Death of the Petrodollar Imminent as China Moves to Undercut U.S. Hegemony

theroadtoriches (46)in #money • 7 years ago (edited)

When you're the reserve currency of the world you get to do things other countries can't. You're the big kid on the block, the hot cheerleader who's table you can't sit at, the jock who's nonchalant egocentric assholery you can't help but envy.

When you have the reserve currency of the world you have Power. You have something everyone wants, strike that, everyone needs, and if they don't play nice and acquiesce to your wishes, BOOM they're out of the club.

PetroDollar Domination

The U.S. Petro-Dollar has dominated global finance since it's inception in 1974. A few years prior, Nixon had just suspended the Gold Standard in 1971 and inflation was rampant as the U.S. spent money it didn't have on WAR and Social Programs.

At the time a lot of countries became very worried about the credit worthiness of a rapidly depreciating U.S. dollar. The Nixon administration responded by striking a deal with Saudi Arabia...

In exchange for protection,
the Saudi's would only sell their Oil for U.S. Dollars.

This deal was a home run for us Americans. Since Oil is in many ways the master commodity, it is the one thing no country can do without. You need oil to drive our cars, fly our planes, move our trade ships, and is integral in countless other applications in our modern day way of life.

By creating a steady demand for dollars, the U.S. cemented it's role as the
World Reserve Currency.

What does that mean?

It means Mexico pays for oil in Dollars not Pesos.
The U.K. pays for oil in Dollars not Pounds.
And China, like every other country, must first buy Dollars instead of paying for Oil directly in Renminbi.

This non-stop demand allows the U.S. to run massive deficits to fund our way of life.

If the U.S. doesn't like you however, it may decide you can no longer use it's globally accepted medium of exchange. Think that might influence your decision making? Sanctions are in effect like punishment for not following U.S. interest and foreign policy.

The reasons made up for these decisions pedaled by the media are mostly hogwash and propaganda.

The U.S. uses Sanctions to push around weaker countries all the time to achieve it's objectives. Just google sanctions and you might find the U.S. sanctions all sorts of sovereign nations for not playing ball. Russia, Iran, Syria, North Korea, Cuba, Myanmar are current examples. As you might imagine, these countries are not thrilled with these options: either play by our rules or you're out of our club.

Countries such as Russia and Iran have chosen to pivot east towards China who imposes no such restrictions on trade. Even U.S. "allies" such as Japan and Australia have switched to bilateral trade agreements and have cut out the U.S. Dollar middleman.

And why shouldn't they? It makes no sense to buy a 3rd party currency to trade with your neighbor.

U.S. fatal mistake...

If you're the U.S., you're used to getting what you want, but if you've ever watched one of those youtube videos of some scrawny kid getting picked on at school, only to see him deliver a double dragon style upper cut to the bully in question, you'll know what I mean in a second..

Recently Steve Mnuchin, U.S. Treasury Secretary said during an event at CNBC’s Delivering Alpha conference in New York on Tuesday.

“If China doesn’t follow these sanctions, we will put additional sanctions on them and prevent them from accessing the U.S. and international dollar system -- and that’s quite meaningful,”

Say whaaaaat? Now sanctioning Cuba is one thing, that's like putting my 3 year old in timeout, but sanctioning the world's 2nd Largest Economy is another thing altogether. Mnuchin's threats are empty of course, not to mention completely ridiculous and politically untenable. Just the same, China is not amused, and has been working hard to create it's own payment system CIPS (The China International Payment System).

As China progressively imports more and more oil, and the U.S. thanks to the shale boom imports less, what sense does it make for the Chinese to use dollars to buy oil instead of cutting out the middle man and just buying them with yuan?

As mentioned earlier, many countries do not want to use the Dollar and chafe at the exorbitant privilege this affords the U.S. But as long as there are many willing countries lining up to buy U.S. Dollars, our $20 trillion debt and political in fighting over the Debt ceiling doesn't matter.

The real power behind America's Empire..

