Happy Holidays from the NewsBTC team. We come bearing gifts. The cure for those suffering from cryptocurrency withdrawal syndrome. Spend the evening learning about Bitcoin in the most relaxed way possible. These five films were released throughout 2021 and contain the alpha everyone needs for the years ahead. At least the first four do, the fifth one has nothing to do with Bitcoin except for one small detail.
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Our sister site Bitcoinist covered the films and most of the accompanying text comes from those articles. Is there a better time for these films to make an appearance in NewsBTC than this lazy evening? Grab your beverage of choice, heat up those leftovers, and hit play in the one that interests you the most. Chances are you’ll end up watching them all.
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Once again, happy holidays and happy watching!
Bitcoin Short #1- “This Machine Greens” (38 mins)
Is Bitcoin mining’s energy consumption a bug or a feature? This documentary’s “thesis is that the process is “a net positive for the environment.” The aim was to “dispels many of the misconceptions about Bitcoin mining.” Directed by Jamie King, of “Steal This Film” fame, and produced by Enrique Posner and Swan Bitcoin.
From the Bitcoinist’s coverage, inPart 1they focus on the Petrodollar system:
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“Watch “This Machine Greens” to learn how the US Military literally backs the Petrodollar. And, of course, the US Military uses infinite energy year after year. Learn about the deal that the US made with Saudi Arabia. The US was to protect the Middle East. The Saudis promised that “The global oil market will be denominated in and conducted with dollars. Ensuring a constant global demand for the currency.” Think about the results of this crucial deal.”
From Bitcoinist’s coverage, inPart 2they explain how Bitcoin mining will fund green energy initiatives:
“According to Alex Gladstein, Bitcoin can fund the “Electrification of new areas and creation of new economic activity.“ This machine greens, if you will. And if we’re talking infrastructure for clean energy, Magdalena Gronowska breaks it down:
“It’s derisking constructions of renewable energy facilities. It’s derisking it because it’s willing to buy 24/7, 365. And when you have a predictable buyer, a predictable revenue stream, it’s easy to plan out your operations. And that certainty means that that site gets built.”
Bitcoin Short #2- “Human B” (73 mins)
This recent German documentary is one of the best introductions to Bitcoin produced to date. On top of that, directors Aaron Mucke and Eva Mühlenbäumer created a slick audiovisual piece that flows like a river and is an aesthetical pleasure to watch.
InBitcoinist’s coverage of the documentary, they introduce it like this:
“Human B” shows us how people in Germany and Austria view the Bitcoin phenomenon. This is a worldwide movement, and it’s important to listen to all the voices out there. In the documentary, we get to hear from Bitcoin authors like Der Gigi and Anita Posch. From economist and punk rocker Marc Friedrich and journalist Friedemann Brenneis. Plus, from a normal person like Jan, who ends up being the star of the show.
The documentary takes a surprising left turn when it travels to Caracas, Venezuela. There, we hear from Alessandro Cecere AKA El Sultán del Bitcoin, and from Juan José Pinto from Doctorminer.”
#3- “Hard Money” (34 mins)
This one is not about Bitcoin per se. This Bitcoin short is about money. To understand why Bitcoin is so important for the planet, people might need a refresher course on what money actually is. This documentary is analogous to the first few chapters of Saifedean Ammous’ “The Bitcoin Standard,” and features sound bites from some of the most important Bitcoin philosophers out there. Directed by Richard James.
InBitcoinist’s coverage of the film, they convince you to watch it with this:
“Watch the “Hard Money documentary and you’ll be able to answer these questions: Why was gold chosen as the premier form of hard currency? What were gold’s “severe flaws”? What is inflation and how does the government hide it? How breaking the relationship between the Dollar and gold broke the relationship between the market and reality. What is low and high time preference? What does fractional reserve banking create? Why are the institutions that issue debt effectively printing new money?”
BTC price chart on Bitbay | Source: BTC/USD on TradingView.com
Bitcoin Short #4- “Bitcoin Is Generational Wealth” (15 mins)
This one is not a documentary, even though it uses some of the genre’s techniques. Also, this is the only specimen on this list that didn’t get a positive review from Bitcoinist. Why is that? We won’t spoil it for you. Watch the film first and then read the linked text.Directed by Matt Hornick. Written and narrated by Tomer Strolight.
InBitcoinist’s bad review of the film, we find this quote:
“Half speculative fiction, half predictive programming, “Bitcoin is Generational Wealth” is in a genre of its own. Using high-quality stock footage to produce a professional montage, the film should work. But it doesn’t. Is the script to blame? Probably. The film shows an idyllic future that every Bitcoiner has dreamt about, but it doesn’t explain how we get there. It takes the “Bitcoin fixes this” meme to its ridiculous extreme.”
#5- “Lynchpin” (21 mins)
This one is about amateur basketball. Its only link to Bitcoin is that Swan and the Bitcoin Movie Club financed and produced it. Is this the first of many or a one-time thing? Word on the street is that the companies will finance several chapters of this story, but don’t quote us on that. “Lynchpin” was supposed to be a TV show, so it sounds possible on that end. We’ll keep you all posted. Directed by Mike Nicoll.
InBitcoinist’s presentation of the short film, they introduced it as follows:
“Compton Magic’s Etop Udo-Ema, “America’s most recognized basketball powerbroker,” is “Lynchpin’s” star. Before Covid hit, this charismatic man receives an offer that he can’t refuse. The whole short film follows him trying to change sponsors and create a league. That carries Etop to Roc Nation and its boss Jay Z, who happens to be Puma’s creative director. The whole enterprise seems to be on its right track. No one could predict the monkey wrench that hit the world’s engines.”
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And that’s enough Bitcoin for tonight. Happy holidays!
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You have probably heard of the petrodollar. You may not know the ins and outs, but you have heard the term in history class or on some podcast. In a very simple and reductive way, it is an abstract noun meant to show the political and military denomination of the United States’ dollar as the sole purchasing currency of oil. By creating the exclusive medium of exchange to be their dollar, be it in treasuries, bonds or cash, the United States could “quantitatively ease” their expanding monetary supply into the ever-demanded energy commodity that is oil.
The idea of tying your monetary system to an energy system might seem a bit odd at first, but consider the actual exchange of capital to be one of time spent earning the pay (working debt for credit capital) for a direct-product-of or service-based expression of the seller’s time. It might seem trite, but time is money; perhaps the truest commodity of the free market. So, by tying your hard-earned greenbacks to an energy-derived system, one can help preserve the scarcity of time spent earning.
This is the concept behind the numerous bimetallic standards the United States has applied before, during and after the revolution of 1776. One central bank and 195 years later, Richard Nixon closed the gold window, severing the stable tie of the dollar to the price of gold, and escorted us into the wide and open skies of fiat currency. What felt like high flying through the following decades was actually falling deeper and deeper into the cavernous hole of an ever-expanding debt balloon. Monetary growth expanded from $636 billion in January 1971 to an absurd $7.4 trillion by the time our fiat experiment caught up to us in the winter of 2007. The pressures of the cascading defaults of a Frankenstein financial creation hit in 2008; a monstrous body of illicit subprime mortgage speculation with the head of a eurodollar system liquidity squeeze.
By the time the news broke of a single hedge fund in the EU defaulting, the fears of insolvency among the system ran as far as New York City. Thirteen years ago this month, a bank run at the fractionally reserved Lehman Brothers drained the 161-year-old institution in a single afternoon. Why would issues with the credit of a single firm cause a global recession? Why would a bad trade for a hedge fund have this much effect on the United States dollar system, never mind the rest of the world’s currencies? The answers are concurrently abstract in exact psychological cause, for, after all, money is just a communications tool, but shockingly simple in an economical sense. Every market, of every kind, can be reduced to simple supply and demand. Every market, at the fundamental core, consists of buyers and sellers. So how did this assumed localized liquidity crisis occurring from a hedge fund default suddenly become a worldwide problem?
Not only did they not have the money to pay the debt in liquid reserves in the bank when the chickens came to roost, but they had already previously sold packaged shares of their debt around the global financial market. Larger hedge funds happily bought these compartmentalized debts in order to allow portions of their wealth to earn interest in the form of another firm’s debt. It was a nice gambit for a while; the smaller, less liquid companies got access to much needed credit, and the larger, more established companies got to earn slim but compounding percentages on assumed future profits. Everyone’s a winner, baby. But when one of those small debtors goes under, like in the case of the narrative of a local default due to some poor and over-leveraged mortgage plays, the larger firms are caught holding the realized loss of their now defaulted debt purchases; overnight that cheap and easy debt became very expensive.
But these days of wine-and-roses ponzi of repackaged, fractionalized debt-for-credit-now was not just enjoyed by a small chain of firms but rather the near entire financial system. The once healthy and strong tree was now a rotten log, eaten away from the inside by vicious, parasitic debtors and gluttonous, grubby creditors. A system-wide dollar liquidity crunch led to defaults and bank runs while, simultaneously, defaults and bank runs led to a system-wide dollar liquidity crunch. A financial crisis perfectly placed right between a Red and Blue president should sound awfully familiar.
But in 2007, there was Ben Bernanke, nominated by George W. Bush and later renominated by Barack Obama, to bail out the banking system that just got caught with their pants down. After gambling with homeowner’s debt via fractional reserve margin plays, the American banking system turned to the lender of last resort, the Federal Reserve, to generate liquidity by printing dollars. The future money printing savant Steven Mnuchin, then of OneWest Bank, profiteered on the bailouts, collecting massive service fees and executive bonuses for the very people and corporations that caused (see: benefited from) the recession in the first place. As the working class licked their wounds and prepared for winter, the Cantillionaires feasted on an eroded housing market and cheap index funds.
We have seen practically nothing but unmitigated growth in markets since these purple bailouts, that really only stood to further drive wealth inequality in the coming decade, and further yet exacerbated by the pandemic. The once unifying financial protests slowly faded into a divided, bipartisan culture clash, with the liberals blaming the Bush administration and the conservatives blaming Obama’s. In a sign of mutual-assured profits, when given the opportunity to prosecute Mnuchin of aforementioned fraud, then acting DA of California and now Vice President Kamala Harris declined to press any charges whatsoever, and, in fact, he later became the Secretary Treasurer only a decade later under President Trump.
So we can see how the violent monetary base expansion of the United States dollar could inflate away the purchasing power of an individual dollar, hurting savers and those with dollar-denominated positions, but why did this not hurt the United States’ purchasing power on a net basis? Why didn’t the massive inflation of dollars, from well under $1 trillion in 1971 to $10 trillion in 2012, bring the economy to its knees and relinquish economic reserve hegemony to China or Japan, our biggest debtors? By the time millions of Americans found themselves without homes and the Occupy Wall Street movement fizzled out, the Federal Reserve was back to business as usual, raising interest rates and resuming sales of bonds to foreign entities, and eventually, to itself. How were we able to fight off the mechanics of an unhinged money supply decreasing its demand?
The reality is, the United States never truly left an energy standard, we just simply switched from a gold-backed dollar system, to an oil-based dollar system. With the decree of 1971, the gold dollar was destroyed, and in its place, the petrodollar was born. American Imperialism has worn many clothes, red and blue cloth alike, but it has always been for one purpose: to make more money. The activity in the Middle East, starting with the marines landing in Beirut in 1958, mutated into a proxy war in Afghanistan between the USSR and the U.S. during the Cold War, and finally grew into a full-scale occupation in the summer of 1990 with Bush Senior’s directed invasion of Kuwait.
By occupying the oil-rich nations of the region, the United States enforced sole denomination of the market share of all petrol sales to foreign entities in dollars. This allowed the Fed to expand our monetary supply, slowly but surely over 50 years, with no apparent loss of demand. Oil-dependent countries across Eurasia were forced to buy dollars first, before then purchasing the precious petrol needed to power their industrial expansion. By 1990, the U.S. dollar system had expanded to $3 trillion dollars. Over the next 30 years, the United States had expanded itself with maneuvers in Iraq, Syria, Lebanon, Yemen, Turkey, Jordan, Saudi Arabia and only now are we removing the last remaining military presence in Afghanistan; by the fall of 2021, the U.S. dollar system stood at $20 trillion.
So, why are we moving military presence out of the region now? Seems like an inappropriate lever to give up in a time when inflation has been acknowledged by retail and a pandemic disrupts supply chains and labor forces across the globe. Why would we want to jeopardize our world currency reserve status by removing our ability to prop up the dollar’s demand, as global interest rates sit at zero, and some, in fact, below it? A ponzi cannot simply be tapered, and we now find ourselves mere weeks away from smacking into our debt ceiling and risking default.
Historically, the United States has raised the debt ceiling countless times in recent memory, across all expressions of political spectrum in the three branches of government, and such are trained to expect the same. We have always had a place to put that new found supply of debt expansion, into the forced demands of a petrol-based dollar system. What makes this threat of default perhaps different from the 2008 crisis? It is nearly the same set up, with a diversified, debt-riddled real estate market on the brink of defaulting, with China’s Evergreen playing the role of the Lehman Brothers, causing a short-term deflationary pressure on the global dollar system. We know more printing is going to come, to prevent default of China’s real estate market, as well as prevent the U.S. from defaulting on its loans.
But it isn’t quite the same for a mathematically succinct reason; the compounding service on our near $29 trillion dollars of debt is now beyond the growth of the GDP of the country. We cannot simply raise interest rates due to this debt service, and yet with the acknowledgment of inflation running far beyond the assumed 2% per year, the once formidable long-term treasury bond yields have made the $120 trillion dollar-denominated bond market mathematically worthless. If a bank bought a large amount of 10-year bonds expecting a yield of 2% over a decade, their money is now stuck no longer generating any profits. The not-yet matured bonds went from guaranteed profits to not even keeping up with the inflationary action of the dollar in just the first year.
The last time we saw the markets on the ropes was March 2020; oil futures went negative, bitcoin halved in value, and precious metals and stock indexes across the economy hemorrhaged value simultaneously. If you were lucky enough to have supplied yourself with the knowledge, it was a once-in-a-generational buying opportunity for commodities. A mere two months later, Bitcoin nodes across the globe enforced the third of 33 supply issuance halvenings and decreased the block reward from 12.5 BTC to 6.25 BTC per mined block. For the first time ever, the relative bitcoin supply issuance was below 2%, and thus below the average inflation of both gold coming out of the ground and the average inflation of the United States dollar. By that same time next year, bitcoin had run from just above $3,200 to nearly $65,000. There were very few aware of it at the time, but on that dark Thursday back in March, a new financial instrument was born: the bitcoin-dollar.
