Right now, the U.S. dollar accounts for approximately 68% of the world’s currency reserves. The reason why is because every nation on the planet has to stockpile dollars, for that is the only type of payment that is accepted to buy oil. Also, the dollar is the only currency used by the IMF, while 2/3 of all trade is denominated in dollars. When you think about this phenomenon, it’s the perfect Ponzi scheme. If every country on the globe is forced to keep spending dollars to buy oil, then the U.S. will never be compelled to stop its out-of-control spending.

Undeniably, our petro-dollar is the primary reason why we’re still an economic powerhouse. Since ever other nation is compelled to buy and sell oil with our currency, they are, in essence, subsidizing us. Think about it – only the United States Federal Reserve (via the Treasury) has a monopoly on printing money (at will) that every other country has to use! The other nations, then, have to obtain our currency by either purchasing our debt, or by selling us their consumer products.

To illustrate how dramatic this situation is, two years ago foreign government’s held over $1.2 trillion in U.S. Treasury securities. In 2000, that total was "only" $609 billion. When you also add in the holdings of foreign banks, it becomes a very significant amount. In fact, Japan now holds $712 billion in T-bills, while China weighs in at $193 billion and South Korea at $69 billion. No other country (or business for that matter) would stay afloat with this type of crippling debt. They’d be 86’d in a week. But since there is such a high demand for our currency, we’re able to keep spending like drunken sailors. Thus, when President George Bush said during his 2006 State of the Union speech that we were addicted to oil, he was only partially correct. The truth is: we’re even more addicted to the currency used to buy this oil.

So let’s examine this situation a little more closely. The world needs dollars, so what they do is sell us goods or commodities (microwaves, stereos, etc) which are then shipped to American stores and sold to consumers. In return, we send them our money, or more accurately, blips on a computer screen.

Now ponder this scenario for a moment. We get actual, physical products, and the producing countries get a cyber-blip! Then, what some of these nations do when buying our debt is send their money or blips back to us! Picture it like this. Pretend you walked into a hardware store and bought a weed-eater, and then took it home. So you have a real product in your hands. But instead of paying for it, you simply sent an e-mail BLIP from your computer to the hardware store. Even better, you didn’t even have to work for this blip; all you had to do was print little pieces of paper off your computer that you said BACKED this blip. In other words, it wasn’t backed by a tangible asset, such as your car or home. Plus, if the hardware store wanted to buy some of your debts, they’d actually send you money in return. So you get the weed-eater and money, while the store gets nothing but a BLIP. That’s the way the world works today, at least for the United States of America. And we – the U.S. – benefit on a daily basis from this hare-brained scheme.

In this light, the U.S. always spends more than it earns, and we currently import 50% more than we export. And since we’ve outsourced a large percentage of our factories to China and other third world countries, they’ve essentially become slave laborers for us. The result of this scenario is that the U.S. can run-up enormous deficits and cut taxes at the same time! It’s incredible.

Furthermore, the two stock exchanges which handle all oil purchases – NYMEX and IPE – also make a considerable amount of money, for as they convert foreign currencies to dollars, they charge a fee for each transaction. This surcharge is essentially a hidden tax added onto the cost for each foreign country.

These nations also get hurt because whenever the dollar depreciates (as it has been doing), so does the value of their dollar reserves. And, the more reserves they have, the more money they lose. Obviously, this situation is not beneficial for the country holding our currency. Plus, whenever the dollar drops, their products become more expensive to Americans, which means they become less competitive on the open market.

The same rationale applies to the oil-producing countries. Let’s take Iran for example. After selling their oil, they get dollars in return. But before doing so, they have to pay ‘transaction costs’ prior to receiving payment, which is again another hidden tax. Also, Iran’s revenue is subject to fluctuating exchange rates, so if the dollar drops, so do their profits, and subsequently their purchasing power.

Of course, all the while, NYMEX and IPE keep rolling in the profits, while the U.S. continues to get subsidized. But what if a second currency reserve (the euro) surfaced? How would that affect the U.S.? The answer is obvious. If every country in the world no longer needs the dollar to buy oil, then they’re not compelled to stockpile so many of them in their reserves.

More dramatically, what if these same countries started cashing-in their T-bills and wanted payment for them? Would we be able to honor our debts? Hell no; we’re so far in debt we couldn’t even conceive of paying them. So instead of our money (which is worthless) they’ll instead demand goods in return. But since we’ve surrendered our manufacturing base and don’t make things any more, we’re out of luck in that regard too.

So, we’d end up having hundreds of billions of dollars flooding back into this country, which would destroy the value of our currency and cause the economy to go belly-up due to rampant hyper-inflation.

We know this is a real concern because San Francisco’s Federal Reserve Board recently published a paper saying that central banks around the world are diversifying their reserves away from the dollar, which is now in decline.

In the end, what could potentially happen? If we can’t repay our debts, and we can’t manufacture products to sell in return for our dollar, what can we do? One possible scenario – and it’s a horrific one – is the selling-off of America! What if the bottom drops out to such an extent that we have to actually sell our country!

Folks, things are getting serious.

Tuesday: Part Six - U.S. Dollar Hegemony