Dollar dominance: The debt-fueled high of the petrodollar may be on the wane. Maybe it’s not a bad thing for the world

It is a universally recognized truth that every mainstream fiat currency will rise and then fall into oblivion. For thousands of years, powerful and prosperous nations have used their currency recklessly – to wage ruinous wars and to finance outsized public works. In every age – ancient Egypt, classical Greece, imperial Rome and Britain – economic prosperity was first weakened by currency depreciation and then drowned in a rising tide of inflation. Will the fate of the dollar be different?

Rome’s problem was trying to manage an increasingly unruly empire by the force of its legions. As the empire grew, its reliance on mercenaries increased, who had to be paid in full and on time. Even during the Pax Romana from 27 AD to 180 AD, when the spoils of war and tribute were plentiful, the amount of silver in the denarius was slowly reduced – from 4.5 g to less than 3 g – to meet the needs of various public works and other extravagances. .

Just over a century later, Roman coins were silver at best, allowing the production of enough money to pay soldiers’ salaries and bonuses, so they could afford the inflated food prices. , especially wheat, the price of which had risen by 300 -plier in a century. This untenable situation continued until 410 AD, when Rome failed to pay its Visigothic mercenaries, leading to the sack of Rome and its eventual downfall.

The economy of the British Empire depended on running a massive trade monopoly, fueled by cheap resources from its colonies. As Britain grew more prosperous, the pound, pegged to the gold standard, became the undisputed reserve currency of the world. But to protect its trading privileges, Britain was prepared to wage costly wars in any part of the globe. World War I proved to be his undoing. Its debt rose from 30% of GDP in 1914 to over 650% of GDP in 1919.

War financing and inflationary pressures severely weakened the pound against other currencies – losing about 3% in value each year – which was exacerbated by the Great Depression. Finally, after the Second World War, the pound officially ceded its primacy to the dollar.

A petrifying movement

But by 1971 the dollar had reached a similar level. Just 27 years after the introduction and proliferation of the Bretton Woods system – whereby the United States enjoyed the privileged position of issuing dollars as a reserve currency to other nations instead of its gold, pegged to $35 an ounce – the growing public debt and the almost entirely credit-sponsored Vietnam War spelled the end of this last remnant of the gold standard. The downside of the system was that gold and dollars were interchangeable. Finding that the United States had only $11 billion in gold to cover nearly $24 billion in debt, Richard Nixon officially declared in August 1971 that the United States would no longer trade gold for dollars.

The affair could well have ended there. The dollar was devalued by more than 10%, Opec (Organization of the Petroleum Exporting Countries) raised the price of oil four times in 1973 alone and imposed an embargo on the United States in response to their support to Israel in the Yom Kippur War. The supremacy of the dollar was in serious doubt, and a multipolar world was suddenly a distinct possibility.

Instead, in a masterstroke, the United States signed a pact in 1974 with Saudi Arabia that guaranteed the latter continued purchases of oil as well as military support and protection, in return for fact that the Saudis prescribed the dollar as the official tender for the purchase of oil. Naturally, these dollars would be reinvested in US Treasuries, thereby financing US debt. The rest of OPEC followed suit a year later. And the US dollar became the almighty petrodollar.

Therefore, over the past five decades, the United States has been able to wage war at will, fund government spending, fuel consumption, and enable gigantic individual fortunes through cheap credit. Unlike the nations of yesteryear, whose debts were severely limited by the gold or silver they could access, the United States simply printed dollars to buy oil or pay off debt, thus demanding seigniorage on its creditors with a license never seen even in the Middle Ages. Europe.

$substance $substitution

At first glance, the beauty of the petrodollar system is that there are no finite resources that need to be exchanged for currency. Instead, the only exchange is between dollars and treasury bills – a substitute for debt – both of which can be produced in almost unlimited quantities as long as the global buying and buying cycle favors the petrodollar.

But there is a catch. Most nations store reserves of dollars for energy security. If a large portion of energy purchases are permitted in another currency or commodity, the need to bolster petrodollar reserves will diminish. As demand for dollars declines, US debt-fueled furloughs will be severely constrained by devaluation and inflation.

As in 1974, today’s world is at a turning point. A war in Ukraine, followed by crippling sanctions, gave a defiant Russia an opportunity to force energy purchases outside the petrodollar system. If they are even moderately successful in the long term, others could follow suit, if only as part of a diversification strategy. In such a situation, OPEC may have to relax its emphasis on the greenback. And currency hegemony could well begin to take hold.

Maybe that’s not a bad thing. Independence from the petrodollar will lead to greater political and economic equality in countries awash in dollar-denominated debt, help overthrow dollar-sponsored tyrants, deter the United States from going to war directly or by proxy and will ensure that a basket of currencies, or an equivalent, regulates access to credit and debt obligations. Posterity may well be grateful.

This does not mean that the United States will not resist with might and might. Even the recent flurry of activity by American diplomats and journalists to convince India to abandon its national interest – to buy Russian oil at a discount – is an attempt to ensure that the supremacy of the dollar is not compromised. If a country like India were allowed to buy all of its energy needs from, say, Iran and Russia – and reduce its dollar holdings – the odds could be against the dollar in the long run. Now let’s see who blinks first.