Satoshi Nakamoto’s Bitcoin was directly inspired by the events of 2008, immortalizing The Times’ headline from January 9, 2009, in its inaugural genesis block. Today, we find ourselves again on the brink of another bail out. A signaling of the Fed on their dot chart of tapering off bond purchases causes market retraction, and an explanation the next day by a Fed chair causes dovish reclaims of yesterday’s all-time highs. If we raise interest rates, we can no longer afford our debt service, and if we don’t raise interest rates, we allow further debt expansion, monetary debasement and loss of purchasing power of the net dollar system. How can we continue to keep up demand for the dollar while still pumping the money supply to pay off our compounding debts? In retrospect, it was inevitable that the first country to adopt bitcoin would be dollarized. El Salvador, the first nation state to adopt bitcoin as legal tender, is one of 66 dollarized countries in the world. Not only does nearly 70% of the population remain unbanked but almost a quarter of their GDP is created via USD-denominated remittance payments. Native to the execution of their Chivo wallet, a Lightning-enabled app based on Jack Maller’s Strike, is the use of a stablecoin pegged to the dollar. In fact, in a few regions, Strike directly uses the oft-misunderstood Tether, or USDT; the largest stable coin by market cap at nearly $70 billion.
Why does this matter? Aren’t customers simply using the dollar stable coin for a moment before transferring and storing their value onto the Bitcoin network? By creating an infrastructural on-ramp to Satoshi’s protocol that is denominated in dollars, in effect, we have recreated the same, ever-present demand for an inflating supply of dollars demonstrated in the petroldollar system. This does not mean you can not use euros or pounds to purchase bitcoin, just like there was never a literal monopoly on the sale of oil in dollars, but the volume on BTC trading pairs is arguably inconsequential outside of dollar-denominated markets; BTC/USD pairs make up the vast majority of volume on the global market. By expanding the Tether market cap to $68.7 billion during the first dozen-or-so years of Bitcoin’s life, when 83% of total supply was issued, the U.S. market made sure the value being imbued into the now-disinflationary protocol would forever be symbiotically related to the dollar system.
Tether isn’t simply “tethering” the dollar to bitcoin, but permanently linking the new global, permissionless energy market to the United States’ monetary policy. We have recreated the petroldollar mechanisms that allow a retention of net purchasing power for the U.S. economy despite monetary base expansion. If the peg of a dollar-denominated stablecoin falls below one-to-one, large arbitrage opportunities are created for investors, bankers and nation states to acquire dollar-strength purchasing power for 99 cents on the dollar. This occurs when expanding stablecoin supply leads to less demand, and those trying to purchase dollar-denominated commodities on bitcoin/USD pairs are forced to sell at a slight perceived loss. So, like any market, when supply increases causes demand to decrease, the selling price moves down; the selling price moving down briefly below a dollar causes demand to increase and suddenly we are repegged at 1:1.
The reason this works uniquely with bitcoin versus oil or gold is the verifiable, auditable and scarce monetary policy of the Nakamoto Consensus; there will never be more than 21 million bitcoin. By combining a decentralized timestamp server via proof-of-work to solve the digital double-spend problem, with a hard-capped token distribution that is innately tied to its security and decentralized governance, bitcoin is the only commodity to break the pressures of increasing demand on inflating supply. If gold doubles in price, gold miners can send double the miners down the shaft and inflate the supply twice as fast, thus decreasing demand and price. But no matter how many people are mining bitcoin, no matter how high the hash rate increases this month, the supply issuance remains at 6.25 bitcoin per block. Bitcoin is the only decentralized financial model in existence, and most likely the idea of a “decentralized stable coin” is pure logical fallacy.
How can you distribute, secure and order transactions in a decentralized manner when the monetary policy itself is innately tied to the whims and dot plots of a seven-person centralized Federal Reserve? Tether and the grander stablecoin system is a money market for the digital financial market place at large. By creating a robust, heavily margined ecosystem perpetuated and overwhelmingly supported specifically with inflows from dollar-denominated tokens, Tether and the like have pegged the short- and medium-term success of the bitcoin market to the dollar; when bitcoin retracts, arbitrage opportunities now exist for the dollar system to inflate further into the hard-capped, ever-demanded monetary system of Bitcoin. This pendulum-like market mechanism is the key component of the most important technological advancement in the finance world since the energy-based bimetallic and oil standards of yore. The world economy now finds itself irreversibly changed by the dawn of the bitcoin-dollar era.
Perhaps we should be less surprised by this realization than we are; the clues for an encouraged and implicit governmental policy approach to the dollarization of bitcoin are numerous. For starters, SHA-256, one of the secure hashing algorithms used in the Bitcoin network, was invented by the National Security Agency. But from strictly a financial and regulatory standpoint, the United States has significantly much more to lose than most with a net loss of purchasing power of the reserve dollar system.
Nearly four times as much profit was generated by Americans off bitcoin investments in 2020, at around $4.1 billion, than the second closest nation (China at $1.1 billion). Would the U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) let American investors send a lofty percentage of our retail GDP value to an open-source network without a plan to conserve our purchasing economy? An ETF has yet to be approved by either of these regulating bodies, and yet they allow companies like MicroStrategy to take advantage of zero-interest rates and amass cheap debt to make, by all definitions and metrics, a speculative attack on the U.S. dollar system. The six figures of bitcoin purchased on their balance sheet are now worth billions of dollars, surely raising the attention of their next-door neighbors in Langley Park. If the U.S. was afraid of losing economic hegemonic status via bitcoin speculation, they would simply not allow exchanges and companies to do such dealings within their jurisdictions.
In regards to new financial regulations, legislation like Basel 3 requires companies to have considerable holdings of on-sheet liquidity to offset speculations into commodities and assets. On New Year’s Day, any bank wanting to hold a bitcoin or gold position would also be required to hold an equal-part dollar to dollar-denominated value of their investments. This forces a net demand for dollars in the dollar system in spite of a loss of individual purchasing power due to inflation. There is certainly a future regulatory reckoning coming in the unregistered security sales of centralized protocols with known human leadership, but even Gary Gensler, the now acting chair of the SEC, has determined Bitcoin and Nakamoto’s innovation as “something real.”
You can almost reductively view the consumption-based, ever-expanding debt bubble of fiat currency as a large balloon, and the conservation-encouraging, hard-capped and distributed protocol of Bitcoin as a vacuum. By allowing somewhere for the United States monetary supply to inflate into, we can pay off our immense debts without losing any demand or net-purchasing power via the congruent appreciation of bitcoin to the dollar. Pegging this new energy remittance market to the dollar during the increasingly important first decade of tokenized supply issuance has now forever linked the fates of the purchasing power of the dollar to the store of value properties of bitcoin. The United States has proven time and time again that they will do whatever is necessary to protect the purchasing power of the dollar system. The bitcoin-dollar is simply the next evolution of the energy-capital system needed for a functioning global economy. Perhaps the time has come for the Oracle of Omaha to take his own advice and never bet against America; the petrodollar died in March 2020, but like a phoenix rising from the oily ashes, so, too, was born the bitcoin-dollar.
This is a guest post by Mark Goodwin. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.
What do Saddam Hussein and Bitcoin have in common? According to the government, they both have ties to terrorism. In reality, both threaten the United States dollar (USD) and its global hegemony.
“One man’s terrorist is another man’s freedom fighter.” — Gerald Seymour
Throughout this article, we are going to peel back the layers of inflationary monetary policy to be able to answer these three questions:
1. Why does the Federal Reserve target inflation?
2. What do the military and counter-terrorism have to do with protecting the inflation narrative?
3. How come bitcoin sees such strong opposition from certain individuals within the government?
Before we can answer these questions thoroughly, we must take a step back and delve into the world of money. This will give us the building blocks to better examine why the government does what it does. To do so, we must first ask the question: What is money?
The broad definition of money tends to revolve around “an economy’s generally accepted and recognized medium of exchange that is used to facilitate trade for goods and services.” In layman’s terms, money is the store of value intermediary between transactions. If money did not exist, trade would become significantly more challenging. A trade would require both parties to have the exact goods that each other needs. For example, John is a fisherman and Michelle is a carpenter. What’s to say Michelle needs fish at the same time that John needs a table? Additionally, how much fish is this table worth?
Money allows individuals to swap resources or services for a store of value, regardless of whether we have an immediate use for it. This has allowed our civilization to expand and grow much more efficiently than it otherwise would have, as both domestic and international trade becomes almost impossible without money.
For the average person, there are two methods to obtain money:
1. We must expend time and energy in return for money (e.g.., work, labor, services).
2. We must trade goods or resources in return for money. However, to obtain these goods or resources, we must have previously expended time and energy.
Therefore, in both scenarios, to obtain money, we must expend time and energy. With this, we can conclude:
Money = Time + Energy
With this simple equation in mind, we can better understand the inner workings of the monetary system.
Our Monetary System
Our economy operates on a centralized monetary system, where at the top we have the Federal Reserve (the Fed). The role of the Fed is to regulate the U.S. monetary and financial system through monetary policy. This gives the Fed the ability to control the money supply. This ultimately influences whether we are in an inflationary or deflationary environment, regardless of what should naturally occur.
Although the Fed was created as a private entity, we don’t have to look much further than the board of governors to realize that it is just an extension of the government. The board of governors, which guides decision-making, is at the heart of the Federal Reserve and is a government agency. Therefore, although the Fed appears to be independent and impartial, the government has a significant influence over the Fed’s decision-making and, subsequently, monetary policy direction.
Considering the Fed’s role in regulating the U.S. monetary system, one could conclude that it would strive for the USD to maintain sound money characteristics. However, since the introduction of the Fed, the idea of sound money has slowly but surely been undermined and destroyed, with a complete break occurring when the U.S. departed from the gold standard in 1971. Rather than the dollar being somewhat backed by gold, it is now backed by debt. Therefore, it becomes relatively easy for the U.S. to expand the money supply.1 The Fed uses four key levers to control the money supply:
a) Open Market Operations (OMO): The Fed has the ability to purchase short-term treasury bonds from the open market. In doing so, the commercial banks who sell these treasury bonds receive payment in the form of increased bank reserves. This serves two purposes. First, this artificial demand for short-term treasuries decreases short-term interest rates. Secondly, with increased bank reserves and lower short-term rates, commercial banks tend to lend more freely. This results in an increase in the money supply since banks operate on a fractional reserve system, whereby they only need to hold a fraction (generally 10%) of their total deposits/loans in reserves. Therefore, a $1 increase in reserves can result in a $10 increase to the money supply.2
b) Quantitative Easing (QE): QE is usually only reserved for times of economic stress, otherwise it is very similar to OMO. The main difference is that with QE, the Fed targets long-term, instead of short-term, treasury bonds. This causes an artificial suppression of longer-term interest rates, as well as a potential increase in the money supply.
c) Discount Rate: The Fed has the ability to adjust the discount rate. By lowering the discount/interest rate that commercial banks have to pay on short-term loans, the Fed makes borrowing more favorable and, as borrowing increases, so does the money supply. As explained above, banks do not have to have 100% collateral-backed loans. Therefore, any loan created has the potential to cause an increase in the money supply.
d) Modifying Reserve Requirements: The Fed has the ability to modify reserve requirements. This modification refers to the amount of reserves a bank must hold against deposits in bank accounts. By lowering the reserve requirements, banks have the ability to create more loans, which can result in an increase in the overall money supply.
In all four examples, when a dollar is created through monetary expansion, it is backed by nothing but a liability. Therefore, an increase in the money supply is either an expansion of the Fed’s balance sheet or a liability on behalf of the bank that has lent out the money.
In addition to the many levers the Fed has in its arsenal, the Fed openly targets a 2% year-over-year inflation rate. “The Federal Open Market Committee (FOMC) judges that inflation of 2 percent over the longer run, as measured by the annual change in the price index for personal consumption expenditures, is most consistent with the Fed’s mandate for maximum employment and price stability.”3 In layman’s terms, the Fed seeks to achieve a 2% annual increase in the price of goods and services alongside maximum employment and price stability.
If we intuitively think about what the Fed is saying, something doesn’t seem to add up. First, it doesn’t make sense that the Fed is targeting stable prices. We live in a world where we constantly strive to get more for less by increasing efficiency and productivity. For instance:
● Cars were invented to reduce time spent traveling.
● Mass production was introduced to reduce the cost of goods to the consumer.
● The internet was born to aid communication and increase information-sharing and consumption.
● Spotify was created to consolidate music into one easy-to-access space.
● Netflix was founded to allow anyone access to movies without having to travel to the movie store.
And the list goes on. At no point has human ingenuity been used to get less for more, with the exception of inflation targeting.
Although it is possible to see prices rise (natural inflation) through structural demographic changes or supply-and-demand imbalances, prices tend to fall in the long run. However, by targeting inflation, the Fed is actively aiming for a steady increase in prices over time. They are able to achieve this through monetary expansion, which creates a slow decay in the purchasing power of the currency and, in turn, an increase in the cost of goods, services and assets. This is not natural. Instead, as technology advances and we see increased productivity, prices should naturally decline, and the currency should strengthen, allowing us to buy more for less.
Additionally, is unemployment such a bad thing? With a strengthening currency and decreasing cost of goods and services, the cost of living should also decline. In turn, we should be able to work less with a greater output. This ultimately allows us to achieve a higher standard of living. Under this lens, unemployment may not be the bad egg it is made out to be. Instead, we should view decreasing prices alongside reduced work hours and a slow increase in unemployment as a potential sign of a healthy, happy economy. So, what are the effects of inflation, and who is it benefiting?
What Are The Effects Of Inflation?
As explained above, the Fed, through its arsenal of tools, has the ability to influence the money supply with the goal of hitting specific inflation targets. However, this targeting comes at a cost. As mentioned above, monetary expansion to reach inflation targets negatively affects purchasing power, causing an increase in the cost of goods, services and assets. However, as this destruction of purchasing power occurs incrementally over time, it can be difficult for the average person to grasp inflation’s adverse effects. Irrespective of the societal and economic impacts,* the four main monetary side effects of inflation are:
1. Dilution: Creating more dollars backed by debt does not add value to the economy. Instead, it dilutes the currency that is already in circulation. For example, if a pizza is cut into four slices, doubling the money supply would not be equivalent to doubling the amount of pizza. Instead, it would be equivalent to cutting those four slices in half to create eight slices. We have not gained any additional pizza. We just have more slices.
2. Interest: As explained above, to increase the money supply, a liability must be created. When this is done, there has to be interest paid on this liability. For example, when the Fed increases bank reserves for commercial banks, it pays interest on excess reserves (IOER). Therefore, in addition to the dilution of the currency, a liability with interest payments is created. Not only has inflation diluted our existing currency, we now have to divert productive capacity to pay down debt plus interest.
3. Loss of Accurate Measurement: Currently, we measure assets, wealth, goods, services, income and so on in dollars. The challenge with using the USD as a medium of measurement is that, as inflationary monetary policy destroys purchasing power, we see a change in the value of the dollar. This inadvertently inhibits our ability to use the USD as an accurate measuring stick. The USD would be a great form of measurement if its supply was stable and consistent. However, this is unfortunately not the case. Using the dollar as a medium of measurement is like trying to build a house using a ruler, where the measurements on the ruler keep changing unexpectedly and unpredictably. I doubt the house would be structurally sound.
4. Distortion of Economic Indicators: The USD is a crucial indicator for economic decision-making. However, by performing inflationary monetary policy and masking economic stress through monetary expansion, we hinder our ability to obtain insightful economic information when analyzing the USD. Consequently, we are impeding the economy from error-correcting accurately and, in turn, hampering its ability to adapt, evolve and innovate effectively.
