What still puzzles me is the relation between Saoudi-Arabia and the US.. Is the US so much in debt by the saoudis that the US military force is essentially the Saoudi military force?
Here we go:
Once upon a time, gold was money. In fact, many times in the past gold was money and when kings & emperors ran out of gold they would dilute it (debase) with other metals until no-one wanted their coins any more, or they would replace the gold with a paper promise until no-one trusted the promise any more - and then people would go back to gold.
The USA won both WWI and WWII. They didn't do most of the fighting instead leaving the old colonial powers to duke it out while making big loans to their allies and then swooping in at the last minute to claim the spoils and extract tribute from both the allied and axis sides and establish an enduring military/political presence.
The Soviets also made great gains from the war in terms of captured territory and resources but they had paid a far higher price for it than the Russians had.
The US Pacific war (a separate campaign often conflated with the war between the European powers that ended on VE Day) was won shortly after.
At the end of 1945 the US was the dominant power in the world. The US gained gold both directly from conquest and also during the war by having countries store their gold in the US to keep it out of Hitler's hands, and after the war having European countries store their gold in the US to keep it out of Soviet hands.
The world at the time was still a world that ran its financial system on gold. In 1944, in preparation for the end of the wars in Europe and Asia, representatives of 44 countries met in
Bretton Woods, New Hampshire, to hash out how the economy of the new world order should be run.
Simplistically, the Bretton Woods system works somewhat like this. The US dollar is backed by gold (and the US has most of the gold to back the currency) and all the other countries should use the US dollar as their reserve currency. The agreement also created the IMF to keep the rules manage the whole thing.
Now other countries would hold US dollars instead of gold because it was as good as gold and they could always go to the US and redeem their dollars for gold if they really needed gold. For the most part nations were willing to conduct trade in US dollars instead of gold because dollars are more convenient and they were equivalent to trade in gold because they had a fixed gold value ... until they didn't.
Because the US dollar became the world reserve currency, the US was able to pump out and sell a lot of dollars to other countries, and because you could buy just about anything you wanted in dollars, lots of countries were willing to buy them. To buy dollars you either need to buy them with a currency that other people want (but everyone wants the dollar and not whatever currency your crappy little country uses) or you have to buy the dollars with goods and labour. The US became very wealthy because it could make money out of nothing and trade it for real goods and resources.
The problem was that while the US was printing dollars to fill the demand for dollars they weren't increasing their gold reserves at the same rate so the world was being flooded by far more dollars than there was gold to back those dollars. However, the rate of conversion for dollars to gold was relatively fixed and many countries, seeing this, started to redeem their dollars for gold. By 1971 the depletion of US gold reserves became so troubling that Nixon ended convertibility of USD to gold. The value of the USD plummeted.
US oil production peaked in 1970
but demand was nonetheless increasing. Industry and daily life had become increasingly dependent on oil and the US was becoming increasingly dependent on imported oil. Meanwhile the buying power of the dollar was falling and it was taking more and more US dollars to buy the same amount of oil.
The Saudis recognized the effect this was having on US power and, since they were the biggest oil producers in the world, decided to press the issue further to force the US to drop its support of Israel. The 1973-4 oil embargo was painful to the US but it was also painful to Saudi Arabia since the reaction around the world had been: a) for lots of oil consumers to start looking for alternatives to oil; b) for other oil producers to increase their exploration and output. It also offered a great opportunity for the US and the Al-Saud family to come to a new arrangement.
The new arrangement was this - the US will help the Saudis defend the oil fields, will give the Saudis the latest and greatest US weaponry and will make sure that Israel does not interfere with Saudi Arabia's interests. All the Saudis had to do was insist that their oil only be sold in dollars and the US dollars could then be used to buy US debt instruments.
It's clear what the Saudis were getting, but what was the US getting out of this deal?
Well, for one thing, the US can create dollars whenever it wants so it can always buy oil from Saudi Arabia and then, cleverly, they get to sell the debt for this purchase back to Saudi Arabia. Sweet. But the other thing that happened was that all the countries that needed oil now needed US dollars to do it. That is to say, the arrangement created a demand for dollars. The deal maintains the buying power of the US dollar.
Shortly after the 1974 deal the Saudis had brought the rest of OPEC into the petrodollar so that anyone in the world needing to buy oil would need first to buy US dollars.
A lot people are mystified by this. Surely, they often say, when you want oil you just buy in whatever currency and then do the exchange. This is explicitly excluded - OPEC won't take any other currency. Any buyer who wants oil needs to first go and exchange their currency for dollars or exchange goods for US dollars. Instead of linking the value of the dollar to gold it is now linked to oil. The demand for oil is converted into a demand for dollars - the US is a middleman in all oil transactions, in a way it is selling the drinks tickets for the world.
So here we are with the US and Al-Saud family locked in this business deal that both of them are motivated to protect. If the system breaks down and other people get to trade oil in other currencies then the world market for US dollars shrinks. If the US dollar is devalued it impacts the Al-Saud family and it impacts the oligarchs in the US. Anyone who dares to break the dollar hegemony in the oil market threatens the value of the US dollar which threatens the US dollar reserve system which threatens the US ability to live for free by printing dollars.
Come to today. The US has abused its dollar hegemony by creating too many dollars and then feeding them back into a debt system that creates more and more and more unbacked dollars. In 2000, Iraq began selling oil in Euros (great for Europe, very bad for the US) and the US invaded Iraq and reverted oil sales to US dollars. Venezuela started selling oil in Euros in 2006. Iran has started selling oil for gold, euros and yen. Gadhafi was moving Africa towards a gold based currency and trading Libya's oil (and if the African nations had joined the dinar system, all of Africa's oil) for gold dinars. The dinar was also getting some traction among the OPEC nations. This would have been devastating to the US since it doesn't have nearly enough gold to satisfy it's oil needs. Libya's bank was also outside of the IMF system. Since the "liberation" of Libya, Libya's national bank has been privatized and integrated into the IMF system and Libya's gold has gone missing.
As of 2012 the BRIC countries all buy and sell oil in currencies other than US dollars and whole raft of countries are looking at getting on board. The US has shown that, for all it's bluster and military expenditure, it can't actually decisively win wars against relatively small countries. It also can't necessarily wage wars against countries that it has exported its industry to without scoring a significant own goal.
Meanwhile, Saudi Arabia is running out of oil though it will likely be a top producer for quite a while though it will be eclipsed by countries like Canada and Venezuela who's cruddy heavy and tight oil is now coming on line to replace diminishing supplies of sweet and light crudes. The US is trying to produce more of it's own oil too. The Saudis still hate Israel as much as ever and they hate Iran both because they are a rival oil exporter, a breaker of the US dollar system and they are the wrong type of Muslim. The US is stuck between protecting Israel from Saudi Arabia and protecting Saudi Arabia from Israel at a time when the dollar system that backs it's military might is teetering. There is more than one proxy war going on in Syria.
While the gravy train was rolling along it was pretty easy to keep the alliances relatively strong. Now that the good times look like they are coming to an end we will see more players positioning themselves for a non-dollar world and, in that eventuality a non-US monopolar world.
