 Petro-Dollar & Protection Racket
Jim Willie
CB
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Jim Willie CB is the editor of the "HAT TRICK LETTER"
Apr 7, 2005
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The term "Petro-Dollar"
has been bandied about for years. In my travels, much has been
mentioned in indirect terms about it, with assumptions of its
nature and structural significance. It is mentioned often carelessly
when talking about crude oil and its Persian Gulf sales. Yet
little is written on the topic, and little is easily found to
read and learn. A recent radio show with Al Korelin delved into
this subject, although we only scratched its surface to identify
some warning signals on economic impact. Changes are occurring
under our feet to a critical foundation of both world commerce
and world banking.
The Petro-Dollar
system is a vast banking and commerce system designed by major
world economies. Japan, South Korea, France, Germany, Argentina,
these nations are typical in purchase of oil without the benefit
of domestic production. So they must create a system for having
cash ready to make timely payments, much like a checking account.
The system's overt original purpose was to enable and facilitate
payment for extremely large supplies of delivered energy products,
principally crude oil but also natural gas. The commodity payment
system has actually evolved to become much more far reaching.
Try to purchase copper or cotton or forest timber or grains,
and payment is almost assuredly demanded in USDollar terms, the
international currency for commerce in commodities generally.
What we have is a system for purchasing minerals and resources,
totally bound in US$ denomination pricing and transaction settlements.
The most visible element is energy trade, whose supplies clearly
make for the largest bill payments. Definitely the most important
payments for economic survival are for energy, the lifeblood
of industry and transportation. Nations keep funds liquid, and
use 3-month TBills almost like cash. It bears an interest yield.
Money does not sit in banks without bearing a yield in return,
a practical measure. Considerable lead time is involved for orders
and payment, for both inventory management and delivery. The
typical time lapse is 45 days from Persian Gulf port shipment
to exit from domestic refineries, according to an energy expert
colleague.
In response,
due to an established system, world bank centers accumulate US$-based
liquid assets in what act like checking accounts. Nations must
be constantly prepared to be in position to pay for energy supplies.
Industrial & transportation costs are much larger bills than
the human food necessities. The Petro-Dollar system is the
practical commercial flipside, the visible evidence to the USDollar
as world currency reserve in central banks. The financial
effect is for banking systems across the globe to accumulate
reserves in US$-based assets. Major components are USTBonds across
the maturities (3-month, 12-month, 2-year, 5-year, 10-year),
and in addition even GSE Agency mortgage bonds. Longer maturity
bonds "shore up" and fortify short-term bonds like
the highly liquid 3-month TBills. The entire world accumulates
US$-based reserves for the purpose of buying their commodities,
principally crude oil.
Two regions
are unique, however. The primary export giants in Asia have stockpiled
$1800 billion in reserves. Their hoard is primarily US$-based.
What began as a checking account for oil payments has morphed
into a gigantic bloated beast of a dangerous financial pyramid
whose foundation has corroded and weakened as the USDollar bear
market progresses. Unless Asian banks print money to purchase
(monetize) more USTBonds, they will see erosion in their entire
banking system capital base. South Korean and Japanese painful
pronouncements testify to this corrosion and weakness. What is
not reported in the intrepid US press is that the entire banking
system of South Korea is at risk. Their reserve base has shrunk
by 20% in value this last summer in the face of a noteworthy
SKwon currency rise. It has additional risk from principal loss,
as our rates rise. With fractional banking practices entrenched,
stress to bank portfolio ratios is clear but not emphasized.
All we hear in the USA is how Asians are showing lack of support
for our beleaguered US$ currency, showing lack of loyalty to
their ally, are not grateful for our open markets, and are doling
out harmful effects manifested in domestic inflation. This is
shallow reporting, to be sure.
The other region
of note is Europe. For thirty years, Europe has employed a clever
instrument as a device in banking. The EuroDollar was created
for many purposes. One was to facilitate payment for energy supplies
in US$ terms, without the necessary step to convert trade surpluses
back to DeutscheMarks or Swiss francs or British pound sterling.
Thereby a double currency conversion is averted. The money was
kept sterilized, in order to avoid pushing up the mark or franc
or sterling currencys. A rising continental currency trend would
change the export pricing structure to the detriment of European
businesses. A EuroDollar is a US$ held in European banks,
not converted to local currency units, and serves as a buttress
to support the Petro-Dollar system. It becomes more complex
when futures contracts are involved, where bearing yield is offered.
The world is awash in USDollars, for many reasons ranging from
our abandoned manufacturing base, our depletion of oil resources,
our dependence on foreign commodities, our profligate spending
waste, to our lack of discipline in federal budgets, and military
spending for adventures and annexations.
