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I am the Director of the Libertarian Institute, Editorial Director of Antiwar.com, author of the book Fool's Errand, Time to End the War in Afghanistan, and I've recorded more than 5,000 interviews going back to 2003, all of which are available at scotthorton.org.
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All right, you guys, introducing Ryan McMacken, Senior Editor at the Mises Institute, the Ludwig von Mises Institute, that is, the Austrian economists.
They make the Chicago school look like a bunch of communists.
Welcome to the show, Ryan.
How are you doing?
Hi.
It's great to be with you.
I'm happy to have you here.
Hey, listen, it's been way too long since I've covered this subject, and it's such an interesting one.
And I know, you're thinking, wait, which one, because you write such great pieces all the time.
But no, I'm talking about this one.
Huge debt got us hooked on petrodollars and on Saudi Arabia.
What about the switch from the gold standard to the oil standard, something like that?
Yeah, I think it's all way too much ignored is the importance of the dollar and the maintenance of the dollar system in American foreign policy.
So I did a couple articles on those this week.
One was on petrodollars, and then on a very closely related issue of maintaining sanctions through the international dollar system.
And yeah, both of those things are closely interrelated.
And just in general, the goal of maintaining the dollar as the global reserve currency.
Okay, great.
So now immediately I start thinking of other reasons why the American government does the things that it does, and including perhaps especially in regards to the states that you talk about in here, Iraq, Libya, Iran.
And yet I know that this is all tied up in it somehow or another.
So why don't you try and break it down for us here?
Yeah, and I should be clear that I'm not saying that this is the only reason that foreign policy happens the way it does.
I don't subscribe to those views that all human history can be described by one variable or something like that.
However, it's certainly an issue, and one thing that should be considered when we're looking at foreign policy.
And so yeah, in order to really understand the petrodollars issue, you got to go back really to the 60s when the U.S. is in that post-World War II golden age.
And thanks to the Bretton Woods system being established toward the end of World War II, the dollar becomes both a de jure and de facto global reserve currency.
I mean, they purposely wanted to make the dollar the new reserve currency, and they did it.
But that the dollar would be backed up in international exchange between countries and central banks based on a fixed dollar to gold ratio.
And what happened then was that the U.S. started spending so much on the Korean War, on the Vietnam War, and on a variety of social programs like the Great Society and so on, that the U.S. required a lot of deficit spending.
And so over time, by the early 1970s, this led to inflation in the money supply through in part monetizing the debt, but also a need to sell a lot of debt instruments.
And so this devalued the dollar in a de facto way.
But nevertheless, the U.S. was still held to this, to a fixed number of dollars per ounce of gold, and it couldn't keep that up or else all of the nation's gold reserves would be drained in the very near future.
So in 1971, Nixon announces that he's closing the gold window, and that they're no longer going to honor these obligations.
And this had come after Switzerland, France, some other countries started demanding that their dollars be redeemed for gold.
Once they saw that the dollar was going to keep devaluing, they figured we better change it back into gold.
And they realized they couldn't do that anymore, so they said, okay, no more gold.
And so then the U.S. dollar started to float in the international system.
But the American policymakers became concerned that the dollar might not be able to maintain its own against the Deutsche Mark especially, or other currencies that might come along as well.
So they devised in 1974, they had this brainstorm that maybe we can make the dollar more important and more of value to everyone globally if we can turn it into the internationally recognized currency that is used for all oil purchases.
And so the U.S. entered into a deal with Saudi Arabia, where Saudi Arabia would agree that anyone who purchased oil from it would have to purchase in dollars.
And then since Saudi Arabia so dominated OPEC, that all purchases to OPEC countries for oil would be done in dollars as well.
So this opened up a huge demand then for dollars, because at the time, non-Middle Eastern sources of oil were greatly underdeveloped.
And so the U.S., Mexico, Venezuela, Russia had not really done much at the time to really address their own oil needs domestically.
And so people just started pouring money into the OPEC countries, and they needed a lot of dollars to do that.
So suddenly that added a huge amount of demand for dollars internationally.
