The MMT view of the reserve currency, or petrodollar.

This contains views about the MMT view of the reserve currency (petrodollar), first by economists, then by me, a layperson.

[Go back to the table of contents.. This resource was created by Activist #MMT, the podcast (Twitter, Facebook, web). Last updated July 30, 2020]

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The economists

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MMT investor Mike Norman:

What would happen if the dollar loses its status as the reserve currency? … The only way for the rest of the world to completely rid itself of its dollar holdings is to exchange them for goods and services produced by Americans. … If a Frenchman exchanged his dollars with a German and a German exchanged his dollars with a Brazilian, uh-uh. That wouldn’t work. The world would still have those dollars they’d just be in different hands. The only way… is for every foreigner to exchange his or her dollars for goods that American workers may made that would mean that those three trillion or
so of dollars held by foreigners would be used in one ginormous shopping spree. …

So the question is, why then would the dollar be weak if it lost its reserve status? Hmm. I
guess they just haven’t thought of that.

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My own layperson take

Disclaimer: I am a layperson who has studied MMT since February of 2018. I’m not an economist or academic and I don’t speak for MMT. The information in this section is my best understanding but I don’t assert it to be perfectly accurate. In order to ensure accuracy, you should rely on the many expert sources linked throughout.

Here’s my own layperson take on the petrodollar, written early in my learning. It’s generally correct and makes some good points. But more importantly, it points to multiple expert sources and quotes. (This article was also published on Naked Capitalism, but an important update has been made only in the original (Citizens’ Media TV) version.)

As I understand it, the only way the dollar “collapses” is if the United States itself collapses. The petrodollar is an inconvenience imposed only when purchasing oil. It’s not an exchange requirement such as the gold standard.

‪From a foreign exchange/relations point of view, the fact that the United States is the “petrodollar” has important implications.‬ From a domestic point of view, however, the petrodollar makes little difference to the United States’ capacity to provide for its people or the domestic value of the dollar.‬

‪Think about it, if the US economy really were that dependent on oil, then with the climate crisis, we would have this false choice:

  1. We don’t get off oil in order to preserve the value of the dollar and basically go extinct,
  2. or we go off oil so we don’t go extinct, permanently and thoroughly killing our economy.‬

The real choice, of course, is to

  1. Responsibly move from fossil to green energy. Fast.

Speaking only from a domestic point of view, oil does not, in fact, give the US dollar its value. The primary thing that gives it (and the pound, yen, yuan, $CA, $AU, etc.) value is the government’s ability to impose a tax in its currency.‬