Australia’s Approaching New 1942 National Crisis
Australians must become alert to the national consequences resulting from a challenge to the petrodollar system.
The petrodollar system, an arrangement struck initially between the United States and Saudi Arabia in 1973 and which later expanded to all OPEC nations in 1975, mandates that all crude oil supplies sold on the international market by OPEC nations are denominated in U.S. dollars in exchange for American military protection, the supply of American weapons and a stable U.S. dollar.
Under this arrangement, any country which seeks to purchase oil from OPEC nations are required to first exchange their own national currency for U.S. dollars.
This monetary trade system has been, and continues to be, essential to maintaining the economic strength of the U.S. dollar as the global reserve currency.
It is the petrodollar system which has allowed the United States to incur federal government debt of $US 20 trillion (103% of GDP) and Gross External Debt of $US 18.29 trillion (94.4% of GDP) without any major disruption of the supply of financial credit or loss of confidence from international creditors.
Strategic rivals to the United States who do not possess comparable military strength have long calculated that American economic and military power can be compromised if the petrodollar system is undermined if not dismantled.
Independent analysts have suspected that US Government military action against Saddam Hussein and Muammar Gaddafi were in part due to Hussein’s plan to sell Iraqi oil in Euros and Gaddafi’s plan to sell Libyan oil via a single gold‑backed African currency - the ‘gold dinar’.
In recent weeks, a long-planned multi-nation effort has been launched to collapse the petrodollar system as a means to undermining, if not destroying, American hegemony.
After hoarding significant amount of the world’s gold reserves over the past decade with other allied nations such as Russia, China announced that it will soon be launching a new crude oil futures contract, through the Shanghai International Energy Exchange, priced in Yuan and fully controvertible into gold.
As the world’s largest importer of crude oil, China, through this facility, would be able to buy oil from major suppliers such as Russia or Iran while simultaneously bypassing the U.S. dollar.
In addition, Venezuela, in the past fortnight, announced that it will no longer accept U.S. dollars for the sale of their oil.
Both actions will undermine the relevance and demand for the U.S. dollar in international trade and finance, placing additional pressure on its relative value which has already fallen 11% on the US Dollar Index since January 2017.
A further fall in the demand for the U.S. dollar will not only worsen America’s trade and current account deficits, but will also lower the demand and therefore the price of US Treasury Bonds, subsequently increasing the interest rate payable on US federal government debt when refinancing is required.
This in turn will further blow out America’s foreign debt as well as the U.S Government’s existing budget deficit.
At this point the U.S. Government would need to adopt severe austerity measures, including significant cuts in government spending, in order to provide confidence to creditors that existing financial obligations can be met.
The need to do so is compounded by President Trump’s intention to incur an additional $US 3 trillion in federal government debt over the coming 8 years as well as the US Federal Reserve’s current attempt to normalize their bloated balance sheet.
Given that military spending is the second largest item of Government expenditure, (projected to be $US 643 billion or 15.7% of total expenditure in FY17-18), America will struggle to financially maintain its current global military footprint.
Much like the Roman, Spanish and British empires or the Soviet Union, an over-extended government that experiences intractable financial challenges will ultimately be forced to reduce the size, geographical spread and influence of its military forces.
The sequence and speed of a withdrawal of strategic American military assets will have both direct and real national security implications for Australia.
An American withdrawal from the East Asian theatre would create a power vacuum in our region allowing rival nations to Australia to strategically flex their diplomatic, economic and military power consistent with their world view which is likely to be a radical departure from our values and institutional arrangements.
Under a scenario where rival military power was utilized for expansionist objectives, Australia, based on current capacity, would not have sufficient air defense capability to defend the mainland.
Australia would therefore face a similar existential threat as experienced in 1942 when, after the fall of Singapore, the myth of British invincibility was shattered and Japan consequently attacked Darwin.
America’s reckless and ever-growing indebtedness cannot go on forever.
Australia must prepare for the day for when we may lose American military protection. Our people must be mentally, physically and materially prepared for all possible geo-political situations.
John Adams is a former Coalition Advisor