So Long, US Dollar

By: Marin Katusa

There’s a major shift under way, one the US mainstream media has left largely untouched even though it will send the United States into an economic maelstrom and dramatically reduce the country’s importance in the world: the demise of the US dollar as the world’s reserve currency.

For decades the US dollar has been absolutely dominant in international trade, especially in the oil markets. This role has created immense demand for US dollars, and that international demand constitutes a huge part of the dollar’s valuation. Not only did the global-currency role add massive value to the dollar, it also created an almost endless pool of demand for US Treasuries as countries around the world sought to maintain stores of petrodollars. The availability of all this credit, denominated in a dollar supported by nothing less than the entirety of global trade, enabled the American federal government to borrow without limit and spend with abandon.

The dominance of the dollar gave the United States incredible power and influence around the world… but the times they are a-changing. As the world’s emerging economies gain ever more prominence, the US is losing hold of its position as the world’s superpower. Many on the long list of nations that dislike America are pondering ways to reduce American influence in their affairs. Ditching the dollar is a very good start.

In fact, they are doing more than pondering. Over the past few years China and other emerging powers such as Russia have been quietly making agreements to move away from the US dollar in international trade. Several major oil-producing nations have begun selling oil in currencies other than the dollar, and both the United Nations and the International Monetary Fund (IMF) have issued reports arguing for the need to create a new global reserve currency independent of the dollar.

The supremacy of the dollar is not nearly as solid as most Americans believe it to be. More generally, the United States is not the global superpower it once was. These trends are very much connected, as demonstrated by the world’s response to US sanctions against Iran.

US allies, including much of Europe and parts of Asia, fell into line quickly, reducing imports of Iranian oil. But a good number of Iran’s clients do not feel the need to toe America’s party line, and Iran certainly doesn’t feel any need to take orders from the US. Some countries have objected to America’s sanctions on Iran vocally, adamantly refusing to be ordered around. Others are being more discreet, choosing instead to simply trade with Iran through avenues that get around the sanctions.

It’s ironic. The United States fashioned its Iranian sanctions assuming that oil trades occur in US dollars. That assumption – an echo of the more general assumption that the US dollar will continue to dominate international trade – has given countries unfriendly to the US a great reason to continue their moves away from the dollar: if they don’t trade in dollars, America’s dollar-centric policies carry no weight! It’s a classic backfire: sanctions intended in part to illustrate the US’s continued world supremacy are in fact encouraging countries disillusioned with that very notion to continue their moves away from the US currency, a slow but steady trend that will eat away at its economic power until there is little left.

Let’s delve into both situations – the demise of the dollar’s dominance and the Iranian sanction shortcuts – in more detail.

Signs the Dollar Is Going the Way of the Dodo

The biggest oil-trading partners in the world, China and Saudi Arabia, are still using the petrodollar in their transactions. How long this will persist is a very important question.

Read more

Floating Exchange Rates: Unworkable and Dishonest [goldseek.com]

By Keith Weiner

Milton Friedman was a proponent of so-called “floating” exchange rates between the various irredeemable paper currencies that he promoted as the proper monetary system.  Many have noted that the currencies do not “float”; they sink at differing rates, sometimes one is sinking faster and then another. This article focuses on something else.

Under gold, a nation or an individual cannot sustain a deficit forever.  A deficit is when one consumes more than one produces.  One has a negative cash flow, and eventually one runs out of money.  The economy of a household or a national is therefore subject to discipline—sooner or later.

Friedman asserted that floating exchange rates would impose the same kind of forces on a nation to balance its exports and imports.  He claimed that if a nation ran a deficit, that this would cause its currency to fall in value relative to the other currencies.  And this drop would tend to reverse the deficits as the country would find it expensive to import and buyers would find its goods cheap to import.

Friedman was wrong.

To see why, one must look at the concept known to economists as “Terms of Trade”.  This phrase refers to the quantity of goods that can be purchased with the proceeds of the goods exported.  For example, country X uses the xyz currency.  It exports xyz1000 worth of goods and it can thereby pay for xyz1000 worth of imports.  But what happens if the xyz drops relative to the currency’s of X’s trading partners, because X is running a trade deficit?

