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The Collapse of the International Monetary System and the Petrodollar

As Jim shows, the collapse of the international monetary system is not an unprecedented event—it’s happened three times in just the past 100 years (1914, 1939, and 1971)… periods that were all followed by intense turmoil.

Nick Giambruno: As you detailed in The Death of Money, the international monetary system has collapsed three times in the past 100 years. And now you say the system is blinking red again. Please explain why.

Jim Rickards: Sure. There are two reasons. One’s sort of more anecdotal; the other is much more rigorously scientific. The first reason is that the international monetary system has collapsed three times in the past 100 years, in 1914, 1939, and 1971. It’s been over 40 years since the last collapse. These things do seem to happen every 30 or 40 years. That’s just based on experience. That seems to be the useful life of the international monetary system. Now, that doesn’t mean that it will collapse like clockwork tomorrow morning. I’m not saying that. I’m just saying that the evidence is that we should expect this or at least not be surprised if it happens sooner than later.

So the next crisis, when it comes, will be bigger than anything in history, and it will be bigger than the ability of the Fed and the other central banks to put it out. The Fed is leveraged 80 to 1, and they’re insolvent on a mark-to-market basis. And the other central banks are no better off. The only clean balance sheet left is the IMF, which is only leveraged three to one, so that’s where the liquidity will come from.

Nick: It seems that the monetary elites understand this to some degree and would prefer an orderly transition to the SDR over time. Is there anything that you see that could derail this so that we would instead get a disorderly collapse as an outcome, instead of the SDR?

Jim: Sure. And getting back specifically to the petrodollar, there are three big vectors in the world today that are all pushing against the dollar, undermining confidence in the dollar and leading to some new kind of international financial system, or what the elites call “the rules of the game.” The first one is the one you mentioned, which is the petrodollar. This goes back to the 1970s with Henry Kissinger and the Saudi rulers. They worked out a deal whereby the US agreed to guarantee the continued rule of the House of Saud and guarantee the security of the kingdom, in exchange for which they agreed to price oil in dollars.
Now there’s no particular reason why oil has to be priced in dollars. It can be priced in Japanese yen, Swiss francs, or pounds sterling. We also have the euro and other currencies. Oil could also be priced in gold. It could be priced in a lot of things. But when you price it in dollars, that means you need dollars whether you want them or not, whether it’s your national currency or not, because everyone needs oil. A country might not want to transact in dollars, but if oil is priced in dollars and you need oil, then you have to get dollars. This is a very powerful prop under the dollar.

Source The Burning Platform

 

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