Written September 21, 2021
You have probably heard of the petrodollar. You may not know the ins and outs, but you have heard the term in history class or on some podcast. In a very simple and reductive way, it is an abstract noun meant to show the political and military denomination of the United States’ dollar as the sole purchasing currency of oil. By creating the exclusive medium of exchange to be their dollar, be it in treasuries, bonds or cash, the United States could “quantitatively ease” their expanding monetary supply into the ever-demanded energy commodity that is oil.
The idea of tying your monetary system to an energy system might seem a bit odd at first, but consider the actual exchange of capital to be one of time spent earning the pay (working debt for credit capital) for a direct-product-of or service-based expression of the seller’s time. It might seem trite, but time is money; perhaps the truest commodity of the free market. So, by tying your hard-earned greenbacks to an energy-derived system, one can help preserve the scarcity of time spent earning.
This is the concept behind the numerous bimetallic standards the United States has applied before, during and after the revolution of 1776. One central bank and 195 years later, Richard Nixon closed the gold window, severing the stable tie of the dollar to the price of gold, and escorted us into the wide and open skies of fiat currency. What felt like high flying through the following decades was actually falling deeper and deeper into the cavernous hole of an ever-expanding debt balloon. Monetary growth expanded from $636 billion in January 1971 to an absurd $7.4 trillion by the time our fiat experiment caught up to us in the winter of 2007. The pressures of the cascading defaults of a Frankenstein financial creation hit in 2008; a monstrous body of illicit subprime mortgage speculation with the head of a eurodollar system liquidity squeeze.
By the time the news broke of a single hedge fund in the EU defaulting, the fears of insolvency among the system ran as far as New York City. Thirteen years ago this month, a bank run at the fractionally reserved Lehman Brothers drained the 161-year-old institution in a single afternoon. Why would issues with the credit of a single firm cause a global recession? Why would a bad trade for a hedge fund have this much effect on the United States dollar system, never mind the rest of the world’s currencies? The answers are concurrently abstract in exact psychological cause, for, after all, money is just a communications tool, but shockingly simple in an economical sense. Every market, of every kind, can be reduced to simple supply and demand. Every market, at the fundamental core, consists of buyers and sellers. So how did this assumed localized liquidity crisis occurring from a hedge fund default suddenly become a worldwide problem?
Not only did they not have the money to pay the debt in liquid reserves in the bank when the chickens came to…
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