Do you know what a Petrodollar is? If the answer is "No," then you are incapable of understanding what is going on in the US economy and political system today. Below is a chapter from an unpublished book I am working on. I hadn't planned on publishing it until later, but with the current debt crisis, I felt that I should go ahead and put this chapter out there (even though the final editing hasn't been completed). Please keep the following in mind as you read it.
Alexis de Tocqueville believed the essential requirements for America to become the nation envisioned by the Founding Fathers, a democratic power that would be a light of freedom for all peoples, American citizens must accomplish the following:
(1) Learn to voluntarily help one another.
(2) Associate with one another for political purposes.
(3) Acquire the habit of forming associations in ordinary life.
(4) Acquire the means of achieving great things by united exertions.
An essential component in accomplishing this is for citizens to have the facts and be able to distinguish between facts and propaganda. As you read the following chapter, ask yourself if you were given these facts by the government, political parties, the media or were taught them in college or a public school. If you didn't get the facts from that list of institutions, then maybe its time for us to do the four things above and change them.
[beginning of chapter]
The Rise of the Market Society
Wall Street created a disaster in the 1920s when bankers decided
to become actively involved in speculating in all kinds of risky and volatile
financial products -- from common stocks
to debt-instruments of weak third world nations. Banks and brokerage firms
hired armies of salesmen to go door-to-door selling these products to ordinary people
who had no concept of what they were buying. In addition to investing in things
of great risks, many also bought them on high interest credit too.
When the investments began to fail, so did the banks
that sold and financed them. Between January 1930 and March 1933, about 9,000
banks failed and wiped out the savings of millions of people. There was
also less money available for loans to industry, which caused a drop in
production and a rise in unemployment. From 1929 to 1933, the total value of
goods and services produced annually in the United States fell from about $104
billion to about $56 billion. In 1932, the number of business closings was
almost a third higher than the 1929 level.[i] Americans
faced the greatest threat to their economic survival in the decade of the 1930s
-- and then December 7, 1941 arrived.
On
an otherwise calm Sunday morning on December 7, 1941, the Japanese shocked the
world by bombing the American naval base at Pearl Harbor, Hawaii. Over 3,500
Americans were killed or wounded in 2 waves of terror lasting 2 long hours. 350
aircraft were destroyed or damaged. All 8 battleships of the U.S. Pacific Fleet
were sunk or badly damaged - including the U.S.S. Arizona. And yet all of
America's aircraft carriers remained unscathed. On December 8, the nation was
gathered around its radios to hear President Roosevelt deliver his Day of Infamy
speech. That same day, Congress declared war on
Japan. On December 11, Congress declared war on Germany. The slogan “Remember Pearl Harbor” mobilized a
nation and helped awaken the mighty war machine and economic engine that is
America.[ii]
World
War II saved America from the Great Depression and united American citizens as
they had never to be united before. Everyone became an American first, whatever
else second. Millions of men and women
entered military service. With so many Americans serving in the military there
was a great shortage of labor in industries that made the supplies needed to
fight the war. In many cases, women that had been wives and mothers stepped up
to the plate and took those jobs – jobs
that had been the exclusive domain of males before.
America emerged from the war as the most powerful and
wealthiest nation on the face of the earth with 80% of world’s gold sitting in
US vaults.
[iv] The
US dollar was increasingly taking over the function of gold as a major
international reserve asset. This made it possible for the US to be
the dominant economy and allowed it to run a trade
deficit without having to devalue the dollar.[v]
The US military was also at the height of its power, with weapons that included
atomic and hydrogen bombs. Mankind had reached a point that made it possible to
destroy itself with its own creations.
Men who joined the military as teenagers came home after the
war as adults. Many had been to places and seen things beyond what they ever
could have imagined. The nation wanted to thank them for their service and one
way Congress decided to do it was the G.I. Bill of Rights. The law gave the following benefits to
U.S. soldiers coming home from World War II:
● education and training opportunities
● loan guarantees for a home, farm, or
business
● job-finding assistance
● unemployment pay of $20 per week for up to
52 weeks if the veteran couldn't find a job
● priority for building materials for Veterans
Administration Hospitals
For
most, the educational opportunities were the most important part of the law.
WWII veterans were entitled to one year of full-time training plus time equal
to their military service, up to 48 months. The Veterans Administration paid
the university, trade school, or employer up to $500 per year for tuition,
books, fees and other training costs. Veterans also received a small living
allowance while they were in school. Thousands of veterans used the GI Bill to
go to school. Veterans made up 49 percent of U.S. college enrollment in 1947.
