If you are sitting on your couch wondering why paying your expenses is harder every day or why your asset’s value increases, this article is for you. Sit back and read to understand what the global monetary system is and will continue to do to your income. You need to be prepared and this text is a good starting point.
Understanding The Petrodollar Global Monetary System: A Must
*This article is based on Lyn Alden's most recent blog post on the petrodollar System*
It all began back in 1974 as a result of the petrodollar system. The chart below -a shocking one I might add- displays major annual household expenditures for a family of four vs. median male income from 1985 to 2015.
On the left, it goes from $10,000 up to 60,000. The blue line represents the median male income, used to try to determine how a one-income family has gotten squeezed over the years.
Back in 1985, the majority of one-income families were male, so if they combined female and male incomes into an average, it would've skewed the numbers.
The red line represents expenses as college, vehicle, health insurance, and housing costs, the normal obligations for a four-person family. It is visible how back in 1985 the income was a lot higher than the expenses.
Over the years, expenses have increased and risen a lot faster than the income, to the point in 2013 where the lines for income and expenses crossed. Think about that for a moment.
It is impossible for the average household out there to exist on just one income, without going underwater and taking on more debt every single year, which eventually leads to bankruptcy.
The bottom line is it's almost not viable for the average family to live on one income today in 2020, and that's a direct result of the petrodollar system we incorporated back in 1974.
In 1974, the US did a deal with Saudi Arabia to price oil in dollars, which created artificial demand for dollars due to the high requirement of oil in every country across the globe. Most of the trade started to transfer into dollars.
So, if XYZ corporation in Mexico was selling goods, they would want to sell those in dollars to have the FX reserves to potentially buy oil in the future, creating a self-reinforcing positive feedback loop.
As all the oil transactions are done in dollars, a lot more trade is done in dollars, therefore all of the new debt that is issued is done in dollars.
Pricing oil in dollars caused a massive excess demand for them. Entities and global corporations that receive those dollars don't just put them in the bank and save them. Often they buy US assets, and we've heard about China doing this, buying US treasuries.
The petrodollar system artificially inflated the stock market, increased the value of bonds, real state, and decreased the overall interest rates in the economy.
What does that mean for the average Joe, the average American living in the economy?
His interest rates are a heck of a lot lower, asset prices are higher, and the goods that he has to buy at Walmart, Home Depot, or Target are a lot cheaper.
This gives the average American a much higher standard of living than they would have if they had to rely exclusively on their productivity and hard work.
For more insight on how the petrodollar system works, I examined an extract from a cool YouTube channel called The Infographics Show:
“The petrodollar system elevated the US dollar to the world's reserve currency, and through this status, the United States enjoys persistent trade deficits and is a global economic hegemony. We all know that in the world, the most in-demand resource is oil. It makes oil-rich countries very wealthy, and it's priced in dollars that makes the USA's currency the most dominant currency in the world.
Some say this gives the USA something called exorbitant privilege, which means, according to Investopedia, the USA can perpetually finance its current account deficit by issuing dollar-denominated assets at very low rates of interest, as well as becoming a global economic hegemony.
The USA can just print its own money, which is nice for the USA, as it can pay off its massive debt with that money. Imagine you were broke, but could just borrow and then just go to the money tree in the garden to pay off the debt. ”
Now, my position regarding the petrodollar system does differ from the Infographics Shows. The whiteboard image above illustrates my perspective.
There is a drawing of the United States. They went to Saudi Arabia in 1974 and worked a deal: “Price oil in dollars and we will be your military.” That's kind of the deal they had. So now all countries have to somehow get dollars to buy the oil they need from Saudi Arabia.
For example, a Mexican corporation is selling t-shirts. They're going to sell them to Saudi Arabia for dollars because they need them to buy oil, so it's a circular process. This situation applies to any other country as well.
At the same time, the Mexican corporation is most likely going to want to take out dollar-denominated loans from bank XYZ in the Cayman Islands. The bank in the Cayman Islands can do that because of the euro/dollar system that allows them to create dollar-denominated debt.
The Mexican corporation does this for a couple of reasons:
- They need dollars to buy the supplies they need because 60% of global trade is done in dollars, due to the origination of the petrodollar system.
- As the dollar is widely used, prices are much more stable, meaning it's less likely the dollar will crash long-term because of the artificial demand. As consequence, interest rates are a lot lower.
So the Mexican corporation can borrow in Mexican pesos at 15% interest, or they can borrow in dollars at 5%, no-brainer. Again, there is a positive feedback loop creating more demand for United States dollars. As a result, interest rates in the United States are a lot lower than they otherwise would be, and asset prices go up.
To continue my example, now I have one of my favorite characters, the average Joe in 1874 and his extra-large version, after +40 years of the petrodollar system.
The XL average Joe’s house has increased in value to an extra $500,000 in equity. His 401(k) has gone up by $500,000, so he has an additional $1 million worth of purchasing power without having to do any extra work.
He didn't have to produce any more widgets or work extra hours, but his purchasing power increased significantly. His standard of living went up, and no more stuff’s being produced by society.
