Global Crisis: Fall of the Petro-dollar Wall

February 21st, 2011
in GEAB reposting

Editor’s Note: This article is republished with permission of LEAP/E2020.  See end of article for credits.

With this issue our team is celebrating two important anniversaries in anticipation terms. Exactly five years ago, in February 2006, the GEAB N°2 suddenly encountered worldwide success by announcing the next "Triggering of a major global crisis" characterized especially by "The end of the West as we have known it since 1945”.

Follow up:

And exactly two years ago, in February 2009, in the GEAB N°32, LEAP/E2020 anticipated the start of global geopolitical dislocation phase by the end of that same year. In both cases, it is important to note that the undeniable interest aroused by these anticipations at international level, measurable particularly by millions of people reading the related public announcements, has been matched only by mainstream media silence over these same analyses and the fierce opposition (on the internet) of the vast majority of economic, financial or geopolitical experts and specialists.

Official unemployment rates (12/2010) – Source: BMGBullion,  01/2011
Official unemployment rates (12/2010) – Source: BMGBullion, 01/2011
However, in early 2011, most of the world has no doubt that we are engaged in a process of historic proportions which is seeing the world after 1945 collapse before our eyes, the US in the lead, while the international community breaks down a little more each day, like the social and economic fabric of most countries in the world (1). But the current evidence didn’t, of course, prevent “decision-makers and experts” (2) to be sure in 2006 that there was no risk of a serious crisis on the horizon and, in 2009, that it was absurd to imagine the slightest risk of breakdown in the existing world order, let alone the social order. Alas, today, the elite’s intellectual capacity to cope with the changes currently taking place doesn’t seem to have improved since the same “decision-makers and experts” never imagined it possible just two months ago that Tunisia and then Egypt would shortly see their regimes overthrown. Blind governments and international institutions (3), outdated experts and media (4) ... the Western elite and their clones in different regions of the world continue to sink in the “holzweg” of history, those forest trails that lead nowhere, or more precisely as Heidegger pointed out, that lead somewhere only if you have the humility to be constantly listening to the forest and its signals (5).

However, whilst the signals become real warning sirens, our elite seem to have decided to do anything and everything to ignore them. Take a very recent example: the comparison of events affecting the Arab world with the fall of the Berlin Wall. Our team has been very interested to note that this image which we have used since 2006 to help understand the ongoing process of the disintegration of US power, has now blithely been taken up by the political leaders (led by Angela Merkel (6)) and experts of all kinds. Yet today, even those who make this comparison abstain from continuing their intellectual journey to the end, until it leads to an understanding of the dynamics of events. They settle for describing, without analyzing.

Yet this "wall" which is collapsing has been built by someone, or something, and for a specific purpose. The "Berlin Wall" was built by the East German government in the broader context of the "Iron Curtain", which the USSR wanted in order to separate the Communist bloc from the West as tightly as possible. And it was mainly to avoid any questioning of the power held by the single party in each communist country to perpetuate Moscow’s control of the East European countries; in return, Moscow guaranteed full support and stipends of all kinds to the leaders of Eastern European countries. The fall of the "Berlin Wall", challenging these monopolies of power and therefore the purposes that they served, thus caused, in a few short months, the successive fall of all the Eastern European communist regimes, ending two years later with the dissolution of the USSR and the end of seventy years absolute power of the Russian Communist Party.

Unemployment rate in the Arab world and Iran - Source: Le Temps,  02/11/2011
Unemployment rate in the Arab world and Iran - Source: Le Temps, 02/11/2011
So if it's also a "wall" that’s falling before our eyes in the Arab world, in order to hope to anticipate the subsequent events it is essential to be able to answer these questions: who built it? for what purpose? And the answers are not that difficult to find for those who don’t watch the news with ideological blinkers:

. this "wall" was built by each Arab dictator (or regime) of the region to ensure their continued monopoly on the power and wealth of the country, avoiding any calling into question of their single party or dynastic legitimacy (for the kingdoms). In this sense, there is very little difference between the cliques in power in the Arab countries and those which led the communist countries.

. this "wall" was part of the broader system set up by Washington to preserve their preferential access (in US Dollars) to the region's oil resources and protect Israel’s interests. The forced integration of the military and security apparatus of these countries (except Syria and Libya) with the US defence system ensures (ensured) unwavering US support and allows (allowed) the Arab leaders involved to receive all kinds of stipends without being called into question by internal or external forces.

