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The petrodollar — a deal, not a currency — was born out of the late 1970s energy crisis. The United States, having just gone off the gold standard, struck a deal with Saudi Arabia — one of the largest producers of petroleum in the world — that meant the Saudis would price their oil exclusively in United States dollars and that any surplus revenues from their sales of petroleum would be invested in U.S. Treasury bonds. This had several effects: It ensured the U.S. a supply of oil, it established the U.S. dollar as the global reserve currency, and it helped the U.S. maintain what was, by today's standards, its modest federal debt.
That agreement is now over. //
Oil being denominated in U.S. dollars alone has significance beyond the categories of oil and finance. By mandating that oil be sold in U.S. dollars (DXY), the agreement elevated the dollar’s status as the world’s reserve currency. This, in turn, has profoundly impacted the U.S. economy. The global demand for dollars to purchase oil has helped to keep the currency strong, making imports relatively cheap for American consumers. Additionally, the influx of foreign capital into U.S. Treasury bonds has supported low interest rates and a robust bond market. //
First, the effect on the dollar: Weakening the dollar, as this is bound to do, will have one major effect, namely, raising the price of anything imported into the United States. And from whom does the United States import the most goods, from knick-knacks to industrial electrical transformers? China. China, we may well remember, is a country that is not particularly friendly towards the United States. Second, the end of the dollar as the global reserve currency will almost certainly lower foreign investment in the U.S. Treasury bonds that are largely used to finance America's runaway spending. Interest rates, inflation, bond markets, and the public debt are all in for a sudden, dramatic readjustment, and it won't be good for American consumers.