Peak Oil is You
Donate Bitcoins ;-) or Paypal :-)
Page added on August 22, 2013
Get Ready For The Death Of The Petrodollar
Even after seven years of writing macroeconomic analysis for the liberty movement and bearing witness to astonishing displays of financial and political stupidity by more “skeptics” than I can count, it never ceases to amaze me the amount of blind faith average Americans place in the strength of the U.S. dollar. One could explain in vast categorical detail the history of fiat currencies, the inevitable destruction caused by inflationary printing and the conundrum caused when any country decides to monetize its own debt just to stay afloat – often, to no avail.
Bank bailouts, mortgage company bailouts, Treasury bond bailouts, stock market bailouts, bailouts of foreign institutions: None of this seems to phase the gibbering bobbleheaded followers of the Federal Reserve cult. Logic and reason and wisdom bounce like whiffle balls off their thick skulls. They simply parrot one of two painfully predictable arguments:
- Argument No. 1: There is no way foreign countries will ever dump the U.S. dollar because they are so dependent on American consumers to buy their export goods.
- Argument No. 2: There is no way the dollar’s value will ever collapse because it is the dominant petro-currency, and the entire world needs dollars to purchase oil.
I have written literally hundreds of articles over the years dismantling the first argument, pointing out undeniable signals that include:
- China’s subtle dumping of the dollar — using bilateral trade agreements with other developing nations and, more recently, major economic powers like Germany and Japan
- The massive gold-buying spree undertaken by China and Russia — even in the face of extreme market manipulation by JPMorgan Chase and Co. and CME Group Inc.
- The dumping of long-term U.S. Treasuries by foreign creditors in exchange for short-term Treasuries that can be liquidated at a moment’s notice.
- The fact that bonds now are supported almost entirely by Fed stimulus. When the stimulus ends, America’s ability to honor foreign debts will end and faith in the dollar will crumble.
- Blatant statements by the International Monetary Fund calling for the end of the dollar’s world reserve status and the institution of special drawing rights (SDRs) as a replacement.
The second argument held weight for a short time, only because the political trends in the Mideast had not yet caught up to the financial reality already underway. Today, this is quickly changing. The petrodollar’s status is dependent on a great number of factors remaining in perfect alignment, socially, politically and economically. If a single element were to fall out of place, oil markets would explode with inflation in prices, influencing the rest of the world to abandon the greenback. Here are just a few of the primary catalysts and why they are an early warning of the inevitable death of the petrodollar.
Egyptian Civil War
I was recently contacted by a reader in reference to an article I wrote concerning the likelihood of civil war in Egypt, a civil war which erupted only weeks later.
She asked why I had waited until this year to make the prediction and why I had not called for such an event after the overthrow of Hosni Mubarak, as many mainstream pundits had. The question bears merit. Why didn’t Egypt ignite with violent widespread internal conflict after Mubarak was deposed? It seemed perfectly plausible, yet the mainstream got the timing (and the reasons) horribly wrong.
My response was simple: The Mideast is being manipulated by elitist organizations towards instability, and this instability is a process. The engineered Arab Spring, I believe, is not so much about the Mideast as it is about the structure of the global economy. An energy crisis would be an effective tool in changing this structure. Collapse in the Mideast would provide perfect opportunity and cover for a grand shift in the global paradigm. However, each political step requires aid from a correct economic atmosphere, and vice versa.
If you want to identify a possible trend within a society, you have to take outside manipulation into account. You have to look at how economic events work in tandem with political events and at how these events benefit globalization as a whole. The time was not right after Mubarak’s overthrow. The mainstream media jumped the gun. If the target is the U.S. dollar and Egypt is the distraction, this year presented perfect opportunity with the now obvious failure of quantitative easing stimulus being exposed.
As the situation stands, the Egyptian military regime that overthrew Mohammed Morsi has completely cut the Muslim Brotherhood out of the political process and murdered at least 450 protesters, including prisoners already in custody.
Morsi supporters have responded by torching government buildings and shooting police personnel. But the real fighting will likely begin soon, as the current government calls for a ban on the Muslim Brotherhood itself. Simultaneously, hatred for the United States and its continued support of the Egyptian power base — regardless of who sits on the throne — is growing to a fever pitch throughout the region. This is not healthy for the life of the petrodollar in the long run.