Nationally, 7.8 million veterans trained at colleges, trade schools and in
business and agriculture training programs.[vi]
After the war, business was good in America, employment was
high, and for many the American Dream was becoming a reality. There was a factor
that was unrecognized in the post-war prosperity that many didn’t understand. It
was that the economies of other nations had been harmed or destroyed by the war
and America had little competition in rest of the world. Also, as a result of
the Bretton Woods Agreement reached in 1944 by the 730 delegates from all 44 Allied nations, America played a major role in
creating the plan for rebuilding the
international economic system after the war.
The World Bank (officially the International Bank for
Reconstruction and Development) was set up to make long-term loans
"facilitating the investment of capital for productive purposes, including
the restoration of economies destroyed or disrupted by war [and] the
reconversion of productive facilities to peacetime needs."[vii]
The bank’s mission was a huge success. By the end of the 1950s, nations
that had been the enemies of the US in the war were rebuilding their economies
and becoming competitors to American corporations. One of America’s greatest
challengers was Japan.
As foreign companies became more successful in selling their
products in US markets, foreign banks acquired increasing amounts of US
dollars. Beginning in 1963, foreign central banks requested that their dollar
reserves be converted into gold by the US. By the end of the year, gold reserve
at Federal Reserve Bank of New York could barely cover its liabilities to
foreign central banks. By 1970, the US gold reserve at FRB New York covered only
55% of the liabilities to foreign central banks. One year later, it was down to
22%. From January to August, $20 billion in US gold assets left the US for other
countries.
On
August 15, 1971, President Richard M. Nixon, without the approval of congress,
changed the US monetary and banking system.[viii] This weakened confidence in the US dollar and created a major crisis for Nixon. He was searching
for a solution when, on October 6, 1973, Syria and Egypt launched a surprise
attack on Israel. Nixon sent supplies to Israel and the Arab League responded
by pressuring King Faisal of Saudi Arabia to stop Aramco from delivering oil to
the US. The US was fighting a war in Viet Nam and needed oil for the military.
Something that many people do not know is that Aramco was owned by Standard Oil
California, Texaco, Standard Oil of New Jersey, and Mobil Oil Company. They
received 50% of the profits from Aramco, while the other 50% went directly to
King Faisal. With Saudi oil off the market, world oil prices quadrupled.
Nixon
sent Secretary of State Henry Kissinger on a secret mission to King Faisal.
Kissinger told him that Saudi oil was a US national security priority and, if
necessary, the US would use the military to intervene to restore the flow of
oil. Faisal secretly arranged for oil shipments to be delivered to the US Navy
until the embargo ended in 1974.[ix]
Kissinger negotiated another secret agreement and it changed the course of
history. Pay close attention to the details:
●
Saudi Arabia only accepts US dollars in
payment for oil.
●
Saudi Arabia invests excess profits in US
Treasury bonds, notes, and bills.
●
United States military protects Saudi oil
fields.
Nixon solved the dollar
problem. He switched the dollar from the “gold standard” to the “Saudi oil
standard” -- and created the petrodollar. Look
at what happen to the US Money Supply after America switched to the “Saudi Oil Standard.”
Now,
as Paul Harvey used to say, here is the rest of the story. Take out a dollar
bill and look at it. At the top you will see the words “Federal Reserve Notes.” A “note” is
an “I.O.U.” – a debt instrument. The creation
of the dollar you are holding required a debt of $1 to be created. Can you
guess what happened when the US Money Supply increased so dramatically to
produce the dollars needed to buy all of OPEC’s oil?
The
“T” on the left side of the graph stands for “trillions.” Take another look at
the years 1959 to 1974 on the “Money Supply” graph. The entire US economy
operated with a fairly level amount of money. The same is true for the amount
of debt. Notice that even in the years America was engaged in major wars, the
amount of debt remained fairy level too. America’s economy shifted from an
economy based on the production of real goods and services to a financialized
economy based on financial products and speculation. Professor
Noam Chomsky provides very valuable insights
about what happened.
The most important changes took place
when the Nixon administration dismantled the postwar global economic system,
within which the United States was, in effect, the world’s banker, a role it
could no longer sustain. This unilateral act (to be sure, with the cooperation
of other powers) led to a huge explosion of unregulated capital flows.
Still more striking is the shift in the
composition of the flow of capital. In 1971, 90% of international financial transactions were related to
the real economy – trade or long-term investment – 10% were speculative. By 1990 the percentages were reversed, and by
1995 about 95% of the vastly
greater sums were speculative, with daily flows regularly exceeding the
combined foreign exchange reserves of the seven biggest industrial powers, over
$1 trillion a day, and very short-term: about 80 percent with round trips of a
week or less.[xii]
The old economy produced jobs and economic opportunities for the
masses, but the new economy did not. The goal and mission of CEOs was to maximize shareholder
value. This
marked the shift from a market economy
(old economy) to a market society. A
market economy was a tool, a valuable and effective tool, for organizing
productive activity. It was a way of life in which market value did not invade
everything aspect of life. But, a market society is a place where everything is
up for sale and shareholder value is a higher priority than human life.[xiii]
This took place in America without any serious public debate about where
markets served the public good and where they did harm to the public -- and didn’t belong.
