Regime Change

Washington, we have a problem.

https://www.pricevaluepartners.com/regime-change/

“Sir Keir Starmer has vowed to use “every lever” to prevent households from being hit by higher energy prices amid growing fears the Iran war is wreaking havoc on the UK economy..

“ On Monday morning, the Prime Minister suggested an emergency Cobra meeting between the most senior government ministers and the Bank of England governor Andrew Bailey would look to prioritise addressing economic issues that are hitting Britons as a result of the war..

“Today we’re looking at the economic impact, and I am asking for every lever that’s available to the government to deal with the cost of living to be discussed at Cobra. Hence we’ve got the Bank of England and others there.”..

“On the weekend, Iceland boss Richard Walker, who was made a peer by Starmer, endorsed a temporary profit cap on energy companies..”

• ‘Starmer vows to use ‘every lever’ to protect Brits from damage to UK economy’, ‘City AM’, 23 March 2026.

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This, as Captain Blackadder once remarked, is a crisis:

“A large crisis. In fact, if you’ve got a moment, it’s a twelve-storey crisis with a magnificent entrance hall, carpeting throughout, 24-hour portage, and an enormous sign on the roof, saying ‘This Is a Large Crisis’. A large crisis requires a large plan. Get me two pencils and a pair of underpants.”

As Schuettinger and Butler point out in their history of wage and price controls, government- provoked inflation is nothing new. (Even if the governments in question today are the US and Israel.) Nor are the proposed solutions, as they explain in ‘Forty centuries of wage and price controls: how not to fight inflation’ (The Heritage Foundation, 1979):

“The co-authors began working on this book in 1974, just after the termination of President Nixon’s controls in the United States. Since that time, we have examined over one hundred cases of wage and price controls in thirty different nations from 2000 BC to AD 1978.

“We have concluded that, while there have been some cases in which controls have at least apparently curtailed the effects of inflation for a short time, they have always failed in the long run. The basic reason for this is that they have not addressed the real cause of inflation which is an increase in the money supply over and above the increase in productivity. Rulers from the earliest times sought to solve their financial problems by debasing the coinage or issuing almost worthless coins at high face values; through modern technology the governments of recent centuries have had printing presses at their disposal. When these measures resulted in inflation, the same rulers then turned to wage and price controls.”

The Roman Emperor Nero (AD 54-68) responded to growing economic problems by devaluing the currency. The devaluation started relatively modestly but accelerated under Marcus Aurelius (AD 161-180) when the weights of coins were reduced. “These manipulations were the probable cause of a rise in prices,” wrote historian Jean-Philippe Levy. The Emperor Commodus (AD 180-192) turned to price controls and decreed a series of maximum prices, but things deteriorated and the rise in prices became “headlong” under the Emperor Caracalla (AD 211-217).

Egypt was the imperial province most severely affected. During the fourth century, the value of the gold solidus changed from 4,000 to 180 million Egyptian drachmai. Levy also attributes the grotesque rise in prices which followed to the increase of the amount of money in circulation. The price of the same measure of wheat in Egypt rose from 6 drachmai in the first century to 200 in the third century; in AD 314, the price rose to 9,000 drachmai and in AD 334 to 78,000. Shortly after AD 344 the price had reached more than 2 million drachmai. Other provinces endured similar inflations.

Levy:

“In monetary affairs, ineffectual regulations were decreed to combat [Gresham’s Law, that bad money drives out good] and domestic speculation in the different kinds of money. It was forbidden to buy or sell coins: they had to be used for payment only. It was even forbidden to hoard them ! It was forbidden to melt them down (to extract the small amount of silver alloyed with the bronze). The punishment for all these offences was death. Controls were set up along roads and at ports, where the police searched traders and travellers. Of course, all these efforts were to no purpose.”

Perhaps the most notorious attempt to control wages and prices took place under the Emperor Diocletian. Commodity prices and wages reached “unprecedented heights” shortly after he assumed the throne in AD 284. The Empire’s economic troubles have been attributed to a vast increase in the armed forces (to repel invasions by barbarian tribes); to a huge building programme of questionable value; to the consequent raising of taxes and the employment of ever more government officials; and to the use of forced labour to accomplish much of Diocletian’s public works programme. (If you thought governments had learnt from the miserable and longstanding economic failure of public works programmes, you may have missed the announcement in the UK last week that HS2 high speed railway trains could be made to run slower than originally planned to save money. This from the country that invented the steam train..)

Diocletian, on the other hand, attributed the inflation entirely to the “avarice” of merchants and speculators. Plus ça change..

What is undeniable is that as taxes rose, the tax base shrank, and it became increasingly difficult to collect taxes, resulting in a vicious circle.

Probably the single biggest cause of Diocletian’s inflation was his debasement of the coinage. In the early Empire, the standard Roman coin was the silver denarius. Its value had gradually been reduced in the years leading up to his reign as emperors issued tin-plated copper coins which still kept the name “denarius”. Under Gresham’s Law, silver and gold coins were hoarded and left circulation.

