By Stephen Leeb, PhD and Megan Davis
The military catastrophe now unfolding in the Middle East will likely be mirrored by economic catastrophe here in the U.S. Since the birth of the petrodollar in the early 1970s, every major spike in oil prices has led to recession, a market crash or both. Iran’s closure of the Strait of Hormuz to virtually all countries other than China already has seen oil prices nearly double, a major spike any way you define it. Admittedly, saving face may be tough but still possible in a world in which propaganda can easily trump truth.
And the longer the war in Iran goes on, the more that oil prices will rise, and the greater the likely economic damage. A bleak outlook indeed—with the potential to be made even bleaker by the fact that Iran is likely to prevail, which would severely curtail America’s influence in the Mideast.
But ironically, it’s possible to view this bleak outlook as having a silver lining—or more precisely, a gold lining—that could ultimately lead to better times. To understand this, a quick review of the history of the petrodollar is useful.
On October 17, 1973, Saudi Arabia, in concert with other Middle Eastern oil producers, embargoed oil shipments to the U.S. They were using oil as a weapon to protest America’s strong economic support for Israel in the Yom Kippur War. That loss of Middle Eastern oil spurred a fourfold rise in oil prices, from $3 a barrel in late 1973 to a high of $12 in 1974, resulting in a severe economic recession, sky-high inflation, and a stock market that by some measures plunged more than 80%.
It also led to the birth of the petrodollar. Nixon and the Saudis came to an agreement: In return for the Saudis’ pricing oil in dollars, the U.S. promised to protect Saudi Arabia from potential threats to the country or to its oil shipping lanes. Because oil was the world’s most important commodity, dollar pricing became standard for nearly all global trade. That positioned the dollar to hold onto its role as the world’s reserve currency despite the fact that the U.S. had abandoned the gold standard in August 1971. The petrodollar not only ensured the dollar’s continued role as the reserve currency, however. It also, in stunning contrast to the gold-backed dollar, imposed no restrictions on how many dollars the U.S. could print. As we have argued before, unlimited dollar printing led to the sharp decline in a culture rich in spiritual beliefs to one that is wholly materialistic – a transformation that has sowed the seeds for the loss of U.S. hegemony.
A pivotal juncture
The war in Iran may prove to be a pivotal moment in which the Saudis decide the U.S. has shown it no longer can serve as the country’s protector—and that therefore they will cease pricing their oil in dollars, pricing it in gold or gold-related securities instead.
As of this writing, the Saudis, unlike other U.S. allies in the region, have largely been spared Iranian attacks. We suspect this might be because of urging from China, which three years ago, in March 2023, brokered a rapprochement between Iran and Saudi Arabia—a remarkable achievement given that their differing interpretation of Islam had seemed to ensure permanent animosity.
China’s actions today are no doubt informed by the same factors that guided it three years ago. That is—as we’ve long argued—China sees a cooperative world as being in its own best interests as well as in the best interests of the world at large. A global currency with gold at its center would have the potential of creating a world in which all countries retain their sovereignty while cooperating with one another. The potential death of the petrodollar holds out hope of being a powerful force for worldwide harmony. If worldwide well-being is not humanity’s driving force, then our species is not long for the planet. We continue to have faith that a new monetary system is in the offing. The death of the petrodollar could, and most likely will, prove to be a powerful force for worldwide harmony.
Evidence of the loss of U.S. technological and military leadership extends well beyond Iran’s immediate successes in the war. The U.S. has virtually exhausted its supply of defensive missiles, leading it to take back weaponry it had supplied to allies. South Korea, which is currently disassembling U.S.-made missile defenses, is said to be furious at this evidence of U.S. weakness, especially given that its closeness to the U.S. damaged its relationship with China.
Also significant is the impact on the Ukraine war. Most credible students of war argue that Russia is clearly winning it but perhaps has taken a “go slow” approach so as to limit civilian casualties. These various sources include Douglas Macgregor, a hero of the first Iraq war and holder of a Ph.D. in history from the University of Virginia; Glenn Diesen, a Norwegian geopolitical expert who is a professor at the University of South-Eastern Norway Glenn Diesen; Pat McGovern, former top analyst with the CIA, who was tasked with giving President Reagan his daily intelligence briefing,; Chas Freeman, a Harvard-educated lawyer whose storied career includes serving presidents Nixon, the first Bush, and Clinton in multiple capacities, including as U.S. ambassador to Saudi Arabia, and many others. Russia may not change its approach, but a heroic Ukraine may have ever greater trouble maintaining a semblance of resistance. Ukraine is yet another victim of America’s sorry need to husband its weapons. Russia clearly has both Odessa and Kiev in its sights, and the fall of both critical cities would end the war and represent another powerful sign of U.S. weakness.