In
the new market society, many Americas were surprised to learn that in Iraq and
Afghanistan, there were more paid private military contractors on the ground
than US military troops. This discussion was also made without explicit public
debate. Citizens were never asked whether they wanted to outsource war to
for-profit private companies. There are now a growing number of for-profit
prisons and, in some California jails, if you don’t like the standard
accommodations you can buy a prison cell upgrade.[xiv]
Today, it would be hard to find anyone in America that believes that money
doesn’t affect the quality of justice people receive. O. J. Simpson and Lindsay
Lohan obviously were treated very differently that the thousands of poor that
find themselves in the justice system.
The shift from a market economy to a market society resulted from
the convergence of many factors -- the
loss of America’s dominance in world markets, the Civil Rights Movement, the
rise of liberalism, the flood of petrodollars, the transition to
financialization, the loss of interest in self-government by citizens, an
organized corporate conspiracy, the use of lobbyists to manipulate government,
tax havens, and unregulated over-the-counter markets driven by unregulated speculation
– to name a few.
This
shift marked a decisive period in the demise of the role of citizens in self-government
and the goal of living a “good life.” One of the primary factors in this shift was
the rise of contemporary liberalism which focuses on individual rights. According
to this liberalism, liberty does not depend on our capacity as citizens to
share in shaping the forces that govern our collective destiny. Liberty depends
on our capacity as individuals to choose our values and ends for ourselves.[xv]
In other words, liberty means everyone can do their own thing. The new image of
freedom became that of individuals as free and independent selves, unbound by
moral or communal ties they had not chosen.
Freed
from the dictates of custom or tradition, the liberal self is installed as
sovereign, cast as the author of the only obligations that constrain. This
image of freedom found expression across the political spectrum. Lyndon Johnson
argued the case for the welfare state not in terms of communal obligation but
instead in terms of enabling people to choose their own ends.[xvi]
History makes it clear that simply dumping tons of money through entitlements
to people who do not share a communal obligations or have any accountability
for their actions will not produce the results that make our nation a better
and safer place. It creates a mass of dependent people that rely on things
provided by others with needs that continually increase.
During this period when jobs were desperately needed by people
being helped by Johnson’s “Great Society” programs, shareholder value driven
CEOs changed the way they viewed businesses. In the old economy, a business was
viewed as a whole and its value included the values it provided for its
employees and the community. The new economy viewed a business as a group of
individual components that were valued by their market values. Each component
was classified as an asset or liability
that produces profit or loss. Anything other than monetary value was
secondary. Components
were kept or sold based on an immediate effect on shareholder value. The fact
that longtime employees lost their jobs or and the economies of local communities
were destroyed were just part of doing business. In
1969 alone, there were 6000 acquisitions, and over the decade of the sixties, almost
25,000 firms ceased to exist as a result of mergers.[xvii]
The flood of new money created by the
petrodollars didn’t make things better for people who needed jobs. Predators
created one of the most lucrative fads in history – the leveraged buyout, or LBO. Leverage is debt and the new fad was
using massive amounts of debt to buy companies. As a dangerous form of
leverage, LBOs rivaled the pyramid holding companies of the 1920s.[xviii]
In
a basic LBO, a company’s managers and a group of outside investors borrow money
to acquire a company and take it private; the company’s own assets are used as
collateral for the loans, which are repaid from future earnings or assets.[xix]
This
completely changed how management, specifically CEOs, could make huge amounts
of money – without the need of existing
shareholders, employees and customers. The story of the Burlington
Industries LBO makes this very clear. Ron Chernow includes a very good overview
of this event in his award winning book, The
House of Morgan: An American Banking Dynasty and the Rise of Modern Finance.
Important points have been underlined for emphasis.
In early April 1987, reports surfaced
that raider Asher B. Edelman was accumulating stock in Burlington, the
largest textile company in America, based in Greensboro, North Carolina. Frank
Greenberg, Burlington’s chief executive, cast about for a “white knight” to
ward of Edelman and his partner, Dominion Textile of Canada. In a meticulous
reconstruction of events published in an August 1987 issue of Barron’s, Benjamin J. Stern chronicled
what happened next.
On April 15, thirty-two-year-old Alan E.
