The Decline of the Petrodollar
The US dollar and its economy are in tatters as the US clings to a failed unipolar quest for global economic dominance
London , United Kingdom of Great Britain & Northern Ireland - 11 Sep 2017 - Ghassan Matar
Two years ago, in hushed tones at first, then ever louder voices, the financial world began contemplating that which could never be openly discussed - the end of the system that according to many has framed and facilitated the US Dollar's reserve currency status as well as its endless wars of aggression against smaller and weaker nations under the guise of National Security: namely the Petrodollar, the system in which oil export countries would recycle the dollars they received in exchange for their oil exports, by purchasing more USD-denominated assets, boosting the financial strength of the reserve currency, leading to even higher asset prices and even more USD-denominated purchases, and so forth, in a virtuous (especially if one held US-denominated assets and printed US currency) loop.
The main thrust for this shift away from the USD, if primarily in the non-mainstream media, was that with Russia and China, as well as the rest of the BRIC nations, increasingly seeking to distance themselves from the US-led, "developed world" status quo spearheaded by the IMF, global trade would increasingly take place through bilateral arrangements which bypass the (Petro)dollar entirely.
And sure enough, this has certainly been taking place, as first Russia and China, together with Iran, and ever more developing nations, have transacted among each other, bypassing the USD entirely, instead engaging in bilateral trade arrangements. This slow evolving transition came to head in July when both China and Russia declared an all-out assault on the Petro-Dollar by announcing their intention to sell their oil for a Gold backed Yuan and followed through in September 2017 by concrete measures.
To be clear, there is a revolutionary transformation of the entire global monetary system currently underway, being driven by an almost perfect storm. The implications of this transformation are extremely profound for U.S. policy in the world and in particular in the Middle East, which for nearly the past half century has been underpinned by its strategic relationship with Saudi Arabia.
And yet, few would have believed that the Petrodollar did indeed quietly die, although ironically, without much input from either Russia or China, and paradoxically, mostly as a result of the actions of none other than the Fed itself, with its strong dollar policy, and to a lesser extent Saudi Arabia too, which by glutting the world with crude, first intended to crush Putin, and subsequently, to take out the US crude cost-curve, may have Plaxico'ed both itself, and its closest Petrodollar trading partner, the US of A.
It is hard to gauge when the process actually began. Although a great deal of emphasis is placed on the manufactured Crimea crisis by the Obama administration which resulted in the tried-and-true measures of every past U.S. administration: sanctions to show America’s displeasure, the illegal wars against Afghanistan and Iraq and the murder of Colonel Gaddafi not to mention the destruction of the richest and most stable country in Africa also had a major impact on the demise of the Petro-Dollar.
Tired of America’s beligerence and financial supremacy; tired of a unipolar world— tired of the wide-spread misuse of the U.S. dollar as the world reserve currency — and tired of the U.S. bullying the world into an American point of view, Russia and China are now moving to reshape global trade in a way that diminishes the role of the dollar by ending the practice of pricing oil globally in dollars.
The White House and many of US Senators have gone into panic mode. They’re anxiously trying to block the Iranian transaction by threatening — yes, as ignorant as it is — more sanctions. Recent headlines also report that “U.S. has conveyed concerns to Iranian government through all channels.” Why is that? Why would the U.S. care about an oil trade that represents just 0.5% of all the oil that’s consumed in a given day? Because it exposes America’s single greatest weakness — a weakness that, if truly exploited, would bring down the USA.
“The Russian-Chinese alternative to the dollar in the form of a gold-backed rouble and gold-backed Renminbi or yuan, will start a snowball exit from the US dollar, and with it, a severe decline in America’s ability to use the reserve dollar role to finance her wars with other peoples’ money,”
As Diplomatico reported, for the first time in almost two decades, energy-exporting countries are set to pull their "petrodollars" out of world markets this year, citing a study by BNP Paribas, Basically, the Petrodollar, long serving as the US leverage to encourage and facilitate USD recycling, and a steady reinvestment in US-denominated assets by the Oil exporting nations, and thus a means to steadily increase the nominal price of all USD-priced assets, just drove itself into irrelevance.
