The Linkage Between Petrodollar Recycling and Demand Side Policies: Its Rise and Fall Under the Carter Administration

The chapter first points to the reaction of the OPEC countries to the US attempt to cause a shift in their investment patterns from short-term highly liquid placements to long-term investments aimed at recasting the supply side of the business cycle since shortly after the first oil shock. In the framework of the OPEC countries’ investment diversifications and bilateral assistance to the LDCs, and their direct and portfolio investments in the US, Washington’s strategy to direct the recasting of the US balance of payments on the capital account proved to be unsuccessful. Against this backdrop, the early Ford administration turned to improve the current account position through an increase in US export to the oil producers by means of technical and industrial cooperation. Thereafter, the Carter administration strove to draw on the OPEC surplus capital to promote demand management policies in support for a restructuring of the business cycle on the demand side in both the US and other advanced industrial nations. The last part of the chapter highlights the failure of such strategies as a result of multiple causes, which included the persistent weakening of the dollar in international exchange markets and the consequent diverging views between Washington and its leading Western partners (Germany and Japan), worsening financial and economic relations between the US and Iran and Saudi Arabia, through to the outbreak of the Iranian Revolution. It rounds off by pointing to the path-breaking new US monetary tightening inaugurated by the new Chairman of the Federal Reserve Paul A. Volcker in late 1979 as the endpoint in the demand side policy implemented by Carter, and its financial path-dependence strategy on the oil producers.