Goldberg of Morgan Stanley telephoned Greenberg and said Morgan would be
interested in buying Burlington while retaining current management. In a follow-up letter of April 21, Bob
Greenhill reinforced the naked appeal to Greenberg’s self-interest,
saying, “We would have no interest in proceeding except upon a basis agreed to
by your management.”
At an April 29 meeting with Greenberg,
Morgan Stanley laid out plans to give management a 10-percent stake in the
buyout, plus another 10-percent if certain performance standards were met.
Facing a clear-cut choice between a
hostile raider, who threatened his livelihood, and the Morgan LBO fund, enticing
him with lucrative incentives, could Frank Greenberg render a fair,
impartial judgment for his shareholders? As Benjamin Stern noted, Morgan
Stanley customarily dangled before management promises of salary increases
ranging from 50 percent to 125 percent after a buyout. In this tempting
situation, Greenberg granted some exceptional concessions to Morgan Stanley. He
agreed to give Morgan a $24-million “break-up” fee in the event it failed
to acquire Burlington.
Morgan Stanley justified this princely
fee by citing interest it would allegedly forgo by locking up capital during
the talks. Yet, as Stern noted, Morgan Stanley had no capital at risk
until the taker’s completion – and then only $125 million of its own money. The
break-up fee, however, worked out to interest that would have accrued on $7 billion over a two-week period. As
Stern concluded, “The `breakup’ fee could be understood only as a form of
payoff to Morgan from its partners on the Burlington board for being
included in the deal in the unlikely event that the deal cratered. It simply
made no sense otherwise.”
Greenburg waited until mid-May before
disclosing his secret talks with Morgan Stanley, which was
privy to company secrets denied Asher Edelman and Dominion. It was hard to see
how both bidder groups were being accorded equal treatment.
In late June, the Morgan Stanley group
made a bid of $78 a share, or about $2.4 billion, for Burlington, defeating the
Edelman raid. It got about a third of America’s largest textile company for
only $125 million and even most of that came from Bankers Trust and Equitable
Life Assurance. It also earned $80 million in fees, including profits
from underwriting almost $2 billion in junk bonds to finance the deal. Did
Burlington profit equally with Morgan Stanley from this financial alchemy?
Before the buyout, the firm had a clean
balance sheet, with debt less than half the value of common shareholders’
equity.
When the LBO went through, the company suddenly struggled with over $3
billion in debt, or thirty times as much debt as equity. It subsequently
had to fire hundreds of middle-level managers, sell off the most advanced
denim factory in the world (ironically, to Dominion Textile), close its
research and development center, and starve its capital budget to $50 million
for a five-year period. All this not only upset the lives of Burlington
employees, but drastically weakened the firm’s ability to compete in
global markets.
By the last quarter of 1987, Burlington
Industries was losing money despite higher earnings from operations. Why? It
had to pay $66 million in interest for the quarter. There were profound
political and social issues at stake in the LBO fad. Participants hailed the
trend as a return to the “good old days” when bankers put their own capital at
risk. They didn’t look closely at that history and the conflicts of interest
that had resulted from executive coziness between bankers and the companies
they financed.[xx]
It
is clear who benefited from this LBO – Morgan Stanley, Burlington’s upper management,
and the other banks that made the loans, arranged for the junk bonds, and
collected huge fees. Who were the ones that were harmed by it – shareholders,
employees, communities, and suppliers, to name a few. Now multiply this by the
thousands of other companies that were affected by this predatory fad that
swept across the world’s economies. But this was just a prelude for what would
follow in America’s new financialized market society. [end of chapter]
The process of change begins citizens having facts so they can work together, instead of a steady stream of engineered propaganda designed to to separate and polarize the citizens of the greatest nation on earth. The government is not going to fix things -- neither are political parties, lobbyists, or anyone else who derives their wealth and power from the existing system -- especially "the 1%." So who is left?
"If not now when, if not you -- who?
[iv] Bankruptcy
of Our Nation: 12 Key Strategies For Protecting Your Finances in ...
By Jerry Robinson; p. 120
[viii]
Bankruptcy of Our Nation: 12 Key Strategies For
Protecting Your Finances in ... By Jerry
Robinson; p. 122
[xii] Profits Over People: Neoliberalism and Global Order By
Noam Chomsky © 1999; Seven Stories Press, New York, NY; p. 23.
[xv] Public Philosophy: Essays on Morality in
Politics By Michael J. Sandel © 2995;Harvard University Press, Cambridge,
MA; p.20.
[xvi] Public Philosophy; p. 21.
[xviii] The House of Morgan: An American Banking
Dynasty and the Rise of Modern Finance by Ron Chernow © 1990; Grove Press,
New York, NY; p. 693.
[xix] The House of Morgan; p. 694
[xx] The House of Morgan; p. 694-698.