* For a more detailed breakdown of societal and economic impacts of inflation, check out “When More Isn’t Better: Inflation in the 21st Century.”4
With these side effects of inflation in mind, it can be difficult to look favorably at inflation. Additionally, it makes us question that if our dollar’s purchasing power is slowly decaying over time, is an increase in wealth in dollar terms all that it is made out to be? One way to view the reality of our situation is to change the medium of measurement. For instance, below is a chart of the S&P 500 versus the S&P 500 divided by the Fed’s balance sheet. This alternate measurement takes into account monetary expansion rather than just relying on the dollar.
As we can see, the 175%+ growth in the S&P 500 over the last 12 years is, in reality, more likely a significant loss when we account for monetary expansion. However, it should be noted that many of these dollars created on the Fed’s balance sheet may never reach the public domain, and, therefore, it is difficult to determine the exact impact on the purchasing power of the dollar. This may mean the loss is not as drastic as -65%; however, the difference is still a far cry from negligible.
Why Does The Federal Reserve Target Inflation?
If we distill everything up to this point, it can be tough to understand why the Fed would target inflation when it has such adverse side effects. However, if we dig into the two main benefactors of inflationary monetary policy, we can better understand why we see such policies.
As the Fed implements inflationary monetary policy, the general population and businesses start to spend and borrow, causing an increase in debt consumption. With an increase in debt, we see money supply expansion and a reduction in purchasing power. Usually, with increased demand for borrowing, we would see a rise in interest rates. However, as previously mentioned, the Fed has a couple of tools in its arsenal that allows it to suppress interest rates. Additionally, by working alongside the U.S. Treasury, the U.S. is able to implement what is called financial repression.
A concept introduced in 1973 by Stanford economists Edward S. Shaw and Ronald I. McKinnon, financial repression is the suppression of interest rates below that of inflation, which allows the government to borrow money at extremely low rates to fund operations.6 This greatly benefits debtors and is disadvantageous to creditors, aligning with the fact that the US is the largest debtor nation with a total government debt of $28.1 trillion.7
This suppression of interest rates is not natural and allows the treasury to obtain capital to fund operations through the issuance of treasury bonds at rates below that of inflation. This indirectly passes on the cost of borrowing onto the creditor, which, in this case, ends up being the economy. In essence, financial repression is a stealth tax on its currency holders in two ways:
1. When the Fed artificially suppresses interest rates, it negatively impacts savers (e.g., pension plans, savings accounts, fixed-income investments). Under normal interest rate environments, savers would be rewarded in the form of reasonable interest rates (i.e., they would get significantly more return on their capital). Instead, savers are punished with suppressed interest rates and this difference in performance is passed onto the government to fund its debt.
2. To suppress interest rates and drive inflation, the government has to perform OMO, QE and other inflationary monetary policies. In all three instances, we see an increase in monetary expansion. This monetary expansion causes a destruction of purchasing power, which directly impacts savers and fixed-income investors, while benefiting the debtors as it reduces their debt burden.
You may wonder why someone would ever lend money at interest rates below that of inflation. Unfortunately, this is not something that the population has much say over. The government puts such measures in place as:
● Reserve requirements. For example, international bank regulatory standards (Basel III) encourage banks to hold government debt by giving it preferential treatment for satisfying capital requirements.
● The capping of interest rates to prevent interest rates from rising above certain levels (i.e., yield curve control8).
● Increased regulation of capital movement between countries. This restricts capital from flowing out of the U.S. to more favorable options.
These tactics and regulations ensure the continual flow of capital into treasury bonds, allowing the government constant access to cash to fund operations and direct it to wherever they feel necessary.
Overall, the government benefits in two ways from inflation and, more specifically, financial repression.
Through inflationary monetary policy and financial repression, the government no longer has to act in the best interest of its population. This is because it is able to fund itself regardless of whether or not it collects enough capital to fund operations through taxation. It is able to fund itself in the following ways:
a) The U.S. treasury issues government bonds to obtain capital to fund its operations. Under normal operations, commercial banks and other entities purchase these bonds and, in return, collect the interest on the money lent to the government. However, through OMO and QE, the Fed can purchase these treasuries off the commercial banks. So, in effect, the government is funding itself by issuing and selling treasury bonds to itself and using the big commercial banks as intermediaries.9
b) Through financial repression’s stealth tax, the government is able to borrow capital at rates below that of inflation, forcing the borrowing costs to be passed onto the creditor. Ultimately, this reduces the government’s debt burden and allows it to fund itself without explicitly taxing its population.
Reduction in the Deflationary Effects of Debt
The government has spent more than it has made through taxation and other forms of income in 19 out of the last 21 years.10 Since it has been running such huge deficits to fund operations, it has accumulated a vast amount of debt. As the debt burden grows, so does the deflationary pressure. Financial repression via monetary expansion and the lowering of rates allows the Fed to reduce the deflationary effects of debt.
When the government implements an inflationary monetary policy, the second biggest benefactor is the banks. As explained above, under our fractional reserve banking system, banks do not need to be fully collateralized (i.e., they only need to have a portion of their liabilities in reserves). When the Fed lowers interest rates, we see an increase in demand for borrowing. With this increased demand, banks are able to expand the money supply by increasing the number of loans they create. In turn, they profit as they collect interest on these loans. Where it gets confusing is that this money did not exist on the bank’s balance sheet prior to the loan being created.11 When a new loan is created, the money supply expands as new money is created to facilitate the loan. It is important to highlight that most of the money in our economy is created this way and not, as most people assume, by Jerome Powell at the Fed hitting the print button.
Additionally, when the Fed performs measures such as QE, this gives the banks greater reserves to create more loans, allowing greater expansion of the money supply.12 Essentially, banks today, under the fractional reserve system, are able to create revenue from lending money that they never had in the first place. They are creating money out of thin air, and so, just like the government, they, too, are benefiting by diluting the currency.
You may be wondering, why are the banks given so much power? The banks are the government’s means of dispersing capital into the economy. When the Fed lowers interest rates, it is the banks that create loans and disseminate capital, which aids productive capacity, allowing further capitalization of the economy by the government in the form of inflation. In short, banks play a pivotal role in the government’s ability to capitalize off its population and the currency holders.
However, disbursement of capital isn’t the only benefit banks give to the government. The financial sector is one of the largest contributors to political campaigns and lobbying. During the 2020 election, Wall Street banks and financial services spent $2.9 billion in lobbying and contributions.13 Therefore, not only do the banks aid in the disbursement of newly created capital, but they also provide a substantial income stream for politicians. It is for these two reasons that the banks are given so much power.
Additionally, if we’ve learned anything from U.S. politics, it is that lobbying has a considerable impact on regulation and the legislative process.14 By lobbying, banks can influence legislation to ensure regulation is put in place, protecting their position within the financial system (e.g., strict anti-competition regulation, which reduces competitors).
From everything we have discussed, it is evident that the government no longer needs to act in the best interest of its population to receive funding (e.g., income tax, sales tax, corporate tax). It can effectively fund itself through hidden taxation in the form of monetary expansion or financial repression without its population or the currency holder’s consent. This is why the government consistently pushes the inflation narrative and continues to target increased economic productivity. The more productive a country is, the more demand there is for that country’s goods, services and currency. This increased demand leads to a strengthening of the currency. The stronger the currency, the greater the amount of monetary expansion that can be performed before its population starts to feel the adverse effects.
However, inflation is a double-edged sword. Although the government and the banks benefit immensely from inflation, alongside inflation comes debt. As mentioned previously, whenever the money supply increases so does the debt burden. This creates a negative feedback loop whereby to service the debt, more money has to be printed. This further impacts the currency holders in two ways:
1. In order for the government to continue to fund itself and keep the deflationary pressures at bay, it must further expand the money supply. This continual expansion destroys the purchasing power of the currency.
2. As the debt burden increases, the house of cards that is the financial system becomes ever more unstable. When interest rates do inevitably rise, the consequences will be catastrophic (such as that of the Asian debt crisis or Japan’s lost decade), and it is nearly always the public which pays the price as losses are usually socialized.
Unfortunately, this doesn’t seem to stop the government from continuing to do anything it can to ensure that the inflation narrative continues.
Let us delve deeper into this nonconsensual taxation through monetary policy. We know from above that money = time + energy. Therefore, as inflation creates a loss in purchasing power — and financial oppression is the suppression of interest rates and the transfer of borrowing costs onto the creditor — and if this has been done without the consent of the currency holders, then this is theft of their time and energy. Although it has been banned since 1865, inflation under this light sounds eerily similar to slavery, which is also the theft of time and money.
Slavery is when an entity benefits off of someone else’s time and energy, at their expense and without their consent. It doesn’t matter whether or not the person knows. The government prefers to use the term “inflation” as it hides their underlying intent and allows them to appear to be doing what is best for the population.
This claim of slavery may sound asinine. However, in 1862, a confidential letter, circulated by English capitalists among American bankers, aptly described a monetary system uncannily similar to the monetary system we use today. The letter is below:
“Slavery is likely to be abolished by the war power, and chattel slavery destroyed. This I and my European friends are in favor of, for slavery is but the owning of labor and carries with it the care of the laborer, while the European plan, led on by England, is capital control of labor by controlling wages. THIS CAN BE DONE BY CONTROLLING THE MONEY. The great debt that capitalists will see to it is made out of the war must be used as a measure to control the volume of money; to accomplish this the bonds must be used as a banking basis.” — Charles Hazard, Hazard Circular, 186215
It is apparent that long before the current monetary system came to be, the immense control someone could wield, if they had authority over money, was well known. For if you control the monetary system, you control the economy, or as Mayer Amschel Rothschild famously said, “Permit me to issue and control the money of a nation, and I care not who makes its laws.”
Robert Breedlove explores this further with his insightful article, “Masters and Slaves of Money,” where he compares monetary expansion and its equivalent in labor hours worked.16 Ultimately, he concluded that the expansion of the M2 money supply between 1981–2020, divided by the U.S. average hourly (assuming that the average U.S. worker works 2,000 hours per year) equates to the U.S. running 11.7 million people for 40 years straight. He then expands further, “Time stolen by The Fed since 1981 is 341% more per year than the trans-Atlantic slave trade. With 23.4B hours stolen annually, The Fed could (in theory) build 2.3 Great Pyramids each year. In terms of absolute human time stolen per year, fiat currency is the largest pyramid scheme and institution of slavery in human history.”
“None are more hopelessly enslaved than those who falsely believe they are free.” — Johann Wolfgang von Goethe
If every other ordinary individual and business has to add value to society to earn money to pay its bills and operate, why shouldn’t the government? Regardless of whether or not one would classify inflation and financial oppression as slavery, most would agree that having the ability to fund oneself removes true supply and demand and, therefore, entitles the holder of that power to act in their own self-interest as opposed to the interests of others. Additionally, when that self-funding comes at the expense of the population, it can become a slippery slope to detrimental authoritarian regimes.
For example, a monopoly corporation in a small town has overarching control of its people as it is the primary source of jobs for the community. It can, therefore, create hardship through layoffs or boost morale through hiring and wage increases. This control over employment and wages cultivates conformity and prevents people from speaking out in fear of losing their jobs or being ostracized from the community. Along this same vein, any entity that controls the money supply can create economic hardship with a restriction of capital or the illusion of economic prosperity through monetary expansion. This allows for population control since, when the population starts to gain independence, or the entity’s power is infringed upon, they can create economic hardship through a monetary contraction. Alternatively, they can give the illusion of economic prosperity via monetary expansion, which additionally aids the facade that they are doing what’s best for the population and thus rebuilds the population’s confidence. At no point is the entity required to offer legitimate value to society.
To clarify, as long as the government is offering a service that provides value to its population and uses proceeds from taxation with the population’s interests at heart, taxation under traditional measures such as income tax, sales tax and corporate tax is by no means theft. Instead, taxes are a necessary part of the economy as it is through taxation that the government can obtain capital to operate and survive.
Where taxation issues arise is when we have financial oppression and inflationary monetary policy in addition to traditional taxation. In this scenario, not only are we paying tax in the form of income tax, sales tax and corporate tax, to name a few, but we are subject to currency debasement and supporting the government’s debt burden without our consent. This is effectively double taxation and allows the government to fund itself without having to offer a beneficial service to its population.
It is fair to play devil’s advocate and recognize that this information can be construed in a multitude of ways. In this instance, it may have been skewed to paint the government in a negative light. Additionally, one could argue that there are benefits to inflation such as:
● allowing the government to obtain capital to fund social, medical, welfare programs, and so on;
● providing capital to the economy, which can aid economic growth;
● giving the Fed the ability to dampen economic stress; and
● reducing the deflationary effects of debt.
These are fair points, so let’s dig deeper to see if the government has kept its population’s interests at heart. The old adage, “do not listen to what they say, look at what they do” seems appropriate.17
Below is a table that looks at government spending directed toward mental health and drug addiction in relation to government spending directed toward counter-terrorism. It then compares the total deaths and the dollars spent per death. As we can see, if the government was concerned about the well-being of its people, we would assume that they would direct spending toward the areas which need it most. Unfortunately, this does not seem to be the case. Additionally, if we look at the military versus healthcare spending, the U.S. spends 450% more on the military than healthcare.18
Why Might The Government Be Spending So Much On Counter-Terrorism And The Military?
Before we can understand why the government spends so much on its military and counter-terrorism, we must first dig into the USD and its world reserve currency status.
Prior to 1971, the USD operated on the Bretton Woods system, a sort of gold standard. Under Bretton Woods, many foreign countries agreed to maintain a fixed exchange rate between their currencies and the dollar. In return, the U.S. agreed that every dollar in circulation was backed by and could be exchanged for its weight in gold. This agreement is what gave the USD value. However, in 1971, the U.S. dropped the Bretton Woods system and transitioned to the fiat standard, which we use today. The difference is that, instead of the dollar being backed by gold, it is now backed by nothing but debt. Internationally, this decision was not well received, and over the coming years, the dollar struggled.20 The U.S. urgently had to find a way to maintain its reserve currency status as the dollar was now under threat.
Through the middle of the 1970s, the U.S. found a way, through bilateral agreements with Saudi Arabia (the largest Organization of the Petroleum Exporting Countries, or OPEC, oil producer at the time) to influence OPEC to standardize the trade of oil, ensuring transactions were facilitated in USD.21 The petrodollar was born.22
Two benefits the U.S. has over every other country:
World Reserve Currency: Since the USD holds the global reserve currency status, most trade is made in USD. With this being the case, there is a vast amount of USD-denominated debt as countries have to obtain dollars to fund global trade operations. This constant demand for dollars to maintain/pay down USD-denominated debt and trade results in an artificial strengthening of the USD.
The petrodollar: This agreement with OPEC in the 1970s, ensuring that most oil trade was now priced in dollars, has provided tremendous benefits to the U.S. With oil being the preeminent global energy source, the need for oil is immense. Just like the world reserve status, the OPEC agreement has created a universal artificial demand for dollars, strengthening the dollar. Additionally, there is one other huge advantage the U.S. has over other countries. As oil is the preeminent global energy source, not only does the U.S. have a considerable influence over the price of oil, the U.S. can now purchase oil through the printing of dollars. These petrodollars are then recycled back into the U.S. via the sale of U.S. Treasury bonds to petrodollar nations. Ultimately, this allows the U.S. to fund itself. This system is called petrodollar recycling.