During the 50 years ending in AD 268, the silver content of the denarius fell to one five- thousandth of its original level. Trade was reduced to barter and economic activity stagnated. The middle class was almost obliterated. To overcome the baleful influence of his bureaucracy, Diocletian introduced a system of taxes based on payments in kind, which had the effect of destroying the freedom of the lower classes and tying them to the land. Then came currency reform, and the Edict on prices and wages. Historian Roland Kent:

“Diocletian took the bull by the horns and issued a new denarius which was frankly of copper and made no pretence of being anything else; in doing this he established a new standard of value. The effect of this on prices needs no explanation; there was a readjustment upward, and very much upward.”

Diocletian had the option of either inflating – minting increasingly worthless denarii, or to deflate – in the form of cutting government expenditures. He chose to inflate. He also chose to fix the prices of goods and services and suspend the freedom of the people to decide what the currency was actually worth. He fixed the maximum prices at which beef, grain, eggs and clothing could be sold, and the wages that workers could receive, and prescribed the death penalty for anyone who disposed of his wares at a higher figure. Prices still went up.

Less than four years after the currency reform associated with the Edict, the price of gold in terms of the denarius had risen by 250%. By AD 305 the process of currency debasement began again. Levy:

“State intervention and a crushing fiscal policy made the whole empire groan under the yoke; more than once, both poor men and rich prayed that the barbarians would deliver them from it. In AD 378, the Balkan miners went over en masse to the Visigoth invaders, and just prior to AD 500 the priest Salvian expressed the universal resignation to barbarian domination.”

David Meiselman, in a foreword to ‘Forty centuries..’ writes as follows:

“What, then, have price controls achieved in the recurrent struggle to restrain inflation and overcome shortages ? The historical record is a grimly uniform sequence of repeated failure. Indeed, there is not a single episode where price controls have worked to stop inflation or cure shortages. Instead of curbing inflation, price controls add other complications to the inflation disease, such as black markets and shortages that reflect the waste and misallocation of resources caused by the price controls themselves. Instead of eliminating shortages, price controls cause or worsen shortages. By giving producers and consumers the wrong signals because ‘low’ prices to producers limit supply and ‘low’ prices to consumers stimulate demand, price controls widen the gap between supply and demand.

“Despite the clear lessons of history, many governments and public officials still hold the erroneous belief that price controls can and do control inflation. They thereby pursue monetary and fiscal policies that cause inflation, convinced that the inevitable cannot happen.

“When the inevitable does happen, public policy fails and hopes are dashed. Blunders mount, and faith in governments and government officials whose policies caused the mess declines. Political and economic freedoms are impaired and general civility suffers.”

Our friend John Butler sees light at the end of the tunnel:

“Were Hayek still with us, he would have helped to explain it. High taxation, burdensome regulations and a generally elevated level of government intervention in the economy discourage investment in equipment, training, you name it. Less investment in physical and human capital eventually results in weaker productivity.

“However, in a twist of fortune, there is one area where UK investment is set to boom, and that is North Sea energy production. Geologists have long known that the North Sea’s resources are far from being fully exploited. Drilling technology is also much better than it was during the first North Sea boom in the 1970s and 1980s.

“If there is one thing that would help to bring general price inflation down, including food price inflation, it would be cheaper energy. Fertiliser, production, processing, transport… Ever since the introduction of mechanised agriculture during the Industrial Revolution, energy costs have been a primary input into food prices.

“That the UK is blessed with substantial low-hanging fossil energy fruit is well known. When things get to the point where the government is considering imposing food price controls, desperation has clearly set in. It might be politically awkward given the current government’s green credentials, but I believe that we are about to embark on a huge detour on the Road to Net Zero.

“I’ll take that over the Road to Serfdom any day, and I suspect a large part of the British public would too. As an investor, I’m also going to take advantage of the huge amount of investment I believe is heading towards the North Sea. Following years or drought, I expect a deluge.”

Which brings us neatly to the concept of the petrodollar.

The petrodollar, per Grok, refers to U.S. dollars earned by oil-exporting countries (primarily OPEC members, plus others like Russia and Norway) from crude oil exports. It is not a separate currency but simply dollars received in payment for oil. The term also describes the broader petrodollar system: the longstanding global practice of pricing and trading most international oil in U.S. dollars, which creates sustained worldwide demand for the dollar.

After World War II, the 1944 Bretton Woods system made the U.S. dollar the world’s primary reserve currency, backed by gold at a fixed rate ($35 per ounce). By the late 1960s, U.S. trade deficits, inflation, and gold outflows strained this arrangement.

In August 1971, President Richard Nixon ended dollar convertibility to gold (the “Nixon Shock”), effectively ending Bretton Woods and allowing currencies to float. This removed the dollar’s gold backing and risked weakening its global status.