It is important for Americans to understand when examining Egypt that this is not about taking sides. The issue here is that circumstances are nearly perfect for war and that such a war will spread and will greatly damage oil markets. The Suez Canal accounts for nearly 8 percent of the world’s ocean trade, and 4.5 million barrels of oil per day travel the corridor. Already, oil prices have surged due to the mere threat of disruption of the Suez (as I predicted). And this time, the nation is not going to recover. A drawn-out conflict is certain, given the nature of the military coup in place and the adamant opposition of the Muslim population.
Strangely, there are still some in the mainstream arguing that the Suez will “never close” because “it is too important to the Egyptian economy,” The importance of the Suez to the Egyptian government is irrelevant in the midst of all-out revolution. The Suez will close exactly because there will be no structure left to keep the canal open. In the meantime, oil prices will continue to rise and distrust of the United States will continue to fester.
Saudi Arabia Next?
The relationship between the United States and Saudi Arabia is at once symbiotic and parasitic, depending on how one looks at the situation. The very first oil exploration and extraction deal in Saudi Arabia was sought by the vast international oil cartels of Royal Dutch Shell, Near East Development Company, Anglo-Persian, etc., but eventually fell into the hands of none other than the Rockefeller’s Standard Oil Company. The dark history of Standard Oil aside, this meant that Saudi business would be handled primarily by American interests. And the Western thirst for oil, especially after World War I, would etch our relationship with the reigning monarchy in stone.
A founding member of OPEC, Saudi Arabia was one of the few primary oil-producing nations that maintained an oil pipeline that expedited processing and bypassed the Suez Canal. (The pipeline was shut down, however, in 1983). This allowed Standard Oil and the United States to tiptoe around the internal instability of Egypt, which had experienced ongoing conflict which finally culminated in the civil war of 1952. Considered puppets of the British Empire at the time, the ruling elites of Egypt were toppled by the Muslim Brotherhood, leading to the eventual demise of the British pound sterling as the top petro-currency and the world reserve. The British economy faltered and has never since returned to its former glory.
On the surface, Saudi Arabia seems to have avoided the effects of the Arab Spring climate, but all is not as it seems. The defection of Saudi Prince Khalid Bin Farhan Al-Saud has brought up startling questions as to the true state of the oil producing giant.
I believe this defection is only the beginning of Saudi Arabia’s troubles and that America’s largest oil partner is soon to witness domestic turmoil that will disrupt oil shipments around the world. America’s support for a monarchy that is so brutal to its population will only hasten the end of the dollar’s use in global oil trade, especially if these puppet regimes are toppled.
For those who doubt that Saudi Arabia is in line for social breakdown, I would ask why the nation felt it necessary to pump billions of dollars into the new Egyptian military junta.
While the country is surely being used in some cases as a proxy by the West, the Saudi government itself is fearful that success of dissenting elements will spread to its own borders. Little do they understand that this is part of the globalist game plan. Without control over Saudi petroleum, the United States loses its last influential foothold in the oil market, and there is absolutely no doubt whatsoever that the dollar will fall as the petro-currency soon after. The desperation caused by such an energy crisis will make international markets beg for a solution, which global banking cartels led by the IMF are more than happy to give.
Iranian Wild Card
The U.S. government’s outright creation of the Syrian insurgency and its funding and armament of al-Qaida agents have understandably angered numerous Mideast nations, including Iran. Iran sits on the most vital oil shipping lane in the world: the Strait of Hormuz. About 20 percent of the world’s annual oil exports are shipped through Hormuz, and the narrow inlet is incredibly easy to block using nothing but deliberately sunken freighters. In fact, this tactic is exactly what Iran has been training for in order to frustrate a U.S./Israeli invasion.
A U.S. or NATO presence on the ground or in the air above Syria, Egypt or Iran will most likely result in the closure of the Strait of Hormuz, causing sharp rises in gasoline costs that Americans cannot afford.
Russia/China Oil Deal
Finally, just as most bilateral trade deals removing the dollar as world reserve have gone ignored by the mainstream media, so has the latest sizable oil deal between Russia and China. Russia has been contracted by the Chinese to supply 25 years of petroleum, and this deal follows previously established bilateral guidelines — meaning the dollar will not be used by the Chinese to purchase this oil.