With both the petrodollar and the world reserve currency, the U.S. benefits greatly as there is this constant demand for dollars resulting in a strengthening of the currency. The U.S. government can then capitalize off this increased currency strength through monetary expansion and fund its operations. This grants the U.S. an extraordinary advantage over any other competing country as it can fund itself at the expense of another country. Any government which wants to compete globally is at the whim of the U.S. First, they have to obtain USD to purchase oil and trade. To do so, they must sell their currency in exchange for USD, which tends to devalue their currency. Second, the U.S. can capitalize off this USD currency holder through monetary policy by expanding the money supply for its own benefit. Ultimately, not only has the competing country had to devalue its currency in the purchasing of dollars, it now holds dollars that can be devalued for the benefit of the U.S.
What Do The Military And Counter-Terrorism Have To Do With Protecting The Inflation Narrative?
As I am sure it is now apparent, the purpose of the military and counter-terrorism is not to protect the people of the U.S. The military and counter-terrorism are there to aid the U.S. in its global hegemony and protect the government from any people or entities that infringe on its ability to capitalize off its currency holders.
Therefore, the best way to protect the U.S.’ global positioning is to fund the military and counter-terrorism. This will ensure global control and allow the U.S. to continue to push the inflation narrative. This explains the imbalance between mental health/drug addiction spending and counter-terrorism in the chart above. It also explains the significant imbalance when we look at global military expenditure, where globally, the U.S. has the highest military spending budget. The U.S. spends 308% more than China, which is in second place, and more than the subsequent 10 countries combined.
If the U.S. were to lose its monopoly on oil trade, we would see a significant drop in demand for the USD. This would most likely threaten its reserve currency status. If this were to play out, the U.S. could no longer capitalize off its global positioning, and it most definitely couldn’t expand the money supply to the same extent, without major repercussions and destruction of the USD’s purchasing power. Just to drive the point home one more time, this is why the U.S. is so highly incentivized to protect the petrodollar. The petrodollar helps ensure global reserve currency status, hugely enhancing its ability to continue legal theft/slavery through monetary expansion.
Where Does This Military Spending Go?
With the positioning of the USD, it is clear that they are incentivized to challenge anyone who attempts to interfere with their power. With this in mind, let’s dig into how and where exactly the U.S. directs their immense global authority and military power.
Although, first, we must detour so that we understand how the U.S. accrues power. This will allow us to understand why the U.S. does what it does when it comes to the military, a coup d’état (removal and seizure of a government and its powers), revolutions, and more.
The U.S. tends to operate in a three stage process when it comes to maintaining and growing their global powerhouse:24
1. Economic Hitmen: The big conglomerates and corporations within the U.S. send economic hitmen (EHM) into developing nations with large energy reserves. The goal is to “altruistically” offer to lend these nations money and help develop and build energy infrastructure, allowing these nations to capitalize off their natural resources. These proposals are usually under the pretense that the country will prosper and see an increase in living standards. However, there is an ulterior motive to these “altruistic” loans. EHM will overemphasize the returns of these energy projects, encouraging the targeted nations to take on significantly more debt than they’re able to support. These nations will struggle and eventually default under the debt burden. As a consolation, these U.S.-backed corporations will offer to take control of the natural resources, military and/or political decision-making capacity. If they succeed, the U.S. will expand its global resources and power (we see China pursuing a similar path with their Belt and Road initiative25). If not, they move onto stage two.
2. Jackals: When these indebted nations refuse to play ball, the Jackals move in. These are CIA-sanctioned entities in charge of staging coups, revolutions, murder, abductions and assassinations.26 Examples of this are the coup against Chile’s President Salvador Allende,27 the coup against Brazil’s President João Goulart,28 and the coup to overthrow Iran’s Premier, Mohammad Mosaddeq,29 all supported by the CIA. To the average person, these events seem like domestic unrest, although when we dig deeper, there tends to be more sinister underpinnings. Usually, these events ensure that the U.S. can continue to capitalize on the nation’s resources or its global positioning.
3. Military: Finally, if all else fails, the U.S. military moves in. The goal is to use brute force to ensure that the U.S. can continue to operate in its monopolistic ways. Military intervention is a way for the U.S. to wipe clean the current political party and put in place someone who aligns with U.S. foreign policy. Proposals for military movement tend to be under the facade of humanitarianism or counter-terrorism. This quickly gains the backing of the general population, the congressmen and the politicians and ensures that the U.S. can continue running its global powerhouse at the expense of the global population.
Within these three stages, the U.S. is able to enforce its authority globally and ensure that foreign nations comply. This may seem outlandish; however, all we need to do is watch the daily news to see global events such as these occur, time and time again. The following are examples of U.S. intervention.
Fact: Iraq is in fifth place for largest known oil reserves, with 8.7% of the total known global reserves.30
In October 2000, Saddam Hussein announced that Iraq was going to transition to selling oil in euros. By February 2003, they had sold 3.3 billion barrels of oil, totaling 26 billion euros.31 In March 2003, the U.S., along with the U.K., invaded Iraq and overthrew Saddam. Three months later, Iraq was back to selling in dollars.
The U.S. has claimed they invaded Iraq to promote human rights as they had deep ties to terrorists such as al-Qaeda and held weapons of mass destruction (WMD). However, as there have never been any verified links between Saddam and al-Qaeda, nor any evidence supporting WMDs in Iraq, it looks more likely that their intention was to protect the petrodollar.32
Fact:- Venezuela has the largest known oil reserves, with 18.2% of the total known global reserves.33
Since Hugo Chávez was elected president of Venezuela in 1999, he consistently threatened that Venezuela would stop selling oil to the U.S.34 In addition, Chávez regularly talked about raising oil prices, taxes and royalties so that Venezuelans could benefit from oil revenue instead of the U.S.35 Chávez did not believe that oil prices should be suppressed and that due to increasing oil demand, there was room for increased prices. However, an increase in oil prices will only benefit the oil producers, ultimately hurting the oil importers (i.e., the U.S.). Chávez aimed to use excess revenue generated by increased oil prices, taxes and royalties to be reinvested into various South American countries in a bid to increase the prosperity of Venezuela and other South American countries.
In April 2002, President Chávez was removed from office in a coup supported by the U.S. government.36 He was then forcefully asked to resign. After he was removed from office, he was kidnapped and finally replaced by Pedro Carmona, the head of Venezuela’s business confederation, Fedecámaras. This event was followed by mass protests by the Venezuelan people and certain army sectors until Chávez was returned and reinstated as president. Although there were many threats up to Chávez’s death, the U.S. was never cut off from Venezuelan oil.
Fact: Libya is home to Africa’s largest oil reserves and is in ninth place for largest known oil reserves, with 2.9% of the total known global reserves.37
In 2009, Muammar Gaddafi proposed the idea of the gold dinar to the states of the African continent, a currency backed by gold and facilitated by the transition from selling oil in dollars to selling oil for gold.38 The gold dinar would be a way to divert oil revenues toward state-controlled funds and away from the U.S.
In October 2011, a NATO airstrike targeting Gaddafi loyalists forced him and his inner circle to flee. While fleeing, he was captured by Misrata-based militias and ultimately executed.39 As expected, with Gaddafi’s death also came the death of the gold dinar. Today, the majority of Libyan oil is priced in dollars.
Again, U.S. intervention reasoning was under the pretence of humanitarian interventionism. However, not only could human rights foundations not find any evidence to support this, in 2015, Wikileaks released a U.S. Department of State document emailed to Hillary Clinton in March 2011, which detailed that Gaddafi’s government held 143 tonnes of gold intended for the establishment of the gold dinar.40 The U.S. knew about Gaddafi’s plans for the gold dinar.41 Therefore, what seems more likely is that they recognized that the petrodollar was under threat of attack, and they needed to react.
With the U.S. displaying a lot of concern for human rights and terrorism, one must find it strange that they haven’t chosen to take on:
● Saudi Arabia: There have been links between Saudi Arabia and terrorism, including connections between the Saudi Royal Family and al-Qaeda.42 There has even been evidence showing that the country’s crown prince, Mohammed bin Salman, directly approved the murder of Washington Post columnist, Jamal Khashoggi.43 However, neither Presidents Trump nor Biden have shown any intent to go after Saudi Arabia.
Instead, whenever Saudi Arabian oil is under threat, the U.S. supports them. Why does the U.S. not want to take action? As explained above, the U.S. and Saudi Arabia have a deep bilateral relationship where the U.S. is not incentivized to go on the offense. Instead, the U.S. will do whatever it takes to protect the Saudis. Saudi Arabia has agreed to sell its oil in dollars, and, in return, the U.S. has agreed to give them access to U.S. arms and military protection. Saudi Arabia supplies the U.S. with a third of its oil, and between 2015–2019, Saudi Arabia alone purchased a quarter of all U.S. arms exports.44
● North Korea: In 2014, the Human Rights in North Korea Report by the United Nations Commission of Inquiry concluded that “the government committed crimes against humanity, including extermination, murder, enslavement, torture, imprisonment, rape, and other forms of sexual violence, and forced abortion.”45 Additionally, North Korea has publicly stated that it has WMDs.46 The U.S. could easily build a solid humanitarian case to infiltrate North Korea, as it did with Gaddafi. However, just like Saudi Arabia, the U.S. shows no signs of intervening. One reason the U.S. may be disinterested could be that North Korea has no proven oil reserves and, therefore, does not pose a threat to the U.S.47
As should now be evident, “do not listen to what they say, look at what they do” can give us a great deal of insight into the government’s agenda.48 We can now more easily understand why the U.S. seems significantly more interested in directing its government spending and military efforts toward protecting the petrodollar and its world reserve status than protecting human rights and the people of the U.S. Until we see a shift away from centralized monetary systems, this will, unfortunately, continue to happen.
Behind The Altruistic Curtain
Although we may never be able to answer with certainty why the U.S. went to war with Hussein and Gaddafi or chose to support the coup against Chávez, we can gain a great deal of information from their approach. Do you think it would be easier for the president to rally Congress and the general public under the altruistic premise that
● the U.S. needs to go to war on humanitarian and anti-terrorism grounds to defend its people
or, under the more legitimate rationale,
● to protect the petrodollar and its world reserve currency status, ensuring that the U.S. can continue to capitalize off its population and foreign currency holders.
Unfortunately, the former seems most likely. Hussein, Gaddafi and Chávez were directly attacking the petrodollar and the ability of the U.S. to capitalize off its currency holders. The most effective way for the U.S. to challenge them is to use its incredible global power to create a narrative relating to humanitarian/terrorism grounds, painting the so-called enemy in a negative light. This will ensure the backing of Congress and the American public, and with this backing and support, they can do what’s needed under the pretense of humanitarian interventionism/terrorism.
This misleading humanitarian/terroristic war narrative will continue as long as the petrodollar exists. In the eyes of the U.S., any threat on the petrodollar warrants a response, and no narrative supports the response better than altruism or defending one’s country. The U.S. will do anything to ensure its position is not encroached upon as a loss of the petrodollar or world reserve currency status would severely impact the U.S. and its ability to capitalize off its currency holders. This is why we see so much funding being directed toward counter-terrorism and the military, even though there is empirical evidence showing that military spending is detrimental to economic productivity and growth.49 The dollar depends on a strong military, and the military depends on a strong dollar.50 Without either, the U.S. is unable to continue its inflationary narrative.
Where Does Bitcoin Stand In All Of This?
*This piece is not so much about Bitcoin and its benefits but rather about how the U.S. operates and why Bitcoin is under threat. Therefore, I won’t go into too much detail about Bitcoin’s well-known benefits. For more information on the benefits of Bitcoin, check out: https://bitcoinmagazine.com/culture/bitcoin-illusion-of-reality.
Bitcoin has the potential to give power to individuals, capitalize off stranded energy, increase economic productivity and boost innovation.51 We could, therefore, assume that this new exponentially growing technology would be adopted with open arms. However, although we have seen incredible adoption from certain areas of the general population and forward-thinking individuals, this is not true for the government. Like Hussein, Gaddafi and Chávez, bitcoin directly threatens governments’ ability to capitalize off its currency holders. If bitcoin were to become adopted as the world reserve currency, it would be a significant threat to the U.S. and its ability to operate an inflationary monetary policy for these three reasons:
1. Fixed Supply: For the first time in history, bitcoin offers an accurate measuring stick with which to view the world. As bitcoin cannot be manipulated, it will always maintain a 21 million coin supply cap. Therefore, bitcoin offers the potential to give accurate insight into supply-and-demand information. As we know, when we hit periods of economic stress, we are given feedback in the form of economic indicators (e.g., interest rates, equity prices, GDP). When we inflate the money supply to capitalize off the currency holders or dampen the underlying economic stress, we distort these economic indicators as we mask true supply and demand. This prevents the economy from accurately error-correcting.
Bitcoin, due to its lack of manipulation, does not allow any entity to capitalize off its currency holders or for the masking of stress through inflation. Instead, governments must offer value to society and solve underlying economic issues directly. This would allow one to see the world as it really is instead of one distorted by monetary expansion. With this in mind, bitcoin would expose the inflationary narrative for what it is, a way for the government to self-fund and capitalize off its currency holders.
Additionally, as individuals, we want our economic productivity to benefit us and those around us. With bitcoin, this increased productivity would accrue in the form of increased currency strength, which would allow the holders, rather than the government, to benefit. This is the case for the USD when they extract this increased productivity through inflation.
2. Decentralized: Bitcoin is a monetary system governed by rules, not rulers.52 No single entity has authority or control over bitcoin. With bitcoin’s decentralized nature, it doesn’t matter whether you are the president, an unbanked asylum seeker or a private doctor. Everybody has to play by the same rules. This would prevent influential figures from controlling monetary policy at the expense of the currency holders.
3. Self-Custody: Bitcoin is the first asset that allows the holder the ability to self-custody easily and securely. Doing so transfers power from the government and the third parties that custody our assets to the currency holders. This ensures that governments, banks and corporations act as service providers with their population and customers best interests at heart, rather than the overbearing, controlling entities that they are today.
How Come Bitcoin Sees Such Strong Opposition From Certain Individuals Within The Government?
Although Bitcoin is a technology that offers excellent benefits, we can see from the three benefits detailed above that bitcoin is at great odds with the current structure of our economy. Bitcoin directly impacts the government’s ability to capitalize off its population and currency holders as it undermines the U.S. and its currency monopoly. Therefore, it is evident why we see such opposition within the government.
Even after many rigorous studies disproving all major false narratives, bitcoin still regularly comes under fire. One study by the ex-deputy director of the CIA concluded that “the broad generalizations about the use of Bitcoin in illicit finance are significantly overstated.”53 Since 2016, only around 0.5% of bitcoin’s total transaction volume has been used for illicit activity. In comparison, within traditional finance illicit activity makes up between 2–4% of GDP. This is a stark difference to how Bitcoin is portrayed in the media, yet we continue to see misleading statements such as that by U.S. Treasury Secretary Janet Yellen,”I see the promise of these new technologies, but I also see the reality: Cryptocurrencies have been used to launder the profits of online drug traffickers; they’ve been a tool to finance terrorism.” It appears that the people in power are not interested in the truth. Instead, they are set on constructing the most damning narratives so that bitcoin is deemed detrimental to the economy in the eyes of the public.
