After the Petrodollar: Bitcoin and the Coming Monetary Reset

Photo by Corbin Mathias on Unsplash

This article was initially delivered as a speech to the 75th Innovation Command of the US Army Reserve on January 8, 2022. ​

A growing number of Americans are recognizing that a long era in American history seems to be coming to an end. Slogans like “Make America Great Again” reflect an awareness of this ending, but the actual characteristics of the era that is ending are harder to define. This essay takes a global view to better understand the structural conditions for American supremacy that are now on a downward slope of decline. [1] It also proposes what might be done–not to recover a far-from-ideal past, but to chart an even better course for the future.  

The World’s Largest Creditor 

Our story begins at the beginning of the twentieth century, when the United States established itself as the world’s creditor based on its loans and arms sales to European countries fighting the First and Second World Wars. After the First World War, the US insisted that the loans we had made to our Allies be repaid in gold; during the Second World War, we also insisted that our Allies pay for the arms we sold them in gold. As a result, by the end of the Second World War, the United States had become the world’s major gold repository, housing about ¾ of the world’s gold. The Allies, by contrast, had depleted their gold stores. 

At first, this seemed great for the United States–until we realized that, if other countries had no money and no assets, there was no one for us to trade with. Not only that, but broke countries were far more likely to go down the paths of fascism and communism–which had created the very Second World War that we had just helped the world end. In other words, we realized that if we were too isolationist–if we put up too many tariff barriers and kept all the toys for ourselves–we would create an unstable and dangerous world order, with enemies around every corner. Such a world was a powder keg, ready to explode at any moment.

So, in 1944, as the Second World War was coming to a close, the world needed stability, and that meant it also needed money. The United States got its allies together at Bretton Woods, in New Hampshire, to figure out how to create a world system that worked for everyone–but of course, for America most of all. At the conference, 44 allied countries came together to align on the world’s post-war economic order. The resulting Bretton Woods Agreement linked the dollar to gold, and other countries agreed to peg their currencies to the dollar. This meant their central banks were committed to maintaining fixed exchange rates between their own currencies and USD. The US dollar has been the world’s primary reserve currency ever since.

Now, how were we going to solve the problem that these countries were largely broke? How would they get the dollars they needed to restart their economies and trade with the United States? We gave loans to some countries to help them along, but the main way we decided to accomplish this was by running foreign trade deficits with countries around the world. In other words, by exporting more to America than they imported, other countries would earn the dollars they needed to then also buy American goods. Surplus dollars could then be converted by foreign central banks into Treasury bills and Treasury bonds and stored as reserves. 

There was also another way we financed the world: military spending and foreign aid, which are often closely connected. Congress has always been reluctant to approve foreign aid programs unless they could be tied to American strategic military interests, and in the second half of the 20th century, that mostly meant fighting communism. The Cold War began, in effect, as a giant program of wealth redistribution from the United States to the countries around the world that we wanted to prevent from becoming communist. The problem with this strategy was that it mired us deeper and deeper in debt to finance our wars. 

The World’s Largest Debtor

Only five years after the end of the Second World War, in 1950, the United States found itself in debt for the very first time–due entirely to the costs of the Korean War. But we kept deficit spending to fund that war and then every war after: Vietnam, other anticommunist proxy wars, Desert Shield/Desert Storm, and most recently, the Global War on Terror (Afghanistan, Iraq, etc.). 

But we didn’t stop at war. We also began deficit spending to fund major social programs, like LBJ’s Great Society–Medicare, Medicaid, and Social Security, among other programs. And we didn’t stop there either. Spending on Human Services–which includes these programs as well as things like unemployment assistance, food assistance, education, and others–has steadily grown as a % of GDP since the early 1960’s. 

How did we achieve this ability to spend without limit? Every other country that has waged war at the scale of the United States has gone bankrupt. This happened to the Allies after WWI and WWII, when the United States–their major creditor–demanded that these countries sell off their gold reserves and international assets to pay their debts to us. But when our turn came to pay our debts, we did something unprecedented–we simply said “no”. 

In 1971, as the Vietnam War entered its final stage and countries around the world were rushing to redeem their dollars for gold, we closed the gold window. This meant that foreign countries could no longer redeem gold for dollars. Instead, the only thing they could buy for their dollars were T-Bills and T-Bonds–US debt. 

