This is a critique of the theory of Freegold (F-theory), which is part of an ongoing series entitled, Freegold: Perspectives and Critiques (FPC).
A key concept underlying F-theory is that Freegold provides the world a way to abandon the debt-dollar global monetary system, after the latter has naturally run its course. It posits that the rest of the world will stop supporting the “peak exorbitant privilege” of the U.S., which it has achieved through the dollar’s reserve currency status, access to cheap oil and the constant necessity for other countries to support our public and trade deficits. F-theory predicts that these other countries will soon refuse to support our structural deficits, the dollar will hyperinflate, and that this event will make way for a new Euro-centric monetary paradigm with physical gold as THE reserve asset used by all countries within the Freegold system.
In this commentary critique, I would like to focus on the idea that the global oil trade, which currently supports the privileged status of the dollar, will soon be made to support the countries and currencies that make up the Freegold system instead. First, we should understand how the U.S. dollar became a proxy for oil after its international gold backing was stripped away by President Nixon in 1971, and why other countries have went along with this setup for so long. FOA gives a pretty good explanation of this dynamic on the “First walk” of his “Gold Trail” (emphasis mine):
“Few people can fully accept or consider that oil became the backing for world dollars after gold was removed in 71. But that is exactly what happened in theory and practice. Using some earlier writing, I’ll tie them into what we are saying today. I’m going to repost some of my comments
(between —- marks) from the USAGOLD forum archives. Starting with FOA (1/15/00; 14:58:12MDT – Msg ID:22961).
—- my friend, they were not using this concept as a real “commodity money play” in the “gold standard perception”. At that time we were buying local oil with “fiat dollars” (made so by the 1933 internal gold confiscation) and foreign oil with “gold dollars”. But, as you pointed out, dollar production was so far past it’s “gold backing” that it was obvious they (USA) were pegging dollar printing to oil prosperity, not gold reserves. Still, with London gold and oil mostly settled in dollars, the foreign dollar oil pricing fully well expected to cash in unneeded dollars for gold. As we can see, reality and present day events of that time were as “mismatched” as today! All of the dollars success was ultimately made possible because oil could (and was) priced so far below it’s “economic worth” to the world. At that time, even our Middle East friends had no idea just how useful oil would (and had) become to maintaining the world economic base.——–
Having read that (and keeping it in mind), I return to the implied questions of my “Foundation” post below. “Why in the world did foreign governments, especially Europeans, eventually go along with supporting a now fiat dollar reserve system after 71?”
The only problem was that if we continued this route, two things had to give: we would have to leave the gold standard because our money supply was exploding (relative to gold supply) and find a new source of oil because ours was running out.
In a somewhat convoluted way, by leaving the gold bond, it forced all world oil prices higher. Advancing the search for new (still cheap by value return standards) oil and paying for it using dollars backed by not only oil payment settlement in dollars but the continued purchase of supply “well under world use value”.
G-7 countries knew that initially they would have to sell some gold in a controlled burn that would allow gold to seek a higher level after the dollar / gold break. However, once oil producers understood that gold was going to be “managed” at reasonable levels, the continued pricing of oil in dollars and it’s flow was assured for some time. Allowing the exchange of dollars for gold on the world markets,,,, as needed and wanted.
This also appealed to major countries outside the US because it addressed the “second” problem I listed in the beginning. That being the geographic location of a currency’s real backing asset. With most of the world oil reserves located outside the US,,,,,, and the US slowly running out of it’s domestic reserves,,,,,,, using oil as a backing dynamic somewhat controlled the “free will” of the US. If indeed, the US backed away from managing a cheap gold market or ran it’s printing press too fast,,,,,, oil prices could be managed upward in a devaluation of the dollar. No, not the best of policy concepts for the world, but better than perceiving that the US “Fort Knox” gold was a control on money printing!”
The unmentioned history here, though, is that the U.S. has routinely used direct coercion/force over the last few decades to maintain its control over the oil trade and the dollar-oil nexus, which also happened to work out well for the energy-hungry Europeans. This use of extreme force started well before the post-9/11 exploits in the Middle East, as evidenced by covert intelligence/military operations throughout the Middle East and Latin America. Puppet governments in these regions were installed and re-installed throughout this period like clockwork.
After 9/11, however, the scope and scale of this coercion has only grown larger to reach epic proportions. Make no mistake – what we are talking about here with the dollar-oil nexus is the most important policy consideration for all of the elite policymakers in the U.S. and Western Europe, who together represent the $IMFS. The military might of the U.S. has been used in anticipation of the “problem” FOA was writing about in 2000 – that the oil reserves backing the debt-dollar would be located outside of U.S. jurisdiction and potentially used as a HUGE check on its influence.
F-theory advocates would have us believe that this dollar-oil nexus will be stripped away rather peacefully, as the interests of ME/Asian countries lead them to advocate for a new reserve system. They severely under-estimate the momentum, dedication and brutality of current U.S. foreign policy, though, and they severely OVER-estimate the power of markets to overwhelm those policies and dictate outcomes. A time will come when U.S. control over the oil trade cannot be sustained any longer – most likely when the direct energy costs of doing so become higher than the energy returns – but that time is not yet here. If you don’t believe me, then perhaps you need to take a closer look at this graphic from the National Post:
(click on image for larger graphic, or follow link above)
DISCLAIMER: I am not an EXPERT on the writings of Another, his friend (FOA) or HIS friend (FOFOA), or on the theory of Freegold. Just like I am not an expert on the writings of any other economic theorist out there or their theories in general. There are a lot of economic works that I have not had the pleasure to read and a lot of ideas I have not considered in-depth, including those contained within the body of work that comprises F-theory. None of my descriptions of F-theory should automatically be taken as 100% accurate, and I welcome any and all challenges to my representations.