What the petrodollar bought, and what it is losing

Richard Wolff and Yanis Varoufakis disagree on many things, but they share one starting premise: to understand why the United States started a war with Iran, you need to understand how the US makes money from running the world — and why that mechanism is under strain. Wolff is professor emeritus at the University of Massachusetts Amherst and one of America’s best-known Marxist economists. Varoufakis is professor of economics at the University of Athens, former finance minister of Greece during its 2015 debt crisis, and the author of books arguing that capitalism has entered a new phase he calls technofeudalism. In a joint conversation hosted by a US political education collective, they walk through eighty years of financial history in about ninety minutes, arriving at a stark conclusion: the petrodollar system that has funded US global power since the 1970s is now being tested in a way it has never been tested before, and the outcome is genuinely uncertain.

How the US turned ruins into an empire

Before the petrodollar, there was Bretton Woods. And before Bretton Woods, there was a war that left the United States as the only major economy still standing.

Wolff opens with 1945. The war in Europe and the war in Asia produced enormous destruction — bombed factories, wrecked railways, collapsed currencies — everywhere except the United States, which the Atlantic and Pacific Oceans had shielded. No bombs fell on the mainland after Pearl Harbor. What the war destroyed elsewhere, it rebuilt in the US: factories that had been idle through the Depression now ran at full capacity, producing tanks and aircraft carriers. When the fighting stopped, the US had an intact economy and massive productive capacity. Everyone else was in rubble.

The problem the US faced in 1944 was the opposite of what you might expect. Who would buy all the goods a postwar American economy could produce? US domestic demand wasn’t enough. European and Japanese consumers had the desire but not the money — their monetary systems had been destroyed along with everything else. The answer the Roosevelt administration worked out at the Bretton Woods conference in New Hampshire was, essentially, to dollarize the world.

The logic was circular in the best way for the US. European and Japanese governments would receive dollars — initially through the Marshall Plan — which they could use to buy American goods. Their economies would recover. American factories would stay busy. And because the whole system ran on dollars, the US got something no other country had: it could print the world’s money. Fixed exchange rates and capital controls (governments limited how much money could flow across borders) kept the system orderly for a generation.

Varoufakis adds the detail that makes this more than just a benevolent aid program. The US was a surplus country in those years — it exported more than it imported, running trade surpluses. Those surpluses were recycled to Europe and Japan in the form of dollar loans and grants. That recycling kept the system alive. Everyone needed dollars. Everyone bought American goods with them. The wheel turned.

The Nixon shock and the recycling that replaced Bretton Woods

When the US stopped being a surplus country, it needed a new mechanism. Paul Volcker, then a young economist at the National Security Council, had one idea: make everyone else pay for American deficits.

By the late 1960s, the Bretton Woods logic had begun to break down. The Vietnam War was expensive. Lyndon Johnson’s Great Society programs — Medicare, Medicaid, the War on Poverty — were expensive. And German and Japanese manufacturers, starting from scratch after the war with newer equipment and higher productivity, were outcompeting US firms. The US moved from surplus to deficit: it was importing more than it exported, and dollars were piling up in Europe and Japan faster than they were coming back.

On August 15, 1971, Nixon went on television and announced that the US would no longer convert dollars to gold at the fixed $35 rate. The Bretton Woods system ended that night. Countries could no longer demand gold for their dollars; the dollar would now float.

What replaced Bretton Woods was, in Varoufakis’s account, almost the mirror image of what came before. Instead of the US recycling its surpluses to the world, it would now run deficits — and the world’s surplus countries (Germany, Japan, later China) would recycle their earnings back to the US, buying US Treasury bonds, real estate, and stocks. The mechanism that made this work was simple: if you wanted access to US markets and US military protection, you held your savings in dollars. And dollars meant US assets.

For the first time in the history of humanity, you have an empire that gets stronger the more into the red it gets — because of this recycling mechanism. — Yanis Varoufakis

This is the line Varoufakis returns to as the key to understanding everything that followed. US deficits, normally a sign of weakness, became a sign of strength. Every Mercedes sold in the United States without a reciprocal American car sold in Germany sent dollars to Europe, where they sat as dollar reserves, earning interest in US Treasuries. The interest payments funded the US military. The military protected the trade routes. The trade routes kept the dollars flowing. The logic was circular again — but now it ran in reverse, and it ran in America’s favor.

