The United States economy – like that of much of the developed world – remains mired in the worst downturn since the Great Depression of the 1930s.
Ominously, the data suggest that conditions are not simply the result of an economic slump, but because of structural weaknesses in our economic and financial systems. What are the origins of these defects? How can they be fixed?
To understand the causes of the present crisis, it is imperative that we examine not only its proximate, near-term causes, but those further in the past. Many Americans ask themselves and those around them why the dollar buys so much less than it used to, or why food and energy cost so much. To get at the real, as opposed to stereotyped, answers to these questions, we need to go back to 1944 and then return to the early 1970s and the Nixon Administration.
Under the terms of the 1944 Bretton Woods economic agreement reached by the forty-four Allied nations, a framework for international post-war economic cooperation was set up, using the U.S. Dollar (USD) as the basis of international commerce. The signatories to the agreement were required to “peg” or set their international currency exchange rates based upon the value of the dollar. The Bretton Woods agreement was reached in part because of the strength of the dollar, and the fact that any U.S. banknote could be exchanged for its value in gold, then $35/ounce.
However, the discipline imposed by the Bretton Woods system was too-rigid for the tastes of America’s political class - and over time, pressures ramped up to disengage from it. By the late 1960s, these pressures had built to a flood. The federal budget was strained when Lyndon Baines Johnson inaugurated his “Great Society” social welfare program, and it was strained further-still by the nation’s involvement in the Vietnam War. Under President Richard Nixon, who was elected in 1968, these expenditures - far from being cut - were increased, until the budget could no longer withstand them. Nixon and his advisors cast about for a means of maintaining current spending on domestic programs and the war – one which would allow them to avoid making politically-unpopular trade-offs or angering any of the various constituencies which vied for favor inside the beltway. The politically-expedient solution they chose ultimately proved to be a disaster for both the nation and its fiscal health: Nixon chose to inflate the money supply; to accomplish that end, he unilaterally took the nation – and thus the signatories to the Bretton Woods agreement - off the gold standard.
In 1971, without consulting the signatories to Bretton Woods, Nixon and a handful of his most-trusted advisors decoupled the dollar from gold, effectively rendering it a fiat currency. Allowing the dollar to “free float” against other currencies removed the last obstacle in Nixon’s way; he – and Congress - were now free to spend as they saw fit without the constraints imposed by the precious metal standard. As the worth of the dollar declined, the value of gold ramped-up sharply; by 1975, gold was trading at $160/ounce, more than 450% of its value at the time the gold window was closed in 1971.
That decision was to have deleterious consequences; today the USD is worth only $0.19 in real terms compared to its counterpart in 1971, another way of saying that it has lost 80% of its value since that time. Nor did Nixon’s malfeasance end there.
In 1973, Israel and her enemies fought the Yom Kippur War, during which Israel received, via airlift, eleventh-hour American assistance which turned the tide of the war in Jerusalem’s favor. In response, the Organization of Petroleum Exporting Countries (OPEC) – then dominated by the Arabic states of the Middle East – enacted an oil embargo against America and its allies. The embargo drove the price of oil, gasoline and other petroleum products sky-high. By 1974, the price of oil had soared to $12/barrel, or 400% over the pre-embargo mark.
Under tremendous political pressure to do something about the price of oil and gasoline, in 1974 Nixon and Secretary of State Henry Kissinger initiated talks with the Saudi Arabian government and formed U.S.-Saudi Arabian Joint Commission on Economic Cooperation. This innocuously-named board was to wield enormous power over the world economy in subsequent decades via a series of informally-reached but enormously significant decisions. Ultimately, the commission gave birth to what later became known as the “petrodollar.”
Kissinger knew that the Saudis and OPEC were cash-heavy in dollars after the oil embargo and subsequent run-up in price. The Secretary of State proposed that the Saudis and their OPEC partners use their surplus dollars to buy U.S. assets, goods and services – including U.S. Treasury bills, bonds and other debt instruments – via what Kissinger termed “petrodollar recycling.” Saudi Arabia and its central bank, SAMA, agreed to transact OPEC business exclusively in U.S. dollars. As a quid pro quo, the United States agreed to protect the Middle Eastern oil fields of OPEC, up to and including the use of military force.