So, in thinking a little more about her comparison with the fall of the Berlin Wall during the
Munich Security Conference, the German Chancellor could have turned to her neighbour in the discussion, the US Secretary of State Hillary Clinton, and asked her: "Don’t you think that current events in Tunisia and Egypt are the early signs of the fall of all the regimes that depend on Washington for their survival? And that, in particular, they can lead to a rapid collapse of the system supplying oil to the United States set up decades ago? And thus the global system for oil billing and the central role of the Dollar here (7) ? Whilst the Munich Security Conference audience would have suddenly realized that they were finally discussing something serious (8), Angela Merkel could have added: "What about Israel? Don’t you think that this fall of the "wall" will involve the need to reconsider the entire US-Israeli policy in the region very quickly (9) ? And then miraculously, the Munich Security Conference would have regained a foothold in the XXIst century and the Euro-American debate could recharge its batteries in the real world instead of rambling in the transatlantic virtual world and the fight against terrorism.

Sadly, as we all know, this exchange didn’t take place. And the ramblings of our leaders are, therefore, likely to continue with the effect of accentuating the shocks of 2011 and its ruthlessness as GEAB No. 51 anticipated.

Annual relative performance of 40 asset classes (in %, expressed  in USD) (in green: profit / in red: loss) - Source: Chris Martenson,  02/04/2011
Annual relative performance of 40 asset classes (in %, expressed in USD) (in green: profit / in red: loss) - Source: Chris Martenson, 02/04/2011
Yet LEAP/E2020 is convinced that the current events in the Arab world, of which we had correctly anticipated the mechanics, are above all the regional translation of fundamental trends of the global systemic crisis, and in particular global geopolitical dislocation (10). As such, they are evidence of major shocks in the coming quarters. We consider, in particular, that the end of 2011 will be marked by what our team calls the "Fall of the petro-dollar Wall" (11) that will immediately generate a major monetary-oil shock for the United States. It is also one of the main topics of this issue with the broader anticipation of more developments in the Arab world (including an accurate country risk indicator for the region). Also, our team analyzes the current acceleration of the Eurozone emergence process and its implications for the Euro and the situation in Europe. Finally, we give our recommendations regarding all these events.


(1) Even the IMF, with the little imagination it possesses is now evoking the specter of civil wars throughout the world as the
Telegraph reported on 02/01/2011, whilst The Onion of 01/24/2011 successfully uses black humour in a surprising article, yet indicative of the current atmosphere, that calls the designation by the World Heritage Foundation, sponsored by Goldman Sachs, of the "Gap between the world’s rich and poor" as the 8th Wonder of the World because of its now unparalleled size.

(2) In quotes because we believe a decision maker who does nothing and an expert who knows nothing are, in fact, impostors.

(3) The CIA and the French government provide two outstanding examples of this trend: they didn’t see it coming in Tunisia and Egypt, even though one spends tens of billions of dollars a year spying on the Arab world and the other walked (the Prime Minister and Minister of Foreign Affairs) in the highest corridors of power of the countries concerned. The simple reading of our expectations for 2008 (
GEAB N°26 on the subject would, however, have put them on the track since it is exactly the trends then described that have led to the events in Tunisia and Egypt of these last few weeks. Summarized sharply in the Spiegel of 03/02/2011, "Revolution isn’t good for business" ... especially when one didn’t see anything coming, one could add.

(4) Here, investors and market players who were satisfied with these analyses now find themselves in serious difficulties since the "El Dorados" smoothly promoted by news reports and "well-informed" glossy articles have been suddenly turned into capital traps in volatile areas whose future cannot be forecast with any certainty. The "tremendous competitive advantages" have for them, almost overnight, become "countries with unmanageable risk". Outsourcing, sub-contracting, tourism, infrastructure construction, ... for all these activities, the whole social, legal, economic, monetary and financial context of the countries involved is pitched into the unknown.

(5) A brief philosophical and methodological comment: without premeditation, our team once again subscribes to a particularly Franco-German approach as our anticipation work not only draws on the concept of "listening" and the unveiling of reality so dear to Heidegger, but also the approach advocated by Descartes, namely the definition of a rational method. Here, moreover, is a synthesis that should inspire those who are currently working to define the future characteristics of Euroland governance. To learn more about this issue of Heidegger and Descartes’ "way", it is worthwhile reading this page on the
Digressions website. And to better understand the method used by LEAP/E2020 and to try to apply oneself at first hand, we recommend the Handbook of Political Anticipation published by Anticipolis.

