The Fallacy of the Petrodollar

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COMMENT:Ā Hi Marty,

Great post on oil and gold. I never owned gold until about 20 years ago. I read about the gold bull of the 70’s and tales of gold mining stocks outperforming in the Great Depression decade. But I never bought into the hype until I started listening to these promoters later. It was lilleĀ walking into a dark parlor filled with incense and loose women. Seductive. Until 2008. Then it all came crashing down. Going through the multi-year crash later from the 2011 high, one can see these people are there to promote even when the stockĀ market raced to new highs as gold miners crashed to new lows.

The point you made is so true. You have to reexamine the facts and your internal biases. Then and only then does one realize gold is just another asset. The monetary system evolves and it is supported by the people who make it grow. Not by the government. Gold is nice and shiny and many coins are beautiful, but it will not do what its promoters claim it will do if enough people see better choices to protect and expand their wealth. Perhaps that’s why people’s ;largest asset generally is their own home. Its utility is obvious. And its unique characteristic, location, sets it apart from gold. Others see this. But gold promotersĀ don’t. Maybe that’s why diamonds have never really taken off as an alternative investment. Because while they are attractive, they aren’t terribly useful. And as for being a store of value…well, there are other more liquid assets that fit that bill…say for example. Stocks!

MS

REPLY: Money has been many things, but what you say about utility is correct. Money has been cattle, and sheepskins, but probably the most truly worldwide commodity to ever gain that status was Bronze. It was the Minoans who created the Bronze Age and you will see in some museums on display a Minoran Bronze Ingot which was used in trade and it took the shape of previous forms of money – the sheepskin. Bronze has a utility value from tools to weapons. But it possessed yet another key element – movability compared to cattle. This is a Roman Aes Signatum displaying a bull which was its replacement for cattle in trade.

Here is a Roman Aes Signatum of about 5 pounds of bronze with two chickens on it. This too was a symbol of value with the reverse a trident.

The requirement of MONEY is that everyone accepts it. The dollar is no more backed by gold, oil, or even propaganda. It is backed by the fact that the United States has a non-Marxist consumer-based economy to which everyone wanted to sell their wares to reestablish their economies. China and Japan rose because they were able to sell to the American consumer. The same was for the German car industry. I know, I was called in by both the Japanese and German car industries. There were no exchange controls on the dollar. Emerging markets issued debt in dollars so they could sell it to American investors.

The largest global producers of oil were, before Biden, the United States, Saudi Arabia, and Russia. These three countries were producing approximately 40 million barrels of oil per day in 2020 before Biden took power and deliberately set out to destroy American energy production. That was 43% of total world production back in 2020. As of the end of 2021, $2.1 trillion was the total value of the fossil fuel industry. Generally, fossil fuels represent about 2.5% of the world’s GDP. When oil prices shot up excessively costing about 4.5% of global GDP, that is when it tends to shift income and will often lead to economic decline as took place during the 1970s that we call “stagflation” which Larry Summers has tried to rename “secular stagnation” just to confuse things.

The number by themselves clearly establishes the claims of the greenback being the Petrodollar is pure sophistry. You could also call it the Weat-Dollar since global wheat is also priced in dollars.

Gold is an asset class. It is recognized worldwide, so it is a valid investment. We do not need the propaganda of nonsense to pretend everything else will turn to dust and only gold will survive. I buy rolls of $20 gold coins. That is fine. But like everything else, it rises and falls – there are no exceptions.