Comment by cladopa
8 hours ago
Are you American? Because if you are from the country that dominated the world since WWII it feels different than being from the rest of the world.
Bretton Woods gave the Americans an "exorbitant privilege" that basically meant the US could live extracting wealth continuously from the rest of the world.
Then later the petrodollar system was established. People needed oil, the US would protect the Arabs with its immense army (financed with the dollar system) and in return the oil had to be sold in dollars, so all the world needed dollars if they wanted energy.
The US could just print dollars, and the rest of the world would suffer inflation.
That was great for the US for sure. Why not continue? Because the rest of the world do not want to continue supporting the US system.
The US was ok with Sadam using chemical weapons against Kurdish civilians until he decided to change the currency for paying the oil to euros.
The US does not want to de-escalate if that means the world stops buying US bonds and suddenly they are bankrupt and can not pay its debts exporting inflation to the rest of the world.
If Americans suddenly lose 50 to 70% of purchasing power then there will be war inside the US, not outside.
>> the world stops buying US bonds and suddenly they are bankrupt and can not pay its debts
How does this work exactly? It doesn't. It's a misunderstanding of public debt.
When you say stops buying US bonds, you're talking about the secondary market for US government bonds right - because in practice, contrary to the econ textbooks and common understanding, only a small number of institutions are allowed to purchase them in the primary market, not only that but these purchasers are compelled by law to continue buying them, to continue bidding for them at a fair price, and if they don't have the reserves to buy them then these purchasers will be given the reserves to continue to buy them. The entire premise of the argument falls apart as soon as you step away from the econ model and look at the legislation governing what actually happens by law.
How does the "petrodollar" exactly prop up the US dollar? The price of a barrel of oil has oscillated quite a bit in dollar terms, so it's not like there's anything like a fixed or artificially-maintained 'exchange rate' there. There's, what, a 10x swing between highest and lowest USD price of oil in the last 10 years alone? The dollar has fluctuated vs other currencies too. I've never fully followed how trading for a dollar just to sell that dollar immediately for oil would only help the USD. It all gets turned into oil quickly, so wouldn't that mostly balance out in how demand for oil then relatively-weakens the dollar against the value of toil itself? The "medium of exchange" need has some effect, but I don't see it by itself driving "store of value." If there was a better store of value for the people selling the oil, what prevents them from swapping out those dollars essentially immediately? And then switch to taking payment in those other things as well?
And "just printing dollars" has well-documented inflationary effects inside the US too.
Not an economist but the petrodollar concept helps the dollar because everybody that needs oil needs to buy dollars. You see it as small thing but it is fundamental thing because oil is used in so many places that as we have seen a disruption of 20% of it would start causing real problems on almost the entire world.
QED: oil powerful, only dollar buy oil, dollar stronger.
The use of dollars to purchase any commodity is a negligible fraction of demand for dollars.
What you should be looking at is investment demand for dollars, that is, in which currency does the seller store their surplus.
Think about it:
I need to buy a barrel of oil, but I am in Argentina. So I sell my pesos for dollars, I buy the oil with the dollar. The seller now has dollars, and sells the dollars for Swiss Francs and invests the money in swiss bonds.
Now, what happened? The global demand for dollars by the buyer was exactly offset by the seller. It is the seller that decides, by choosing where to store his surplus, of what currency is boosted by oil. And it is not the currency that oil is sold for, it is the currency that the proceeds are invested in.
So oil is completely irrelevant for the value of the dollar, what is relevant is that investors want to store their funds in the US capital markets. That's what matters, and it is investor preference to store their earnings in capital markets that determines why they want to denominate oil in dollars. It just saves on an extra transaction.
But focusing on the transactions misses the picture of the dollar's strength, because denominating oil in dollars is merely a consequence of the desirability of US capital markets as a destination for foreign capital. And that desirability drives everything else. It's not oil, it's deep, liquid capital markets with established foreign investor rights. That trumps everything else.
Think about it -- would you keep your earnings in a country with weak foreign investor rights or lack of financial transparency or illiquid markets where you couldn't easily pull your money out when you wanted to? That is much more important to the seller of the oil than anything else. It will drive what oil is priced in. And it will drive the demand for dollars.
Given the immense capabilities of the United States government, I don't think there is going to be a war inside the US. Or at least not one that lasts any amount of time.
This isn't really a given. Historically, whenever you have a civil war the existing state's military splits down the middle, with people generally unwilling to fire on friends, family, and neighbors. Former military officers usually form the core of the rebel military, taking their training, experience, and oftentimes equipment with them to fight for the other side.
The mistake here is thinking of the U.S. government as a monolith. Ultimately it's all just people, bound together by being paid for in dollars that are either raised as taxes or borrowed as treasuries. GP's post posits a world where the dollar is worthless; what's binding them together then?
IMO, invasion of Iraq was to support Israel.
Except America went to war with Saddam Hussein a full decade before the move to the Euro and was largely a reaction to the invasion of Kuwait.
Saddam was their man for a full decade prior to that war, to go against Iran. Even the Kuwait invasion was given the go ahead by the us with false assurances, until they sucker punched him for it. It's not as if they us gave a shit or two about Kuwait's freedom or not (which was partitioned from traditional iraq teritorry in the past anyway, and a monarchy itself).
Then they'd let him mostly be after 1991 until we made the mistake to push for the Euro in early 2000s.
To add, the primary reason the US supported Iraq was because it didn't want Iran to send oil to the USSR.
This was because the US didn't want a communist nation to have a good economy.
That's the story of a bunch of the CIAs operations.
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