PRACTICAL USA ADVANTAGE,
ABUSED USA PRIVILEGE
Practical advantages
to the USA are two-fold, industrial but mainly monetary. World
banks are absolutely drowning in US$-based assets, which grants
US firms a favored position in contract awards. Numerous large
contracts are won with large US firms, downstream in their economies.
See Halliburton, General Electric, Bechtel, and others. Large
US energy service firms typically win contracts with oil producing
nations. It is part of the Petro-Dollar game, with attached military
protection unwritten into the contracts. We protect their governments,
even if they are corrupt. We induce both monetary corruption
and bank dependence, even when other governments are honest and
object to pressured tactics. We are the big bully on the block.
With the USDollar
as world reserve currency, the USGovt abuses the privilege on
a grand scale. Sure we donate heavily to charitable causes, like
disaster relief. But we are heavy handed in order to maintain
the privilege of running an uncontrollable printing press, which
in private circles is known as a counterfeit operation. That
press funds our operations, which in my view have clearly gone
amok. In essence, the USGovt runs the largest protection &
extortion racket in modern history, perhaps ever. The world
is "obliged" to sop up and purchase all the debts we
generate, whether they approve or not of our policies, behavior,
tendency, or justification for military actions. Almost without
enforced discipline, the US system has evolved with unchecked
abuse on a massive scale. Do Europe or Asia have a say in Congressional
decisions which lead to huge federal deficits? Do they have override
in decision to go to war in the Persian Gulf? How about an unwise
tax law change based upon faulty self-serving analysis? The entire
US system can extend credit at will with seeming impunity, with
little consequences. Surely political repercussions surface.
US federal
debt, mortgage debt, and indirectly household debt are all absorbed
by Asia. Exporters are somewhat bound to buy our US Treasury
debt in order to continue selling in our market. Foreign central
banks have few alternatives to sock away $20 to $30 billion per
month, each month, every month. Are they supposed to acquire
a major US pharmaceutical firm or major US technology firm or
major retail chain every two to three months? No, since that
would cause alarm among the US public. The US consumer market
drives the Asian economies. Practical implications are frightening.
The USGovt can run a war on a credit card, with foreigners paying
the costs with no say on the prosecution of that war. The USGovt
can cut taxes without business growth, run deficits, without
paying the costs. The USGovt can fund pork projects to satisfy
Congressional members in certain key states. The USGovt can stimulate
and subsidize its financial asset bubbles, with foreign money
used to push the bubbles, all the bubbles. The USA provides security
& protection of shipping lanes and ocean ports in a grand
international contract. We harm our credit providers, by subjecting
their debt holdings on a regular basis to losses. If foreigners
retaliate, they hurt both their bank systems (from currency loss)
and their export trade with the USA (from currency changes).
THE PROTECTION RACKET
DYNAMICS
Where the Petro-Dollar
system seems to break down is in the writedowns foisted upon
participating nations. The racket seems complex but can be described
in extremely effective and simple terms. The US runs up horrendous
debts, which foreigners finance at $1.8 billion per day. We
continue to print money to pay bills and fund operations, with
credit supply taken for granted even though our national security
on a financial basis is routinely undermined. Our accelerating
money supply growth renders the USDollar vulnerable. The USDollar
declines in value, making for a constant "writedown"
to foreign holders. Foreigners continue to supply capital to
the US system, to feed our USTreasurys, as they recycle their
trade surpluses. Asian surpluses are on the order of between
$250 and $300 billion per year. European surpluses are between
$100 and $120 billion annually. As the fabled Senator Everett
Dirkson once said "a billion dollars here, a billion
dollars there, before you know it, you are talking about real
money."
If foreigners
halt capital supply, their bank systems implode worse than they
did inside Japan in the 1990 decade. Our US assets (housing,
bonds, stocks) rise in "value" without work, as our
debts accelerate and jobs disappear. If Asia withdraws support,
then US consumers witness a sudden disappearance of wealth and
purchase power which immediately is felt by Asian producers of
finished products. If Asia withdraws support, then the entire
price structure for consumer products rises within the US Economy,
for a host of items like stereos, DVD's, video recorders, cameras,
photocopiers, printers, PC's, cars, engines, even construction
equipment. Asia feels obliged to continue, in order to keep
their industries and work force busy (avoid unemployment), and
to prevent their banking systems from imploding. They cannot
abandon support for the USDollar, and demonstrate that support
with frequent central bank interventions. One must suspect that
some interventions are ordered by the USGovt for execution overnight
by the Bank of Japan, which my description calls the Fed's Far
East outpost. They do the Fed's bidding, often under the cover
of darkness. The question of the BOJ truly being independent
is a very big question nowadays.