The petrodollar system, formalized through agreements between the Nixon administration and Gulf oil producers in the early 1970s, was one crucial component of this architecture. Gulf states agreed to price oil in dollars. Countries that needed oil needed dollars. Countries that needed dollars bought US debt. And Gulf oil revenues — petrodollars — were recycled through London and New York into US financial markets. Saudi Arabia and the other Gulf monarchies existed within this system in a particular way: they ran the oil taps that the rest of the world depended on, they earned dollars for it, and they invested those dollars back into the US economy.

Scott Bessent's panic, and the $3 trillion hole

When the US Treasury Secretary announced a $20 billion swap line with Gulf states in the middle of a war, most financial journalists called it a bailout for the Gulf. Varoufakis says they had it exactly backwards.

Varoufakis opens his analysis with a puzzle. Scott Bessent — Trump’s Treasury Secretary, a hedge fund manager who once partnered with George Soros to bet against the British pound — announced a $20 billion swap line with Gulf states. The financial press treated this as the US offering to help Gulf economies weathering the Iran war. But the Gulf states, Varoufakis notes, collectively hold about $6.5 trillion in investments, of which $1.7 trillion is liquid cash. A $20 billion line of credit for those governments is, as he puts it, “a pipsqueak.”

So what was the announcement really about? Varoufakis’s reading: Bessent was sending a signal to Wall Street, not to Riyadh.

Here is the context that makes Bessent’s move legible. In 2025, Trump had secured commitments from Gulf states — Saudi Arabia, the UAE, Qatar, Kuwait, Bahrain — to invest $1.8 trillion in US AI companies and technology ventures over eighteen months, plus approximately $1 trillion in US military hardware purchases. Together, that was close to $3 trillion in promised flows into the US economy, all expected to arrive by early 2027.

The war with Iran ended those flows. Gulf states are no longer generating enough revenue — oil sales are disrupted, Dubai’s tourism economy is running at ten percent capacity, the investment pipeline has frozen. The $3 trillion that Wall Street had priced into its expectations is no longer coming.

Bessent’s $20 billion swap line, in this reading, was a message to the financiers who run the bubble: I know what’s missing, I’m here, I’ll print whatever it takes to keep the markets from collapsing. Not a bailout of the Gulf. A reassurance to the people Bessent used to work alongside — the “pack of wolves in the markets,” as he describes them — that the US government will backstop Wall Street even as the flow of Gulf capital dries up.

What makes this more than a liquidity story, Varoufakis argues, is the bubble dynamic. Everyone in finance knows a bubble exists in US tech and AI stocks. Nobody knows when it bursts — it is mathematically impossible to predict. But when you remove $1.5 trillion in expected inflows from a bubble already stretched thin, you create conditions where the burst becomes more likely. Bessent knows this. Hence the panic. Hence the swap line theater.

Why Iran is different from every war before it

The US has lost wars before — Vietnam, Iraq, Afghanistan — without losing its financial architecture. The reason Iran is different comes down to one word: China.

Wolff makes a point that bears careful attention. The petrodollar system survived Vietnam. It survived Iraq. It survived Afghanistan. In each of those cases, the US military was defeated in the field but the financial architecture — the recycling mechanism, the dollar’s reserve status, the flow of surplus capital into US assets — held together. So why should Iran be different?

The 1973 oil crisis is the instructive comparison. When oil prices quadrupled in 1973, American consumers suffered — long lines at gas stations, price shocks, political backlash. But Kissinger, in his memoirs, wrote a chapter entitled “Who caused the oil crisis?” and opened it with the sentence: “We did.” Varoufakis takes Kissinger at his word. The US allowed — even engineered — the oil shock because it hurt US competitors more than it hurt the US itself. Japan had no domestic oil. Germany had no domestic oil. Their export-driven economies were far more vulnerable to an energy shock than the American economy, which had at least some domestic production and controlled the oil majors. The shock damaged the US’s consumer base but crushed the competitiveness of its main rivals.

The structural difference is this: in 1973, every major US economic competitor was also an energy importer. Hurting the oil market meant hurting them. Today, the main US competitor — China — is insulated from an oil shock in ways Germany and Japan were not. China has invested massively in renewables. It has coal. It has a large strategic reserve. It has Russia willing to sell at a discount. Closing the Strait of Hormuz hurts the US consumer, hurts Europe, and hurts Asian oil importers. It does not proportionally hurt China.

