planted the fundamental axiom that any country could disavow its entire national debt as long as they held such obligation in their own sovereign currency. This is an easy stance to pass off as valid when the entire trade portfolio of OPEC quietly backstops your currency as a store of value. Robert Mugabe and Venezuelan President Nicolás Maduro Moros have experienced less promising results from this economic school of thought applied to their own national management paradigms.

Commodity-backed currencies; even when stealthily backed, will generally fornicate fiat currencies and feed them to the microbes on the bottom of the Earth’s ecological pyramid. This allows economists, and even Stephanie Kelton, PhD, to appear somewhat perspicacious in their monetary maunderings. Taking away the commodity, leaves the fiat currency. At this juncture, only an idiot has full faith in the credit of the US Government. At this point, budgets can no longer spring forth from Clown World. Debt ceilings are then an evil necessity, as opposed to Boomer Conservative Failure Theatre. It’s tougher running a treasury in the absence of very much treasure. This particularly hampers a demotic state. The mob is never happy when some of its constituent thugs are told they won’t be getting a pony.

This brings us around to the utter and ineluctable stupidity of Evil Amerikan Emperor Joe Biden’s simultaneous alienation of both Saudi Arabia and at least a few of the BRICS. Two matters become worthy of debate with regards to what doom mongers describe as the death of the Petrodollar and the rise of the Petroyuan. There is the relative impact of OPEC accepting trades settled in Yuan and there is the absolute impact of OPEC settling trades in Yuan. That will be the subject of another post on Petrodollars. This post just set the platform for that future discussion.

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