The consequences of the creation of the petrodollar were profound. In effect, the agreements reached by the commission “married” the United States economy to that of Saudi Arabia and OPEC. The agreement conferred an enormous short-term advantage upon the United States, whose government could now inflate the money supply almost at will, secure in the knowledge that it had a captive market for its debt. Since the dollar remained the reserve currency of international trade but was not tied to the gold standard, the U.S. government could print up more dollars anytime it needed them – an advantage enjoyed by no other nation. Conversely, foreign nations had to obtain dollars the hard way – by earning them via increased productivity and international trade or by borrowing them from the U.S. Federal Reserve. Nations around the world must therefore accumulate U.S. dollars in their treasuries in order to purchase oil in international markets.
While the petrodollar system conferred some advantages to the United States, it came with significant long-term costs and strings attached, many of which were not immediately apparent. Two outcomes have proven to be especially damaging to the U.S. and its interests.
Prior to the 1970s, the U.S. government – despite some lapses – had managed to operate on a reasonably sound fiscal basis. Deficit spending was generally confined to wartime or to periods of major economic emergency; the national debt was far-lower than it is today. However, the double-whammy of abandoning the gold standard and the formation of the petrodollar inaugurated an era of easy money and big spending which continues down to the present day.
It is no exaggeration to say that the nation’s balance sheet is now a disaster. In hindsight, it is clear to see that the easy money provided by the petrodollar system has had a corrupting influence upon the nation’s fiscal policy and upon government itself. The United States, once the world’s creditor, has now become its biggest debtor.
By removing the practical and political barriers to sustained inflation of the money supply, the petrodollar system institutionalized the practice of deficit spending and the accumulation of debt which threatens to cripple our nation for years to come.
The deleterious effects of the petrodollar system have also been felt in the nation’s foreign policy. Until the 1960s, the U.S. had sufficient domestic oil reserves to cushion it against price shocks and shortages in the international market. However, by 1970, the Saudis and OPEC had become the world’s oil supplier of last resort. Already possessing the geopolitical advantages that came with this position, the Saudis added another hole card to an already-strong hand with the creation of the petrodollar system. If U.S. foreign policy began to veer too-far off the track approved by OPEC, all it would take to set things right would be a phone call and maybe a veiled threat by the Saudis to cut off the flow of oil or petrodollars to which Washington had become addicted. Simple price increases could also be used to punish those who displeased OPEC and their allies.
A second deleterious effect of the petrodollar system is that it effectively gave the Saudis a hand on the rudder steering American foreign policy. A long series of American presidents has had to defer to the Saudis for the simple reason that OPEC could, at any time, threaten to cut off the flow of oil and easy credit. There are those who believe that U.S. foreign policy has been hijacked by Israel; this writer would argue that it is actually the Saudis who have effectively co-opted our foreign policy. The proof of this assertion lies in the historical record of the last quarter century. Saddam Hussein invaded Kuwait in 1990; during the subsequent Gulf War of 1991, a military collation led by the United States ejected Saddam’s armies from that nation and restored the status quo ante bellum. However, lost in all the postwar flag waving was the fact that the war wasn’t about “liberating” Kuwait or restoring “democracy” to that nation (which is not and never has been a western-style liberal democracy). Saddam’s real crime was to challenge the petrodollar system. This the Saudis and their allies could not abide. Calls were placed to Washington, telling the U.S. that it was time for the “big green machine” – the United States military - to go to work – and it did. The Saudis said “Jump!” – and President George H. Bush and other western heads of state asked “How high?”