And then, so what about during the oil embargo and over the 73 war in Israel and all of that stuff?
What effect did that have on all this at the time?
Well, that ended up actually weakening a little bit the dominance that OPEC had, because after both the first and the second oil shock, by the end of the second oil shock, these other countries were realizing, boy, we got to come up with some other way to access oil ourselves.
And so Mexico, Venezuela, the U.S., and Russia all started developing their own ways to get more oil out of places other than the Middle East.
However, it's only a very recent development that the U.S., thanks to fracking, was able to really become a leading oil producer and to stop major oil imports.
Through the 80s and 90s, Russia has gradually added productive capacity.
But this was a long time coming.
And so through all that period, the dollar continued to be extremely important as the petrodollar, that all of these countries that needed oil imports, they continued to need the dollar for that.
And so the petrodollar is certainly not as important today as it was 30 years ago.
However, when we're looking at the fact that Saudi Arabia continues to be 10% of the world's oil production and other OPEC countries, now excluding Venezuela because they decided they're not going to be using the dollar anymore, that's still a lot of money and still a big driver for countries to acquire dollars and keep them and use them for oil purchases.
And so while I don't think if just one or two of these countries went off the dollar, that would lead to an immediate destruction of the dollar or anything like that, you can see how the U.S. is in a bind nevertheless, because debt levels continue to be huge and they're growing quickly.
I mean, we're now running trillion dollar a year deficits, and they've got to make sure that there's value out there for the dollar.
And even minor players then, relatively minor, I mean, Saudi Arabia is still the third largest producer of oil, but countries like Libya, where I point out some sources that note it probably wasn't a coincidence that the U.S. invaded Libya in the manner it did, because Gaddafi had been speaking at the time about moving his African allies toward using a gold-based currency instead of the dollar for oil purchases.
So the U.S. just happens to invade Libya, which of course everybody knew was no threat to the U.S. really.
And then of course, before that, in 2003, in order to just kind of stick his finger in the eye of the Americans, Saddam Hussein had announced, well, we're going to go off the dollar and we're going to start using other currencies for our oil purchases.
And then of course the U.S. invades and then converts Iraq back to the dollar.
And so while, sure, the U.S. is not as dependent on it now as in the past, I think you could make a compelling case that it matters still, and that the U.S. is even willing to factor that in, in a big way, into its foreign policy decisions.
Hold on just one second.
Be right back.
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All right.
So one thing about that is I remember, oh, about 10 years ago now or somewhere around there, maybe more, Robert Higgs, the great libertarian economist saying, nah, phooey.
You know what?
That doesn't amount to very much of the demand for the dollar in the world in any real sense.
If all that went away, it wouldn't really make much of a difference as far as the dollar still being the world's reserve currency.
But then I think he also allowed for the fact that, of course, he's brilliant and wise, and that doesn't mean that the people who run the national government understand it the same way that he does.
And they might still, through misplaced priorities, do terrible things like start wars in order to prevent something that actually probably wouldn't even hurt them that much if the change was made.
Well, there are other factors here as well, of course.
The debt issue, the importance of the dollar to being able to keep up huge amounts of deficit spending is important because it allows then the central bank to monetize the debt to a certain extent.
That is to engage in huge asset purchases, to buy up any slack in debt instruments like treasuries when perhaps they're not being bought up in the levels you want them to be globally.
The central bank can then intervene and buy more treasuries in order to keep interest rates low.
So having more demand for dollars helps avoid price inflation as a result of monetizing the debt.
But the other big related issue here is petrodollar recycling.
And so it's not just a matter of people needing dollars to purchase the oil.
It's a fact that a big part of that agreement with Saudi Arabia and with OPEC in general was that these oil countries would also then recycle those dollars back into the U.S. and purchase U.S. debt.
So what that means is that now you've got a built-in demand mechanism for U.S. treasuries every time the U.S. goes and buys oil in the Middle East, which again, over the last decade was diminished thanks to fracking and the rise of more U.S. production.
