Thursday, January 31, 2013


Updated 11/13/2016

The rise of the "petrodollar" is a little understood phenomena that plays a great role in the Middle East from the 1970s on, but also, in preventing the dollar from turning into worthless little bits of paper.

The PETRODOLLAR trading system requires all oil sales be transacted in US dollars,a system established in the early 1970s by Kissinger in an agreement with Saudi Arabia. It is believe that when Nixon took the dollar off the gold standard, he and Kissinger decided to tie the dollar to barrels of oil, instead.

By 1975, all of the oil-producing nations of OPEC had agreed to price their oil in dollars and to hold their surplus oil proceeds in U.S. government debt securities.
In exchange, oil producing countries would receive US weapons, military aid and other forms of protection. See this graph, with ''oil exporters'' in 4th position holding US debt:

Most of the Middle East has aligned itself  militarily with the US. -- see this map of US military bases in the Middle East (note how Iran is surrounded).

Countries wanting to purchase oil, have to purchase it in US dollars, either by exchanging a national currency at high bank charges, or by producing and exporting consumers items to the US. For example, Japan must convert its yen in US dollars to buy and import oil. Japan ships Hondas to the US, receives US dollars and uses that to buy oil.Thus, countries that don't want high exchange rate charges, are dependent on an export strategy to grow their economies. In addition, countries take their excess profits and invest in (buy up) US debt, thus every global oil transaction increases the demand for US dollars and the demand for US debt securities (bonds). This allows the US to print money to buy oil, at which point interest is occurred by the Federal Reserve, which increases US debt, which is purchased by other countries.

This allows the US to print money indefinitely without fear of having to pay debt or, to suffer hyper-inflation.

Some countries are not happy and want to transact oil transactions on their own or other currencies such as the Euro. China, Iran, Syria, N Korea  and Venezuela are among those countries. Saddam Hussein pegged the Iraqi dinar to the Euro just before the US 2003 invasion. Gaddafi of Libya planned a pan-African gold based currency, before his demise at the hands of a Western-supported insurgency.

Update: In November 2014, China signed an agreement with Qatar to begin direct currency swaps between the two nations using the Yuan. Update: February 2016:
Reuters has reported that Iran is requesting euros for all new and outstanding oil payments

To sum up:
The world today needs dollars to buy oil, global reserve currencies are mainly in dollars, and most countries peg their currency to the dollar and buy up US debt, therefore the US can print as many dollars as it wants. China however in 2012 has started to buy oil in its own currency. China wants to be Iran's number 1 oil client and pay with the Yuan currency. This is the type of move that may one day remove US monetary hegemony and its ties to the Middle East.Sanctions against Russia may be a shortsighted policy because it will force Russia to deal bilaterally with China and create their own petro financing system.

Wednesday, January 30, 2013


Updated July 17, 2013

This week in my INTL 5400 class, students discussed whether US defense spending, the highest in the world, was benefiting the US economy.

The problem with ascertaining defense expenditures is the need to keep some defense budgets away from the public eye, due to national security. One student thought the ratio of US military defense spending to GDP, was 4% (which although the student didn't cite the source, is from the World Bank) , another cited 20% of the US national budget, which is different from GDP. One statistic sounds low, another sounds high.

Here is another conclusion, entirely, which puts defense spending at 22% of the GDP:
"In fiscal year 2014, the federal government will spend around $3.8 trillion. These trillions of dollars make up a considerable chunk – around 22 percent – of the US. economy, as measured by Gross Domestic Product (GDP). That means that federal government spending makes up a sizable share of all money spent in the United States each year."

Another student wrote about how military budgets are difficult to ascertain and sometimes don't include  the costs of actual warfighting. "According to Shea the United States spent $380 billion dollars in 1956 based on 2012 adjusted numbers.  For the Fiscal Year 2013 defense budget, President Obama requested $523 billion. This is approximately a 37% increase in spending when comparing the adjusted numbers.  Shea provides a staggering statistic, however, as he explains the $1 trillion dollars spent to fight in Afghanistan and Iraq (over the life of the wars) were never part of the budget and that those funds were in addition to the normal operating budget.  In addition to the $1 trillion, the cost of maintaining the nuclear arsenal and providing our allies with arms are also not included in the defense budget."

See: Shea, Joe.  “Campaign 2012:  The Gingrich Turn.”  American Reporter Online.  January 22, 2011.,771W/146.html  Accessed July 13, 2013.

Personally, I have tried to research the defense budget in all its complexities and found it difficult.
Students have pointed out the high costs of the War on Terror. Obama is trying to scale back costs by using Special Forces, drones etc, instead of costly boots on the ground wars.

Today, the chances of an American being made a casualty of a foreign terrorist attack are very very low.
1 in 20 million — Chance of dying in a terrorist attack in the United States from 2007 to 2011, according to Richard Barrett, coordinator of the United Nations al Qaeda/Taliban Monitoring Team.
This raises the necessary is a large military budget  today?
According to a 2007 US Chamber of Commerce report, “The more than $70 billion in aerospace and defense sales overseas is important to U.S. national security and the economy because it supports high-quality, high-paying U.S. employment; advances in critical national security areas; improves interoperability with allied forces; and holds down the costs of
equipment purchased by the U.S. military.This study shows that the defense and aerospace industry supports 3.6 million American private sector jobs and requires a supply of the nation’s best and brightest technically trained and skilled talent.”

A 2007 study by the University of Massachusets found that US taxpayer is paying 4.4 percent of the GDP for defense spending  - $600 billion, “eight times the amount of U.S. federal spending on education…The $600 billion military budget creates approximately five million jobs, both within the military itself and in all the civilian industries connected to the military

(Are these two reports consistent? Here students should always do the maths. Could it be that 1.4 million Americans are employed directly by the military?  I’ll let those who are interested do the research…perhaps as a final paper topic.)

The U of Massachusets study found that “by addressing social needs in the areas of health care, education, education, mass transit, home weatherization and infrastructure repairs, we would also create more jobs and, depending on the specifics of how such a reallocation is pursued, both an overall higher level of compensation for working people in the U.S. and a better average quality of jobs.