This is Varoufakis’s argument for why Iran is different. Not because Iran is uniquely powerful, but because the structure of the world economy has changed around the conflict. The 1973 playbook — absorb the pain, but make your competitors absorb more — doesn’t work when your main competitor has made itself largely immune to the pain.

Wolff adds a cultural layer. The US has made “one blunder after another” in this conflict: assuming the war could be won in two weeks, assuming Iran would fold without closing the strait, assuming the strait’s closure would have limited consequences. When a government makes that many miscalculations in sequence, Wolff argues, it is usually because something deeper is wrong — not bad intelligence or poor analysis, but an institutional incapacity to process reality clearly. That incapacity is what he means by imperial decline.

China, the MAGA base, and the question of what comes after

Wolff and Varoufakis converge on a single underlying shift: the manufacturing that built the American working class was sent to China over four decades, and the political consequences are now playing out as MAGA and as imperial overreach simultaneously.

Wolff raises China in response to a question about the crisis of capitalism more broadly. The rise of Chinese manufacturing, he argues, is the mirror image of the hollowing out of American manufacturing. What took three or four centuries to build in Europe — an industrial economy, an urban working class, a manufacturing culture — China compressed into three or four decades. That extraordinary development required the transfer of factories, technology, and supply chains from the US to China. The American communities that built their identities around manufacturing — steel towns, auto towns, the industrial Midwest — watched that identity leave.

Those communities became MAGA. Not because of false consciousness, in Wolff’s account, but because they experienced a real material loss and found in Trump a figure who at least named it. That he couldn’t reverse it — that no policy could bring those factories back to a country whose wages are now far higher than China’s — was the first term’s central failure. The second term is revealing the same failure at greater speed.

Varoufakis develops the China argument differently, focusing on how Chinese companies became competitive. It wasn’t always a grand plan. Huawei and companies like it initially took contracts to manufacture American components — learning by doing, absorbing technical knowledge the way any developing-country manufacturer would. When Beijing blocked Western social media platforms for its own reasons (political control, propaganda management), Chinese tech companies found themselves with a billion-person domestic market and no foreign competition. They built their own equivalents. They turned out to be better.

The point is not simply that China has good technology. It is that China’s markets are structured differently. Varoufakis cites the Alibaba example: when Jack Ma’s company was extracting sixty-to-seventy percent profit margins as platform rents — the same logic as Amazon in the US — the Chinese government told him to cut it to five percent. Ma disappeared for a year. The margins fell. The surplus that had gone to platform rents went instead into investment and wages. This, Varoufakis argues, is why Chinese capital accumulation continues while Western accumulation stagnates: markets in China are regulated by a planning mechanism that prevents extractive monopolies from cannibalizing productive investment.

Both speakers agree the US cannot put this genie back in the bottle. Every attempt to block Chinese technology — export controls on Nvidia chips, bans on DeepSeek, pressure on Huawei — either accelerates Chinese domestic development or proves counterproductive. Nvidia’s CEO went to Beijing to beg them to keep buying chips; Beijing declined, noting they had their own. DeepSeek, despite ban threats, continues to operate and improve. The cat, Wolff says, is out of the bag.

The conversation leaves several questions genuinely open. Whether the bubble Varoufakis describes will burst soon, or whether it can be sustained through more symbolic swap lines and more dollar printing — that is, as he notes, mathematically unpredictable. Whether the Iran war will end at a negotiated settlement or escalate further is unresolved as of this conversation. Whether the MAGA coalition will hold together as its promised economic restoration fails to materialize is a question for the next few electoral cycles.

What is not open, in both speakers’ view, is the structural trend. The recycling mechanism — the system by which US deficits were funded by foreign surpluses flowing into US assets — depended on the US being the indispensable market, the indispensable military guarantor, and the holder of the only reserve currency. Each of those monopolies is eroding. Not ending, but eroding. Wolff is careful to say he is describing decline, not collapse. Varoufakis quotes Keynes: “The markets can stay irrational longer than I can stay solvent.” The same applies to empires.

For a reader who wants to understand the financial news coming out of this war — why oil prices matter to bond yields, why Gulf investment flows matter to AI valuations, why the Strait of Hormuz matters to the dollar — this conversation provides the underlying architecture. The individual headlines make more sense once you can see the plumbing they describe.