Therefore, it does not matter that bitcoin is trying to solve financial oppression through monetary inclusion and equality. Bitcoin directly interferes with the government’s agenda by allowing individuals to opt out of inflation taxation, and so for this reason alone, bitcoin is portrayed as a threat to the U.S.
One may argue, why do we need bitcoin? Or, why not put someone in power who wants what’s best for the people? It is evident from history that people inherently want to protect their bloodline, wealth and power in society. Therefore, anyone in charge of a currency will usually end up abusing their power, and if the present person in power doesn’t, it’s just a matter of time before one will. Bitcoin removes this monetary temptation and creates an even playing field for all. Without temptation, political figures can focus on what’s best for society instead of what benefits them. Additionally, bitcoin allows the currency holders to have a say in monetary policy and ensure that any change is up to general consensus instead of those in power.
“If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary.” — James Madison, Federalist Paper No. 51
Many decades ago, Milton Friedman famously said, “There’s no such thing as a free lunch.” Those words still hold true today. As shown below, no nation in history has ever maintained its global hegemony indefinitely (this is known as the Triffin paradox).54 As the global reserve currency, the U.S. cannot maintain its reserve currency status, grow its manufacturing base and preserve its sovereignty.
With the U.S. directing all its energy and resources into protecting the petrodollar in order to maintain its reserve currency status, we inevitably see sacrifices when it comes to healthcare, infrastructure and domestic manufacturing. In time, these sacrifices will end up being the demise of the U.S. and its global hegemony. It will then become clear that its attacks on bitcoin and other entities that infringed on the government’s ability to capitalize off its currency holders were just the U.S.’ desperate final attempts to defend its global positioning.
However, until this day comes, bitcoin will most likely continue to be seen as a threat by the US. Therefore, it does not matter that bitcoin may be one of the most ingenious and economically productive inventions to date, or that it has an incredible ability to channel human ingenuity, transfer power and spur on the construction of a true decentralized free-market capitalist system. While the U.S. holds its global hegemony, bitcoin interferes with its ability to self-fund and push its inflationary narrative. Therefore, under the lens of the government, bitcoin does not aid economic productivity and, just like Hussein and Gaddafi, will be tarnished by the people in power and be positioned as a threat to society. As an advocate for equality and an investor in bitcoin, this attack on bitcoin can be disheartening. However, we must keep in mind:
a) The powers that be are incentivized to prevent the adoption of bitcoin as it impacts their ability to self-fund and continue their inflationary narrative. However, they cannot maintain this hegemony indefinitely.
b) Bitcoin paves the way for a new paradigm in monetary inclusion, equality and reduced financial oppression. It concurrently brings increased economic productivity, as it channels ingenuity and encourages innovation.
c) Bitcoin is a monetary system governed by rules, not rulers.56
Considering these points, one can more easily look through the fear, uncertainty and doubt (FUD) and advocate for a world of equality, where the population’s best interests are at heart and where decision-making is by consensus rather than power.
We should not let a fear of the U.S. and its overbearing nature dictate our decision to demand global monetary equality. Instead, we should embrace it. Let this fear be the fuel that stokes the fire of change. Bitcoin is attempting to transfer many millennia of centralized power through currency to the people. Of course, there will be hurdles, and, of course, there will be pushback, but that’s a small price to pay on the road toward freedom and equality.
Just like China, the Netherlands and the U.K., which all succumb to the Triffin paradox, so, too, will the U.S. But as with any global change in reserve currency comes opportunity, which brings up the important question: Who will pick up the mantle?
“I predict future happiness for Americans, if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.” — Thomas Jefferson
This is a guest post by Sebastian Bunney. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.
1 Gallant, Chris. “How Central Banks Can Increase or Decrease Money Supply.” Investopedia, May 18, 2021, https://www.investopedia.com/ask/answers/07/central-banks.asp.
5 FRED. “Assets: Total Assets: Total Assets.” FRED, July 27, 2021, https://fred.stlouisfed.org/series/WALCL.; Google Finance. “S&P 500 Index.” Google, 2021, https://www.google.com/finance/quote/.INX:INDEXSP..
6 Hayes, Adam. “Financial Repression.” Investopedia, March 1, 2021,
11 Werner, Richard. “Can Banks Individually Create Money Out of Nothing?” Science Direct, December 2014, https://www.sciencedirect.com/science/article/pii/S1057521914001070.
12 Barone, Adam. “Bank Reserves.” Investopedia, July 25, 2021, https://www.investopedia.com/terms/b/bank-reserve.asp.
13 Americans for Financial Reform. “Wall Street Money in Washington.” CNBC, March 2021, https://fm.cnbc.com/applications/cnbc.com/resources/editorialfiles/2021/04/14/AFR_Wall_Street_Money_in_Politics_2021.pdf.
14 Cigler, Allan J., Burdett A. Loomis, and Anthony J. Nownes. “Lobbying in the Shadows.” SSRN, October 7, 2014, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2507300.
15 fileandclaw322. “The History of the Hazard Circular.” File & Claw Archives, October 20, 2014,
17 Jankélévitch, Vladimir, and Ann Hobart. “Do Not Listen to What They Say, Look at What They Do.” JSTOR, Spring 1996, https://www.jstor.org/stable/1344022.
18 Ghosh, Iman. “How Much Do Countries Spend on Healthcare Compared to the Military?” Visual Capitalist, July 22, 2020, https://www.visualcapitalist.com/what-do-countries-spend-on-healthcare-versus-military/.
19 The National Council. “Federal Budget.” The National Council, 2015,
https://www.thenationalcouncil.org/topics/federal-budget/; NIMH. “Suicide.” NIMH, May 2021, https://www.nimh.nih.gov/health/statistics/suicide; Stimson Study Group. “Counterterrorism Spending: Protecting America While Promoting Efficiencies and Accountability” Stimson, May 2018,
23 Szmigiera, M. “Countries with the Highest Military Spending Worldwide in 2020.” Statista, May 7, 2021, https://www.statista.com/statistics/262742/countries-with-the-highest-military-spending/.
24 Perkins, John. Confessions of an Economic Hitman. San Francisco: Berrett-Koehler Publishers, 2004.
25 Kuo, Lily, and Niko Kommenda. “What Is China’s Belt and Road Initiative?” The Guardian, 2017, https://www.theguardian.com/cities/ng-interactive/2018/jul/30/what-china-belt-road-initiative-silk-road-explainer.
26 Younge, Gary. “A Hit Man Repents.” The Guardian, January 28, 2006,
41 Cockburn, Patrick. “Amnesty Questions Claim that Gaddafi Ordered Rape as Weapon of War.” Independent, October 22, 2011, https://www.independent.co.uk/news/world/africa/amnesty-questions-claim-gaddafi-ordered-rape-weapon-war-2302037.html; Brown, Ellen. “Why Qaddafi had to go: African gold, oil and the challenge to monetary imperialism.” Theecologist, March 14, 2016,
42 Levitt, Matthew. “Evidence of Financial Links Between Saudi Royal Family and Al Qaeda.” New York Times, n.d., https://www.nytimes.com/interactive/projects/documents/evidence-of-financial-links-between-saudi-royal-family-and-al-qaeda. Accessed July 16, 2021.
43 Sanger, David E. “Biden Won’t Penalize Saudi Crown Prince Over Khashoggi’s Killing, Fearing Relations Breach.” New York Times, February 28, 2021, https://www.nytimes.com/2021/02/26/us/politics/biden-mbs-khashoggi.html.
44 U.S. Department of State. “U.S. Relations With Saudi Arabia.” December 15, 2020,
https://www.state.gov/u-s-relations-with-saudi-arabia/; Gladstein, Alex. “The Hidden Costs of the Petrodollar.” Bitcoin Magazine, April 29, 2021,
46 BBC. “North Korea: What We Know About Its Missile and Nuclear Programme.” BBC, April 14, 2021, https://www.bbc.com/news/world-asia-41174689.
47 Fensom, Anthony. “Could North Korea Become the Next Oil and Gas Mega Producer?” The National Interest, December 28, 2019, https://nationalinterest.org/blog/buzz/could-north-korea-become-next-oil-and-gas-mega-producer-109066.
48 Jankélévitch, Vladimir, and Ann Hobart. “Do Not Listen to What They Say, Look at What They Do.” JSTOR, Spring 1996, https://www.jstor.org/stable/1344022.
49 Azam, Muhammad. “Does Military Spending Stifle Economic Growth? The Empirical Evidence from non-OECD Countries.” ScienceDirect, December 2020,
53 Josh Kirshner and Thomas Schoenberger. “An Analysis of Bitcoin’s Use in Illicit Finance.” Crypto Council for Innovation, April 6, 2021, https://cryptoforinnovation.org/resources/Analysis_of_Bitcoin_in_Illicit_Finance.pdf.
54 Smith, Tim. “How The Triffin Dilemma Affects Currencies.” Investopedia, June 25, 2019,
The United States dollar dominates world commerce. In 2019, it made up 88% of global trade, and no other currencies came close. This dominance gave the United States power over any other country that exports anything from anywhere. For example, due to the mechanics of the petrodollar, oil is settled in dollars regardless of where it comes from. Consequently, not only does this frustrate U.S. rivals by making them vulnerable to trade sanctions, but ultimately causes them to craft savvier innovations to conduct commerce. This is what the Central Intelligence Agency (CIA) calls blowback.
Blowback (a term which originated within the CIA), explains the unintended consequence and unwanted side effects of a covert operation. The effects of blowback typically manifest themselves as “random” acts of political violence without a discernible, direct cause; because the public—in whose name the intelligence agency acted—are unaware of the affected secret attacks that provoked revenge (counterattack) against them.
This article will chronicle the history of America’s dollar hegemony, the strides taken to achieve that position, and the unintended consequences that followed to this day. The main goal of this piece is to demonstrate how much of a fool’s errand it is for a single nation to maintain supremacy over the world reserve currency, and how the world is reframing the technological innovation of money as we know it. The short answer: #BitcoinFixesThis.
The Roots Of Dollar Hegemony: Economic Warfare And Debt As A Weapon
“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.” – John Maynard Keynes
Even before the dollar became the world reserve currency, America was able to wield it as an economic weapon and make other nations abide by its monetary policy. The dollar as a monetary system and network is unfair to those who are forced to abide by its dominance. However, history shows us that a single world currency was the best solution the global economy needed, mostly to win wars. It’s crucial to understand how we got to this point. Let’s look at the roots of how dollar hegemony came to be.
The root cause of other countries depending on the dollar was due to their decision to print more money to fund war efforts. Arguably, the only thing war is good for is printing more money. World War I demonstrated that Germany was forced to destroy their currency through hyperinflation. The German Deutsche mark was fully pegged to gold until it entered the First World War. Going to war is expensive, and printing unlimited amounts of money was (is) the only way Germany could finance their military actions. Economist Carl Hellfrick stated in 1915, “The only way to finance the cost of war is to shift the burden into the future via loans.”
Germany (and as every other government state does during times of war) defended their monetary policy by saying it was an “economic necessity,” and that once they secured victory over Europe, there would be an economic boom as they ruled over resource-rich nations and charged reparations to the countries they defeated. A fair argument in theory, but even the Marxist theorist Ed Bernstein understood in 1918 that “there’s a point in which printing money destroys purchasing power by causing inflation.” A Marxist, of all people!
When Germany lost the war, they were forced to pay reparations, which was paid for with borrowed money to pay on top of the debt they were already in. By 1923, the German economy went from having 8.6 billion to 40 quintillion Deutsche marks in circulation, all from printing to fight the war. Germany received between 27 and 38 billion marks in loans during the reparation period. By 1931, German foreign debt stood at 21.514 billion marks, with the main sources of aid stemming from the United States.
As for the German people, the rich got richer, while the poor suffered. The German middle and lower classes were left with no other choice but to barter for actual goods because their money became worthless. The rich on the other hand prospered because they owned assets and financed it with debt, which became worthless since they could easily pay it off due the hyperinflation.
Even Britain, who held the dominant currency at the time, began borrowing money for the first time to fund the war. Their banker of last resort was the United States of America, a foreshadow of the dollar hegemony to come in the next war. America used its monetary policy as a war strategy by forcing both their opponents and allies to bleed themselves into bankruptcy. As the economies of warring nations were destroyed, so were any chances of a military victory. In Germany’s case, the economic unrest from hyperinflation was a catalyst to the rise of populism, and eventually Hitler’s Nazi regime. Although a dependency on a single fiat currency was helpful in economic aid and cooperation in wartime, the strategy of dollar hegemony as a weapon would lead to more unintended consequences (blowback) in the future.
Bretton Woods: Dollar Hegemony Comes To Fruition
Since the end of World War II, the dollar has been the dominant leader in international trade and cooperation. It officially began in 1944, where 45 allied nations met in New Hampshire at the Bretton Woods conference.
The conference was an effort to avoid the consequences (blowback) that ensued following the end of WWI during the Treaty of Versailles in 1919. Britain owed the U.S. substantial sums of debt by the end of the war, which could not be repaid because the funds were used to support allies like the French. Since the Allies could not pay back Britain, Britain could not pay back the U.S. In response, it was decided at the conference in Versailles that Germany would make reparations to the French, British, and Americans for the debts. However, it was unrealistic for Germany to meet these demands having just destroyed their economy through hyperinflation to fund war efforts. If Germany couldn’t pay up, neither could the Allies. Thus, many nations’ “assets” on bank balance sheets internationally were actually unrecoverable loans, leading to a banking crisis in 1931. Continued insistence by creditor nations for the repayment of Allied war debts and reparations caused a breakdown in the international financial system and a world economic depression.
To avoid similar blowback, the political basis for Bretton Woods consisted of two key conditions: a failure to deal with economic problems after the First World War had led to the second and the centralization of power in a small number of states. The representatives of each nation agreed to peg their currencies to the U.S. dollar, while the dollar would be pegged to gold (hence, the gold standard). Similar to the First World War, America acted as Britain and France’s bank by selling them arms and supplies and lending them money to fight WWII. Once again, the Allies turned to America to help rebuild their countries after the war. Most of this financing was paid for in gold, and the U.S. became the dominant superpower by accumulating two-thirds of the world’s gold reserves from the allied countries.
As the dust cleared from the battlefield, the dollar was the most stable and plentiful currency remaining and the U.S. became the biggest economy on the global stage. America became the bank of the world as nations continued to deposit their gold reserves at the Federal Reserve in exchange for dollars (or treasury bills). Countries used these dollars to store their value by buying U.S. debt à la treasury bills. This created a U.S.-backed “gold standard” and worked fairly well with a gold-pegged dollar. This sound monetary policy created a golden age of capitalism, resulting in a post-war boom as trade flourished via a universal agreement for scarce money.