There is another potential golden lining in the offing that comes from the fortuitous economic coincidence that China and the U.S. currently have complementary economic needs. China, by a wide margin, is the world’s leading exporter, while the U.S., by a large margin, is the world’s leading importer. The U.S. carries a significant trade deficit, while China carries a significant trade surplus. A solution that would simultaneously benefit both countries would be a stronger yen and a weaker dollar. The stronger yen would in effect give Chinese citizens more money to buy more foreign goods. The weaker dollar would benefit the U.S. by encouraging other countries to import more goods made here. If a stronger yuan and a weaker dollar were accompanied by a dramatic reduction in tariffs, it could lead to positive changes and mark a swing of as much as $1 trillion in U.S. G.D.P. A potential trillion dollars in the trade balance would make the U.S. a surplus country.
There would be a short-term price to pay, as inflation would most certainly rise. It might even rise quite high. But even double-digit inflation, particularly if it is relatively gradual, does not have to be a death sentence to the economy. It can be accompanied by fairly strong overall economic growth, as evidenced by the double-digit inflation that occurred during the second World War, or the double-digit inflation of the end of the 1970s and the very early 1980s. Troublesome, yes, but not a fatal blow.
Worse for stocks, better for consumers
Without-a doubt, a high inflation is a huge negative for financial institutions such as the stock market, but this is almost surely a blessing in disguise, because the inflation we expect will stem from higher goods prices (and, indeed, that is the standard definition of inflation). In the nearly 2-decade period since the Great Recession, with the exception of the brief post-pandemic surge from 2021-2023, inflation was almost solely contained in financial markets. The major reason was that quantitative easing took place by funneling massive amounts of money into the economy through major banks and financial institutions. This meant that hedge funds, mutual funds, and market players got the bulk of the money. They had the highest credit, their finances were far stronger than those of the typical household, and they had strong relationships with the lending institutions. By contrast, the consumer (again, with exception of the pandemic) got virtually none of the money. The net result was a massive stretching in inequalities. That stretching marked a sharp acceleration of trends that were in place prior to the recession and contributed greatly to the reasons that we are in such dire straits today. In the 1960s and early 1970s, you could find factory workers sharing a meal in the cafeteria with a company’s CEO. Today, that same CEO is making thousands or more times what their factory employees make. This is not to say that there wasn’t always a spread in salaries, which can be healthy for capitalism, but the gap has become unsustainable. There is a big difference between a 40-times gap in pay and a 1,000-times gap in pay.
By contrast, inflation in which goods are the major driver is a negative for the stock market and a potential equalizer for the massive inequalities that have driven them into the ground. The health of the markets is good for some U.S. citizens, but not all. Particularly, it favors those with capital gains. The stock market has been on a fantastic tear since the early 80s, during which time we have seen divided classes and the fracturing of this country into unimaginable differences and it is time that this country takes care of all of its citizens, not just the ones with the most money. The fracturing of the U.S. into the very elite and all the rest has, among all its many obvious problems, been complicit in our declining technologies and overall cooperation, and the loss of spiritual connectedness that had made this country great as one nation – spirituality evidenced by FDR, Eisenhower and JFK, to name a few.
The golden-lining of a brand-new world
Trump and Xi were originally scheduled to meet on March 31, and though it has been postponed, they are still likely to meet. They may discuss the potential for complementary economic adjustments. The upshot could be a U.S. economy that is less great for the oligarchs here, as the stock market won’t flourish in the face of inflation. Economic stress is inevitable, but the two leaders could agree on a path that would take the U.S. into a tolerable economy, one in which growth might actually be fairly swift on the heels of a shift from a trade deficit to a trade balance or trade surplus. It’s at least a possibility, one that would come with the aforementioned high inflation—but inflation that, in contrast to 1973-1974, could come with economic growth. But it’s also possible that this path will be rejected. If so, we’d expect a much worse scenario to develop, featuring high inflation but negative economic growth.
In a way, this would complete the circle. The petrodollar began on the heels of a crashing economy and would end on the same terms. Either way, inflation seems unavoidable. And it seems it would be in the benefit of all parties, and the world population as a whole, to embark back on a monetary standard centered around gold, and, thus, restore and reconstruct the spiritual ties that bind us all as we collectively move toward a future with world-wide well-being and sovereignty on the horizon.
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