This decline follows years of windfalls for oil exporters such as Russia, Angola, Saudi Arabia and Nigeria. Much of that money found its way into financial markets, helping to boost asset prices and keep the cost of borrowing down, through so-called petrodollar recycling.
But no more: "this year the oil producers will effectively import capital amounting to $7.6 billion. By comparison, they exported $60 billion in 2013 and $248 billion in 2012, according to the following graphic based on BNP Paribas calculations.
" In short, the Petrodollar may not have died per se, at least not yet since the USD is still holding on to the reserve currency title if only for just a little longer, but it has managed to price itself into irrelevance, which from a USD-recycling standpoint, is essentially the same thing.
The petrodollar system that was created in the 1970’s has served America well, both economically and politically. What began as a way to drive more demand for the U.S. dollar in the wake of a move away from the international gold standard in 1971, has provided benefits that few could have ever imagined including the solidification of the U.S. dollar as the global currency of choice. This was important, especially following a temporary loss of dollar credibility after President Nixon’s decision to close the gold window. Put simply, this ‘dollars for oil’ system has greatly enriched the United States. But this national prosperity has come at the expense of other nations and their potential prosperity.
This brings us to one of the more sensitive, and therefore veiled, aspects of the petrodollar system. Namely, how it has impacted America’s relations with foreign nations, especially in the Middle East.
The consequences have been nothing short of tragic. Since World War II, the United States has killed or was responsible for the death of more than 20 million people in 37 countries around the world excluding American casualties of these wars. None of these nations threatened or were capable of launching an offensive war against the US mainland, and yet, the United States saw it necessary to directly or indirectly through proxy forces, to attack, invade or support insurrections in these countries. Although oblivious to these acts of aggressions, Americans enjoyed a higher standard of living directly as a result of these atrocities.
The problem with this strategy was that the only way that this higher standard of life could be sustained was if the United States engaged in endless wars. Grasping this last point is extremely important. For if the artificial global dollar demand, made possible by the petrodollar system, were ever to crumble, foreign nations who had formerly found it beneficial to hold U.S. dollars would suddenly find that they no longer needed the massive number that they were holding.
This massive number of dollars, which would no longer be useful to foreign nations, would come rushing back to their place of origin… America. Obviously, an influx of dollars into the American economy would lead to massive inflationary pressures in the US economic system.
It is difficult to overstate the importance of this concept as the entire American monetary system hinges on this “dollars for oil” system. Without it, Washington would lose its permission slip to print excessive numbers of dollars. So… What will Happen when the Petrodollar System Ends Allow me to briefly explain the impact that a sudden loss of the petrodollar system would have upon the United States of America.
- Foreign nations would begin sending a flood of U.S. dollars back to the United States in exchange for the new currency needed for oil.
- The Federal Reserve would lose their ability to print more dollars to solve America’s economic problems.
- The US would no longer be able to exchange dollars for imports, resulting in huge shortages of goods throughout the supply chain
- The Treasury Secretary and the Federal Reserve Chairman would meet to determine the best course of action which would involve an immediate and dramatic increase in interest rates to reduce America’s money supply.
- The US will default on most of its debt and will be unable to finance any new debt.
- Hyperinflation would ensue temporarily while higher interest rates take their time to full effect.
- All oil-related prices, including gas prices, would reach outrageous levels.
- Washington would soon realize that the total amount of money in the system would have to be dramatically slashed even further, leading to an even higher increase in interest rates.
- People with adjustable rate debts would be crushed and massive layoffs would occur as businesses suffered from the high interest rates.
- Asset prices across the board would plummet in value.
- Amid the financial carnage, an economic recovery eventually would begin to take place. But this new American economy would be tremendously smaller due to a drastically reduced money supply.
- America’s foreign policy will change beyond recognition as it pulls all its weight to salvage some clout from its momentous loss.
- America’s military might and projection will shrink significantly.
- America will lose most of its clout in most international institutions.
The Washington elites are intimately aware of how serious the economic situation could become if the petrodollar system collapsed. After all, they were the architects and masterminds of the entire system. And if one considers Washington’s policies since the mid-1970’s, it is evident that they will do anything to salvage the status quo, alas they may be unable to do anything about it.