So where does the stuff come from?
It comes from China. They are more than happy to take the dollars because of the artificial demand from the petrodollar system.
China does the hard work and uses its scarce resources with alternative uses to produce the stuff they send to the United States for XL version of the average Joe to consume because he's not producing it himself.
He's just living on the fact that his assets have gone up in value. So those dollars go to China, but they turn right back around and buy assets with those dollars they're accumulating.
Wrap your head around this: we send China dollars, they send us stuff because we're not producing the stuff ourselves, then they take those dollars and buy US debt, treasuries, stocks, and real estate.
If we continue to outsource all of our production of stuff to other countries, at some point, those other countries will own all the assets in the United States.
Right about now, your friend and family member Fred is saying “Well who cares? Why don't we all just sit back on the couch, relax, never work a day in our lives if all these foreigners are willing to produce all this stuff and all we have to do is give them green pieces of paper? Who cares if they own all the assets?”
I would remind your friend and family member Fred what wealth is.
See, is a society wealthy just because it has a lot of green pieces of paper?
I don't think so. The wealth of society is its ability to produce goods and services efficiently.
So if China, in this case, can produce 100% of the stuff, and they own 100% of the assets…
Who in this equation is rich and who is poor?
China is getting rich, while every single average Joe, even the XL version, although they think they may have a high standard of living, in reality, in the long run, they're the poor ones.
How Is The Petrodollar System Crushing The Middle Class?
A quick recap: Artificial demand for dollars allows the United States to run a huge trade deficit, which means we can import most of our goods and services, and export very little.
We're not producing what we consume, it's being produced outside the United States in places like China, Mexico, and even Europe.
As the petrodollar system has helped the dollar become the world reserve currency, this creates artificial demand, so even though we have huge trade deficits, the dollar remains relatively strong.
If we didn't have the reserve currency and we ran great trade deficits, the value of the dollar against other currencies would go down dramatically, and it would keep going down unless we started producing more than we consume and exporting it to create real demand for dollars. The net result is it allows us to outsource all of our manufacturing.
Why should we do it here in the United States, work hard, when we could just outsource it to another country and get those same goods at a much cheaper price?
The only thing we have to do is give them our dollars. They take them, buy treasuries, decrease the interest rates, which allows asset prices to go up, and the Americans that own those assets feel richer and richer as a result.
Unfortunately, with the petrodollar system, we outsourced not only manufacturing but a lot of high-paying jobs that are replaced with lower-paying jobs, reducing real wages.
That demonstrates how expenses for the average family are increasing a lot faster than the average income. This is putting the squeeze on the average Joe.
Before the petrodollar system, the United States had a very solid manufacturing base. I'm not here to say that it is all manufacturing, but we ran surpluses, we were a creditor nation considered wealthy.
We produced a lot of the stuff that was consumed, not only in the United States but out of the country as well. However, we started sending those very good manufacturing jobs overseas.
What did we replace them with?
The economy that we have today.
After the petrodollar system was put in place, and 40+ years later, instead of seeing lots of manufacturing, we see things like Uber, Top Golf or DoorDash, a lot of restaurants and bars, lawyers, and accountants.
This is an economy that revolves around domestic services, but the goods consumed inside it are produced outside of the domestic economy, leaving us with huge trade deficits, where we're importing most of the goods we consume.
To comprehend how much the petrodollar system has destroyed the middle class in the United States, and, I would argue, our entire economy from a fundamental standpoint, I reviewed Lyn Alden's blog post to put things into perspective.
The first chart from Lyn's report that stands out is the United States balance of trade, so the trade deficit or surplus. After the petrodollar system began in 1974 the trade deficit got worse to where it is today at $70 billion per month.
That means we are importing $70 billion more goods and services than we are exporting to other countries. In other words, we are consuming far more than we produce.
As I mentioned before, the people producing those goods are taking the dollars they earn and buying US assets, as shown in the following chart.
In Lyn's words:
The US net international investment position has collapsed, with the US has gone from being the world's largest creditor nation to the world's largest debtor nation. The net international investment position of a country measures how much foreign assets they own, minus how much of their assets foreigners own. The chart above shows it as a percentage of GDP. As of this year, the United States owns 29 trillion in foreign assets, while foreigners own 42 trillion in US assets, including US government bonds, corporate bonds, stocks, and real estate.
This is a result of an accumulated trade deficit that puts the US in one of the weakest positions in the world in terms of this metric. The United States is -52%, and the only countries in a worse situation are Spain and Mexico.
The next graphic shows how the United States has become a country of haves and have-nots, and how this petrodollar system has destroyed the middle class.
The percentage of wealth owned by the top 1% has grown in the United States since 2000, it is higher than any of the other developed countries. A lot of people would say this is a result of higher taxation; that is utter nonsense.
It's a result of the petrodollar system, our manufacturing being outsourced, and asset prices being artificially high, thus the owners of those assets are artificially rich.
The chart above displays that the net worth held by the bottom 90% has decreased substantially, while the net worth of the top 1% has increased since 2000.
