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Dollar Hegemony

Dollar Hegemony seems to be a forbidden term in the financial press. It is rarely if ever mentioned by pundits, journalists, or Wall Street analysts yet as a force of nature it has been a cornerstone as to why the US has remained the omnipotent global financial power in the modern age. Put simply, the US has been blessed with the lowest cost of capital of any nation on earth by virtue of the dollar’s status as the world’s reserve currency.

Few understand exactly how it came to be or how it endures despite our ever escalating trade and budget deficits. We want to change that.

We all shouldn’t, yet perhaps we do take for granted the dollar’s reserve status because it’s the only thing we have ever known. Today, the ice is cracking right beneath our feet as the US Dollar Index (the basket of major foreign currencies vs. the dollar) has declined substantially in recent years from 122 in 2002 to 72 today. Why? Because foreign capital credits have opted for other currencies of countries offering higher yields and not as encumbered with the staggering liabilities as the US. This was facilitated primarily through the Euro, which now offers global investors a bona fide proxy for a store of wealth. In fact, the high exchange rate and relative stability of the USD for decades are magical creations of a petro-dollar hegemony condition that mandates that all oil produced anywhere in the world by anyone must be paid for in US dollars. This mandate is now eroding and should continue to put further pressure on the USD for some time to come as Iran and other Arab nations begin to defy the mighty US mandate.

Consider the implications for a moment- most of the oil produced on earth has been between non-US producers and consumers yet MUST be bought in US dollars. This travesty was schemed in the early 70’s when foreigners became weary of the accepting US dollars from a nation whose gold reserves became depleted from our fiscal deficits. US debts were in fact so substantial President Nixon was forced into a deal that allowed OPEC to substantially raise and control oil prices going forward as a cartel but mandated a monopoly of all purchases of oil be paid for in USD. This allowed the US to initiate a fiat currency program and get off the gold standard of $35/oz to allow both gold and currencies to float with the market. Naturally, gold went from the fixed $35 for many decades to $850 in just a few short years and oil and gas prices surged in price permanently. This arrangement was worked out well for the OPEC nations, whose wealth has risen trillions, and for us as well in a strange way, enabling the US to incur trillions of dollars of debt to foreigners to finance our deficit spending for the past several decades. Petro-Dollar hegemony has served to insure that these large sums of foreign capital continue to be repatriated back into dollar denominated assets (US government securities). This cycle of repatriation of US Government securities is what actually provides the “full faith” in the legal tender of our currency and we would suffer tremendous consequences without these foreign buyers. Few realize that the US simply prints paper backed by our “word” that is paid back years later in ever-depreciating dollars that have the effect of exporting inflation to the world as if it was a commodity being loaded on a tanker. This scheme has worked so well because of dollar hegemony, but what happens when the music stops? Who wants to be holding dollars then? How do all Ponzi schemes work out in the end?

Some countries, such as Kuwait, have begun to peg their currencies away from the dollar and many OPEC nations have formal plans for a new Arab currency backed by oil to diversify out of the USD. These developments all underscore the debilitating nature that our deficits are having upon our nation’s wealth and sovereignty, and understanding the nefarious and confounding nature of dollar hegemony is necessary to understanding how these powerful yet subtle forces are impacting us today just below the surface.

To that extent, I have selected articles that can best explain those forces of dollar hegemony so we can see how dependent our economy and way of life is on maintaining the sanctity of the US dollar.

  1. How does the US Dollar Defy the Law of Gravity? – A lengthy (29 pages) article that outlines the basic forces that account for the longstanding artificial strength in the US dollar (Arab petrodollar monopoly and Chinese exports) through an elaborate process of extrapolating the economic aspects of our major trading partners to the price movements of their underlying currencies. It explores the actions of the central bankers in support of their policy directives and how those actions continue to generate severe imbalances between these countries. Through this examination a framework is presented to reflect how vulnerable the US dollar is to maintaining its currency reserve status it has enjoyed for so long.
  2. The End of Dollar Hegemony – US Rep Ron Paul (R-Texas) speech to Congress retracing the history of “dollar diplomacy” in the 20th century and how it morphed into today’s unsustainable condition of dollar hegemony. He lectures skillfully and objectively, parsing a wide range of subjects including fiat currency, inflation and perhaps most importantly on the essence of the “recycling” process of US dollars which has been long ignored by his colleagues or the financial press. Such candor on such a delicate subject is especially noteworthy of an elected government official.
  3. Hysteria Over Iran & A New Cold War With Russia
  4. This 58 page expertly reports on all issues relating to the petrodollar to frame the world we live in today in terms unlike you will hear from the mainstream press. He recounts the establishment of the petrodollar monopoly with the House of Saud and explains in great detail how the enabling forces of central bankers, multi-national oil companies, and sovereign governments work together to maintain the hegemony. It is a fascinating look into a reality known as common knowledge to few.