Nick’s Rokke’s Note: Nick Giambruno is Casey Research’s globetrotting analyst. Today, he shows why Trump has been so cozy with the Saudi government, and how it could ultimately lead to disaster…
By Nick Giambruno, editor, Crisis Investing
Over the past week, the government of Saudi Arabia began a shock-and-awe style political crackdown.
More than five dozen members of the royal family, ministers, and prominent businessmen were arrested. More than $800 billion in assets was seized by the government.
The official excuse is to stamp out corruption. But it’s clear that this is an attempt by the crown prince, and heir apparent to the throne, Mohammed bin Salman to consolidate power in the country.
You might think the United States would decry these sorts of actions.
As a candidate, Trump blasted the Saudis countless times. He called them the biggest funders of terrorism in the world.
But, after he took office, Trump did a complete 180. He stopped criticizing the Saudis. In fact, he’s now singing their praises.
It’s bizarre… as if someone put a severed horse head in his bed.
Trump’s about-face was astounding. But his newly adopted deference to the Saudis is no different than Obama’s, Baby Bush’s, or any previous president’s.
Today, I’ll tell you why Trump made such an abrupt turnaround. I’ll also explain why the Saudis get special treatment from the U.S. Deep State.
As Good as Gold
It’s been rightly said that he who holds the gold makes the rules.
After World War II, the U.S. had the largest gold reserves in the world, by far. Along with winning the war, this let the U.S. reconstruct the global monetary system around the dollar.
The new system, created at the Bretton Woods Conference in 1944, tied the currencies of virtually every country in the world to the U.S. dollar through a fixed exchange rate. It also tied the U.S. dollar to gold at a fixed rate of $35 an ounce.
The dollar was said to be “as good as gold.”
The Bretton Woods system made the U.S. dollar the world’s premier reserve currency. It effectively forced other countries to store dollars for international trade, or to exchange with the U.S. government for gold.
However, this pseudo gold standard was doomed to fail.
Warfare and Welfare
Not surprisingly, runaway spending on warfare and welfare caused the U.S. government to print more dollars than it could back with gold at the promised price.
By the late 1960s, the number of dollars circulating had drastically increased relative to the amount of gold backing them. This encouraged foreign countries to exchange their dollars for gold, draining the U.S. gold supply. It dropped from 574 million ounces at the end of World War II to around 261 million ounces in 1971.
To plug the drain, President Nixon “temporarily” suspended the dollar’s convertibility into gold in 1971. This ended the Bretton Woods system and severed the dollar’s last tie to gold.
The “temporary” suspension is still in effect today.
This is why the Fed can print as much paper money as it pleases.
The death of the Bretton Woods system had profound geopolitical consequences. Most critically, it eliminated the main reason foreign countries stored large amounts of U.S. dollars and used the U.S. dollar for international trade.
At this point, oil-producing countries began to demand payment in gold instead of rapidly depreciating dollars.
It was clear the U.S. would have to create a new monetary system to stabilize to the dollar.
So, the U.S. government concocted a new scheme—the petrodollar system. It gave foreign countries another compelling reason to hold and use the dollar.
The new arrangement preserved the dollar’s special status as the world’s top reserve currency.
For President Nixon and Secretary of State Henry Kissinger, it was a geopolitical and financial masterstroke.
Rise of the Petrodollar
From 1972 to 1974, the U.S. government made a series of agreements with Saudi Arabia that created the petrodollar system.
The U.S. handpicked Saudi Arabia because of the kingdom’s vast petroleum reserves and its dominant position in OPEC—and because the Saudi royal family was (and is) easily corruptible.
In essence, the petrodollar system was an agreement that the U.S. would guarantee the House of Saud’s survival.
In exchange, Saudi Arabia would:
Use its dominant position in OPEC to ensure that all oil transactions would only happen in U.S. dollars.
Recycle the many billions of U.S. dollars from oil revenue into American weapons manufacturers and infrastructure companies—and critically, into U.S. Treasuries. This let the U.S. issue more debt and finance previously unimaginable budget deficits. By 1977, at least 20% of all Treasuries held abroad were in Saudi hands.