I expect that this is just the beginning of a chain reaction of oil deals shunning the dollar as the primary trade mechanism. These deals will accelerate as the Mideast sees more internal strife and as the popular distaste for the United States becomes a liability for anyone in power.
The Dollar Is A Paper Tiger
Some might argue that oil discoveries in the Midwestern U.S. could be used to counter the disruption of oil pipelines in the Middle East, and certainly, there is much untapped oil in America. However, to claim that this oil would somehow negate a crisis is naive, primarily because oil supply is not the ultimate issue; the dollar’s petro-status IS the ultimate issue. That status is dangerously reliant on the continued stability of Western friendly regimes in the East. We can produce all the oil we want within our own borders, but if the dollar loses global standing as the world reserve, we will STILL see a massive debasement of our currency’s value, we will still see collapse, and I guarantee, most of our domestic oil will end up being exported as payment to foreign creditors just to satisfy outstanding debts.
The dollar is no more invincible than any other fiat currency in history. In some ways, it is actually far weaker than any that came before. The dollar is entirely reliant on its own world reserve status in order to hold its value on the global market. As is evident, countries like China are already dumping the greenback in trade with particular nations. It is utterly foolish to assume this trend is somehow “random” rather than deliberate. Foreign countries would not be initiating the process of a dollar dump today if they did not mean to follow through with it tomorrow. All that is left is for a cover crisis to be conjured. Existing tensions in the Mideast signal a pervasive crisis, most likely an energy crisis, in the near term.
11 Comments on "Get Ready For The Death Of The Petrodollar"
BillT on Thu, 22nd Aug 2013 1:36 am
Very good article covering the present situation pretty well. I only disagree with the statement: “We can produce all the oil we want within our own borders…” BS!
However the statement: “…the dollar’s petro-status IS the ultimate issue…..” is 100% correct. When the dollar goes, it will take down most of the Western financial system. and cripple many others. through derivatives and the interlinking bad debt on all of their books.
actioncjackson on Thu, 22nd Aug 2013 3:20 am
Agreed, the petro-dollar is the US’s Achilles’ heel. Murica no like expensive oil! Murica no like pay debts!
DC on Thu, 22nd Aug 2013 5:02 am
Well, to be technical there Bill, the US *can* produce all the oil it wants within its own ‘borders’, provided its counts all the oil within the borders of Canada and Mexico as ‘amerikan’. And the other qualifier to that is, the US can indeed produce all the oil it wants, as long as all it wants does not exceed about..say..6 million BPD or so.
🙂
But otherwise, yes a very good article.Lets hope for the people of Syria and all the others in the ME being murdered and terrorized every single day by the US and its proxies, that this collapse comes soon. Many peoples lives depend on it. Only after the US can no longer afford its platinum plated military and its brutal CIA\NSA gestapo regime, and the US fleets and jets sit rusting away in fields and ports, unable to buy fuel, or spare parts, or even pay its mercenary thugs in uniform, will anything like peace have a chance.
TIKIMAN on Thu, 22nd Aug 2013 12:09 pm
RT is nothing but a lying agencey that needs to die a slow death. Sounds sorta like MSNBC.
Luke on Thu, 22nd Aug 2013 3:00 pm
The fall of the dollar would liberate us from US monetary, petro and military domination. Other regions like EU (except the UK) and China take over anglosaxon arrogancy. Both have thousand years of wisdom to relieve humanity from those wrong capitalist short term imperialists and save the world for next generations. So down asap with the green(devil)back! This has been read and approved by the NSA.
Matt on Thu, 22nd Aug 2013 3:21 pm
Peace doesn’t exist in this world anymore, but if indeed the US petro status diminishes and the US economy falls similar to Britain in the past, this will certainly affect the world on a large scale. The US is too influential for it to not impact the global economy. Remember the stock market crash & the worldwide mayhem a few years ago? & we’re still recovering…
Yes, another country may gain the world reserve currency, but the world will not be the same.
mike on Thu, 22nd Aug 2013 3:22 pm
Never trust anyone with a face that well manicured and pampered. FACT
Luke on Thu, 22nd Aug 2013 4:14 pm
Indeed, the world will be not the same. I truthfully hope it will be a better sustainable system also for good willing people in the US, UK, EU and elsewhere. Remember we borrow this world from our children! Don’t have Big Oil and the opportunist politicians spoil it. Their only interest to keep up their hemogony and leave a devastated world. They don’t care, but we do. Yes we can!
bobinget on Thu, 22nd Aug 2013 4:58 pm
At present there is no other currency that can remotely replace the dollar. Keep in mind besides the world’s reserve currency US$ also the national currency of Ecuador, East Timor, El Salvador, Marshal Islands, North Mariana Islands, Palau, Panama, Turks & Caicos,
and Great State of Texas, Guam, Puerto Rico, Alaska and Hawaii.
