The Petrodollar and the rise of the petro-yuan. Why Bitcoin provides the financial insurance Americans may seriously need
***This is a featured post written by one of our subscribers, JR. If you would like to share you thoughts about the petrodollar, JR’s email is jfr44@georgetown.edu.
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Bitcoin and cryptocurrencies have caused much confusion as they’ve jumped to the forefront of financial news and our everyday discussions ever since prices have shot up over the past year. Much of this confusion stems from the fact that bitcoin, at its core, brings into question the fundamentals of monetary policy, which is something that not many people are familiar with. To understand the core of monetary policy and why some believe so strongly in the value of a competing digital currency and its un-inflatable store of value, we must take a brief look at the history of United States monetary policy in order to comprehend the primary driver of the cryptocurrency movement.
Monetary policy with the US dollar has a long history, but lets first start with a story. The year is 1944 and the end of WWII is nearing. In an effort to rebuild the global financial system, to ensure exchange rate stability, and to prepare the world for a post-war economic boom and financial stability, a collection of 44 countries, including the United States and those of Western Europe, met in New Hampshire and established the Bretton Woods Agreement. This decision dictated global monetary policy by making sure that all current currencies would be tied to gold. The US had by far the most gold and power after WWII, so the Agreement was established so that all other currencies could be exchanged for US dollars, which was convertible to a fixed amount of gold at a rate of $35 an ounce. This Bretton Woods system established the US dollar as the global reserve currency and quickly created a global demand for the American money, which helped lead to a long period of US economic expansion post-WWII. Other countries were not necessarily thrilled about this system, declaring it “America’s exorbitant privilege,” as they had to exchange real goods and services to America in exchange for US dollars that could essentially be created out of thin air with American expansionary monetary and fiscal policies.
The next major event was the Vietnam War. Amidst the US being bogged down with an increasingly expensive war effort in Asia, countries around the world sensed financial irresponsibility on behalf of the United States. They determined that the US was spending too much and that the gold that the dollar was backed by had more value than the money itself. As a result, in the late 60s and early 70s there was a run on US gold reserves. Over half of the reserves were depleted in the span of a couple years, which led President Nixon to give a famous speech on August 15th, 1971, announcing the unilateral end of the direct convertibility of dollars into gold, ending the Bretton Woods system. This became known as the Nixon shock.
Nixon’s decision left a lot of uncertainty as to what would happen to the US dollar. It had established itself as a medium for trading around the world, but was now backed by nothing but the full faith and confidence of the United States government. Many feared that this confidence would be short lived and that the US needed to do something to maintain the status quo and the artificial demand for its currency.
Two years later this problem was solved when Secretary of State, Henry Kissinger, negotiated a deal with Saudi Arabia. The United States offered military protection and arm sales to Saudi Arabia, and, in exchange, Saudi Arabia would sell its oil in US dollars. With the rest of the OPEC countries following Saudi Arabia’s lead, most of the oil in the world was now priced in US dollars. This drove a global demand for American money, which was needed to buy the increasingly demanded commodity that was oil. Thus, the US restored its currency as the global reserve, this time backed by the power to purchase oil rather than gold. This pricing of oil in US dollars, known as the petrodollar, has created a global demand for United States currency.
Given how the petrodollar system has inflated the US dollar, these next few articles were the reason why I finally decided to ask my friends about Bitcoin and think seriously about investing in it.
So what would happen if oil starts to be priced in the Chinese Yuan, and how would that relate to Bitcoin?
If the oil that is currently priced in dollars becomes priced in yuan, then the US dollar will lose the foundation, and thus its real value, of what makes it the global reserve currency. US money throughout the world would start to flood back to domestic shores as countries would no longer need or want the floating fiat currency. Monetary irresponsibility and artificial increases in our money supply, especially with Quantitative easing, have not gone unnoticed in recent years. However, low interest rates and global saturation of the dollar has prevented the inflation some would expect to see. On the other hand, if US dollars do end up returning home, the economy would experience a state of hyperinflation. Once significant inflation occurs, confidence in the dollar will drop. It is at this point when people will look for a better currency, one whose value cannot be inflated in any way. They will turn to Bitcoin and other cryptocurrencies, and that is when the price will truly skyrocket.
Now comes the good news, although it’s actually bad news. I don’t know exactly how likely this is to happen because the US is very protective of the petrodollar system. Some people argue that the petrodollar is a primary driver of US foreign policy. In 2000 Iraq started selling its oil in Euros. A couple years later the US arrived on their doorstep and killed Hussein, taking control of the oil fields and restoring sales in US dollars.
Next was Libya. Have you ever wondered how your freedom ended up in Libya or how the War on Terror ended up in that same place — with the United States killing the leader of a sovereign country on the pretense of a humanitarian intervention, only to let that country slip into a failed state where there is a modern day slave trade? Some would point to Gaddafi’s plans to sell oil in a pan-African gold backed currency called the Dinar. Gaddafi had been advocating at global summits for the adoption of this new currency for years, hoping to bring other African countries on board. He had successfully stockpiled a large amount of gold and was planning to start selling oil in this gold backed currency, but then a western coalition decided it was time for him to go.
The US military is the true protector of the petrodollar system, which is why countries like Iran, Russia, and Venezuela are seen as our global enemies, while a country like Saudi Arabia is our ally. If you don’t subscribe to the petrodollar system you are the enemy, and if you try to break out of it, we’ve come with good ‘humanitarian’ bombs and drones to take control and convince you otherwise.
News about the petro-yuan can be surprising, considering the US military empire and our determination to maintain the system, but it isn’t completely “new.” However, the IPO of Saudi Aramco is something new, and with it not being allowed to happen on the NYSE because of JASTA and with China set to be the world’s largest importer of oil in the future, there is a growing fear in the west that China will capitalize on this public offering.
I don’t know if the shift to the petro-yuan will happen given the sphere of influence of the United States, but the possibility alone — the off chance, that maybe, just maybe it could happen, a scenario makes investing in Bitcoin and cryptocurrencies a necessity for some. Remember, to make money off of an investment in Bitcoin does not require a shift to the petro-yuan, it only requires more people to buy into Bitcoin and decide for reasons like this that it makes sense to purchase them. Bitcoin is financial insurance for this potential. The more people that decide that it’s a good idea to buy this insurance, the more valuable this insurance will become. As more people learn about Bitcoin over the years, I can only believe that the number of people who see value in this financial insurance will also rise.
You don’t have to take my word for it, you can decide for yourself, but the one thing you should avoid is not preparing for something bad to happen just because you don’t want it to happen. This article is not meant to scare anyone, but just as people purchase life insurance to prepare for something unpleasant, it makes sense to purchase financial insurance and currency diversification if there may be a significant problem on the horizon.
I see Bitcoin as necessary financial insurance in the case that this petrodollar system comes to an end and we see hyperinflation in the United States. This is just one of the many reasons why people have purchased Bitcoin, but I personally see it as a more significant factor. I encourage people to follow news about the petro-yuan, which will be immensely consequential. Lastly, consider history: all fiat currencies have come to an end and the global reserve currency has seen many live out their time, only to be replaced by another. On the small chance that this occurs, it certainly would be nice to have some Bitcoin.