Let’s pause for a moment to remark on how unprecedented this was. We told other countries that not only would we not repay our debts in gold, like we promised at Bretton Woods (and like we made them do for us). Instead, we told them that they had to keep buying more of our debt if they wanted their economies to remain solvent. We did something no other country in the world had ever done before: we created a global empire by becoming the world’s biggest debtor. 

In a memo circulated to the British War Cabinet in 1945, economist John Maynard Keynes wrote, “Owe your banker £1,000 and you are at his mercy; owe him £1 million and the position is reversed.” This statement has been re-said many times in different ways. The basic thrust is that there is an inflection point when it comes to debt: once it passes a certain threshold, the power dynamic between debtor and creditor reverses. Creditor and debtor are locked in a relationship, and what happens to one of them necessarily impacts what happens to the other. Even a very imbalanced relationship where one or the other seems on top is never as unilateral as it may seem. The power the United States has been able to exercise as the world’s greatest debtor has also become the power other countries hold over us. 

So why did countries around the world keep buying US debt, despite this seemingly unfair bargain? Well, countries with currencies pegged to the dollar needed to keep buying T-bills in order to keep their exchange rates stable. But even those who stopped pegging their currencies to the dollar after the gold window closed in 1971 still wanted to keep their currencies competitive to ensure export markets for their goods and services. If countries stopped buying US treasuries, the US dollar would rapidly lose value against their own currencies as dollars flooded the international markets. This would make US exports far cheaper and more competitive, crushing competition. While only about 9-12% of US GDP has come from exports over the past few decades, many other countries rely on exports for around 25%--sometimes more–of their GDP. Those countries buy up US debt in order to ensure that they don’t lose their export markets–particularly the lucrative US market. Thanks to their competitive exports, many developing countries have realized the international development goals that were conceptualized at Bretton Woods: they have used their trade surpluses to build out their manufacturing bases, often at the expense of US manufacturing. 

The United States also used its prominent position–and veto power–in international financial bodies like the IMF to ensure that we could open large streams of credit whenever needed, and never be obligated to repay those loans. This is, in essence, what motivated the creation of the Special Drawing Rights (SDR) reserve asset in 1969. The US needed to continue financing the Vietnam War and social programs as it closed the gold window. It convinced countries that subscribed to this plan to accept SDRs instead of gold, dollars, or more tangible assets. Notably, countries that didn’t subscribe to this plan at the time included a few major oil producing countries: Kuwait, Libya, and Saudi Arabia. 

The Petrodollar System

This was a problem for the US, especially after the 1973 Arab-Israeli war drove OPEC to curtail oil supply and drive up prices fourfold to punish the United States for its military support of Israel. In response, the US used the full force of its diplomacy and the lure of military aid to strike a deal with Saudi Arabia to price oil–arguably the world’s most important commodity–in dollars. This created a domino effect whereby most oil-producing nations also started pricing oil in dollars, and the “petrodollar” reserve system was born. This system “shadow backed” the US dollar with another global commodity–oil–after the gold window had closed. The system helped finance US deficits and ensured that oil wealth would be infused into the US economy through “petrodollar recycling.” It also incentivized countries around the world to sell their exports in dollars so that they could buy the oil they critically need. 

However, this handshake agreement with Saudi Arabia has cast a long shadow over the United States. Our military presence in Saudi Arabia, a critical element of the political exchange between the two countries, has been deeply resented by many Saudis. It is by now well-known that fifteen of the nineteen 9/11 hijackers were Saudi citizens. While the Saudi Government has repeatedly denied any involvement in the attacks, attempts to pursue evidence of links both through Congressional and FBI investigations have been actively censored or thwarted by US Government officials–even at the highest levels of the Executive Branch. It is remarkable that after an attack on the US mainland that killed more Americans than Pearl Harbor, the US did not reconsider its special relationship with an implicated sovereign nation. Instead, we invaded Iraq–a nation that had no ties to 9/11, but that had recently (in 2000) begun pricing its oil exports in the new “Euro” currency. 

