“..when its economic foundation has eroded, it can only be maintained for so long by bluster and smoke and mirrors.”
• Death Of The Petrodollar: What Really Happened Between The US and Saudis? (RT)
It is said that works of fiction can often convey certain truths better than a newswire. That is perhaps the light in which to view reports circulating around the internet recently about the expiration of a 50-year ‘petrodollar’ treaty between the US and Saudi Arabia. The agreement is a piece of fiction. The spurious reports appear to have originated in India or in the murky tangle of websites aimed at crypto investors. There was an official agreement between the US and Saudi Arabia signed in June of 1974 and another, secret one reached later that year according to which the Saudis were promised military aid in exchange for recycling their oil proceeds into US Treasuries. The deal whereby Riyadh would sell its oil in dollars was informal, and there was no expiration date. The petrodollar system as we have come to known largely grew organically.
However, this fiction points to an underlying truth: the petrodollar has entered a long twilight from which there will be no return. No other economic arrangement has done more to ensure American preeminence over the last half-century. Yet in its essence it represented an implicit oil backing to the dollar that would be maintained. To borrow an idea originally expressed by financial analyst Luke Gromen, it is ultimately America’s inability and unwillingness to maintain this backing that is gradually dooming the system.
[..] We are now accustomed to the proliferation of unbacked currencies, so it’s hard to appreciate just how unusual the petrodollar arrangement was for a world long used to dealing with some form of gold standard. It’s one thing for a government to insist that a currency be accepted within its own borders, but to propose that another country part with real goods – such as oil – for money backed by absolutely nothing would have been a tough sell in past eras. Yet the US managed to do that and more. But such an arrangement would never have been sustainable for so long – longer than the gold-backed Bretton Woods lasted – based on military power and backroom dealings by cabals of diplomats alone. While Washington has always acted with a certain sense of impunity, believing there to be no viable alternative to the dollar, for the several-decade-long golden age of the petrodollar there was at least an economic justification for it. It worked well enough for the rest of the world that, until recently, no major bloc emerged to oppose it. There also was the long shadow of Paul Volcker to give it credibility.
However, just as the US reneged in 1971 on its obligation to convert dollars into gold, it later reneged on its implicit obligation to maintain the value of the dollar against oil. Since then, Washington has shed all semblances of fiscal restraint and any pretense of managing the dollar in the best interests of everyone. Instead, it now wields the greenback as a weapon in a desperate bid to roll back the very events it helped set in motion by not preserving the integrity of the currency in the first place.The US is now fighting to maintain all the benefits of this broken system, the responsibility for which it is neither equipped nor willing to take any longer. If the dollar isn’t pegged to gold and isn’t even implicitly backed by oil, and Washington won’t preserve its integrity, then it is hardly up to the task of facilitating trade in critical resources. A system as deeply entrenched as the petrodollar won’t disappear overnight, but when its economic foundation has eroded, it can only be maintained for so long by bluster and smoke and mirrors.