But certainly it was relevant in the days of the Iraq war and certainly relevant in the days of the Libya war, where the U.S. also was benefiting from the fact that as it purchased oil, you also could know that a lot of those dollars would simply be plowed back into the United States to purchase not just U.S. treasuries but other assets as well.
And so these were dollars that were then being invested while at the same time promoting demand for the dollar.
Now, other things we might mention, of course, is that petrodollar recycling led to things like the debt crisis in Latin America, because so many of these dollars were being poured into OPEC countries and then being lent out for cheap debt to countries like Mexico and Peru and Bolivia and so on.
And then when interest rates went up significantly in the mid-'80s, then a lot of those countries found themselves in serious financial crisis.
Those wouldn't have happened without the whole petrodollar recycling concept.
So it's certainly far beyond just, oh, we need to make sure that people need dollars to buy oil.
There's also the issue of petrodollar recycling.
And there's the issue of just ever-larger amounts of debt.
All things being equal, if the U.S. had kind of equalized its debt, and say we're at late 1990s levels where debt was kind of evening out and maybe there was even a small surplus every now and then or something like that, then you could say, well, the U.S. clearly has some wiggle room in terms of debt.
It doesn't need the petrodollar recycling.
It doesn't need the dollar demand like it used to because things are kind of coming under control.
But the exact opposite is happening.
The debts, even though we're in a economic expansion, are becoming larger.
And then when the next recession finally hits, whenever that may be, if we've got trillion-dollar deficits now, we can expect, I don't know, two trillion-dollar deficits when the economy tanks because that's what happened back during the last financial crisis is deficit spending shot up by hundreds of billions of dollars.
So let's just say $1.5 trillion deficits then.
These would be historical highs.
And you're going to find yourself in a situation where every little bit helps in terms of ensuring that there's demand both for dollars and for U.S. treasuries.
Well, and that brings up the question of what happens when the debt is expanding that rapidly and it's already at, what, 21 trillion more?
And it's expanding by another two trillion a year or what have you like that?
And then interest rates go up.
And then just paying the interest on the debt is in the trillions of dollars.
At that point, you've got to just repudiate the whole thing and start over, right?
Well, yeah.
I mean, you need that petrodollar recycling and just the manufacturing of global demand for U.S. debt in general because if you don't have it there, the interest rates are going to go up significantly.
I did an analysis for amizes.org where I looked at just how many hundreds of billions of dollars per year are we spending in debt service, that is just paying the interest on the debt.
And if memory serves, we're talking about $300 to $400 billion, so more than a third of a trillion dollars per year.
Now, we looked at the Congressional Budget Office, then looked at that and said, well, what are interest rates going to do in the future?
And even their pretty conservative estimate said, okay, well, not that far in the future, maybe five years down the line, we're looking at more like $600 billion that we're going to have to spend per year on interest rates because it was expecting interest rates to go up just moderately.
And we're not talking like eight, nine, 10 percent, 1980s type interest rates or anything like that.
We're just talking about maybe a 50 percent increase.
And then you're suddenly in a position where you're paying more on servicing the debt, you're paying more on paying interest than you're paying right now on, say, the Pentagon.
And that's a large amount of money that then has to be drained away from politically popular programs into just debt service.
So I'm not sure how the Fed's planned to deal with that.
But since I can't imagine that they would cut the Pentagon significantly at first, they're probably just going to come back and say, well, you know, you social security recipients, we're just going to have to really start cutting back here.
We're on Medicaid and Medicare.
We're going to have to start really cutting back on these programs.
And that's going to be a big political problem for the Feds and would foster all kinds of problems in terms of less faith in the federal government, more calls for more local autonomy, all that sort of thing.
And those are not things that Washington wants to see.
Yeah.
Well, and at that point, I mean, is there anything that they can do about it?
The interest rates now are essentially nothing.
That means if they go up to five percent, they're bankrupt.
If they hold a gun to the entire world's head and tell them they better spend nothing but dollars on everything forever or we'll nuke them, that still wouldn't save their bacon at that point.
Right.
I mean, what good would that do?
No.
I mean, they clearly cannot keep up the spending levels that they've got now if there's not the global demand for the debt at super low interest rates that we've got now.
