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The one big gotcha in international finance is the petrodollar. Going back to the 70s we made an incredibly prescient deal with Saudi Arabia. They agree to sell

The one big gotcha in international finance is the petrodollar. Going back to the 70s we made an incredibly prescient deal with Saudi Arabia. They agree to sell their oil only in USD and then to invest annual surpluses back into US securities. In exchange we agree to ensure protection of their kingdom and guarantee weapon sells. This arrangement continues to this day in grand fashion. For instance even though Saudi Arabia only has some 30 million people, it's the third largest defense spender in the world spending some $70 billion a year on weapons, with most of that going straight [back] to us. Our influence in turn led to the expansion of the petrodollar beyond just Saudi Arabia to nearly all oil sales. This doesn't seem like a particularly big deal, until you realize what it does. Imagine the US pumps a bunch of funny money (I'm using a sardonic term just to clearly distinguish between organic/'real' growth) into our economy. This would naturally cause inflation. But here's where the fun kicks in. Oil is still by far the most in demand resource in the world. And now when countries go to buy oil they need to accumulate USD. But now due to inflation a country that wants to buy the same amount of oil needs to keep an even larger reserve of USD on hand. And that's exactly what happens. The USD becomes worth less and countries are obligated to hoover up more USD to ensure access to oil. As that USD starts getting removed from circulation, the effects of the inflation start to abate. Like magic, we can 'print' (not how many is made, but that's another topic) a practically unlimited amount of funny money with minimal economic consequences. This also explains much of otherwise inexplicable actions in the Mideast and related places. We don't want their oil, we want them to sell their oil in USD only. This [1] is an article from Time in 2000: "Europe's dream of promoting the euro as a competitor to the U.S. dollar may get a boost from SADDAM HUSSEIN. Iraq says that from now on, it wants payments for its oil in euros, despite the fact that the battered European currency unit, which used to be worth quite a bit more than $1, has dropped to about 82[cents]. Iraq says it will no longer accept dollars for oil because it does not want to deal "in the currency of the enemy."" By 2003 we had destroyed the Iraq government and killed Saddam in a kangaroo court. Similarly with Libya, Gaddafi was aiming to create a gold backed 'Afro-currency' which is what he wanted to start selling his oil in. Two other nations which have moved against the petrodollar are Iran and Venezuela. On the other side of things, this also explains Saudi Arabia. One of the most backwards and repressive nations in existence today, we're still BFF since they act like a loyal lapdog when it comes to the petrodollar. In exchange we let them do just about anything. The CIA has recently stated that Khashoggi's murder was likely ordered all the way from the top. I can tell you how this story will end. Do you remember in 2015 when Saudi Prince Majed Abdulaziz Al Saud had a rape and assault filled 'party' at a rented mansion in Beverley Hills? The 'party' was only stopped once a neighbor called the police after seeing a bleeding woman screaming for help as she tried to scale the fence of his mansion to get away. He was arrested and that's where most media reporting ended. The epilogue is that he was rapidly granted bail, got on a plane and simply flew back to Saudi Arabia with no consequences whatsoever. --------- This is already getting long enough, but something very important now a days is that the petrodollar is dying. It's a mixture of a perfect storm of a large number different of factors, but it's definitely a dead system walking. And this has major implications for the future of the US economy. To date we've had 'economy armor' on. In the not so distant future, that armor is coming off and our economy will stand or fall under its own weight. And this is when being massively in debt suddenly does start to matter because if you just try to print your way out of it, you would not be able to rely on the petrodollar to protect the economy anymore. [1] - https://content.time.com/time/magazine/article/0,9171,998512,00.html https://content.time.com/time/magazine/article/0,9171,998512... [2] - https://www.cbsnews.com/news/saudi-prince-majed-abdulaziz-al-saud-forced-oral-sex-beverly-glen-california/ https://www.cbsnews.com/news/saudi-prince-majed-abdulaziz-al...

russellbeattie 8y ago
This is terrifying, and explains sooooo much! Wow.
jjeaff 8y ago
Thanks for the interesting insight. While I agree the petrodollar is a big deal, and it does afford us a lot of extra leeway in monetary policy, we can't forget that the US is still an economic powerhouse in many, many different industries. And the power of singularly focused economies like Saudi Arabia is waning. The shallow reporting is that manufacturing is gone, but the reality is, we have higher manufacturing output than ever. (The fewer jobs needed for higher output is a different story.) We have an enormous lead in software. Intel and Qualcomm are the two biggest semiconductor companies. We have the largest oil and natural gas reserves, much of which is still untapped. A large share of world media entertainment is here. The US pharmaceutical industry accounts for almost half of the world output. World banking and finance is huge. Real estate market is enormous and highly desirable to outside investment. And this is for a country with less than 5% of the world's population. And that's just some of the big stuff that the US leads the way in. There are so many other industries that the US is still a global player in. What I'm getting at is the the breadth and depth of the U.S. economy is so large that it is hard to comprehend and I don't think the failure of any one industry will be enough to produce significant hardship for the US. Nor does the economy need to rely on the petrodollar for protection in the long term.
- jacobush 8y ago
  What the fall of the petrodollar will change though, is that the US will lose some of its "friends" it could rely on by default. The US will have to work on its diplomacy again. I hope it will not be too much of the gunboat kind.
- deathhand 8y ago
  As we have seen however intellectual property theft and knowledge transfers can even the game very quickly. IP scales infinitely while the meat space is governed by physics.
marvin 8y ago

russellbeattie 8y ago

This is terrifying, and explains sooooo much! Wow.

jjeaff 8y ago

Thanks for the interesting insight. While I agree the petrodollar is a big deal, and it does afford us a lot of extra leeway in monetary policy, we can't forget that the US is still an economic powerhouse in many, many different industries. And the power of singularly focused economies like Saudi Arabia is waning. The shallow reporting is that manufacturing is gone, but the reality is, we have higher manufacturing output than ever. (The fewer jobs needed for higher output is a different story.) We have an enormous lead in software. Intel and Qualcomm are the two biggest semiconductor companies. We have the largest oil and natural gas reserves, much of which is still untapped. A large share of world media entertainment is here. The US pharmaceutical industry accounts for almost half of the world output. World banking and finance is huge. Real estate market is enormous and highly desirable to outside investment. And this is for a country with less than 5% of the world's population. And that's just some of the big stuff that the US leads the way in. There are so many other industries that the US is still a global player in. What I'm getting at is the the breadth and depth of the U.S. economy is so large that it is hard to comprehend and I don't think the failure of any one industry will be enough to produce significant hardship for the US. Nor does the economy need to rely on the petrodollar for protection in the long term.

jacobush 8y ago
What the fall of the petrodollar will change though, is that the US will lose some of its "friends" it could rely on by default. The US will have to work on its diplomacy again. I hope it will not be too much of the gunboat kind.
deathhand 8y ago
As we have seen however intellectual property theft and knowledge transfers can even the game very quickly. IP scales infinitely while the meat space is governed by physics.

marvin 8y ago