The moment of truth for Saudi Arabia and petrodollars

The moment of truth for Saudi Arabia and petrodollars

mars 4, 2017 0 Par Michel Santi

At the end of the Second World War, the enormous reserves of American gold – the largest in the world at the time – allowed this metal to construct a new world order centred around the dollar. The Bretton Woods Conference held in 1944 formalised the consecration of the greenback, around which all other currencies in the world would gravitate according to a fixed exchange rate, just like the ounce of gold whose value was also frozen at 35 dollars. This inauguration gave the dollar the status of the world’s top reserve currency that all central banks were to hoard away, and that international trade was to use as a medium of exchange.

A victim of its own success, the greenback was frantically amassed by investors across the planet, by savers, by States and by businesses, so much so that the US Federal Reserve’s gold stores were no longer enough to satisfy the demand. Many holders of these dollars were asking – as they so had the right – to convert them into gold, causing America’s reserves to melt from 574 to 261 million ounces between 1945 and 1971! The (logical) abolition of the gold standard on 15 August 1971 by Richard Nixon was a major moment in American and indeed world history, comparable to the stock market crash of 1929, JFK’s assassination and 9/11. The end of Bretton Woods allowed the dollar to float freely along the whims of supply of demand since it was not fixed to any particular value in relation to an ounce of gold. Of course, this crucial decision was labelled “temporary” by Nixon, who was quite happy – in reality – that his central bank was thus able to print money at will. Temporary he said, but it’s lasted more than 45 years and has lost the dollar more than 80% of its value since 1971!

The death of Bretton Woods de facto led the Americans to a default on their commitment to honour the fixed and immediate convertibility of their currency into gold. From that point, since foreign nations and businesses no longer really had any reason to keep hold of their dollars in the same quantities, and since the demand for American currency was obviously in strong decline, the Americans had to find a way to fight back. In truth, the Bretton Woods system didn’t only have global financial implications, but also major geopolitical consequences. A new order was established by the US government which was to preserve the dollar’s status. This, which was to force all the countries of the world to carry on holding and trading in dollars, was the petrodollars system. This master stroke concocted by the legendary pair of Richard Nixon and his Secretary of State Henry Kissinger consisted of forging, between 1972 and 1974, a special relationship with Saudi Arabia, a country which held vast petrol reserves and was the almighty leader of OPEC.

This alliance allowed the US to strategically free itself up for the fight against the Soviet Union, all the while ensuring precious support for its supply of provisions in the worrisome situation that was the Yom Kippur War (in 1973) where petrol prices had quadrupled. Because of the pact, the US committed itself to the preservation of the Wahhabist dynasty which, in turn, guaranteed that all petrol exchanges would be made for ever more in dollars, to then be reinvested in US Treasury bonds. This exorbitant privilege granted to King Dollar was thus imposed throughout the entire world, leaving every nation no choice but to pay its energy bills in this currency. From that point onwards, central banks and treasuries from every nation were to amass dollars since this was vital for their petrol and gas transactions. This artificial market created for the dollar – obligating a country like France for example to go and sell francs on the currency market and to buy dollars in order to pay its petrol bill – was, thus, the petrodollars system.

It is impossible to accurately estimate the gigantic profits made by the United States from the establishment of this system whereby a multitude of operations and transactions not strictly affecting them were nevertheless conducted in their own currency, and whereby they themselves imported and exported in their own currency which they could print endless amounts of! So there it is, the fundamental reason for the special treatment accorded to the Saudis by the American elite. This is also the explanation for why Saudi Arabia – the manufacturers of the 9/11 terrorists – do not figure on the list of nations affected by the recent decision made by Donald Trump to prevent citizens of certain countries considered to be in support of radical Islam from setting foot in the US. However, this order, set up in 1971, now seems to be rattled by the threat of the Saudi dynasty imploding since it is going through a moment of considerable vulnerability, certainly the most critical since its birth in 1932. The stars seem to be aligning in an unfavourable form for a Saudi Arabia that is gasping for air with, on top of everything else, the potential death of the petrodollars system, which will surely bring about a paradigm shift as important for the world as Bretton Woods was in 1971.