"Look not to the politicians; look to yourselves." ~ Richard Cobden
Exclusive to STR
In a (nearly) parallel universe, portions of recent history are recorded as follows:
late 19th century-1934 Saudi Arabia's currency is called the Petro, and it is backed with oil, such that one barrel of oil equals 20.67 Petros. All taxes and payments to the Saudi government must be made in Petros. World markets utilize the Petro, a way to deal in oil without actually taking delivery of the commodity. The currency circulates and holds value primarily because the countries holding Petros can exchange the currency for actual oil. Holding Petros in reserve is actually advantageous to holding oil, as oil incurs storage costs while Petros can be invested in stocks and bonds that can earn even more Petros. The Petro is "as good as oil," and in fact even better, as oil cannot earn interest.
1934 The French government holds 20,670,000 Petros in its treasury, at any time exchangeable for 1,000,000 barrels of oil.
1934 Because of a worldwide economic crisis, the Saudis declare that they are "increasing the value of oil," by now making 1 barrel of oil worth 35 Petros.
1934 France's 20,670,000 Petros can now be exchanged for 590,000 barrels of oil, for an overnight 41% net loss of 410,000 barrels. The French interpret the phrase "increasing the value of oil" to mean "decreasing the value of the Petro." Anyone holding Petros is forced to agree with this assessment. France, along with all the other nations of the world, accept this unfortunate devaluation but soldier on—after all, they all need oil.
1960-1968 Saudi Arabia greatly accelerates the pace at which it creates Petros, and the nations of the world begin to wonder if there really is enough oil available to cover all the notes. Saudi Arabia solemnly pledges that Petros will continue to be exchangeable for oil. Fewer and fewer nations, however, are willing to hold on to the notes for any extended time, preferring instead to exchange them immediately for oil.
1971 Reacting to the increase in oil delivery demands and subsequent weakening of the Petro due to lessening confidence in its backing, the Saudis declare that they are "closing the oil window" and are disconnecting the Petro from oil because international speculators have been attacking the currency. The Petro will now float on the open market, but the Saudis will no longer accept Petros in exchange for oil. The Petro retains some market value because the Saudi government still accepts it as payment for everything (except oil). The world will have to go get its oil from other countries. The Saudis have closed shop. The world markets discount the Petro appropriately.
1973 The Saudis increase the value of oil to 38 Petros a barrel, and then to 42.22 Petros a barrel. These new values represent the new official prices for which they refuse to sell oil.
1980 Saudi Arabia continues to print more and more Petros, and the world markets begin to rapidly discount the paper. At one point, 850 Petros are required to buy a single barrel of oil on the world market. It looks like the Petro is destined to collapse as an internationally traded currency. The Saudi central bank steps into the breach to save the day, setting the interest rate higher and higher until it is over 20%. This high rate of return on investments made in Petros finally reaches a level the market considers appropriate for a risky investment, and "confidence" is restored. The Petro stabilizes, and a currency collapse is averted.
2010 It takes in excess of 1,000 Petros to buy a barrel of oil from any world supplier. The Saudis continue to refuse to sell oil, holding on to whatever supply still remains in their country. The Saudi government still values its oil at the officially decreed 42.22 Petros per barrel, ignoring the fact that it takes more than 1,000 Petros to buy a barrel of oil from any other supplier. The Saudi government will not be dictated to by the market, dammit!
Boy, those parallel universe Saudis are some clever weasels, don't you think? They really pulled it off against the rest of the world, who apparently is just a large collection of chumps. What a parallel universe planet of fools!
I recently discovered that by substituting "United States" for "Saudi Arabia," and "dollars" for "Petros," and "ounces of gold" for "barrels of oil," we actually arrive at the recently recorded history of our universe.
Right on down to the last detail: (See http://fms.treas.gov/gold/index.html)