Another graphic proving to us the effect of the petrodollar system on the middle class is the increase in the gap between productivity and the typical worker's compensation since 1979.
Productivity went up with an increase of 252%, while hourly compensation stopped and just went sideways since the end of Bretton Woods and the start of the petrodollar system.
Even though we like to believe the United States is the wealthiest country in the world, it's not true. The chart above speaks for itself.
According to the 2019 Credit Suisse wealth report, although the United States is wealthy per capita because that wealth is so concentrated, the median American net worth (which represents the 50th percentile, the middle person on the spectrum) is lower than the median net worth of most other advanced countries.
Additionally, the first sobering chart I examined for this article tells the whole story: A year of wages no longer covers a year of family expenses.
The middle class of America is becoming poorer every day, as a result of the petrodollar transforming our economy into a domestic services-based economy that is heavily reliant upon huge trade deficits, and foreigners producing all the goods we consume.
So we know what it was, we know what it is now, but the most important question to ask is:
What happens to the American economy in the future?
What happens to the average Joe and the middle class?
What is the endgame?
The Middle Class And The American Economy: Should We Prepare For Their Funeral?
You need to understand the petrodollar system I have referred to is starting to disintegrate. The demand for dollars is starting to decrease globally.
I'm not saying the dollar is going to lose its reserve currency status tomorrow, or in a year, but demand for dollars is gradually deteriorating across the globe.
It's a slow process, it doesn't happen overnight, and I think that in 15, 20 years, there's a good chance the dollar won't be the reserve currency, and I agree with Lyn Alden's base case that there might not be a global reserve currency.
It'll be decentralized, different countries are doing business with different currencies. Maybe Bitcoin, maybe gold, who knows. This is already happening, the following chart is indisputable evidence.
Six years ago, 98% of the export deals from Russia to China were done in dollars. Now? It's only 33%. The majority of the transactions are now done in euros.
It's the same thing if you look at exports between India and Russia. Now it's mostly in rubles. China stopped taking dollars and buying treasuries (US assets). Instead, they are spending dollars on infrastructure projects outside of China as the Belt and Road initiative.
If there is less artificial demand for dollars, it goes back to -I hate to say it- its intrinsic value. In any fiat currency, the value is zero. Let’s assume the value of the dollar based on exports, imports, or trade deficit on the DXY, would go from 90 down to 50 or 40, who knows how low it would go.
The outcome would be a price increase of all the goods that we have to import into the US. The dollar versus imports would go down, the price of the imports would go up.
What does this mean for the average American?
The prices of the stuff you buy daily would go up massively, double, triple, maybe even quadruple in price. We would have to start consuming what we produce.
But remember, we don't produce that much. It's an economy that's based on domestic services.
When there was tremendous artificial demand for the dollar outside of the United States, we were able to import low prices into our economy, therefore our standard of living was much higher. But now, or in the future, we would be importing higher prices into the United States.
It takes us right into an economic doom vortex, where prices are going up, sales going down because people can afford to buy less. If sales go down, jobs decrease. If jobs decrease, that means the amount of spending in the economy decreases.
“One man's spending is another man's income,” says Ray Dalio, so if spending goes down, incomes are going down, foreigners are buying fewer US assets, which means spending goes down even further.
If the Fed or the government saw this happening…
What would they do?
You know just as well as I do, it starts with the money printer. They would print up money and make it rain on the real economy, increasing the number of currency units that were chasing an ever-shrinking supply of goods and services.
This makes prices go even higher and we go right back into the doom vortex that takes us to a negative economic feedback loop that just gets worse.
I'm sure your friend and family member Fred is saying, “Whoa, George, time out. You are crazy, what are you talking about? If the dollar goes down in value, that means that our exports are going to be more attractive, so all of that manufacturing that we outsourced in the past is going to come right back to the United States, and we're going to be rich again. We've got nothing to worry about, you're just fear-mongering.”
What I would say to your friend and family member Fred is…
How is that manufacturing going to come back with all of the regulations we now have in the United States?
I'd like to point out, the regulatory environment in the United States isn't getting any better, it's going to get far worse.
Also, as the dollar goes down in value, slowly loses its reserve currency status, and artificial demand drops, there's going to be a capital flight out of the United States. You're going to want to take out your dollars, not invest here. You're going to want to invest somewhere else where the risk/reward is a lot better.
Let's not forget about taxes. There are no certainties, there are only probabilities. One thing that I think has an extremely high probability of coming to fruition is taxes in the United States going up.
Finally, the Great Reset agenda of the World Economic Forum, is not exactly business-friendly. So if you have $1 billion…
Do you want to put it to work in a country with regulations, capital flight, taxes, and Klaus breathing down your neck trying to regulate you out of existence?
I don't think so. The probability of taxes going up is high, as the probability of manufacturing coming back to the United States is low.
The main takeaway is expenses are most likely going to continue to go up, while the incomes will continue to go down. This is how the petrodollar, the global monetary system, is destroying the middle class.