Oil prices were already rising, and the U.S. faced economic pressure. The 1973 Yom Kippur War led to an Arab oil embargo (by OPEC) against the U.S. and allies supporting Israel, causing oil prices to quadruple, with all the attendant global economic shocks.

To restore dollar demand and stabilize the post-gold era, the U.S. negotiated a strategic partnership with Saudi Arabia, the world’s largest oil exporter and a key OPEC influencer.

In 1974, under Treasury Secretary William Simon and with involvement from Henry Kissinger, the U.S. and Saudi Arabia reached an agreement: Saudi Arabia would price its oil exports exclusively in U.S. dollars and recycle surplus revenues (“petrodollars”) into U.S. Treasury bonds and other American assets. In return, the U.S. provided military protection, arms sales, and technical and economic assistance to the kingdom.

This deal was largely secret until details emerged years later. Other OPEC nations largely followed Saudi Arabia’s lead by the mid-1970s, standardizing oil pricing in dollars.

The system replaced gold with “black gold” (oil) as a de facto anchor for dollar demand: every country needing oil had to acquire dollars, creating a self-reinforcing cycle. Oil exporters often earned more dollars than they could productively invest domestically (due to small populations or limited industrialization). They “recycled” surpluses by:

• Buying U.S. Treasury securities (financing U.S. deficits and keeping interest rates lower).

• Investing in Western banks, stocks, or development projects.

• Purchasing U.S. goods, weapons, and services.

This recycling helped offset the 1970s oil shocks’ recessionary effects for importers while providing oil exporters safe, liquid returns. Major surges occurred in 1974–1981 and 2005–2014, when high oil prices generated massive surpluses.

For the US, sustained dollar demand reinforced its status as the world’s reserve currency, enabled cheaper borrowing (via foreign purchases of Treasuries), and supported geopolitical influence through military ties.

The petrodollar system offered oil exporters security guarantees and access to U.S. markets and technology.

Globally, the system facilitated smooth oil trade but tied the world economy closely to the dollar and U.S. financial system. Roughly 80% of global oil transactions have historically been in USD.

The arrangement helped the U.S. maintain economic and military pre-eminence after losing the gold standard.

The system faced criticism for linking oil to U.S. power, contributing to “petrodollar recycling” imbalances (e.g., debt in importing nations), and geopolitical tensions. Some view it as enabling U.S. deficits and interventions. In recent years, the system has shown signs of erosion due to:

• De-dollarization efforts: Countries like China and Saudi Arabia have tested oil deals in yuan or other currencies. BRICS nations have explored alternatives, including commodity-backed instruments.

• Saudi diversification: Under Vision 2030, Riyadh has broadened partnerships (e.g., with China) and allowed some non-dollar settlements, though most oil remains dollar-priced.

Rising renewables, sanctions, and multipolar alliances (e.g., the expansion of the so-called BRICS economies) have accelerated discussions of reduced dollar reliance in energy trade. As of 2025–2026, the dollar’s share of global reserves has declined (from ~71% in 2000 to around 58–59%), though it retains dominance in liquidity, if not necessarily in trust.

Despite these shifts, oil is still overwhelmingly traded in dollars, and the U.S.-Saudi security/financial ties remain strong. Grok concludes: the petrodollar system emerged as a pragmatic 1970s solution to preserve U.S. monetary power after the gold standard’s collapse. It created a durable link between oil—the world’s most traded commodity—and the dollar, shaping global finance for over 50 years while enabling “recycling” that benefited both the U.S. and exporters. While pressures from multipolarity and energy changes are real, the system has proven resilient so far.

So far..

Fast forward to the new Iran war and this headline from the ‘Asia Times’:

‘Iran’s Hormuz yuan play a direct hit on the petrodollar’:

“If recent reports are accurate that Iran is considering allowing limited tanker passage only if transactions are settled in Chinese yuan, then the issue at stake is no longer merely the movement of ships. It is the future architecture of global energy finance..

“reports that Tehran may condition tanker passage on yuan-denominated oil trade should be read less as a technical payment proposal than as a geopolitical signal. It would represent a deliberate attempt to fuse military geography with monetary strategy..

“For China, wider yuan use in oil trade would advance two long-term goals at once: currency internationalization and energy security. China imports vast quantities of Middle Eastern oil, and it has strong incentives to build payment structures less exposed to US pressure or wartime disruption.

“For the United States, by contrast, any movement of Gulf energy trade away from the dollar risks eroding both sanctions leverage and broader strategic influence in the region. This is why the current crisis should not be interpreted solely through the lens of shipping security.”

The decision by the West to freeze Russia’s foreign reserves (including US dollars and US Treasury bonds) was the first nail in the coffin for the dollar, obliging sovereign countries to favour stateless assets such as gold. The decision by the US to join Israel in military adventuring against Iran will likely prove the first nail in the coffin for the petrodollar (and similarly boost prospects for the likes of gold over the medium term).

The US may yet get regime change, just not the type it anticipated.

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Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com.

Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks and real assets, and also in systematic trend-following funds.