(6) Source:
Bundeskanzlerin, 10/02/2011

(7) We have already witnessed some sizeable changes over oil since the US is about to abandon its own
WTI oil index to go by the European Brent index to which Saudi Arabia already converted in 2009 in abandoning the WTI. The price divergence between the two indices culminated with the Egyptian crisis. We will return to the oil issue in another chapter of this issue. Source: Bloomberg, 02/10/2011

(8) This conference, like the
Davos Forum, has a delightfully retro air about it. Organizers and participants do not seem to have realized that the world to which they belong has disappeared, that their discussions don’t actually interest anyone in the "real" world and that the many hours of programming devoted to them by international television are the inverse measure of the very small number of spectators who watch them. With more than 1,500 US and UK participants versus 58 Latin American and less than 500 Asian ones, Davos undeniably embodies the typical forum of the "world before the crisis”, confirmed by its linguistic signature, just English (even on its website). Indeed, monolingualism or multilingualism is, according to LEAP/E2020, a first sign, very simple to assess, of whether a project or an organization with international ambitions belongs rather to the world before the crisis or, on the contrary, is already partially adapted to the world after.

(9) On this subject, one should read Larry Derfner’s outstanding editorial in the
Jerusalem Post of 02/09/2011.

(10) Washington has thus demonstrated a complete lack of preparation, then obvious indecision, confirming not only the end of all US leadership internationally, but the acceleration of a process of paralysis at the heart of US government. To understand the importance of the event, remember that Egypt is one of the countries in the world that has been the most directly funded and supervised by the United States since the late 1970s. Moreover, the
New York Times of 02/12/2011 summarizes the situation very well, whilst trying to present it as a strategy whereas it’s only a lack of strategy, describing the management of the crisis by Barack Obama as the "straddle;, a market technique of trying to cover both sides when one feels that something important will happen but with no idea of what direction it will take. Incidentally, the article illustrates the divide between "ancient" and "modern" that this crisis has brought to the surface at the heart of US power. But we return in more detail to all these aspects and their consequences in another part of this issue.

(11) Which is a strategically essential block of the « Dollar Wall », like the « Berlin Wall » was for the whole of the “Iron Curtain”

Mercredi 16 Février 2011

Editor’s Note: This article is a Global Europe Anticipation Bulletin from think-tank LEAP/Europe 2020, published in partnership with the Dutch foundation GEFIRA. As such, their aim is to provide state-of-the-art analysis of geo-political anticipation centered around the study and follow-up of the global systemic crisis, itself focused on the evolution of the dollar and of the US economy, and their impact on international economy and financial markets, all that seen from a European perspective. Original article post here.

Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.

