There’s a lot of talk about the state of the U.S. economy and what will happen to the U.S. dollar. While many people think the dollar will lose its reserve currency, the million-dollar question is WHEN?
No one knows for sure when this will happen, but in my opinion, as long as the world uses PETRODOLLARS, the dollar is safe. The day the world stops using petrodollars is the day America is in SERIOUS trouble…
Russia and Ukraine
The events between Russia and the Ukraine have stunned the world. To penalize Russia, heavy sanctions have imposed heavy sanctions on the country to punish them monetarily.
Russia is a large exporter of oil and natural gas, which helps to provide energy to many European countries, including Estonia, Poland, Slovakia, Finland, Germany, Turkey and Italy. Asia also receives large amounts of Russian oil. In total, nearly 98% of Russian oil exports are delivered to Europe and Asia.
Many thought the sanctions would include natural gas exports, but that is not the case:
With large parts of Europe reliant on Russian gas, sanctions have not been placed on payments for energy and shipments can still flow through the continent.
“We don’t have a strategic interest in reducing the global supply of energy,” principal deputy press secretary Karine Jean-Pierre told reporters aboard Air Force One.Read the full story HERE.
This allows Russia to continue exporting their oil. Traditionally, is transacted in American dollars or Petrodollars, but could this be a threat to the petrodollar system?
What Are PetroDollars?
In its simplest terms, all oil bought and sold in the world must be done using U.S. dollars. Once upon a time, the U.S. dollar was backed by gold. This was called the “gold standard.” However, when the dollar was removed from the gold standard in 1971, the value of the dollar began to decrease.
In addition, this meant countries could not exchange the dollars they held in their banks for gold. This also included oil-producing countries who saw their revenues dramatically decrease along with the value of the American dollar. On October 19, 1973, President Richard Nixon requested $2.2 billion dollars in military aid to support Israel during the Yom Kippur War.
This angered the Arab members of OPEC, who promptly stopped selling oil to America and its Israeli allies. (OPEC is an abbreviation for the Organization of the Petroleum Exporting Countries). This turn of events caused a recession and eventually stagflation, which is a combination of high inflation, high unemployment and little economic growth.
During this time, gas rises increased dramatically, and a 55mph speed limit was imposed to decrease gas consumption.
In the 1970’s the United States and Saudi Arabia negotiated a deal that included the following terms:
- Saudis must agree to sell ALL their oil in U.S. dollars;
- Saudis would purchase U.S. debt securities with the surplus proceeds.
In exchange the U.S. would provide the following:
- Protection for the country’s oil fields;
- Provide Military equipment;
- Guaranteed protection from Israel.
By 1975, all OPEC nations were part of this agreement to sell their oil in U.S. dollars. For more information, check The United States-Saudi Arabian Joint Commission on Economic Cooperation.
Dangerous Reliance on Petrodollars?
In my opinion, as long as the world continues to use petrodollars, we are safe. But is there a chance the use of petrodollars will come to an end? The last known threat to petrodollars came in 2019, when Saudi Arabia Threatened to Ditch USD Oil Trades if NOPEC Passes. Per the article:
The time of the United States dollar (USD) being the world’s main reserve currency is reportedly in jeopardy, as Saudi Arabia is threatening to sell its oil in currencies other than the USD if Washington passes a bill that exposes OPEC members to US antitrust lawsuits, according to a report from Reuters.
Read the article HERE.
The American economy has become primarily a consumer–driven economy. Ask yourself the following:
- How many service-oriented businesses do you see in your area?
- How many fast food, gas stations, grocery stores or office buildings are in your neighborhood?
- Where are your clothes made? Your electronics or furniture? Are they made in the USA or other countries?
As you ponder these questions, they should make you think. The majority of the products we use are made overseas. In addition, America continuously runs trade deficits, meaning we consume more than we produce.
If the world decides to cease using petrodollars, what is their incentive to use American dollars? One reason would be to purchase U.S. bonds, but the U.S. currently has a budget deficit of over $30 trillion dollars. There is talk that the U.S. won’t be able to repay this debt. In addition, interest rates are extremely low, at 7.12%. This is important, because the inflation rate is currently at 7.5%, the highest since February 1982. In other words, bonds are not keeping up with the rate of inflation. The incentive for countries to buy our bonds is low.
If the world stops using petrodollars, the demand for American dollars will plummet. This could cause the value of the dollar to fall, causing the price of goods and services to increase dramatically. This would cause havoc on the stock market and the American standard of living for years.
Concerns about the dollar has fueled the interest in alternatives to the dollar. These would include cryptocurrencies and precious metals, such as gold and silver. Bitcoin is now over $40,000 per bitcoin. Investors are also increasing their positions in gold and silver. In each instance, it is believed these forms of money will retain their value if the value of the dollar decreases.
It’s critical we follow the events concerning the economy, the federal deficit, and the value of the U.S. dollar. We must also have a plan of action in case the stock market crashes, if inflation begins to rise, or worse, the petrodollar system ends.
One option is to follow the moves of wealthy investors, central banks, and governments around the world. Follow how they invest their money, then do your due diligence to see if their moves are good for you as well:
Another strategy is to increase your revenue streams. Find ways to become a producer and create multiple streams of income. By selling a product or service, you maintain control of your income. If inflation rises, you can raise your prices accordingly. Another benefit is you can accept alternative forms of payment, such as in the yuan, bitcoin, gold or silver.
No one knows what will happen, but it’s critical we are prepared for the unexpected. Start working on a plan of action. Learn everything you can about the dollar, various assets that retain their value and creating multiple streams of income. Get more tips in my books on investing, and success on Amazon. Invest For Success: Millionaire Wealth Strategies Not Taught in School. Available in eBook, paperback and audible formats on Amazon.
Want more? See our online courses on Udemy.