And so, yeah, they would have to cut spending.
But I mean, to such degrees, right, if the debt is already in the $20 trillion range, something like that, you're not just talking about cutting Medicare, you're talking about completely abolishing the welfare state in a day, and not out of libertarianism, but out of, as you said, service to the Pentagon and the state's top priority, global hegemony.
Right.
They're going to try to, I think, inflate away the problem to a certain extent.
So they'll just have the central bank buy up those treasuries for which there is not demand and just provide the Pentagon with the money it wants by just printing it, essentially.
These are all crisis short-term measures, of course, that just lead to greater crises in the future.
And I think it's impossible really to predict at this time what direction that would end up going in.
Now, I think one of the things that gives me hope is looking at what happened to the British Empire, right?
I mean, this is something that went into decline, where they eventually had to cut back significantly on their defense spending, on their attempts at global hegemony.
And their standard of living did not totally collapse.
Certainly it declined significantly.
But a lot of that was actually just due to them increasing or adopting an increasing load of socialism, where they started just really embracing more government-owned industries and so on.
That really hurt their standard of living.
But it wasn't the fact that the world abandoned the pound that impoverished all Brits or anything like that.
And so I think it is possible to live through that sort of thing.
But it does mean that the days of the Pax Americana would have to come to an end as soon as people abandon the dollar, at least in part.
Yeah, that was what Chalmers Johnson used to talk about, too, that, you know, I never could find this when I Googled it a million times, but I know that he said this on my show somewhere about how you have to give up your empire or live under it.
And the only way to enforce the kind of payments from the American people that would require the level of extortion we would have to tolerate would require an authoritarian state to enforce.
Or we can just give up our foreign authoritarian state.
Then we don't have to afford it.
We don't have to resort to such measures here.
And he brings up England as the example.
They ran the world empire for centuries.
When it came down to it, they fired Churchill and brought in the new guys who said, we're going to keep the welfare state and abolish the warfare state, or at least turn it over to the Americans as they did it back then.
Yeah, I mean, they kept certain things that they wanted, like the Falklands and stuff like that, and maintained some outposts like at Gibraltar.
But yeah, clearly they had to abandon the maintenance of basically this global empire that they had.
And they made a decision that fortunately worked out that Britain still numbers among people with pretty high standard of living and so on.
And so I think my dream is that the U.S. could come through it as well without some sort of major global war or anything like that.
It really depends on who's in charge and if certain parties are able to force the continuation of essentially a garrison state at the expense of domestic standard of living.
And that's a political question and something I can't predict.
Well, now, so back in 2008, after the financial catastrophe there, there was at least some understanding that it was American monetary policy around the world that had helped to lead to all these distortions.
And so other governments were talking about creating a new global currency, and maybe it would be a market basket of different currencies led by the euro and the won and the yen and maybe the ruble or I don't know what.
But then there's no real demand for that.
Kind of all fell apart for some reason.
Even those countries prefer to have dollars sitting in their central bank vaults.
But why?
Well, a big part of it is that the whole financial system, the global financial system, of which petrodollars is a part, but not the only thing.
It's also due to the fact that the U.S. economy is enormous.
It's $16 trillion.
Last time I checked, it's giant.
A lot of major companies are based in the U.S. and New York City remains the world's financial center in many ways.
If you want to do business as a major global bank, you've got to do business with New York and you've got to do business with the dollar.
And that brings us to our other topic of these sanctions.
And that's what makes it so easy for the U.S. to sanction other countries and to really dominate the global financial system is the fact that basically the overwhelming majority of large financial transactions and banking transactions in some way go through New York and are in some way handled by dollar-based institutions.
And a lot of this is the SWIFT system, which although based in Belgium, has come very much under the sway of U.S. policymakers.
And so they essentially do the bidding of U.S. policymakers who demand that SWIFT will exclude, say, Iranian banks and other rogue states or banks who don't take orders from the U.S. and therefore that will exclude them from the financial system.
And that's very impoverishing and a big problem.
