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Whose responsibility is it? #27 - Inherent perils in the Petrodollar system

Some months ago in this series, I discussed the projected outcome of the Brexit; the impact on the EU and Britain, and possible fallout on Jamaica. I also projected the Trump victory and pointed to external reactions to his victory. It is sufficient to say that we are living in the aftermath of these generally unexpected results.

The results have created problems for some, and opportunities for others. Therefore I outlined the global possibilities and suggested that a possible unexpected attempt to end the global hegemony of the United States, Britain and the EU could be a reality. I also related two historical events that have made dissent a strong possibility. The two are the Breton Woods Agreement, and the creation of the Petro-dollar.

Breton Woods saw a new monetary regime that moved away from currencies backed by Gold Reserves (Gold Standard), to a currency convertibility of an unbacked nature.

This developed into a strategy of the USA (solidified by Richard Nixon and Henry Kissinger) which allowed their dollar to become the currency through which trade in oil and its derivatives were settled. This increased the demand for US dollars, which further allowed the USA to increase its printing of more dollars to meet the external demand. This allowed the USA to increase its own asset values and wealth on the back of a currency not backed by gold reserves.

To be truthful this synopsis will not try to go behind the concepts of an alliance with Saudi Arabia; behind the scenes of war in Iraq and Afghanistan; but the intrigue demands a close scrutiny by you. All I will say here is that an opportunity presents itself for an alternative to the Petro-dollar and its replacement by another currency or currencies.

The game has already started and the success or failure will possibly have severe effects on the US economy (currently the largest in the world). Russia, China, Iran, and North Korea have already voiced their dissatisfaction with the US dollar remaining as the Petro-dollar.

Russia and China have already commenced some oil trade in both Euro’s and the Renminbi. To be absolutely clear, this is not a new initiative, however the timing and prospect of success seems more feasible due to Brexit and Donald Trump. Their plan seems to include a mechanism that is guaranteed by gold (as in the pre-Breton Woods era).

Will this affect Jamaica in any substantial way? Currently our Net Reserves do not have any gold in that portfolio and any change in the relative value of the US dollar could be devastating for us as we have all our eggs in that basket. Therefore it is important that we understand the scenario in order to be prepared for all eventualities. In this regard very few living persons in Jamaica would remember international oil trading prior to 1948. In fact that was the sole purview of the British Empire and above the pay grade of even regional Colonial Governments.

Although we have not discovered viable oil reserves of our own, our usage for energy generation and transportation represents the greatest portion of our import bill, and instability in the world oil supplies and pricing must affect our Balance of Payments. This in turn affects inflation, the cost of living, the value of our dollar, and also propels us towards greater appetites for loans. So there are consequences locally.

Perhaps the outcome will indicate that the discovery of gold or an increased appetite for gold in our NIR portfolio may be part of the strategy for protecting our vulnerable economy. Empires do not last forever, and there is a distinct possibility that the USA Empire may be in its rapid decline. Every archer knows that having more than one arrow is a good strategy for survival in a hazardous environment, (even if you are Robin Hood).

“The only new thing in the world is the history you do not know”: President of the USA Harry Truman. How true this is in the face of a generation who do not know about why things happened. The Petro-dollar; gold reserves; alliances of power with Saudi Arabia; wars in furtherance of the hegemony of the US dollar; and the emergence of particular “axis of evil” designations, and the “invention” of weapons of mass destruction.

My recommendation to academics, students, financial advisors, business persons, and politicians is to study these historical events and to devise alternatives that can be implemented as the need arises. Prior to and immediately after Independence, Jamaica was accustomed to trading in multiple currencies through our banking system.

This flexibility has been lost and we have three generations who only know the “safety” of the US dollar, and for whom “arbitrage” is only a theoretical word in a textbook. There is no safety in ignorance.


James Moss- Solomon
Executive in Residence
Mona School of Business and Management

November 7, 2017

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