The Rise and Coming Fall of the Petrodollar

“The petrodollar system requires every country to have U.S. dollars on hand to buy oil. It keeps demand for the U.S. dollar as high as it was when the dollar was the only currency that could buy gold.”

— Kei Pritsker and Cale Holmes, “Petrodollar Warfare”

Addison WigginDear Reader,

We’re rapidly approaching the 50th anniversary of the “Nixon Shock” — the day then-President Richard Nixon announced extreme measures to stop our country’s runaway inflation.

He addressed the nation on Aug. 15, 1971. Among his declarations was that foreign nations could no longer exchange U.S. dollars for a fixed amount of gold. The Bretton Woods system, which had kept currencies more or less in line since 1944, was effectively moot.

None of this is news to you if you’re a regular reader. We’ve extensively covered the Bretton Woods arrangement from multiple angles. How it started… why it fell apart… what Nixon could have done differently… and more.

By all rights, depegging the dollar from gold should have ended its status as a reserve currency. Our bills and coins no longer had any tangible value.

Indeed, as Bryon King tells us, “within months” of Nixon’s announcement, “things were getting way out of hand in terms of valuing currencies.”

The situation wasn’t helped by the Yom Kippur War of 1973, when several Arab nations attacked Israel. The United States assisted the Israelis, leading to an oil embargo. But the conflict’s resolution helped re-establish the dollar’s prestige.

“Henry Kissinger and Richard Nixon worked with the Saudis, mainly, but the rest of OPEC,” Byron says. The U.S. promised to “start keeping our dollar valued against a barrel of oil in terms of the price.”

Suddenly the dollar “was backed up as an item of value” again. That’s because “oil is energy and energy is a way of calculating value.”

The arrangement has helped keep the dollar on top, though Byron doesn’t think that will be the case for too much longer.

On the one hand, “the U.S. has just spent money like crazy” and run up “big, huge debts.” Meanwhile, over the last year, “the pandemic and the global contraction played havoc on oil prices.”

“Coming out of all that,” Byron says, “the petrodollar is not going to have the strength that it used to have.”

So very soon, “the U.S. dollar itself is not going to be the conductor of the whole global monetary band anymore.”

When that happens, our government will “have a tough time just throwing dollars out into the world, willy nilly.”

You can listen in to more of our conversation — including Byron’s thoughts on cryptocurrencies — here.

Regards,

Addison Wiggin

Addison Wiggin
Founder, The Financial Reserve

P.S. Starting Monday, Baltimore will require everyone to wear masks inside of public places — regardless of vaccination status. I’ve told the staff to just start staying home again. There’s no reason for us to commute in for muffled conversations where we all sound like masked bandits.

Luckily, we haven’t heard any talk of new lockdowns yet. But there was a surprisingly large jump in payrolls and a drop in the unemployment rate. If politicos aren’t careful, people might stop depending on government handouts. And using the Delta variant as an excuse to shut down businesses again would be a great way for Congress to pass another wave of stimmies.

In the meantime, the jobs numbers have pushed the major indexes to record highs.

Addison Wiggin

Addison Wiggin

Addison Wiggin is founder and executive publisher of Agora Financial LLC, an independent economic forecasting and financial research firm. He and Bill Bonner began writing the firm’s flagship Daily Reckoning in the midst of the tech boom and bust. It was one of the first widely distributed email newsletters on the Internet. The publication’s critical eye on finance and economics continues today. He’s also creator and editorial director of Agora Financial’s daily missive The 5 Min. Forecast.

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