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October 17, 2018

The Real Reason the US Does Nothing About Saudi Belligerence

The ruling monarchs in the Kingdom of Saudi Arabia have been implicated in a variety of atrocities from the 9/11 terrorist attacks to civilian bombings in Yemen to the recent murder of Washington Post journalist, Jamal Khashoggi. Yet, the current - and previous - US administration is slow to condemn or blame the House of Saud (the Saudi royal family).

The reason lies deep in the structure of the world economic system, which supports US supremacy across the globe.

To understand why the US administration unconditionally supports the Kingdom of Saudi Arabia you must first understand the Petrodollar system - a strategic partnership between oil producers and America.

In the mid-1970s, two events helped fortify the foundation that supported US supremacy over the planet:

  1. Former US president Richard Nixon took the US dollar off the gold standard, ultimately freeing the US Federal Reserve to continuously expand the money supply.
  2. The OPEC oil embargo (in response to US support of Israel during the Yom Kippur war) pummeled the world economy, bringing the US to the bargaining table.

In response to the oil embargo, the US began negotiations with OPEC and the Saudis. The outcome of the negotiations was a win-win for America and Saudi Arabia and gave birth to the Petrodollar system.

Here's how it works: The US was promised that Saudi Arabia (and OPEC) would only sell oil to the world in US dollars and would reinvest proceeds from sale into US Treasuries. In exchange, the US promised unconditional military and political support for The House of Saud. This was a critical arrangement that solidified dollar hegemony and US economic - and consequently, military - dominance. At the same time, the Saudi royals gained unrestrained wealth and regional power.

The Kingdom of Saudi Arabia is one of the world's largest and lowest-cost oil producers (also known as the world's swing producer). This means that most countries around the world that need to import oil have to first obtain US dollars. To get US dollars, these countries have to price their goods and services exports in US dollars, essentially creating artificial global demand for the currency.

The artificial demand for US dollars also supports the US Treasury market, as surplus dollars held by exporting nations are invested. This has the effect of keeping Treasury yields artificially low, and again absorbs the supply of US currency on the open market, supporting the value of the dollar.

Consequently, the US Federal Reserve is able to maintain non-inflationary loose monetary policy longer, the US government is able to borrow almost indefinitely and the US economy can run constant trade deficits.

Countries that strayed from the arrangement of selling oil for dollars were/are considered enemies of the US government. Iraq, Iran, Libya, Russia and Syria all left, or threatened to leave, the Petrodollar arrangement in one way or another (e.g. by selling in Euros) and were subject to sanctions and regime change. China is actively working with oil producing countries to set up a Petroyuan system that competes with - or even replaces - dollar hegemony. This is of critical strategic importance to America, and can explain why the current administration is resolute in stifling China's economic progress.

The collapse of the Petrodollar system would devastate America. The US dollar would tank and US inflation would skyrocket. The American standard of living would drop and US influence and power would wither. The speed at which these events occur would depend on the speed of the Petrodollar's decline, but the outcome remains just as dire.

This is why the US does nothing about Saudi belligerence and 100% supports the Kingdom of Saudi Arabia - even in the face of clear and obvious atrocities.

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