The Petrodollar, Part 2: Dies with a Whimper? – Available Now!
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In these economically volatile times, many financial experts argue that the question is not if the dollar will collapse but when. This scenario could in fact occur sooner than later, and if it does, such a collapse would mean the end of the U.S. dollar as the world’s reserve currency. Many countries have already introduced measures that are indicative of an impending abandonment of the U.S. dollar as their reserve currency. But let’s take a step back and look at the development of the U.S. dollar as the global reserve currency.
At the end of World War II, the Allied nations established a monetary system that would obligate each country to maintain the exchange rate by tying it currency to the U.S. dollar which was convertible to gold. The US dollar’s convertibility to gold prohibited the U.S. government from printing excessive amounts of money, which could destabilize the economy severely. Thus, the U.S. dollar was practically as good as gold to the Allies, with the added bonus of the currency’s flexibility and interest rates.
However, the United States abandoned the gold standard in 1971 in order to combat the economic crisis. The government converted the U.S. dollar from a stable gold-backed currency to a feeble fiat currency. As a result, the demand for U.S. dollars declined sharply around the world. To maintain global demand for U.S. dollars, the United States struck a deal with the OPEC nations that would require them to price their oil in U.S. dollars in exchange for weapons and military protection. The Petrodollar saved the U.S. dollar as the global reserve currency.
As almost all oil trade is conducted in U.S. dollars now, virtually every country needs dollars to buy oil, which has led to an export industry with the United States that permits these countries to exchange goods and service for U.S. dollars. But since the value of the dollar has been falling, there is no longer any real financial incentive for the rest of the world to sell its oil in dollars. As a matter of fact, many nations have already moved away form the Petrodollar system, among them Russia and China. Yet, there is an even greater threat to the Petrodollar that could drastically accelerate the disintegration of the U.S. dollar.
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