As global trade grew, so did the use of the dollar for conducting business to regrow the global economy. Even after the U.S. went off the gold standard in 1971, the dollar still remained the global currency of choice. But why?
Josseled In The Jungle
With the privilege of holding the world’s reserve currency, America continued to assert its dominance through funding war efforts. In 1965, the U.S. quietly launched a bombing attack in North Vietnam. For the next three years, the U.S. continued dropping bombs on the Ho Chi Minh trail under what would be revealed as Operation Rolling Thunder. The Vietnam Conflict was bloodier, longer, and much more expensive than expected. Naturally, the U.S. began rapidly borrowing money to fund the war and turned the money printer back on.
Having suspicions of having their gold reserves rehypothecated and the incessant printing of dollars caused other nations to worry about the state of America’s economy. Fearing debasement of the dollar, the Allies began requesting to have their gold reserves back. France’s Charles DeGaul was most aggressive on this by converting $150 million of reserves back into gold and threatened another $150 million. Consequently, this triggered a bank run on Fort Knox as more nations converted into gold, and the U.S. began making the same mistake Germany did as they continued to print more money and watch their ice cube of gold reserves melt away. In reaction to the blowback, Nixon “temporarily” suspended the convertibility of dollars into gold in 1971, and the dollar officially became a fiat currency. The hegemony of the U.S. dollar was hanging in the balance.
Enter The Petrodollar
In 1974, the Petrodollar was created as a last-ditch effort to maintain the dollar’s dominance. The Nixon administration made a deal with Saudi Arabia where they would only allow other countries to buy oil from them in U.S. dollars. In return, the U.S. would protect them by providing military support and selling them weapons. Furthermore, unbeknownst to the American public, America would provide Saudi Arabia preferential deals on treasuries if they promised to use dollars to buy back U.S. debt. This arrangement led to the formation of the Organization of the Petroleum Exporting Countries (OPEC) where the combined parties controlled 80% of the world’s oil reserves in dollars and would rush that profit back into U.S. treasuries—or a form of Petrodollar “recycling.” With OPEC, the U.S. was allowed to continue running up ginormous deficits to finance social welfare programs and the Military-Industrial Complex. Due to this newly created artificial demand for dollars, America could not devalue her currency. The dollar’s exorbitant privilege of hegemony over global economic cooperation was restored once again.
America’s position of dollar hegemony was threatened most notably during this time by the Saudi Arabian oil embargo in October 1973. The U.S.’s stranglehold on dollar supremacy was nothing compared to Saudi control of the oil supply. Although it only lasted until March 1974, the embargo had a massive impact on the world economy as gas prices soared from $1.39 in 1970 to $8.32 a barrel by 1974. This shock strengthened the bond between three main sectors: big corporations, international banks and the government. These sectors comprise the corporatocracy and were the catalyst of many policy changes and how the global economy would view oil moving forward in order to maintain the flow of petrodollars back into the United States.
In addition to OPEC, America and Saudi Arabia had another arrangement. To avoid another economic catastrophe, the U.S.-Saudi Arabian Joint Economic Commission (JECOR) was formed as a strategic agreement for American corporations to provide infrastructure projects in Saudi Arabia. Former reporter Thomas W. Lippmann describes the agreement as such:
“JECOR’s mission was twofold: first, to teach the Saudis—who had no tradition of organized public agencies—how to operate the fundamental bureaucracy of a modern state; and second, to ensure that all the contracts awarded in pursuit of that mission went to American companies. JECOR would operate for 25 years, channeling billions of Saudi oil dollars back to the United States, but would attract almost no attention in this country because Congress ignored it. The Saudis were paying for it, so there was no need for US appropriations or congressional oversight.”
The interest Saudi Arabia made in their U.S. treasuries would be paid to American corporations to build their new infrastructure and paid for by the treasury department. This would reinstall the dollar’s dominance and strengthen American and Saudi relations by liberalizing the Saudi Arabian economy via the amount of money the oil embargo produced for the Saudi kingdom.
By the end of Bill Clinton’s presidency, JECOR discontinued operations. Saudi Arabia is now, by all technological measurements, a fully modern country. However, this new relationship with Saudi Arabia would complicate U.S. relations with neighboring countries in the Middle East and determine foreign policy decisions from here on. Dollar hegemony was restored, but it would not remain without its consequences.
Through strengthening relations with the Saudi royal family, the U.S. made an ally out of Osama Bin Laden, who had close ties with the Mujahideen, the guerrilla-type militant groups led by the Islamist Afghan fighters in the Soviet–Afghan War. In what would be documented as Operation Cyclone, the CIA would go on to train and fund the Mujahideen to fight the Soviets in Afghanistan. Although these efforts aided in the collapse of the Soviet Union in the 1990s, members of the Mujahideen would later join al-Qaeda and participate in the attacks in New York on September 11, 2001. Countless other unintended consequences (blowback) have followed, all for the sake of maintaining the economic interests that maintain the petrodollar and solidify America’s dollar hegemony.
How The Dollar’s International Transactions Work
Once the U.S. forced countries to settle crucial commodities like oil, coffee, and gold in dollars, the world became used to this coercive form of business. The dollar became very liquid, making it easier than any other currency to buy and sell goods all over the world. Bitcoiner criticisms of centralization and fiat chicanery aside, the U.S. banking system is still very efficient to this day. Thus, both its liquidity and banking efficiency are the two key points that make it easier and cheaper to buy and sell in dollars, but what exactly are the mechanics of the dollar hegemony system that makes it so efficient?
Imagine a Canadian Lumber Company sells boards to a French Home Builder. The seller’s bank (Canada) and the buyer’s bank (France) settle the payment in dollars via correspondent banks in the U.S. The correspondent banks have accounts with the U.S. Federal Reserve. The money is transferred seamlessly between the correspondent banks’ Fed accounts because their status as correspondent banks means they are seen as safe counter parties. In the eyes of the United States, the use of all the correspondent banks in other countries means that every transaction is being conducted (technically) on U.S. soil, giving it legal jurisdiction and compelling foreign countries to abide by its laws on money laundering and corruption.
The Dollar As A Weapon Today
The dollar still dominates global trade and causes friction between the U.S. and other nation states. The only benefactor of this system is America and her allies. You can see this in the standoff between the U.S. and Iraq. In a Wall Street Journal article by Ian Talley and Isabel Coles, it describes the following scenario: Iraq says it wants to throw U.S. troops out of the country, since the U.S. has occupied the country since the second Gulf War. In response, the U.S. can use the dollar as a weapon and just cut Iraq off from receiving dollars and remove Iraq from the U.S. monetary system entirely. One of the main reasons the U.S. invaded Iraq in the first place was because former Iraqi leader, Sudam Hussein, priced oil in euros instead of dollars. This protest was a direct threat to the dollar’s legitimacy.
Since the attacks on 9/11, the U.S. uses the power of the dollar to advance its foreign policy goals. The idea? Cut out the sources of funding for terrorist organizations. The U.S. uses its control of the dollar to
1. increase surveillance of global money flows, and
2. curb financing toward bad actors.
The U.S. accomplishes this by imposing sanctions on rivals. Under this system, if a business or country tried to trade with a sanctioned entity in dollars, the U.S. has the power to cut off their access to U.S. currency. However, other countries have been building workarounds.
Resistance To Dollar Hegemony
We have now arrived at the inevitable blowback of the dollar’s dominance: resistance. Some European Union countries oppose the U.S. sanctions against Iran. Sanctions on Iran were put in after the U.S. withdrew from the 2015 JCPOA (Iran Nuclear Deal) in 2018 and included banning dollar transactions with Iranian banks. As a result, the EU developed a euro-backed system, the Instrument In Support of Trade Exchanges (INSTEX) without having to send money across borders. However, the system didn’t prove to be as successful as planned and was disbanded.
In retrospect, the dollar has had a decent run for over half a century as the global reserve currency.
The U.S. makes up 20% GDP.
40% all debt issued is in the U.S. dollar.
60% of exchange reserves is in U.S. dollars.
However, we can expect this to drop. Russia just announced they will completely remove U.S. dollar assets from its National Wealth Fund. In a research note after the announcement, Russian President Vladimir Putin stated that their messaging is “’we don’t need the U.S., we don’t need to transact in dollars, and we are invulnerable to more U.S. sanctions.”
Russia’s central bank governor, Elvira Nabiullina, told CNBC that digital currencies will be the future of financial systems because it “correlates with this development of digital economy.” Russia aims to have a prototype of their digital ruble out by the end of 2021, a sure sign that other countries suffering from the dollar’s policy will follow in Russia’s footsteps. Countries victimized by sanctions and strict trade laws will create alternatives beneficial to them.
No longer are foreign countries buying the majority of U.S. treasuries. The buyer of last resort is the Federal Reserve. The Fed will continue lowering interest rates and treasury yields will fall until monetary manipulation takes place and owning U.S. debt will become unattractive to foreign countries. On the domestic level, printing and monetizing debt will continue and asset price inflation (as well as health/welfare programs) will price out the middle class and poor. As for America’s economy, the Triffin Dilemma states holding the reserve currency means there will be less jobs at home since the U.S. exports cheap labor and more imported goods. America is dependent on the rest of the world for goods and is much less self-sufficient. As the reserve currency continues to inflate asset prices and dilute the value of investments, the only rational economic decision for American investors will be to store their wealth in bitcoin.
China still exports to the U.S. but doesn’t recycle their dollars like Saudi Arabia. They are losing faith in the value U.S. treasuries hold and are selling them to fund their own economic imperial efforts such as the Belt and Road initiative. The dollar hegemony has created geopolitical and economic blow back where more countries are doing business with each other outside of the dollar system.
Eventually, currency wars lead to real wars. China and Europe are competing with the U.S. by pumping more money into their systems. Every country is incentivized to devalue their currency to stay competitive. It’s a race to the bottom: the beggar via neighbor policy. Eventually, a country will run out of ways to weaken the currency, and hyperinflation is, therefore, inevitable. It is only a matter of time that every country will react to the dollar’s dominance and search for a greater alternative.
Bitcoin: The New Monetary Hegemony
In the future, the U.S.’s monetary hegemony faces a much larger threat, now that it’s victim-countries have found a new tool to chip away at the power of the dollar: bitcoin. The points mentioned above demonstrate how other nation states and Americans themselves will, and are, beginning to lose faith in the dollar.
The area in the world that is primed for using bitcoin as a monetary escape is Central America. With countries like El Salvador adopting bitcoin as legal tender, people can trade openly and freely anywhere in the world without having their savings diminished before their eyes. In the Kingdom of Tonga, remittances make up 40% of their economy but, in real terms, that’s approximately 20% after fees are paid to Western Union. Bitcoin will enable the elimination of all fees and bring more money into the pockets of the country’s people and yield real economic growth and prosperity. Talk about an unintended consequence.
Bitcoin has rules, not rulers. Instead of a nation state hegemon, there are strict rules of the Bitcoin network’s protocol that all participants of the network must abide by in order to participate in the world economy. These characteristics are what make bitcoin the ultimate form of blowback against dollar hegemony.
If the power of the dollar falls, it could hurt the United States’ ability to control the global trading system. All efforts before bitcoin have been proven futile. Now, with a completely open, permission-less, censorship-free, confiscation-resistant monetary network, any and all countries around the world can trade with each other.
Like the dollar, bitcoin is an economic weapon. Unlike the dollar however, bitcoin is a weapon of self-defense. Before bitcoin, countries had no other viable choice but to peg their economies to the dollar and depend on America for economic cooperation. As mentioned above, this has led to countless examples of economic hardship. Bitcoin gives people an option. Opting into the Bitcoin network guarantees the protection of one’s wealth and property regardless of any entity. Trade within the Bitcoin network cannot be stopped, and economic cooperation can flourish. Bitcoin is the inevitable blowback the world has desperately needed for over a century. Now, the wait is over.
Special thanks to @newzealandhodl.
This is a guest post by Phil Gibson. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.
Alex Gladstein joined “Fed Watch” to discuss his recent article about the petrodollar and lessons for Bitcoin’s growing monetary role.
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In this episode of Bitcoin Magazine’s “Fed Watch” podcast, hosts Christian Keroles and Ansel Lindner sat down with Alex Gladstein, chief strategy officer at the Human Rights Foundation. They dove deeply into the petrodollar, its history, implications for the future and lessons that we can apply to thinking about bitcoin’s growing role in the global financial system. Read Gladstein’s great petrodollar post on Bitcoin Magazine, “Uncovering The Hidden Costs Of The Petrodollar.”
The petrodollar reentered the alternative financial discussion in 2003 with the invasion of Iraq. We were told the invasion was due to the presence of weapons of mass destruction (WMDs) and the funding of terrorism by Saddam Hussein. However, as it turned out, Hussein was also beginning to sell oil for euros. That was a major break of international protocol, since the U.S.-Saudi oil deal in 1974, where oil was to be priced in and sold for dollars.
This special U.S.-Saudi relationship became known as the petrodollar and replaced the gold dollar, which was ended a few years before in 1971 by President Nixon.
There is so much to unpack about this event and the era in which it happened. Gladstein walked through some of the basics also found in his piece, and then the hosts started to ask some more systemic questions. Instead of rehashing all the details, they focused on broad macroeconomic effects.
Of course, they covered the many negative impacts of the petrodollar system mainly through U.S. military involvement to maintain the agreement, but people rarely stop to think about it from a monetary angle. A single currency is extremely efficient for global trade, it is also extremely beneficial to emerging markets to be able to borrow in U.S. dollars which the international system can print.
Gladstein dug into some of those negatives and the hosts pushed back slightly, saying it wasn’t all negative. One question you won’t hear anywhere else is when Lindner asked about the very real threat at the time, in 1974, of the Soviets signing a similar deal with Saudi instead of the Americans. Saudi did not like the U.S. at all, a deal with the Soviets was more obvious. All of the evils of the petrodollar would have been magnified if the communists, who killed millions of their own people, would have been able to set up a “petro-ruble.” You have to listen to hear Gladstein’s response to that one.
In its growth from conceptual white paper to trillion-dollar asset, Bitcoin has attracted an enormous amount of criticism. Detractors focus on its perceived negative externalities: energy consumption, carbon footprint, lack of centralized control and inability to be regulated. Regardless of the validity of these arguments, few critics stop to think comparatively about the negative externalities of the world’s current financial system of dollar hegemony.
This is, in part, because many Bitcoin critics see it as just a Visa-like payment platform, and analyze its performance and costs by “transactions per second.” But Bitcoin is not a fintech company competing with Visa. It is a decentralized asset competing to be the new global reserve currency, aiming to inherit the role gold once had and the role the dollar holds today.
The world relies on the U.S. dollar and U.S. treasuries, giving America unparalleled and outsized economic dominance. Nearly 90% of international currency transactions are in dollars, 60% of foreign exchange reserves are held in dollars and almost 40% of the world’s debt is issued in dollars, even though the U.S. only accounts for around 20% of global GDP. This special status that the dollar enjoys was born in the 1970s through a military pact between America and Saudi Arabia, leading the world to price oil in dollars and stockpile U.S. debt. As we emerge from the 2020 pandemic and financial crisis, American elites continue to enjoy the exorbitant privilege of issuing the ultimate monetary good and numéraire for energy and finance.