No doubt, in time we will move to a basket of currencies for oil and gold trades. In the mean time oil will move higher because it more useful then gold.
A reserve currency, or anchor currency, is a currency which is held in significant quantities by many governments and institutions as part of their foreign exchange reserves. …
http://en.wikipedia.org/wiki/Reserve_currency
Just because Democracy as practiced in America, is under siege from a right wing minority is no reason to throw the entire system under the bus. If posters here want credibility they should cool the Anti American rhetoric and do the homework.
bobinget on Thu, 22nd Aug 2013 5:09 pm
The ‘Death of the USD” has been highly exaggerated.
This blog, from 2011, is just as relevant today.
US Dollar About to Lose Reserve Currency Status – Fact or Fantasy?
A number of sites are commenting on a Bloomberg video in which El-Erian, PIMCO Co-CEO says “Dollar could lose its reserve currency status”.
Bloomberg: “Mohammad what does a weak dollar signal to you, a dollar that can’t jump up here on a day like we’ve seen today?”
El-Erian: “It is a warning shot to America that we cannot simply assume flight to quality, flight to safety. That people are starting to worry about the fiscal situation in the U.S. They are starting to worry about the level of debt. They are starting to worry about what they hear about states and municipalities. So, I would take this as a warning shot that we cannot assume that we will maintain the standing of the reserve currency as we have in the past.”
Reserve Currency Definition
Before we can debate whether or not the US will lose reserve currency standing, we must first define what it means.
Investopedia defines Reserve Currency as follows.
“A foreign currency held by central banks and other major financial institutions as a means to pay off international debt obligations, or to influence their domestic exchange rate.”
I accept that definition. Unfortunately Investopedia rambles on with nonsense about the implications: “A large percentage of commodities, such as gold and oil, are usually priced in the reserve currency, causing other countries to hold this currency to pay for these goods.”
That sentence is a widely believed fallacy. The reality is no country is obligated to hold dollars to buy goods denominated in dollars.
Currencies are Fungible
Currencies other that illiquid currencies with low or no trading volume (think of Yap Island stones or the Cuban Peso) are fungible. It is a trivial process to switch from one currency to another.
You can buy gold or silver in any country, and I assure you those transactions do not all take place in dollars. Thus, just because a commodity is widely priced in dollars does not mean it only trades in dollars.
That holds true for oil as well.
I keep pointing this out, unfortunately to no avail, that oil trades in Euros right now. There is no selling of Euros to buy dollars on the front causing the oil producers to trade dollars for euros on the back end. The oil states simply sell oil for a price in Euros and then hold Euros in their Forex reserves.
Fact and Fantasy
The first part of what El-Erian said is factual. Here it is again for convenience. “People are starting to worry about the fiscal situation in the U.S. They are starting to worry about the level of debt. They are starting to worry about what they hear about states and municipalities.”
Those are true statements. Unfortunately, his “warning shot” regarding reserve currency status is fallacious.
To understand why, let’s return to the definition of reserve currency: “A foreign currency held by central banks and other major financial institutions as a means to pay off international debt obligations, or to influence their domestic exchange rate.”
Foreign Currency Reserve Factors
Trade Volumes
Trade Deficits
Currency Manipulation
Hot Money
Trade Volumes and Trade Deficit
The US happens to be at or near the top of nearly every country’s trading partners. The US runs a trade deficit with most of them. Those trading partners accumulate dollars as a simple function of math. We run a deficit, someone else runs a surplus.
Some wonder why the surplus countries do not buy oil or commodities with their accumulated dollars. OK, what does Saudi Arabia, Iran, or Venezuela do with the dollars then?
Does Iran or Venezuela even hold dollars now? Think of the implications of that answer in light of the widely viewed fallacy that one needs dollars to buy oil.
Regardless, of where the dollars end up, those US dollars will eventually return home. Recall that Dubai tried to buy a US port and China tried to buy Unocal. Both were rejected for security reasons. However, those dollars will return home, with China, Japan, and the oil states buying various US assets.
