The worst has yet to come - Part 1
By Chris Clancy
web posted October 1, 2012
Like all great performers Obama has saved the best for last. The Middle East, as if right on cue, erupted last month.
Unfortunately for him, it would seem he misplaced his script shortly after "hope and change" got underway:
"Obama [said he] would make us loved throughout the world once again. He would restore our damaged global image, especially throughout the Middle East. During a visit to Israel, then Senator Obama went so far as to vow to "bring peace to the Middle East," if he should become the president." - Jack Kerwick.
Indeed.
To make the ending of his disastrous presidency even more spectacular and memorable, this outpouring of unbridled hatred towards the USA appeared to grow legs.
What began in the Middle East quickly spread. The message was clear. The entire Islamic world, not to mention quite a few other countries, would like nothing better than to see America utterly destroyed.
In fact they make it clear they will do whatever they can to bring this about. And they may be well on the way to achieving just this – and without firing a single shot.
I refer to the inevitable demise of the so-called "petrodollar system".
I wonder if, between fund-raising, golfing and hanging out with celebs Obama has given this matter any serious thought? In fact, I wonder if he and most of his loons are even aware of it?
Certainly, it's something which has received very little attention in the MSM. So what is it, where did it come from, why is it on the way out and what does it mean for the USA?
The answer to the last question is "plenty" – and not much of it good.
Following WWII an international system was set up whereby the US dollar (USD) became the world's reserve currency. Each USD was backed by a fixed amount of gold. The deal was that any country which held USDs always had the option of exchanging them for gold. The idea was to create greater confidence and stability in international trade – which it did – for about twenty years.
This agreement put the USA in a particularly advantageous position; not dissimilar to a commercial bank operating a fractional reserve banking system.
Valéry Giscard d'Estaing famously referred to it as an "exorbitant privilege" - way back in the 1960s.
Which is what it was. And one which was open to abuse. Which is what happened.
Whilst it was understood that America would have to "put the dollars out there" in order for the thing to work, no-one foresaw the massive increases in government printing and spending which would be required to fund, amongst many other things, the escalating cost of the war in Vietnam.
By the late 1960s it became pretty obvious that the volume of USDs floating around the globe was far in excess of the amount of gold which should have been available to back them up. What then ensued, after a series of financial scares and crises, was the equivalent of a bank run – let's call it a gold run – with the French leading the charge.
The outflow of gold from Fort Knox reached such alarming proportions that Richard Nixon was forced to call a halt to convertibility on August 15, 1971. This was supposed to be a temporary measure.
But as Milton Friedman would say: "Nothing is so permanent as a temporary government program."
And so it was.
The dollar, no longer backed by anything, became a pure fiat currency and soon began to lose value against other currencies. OPEC continued to price its oil in USDs but then saw it was losing money and started to consider using other currencies or even gold.
A new big idea was urgently required in order to restore the USD to its former position.
Move aside Machiavelli - enter Henry Kissinger! The story goes that in 1973 Nixon dispatched him to Saudi for a series of secret high-level talks. By the end of it, one year later, a deal was made:
"Amazingly, a new system was devised which allowed the U.S. to operate the printing presses for the world reserve currency with no restraints placed on it-- not even a pretense of gold convertibility! …This gave the dollar a special place among world currencies and in essence backed the dollar with oil." - Ron Paul.
As the most powerful member of OPEC, Saudi soon roped in the other members.
Marin Katusa pulls things together nicely in this superb article:
"By 1975 all of the members of OPEC agreed to sell their oil only in US dollars. Every oil-importing nation in the world started saving their surplus in US dollars so as to be able to buy oil; with such high demand for dollars the currency strengthened. On top of that, many oil-exporting nations like Saudi Arabia spent their US dollar surpluses on Treasury securities, providing a new, deep pool of lenders to support US government spending."
He continues:
"The "petrodollar" system [as it came to be called] was a brilliant political and economic move. It forced the world's oil money to flow through the US Federal Reserve, creating ever-growing international demand for both US dollars and US debt, while essentially letting the US pretty much own the world's oil for free, since oil's value is denominated in a currency that America controls and prints. The petrodollar system spread beyond oil: the majority of international trade is done in US dollars."
Put simply, if countries wanted to buy just about anything from other countries, not just oil, they needed to have USDs. If they couldn't borrow them they had to go out and earn them!
The power and privilege which this conferred on the USA would not be relinquished easily.
Why did OPEC leaders agree to this? There were two main reasons.
The first is to do with the nature of cartels. The only way the thing would work long-term (i.e. the only way to deter individual members from cheating) was to ensure all trade took place in a single traceable currency. At the time the USD fitted the bill; under this agreement it would again become to be the world's safest, most stable and most trustworthy medium of exchange.
The second was that America promised protection to OPEC leaders against foreign invasion or domestic uprisings. The system remained in place, unopposed and unchallenged, for the next twenty five years.
Throughout this period, unbelievable wealth from oil sales continued to flow, almost exclusively, to the elites in the OPEC countries.
One can only imagine the resentment felt by ordinary people in the Middle East, when they compared their situation and their non-development, to countries like India and China over the same period. Their hatred festered, not just for their rulers, but for every successive American administration which kept their subjugators in power.
But nothing lasts forever.
In the year 2000, the first major challenge to the petrodollar system was launched by Saddam Hussein.
If one had any doubts, that by this time American foreign policy was primarily about protecting the petrodollar system, then what happened subsequently would have laid them to rest. 
Chris Clancy lived in China for seven years. Most of this time was spent as associate professor of financial accounting at Zhongnan University of Economics and Law in Wuhan City, Hubei Province. He now lives in Thailand where he spends his time reading, writing, lecturing and, whenever he gets the chance, doing his level best to spread Austrian economics.