By Gary Brode, Deep Knowledge Investing
Contemplations on the Tree of Woe wrote Running on Empty, a three-part analysis of the petrodollar system that was so full of woe that it ran a full four parts. That’s 33% more woe than had been promised. Because we thought the series represented the kind of deep-dive analysis that we admire, we asked the Tree if we could print Part I as a guest post. You can find that piece along with links to parts II, III, and IV here.
Part I of the series explained the origins of the petrodollar system, and noted that it’s the first reserve currency not backed by gold or other precious metals. We’ve made similar comments about the disaster started when US banks in conjunction with the government created the Federal Reserve, and then took the US off the gold standard in 1971.
Part II of the series explained how the system enabled the Federal Reserve to print increasing amounts of currency and enabled Congress to run increasing deficits. Because the US could print dollars for free, we did so and sent them overseas in exchange for foreign goods. This hollowed out the manufacturing base of the US and led to a decline in living standards for many Americans at the same time that the people decrying inequality were pursuing policies that led to more of it.
Part III took on the controversial issue regarding where and why the US deploys the military. Contemplations on the Tree of Woe describes current and future military conflict based on US naval power controlling the ocean vs the Russians and Chinese who seek to control the resource and population-rich Eurasian land mass.
Part IV discussed incorrect assumptions by all parties involved in the Russia / Ukraine war. Most importantly, the Tree concludes that after decades of massive deficit spending, the US policy of printing dollars to fund ever-greater debt is no longer a viable strategy. The final conclusion is that this strategy is now “empty” and we either need to eliminate deficit spending, to pay for our spending with taxes, or if the US is going to continue both spending and printing, we’ll pay with further inflation decreasing the value of the dollars held by American citizens.
Unfortunately, Contemplations on the Tree of Woe has done detailed research and astute analysis. Deep Knowledge investing agrees that over the past few decades in general, and the past few years in particular, Congress, the White House, and the Federal Reserve have debased the currency. I’ve personally laid out the case that a stable currency is a requirement for a free and prosperous people, and pointed out that the anti-Russian sanctions are destroying the value of the dollar as the world’s reserve currency. This has significant negative implications for US foreign policy and national security. It also negatively affects the standard of living of most Americans.
Tree of Woe exists to provide readers with sufficient amounts of daily woe. Deep Knowledge Investing exists to help you earn better investing returns regardless of how woeful the environment is. We have been invited to write Running on Empty Part V in which we help you figure out what to do about the long-term decline in the dollar, and what to do in a world where the petrodollar is broken. This arrangement, which supported the US dollar as the main reserve currency, is being replaced with a bi-polar financial world where the power of the dollar is going to be challenged by the ruble and the won.