Guarantee the price of oil within limits acceptable to the U.S. and prevent another oil embargo.
Oil is the largest and most strategic commodity market in the world.
As you can see in the chart below, it dwarfs all other major commodity markets combined.
Every country needs oil. And if foreign countries need U.S. dollars to buy oil, they have a very compelling reason to hold large dollar reserves.
Think about it… If Italy wants to buy oil from Kuwait, it has to purchase U.S. dollars on the foreign exchange market to pay for the oil first.
This creates a huge artificial market for U.S. dollars.
In part, this is what differentiates the U.S. dollar from a purely local currency, like the Mexican peso.
The dollar is just a middleman. But it’s used in countless transactions amounting to trillions of dollars that have nothing to do with U.S. products or services.
Since the oil market is so enormous, it acts as a benchmark for international trade. If foreign countries are already using dollars for oil, it’s just easier to use the dollar for other international trade.
In addition to nearly all oil sales, the U.S. dollar is used for about 80% of all international transactions.
This gives the U.S. unmatched geopolitical leverage.
A New Reality
The U.S. can sanction or exclude virtually any country from the U.S. dollar-based financial system at the flip of a switch. By extension, it can also cut off any country from the vast majority of international trade.
The petrodollar system is why people and businesses everywhere in the world take U.S. dollars. Other countries have had little choice over this.
Today, the biggest U.S. exports are dollars and government debt. The U.S. government can create unlimited quantities of both… from nothing.
It requires no effort to create U.S. dollars, which can then be exchanged for real things like French wine, Italian cars, electronics from Korea, or Chinese manufactured goods.
Ultimately, the petrodollar boosts the U.S. dollar’s purchasing power. It entices foreigners to soak up many of the new currency units the Fed creates.
The system helps create a deeper, more liquid market for the dollar and U.S. Treasuries.
It also helps the U.S. keep interest rates artificially low. This allows the U.S. government to finance enormous and permanent deficits. Otherwise, this would be impossible without destroying the currency through money printing and inflation.
The petrodollar allows the U.S. to finance the world’s largest military, which is bigger than the next seven largest militaries combined.
The petrodollar has also allowed the U.S. to spend astronomical amounts of money on welfare and other benefits for over half of its population. It gives Americans a much higher standard of living than they would have otherwise.
In short, the petrodollar is the ultimate enabler of big government.
The U.S. government could never have become as powerful without it.
It’s hard to overstate how much the petrodollar system benefits the U.S. It’s the bedrock of the U.S. financial system.
And it’s the reason the U.S. political elite pamper the Saudis.
Bretton Woods lasted 27 years. So far, the petrodollar has lasted over 40 years.
I think we’re on the cusp of another paradigm shift in the international financial system. It will be at least as fundamental as the end of Bretton Woods in 1971.
For decades, the petrodollar system has allowed the U.S. government and many Americans to live way beyond their means.
The U.S. takes this unique position for granted. But it will disappear once the petrodollar system breaks down.
When that happens, I expect severe inflation.
This will likely be the tipping point…
Afterward, the U.S. government will be desperate enough to implement capital controls, people controls, nationalization of retirement savings, and other forms of wealth confiscation.
I urge you to prepare for the economic and sociopolitical fallout while you still can. Expect bigger government, less freedom, shrinking prosperity… and possibly worse.
It probably won’t happen tomorrow. But it’s clear where this trend is headed.
One day soon, Americans may wake up to a new reality.
It’s now more important than ever to own some physical gold.
Gold is the ultimate form of wealth insurance. It’s preserved wealth through every kind of crisis imaginable. It will preserve wealth during the next crisis, too.
Editor, Crisis Investing
P.S. Once the petrodollar system kicks the bucket and the dollar loses its status as the world’s premier reserve currency, you will have few, if any, options. The sad truth is, most people have no idea how bad things could get.
But times of crisis also present incredible moneymaking opportunities… if you know what to look for. I’ve put together a brief presentation to show how you can survive, and thrive in, the coming financial hurricane. All the details here.
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