by Steven Neill, ©2014
(Jan. 21, 2014) — With the escalation of the war in Vietnam, growth of US trade deficits and the rush to create a welfare state, the US government was running out of money while the Bretton Woods Treaty restrained the FED from just printing money. In order to be able to afford both “Guns and Butter” (9) a new way of backing the US dollar needed to be found and that way was the creation of the “petrodollar.”
In it the US government would protect Saudi Arabia’s oil fields and in return, the Saudis would only accept US dollars for their oil and reinvest surplus oil revenues in US debt securities. By 1975, all of the oil producing nations of OPEC agreed to the same deal. This arrangement suited most of the world as the US currency was stable and the US always paid its debts.
Since all but a few of the nations of the world are forced to import oil, (10) the petrodollar arrangement requires them to stockpile US dollars to pay for that oil. This in turn creates a consistent demand for the US dollar and allows the sales of bonds at lower interest rates than would otherwise be needed to attract investors. Currently most global trade is also conducted in U.S. dollars, and almost 56% of all global foreign exchange reserves are held in U.S. dollars, meaning more U.S. dollars are used outside of the United States than inside of it. The end result is the US government can afford to run higher budget deficits than other nations and goods imported to the US are cheaper than they otherwise would be.
These exporting nations traditionally reinvest most of these dollars into low risk securities that can be easily converted back into dollars when needed. Since the creation of the petrodollar, the most popular way to do this is to buy U.S. Treasury bonds. This arrangement created a system that helps artificially keep the demand for the US Government debt high and the interest on it low. This means that huge amounts of foreign money winds up being loaned to the US Treasury in the form of low-interest loans.
The artificially low interest rates created by this scheme have affected every area of borrowing in the US. For instance, home buyers, (11) many of whom have struggled since the Great Recession and global credit crisis to qualify for mortgages have their buying power greatly affected once they are approved for a loan. Buyers who obtained a $200,000 mortgage when interest rates were about 3.5 percent in April landed a monthly payment of about $900. But if rates head north to 5 percent, (12) buyers hoping to get that same monthly payment would have to limit their mortgage to $170,000 — or $30,000 less than they could have afforded with the lower loan rate. This rise in interest also affects the buyer’s ability to purchase other consumer goods and services as over the 30-year life of a $200,000 mortgage, a home buyer would pay an additional $63,000 over the life of the loan. When one sees the difference only 1 percentage point makes, it becomes very apparent just how much a rise back to the 30-year average (13) of 8 percent will crush the rebound in real estate.
“There are two ways to conquer and enslave a country. One is by the sword. The other is by debt.” — John Adams (14).
The US has used this power to run up deficits unheard of in world history. According to former Comptroller General David Walker (15). “The government estimates the national debt at about $17 trillion, its closer to $73 trillion, once all the unfunded promises for future Social Security benefits and other obligations are added in.” Some economists have calculated it to be as high as $222 trillion (16) when those unfunded liabilities (17) are included. To put this in perspective, if the US deficit were just the 17 trillion most American believe we owe, each US citizen part of the debt is $54,005 (18). If Walker is correct, then each citizen owes $232,221.5 on the debt and if the $222 trillion is right, then each person’s responsibility is a mere $702,065. (19) There is simply no way the majority of Americans have this kind of money.
The cost to service the national debt at the $17 trillion level is $170 billion every year for every percentage point of interest. Historically, the interest rate on the US National debt went from 0% in 1945 to 11% in 1980. (20) So, if the average rate of interest on U.S. government debt rose to just 6 percent, we would be paying more than a trillion dollars a year on interest without paying a penny on the debt. And that is just the debt the government is admitting to.
Even though many Americans seem to think the US can continue to spend money it does not have, the rest of the world has a better grasp of history and many countries have taken steps to move away from the dollar or is at least contemplating life without the dollar being the world’s reserve currency. Any honest economist understands that at some point the US will simply not have the money to pay its debt and that scenario was shown to the world with the prospect of a US default in October which was only averted when the government agreed to raise the debt level once again. .
This reckless and criminal behavior (21) by the Federal Reserve and US Government has opened Pandora’s Box as many nations begin to fear that the money they have been putting into US debt is never going to be repaid. This point was driven home in October as the global economy shuddered over the prospect of a US default on their loans sending the world back into a global recession. Even the Bank of International Settlements (BIS) which is the world’s biggest bank is concerned over the amount of money the FED is printing and made a statement concerning a “wall of debt” (22) about to hit the world. This fear has been seized by an opportunistic China as a way to promote the Yuan as the world’s reserve currency.
“It is perhaps a good time for the befuddled world to start considering building a de-Americanized world.” Xinhua, the official state-run Chinese news agency (23)
On October, 13, 2013, during the US budget debates, China called out for the world to “de-Americanize” itself. Xinhua, the official Chinese government news agency, released a lengthy commentary stating “that as American politicians (24) continued to flounder over a deal to break the impasse, it is perhaps a good time for the befuddled world to start considering building a de-Americanized world.” The commentary continued: “A new world order should be put in place, according to which all nations, big or small, poor or rich, can have their key interests respected and protected on an equal footing.”
This commentary should chill every informed American to the bone as it further stated: “emerging economies should have a greater say in major international financial institutions the World Bank and International Monetary Fund and proposed a “new international reserve currency that is to be created to replace the dominant US dollar.” (25) At the same time, China has announced that it is going to start limiting the amount of foreign debt it will continue to buy and hold. (26) China buys and holds more than $1.28 trillion in US debt.
China has been working extremely hard for years to make the Yuan the “new international currency.”
US Department of Commerce figures show that by the end of 2012, China officially surpassed the United States as the world’s biggest trading nation (27) in terms of the sum of imported and exported goods. U.S. exports and imports of goods totaled US $3.82 trillion in 2012, while China’s trade amounted to US $3.87 trillion. (28)
Furthermore, 124 countries now consider China their largest trading partner, (29) surpassing the United States as the world’s premiere trade partner, stripping the United States of a title that it has held for over six decades.
14. John Adams Quote