RUSSIA & OPEC
UNDERMINE THE PETRO-DOLLAR
The Petro-Dollar
system is under new attack. Russia and fringe nations of OPEC
are responsible for dissension. Their motive is self-preservation.
They strive to avoid selling crude oil output in a falling currency,
which cuts into revenues. They dislike buying commodities in
US$ terms, as inherent prices are rising. Rather, they desire
a stable or rising currency. The rogue nations involved in the
act of insurrection include Russia, Iran, Venezuela, and Indonesia.
Being a European nation, Norway should also be so motivated,
but so far they have not made any rumbling noises. An added motive
for selling oil outside the US$ sphere addresses a larger economic
issue. If a nation can manage to trade a host of commodities
(like oil, natural gas, copper, iron, cotton, coffee) in euro
denomination, that national economy would be far less subject
to the distress of systemic rising prices. For instance,
the Russian ruble is down 30% versus the euro, in part from selling
oil supplies in US$ terms, in part from the horrible fallout
from the Yukos legal treachery, in part from unusual fallout
from tampering in the Ukraine elections. Regardless of why, the
faltering Russian currency has contributed to 11.7% price inflation
inside this enormously important commodity powerhouse nation.
Russia might lead the pack in output for as many as a dozen commodity
items such as platinum, cobalt, titanium, tin, zinc, aluminum,
and others. Russia sells 81% of its oil exports to Europe, with
65% of its overall trade with the EuroZone. Therefore, it is
in Russia's best interest to sell oil in euro denomination. It
appears Russia is the spearhead behind the transformation toward
the Petro-Euro and creating a new system.
Few observers
seem to attach many military implications to the Petro-Dollar,
its defense, its dismantling, and geopolitical shifts it might
cause. Not here, no way! The Iraq War has numerous grounds for
its justification, surely the weapons of mass destruction among
them (although not taken seriously by me here). Any curious thinking
person with a pulse must consider that establishment of military
bases in the hot Middle East was another motive. Locking in multi-billion
contacts with oil field renovation and restoration is yet another
motive. We did not share such contracts with European firms,
much to their anger. Also, stemming the sale of Iraqi crude oil
in euro denomination was another motive, which in my view was
far more important even in March 2003, just as important two
years later now. The Petro-Dollar system is that important
to defend.
The sleepy
US press & media has given weapons of mass destruction 50
hours of air time for every 5 minutes of serious discussion of
petro sales in euros. Saddam Hussein's defiant sale of Iraqi
oil for euros made for a highly profitable maneuver. In my
analysis, Russia is attempting to take the front position to
attack the Petro-Dollar system directly, first by selling oil
and gas to Europe in euro terms, second by attempting to lead
OPEC in secret fashion with little publicized meetings. OPEC
refuses to confront the USA, since it owns no military and is
quite dependent upon the USA for its protection. They sell us
oil; we protect their leadership (see Kuwait and Saudi Arabia
and Qatar). Russia is willing to confront the USA, an adversarial
role which it seems unwilling or unable to be put to rest, a
certain remnant from the Cold War. The fact that Iran nuclear
armament is no longer in the news in the last few weeks speaks
volumes about the tactical weakness of the USA. Our nation
is extraordinarily vulnerable to sales of USTBonds by foreign
central banks, and to sales of foreign produced oil in euros
(not USDollars). In my view, Putin showed Bush his weapons
last month, and the USA backed off.
Behind the
scenes is anger by Russia for the construction of numerous small
bases for the US Military in former Soviet Republics like Uzbekistan
and Kazakstan. Their erection might have helped to drain world
cement supplies last year. We seem in Putin's eyes to be encircling
Russia, who might retaliate by knocking the Petro-Dollar system
off its foundation pillars. The new Shanghai Cooperative Group
represents a potential supply network which will have member
nations of China, India, Russia, former Soviet Republics, and
Iran as its core. New nations are being actively courted, such
as Venezuela and Brazil. Energy (crude oil & natural gas),
industrial metals, and more are to be bought and sold by this
new network, outside OPEC and its gaggle of disunity and diverse
puppet strings held by Washington DC. In my view the "COOP"
is likely to have been organized to be a direct assault on the
Petro-Dollar, if not a consciously designed network to blockade
the USA from the supply chain. The COOP is a direct answer
to the corrupted OPEC cartel, which seems overly influenced by
US leaders. The Saudi oil minister sounds as though he has been
trained in FedSpeak, when he talks of hiking oil output from
already strained capacity (if it exists). It is highly likely
that the COOP creates the framework to undermine the dollar-based
supply system that is the PetroDollar. My guess is the euro
will be the COOP's transactional currency.
