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Posts Tagged ‘Bretton Woods Agreement’

Saudi Arabia’s Quandary: The End of the Petrodollar | Mises Wire

Posted by M. C. on March 3, 2023

The good news is that Washington’s plans for world domination are bound to fail as China and Russia have a revived alliance, which also appeals to and is open to other powers. The bad news is that this will lead to the drawn-out collapse of the dollar, which Washington will attempt to parlay into a new central bank digital currency to accompany an increased crackdown on opposition within the dwindling empire.

J.R. MacLeod

In 1971 Richard Nixon took the US off the last feeble vestiges of the gold standard, otherwise known as the Bretton Woods Agreement. That system had been a bizarre gold-dollar hybrid where the dollar was the world reserve currency but the US agreed to keep the dollar backed by gold. Henry Hazlitt’s book From Bretton Woods to World Inflation explains the consequences of this situation well.

The end of this system left a vacuum at the heart of world financial affairs, one that needed to be filled quickly. The dollar, now unmoored by gold, remained the default currency for international trade, but without the confidence derived from its former gold backing, the US needed to bolster its credibility lest other more enticing options appeared to displace the dollar’s hegemony.

During the 1973 Arab-Israeli war, Organization of the Petroleum Exporting Countries (OPEC) had gained leverage by imposing an oil embargo, which caused serious disruptions in the global economy. In 1974 Henry Kissinger brokered a deal: Israel would back off its territorial ambitions, the Arab states would end the embargo, and oil would be traded in dollars. Thus, the petrodollar was born.

Every economy needs energy, and Saudi Arabia supplies plenty of oil, meaning that the dollar was backed up by a valuable commodity that would always be the recipient of demand. Everyone wants oil, and the Saudis would only trade it for dollars, so the dollar became unavoidable in international trade, reaffirming its status as the world reserve currency.

Even if others would have preferred a neutral, market-based currency not subject to manipulation, the opportunity cost of foregoing oil was far higher than the cost of having to use the dollar. A global medium of exchange selected by the market would have been more economically efficient, but given that the US and the Saudis possessed the ability to impose a politically motivated system, nobody was willing to bear the costs to create an alternative as long as the dollar was managed fairly sensibly.

Washington and the Gulf States benefit enormously from this situation. The petrodollar gives the Fed extreme license to print currency and export its inflation. If other countries are forced to use your currency, that gives you a lot more room to debase it. Imports are made cheaper with the high purchasing power of the dollar, and exports are propped up because the easiest way to spend dollars is to buy American products.

All this amounts to Washington essentially taxing world trade. The Gulf States benefit in the same ways by having enhanced access to the world reserve currency. Their oil is given priority in world markets compared to competitors opposed by Washington, such as Iran. They are also just simply given financial aid by Washington for participating in this scheme.

However, there are consequences for the countries involved. Even if the US has largely avoided extreme domestic consumer price inflation by circulating dollars around the world, the business cycle consequences of inflation are unavoidable. For example, the 2008 recession was severe yet unaccompanied by extreme inflation before or after. Holding the world reserve currency has also given the US a free ride with far less need to produce valuable goods and services. The dollar holds its value because there has always been global demand for it, so it has been possible to print money to prop up the US economy by consumer spending without an extreme loss of value in the dollar. But there is now very little worth in the underlying US economy.

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The Hidden Link Between Fiat Money and the Increasing Appeal of Socialism | Mises Wire

Posted by M. C. on November 27, 2019

The longer a fiat currency is the coin of the land, the more one is led to believe that nothing should be in short supply, since everything is bought with money and money need not be in short supply.

What causes the seemingly unfounded confidence in socialism we encounter more and more in the news media and among political activists? In the Extinction Rebellion movement, for example, activists are quite certain they have learned that there is an alternative to markets as the means to economic prosperity. It’s a means that does not involve meeting the legitimate needs of one’s fellow men in the marketplace.

It is likely not a coincidence that most people living today have lived most of their lives in a world dominated by fiat money. It has now been nearly fifty years since the United States broke all ties between the dollar and gold. It’s been even longer since other major currencies were tied to gold at all. Consequently we now live in a world where the creation of wealth is seen by many as requiring little more than the creation of more money.

In this kind of world, why not have socialism? If we run out of money, we can always print more.

Unlimited Money Feeds the Myth of Unlimited Real Resources

The world was on a watered down version of a gold standard until 1971 when the US abandoned its solemn promise — the 1944 Bretton Woods Agreement — to back the dollar with gold at $35 per ounce. Gold backing of a currency provided a solid intellectual foundation of reality that few even recognized existed within themselves; (i.e., that we live in a world of scarcity and uncertainty). This reinforced the idea that wealth has to be built. It cannot be conjured out of thin air, just as gold cannot be conjured out of thin air.

But fiat currency can be conjured out of thin air and in enormous amounts. The longer a fiat currency is the coin of the land, the more one is led to believe that nothing should be in short supply, since everything is bought with money and money need not be in short supply. Those who know only unlimited fiat money soon demand free healthcare and free higher education as a right. And why not? Unlimited money will pay for it. Into this never-never land comes demands for scrapping the fossil fuel underpinnings of our modern economy by those who understand nothing of how an economy works. But, apparently one does not need to understand technical limitations, because there are no technical limitations. The “barbarous relic” (gold) had once limited the money supply and thusly seemed to limit the supply of vendible goods. Gold has been replaced by unlimited fiat money. Now it seems that unlimited aggregate demand can be funded by unlimited fiat money, leading to a world of plenty. Designer of the Bretton Woods Agreement Lord Keynes says so in this very insightful short video.

Fiat Money Turns the World Upside Down

The psychological impact of a lifetime within a fiat money economy cannot be underestimated. One’s world is turned upside down. For many, financial success becomes prima facie evidence of exploitation of the masses rather than something to be admired and to which one could aspire also. With more wealth seemingly available at the click of a computer button, only an Ebenezer Scrooge would deny funding the latest demanded government program. If wealth is so easy to create, many conclude only greed and cruelty are what stand between us and far greater prosperity for all.

But that is the very reason that fiat money is so subversive to the social order. In a sound money economy any new spending program can be funded only by an increase in taxes, an increase in debt, or by cutting existing funding. There is a real cost to each of these options. There is a real cost to printing money, too, but the cost is hidden. One does not see malinvestment at the time of money printing. Price increases are delayed and uneven, due to the Cantillon Effect whereby the early receivers of new money are able to purchase goods and services at existing prices. Later receivers or those who do not receive the new money at all suffer higher prices and a reduction in their standard of living. Even then most people do not link higher retail prices with a previous expansion of the money supply.

It would be hard to invent a more effective method for the destruction of modern society. As Pogo would say, “We have met the enemy and he is us.”

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There is No Escaping the History of Fiat Currency Failure ...


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