I think back before I was doing this research years ago, I thought, oh, well, when the U.S. has a embargo or sanctions against some country, what it essentially says to this government is, well, you can't do business with any of our companies, and if you try to import any goods into our ports, we'll reject them and send them home.
I was thinking, you know, hopelessly old-fashioned-like about how an embargo of old might work.
But it's nothing like that now, thanks to the U.S. takeover of the SWIFT system since 9-11.
The way these sanctions really work now is you either do what we say or we'll use this highly centralized dollar-based financial system to basically cut you off, not just from us, but from everybody else as well.
Because if you're dealing in dollars and in any way going through these New York systems, then you can't do business between an Iranian bank and a German bank.
Or the Russians, if we've got them under sanctions, can't do business with Germany if they're dealing in dollars.
And so that's a big problem for much of the world, and it is why they're now exploring other ways to abandon the dollar and find ways to do business internationally in a complex way without the dollar.
Perhaps just using the euro seems to be in second place now.
Yeah, isn't it funny, as Ron Paul used to always point out, the people who point and scream isolationist the loudest are always the ones sanctioning countries right out of the global market.
And you can read whatever, Yahoo News or the Washington Post or any old place, that right now in Iran people are having trouble getting their chemotherapy medicine, getting their prescriptions for their diabetes, whatever you got.
And the reason why is America never put sanctions on medicine.
That would be bad public relations.
But no company of any description, including the shipping firms, the banks, financial institutions of all descriptions, no one wants to touch Iran with a 10-foot pole.
Because if the U.S. Treasury comes after you, it doesn't matter if you're really guilty or not.
If they don't like what you did, they can absolutely destroy you.
And so people are wanting for medicine that, you know, we're talking about civilians dying of otherwise treatable diseases because of this exact kind of thing that you're talking about.
It's all in the name of war against their central state.
But in the reality, it's mostly collateral damage and the Ayatollah survives.
Well, and the way the sanction system works really highlights how sanctions are an act of war.
I mean, it really is.
It's the equivalent of sending boats or armies to surround another country and not let anything get in or out.
And yeah, it's exactly as you say, right?
Oh, sure.
They're not specifically cutting them off from medicine.
But since all of these Iranian financial institutions can't do business now, how are they supposed to get this medicine?
Now, the Europeans, they did set up their INSTEX kind of parallel system, which is designed to essentially mimic the SWIFT system.
And that was designed for food and medicine transactions.
But they haven't used it yet.
And I don't know if it's really operational.
But the fact that they have now started pouring resources, and this includes London as well, London, Paris, Berlin, I think the Swedes are also in on it and the Danes, that they're trying to really create a system outside SWIFT that they can use to trade.
Now, they're justifying it right now in terms of, well, we just want to send medicine and food to Iran.
But there's no reason why they can't take this infrastructure that they're pouring money into now and then just set it up to use whatever they want.
And so as I note in the article, yes, the dollar still is far and away dominant in terms of global reserves held by central banks and private banks and so on.
However, the euro is getting very close to the dollar in terms of being used in international banking transactions.
So if they can get to the point where the euro becomes well used globally, and also they then have an electronic system beyond the reach of the U.S. to do this, then that's going to really cut the power of the U.S. to do sanctions.
And we'll also then cut demand for the dollar.
And so that will then force, then we're back to where we were before.
It's similar to the petrodollar issue, where interest rates then are heading up and it's harder to monetize the debt without causing price inflation.
So this is a life or death issue really for the U.S. financial system as well.
Yeah.
All right.
Well, thank you so much for your time on the show talking about this stuff.
Everybody, it's Ryan McMacken, senior editor at Mises.org.
And thank you for tolerating my poaching of your articles all day long for the Libertarian Institute site.
You guys do such great work over there.
This one is huge debt got us hooked on petrodollars and on Saudi Arabia.
And the next is the world looks to abandon the dollar as U.S. sanctions tighten their grip.
Thanks again, Ryan.
Thank you.
The Scott Horton Show, Antiwar Radio, can be heard on KPFK 90.7 FM in LA, APSradio.com, Antiwar.com, ScottHorton.org, and LibertarianInstitute.org.
