aggrivated-
Since gold, the oil trade has backed the dollar.I do think its all connected. Here are my steps:
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Over at AE, Stoneleigh likes to say that "oil is liquid hegemonic power." (Is LENR a threat to this? I think it is)
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CAF says that the USD's underlying strength comes from US military capability. I think, its necessary but not sufficient.
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I say, USD is essentially backed by what you can buy with it. Part of US overall valuation is military strength, part economic/resources/educated population.
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Martin Armstrong says, US is a safe haven because there is nowhere else in the world that big money can come and park without moving the market dramatically. I agree. Adds to USD strength.
Since US military power is in essence dependent on oil, the USD is backed by oil as well. Not directly from the standpoint of "oil must be priced in dollars or else we're going to kick your butt", but from the standpoint of controlling the sea lanes - both positively and negatively. The US sub fleet can sink tankers as well as anything on earth. Keeping the world dependent on oil, much of which travels by sea, is very useful.
So oil and the USD are tightly connected for sure.
The whole concept of "oil trade must be conducted in dollars" is another myth. My opinion. Easy enough for buyers and sellers of oil to swap dollars into a currency they would prefer after the trade - or to engage in a side deal where the price in in USD, but the actual exchange takes place in another currency.
If nobody wanted to hold dollars, they simply wouldn't - at least not longer than it took to make the oil trade. And no military assult could/would stop that from happening.