There is no way to overstate the damage that 9/11 and the post-9/11 fallout has done to American society and governing institutions. Although the attacks briefly created a feeling of national unity, that unity quickly dissipated as the administration began pursuing wars in Afghanistan and Iraq. These were struggling countries on the other side of the world that most Americans could not connect to their everyday lives–and now they were being asked to fight and die there. Almost immediately (in 2002), the War on Terror resulted in the justification of torture–previously anathema to official US policy, which had adhered to the Geneva Conventions established after the Second World War. The American public did not become aware of this shift until the 2004 Taguba Report, which revealed the widespread torture of Iraqi prisoners by American forces at Abu Ghraib prison. Private contractors made $138 billion on the War in Iraq alone, about $38 billion of which went to Halliburton, a company that had been led by Vice President Dick Cheney as CEO from 1995 until 2000. While Cheney denied conflicts of interest, he held 433,000 Halliburton stock options during his tenure as VP. This led to a widespread sense among American people that the wars were characterized by corruption and backroom dealing. Finally, a series of whistleblower revelations–especially those provided by Chelsea Manning to Wikileaks–revealed evidence of war crimes perpetrated by American forces. To this day, senior editor of Wikileaks Julian Assange is still being prosecuted by the US government and allied governments; under the Trump Administration, the CIA even discussed kidnapping and killing him. 

It is these “moral injuries” of war--the public damage to professed American values–that arguably has had the most corrosive effect on American political institutions. If the abuse of power is publicly normalized by American leaders and government institutions, then what does that say about the integrity of our country? 

In addition, what was achieved by sacrificing American values? Much like Vietnam, which ended with victory by communist forces (the very thing we ostensibly gave up the gold standard to prevent), the end of the Afghan war last year prompted an immediate takeover of the country by the Taliban, protectors of the very terrorist organization–al-Qaeda–that had orchestrated the 9/11 attacks. The bungled Afghanistan withdrawal quickly became a disaster for the Biden administration, even as most Americans supported a withdrawal in principle. The war in Iraq was officially shorter (2003-2011), and did successfully remove Saddam Hussein from power. But it certainly failed to defeat terrorism, which was its stated goal. Instead, it created the conditions for the rise of the Islamic State, an even more violent offshoot of al-Qaeda. The Islamic State is now at war with its parent terrorist organization in the region, where the US continues to conduct military operations to “contain” it. 

The wars in Iraq and Afghanistan sharply polarized and divided the United States, in large part due to their cost, which was never really discussed with Congress or the American people prior to their authorization. The War in Afghanistan alone cost $2.3 trillion, and that does not include future interest payments on the loans we took out to fight that war. Our humiliating withdrawal from that country has only made those costs sting more. As of 2020, the conflicts in Iraq and Syria cost another $2 trillion (including interest payments), with very mixed foreign policy outcomes for the United States. Iraq is in effect a failed state, while Syria is now back under Bashar al-Assad’s despotic rule, thanks to Russia’s support–and increased influence in the region. 

Meanwhile, as these wars have raged, most Americans have seen their costs of housing, healthcare, and education rise dramatically. The median American income can no longer provide for these costs. Record numbers of Americans are struggling with lifetime student loans and medical debt that is our nation’s primary cause of personal bankruptcy, and an economy where real wages have not increased since the early 1970’s. To add insult to injury, Americans see wealth inequality in our society equal to or greater than during the Gilded Age. The net worth of the top 1% in America is equal to the net worth of the bottom 90%. Among developed nations, the US has the highest level of income inequality and the lowest level of socioeconomic mobility–which has called into question the idea of the “American dream”. According to the US Census Bureau, wealth inequality hit a 50-year high in 2021, and approximately 33 million people earn poverty-level wages (less than $10 per hour). But during the first eleven months of the Coronavirus Pandemic alone, the wealth of US billionaires grew by 44%--$1.3 trillion–even as millions lost jobs and healthcare coverage. 

Political party leaders like to counter the fact of Americans’ declining purchasing power and rising inequality with: “We have a strong economy with high employment.” Indeed, the US Department of Labor puts the official unemployment rate for December 2021 at 3.9%. But that number paints an all-too-rosy picture. The Ludwig Institute for Shared Economic Prosperity has calculated what they call the rate of functional employment, or true rate of unemployment. That number includes those looking for full-time work who can only find part-time work and those working full-time but earning too little to climb above the poverty line. That number was over 25% in January 2021--and it had barely changed from the 24% it registered in February 2020, right before the pandemic hit, when the economy was supposedly “hot”. If you add in Americans who have simply given up looking for work, nearly 54% percent of working-age Americans did not have living-wage full-time jobs as of January 2021, only one year ago. 

