Wednesday, February 3, 2016

Is the petrodollar about to tank the economy?

Dear Cecil:
A friend warns that the impending collapse of the petrodollar, devised by Henry Kissinger as the world’s reserve currency when the United States dropped the gold standard, will bring down the entire U.S. financial system. How worried should I be?
Cecil replies:
How many gallons of water should you stock in the emergency cellar? Will three AR-15s suffice, or does the well-equipped arsenal really demand four? If these be your concerns, Kingsley, you’ll find a fantastic resource in the Internet, the petrodollar and the havoc that’ll result from its impending collapse being an extremely popular topic among the black-helicopter set. You can’t go wrong with freeze-dried peas, I hear.
A calmer assessment reveals a more prosaic concept. What we talk about when we talk about petrodollars is international oil sales as transacted in U.S. dollars — which is to say, oil sales: the dollar has long been the standard currency for all such dealings.
The primary world reserve currency, meanwhile, is the very same dollar — full stop. The origins of this arrangement hark back to Bretton Woods, the 1944 confab of Allied nations where it was decided that the dollar would be the world’s backup buck, backed itself by gold at a fixed rate of $35 per ounce. International spending, though — and it was a spendy era, what with the rebuilding of Europe, the Great Society, the Vietnam War, etc — promptly grew to dwarf the Fort Knox reserves, which at one point held only a third of the gold needed to cover the dollars in foreign circulation, prompting fears of a run on the place. In 1971 President Richard Nixon suspended the direct convertibility of the U.S. dollar into gold, bringing about a system of floating, rather than fixed, exchange rates. Among other things this move, the so-called Nixon Shock, increased the ability of the Federal Reserve to influence monetary policy, which in turn, decades later, led yahoos like Ron Paul and Ted Cruz to pine for a return to the gold standard. (Most economists continue to see this as a pretty bad idea.)

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