The latest
development is the creation of an Iranian commodity exchange
market. The US press has yet to report on it, despite the extreme
importance. Would even 10% of the viewing audience understand
the story or its importance??? So why bother to air it? Its plan
is to sell crude oil and natural gas in euro denomination. So
far China is a central customer to participate in the new exchange.
Again, behind the scenes, deals are being struck. The CIA and
other agencies warn that China is selling far more than scud
missiles to Iran, which fears an invasion by the USA. Perhaps
the most important factor of all which pertains to Iran is the
decision made independently by at least three multi-national
energy firms (including Agip of Italy and Elf Aquitaine of France)
to construct an oil pipeline south from the Caspian republics
through Iran. A pipeline through Georgia or Chechnya might not
come to completion, due to smaller measured oil deposits in the
surrounding Caspian region. If the key oil pipelines are
to routed through Iran, then Iran rises in strategic importance
almost beyond what words can describe. Look for stories
by the obedient lapdog US press & media on Iran's nuclear
threat, which might be about as accurate as Iraqi warnings weapons
of mass destruction. Fool me once, shame on you. Fool me twice,
shame on me. NOT ME. Iran sits in the most important location
in the entire Persian Gulf, and they are not friendly nor cooperative
with the USA. Any attack of Iran by US Forces will involve the
Russian and Chinese militaries !!!
FAILING TOOLS &
THE VULNERABLE USA
Previously
useful weapons used by the USA are likely ineffective here. The
IMF and World Bank have been used in devious ways in past years.
These organizations have been accused of serving as fronts for
securing contracts for US contractor firms, for disrupting foreign
governments, and more. Evidence abounds that the IMF blocked
attempts for member OPEC nations to firm the usage of an Islamic
Dinar to be used in oil sales. A gold-backed Dinar is not used
much for international settlements, but still is talked about
between Iran and Indonesia. The role of the World Bank might
become more strategically important with Wolfowitz as its new
head. If you think this is a maneuver of no importance or consequence,
YOU ARE BRAIN DEAD.
The power of
the IMF is blatantly evident in the 2001 collapse of the Argentine
bank system, and in frequent Brazilian debt writedowns. In recent
months, Argentina has since defied the IMF with a gold backed
new peso currency. Financial weapons prove ineffective in defending
the Petro-Dollar from Russian maneuvers. They sell directly to
Europe. It is an obvious next step. Not only will Russia continue
to sell energy supplies in euro terms, but Russia will balance
its central bank reserves toward the EuroBonds. Reserves will
reflect their commerce.
My assessment
is that a currency war is underway between USA and Russia, with
the Petro-Dollar the central battle ground. THAT WAS THE HIDDEN
AGENDA BEHIND THE PUTIN VS BUSH TALKS LAST MONTH. We are long
past the buddy-buddy horseback rides in Crawford Texas with Vladimir
Putin. This man Putin comes from the KGB and knows how to
play chess. Our USGovt leaders know how to use sledge hammers,
not move chess pieces on a complex chess board. A
transition is in place to have the euro replace the USDollar
as world reserve currency, or at least to share it with the euro
during a transition phase. Russia, China, India, Indonesia, South
Korea all announced "diversification" away from the
US$-based debt securities in their central bank reserves management.
Such pronouncements serve as verbal after-shocks to basic shifts
underway in the Petro-Dollar foundation earthquakes.
Pricing oil
in euro terms will help oil producing nations and oil consuming
nations to transfer higher costs to US Economy!!! They will realize
more supply sale income; the USA will realize higher costs for
those supplies. Pricing oil in euros helps nations to reduce
domestic price inflation within their own economies, and to add
to incoming revenue from oil sales. It is a zero-sum game with
the USA the loser when the Petro-Dollar fractures and slowly
erodes into oblivion. Removal of the Petro-Dollar system will
have a magnificent effect on the crude oil price or the USDollar
exchange rate or US Treasury yields. Its removal might have a
significant effect on oil AND the USDollar AND the USTBonds.
The initial effect is to be an effect on the oil price and a
slew of commodity prices. Then might come an effect on currencys
and bonds as a secondary effect. Then we might see a gold effect.
An acceleration down with USDollar could trigger a world bank
crisis. Foreign banks have responded with diversification into
the euro and to a minor extent into gold. The Petro-Dollar foundation
is being shaken under our feet.
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Apr 06, 2005
Jim Willie CB
 Jim Willie CB is the editor of the "HAT
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