In other words, many Americans are beginning to wonder whether our status as the world’s sole superpower actually benefits them. It is no accident that President Trump campaigned twice on a populist platform of ending what he called America’s “forever wars”. (Of course, as President, he often behaved very differently.) Some of the biggest promoters of the Wars in Afghanistan and Iraq–Liz and Dick Cheney–are currently in the process of being publicly and dramatically forced out of the Republican Party. They are being embraced, in what at first might seem an unbelievable reversal, by the Democratic Party. But we should remember that Democratic Party leadership not only voted for both the Afghanistan and Iraq wars, but led the pursuit of regime change in countries including Serbia, Libya and Honduras. By the time the Syria war came along, Congress would no longer vote to authorize military force, so the Obama administration went ahead and began striking ISIS in Syria anyway, claiming it was authorized under the 2001 AUMF against al-Qaeda. The broad war-making drive of both Republican and Democratic parties is simply a matter of public record. 

Costs of the Petrodollar System

The point of this historical excursion is that American society has paid a steep price for maintaining the dollar as the world’s reserve currency–and for being the world’s military superpower. Let’s itemize this receipt:

1. Cost #1: An ever-growing mountain of public debt. Currently US public debt is at about $30 trillion. So long as the dollar is the world’s reserve currency, however, there is no incentive to reign in government spending. Both parties approve ever-higher levels of defense appropriations and social spending every year. One could argue that the annual battle over raising the debt ceiling is at this point a kind of political kabuki theater. Although there is typically some conflict over what types of social spending the government should fund, there is always the ability to point a finger and say “If we can spend on that, we can spend on this too.” In reality, we can spend on everything, because foreign central banks are obligated to buy up the T-bills and T-bonds that we issue to fund our foreign and domestic priorities.
   
   
2. Cost #2: We can’t afford to run a trade surplus. Being the world’s reserve currency means that we are also the world’s source of liquidity: we have to issue enough dollars for all countries to use to meet their economic needs, even as world economies grow. This means not only the use of dollars to pay for goods and services, but to service dollar-denominated debt. In addition to debt held by the US, countries around the world, including China, Japan, and European countries, make dollar-denominated loans.
   
   Taken together, these factors create demand for so many dollars that the United States running a trade surplus is impossible if the system is to be sustained. A shortage of dollars would immediately crash global markets. President Trump tried to move the US in the direction of trade surplus by starting a trade war with China. Instead, the US trade deficit increased. That is because it is a structural necessity of the world economic system, not a policy that can simply be reversed with a new administration.
   
   
3. Cost #3: Devaluation of the dollar over time. World GDP is rising faster than US GDP. Not only that, but the US share of world GDP is shrinking. If we continue to commit to backstopping the global economy with US dollars, that means we have to issue many more dollars each year than our economy can support from a value generation standpoint. Eventually, the US economy will not be able to sustain the value of the dollar, and both the dollar and the world economic system will collapse together.
   
   Shocks to the system will only accelerate this trend. While the US has been spending freely since the US dollar became the world’s reserve currency in 1944, it is only since the 2008 economic crisis that the government has embarked on a policy of “Quantitative Easing”--basically, ballooning the supply of dollars by purchasing securities at scale. Once the Federal Reserve began QE in 2008, it didn’t stop. Although it had started to taper its reserves in 2019, the coronavirus pandemic immediately spurred the Fed back into spending at a historically unprecedented rate. From 2020 to 2021, the Fed’s balance sheet doubled to $8 trillion; it went from owning half as many Treasuries as all central banks combined to owning twice as many Treasuries as all central banks combined. All in all, the Fed’s balance has risen over eightfold since the Great Financial Crisis of 2008. When the issuer of the global reserve currency is also its main buyer, that is a sign of the reserve currency system’s instability.
   
   Such a large increase in the money supply was bound to have a near-term impact on the dollar’s purchasing power. The official average annual inflation rate, based on the Consumer Price Index, was 7% in December 2021, the highest since June 1982. Some estimate the rate might be even higher, as there is debate about how reflective of the cost of living the CPI basket of goods actually is.
   