Currency Manipulation
Most US trading partners do not want their currencies to rise, especially China and Japan.
Consider the Yuan which does not float. To suppress the value of the Yuan, China takes US dollars and exchanges them for Yuan at a pegged rate. China does this hoping to create job and boost exports.
The US calls this currency manipulation and it is. However, it is no more manipulative than Bernanke flooding the markets with US dollars hoping to weaken the US dollar and stimulate growth.
Hot Money
Hedge funds and other speculators have moved money to China banking on currency appreciation.
China needs to maintain currency reserves to allow for the repatriation of those US dollars. Michael Pettis at China Financial Markets points out that most of the hot money inflows into China are done by Chinese businesses that understand how to get around rules and regulations regarding currency inflows.
That argument make perfect sense, but the math remains the same regardless of where the hot money comes from.
Global Beggar-Thy-Neighbor Policies
It is pretty pale to suggest the end of the US dollar as a reserve currency when countries hold dollars as a function of math, then hold still more dollars to suppress their currencies, hoping to keep their exports up to “stimulate growth”.
Mathematical Impossibility
Another mathematical relationship says the dollar, the pound, the Yen, and the Yuan cannot all be weak at the same time (relative to each other). Yet that is precisely what every country wants. It’s mathematically impossible.
You can see the effect in rising commodity prices.
If commodity prices were a function of the US dollar alone, then they would be rising in US dollar terms alone. Instead there is upward pressure on commodities in all currencies.
At some point the desirability to hoard commodities will peak.
Zero Hedge Comments
Zero Hedge commented on reserve currency status about a week ago.
Regarding El-Erian’s statement: “I would take this as a warning shot that we cannot assume that we will maintain the standing of the reserve currency as we have in the past”
Zero Hedge quipped:
That’s a given – the question however remains, which fiat currency, if any, is willing and ready to step in and replace the USD? With all eyes continuing to be look at the CNY, how long before China finally takes the plunge to find out just who is the real reserve currency in the world?
Will Another Fiat Currency Replace the Dollar?
For starters, Zero Hedge ignored the essential trade deficit math. The US runs a trade deficit, someone else must run a trade surplus.
Second, Canadian dollar and the Swiss Franc do not have enough trading volume. More importantly, there are not enough Canadian Dollars or Swiss Francs to go around. Look at what happened to Iceland when too many plunged into the Icelandic króna.
The Canadian and Swiss economies are simply not big enough for them to be global reserve currencies. In regards to the Euro, is Europe in a better fundamental situation than the US? Would it matter even if it was? To answer the second question, please remember trade deficit math.
As for the Yuan, it is complete silliness to suggest the currency of a command-economy dictator-led country that will not even float its currency will be some sort of major reserve currency.
To the extent that China trades with Russia, South Korea, etc., local reserves in varying currencies can happen (and are happening already), but the global significance of it is wildly overstated. The amounts in question are tiny, as a simple function of math.
Will the dollar remain the global reserve currency forever? Of course not. However, it is highly unlikely any of the presumed leading Fiat candidates including the Yuan and the Keynesian wet-dream IMF SDRs (Special Drawing Rights), will take the dollar’s place. SDRs are essentially a basket of currencies.
The concept of trading in baskets of currencies backed by nothing is even more ridiculous than the existing setup. People do not buy goods and services in baskets of currencies.
What can replace the dollar?
Gold, or a mechanism like gold that would impose a hard restrictions on perpetual deficits is what its takes to restore sanity. However, we may not see a significant move towards gold until there is a massive currency crisis or revolt against fiat currencies in general, not just the US dollar.
Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
DMyers on Fri, 23rd Aug 2013 1:44 am
The gist of the preceding argument is that the US $ will retain reserve status because it is the reserve currency. Sort of like being an incumbent politician. I don’t buy that.
One advantage of having reserve status, as I have often read, is facilitation of money printing. This facet is not adequately addressed. This is, as well, the seed of the reserve currency’s destruction. As may be more pertinent to the forum, oil sold in dollars and the ability to print dollars results in the ability to buy oil. The petrodollar may, indeed, be the savior of America to this point. But it is not indispensable. I’m going to bet that the world will find an adequate replacement, “Mish” notwithstanding. .