Iran Has Bush Over a Barrel

Source Economic Rot:

If you follow this blog regularly, you know I've been talking about IRAN for a couple of years now, and I've been predicting that we'll probably start dropping bombs before the end of Bush's tenure in office.

Why do I feel this way? Well, it's complicated, but I'll try to keep the explanation simple:

The US Dollar has been the World's reserve currency since the end of WWII. This reserve status was seriously threatened in 1971, when Nixon removed the Dollar/Gold peg and changed the dollar from a "commodity" to a "Fiat" currency.

The US-Saudi Arabian Joint Commission on Economic Cooperation of 1974 restored waning confidence in the dollar by mandating that OPEC sell its oil for US Dollars ONLY. Any country who needed oil now needed to earn or borrow dollars to pay for their oil -- creating a huge worldwide demand for the US dollar and any excess dollars eventually got recycled back to the US.

For many years, this excess dollar recycling created a boon for America and these Petrodollars were used by our banking system to create new credit/debt -- helping our economy to grow.

If there were no good reasons for other countries to buy all those American dollars, the dollar would decline in value until the US economy could no longer afford to import goods from abroad.

Additionally, this excess foreign savings that America has grown used to would also dry up—putting us in quite the predicament.

The deal with OPEC however, means other countries have no choice but to buy all those excess American dollars, which props up the value of the dollar and allows the American "import economy" to go on year after year.

Effectively, America's main export is US dollars, and it is absolutely imperative to preserve a captive market for those dollars among oil-consuming countries -- the continued viability of the US economy depends on it. Americans today can still afford to consume because the economy is inundated with cheap imports, but a continued falling dollar will significantly raise the prices of imported goods and our cost of living.

For three decades, America has reaped the benefits of trading our printed dollars (created from nothing) for oil, but as our trade deficits continued to grow beyond comprehension and foreign policy blunders created new enemies, things started to change.

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Front Page Photo from Economicrot

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