by Robert Bonomo

September was not a good month for the U.S. dollar. The world’s reserve currency is sustained in large part by the Petrodollar, the agreement by the Saudis and OPEC to price oil in dollars and only accept dollars for payment. The US gets a guaranteed demand for its fiat currency and in exchange the US has agreed to protect militarily Saudi oil fields. However, after President Obama was forced to back off his plans to attack Syria in support of the Saudi backed insurgency fighting the Assad regime, one of the pillars of the Petrodollar scheme was shaken to its core.

If America has no more stomach for war in the Middle East, how certain can the Saudis be that America will protect the regime militarily if the need arises? Now that the President has acquiesced to public opinion in his decision on whether to use military force, can he be counted on in the future to hold up his end of the bargain in the Petrodollar scheme? The United States may have by far the world’s largest military, but what use is it if it can’t be used? And even when it is, seven years of war in Iraq has done little more than bring the country under the influence of Iran.

Another major problem for the dollar is the fact that the Fed has spent five years printing money and its balance sheet, at about 3.4 trillion dollars, is almost a quarter of US GDP. When Bernanke let the world know he was going to tap on the brakes, interest rates soared and the equities markets got spooked. He, like the President, had to back off.

And to finish the month we get an exercise in game theory galore with the House leadership playing high stakes chicken with the President by offering him only two solutions to the debt-ceiling, both of which would leave him devastated politically. He can either postpone implementation of his signature accomplishment, Obamacare, or shut down the government- it seems Mr. Boehner has taken a page from Mr. Putin’s playbook. After the foreign policy debacle with Syria, can the President afford to reside for long over a shutdown government? His other option is to be made politically irrelevant. One would think that his opponents will feel emboldened to hold their ground.

The dollar is backed by a military that has been left neutered by an incalcitrant home front, by a Federal Reserve Chairman who has no idea how to stop printing money by the trillions, and by an executive and legislative branch who spend billions on election campaigns yet are unable to renew the credit card used to pay the monthly bills of the government they supposedly serve.

It seems difficult to fathom that gold will not recover its march toward $2,000 an ounce and beyond while the dollar’s stature as a secure store of value continues to be gutted by an inept and irresponsible national leadership.

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http://www.thecactusland.com/2013/09/a-bad-month-for-the-dollar.html

by Robert Bonomo