1 comment

  1. Nalliah Thayabharan says :

    At the end of World War II, an agreement was reached at the Bretton Woods Conference which pegged the value of gold at US$35 per ounce and that became the international standard against which currency was measured. But in 1971, US President Richard Nixon took the US$ off the gold standard and ever since the US$ has been the most important global monetary instrument, and only the US can produce them. However, there were problems with this arrangement not least of all that the dollar was effectively worthless than before it reneged on the gold-standard. But more importantly because it was the world’s reserve currency, everybody was saving their surpluses in US$. To maintain the US$’s pre-eminence, the Richard Nixon administration impressed upon Saudi Arabia and therefore OPEC (Organisation of Petroleum Exporting Countries) to sell their oil only in US$. This did two things; it meant that oil sales supported the US$ and also allowed the USA access to exchange risk free oil. The USA propagates war to protect its oil supplies, but even more importantly, to safeguard the strength of the US$. The fear of the consequences of a weaker US$, particularly higher oil prices is seen as underlying and explaining many aspects of the US foreign policy, including the Iraq and Libyan War. The reality is that the value of the US$ is determined by the fact that oil is sold in US$. If the denomination changes to another currency, such as the euro, many countries would sell US$and cause the banks to shift their reserves, as they would no longer need US$ to buy oil. This would thus weaken the US$ relative to the euro. A leading motive of the US in the Iraq war -- perhaps the fundamental underlying motive, even more than the control of the oil itself -- is an attempt to preserve the US$ as the leading oil trading currency. Since it is the USA that prints the US$, they control the flow of oil. Period. When oil is denominated in US$ through US state action and the US$ is the only fiat currency for trading in oil, an argument can be made that the USA essentially owns the world's oil for free.
    So long as almost three quarter of world trade is done in US$, the US$ is the currency which central banks accumulate as reserves. But central banks, whether China or Japan or Brazil or Russia, do not simply stack US$ in their vaults. Currencies have one advantage over gold. A central bank can use it to buy the state bonds of the issuer, the USA. Most countries around the world are forced to control trade deficits or face currency collapse. Not the USA. This is because of the US$ reserve currency role. And the underpinning of the reserve role is the petrodollar. Every nation needs to get US$ to import oil, some more than others. This means their trade targets US$ countries.
    Because oil is an essential commodity for every nation, the Petrodollar system, which exists to the present, demands the buildup of huge trade surpluses in order to accumulate US$ surpluses. This is the case for every country but one — the USA which controls the US$ and prints it at will or fiat. Because today the majority of all international trade is done in US$, countries must go abroad to get the means of payment they cannot themselves issue. The entire global trade structure today works around this dynamic, from Russia to China, from Brazil to South Korea and Japan. Everyone aims to maximize US$ surpluses from their export trade.
    Until November 2000, no OPEC country dared violate the dollar price rule. So long as the US$ was the strongest currency, there was little reason to as well. But November was when French and other Euroland members finally convinced Saddam Hussein to defy the USA by selling Iraq’s oil-for-food not in US$, ‘the enemy currency’ as Iraq named it, but only in euros. The euros were on deposit in a special UN account of the leading French bank, BNP Paribas. Radio Liberty of the US State Department ran a short wire on the news and the story was quickly hushed.
    This little-noted Iraq move to defy the US$ in favor of the euro, in itself, was insignificant. Yet, if it were to spread, especially at a point the US$ was already weakening, it could create a panic selloff of US$ by foreign central banks and OPEC oil producers. In the months before the latest Iraq war, hints in this direction were heard from Russia, Iran, Indonesia and even Venezuela. An Iranian OPEC official, Javad Yarjani, delivered a detailed analysis of how OPEC at some future point might sell its oil to the EU for euros not US$. He spoke in April, 2002 in Oviedo Spain at the invitation of the EU. All indications are that the Iraq war was seized on as the easiest way to deliver a deadly pre-emptive warning to OPEC and others, not to flirt with abandoning the Petro-dollar system in favor of one based on the euro.
    Informed banking circles in the City of London and elsewhere in Europe privately confirm the significance of that little-noted Iraq move from petro-dollar to petro-euro. ‘The Iraq move was a declaration of war against the US$’, one senior London banker told me recently. ‘As soon as it was clear that Britain and the US had taken Iraq, a great sigh of relief was heard in London City banks. They said privately, “now we don’t have to worry about that damn euro threat”.
    First Iraq and then Libya decided to challenge the petrodollar system and stop selling all their oil for US$, shortly before each country was attacked.The cost of war is not nearly as big as it is made out to be. The cost of not going to war would be horrendous for the US unless there were another way of protecting the US$'s world trade dominance.
    Guess how USA pays for the wars? By printing US$ it is going to war to protect.
    After considerable delay, Iran opened an oil bourse which does not accept US$. Many people fear that the move will give added reason for the USA to overthrow the Iranian regime as a means to close the bourse and revert Iran's oil transaction currency to US$. In 2006 Venezuela indicated support of Iran's decision to offer global oil trade in euro.
    6 months before the US moved into Iraq to take down Saddam Hussein, Iraq had made the move to accept Euros instead of US$ for oil, and this became a threat to the global dominance of the US$ as the reserve currency, and its dominion as the petrodollar.
    Muammar Qaddafi made a similarly bold move: he initiated a movement to refuse the US$ and the euro, and called on Arab and African nations to use a new currency instead, the gold dinar. Muammar Qaddafi suggested establishing a united African continent, with its 200 million people using this single currency. The initiative was viewed negatively by the USA and the European Union, with French president Nicolas Sarkozy calling Libya a threat to the financial security of mankind; but Muammar Qaddafi continued his push for the creation of a united Africa.
    Muammar Gaddafi’s recent proposal to introduce a gold dinar for Africa revives the notion of an Islamic gold dinar floated in 2003 by Malaysian Prime Minister Mahathir Mohamad, as well as by some Islamist movements. The notion, which contravenes IMF rules and is designed to bypass them, has had trouble getting started. But today Iran, China, Russia, and India are stocking more and more gold rather than US$.
    If Muammar Qaddafi were to succeed in creating an African Union backed by Libya’s currency and gold reserves, France, still the predominant economic power in most of its former Central African colonies, would be the chief loser. The plans to spark the Benghazi rebellion were initiated by French intelligence services in November 2010.
    - Nalliah Thayabharan



Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day


Asia / Pacific
Middle East / Africa
USA Government

RSS Feeds / Social Media

Combined Econintersect Feed

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution



  Top Economics Site Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved