What a Hamburger Can Teach Us About the Coming Dollar Collapse

(This is part 2 of our article series about the Petrodollar System. To read part one, click here.)

Today, the world is consuming more than 86 million barrels of oil each day. And with each barrel of oil sold, more demand for U.S. dollars is created. What kind of effect do you think that this consistent demand for the U.S. dollar has on the U.S. economy? Based upon the benefits I have described in my last piece, we can probably agree that the effect is much more positive than negative.

How does this juicy hamburger explain how the U.S. Dollar will collapse?

To better understand the power of the petrodollar system and how it greatly benefits the U.S., I often use an illustration.

Let’s say that you own a hamburger stand in your city. If you had the choice, would you want only people in your city to know about your burgers? Or would you prefer that the entire state know about your amazing burgers?

What if your small burger stand was featured on the Oprah show and you immediately gained a new national customer base that raved about your burgers? Now, if given the choice, would you prefer a national customer base or would you want an international customer base? I think you get the picture.

My point is that the more demand for your goods or services, the better off you — and your hamburger stand — will be financially.

But more importantly, more demand for your product provides you with a permission slip to hire more workers, to expand your business, etc.

Friends, the very same thing is true for currencies, like the U.S. Dollar. If a nation can develop demand for its own currency outside of its borders, then it has a permission slip to create more of the currency. And when more of its currency is in circulation, the standard of living is generally higher for that nation. This is all simple monetary economics 101.

To say it another way, the increased demand for the U.S. dollar provided by the petrodollar system means that the Federal Reserve must keep the dollar in a plentiful supply. This means that the U.S. dollar must be printed regularly and often to keep up with the growing global demand.

More money in circulation leads to an expansion of the monetary base. And a larger monetary base typically means a higher standard of living – assuming that the demand for the currency and for the debt securities remains strong.

This last point is extremely important. For if the petrodollar system were ever to crumble, America would be stuck with a whole lot of extra U.S. dollars that are no longer in demand. Those dollars would then naturally find their way back to America which would ultimately lead to massive inflation.

One of warnings that I have been issuing for years is that the America’s petrodollar system, while brilliant and lucrative, will eventually breakdown. And when it does, it will lead to the absolute destruction of the U.S. Dollar as the global reserve currency.

So, how is the petrodollar system doing currently? Is it presently endangered?

Since 1980, America has devolved from being the world’s greatest creditor nation to the world’s great debtor nation. But thanks to the massive global demand for U.S. dollars and government debt made possible by the petrodollar system, America is able to continue its spending binges, imperial pursuits, and record deficits. Modern-day America is living proof that having the world’s most important currency translates into a higher standard of living than most nations.

At one point in America’s history, our nation’s largest export was a variety of consumer goods. Today, however, America’s largest export is the U.S. Dollar. And the dollar costs us practically nothing to create.

How long before the nations of the world figure out the dollar fiasco is a fraud?

Instead of viewing U.S. dollars as worthless paper backed by nothing (as they should), foreign oil producers and consumers have been convinced – and even required – to hold U.S. dollars in order to make oil transactions. However, this demand ‘at gunpoint’ is not genuine; rather, it is purely artificial. If left to the power of the free markets, an alternative would arise naturally and quickly. It is my forecast that over the next several years it will become obvious to all that the petrodollar system is completely unsustainable.

Dr. Bulent Gukay, of Keele University, puts it this way: “This system of the US dollar acting as global reserve currency in oil trade keeps the demand for the dollar `artificially’ high. This enables the US to carry out printing dollars at the price of next to nothing to fund increased military spending and consumer spending on imports. There is no theoretical limit to the amount of dollars that can be printed. As long as the US has no serious challengers, and the other states have confidence in the US dollar, the system functions.”

Pay particular attention to Dr. Gukay’s comment regarding “serious challengers” to the United States. Are there “no serious challengers” to America’s current position as holder of the world’s reserve currency?

I will save my answer to that question for an upcoming article.

Tomorrow: More on the coming breakdown of the U.S. Dollar and why it matters…

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