The past few decades have seen a vast global rise in economic activity, population, democratic progress, technological advancement and living standards, but there are many flaws in this system that are rarely spoken about and that weigh heavily on billions of people across the globe.
What would the world look like with an open, neutral, predictable base money instead of one controlled and manipulated by one government representing only 4% of the planet’s population? This article explores the seldom discussed and staggering downsides of the current system in the hope that we can replace it with something more fair, free and decentralized.
This essay will explore the rarely discussed creation of the petrodollar and lay out how America has supported brutal dictators, compromised its national security, harmed its industrial base, propped up and protected the fossil fuel industry and even waged conflict abroad, all to bolster the dollar’s status as global reserve currency. While this strategy worked for U.S. leaders for many decades, today the world is inexorably moving to a more multipolar financial structure, and possibly, towards a Bitcoin standard.
I. Birth Of The Petrodollar
The British Empire was the unquestioned economic hegemon of the 19th century, but began to lose steam early in the 20th century, especially after World War I. The United States emerged much healthier than war-torn Europe and as the country with by far the most gold. By the outbreak of World War II, the dollar had unquestionably eclipsed the pound as the world’s most influential national currency.
Governments still relied on gold as the underlying global reserve currency, but U.S. and U.K. policymakers were determined to create a more “flexible” system. In the waning months of World War II, leaders from 44 countries gathered in a hotel in Bretton Woods, New Hampshire, to choose a new financial bedrock. British economist John Maynard Keynes pushed the idea of the bancor, a global unit of account that many nations would manage. But the U.S. preferred the idea of the dollar at the center, pegged to gold at $35 per ounce. Since international trade deficits still had to be settled in gold, America’s substantial control of the world’s gold supply and favorable balance of payments position provided the leverage to get its way.
Over the coming decades, the world shifted to the Bretton Woods standard, with national currencies pegged to adjustable dollar amounts, where the U.S. was trusted to custody and hold enough gold to prop up the whole system. Up until the early 1960s, it did a reasonably good job. Dollars became the dominant medium of exchange for international settlement, backed by a promise to pay in gold. America became the largest creditor nation and an economic powerhouse. However, after the assassination of President Kennedy, the U.S. government chose a path of huge social and military spending. With President Johnson’s “great society” social programs and the invasion of Vietnam, U.S. debt skyrocketed. Unlike World War II or the Korean War, Vietnam was the first American war waged almost entirely on credit.
As Niall Ferguson wrote in “Ascent Of Money,” “In the late 1960s, U.S. public sector deficits were negligible by today’s standards, but large enough to prompt complaints from France that Washington was exploiting its reserve currency status to collect seigniorage from America’s foreign creditors by printing dollars, much as medieval monarchs had exploited their monopoly on minting to debase the currency.”
French economist Jacques Reuff called this the “monetary sin of the West,” and the French government coined the term “exorbitant privilege.” Poor British fiscal policy forced a devaluation of the pound in 1967, and the French, fearing that unsustainable American spending would result in similar negative results, wanted its gold back before a dollar devaluation.
By 1971, U.S. debt had simply grown too high. Just $11 billion in gold backed $24 billion in dollars. That August, French President Pompidou sent a battleship to New York City to collect his nation’s gold holdings from the Federal Reserve, and the British asked the U.S. to prepare $3 billion worth of gold held in Fort Knox for withdrawal. In a televised speech on August 15, 1971, President Richard Nixon told the American people that the U.S. would no longer redeem dollars for gold as part of a plan that included wage and price freezes and an import surcharge in an attempt to save the economy. Nixon said closing the gold window was temporary, but few things are as permanent as temporary measures. As a result, the dollar was devalued by more than 10%, and the Bretton Woods system ceased to exist. The world entered a major financial crisis, though when asked about the impact that the “Nixon Shock” would have on foreign nations, Nixon made his position clear: “I don’t give a shit about the lira.”
As David Graeber wrote in “Debt,” “Nixon floated the dollar in order to pay for the cost of a war in which he ordered more than four million tons of explosives and incendiaries dropped on cities and villages across Indochina… the debt crisis was a direct result of the need to pay for the bombs, or, to be more precise, the vast military infrastructure needed to deliver them. This was what was causing such an enormous strain on U.S. gold reserves.”
For the first time in history, the world was in a pure fiat standard. The dollars held by central banks across the globe lost their backing, and there was a geopolitical moment where U.S. dominance was called into question and where a multipolar financial world was a distinct possibility. Adding even more pressure, in 1973 the Arab petroleum exporters of OPEC decided to quadruple the price of world oil and embargo the U.S. in response to its support for Israel during the Yom Kippur War. In just a few years, a barrel of oil rose from less than $2 to nearly $12. Faced with double-digit inflation and declining global faith in the dollar, Nixon and his Secretary of State and National Security Advisor Henry Kissinger came up with an idea that would allow them to keep “guns and butter” going in the post-gold standard era and alter the fate of the world.
In 1974, they sent new Treasury Secretary William Simon to Saudi Arabia “to find a way to persuade a hostile kingdom to finance America’s widening deficit with its newfound petrodollar wealth.” Simply put, a petrodollar is a U.S. dollar paid to a petroleum exporter in exchange for oil. As a Bloomberg report says, the basic framework was “strikingly simple.” The U.S. would “buy oil from Saudi Arabia and provide the kingdom military aid and equipment. In return, the Saudis would plow billions of their petrodollar revenue back into Treasuries and finance America’s spending.” This was the moment that the U.S. dollar was officially married to oil.
On June 8, 1974 in Washington, Kissinger and Crown Prince Fahd signed agreements establishing Saudi investment in the U.S. and American support for the Saudi military. Nixon flew to Jeddah a few days later to continue working out details. Declassified documents later revealed that the U.S. government confidentially enabled the Saudis to purchase treasuries “outside regular auctions and at preferential rates.” In early 1975, they purchased $2.5 billion of treasuries, beginning a spree that would later become hundreds of billions of petrodollars invested in U.S. debt. Decades later, Gerry Parsky, who was deputy to Treasury Secretary Simon at the time, said that this “secret arrangement with the Saudis should have been dismantled years ago,” and that he was “surprised the Treasury kept it in place for so long.” But even so, he said he “has no regrets” since “doing the deal was a positive for America.”
By 1975, other OPEC nations followed Saudi Arabia’s lead. If you wanted to buy oil from them and their store of nearly 80% of world petroleum reserves, you had to pay in dollars. This created new demand for America’s currency at a time of global uncertainty and even at a time of continued inflation. Industrializing nations needed oil, and to get it, they now had to either export goods to the United States, or buy dollars in foreign exchange markets, increasing the dollar’s global network effect. In 1974, 20% of global oil was still transacted in the British pound, but that number fell to 6% by 1976. By 1975, Saudi imports of U.S. military equipment had risen from $300 million to more than $5 billion. Oil prices, boosted by the premium that came with being able to be sold for dollars, would remain sky-high until 1985.
II. Impact Of The Petrodollar
In his research on the petrodollar, political economist David Spiro argues that OPEC dollar profits were “recycled” into U.S. treasuries to subsidize the “debt-happy policies of the U.S. government as well as the debt-happy consumption of its citizenry.” Petrodollar recycling over time pushed down interest rates and allowed the U.S. to issue debt very cheaply. This system was created and held in place not by pure economics but by politics through the pact with Saudi Arabia. As Alan Greenspan said in 1977, reflecting on his experience as chairman of the Council of Economic Advisers during the Ford administration, the Saudis were “non-market decision-makers.”
Graeber points to petrodollar recycling as an example of how U.S. treasuries replaced gold as the world’s reserve currency and ultimate store of value. The kicker, he explains, was that “over time, the combined effect of low interest payments and inflation is that these bonds actually depreciate in value… economists prefer to call it ‘seigniorage.’”
Since its creation in 1974, the petrodollar system has changed the world in many significant ways, including:
The creation of a tight alliance between the United States and the Saudi Arabian dictatorship, as well as other tyrannies in the Gulf region.
The steep rise of the “eurodollar” shadow global economy as petrodollars (created outside the control of the Federal Reserve) flooded banks in London and North America and were then recycled into U.S. treasuries or loaned back out to emerging markets.
The financialization of the American economy as the artificially strong dollar made exports uncompetitive, hollowed out the middle class and shifted focus from manufacturing to finance, technology, defense and services, all while increasing the leverage in the system.
Additional stress on the Soviet Union, which was now faced with an increasingly dollarized world market, where the U.S. could print money to buy dollars, but it had to dig oil out of the ground.
Painful issues for emerging market economies, which became mired in dollar-denominated debt that was difficult to pay back and stuck in a system that prioritized dollar accumulation over domestic investment, harming income and triggering debt crises everywhere, from Mexico to East Asia to Russia to Argentina.
Steady growth of the oil and fossil fuels industries at the expense of nuclear power and regional energy independence.
And, of course, the continuation of the U.S. as a military-financial hegemon and the ability of the U.S. to run humongous deficits to finance wars and social programs, all in part paid for by other countries.
There are petrodollar theory critics who say the phenomenon is largely a myth. They say the dollar has been dominant simply because there has been no competition. Dean Baker from the Center for Economic and Policy Research has said that “while it is true that oil is priced in dollars and that most oil is traded in dollars, these facts make relatively little difference for the status of the dollar as an international currency for the economic well-being of the United States.”
Meanwhile, Modern Monetary Theorists like Warren Mosler and Stephanie Kelton downplay the importance of the petrodollar, saying “it doesn’t matter” or “it’s irrelevant” as it does not limit what the U.S. can do domestically and that internationally, it does not matter what oil is priced in because countries can just swap currencies before purchase. Critics point to the fact that the dollar was already the world reserve currency before 1973, and that the pricing of commodities in dollars is “just a convention,” and that “there would be no real difference if the euro, the yen, or even bushels of wheat were selected as the unit of account for the oil market.” They also say the dollars involved in the oil trade are “trivial” compared with other sources of demand.
But the decision of Saudi Arabia and OPEC to price their oil exports in dollars and invest the profits in U.S. debt was not a strict market decision, and not one of fortune or happenstance, but a political one, done in exchange for protection and weapons, and one that sparked countless additional network effects that over time solidified the dollar as the world’s reserve currency. When countries are forced to exchange their own currencies for dollars to buy oil, this strengthens that trading pair for that country, extending U.S. influence beyond energy markets. In “Debt,” Graeber does mention the debate over whether or not oil sales denominated in dollars give any seigniorage to the U.S., but says that regardless, what ultimately matters is “that U.S. policymakers seem to feel the fact that they are symbolically important and resist any attempt to alter this.”
III. American Foreign Policy And The Petrodollar
In October 2000, Saddam Hussein did attempt to alter the petrodollar system when he announced that Iraq would sell oil in euros, not dollars. By February 2003, he had sold 3.3 billion barrels of oil for 26 billion euros. With his French and German trading partners, the “petroeuro” was born, which if expanded would help a euro market develop against lots of other currencies, boosting the euro’s strength and eroding the dollar’s exorbitant privilege. But one month later, the U.S., aided by the United Kingdom, invaded Iraq and overthrew Saddam. By June, Iraq was back to selling oil in dollars again.
Did America go to war to defend the petrodollar? This possibility is almost never discussed in retrospective analyses of the war, which tend to fixate on questions of Iraq’s alleged weapons of mass destruction stockpile, human rights abuses or terror links. But at the time, the euro was actually seen by many as a realistic challenger to the dollar. Given that the ouster of Saddam, in retrospect, helped deter change and give the petrodollar system many more years of dominance, it seems like one of the more reasonable explanations for the most mysterious war in modern American history.
Last year, the journalist Robert Draper appeared on Ezra Klein’s show to discuss his new book, “To Start A War: How The Bush Administration Took America Into Iraq.” With a decade of hindsight, they covered many of the possible motives for the invasion, but ultimately called it a “war in search for a reason.” To this day, there is no consensus for why exactly the U.S. invaded Iraq, and the official reasons have proven to be completed contrived.
According to former Treasury Secretary Paul O’Neill, by February 2001 the Bush Administration was already talking internally about the logistics of invading Iraq. “Not the why,” he said, “but the how and how quickly.” Blueprints were already being made. On 9/11, just a few hours after the attacks, then-deputy secretary of defense Paul Wolfowitz ordered a comprehensive study of Saddam’s ties to terrorist organizations.
Over the next 18 months, the Bush administration sold the war effort, and by March 2003 had achieved wide support, especially with the help of Secretary of State Colin Powell who spent his credibility on a PR campaign at the United Nations and on news television. Both houses of Congress supported the removal of Saddam, including Senators Clinton, Kerry, Reid and Biden. In the media, outlets ranging from “Fox News” to The New York Times supported the invasion, as did 72% of the American people in polling in the weeks leading up to the invasion. The public rationale was clear: Saddam was dangerous, was believed to have weapons of mass destruction (WMDs), could slip them to Al Qaeda and needed to be stopped. At the time, vice president Dick Cheney said “there can be no doubt that Saddam has WMDs.” The war was also marketed as a humanitarian effort and was given the name Operation Iraqi Freedom. But in retrospect, America did not invade Iraq to promote human rights. There was no connection to Al Qaeda or 9/11. And, despite Cheney’s promises, no WMDs were ever found.
Other motives were and continue to be discussed, including countering Iran, which makes little sense given most Iraqis are shia and their political structure ended up tilting more toward Iran during the occupation, and given that the U.S. had supported Saddam in previous decades for this very purpose. The flimsy nature of the official reasons for war led many to believe that oil was the root cause. This would not be unusual. Over the past 150 years, natural resources have been at the root of many wars, invasions and occupations that have shaped our world, including the Scramble for Africa, the Great Game in Central Asia, the Sykes-Picot treaty, the assassinations of Mossadegh and Lumumba and the first Gulf War.
George W. Bush, Colin Powell, Secretary of Defense Donald Rumsfeld, Coalition Provisional Authority Paul Bremer and British Foreign Secretary Jack Straw all publicly denied that the war was about oil. But former Federal Reserve Chairman Alan Greenspan wrote in his memoir that “I am saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil” and told the media that removing Saddam was “essential” to secure world oil supplies. Former head of U.S. operations in Iraq General John Abizaid said that “of course it’s about oil; we can’t really deny that.” And former defense secretary Chuck Hagel admitted in 2007 that “people say we’re not fighting for oil. Of course we are.”
It is true that America, even at the time, did not consume a large portion of its oil from the Middle East. In 2003, the U.S. received most of its oil from domestic production plus sources in Canada, Mexico and Venezuela. In this light, invading Iraq simply to “control” oil seems like a weak reason. And most could easily predict that a hot war would damage Iraq’s oil infrastructure, creating long delays before production could get back up to speed. But perhaps the war was not waged for oil in a general sense, but specifically, to defend the petrodollar system.
In post-invasion May 2003, weeks before Iraq switched back to selling oil in dollars, Howard Fineman wrote in Newsweek that the Europeans were debating the U.N. over whether or not to continue searching for the WMDs that they could not find. He reported that the real dispute was not “about WMDs at all. It’s about something else entirely: who gets to sell — and buy — Iraqi oil, and what form of currency will be used to denominate the value of the sales.”
As Graeber asks: “How much did Hussein’s decision to buck the dollar really weigh into the U.S. decision to depose him? It’s impossible to say. His decision to stop using ‘the enemy’s currency,’ as he put it, was one in a back-and-forth series of hostile gestures that likely would have led to war in any event; what’s important here is that there were widespread rumors that this was one of the major contributing factors, and therefore, no policymaker in a position to make a similar switch can completely ignore the possibility. Much though their beneficiaries do not like to admit it, all imperial arrangements do, ultimately, rest on terror.”
With hindsight, the early 2000s were an era when, presented with the challenge of the euro, it made sense for the U.S. to take action. And so, whether or not the defense of the petrodollar was the main aim of the invasion of Iraq, the outcome was the same: other countries saw what was done to Saddam, and were, for many years, careful about pushing their own “petro” currency. And the oil? Iraq’s production more than doubled from 2001 to 2019, eventually climbing to five million barrels of oil per day. The financial world has become multipolar over the past few years, but as of 2019, more than 99% of crude oil trade payments were still in dollars.
IV. Dictators, Inequality And Fossil Fuels
Beyond the Iraq War, there are several other key and much more obvious negative externalities of the petrodollar system. American support for the Saudi dictatorship is one. Even though 15 of the 19 hijackers on 9/11 plus Osama Bin Laden himself were Saudi, the U.S. government has forcibly resisted any attempt to investigate the Saudi regime for involvement in the attack and instead invaded and bombed other countries in retaliation. The petrodollar is one of the primary reasons why the murderous House of Saud is still in power.
In 2002, former U.S. Ambassador to Saudi Arabia Chas Freeman told Congress: “One of the major things the Saudis have historically done, in part out of friendship with the United States, is to insist that oil continues to be priced in dollars. Therefore, the U.S. Treasury can print money and buy oil, which is an advantage no other country has.” In 2007, the Saudis warned the U.S. that it would drop the petrodollar system if they pursued the “NOPEC” Congressional bill that would enable the Justice Department to pursue OPEC governments under antitrust laws for manipulating oil prices. The bill was never enacted.
According to a 2016 New York Times story, Saudi Arabia “told the Obama administration and members of Congress that it will sell off hundreds of billions of dollars’ worth of American assets held by the kingdom if Congress passes a bill that would allow the Saudi government to be held responsible in American courts for any role in the Sept. 11, 2001, attacks.”
In 2020, then-Attorney General William Barr prevented the name of a Saudi diplomat linked to 9/11 from entering the public domain because such a disclosure risked “significant harm to the national security.” In the wake of the murder of Washington Post columnist Jamal Khashoggi, President Donald Trump would not push for action against Mohamed bin Salman. On “NBC News” he said “I’m not like a fool that says, ‘we don’t want to do business with them.’” President Biden has also refused to penalize MBS directly, even though he has been presented with evidence from his own intelligence agencies showing that he ordered Khashoggi’s murder, saying it would be too costly for America.
These are just a few examples of how, despite the Saudi regime’s bloody war in Yemen, its torture of female political prisoners and its assassination of Khashoggi, America’s relationship with the kingdom remains steadfast and protected at the highest levels. According to research from the Stockholm International Peace Research Institute, “between 2015 and 2019, the six Gulf states bought more than one-fifth of arms sold globally, with Saudi Arabia, the United Arab Emirates (UAE) and Qatar ranking as the world’s first, eighth and tenth largest arms importers. Saudi Arabia alone purchased one-quarter of total U.S. arms exports during that period, up from 7.4 percent in 2010–14.” The oil pricing pact first made in 1974 remains strong in 2021, despite very different times.
Domestically, certain factions of America have prospered because of the petrodollar, but the impact on the median American has been negative. As was recently written in “Foreign Affairs,” “the benefits of dollar primacy accrue mainly to financial institutions and big businesses, but the costs are generally borne by workers. For this reason, continued dollar hegemony threatens to deepen inequality as well as political polarization in the United States.” Corporations and asset owners have benefited most in the system’s low-interest rate environment. As Feygin and Leusder argue in “The Class Politics Of The Dollar System,” “dollar primacy feeds a growing American trade deficit that shifts the country’s economy toward the accumulation of rents rather than the growth of productivity. This has contributed to a falling labor and capital share of income, and to the ballooning cost of services such as education, medical care, and rental housing.”
As the petrodollar system kept international demand for the dollar artificially strong throughout the decades, America’s manufacturing base became weak and uncompetitive and lost jobs overseas. Normally a currency that is too strong ends up creating a deficit issue and is forced to devalue to sell exports. But, as investor Lyn Alden points out in “The Fraying Of The US Global Currency Reserve System,” that has never happened with the U.S. due to the continual payment of its deficit by foreign nations. In 1960, the economist Robert Triffin identified this phenomenon, now known as the Triffin Dilemma: to remain the world’s reserve currency, the U.S. must provide global liquidity by running increasingly large deficits, which one day must undermine faith in the dollar.
The U.S. financial sector has ballooned, now accounting for 20% of GDP, compared with 10% in 1947. This financialization has enriched the asset-holding elite on the coasts while ruining Rust Belt workers who deal with stagnant wages. This has sparked populism and extreme inequality, where the U.S. average wealth is still relatively high among advanced nations, but its median wealth is relatively low. In this way, Alden and other macroeconomic thinkers like Luke Gromen argue that dollar hegemony actually hurts the U.S. in its competition with nations like China, which are able to continually borrow dollars to stockpile hard assets, and consolidate control over important global supply chains.
And then, of course, we have the petrodollar itself and its impact on the environment. As Reuters reported, “if dollar-denominated oil usage declines in favour of home-produced wind, solar or hydro energy sources, then the swelling pool of global petrodollars recycled and invested by the world’s big oil producers since the end of the gold standard in the 1970s may drain with it.” Simply put, a global shift to renewables would put a big dent in the demand for fossil fuels, which could deal a knockout blow to the petrodollar system and the ability for the U.S. to run up massive deficits without consequences. Oil interests have aggressively resisted attempts to develop nuclear energy and other renewables over the past few decades. The U.S. military continues to be the single largest consumer of petro resources.
When the global reserve currency is literally reliant on the sale of oil, the world has a massive carbon emissions problem. Not to mention the fact that, as discussed, the petrodollar is defended by the U.S. military’s global presence, which has a carbon output the size of a mid-sized nation, is exaggerated in size by America’s need to protect the dollar, and is boosted by the oil price-spiking wars it fights on various continents. It is truly impossible for the petrodollar system to be green when it is based on black gold.
V. Bitcoin And A Multipolar World
U.S. foreign policy has kept the petrodollar dominant for many decades, but its power is inarguably beginning to wane. Many Americans, including this author, have been incredibly privileged by this system, but it will not last forever.
Luke Gromen calls the petrodollar system a “company town,” where the U.S. has enforced control over oil pricing with threats and violence. After the fall of the Soviet Union, he says, America could have restructured the system and held another Bretton Woods, but it held on to the unipolar moment. Beyond protecting the system against disruptions like the petroeuro, Gromen says that America extended the life of the system by launching NAFTA and helping China join the World Trade Organization in 2001. These steps allowed the U.S. to continue exporting manufacturing and treasuries abroad in exchange for goods and services. He notes that in 2001, China’s treasury holdings were $60 billion, but rose to $1.3 trillion a decade later. From 2002 to 2014, America’s biggest export was treasuries, where foreign central banks bought 53% of the issuance, using it as a new form of gold. But since then, China and other governments have been divesting treasuries and pushing us toward a new system, in expectation of that gold losing value. According to Gromen, they realized if dollars were still priced in oil as the U.S. continued to run higher debt-to-GDP ratios (up from 35% in the 1970s to more than 100% today), the price of oil would eventually skyrocket. Europe was not able to disrupt the petrodollar system in the early 2000s, but over time the U.S.’s hegemony and ability to stop other nations from pricing oil in their own currencies has eroded.
More and more countries are denominating oil trade in other currencies, like euros, yuan and rubles, partly because they fear reliance on a weakening system, and partly because the U.S. government continues to use the dollar as a weapon. The American sanction system is incredibly powerful, as it can cut enemies off from the SWIFT payment network or from the World Bank or IMF. As the Financial Times reported, “by using American banks as a cudgel against Russia, Joe Biden has shown a willingness to weaponize the U.S. financial system against foes, continuing a tactic honed during the Obama years and dramatically ramped up under Donald Trump.”
This month, President Biden publicly denounced the Nord Stream2 Pipeline project, which would build on the momentum Russian President Vladimir Putin already has with Rosneft, pricing more than 5% of the world’s oil in euros by connecting Europe and Russia. Team Biden reportedly wants to “kill” the project, and its officials have commented that dollar primacy remains “hugely important” to the administration and that “it’s in our national interest because of the funding cost advantage it provides, [because] it allows us to absorb shocks… and gives us enormous geopolitical leverage.” This is a striking indication of just how important the petrodollar system remains politically to the U.S., 50 years after its creation, despite critics who say the world uses dollars for pure market reasons.
Many countries want to escape from U.S. financial control, and this desire is accelerating global de-dollarization. For example, China and Russia are, as of last year, transacting in dollars just 33% of the time, versus just 98% seven years ago. China is expanding oil trading denominated in yuan, and many worry about the Chinese Communist Party’s new “DC/EP,” or digital yuan project, being a ploy for increased international use of the yuan. Meanwhile, former European Commission president Sebastian Juncker has said “it is absurd that Europe pays for 80 percent of its energy import bill — worth 300 billion euros a year — in U.S. dollars when only roughly 2 percent of our energy imports come from the United States.” While the dollar is still dominant, trends point to other major currencies gaining traction in the coming years.
Beyond a shift to a multipolar currency world, another threat to the petrodollar could be the SDR, or “Special Drawing Right,” employed by the IMF, which is based on the dollar, euro, pound, yen and yuan. Inspired by Keynes and his failed bancor idea from Bretton Woods, the SDR has achieved more traction in the past few years, with more than 200 billion units in circulation and another 650 billion possibly being created. But few governments in a position of economic power would willingly hand their monetary control over to an unelected alphabet soup organization.
As for gold, the world is not going back. As Jacques Rueff wrote in the 1960s, “money managers in a democracy will always choose inflation; only a gold standard deprives them of the option.” The left-wing historian Michael Hudson explains that in the 1970s, he tried to make an apolitical case for the U.S. government to revert to the gold standard, teaming up with the right-wing scholar Herman Khan: “He and I went down and gave a presentation to the U.S. Treasury, saying, ‘gold is a peaceful metal because it’s a constraint on the balance of payments. If countries had to pay their balance-of-payments deficit in gold, they would not be able to afford the balance-of-payments costs of going to war.’ That was pretty much accepted and that was why the United States basically responded, ‘That’s why we’re not going back to gold. We want to be able to go to war and we want the only alternative to hold central bank reserves to be the United States Dollar.’” Gold is, by the account of most economists today, simply too restrictive.
A 2020 study in the Journal of Institutional Economics posited four potential future monetary outcomes for the world: continued dollar hegemony, competing monetary blocs (where the EU and China act as counterweights to the U.S.), an international monetary federation (where at the top of the international hierarchy stands no longer a state, but the BIS and the SDR), and international monetary anarchy, where the world shrinks into less connected islands. The authors, however, miss a fifth possibility: a Bitcoin standard where the digital currency becomes the global reserve asset.
Since its creation in 2009 by Satoshi Nakamoto, bitcoin has grown in value from less than a penny to more than $50,000, spreading to every major urban area on earth as a store of value and, in some places, a medium of exchange. In the past year, Fortune 500 companies like Tesla and sovereign wealth funds like Singapore’s Temasek have started to accumulate bitcoin on account of its inflation-resistant properties. Many call it digital gold.
We are very possibly witnessing the birth of not just a new ultimate store of value but also a new global base money, neutral and decentralized like gold, but unlike gold in that it is programmable, teleportable, easily verifiable, absolutely scarce and resistant to centralized capture. Any citizen or any government can receive, store or send any amount of bitcoin simply with internet access, and no alliance or empire can debase that currency. It is, as some say, the currency of enemies: adversarial parties can use the system and benefit equally without detracting from each other.
As bitcoin’s value goes up against fiat currencies, more and more corporations and individuals will begin to accumulate. Eventually, governments will too. At first they will add it as a small part of their portfolio alongside other reserve currencies, but eventually, they will try to buy, mine, tax or confiscate as much as they can.
Born at a time when the previous world reserve currency had reached its apex, Bitcoin could introduce a new model, with more possibilities but also more restraint. Anyone with an internet connection will be able to protect their wages and savings, but governments, unable to so easily create money on a whim, will not be able to wage forever wars and build massive surveillance states that contradict the wishes of their citizens. There could be a closer alignment between the rulers and the ruled.
The big fear, of course, is that America will not be able to finance its exorbitant social programs and military spending if there is less global demand for the dollar. If people prefer the euro or yuan or bonds from other countries, the U.S. in its current form would be in big trouble. Nixon and Kissinger designed the petrodollar so that the U.S. could benefit from global demand for dollars tied to oil. The question is, why can’t there be a global demand for dollars tied to bitcoin?
No matter the base money, there could still be fiat currency and government debt, priced according to the economic power and bitcoin position of those countries. And in the emerging Bitcoin world, America is leading in many categories, whether it is infrastructure, software development, actual holdings by the population, and, increasingly given current trends, mining. America is also built on liberty, equality of opportunity, free speech, private property, open capital markets and other values and institutions that Bitcoin reinforces and reverberates. If Bitcoin did eventually become the global base money, then America is in a position to capitalize on that transformation.
This means no more reliance on dictators and secret pacts in the Middle East, no more need to threaten or invade other countries to preserve dollar primacy, and no more opposing nuclear or other renewable energy technology to protect the fossil fuel industry. Unlike the petrodollar system, Bitcoin could very well accelerate the global energy transition to renewables, with miners always choosing the cheapest sources of electricity, and trends pointing to cheaper renewables in the future.
Under the Bitcoin standard, everyone would play by the same rules. No government or alliance of governments can manipulate the monetary policy. But any individual can opt into a nondiscretionary rules-based currency and control a savings instrument that has historically appreciated versus goods and services. This would be a dramatic net benefit for most people on earth, especially when considering that billions today live under high inflation, financial repression or economic isolation.
This transition may not be so pleasant for authoritarian regimes, which are more closed, tyrannical, violently redistributionist and isolated than liberal democracies. But in this author’s view, that would be a good thing, and one that could force reforms where activism alone has failed.
The world’s multipolar drift is inevitable. No one country can, in the near future, gain as much power as America had at the end of the 20th century. The U.S. will still be a powerhouse for a long time to come, but so will China, the EU, Russia, India and other nations. And they may compete in a new monetary system that moves away from the petrodollar and all of its costly externalities: a neutral Bitcoin standard that plays to the strengths of open societies, does not depend on dictators or fossil fuels, and is ultimately run by citizens, not the entrenched elite.
This is a guest post by Alex Gladstein. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.