   
4. Cost #4: Our manufacturing base has declined. Because we’ve enabled other countries to run trade surpluses with us for so long, we have become less competitive in manufacturing, which has had a devastating impact on the American middle class. This contributes directly to political instability at home. In addition, exporting our manufacturing capabilities also has had significant national security implications, as America now relies greatly on foreign manufacturers for its defense needs.
   
   (Of course, it is worth mentioning here trade surpluses can come about honestly or through currency manipulation; in an all-fiat system, manipulation is easier than ever before, and countries are incentivized to do it if they can.)
   
   
5. Cost #5: US hard assets and companies will increasingly be owned by foreigners. All those dollars circulating in foreign hands have to go somewhere. Many use them to buy hard assets–land, real estate, precious metals, and commodities–both in the United States and elsewhere. Foreign entities will also use dollars to buy US corporate bonds, equities, and private companies. Macroeconomic analyst Lyn Alden refers to this as the “capital sponge”--countries running trade surpluses against the United States are slowly buying up the country, asset by asset.
   
   
6. Cost #6: Erosion of trust and diplomatic ties around the world. A country that imposes its own view of the world–whether that view is right or wrong–without constraint, for long enough, will make a lot of enemies. While such behavior may achieve short-term gains, it is not in the long-term strategic interests of any country to inspire hatred and resentment around the world.
   
   This is not to say any other country would be “better” as a superpower than the US; I mean that the very structure of “superpower” is no different from the structure of power itself–it corrupts. And corruption is most evident in the sacrifice of the main glue that fosters social cohesion and trust: truth. It is no coincidence that a growing number of voices talk openly about how we now inhabit a “post-truth” society where manipulation of evidence and facts is assumed to be the norm.
   
   
7. Cost #7: Corrosion of America’s character and identity as a nation. America was founded on the idea of liberty and justice for all. Many people have sacrificed their lives for this cause. But the wars we have fought in the name of those values have often produced very different outcomes. Closer inspection has revealed that lofty ideals of spreading democracy and freedom or defending the world from communism have often boiled down to prosaic political interests, like projecting power for power’s sake, or enriching well-connected contractors, campaign donors, and individuals. Many Americans are wondering what we are fighting for and who we are as a country. If we don’t stand for an idea–liberty and justice for all–then what makes us any better than the countries we are invading and policing? This is a question that cannot be answered simply by electing the “right” politicians. It must be answered structurally, by architecting and achieving a country we are genuinely proud to inhabit.

In short, the United States has been relying on its “too big to fail” status as the arbiter of the petrodollar world reserve system and as the world’s guarantor of “peace and security” via warmaking. But all “too big to fail” means is that, in this moment, the structural incentives are such as to motivate powerful actors to prop something up. The moment conditions change and those incentives are no longer there, whatever was previously too big to fail, fails indeed. And that moment is coming. 

As wars become more expensive to fight directly, some in the US take solace in the fact that the petrodollar’s reserve status enables us to project power as the world’s financial police, using our sway over the SWIFT network and international financial institutions to sanction countries and individuals that do things we don’t like by cutting them off from the international payments system. But do we really want to be proud of cutting off Afghanistan–the country we occupied for two decades–from its sovereign bank accounts, plunging an entire population into starvation? Will future generations remember us freezing the assets and confiscating the property of whistleblowers as in line with American values of liberty and justice for all? And if the United States–the supposed bastion of free-market capitalism–doesn’t stand for property rights, what rights do we stand for? 

Bitcoin: Sound Money as Structural Diplomacy

It was inevitable that countries like Russia, China, and India would find ways to become increasingly sanctions-resistant by moving away from the dollar to trade in oil and other commodities, and to use alternative payment systems. For example, Russia and India are already trading oil bilaterally in rubles and rupees. India has been paying for Iranian oil in rupees since 2019. And not only has China built an alternative to the SWIFT network, CIPS, but it has used blockchain technology to build its own digital currency that will soon be required to transact in China. This reflects a nascent move toward a more regional reserve currency model–a decentralization of world power in which the US is still a very powerful actor, but one among many. In Russia, President Vladimir Putin and the Ministry of Finance are pushing back against a ban on Bitcoin proposed by the country’s Central Bank to suggest that regulated mining and use of the stateless cryptocurrency could be a competitive advantage.