Ask yourself this: What is the U.S.'s Largest Export? Is it tech? wheat? chicken? Well you might be surprised to find that it's not Iphone's, movies, or Taylor Swift videos, but
$50-million-pallet2.jpg

It's estimated that more than half of U.S. dollars are held abroad, which makes sense as this is the nature of having the World's Reserve Currency.

According to Wikipedia:

A reserve currency is a currency that is held in significant quantities by governments and institutions as part of their foreign exchange reserves. The reserve currency is commonly used in international transactions, international investments and all aspects of the global economy. People who live in a country that issues a reserve currency can purchase imports and borrow across borders more cheaply than people in other nations because they do not need to exchange their currency to do so.

Now don't get me wrong, as an American I'm definitely not complaining.. because it's a stupid good deal for us! We send the world little pieces of paper and in return they send us oil, cars, and flat screen t.v.'s!

But what would happen though if the world no longer needed to hold Dollars to trade among themselves? Well that situation would reverse. All of those dollar hoards would no longer be needed and would flood back into the U.S. causing double digit inflation over night!

China STRIKES Back! Creates Yuan Priced Oil Benchmark.

This is an absolute GAME CHANGER! To use Donald Trump terminology, this is a Yuge deal, and strikes at the very heart of the U.S. Petrodollar system.

As we know, the U.S. abandoned the GOLD backing of it's dollar years ago, but with this move China is effectively making it's dollar the Yuan as good as Gold!

The U.S. can print as many Dollars as it wants out of thin air, but GOLD is another story. I can't overstate the significance of this step by China, as it could lead to significant reduction in the use of U.S. dollars abroad as a medium of trade.

According to Legendary Investor Jim Rogers:

"This is just another step in that direction. Many people do not like using US dollars because if the US gets angry at you, they just set enormous pressure on you that can even get you out of business. China, Russia, and other countries understand this, and they are trying to move world trade and world finance away from that”

Dollar Already Crashing..

DOLLAR INDEX SPOT DXY Spot Rate - Bloomberg Markets.png

The dollar is crashing hard right now. Whether this trend continues or not, only time will tell.

China's Master Plan

The Chinese are led by a Communist Party, and as such can plan and dictate over longer periods of time than can our own typically short sighted politicians. This is what we know so far:

Chinese co-found BRICS Development Bank in 2014 to compete with western dominated IMF and World bank.
PBOC (China's Central Bank) has been increasing GOLD reserves at a frenetic pace over the last 10 years. Why?
Chinese announce a physical Shanghai Gold Exchange in 2015 to increase its influence over gold pricing. A yuan-denominated gold index was launched to challenge London's own benchmark, the "London Gold Fix", which has served since 1919 as the global reference point for the industry.
China has announced plans to start a Crude oil futures contract priced in Yuan and convertible into Gold.

"China is the world’s biggest crude buyer, the new contract may allow exporters to avoid US sanctions by trading oil in Yuan. Such countries as Russia, Iran, Pakistan, Vietnam, China and many other Asian countries are interested in that", says Rogers.

Effective October 1st 2017, the IMF is adding the Chinese Yuan to the basket of currencies that make up the SDR, a sort of 'World Money' and the subject of much speculation and conspiracy theories. China joins a very elite club, including the U.S. dollar, Euro, Japanese Yen, and British pound.

Check Mate

In conclusion, the US rose to power after WWII. At a time when the Dollar was as good as Gold (we had all the gold). We had the world's strongest Economy, and we were the world's largest Creditor nation.

Fast forward to today it appears China is pursuing a similar strategy. Today the U.S. is the largest Debtor nation, and China is our largest creditor. According to Forbes, China's Economy Will overtake the U.S. In 2018. And now China is effectively backing it's currency with Gold.

Which has led more than one pundit to wonder..

Is China's Next Step to Destroy the Dollar?

If you're an Oil producing country, you can continue selling your product for Dollars; a system in which the U.S. can print at will and decide to lock you out the moment you don't bow to the crown

OR...

You can sell your Oil to trading friendly China for Yuan with the option to convert it into GOLD like the U.S. used to do before we discovered deficit spending.

I know which one I'd pick, cheerleaders are overrated anyway.

Until next time.

It's your move.

JESS