Cuckold USA

America is losing its petrodollar partner and will be watching her dance with others.

Recent news about the Kingdom of Saudi Arabia (KSA) entering into a defense pact with nuclear armed Pakistan got me musing about the past this morning.

Talking P. M. "Bug" Heads said:

And you may find yourself living in a shotgun shack
And you may find yourself in another part of the world
And you may find yourself swimming in the cream of a world reserve currency
And you may find yourself in a beautiful house, with a beautiful wife
And you may ask yourself, "Well, how did I get here?"

Letting the days go by, let the fiat hold me down
Letting the days go by, fiat flowing underground
Into the PMs again, after the fiat's gone
Once in a lifetime, fiat flowing underground
...

Click to expand...

They say that hindsight is 20/20 and looking back at the past, it's somewhat obvious to identify the milestones that marked the road we have traveled. I don't want to delve into them in great detail here, but some of the more significant ones related to the issue at hand here are:

• The Federal Reserve was created in December 1913. Their fiat dollar was convertable into physical gold and silver.
• World War I breaks out in 1914. America joins in 1917. The war expands the Federal Reserve's growth and influence.
• WWII, Korean war and Vietnam war all drove significant increases in the national debt (war is expensive, y'all!). The Federal Reserve evolves into a key player in war finance and monetary policy, expanding its balance sheet through Treasury security purchases to keep borrowing costs low. This "monetization" of debt grew the Fed's assets and influence but also sowed seeds for postwar inflation.
• Bretton Woods agreement in 1944 created a fixed exchange rate where the US dollar was pegged to gold at $35 per ounce, and other major currencies were pegged to the dollar. The "gold window" required the US Treasury's to convert foreign-held dollars (primarily by central banks) into gold upon request.
• In 1960, Robert Triffin describes "Triffin's Dilemma" (or paradox) wherein he noted that if the U.S. failed to keep running deficits the system would lose its liquidity, not be able to keep up with the world's economic growth, and, thus, bring the system to a halt. But incurring such payment deficits also meant that, over time, the deficits would erode confidence in the dollar as the reserve currency created instability.
• A negative balance of payments, growing public debt incurred by the Vietnam War and Great Society programs, and monetary inflation by the Federal Reserve caused the dollar to become increasingly overvalued. In 1965 France begins aggressively redeeming dollars for gold.
• The London Gold Pool collapses in 1968 and Nixon closes the gold window in 1971.
• The "Petrodollar" system is realized circa 1973 as the USA makes a deal with KSA - USA provides security guarantees and KSA trades oil globally for US dollars.
• Deficit spending became normalized under Reagan as he increased military spending in an effort to bankrupt the USSR. The schism betweem the Federal Reserve (monetary policy) and US government (fiscal policy) begins to grow. Volcker out and Greenspan in. The Federal Reserve's "independence" begins to wane.
• "Dubya" Bush elected President. Neocons fill the cabinet. The drumbeats for war in the middle east ramp up. 9/11 happens (with KSA nationals). Iraq is toppled. The country is divided with a strong anti-war sentiment contrasting with pride/support for the military.
• The anti-war sentiment wins at the polls. Obama is elected. The drumbeats for more war (with Syria and/or Iran) encounter hiccups as Obama resists. Obama pushes green energy initiatives. KSA is not amused. Obama weaponizes SWIFT to enforce sanctions on Iran and then Russia accelerating political will amongst the BRICS for dedollarization of global trade.
• In 2015, King Abdullah dies and Mohammed bin Salman (MbS) becomes the de facto ruler of KSA. In 2017, he purges business and political rivals with arrests, beatings and blackmail. After securing his position domestically, he begins testing KSA's relationship with the world:
  • In 2018, Jamal Kashoggi is murdered and dismembered in the Saudi consulate in Turkey. Evidence surfaces that MbS ordered the operation, but the world does not hold him accountable.
  • KSA expresses interest in joining the BRICS late 2022, but never formally completes the process to join. They begin flirting with BRICS as relationship with the USA deteriorates.
  • KSA re-establishes diplomatic relations with Iran at the behest of China as a condition for joining the BRICS. This was a strong signal that the KSA flirtations with the BRICS were actually serious.
  • Security deal with USA expires and negotiations for renewing it begin during Biden's term but appear imperiled. A renewal agreement is eventually secured in May 2025. The petrodollar breathes a sigh of relief. It appears that quid pro quo will continue.
  • In July 2025, we got confirmation that China is expanding the Shanghai Gold Exchange operations with a warehouse under development in KSA. This is a huge red flag that the petrodollar is indeed in peril. The only reason to allow an SGE warehouse in KSA is if KSA plans to conduct oil trade with BRICS in RMB/gold.
  • KSA enters a mutual defense pact with Pakistan. It certainly appears that KSA is preparing contingencies against potential American wrath.

I was never a fan of the neocons in the Bush administration and their incessant lobbying for war. Looking back, I have to wonder how much of their efforts were tied to KSA demands/wishes. And, tin foil hat on, how they may have potentially engineered the political will to push those plans to fruition.

Americans like to think we have sovereign autonomy - that we can impose our will on the world. But reality is not so black and white. Everyone (every nation) has an array of leverage on everyone else. It just so happens that KSA has a rather significant lever on the USA.

So as the anti-war protestors lamented another "war for oil" in Iraq as Dubya's second term was ending, voters in the 2008 Presidential election faced a Sophie's choice amongst the foreign policy of the "neocons/KSA war for oil and middle east restructuring" vs. "no more ME war" which seemed simple except, I suspect, few really understood the potential consequences of snubbing the KSA.

America has enjoyed an elevated standard of living thanks to the petrodollar trade. To the extent that wars in the middle east preserved the petrodollar trade by appeasing KSA, yes, the wars were fought for oil - just not in the sense that most protestors meant.

It seems apparent to me that the Obama administration essentially shut the door on KSA with both the resisting of military interventions in Iran and Syria and the embrace of green energy initiatives that threatened the oil trade. America could likely get away with such transgressions if there weren't a viable alternative to trading with the King dollar. It's dangerous hubris that drives some people to think there isn't and never will be.

They say that necessity is the mother of invention. Well, the BRICS are inventing. China is building a yuan/gold payment rail for global trade. The BRICS are experimenting with the BIS designed mBridge electronic payment clearing (crypto) system. The last few dominos are almost in place and ready for the grand chain reaction.

I'm afraid that the fiat dollar is already doomed though far from dead. We can't put spilled milk back in the bottle. Sound money (ie. gold) is coming back to support a new global financial order. Unfortunately, it's not the USA that is leading the charge.