When the U.S. signed its 1973 agreement with the House of Saud to peg oil to the dollar, few tended to realize that the opposite would be true, and that the dollar itself is intrinsically tied to oil and the price of this commodity. It is one of the reasons why Kissinger had the Saudi’s (and OPEC) increase the price three fold so that this inflation would allow the U.S. to then increase the nation’s money supply by having the House of Saud put all of their reserves in U.S. debt instruments (Treasuries).
But as the use of debt and credit began to expand, and eventually reach exponential growth due to central banks choosing the Keynesian road over sound monetary policies, it put the dollar on a fragile precipice that then relied upon oil and other asset prices to remain high to keep the spigot going enough to be able to both roll over the growing debt, and to ensure confidence that in desired times they could increase that debt with little opposition.
However, following the Credit Crisis of 2008 confidence in the dollar began to crack, and eventually lead to an ever growing rejection of the reserve currency by nations who have been forced to devalue their own currencies to remain sustainable. And this worldwide increase in debt has not only brought about a global point of diminishing returns (see the need for negative interest rates by some), but it has also killed real economies who’s consumers can no longer spend at the rates they were over the past two decades.
Today’s decline in oil prices are a microcosm of both the futility of central bank’s to control inflation and deflation within economies, and the rejection of the dollar, which has as noted above lashed its existence to oil and the need for high oil prices. And with a new global recession already in the midst of the world economy, and no real potential for additional printed money to stave off defaults and insolvency, the bottom line is the coming end of the dollar in its present form, and the eventual emergence of a new monetary system that goes back to the one stable form of money that should never have been discarded.
After 1971, the USDollar was no longer backed by Gold. Quickly the USDollar benefited from the defacto Petro-Dollar Standard in 1973, hastily arranged. No evidence is more clear of a dying USDollar than the collapse of the oil price, practical foundation of the global reserve currency. The foundation was affirmed in the mass of derivative contracts, in addition to the Arab Petro Surplus Recycle practice, whereby the Saudis and other Arab Emirates agreed to keep their oil surpluses in USTreasury Bonds. They agreed not to sell out of the USDollar. They hold a mountain of USTBonds still.
They agreed to make gigantic USMilitary contractor weapons purchases. So observe the crude oil price down in a death spiral, the USDollar rise in a balloon flight upward into thin air, and the Gold price kept down by the rising USD. The negative correlation between the USD currency index and Oil price is evident. The negative correlation between the USD and Gold is well known. Notice the competition with new Russian oil benchmark in the St Pete contract. The game is over, with the music continuing to play. The chairs on the USS Titanic are not being rearranged. They instead were given to the Chinese, where they take in sun on the disputed islands. – Jim Wille, Hat Trick Newsletter via Silver Doctors
As early as 2008 the U.S. understood that the petro-dollar system was dying, and to keep control over the reserve currency they had to find a new scheme to backstop the dollar and ensure global acceptance. This is the true reason for the fraudulent ‘Global Warming’ and ‘Climate Change’ push by the West, since it is attempting to move the dollar behind a new form of currency, that of carbon credits.
But like the passage of the TPP, Eastern powers and emerging markets will only give lip service and a nod to Washington as they continue on their own agendas of a new monetary system that is outside dollar hegemony, and backed by a golden foundation. But what we are really seeing right now in the fall of oil prices is the last days of the dollar, and like the crisis of 2008, this demise could occur at any time, and simply requires the right ‘Lehman Moment’ to bring about its final collapse.
Kenneth Schortgen Jr is a writer for Secretsofthefed.com, Examiner.com, Roguemoney.net, and To the Death Media, and hosts the popular web blog, The Daily Economist. Ken can also be heard Wednesday afternoons giving an weekly economic report on the Angel Clark radio show.