Another Guest Post, by Jim

Jim got so much response to my last post of his, he wanted me to do this one. So here it is...

Another look at the almighty dollar

By JIM LYDECKER
Wednesday, May 23, 2007

It seems like only yesterday the Federal debt reached $8 trillion (Oct. 18, 2005). For those of you counting, we are about to pass another dubious milestone and reach the unheard amount of $9 trillion. Adding another trillion in record time prompted the Economist to dryly remark, "At least it hasn't hit a zillion yet.

"The impending crisis caused by the exploding federal deficit and debt is something that raises its ugly head in the press from time to time. Ever so often, some politician, economist, congressional committee or think tank reminds us that we are looking at a financial meltdown of unprecedented proportions.

But when it comes to money, there is something worse to worry about: The collapse of the fiscal system brought on by currency that can become worthless overnight.

A financial collapse brought on by debt is like an organism infected by a cancer it couldn't control. On the other hand, a fiscal collapse is more like a massive coronary. Uncle Sam may be dead before he hits the floor.

It has been said that "he who holds the gold rules." Throughout the ages, when gold was used, and laws protected honest commerce, productive nations thrived. However, when wealthy nations -- those with gold and powerful armies -- lived beyond their means, they had to strive for empires of easy fortunes.

Those nations failed.Today, gold no longer rules. Instead, "he who prints the money makes the rules." And the rules are similar: Compel foreign countries to produce and subsidize the country with military superiority and control over the monetary printing presses.

Dollar dominance began in 1944 with the Bretton Woods agreement. Due to our political and military muscle, and because Fort Knox held a mountain of gold, the world accepted the dollar as the reserve currency with its value set at 1/35 of an ounce of gold. With no controls, the Federal Reserve printed more money than we had gold for the next 27 years. This sham was exposed in 1971 when the French wanted to cash in their surplus dollars only to find there wasn't enough gold. On Aug. 15, Nixon essentially declared insolvency until we could come up with something new.

To rescue the dollar, it had to be backed by something of value before becoming interchangeable with Monopoly money. In 1973, the Nixon Administration struck a deal with OPEC to price oil in and only accept dollars for all transactions. We in turn promised to protect various oil-rich kingdoms from any internal or external threat. Thus the birth of the petrodollar.

The agreement with OPEC has allowed tremendous artificial demand and strength allowing the Federal Reserve to print money at will. Since most nations need to import oil, they needed dollars. This arrangement kept the third world mired in poverty: To get dollars, they had to keep their natural resources and labor cheap.

The problem is that this arrangement can't last.

There are several ways to bring these ethereal days to an end, and one is if OPEC decides to accept currency other than the dollar for oil. This could bankrupt us in a very short time.In November 2000, Iraq demanded euros for oil. The first Bush Cabinet meeting (January 2001) was dominated by how to get rid of Hussein and Iraq back on the dollar. There was no concern of his military or terrorism prowess. It was instead about his attack on the integrity of the dollar.Concern for pricing oil only in dollars helps explain our willingness to drop everything and teach Saddam a lesson for his defiance in demanding euros for oil after 9/11.

Another example was when Venezuela floated the idea of switching to the euro in mid-2001. Immediately, there was a coup attempt against Chavez, reportedly with CIA assistance.

Real threats come from countries who are incapable of threatening us militarily but able to dismantle us economically. This is the threat we see from Iran.Since 2004, Iran has been talking of switching to the euro, and we have repeatedly put Tehran in our cross hairs. The fear is not a fundamental Islamic revolution causing Middle East countries to fall like dominoes, but that there may be a domino effect where they will all stop taking dollars.

The truth of the matter is this: Our currency is backed by our military in the sense that anyone choosing to not accept it will get a thumping by our armed forces. Dollar superiority depends our strong military, and our strong military depends on the dollar. Ironically, no outside military force is needed to tear this relationship apart, and with it would go the economic engine that powered what was the American Century.

There's a new world awaiting us, and it is not promising.