Through the 1990s and into the 2000s, our foreign policy has remained entangled with that of Saudi Arabia, chiefly due to the petrodollar system. Fifteen of the nineteen al-Qaeda men responsible for the September 11th terrorist attacks were Saudis; two more were from the United Arab Emirates. For many years, elements within the Saudi royal family have been subsidizing jihad and terrorism around the globe with – you guessed it – petrodollars. Given these facts, one might reasonable ask why the United States is not at war with Saudi Arabia, or at least on more-hostile terms with that nation. The answer again lies in the tremendous leverage given to the Saudis by the petrodollar system. The rubble where the WTC Towers once stood had not yet stopped smoking before the Saudi propaganda machine began to work. And work it did, right up to President George W. Bush, who repeatedly emphasized that Islam is a “religion of peace.”
Informed observers have noted over the years the extremely close ties between the Bush political dynasty and the Saudi royal family. However, the ties to Saudi Arabia did not end when George W. Bush retired to Texas. Indeed, much evidence suggests that they have deepened and strengthened. On one state visit to Saudi Arabia, Barack Obama - the current occupant of the White House - bowed so deeply to the king that it is a wonder he did not strain his back. Was this a bow of politeness, or one in acknowledgment of an influential political patron and benefactor?
The Saudi influence in the White House and in the halls of power continues apace. The war drums are currently being beaten for attacking Iran. The stated reason is that Iran’s regime cannot be allowed to possess nuclear weapons. The real reason, as with Saddam Hussein, is that Tehran has had the temerity to challenge the Saudi-dominated petrodollar system. Of course, it does not hurt that the Saudis, who are Arab Sunni Muslims, and the Iranians are Shi’ite Muslims who are not Arabic, but Persian. All the better to sell the deception to a gullible public.
The blood of America’s sons and daughters continues to be spilled in places like Afghanistan in the name of nebulous and ill-defined foreign policy goals such as spreading democracy in the Islamic world. This is not the whole truth and nothing-but-the-truth; our soldiers’ lives are in fact being spent to support the petrodollar and the corrupt economic system upon which it rests. Long ago, a retired, crusty old Marine general named Smedley Butler said, “War is a racket.” How right he was!
The bad news is that the tentacles of power of the Saudis and the other Gulf oil-producing nations reach deep and wide into American national life. Over the last forty years, these nations and their leaders have used the oceans of oil revenues flowing into their coffers to buy considerable influence throughout the western, non-Islamic world in everything from think tanks to schools and universities to charitable foundations to politicians of every stripe.
The good news is that the era of the petrodollar may be coming to a close. There are signs at hand that a paradigm shift may soon occur, one that threatens to upend the current centers of power within the Middle East. Vast new petroleum and natural gas reserves have been discovered under the north-central United States and southern Canada, in the Bakken oil shale deposits and others like it. Concurrently, the reserves of the Gulf oil states are being drawn down. New technologies in extraction and refinement of oil have allowed the United States and Canada to ramp up production, easing our dependency upon OPEC oil. Significantly, the Democrats and the left – led by Mr. Obama – have strenuously opposed exploitation of the Bakken oil fields, citing environmental concerns over fracking. Don’t buy it – dig deep-enough, and you will find that the left’s opposition to domestic oil exploration can be traced right back to Saudi Arabia and their generous donations to Democratic causes over the years.
For the last forty years, the OPEC nations have held America hostage in the name of oil. The passage of time has allowed us to see the extent to which oil has been used as a weapon against the United States and its interests by Saudi Arabia and its oil-producing allies in the Middle East – not to mention many of our own politicians and elites with a less-than-honest agenda.
Despite hopeful signs that a new paradigm may be emerging, the position of the U.S. and other nations remains precarious. We have not yet attained energy independence from OPEC, and even if we become self-sufficient in petroleum and fossil fuels, the Saudis still exercise considerable control over our economy via the petrodollar system and the Federal Reserve. No real or lasting economic rebirth can occur in America – or the remainder of the western world – until the petrodollar system is finally consigned to the ash heap of history. Until then, literally and figuratively, we will remain over a barrel.
Copyright 2013 – Peter Farmer