The United States will need more than military strength to prevent this growing decentralization from becoming a bloody contest among nations that leads to the next set of World Wars. We will need more than a powerful military to solve the domestic problems caused by taking on the role of the world’s sole superpower. Indeed, for the United States to begin thriving again, we must start rebuilding a net creditor position, and to do this we will need international institutions that are truly neutral arbiters of value and cannot be captured by the political interests of any country or class of people. That is why Bitcoin–the distributed, unforgeably scarce digital currency–represents a critical store of value and medium exchange for the 21st century. Its political neutrality and censorship-resistance are the very properties that make it ideally suited to mediate value between states, societies, and individuals. In this way, Bitcoin is critical not only for ensuring economic growth, peace, and security for the United States, but for the wider world. 

While the Bitcoin protocol prescribes the creation of 21 million bitcoin, the entire world economy could be rebooted from a single coin. In other words, the absolute amount of bitcoin circulating in the world has no impact on the currency’s ability to act as a backstop of value for everything else. This is what makes Bitcoin “sound money”, and sound money constrains spending and debt while providing great elasticity from a credit standpoint. Sound money also restores confidence in the value of assets (like fiat currencies) that may be pegged to or backstopped by it. In addition, as a peer-to-peer digital currency that enables people to transfer value directly without intermediaries, Bitcoin embodies American values of liberty and justice that have been so publicly compromised by political institutions in recent decades. It reminds us that the right to our own property is, in seed, the right to many other things–that it is the basis for inviolability that protects the individual from the state and enables individuals to constitute societies together. Finally, Bitcoin’s energy consumption is already driving a shift to a new energy paradigm by incentivizing decarbonization and the transition to renewable energy. This reduces the need for oil and the global power politics it gives rise to, creating new possibilities for shared prosperity. 

This is not to suggest that Bitcoin will necessarily become “the” new reserve currency of the world, but rather that it will soften the inevitable transition from a global petrodollar reserve system to a more multipolar system of regional reserves that include the dollar and that are potentially backstopped by, or at the very least in a trade pair with, Bitcoin. This is ultimately in the United States’ interest, as it will help to prevent or soften the terrible economic devastation if the current system collapses without an alternative already in place. The end of the petrodollar reserve system is, after all, coming. It is structurally inevitable, but it is within our power to ensure that we not only survive but thrive through it together. For this reason, the United States should immediately begin stockpiling a strategic Bitcoin reserve, as we will need a monetary reset pegged to something sounder than the full faith and credit of the United States when the latter is no longer of sufficient value. 

The dollar’s unique global reserve status was a function of specific historical circumstances that no longer obtain. There is no going back to the mid-20th century world that gave rise to that reality. Even if the United States were to somehow acquire ¾ of the world’s Bitcoin, like we did with the world’s gold after the Second World War, and pegged the US dollar to that Bitcoin, there could not be another Bretton Woods in which so many countries agree to peg their currencies to that dollar. Quite simply, after nearly a century of American global dominance, the world’s countries are looking for more equal partnerships not only with the United States, but with other countries as well. And they are in a stronger position than ever to demand that. If we are smart, we will use this reality to our advantage by forming strong trade partnerships and becoming the jurisdiction of choice for the best and brightest from all over the world to come and generate value. We will achieve this as much through our character as we do through our strength. We can build the next generation of global alliances and American prosperity by increasingly channeling our vast military power toward what that Presbyterian minister and icon of American popular culture, Mr. Rogers, suggested we all become–a Good Neighbor. This is not some kind of pollyanna naïveté, but what leadership with moral courage looks like. 

In summary, by embracing a truly decentralized sound money reserve–Bitcoin–America can once again start running a trade surplus; restore manufacturing power to our country; bolster our national security; become energy self-sufficient; dramatically decrease carbon emissions, kickstart GDP growth; protect property rights; and refrain from the overextension of commitments and resources that eventually destroys all empires. 

Perhaps most important of all, we can heal our moral injuries and restore hope by remembering who we are as a nation; what we stand for; and what we fight for: liberty and justice for all. 

Notes:

[1] This essay adapts findings from Michael Hudson’s Super Imperialism: The Economic Strategy of American Empire. Islet, 2021.