The country exports the same goods as before, but they are now worth less on the export market.  So X can pay for fewer goods than before.  Buying the same amount of goods will result in a larger deficit.

At this point, one may be tempted to say “Ahah, Friedman was right!”  But remember, we are not talking about a gold standard.  We are talking about an irredeemable paper money system.  Money is borrowed into existence. Looking at the trade deficit from the perspective of Terms of Trade, we see that trade deficits lead to budget deficits, which leads to a falling currency, which leads to increased trade deficits.  It is not a negative feedback loop, which is self-limited and self-correcting.  It is a positive feedback loop.

There is no particular limit to this vicious cycle until the country in question accumulates so much debt that buyers refuse to come to its bond auctions. And this is not a correction or a reversal of the trend; it is the utter destruction of the currency and the wealth of the people who are forced to use it.

And, of course, Friedman had to be aware that America was likely to be biggest trade deficit runner in the world.  Its currency, the dollar, was (and is) the world’s reserve currency.  That means that every central bank in the world held dollars as the asset, and pyramided credit in their own currencies on top of the dollars.

Read more

Ditching the Dollar [caseyresearch]

By Marin Katusa, Chief Energy Investment Strategist on CaseyResearch

 

There’s a major shift under way, one the US mainstream media has left largely untouched even though it will send the United States into an economic maelstrom and dramatically reduce the country’s importance in the world: the demise of the US dollar as the world’s reserve currency.

For decades the US dollar has been absolutely dominant in international trade, especially in the oil markets. This role has created immense demand for US dollars, and that international demand constitutes a huge part of the dollar’s valuation. Not only did the global-currency role add massive value to the dollar, it also created an almost endless pool of demand for US Treasuries as countries around the world sought to maintain stores of petrodollars. The availability of all this credit, denominated in a dollar supported by nothing less than the entirety of global trade, enabled the American federal government to borrow without limit and spend with abandon.

The dominance of the dollar gave the United States incredible power and influence around the world… but the times they are a-changing. As the world’s emerging economies gain ever more prominence, the US is losing hold of its position as the world’s superpower. Many on the long list of nations that dislike America are pondering ways to reduce American influence in their affairs. Ditching the dollar is a very good start.

In fact, they are doing more than pondering. Over the past few years China and other emerging powers such as Russia have been quietly making agreements to move away from the US dollar in international trade. Several major oil-producing nations have begun selling oil in currencies other than the dollar, and both the United Nations and the International Monetary Fund (IMF) have issued reports arguing for the need to create a new global reserve currency independent of the dollar.

The supremacy of the dollar is not nearly as solid as most Americans believe it to be. More generally, the United States is not the global superpower it once was. These trends are very much connected, as demonstrated by the world’s response to US sanctions against Iran.

US allies, including much of Europe and parts of Asia, fell into line quickly, reducing imports of Iranian oil. But a good number of Iran’s clients do not feel the need to toe America’s party line, and Iran certainly doesn’t feel any need to take orders from the US. Some countries have objected to America’s sanctions on Iran vocally, adamantly refusing to be ordered around. Others are being more discreet, choosing instead to simply trade with Iran through avenues that get around the sanctions.

It’s ironic. The United States fashioned its Iranian sanctions assuming that oil trades occur in US dollars. That assumption – an echo of the more general assumption that the US dollar will continue to dominate international trade – has given countries unfriendly to the US a great reason to continue their moves away from the dollar: if they don’t trade in dollars, America’s dollar-centric policies carry no weight! It’s a classic backfire: sanctions intended in part to illustrate the US’s continued world supremacy are in fact encouraging countries disillusioned with that very notion to continue their moves away from the US currency, a slow but steady trend that will eat away at its economic power until there is little left.

Let’s delve into both situations – the demise of the dollar’s dominance and the Iranian sanction shortcuts – in more detail.

(The continual erosion of the dollar could well be the tipping point that causes oil prices to skyrocket. But investors who get positioned before that happens could make life-changing gains.)

Signs the Dollar Is Going the Way of the Dodo

The biggest oil-trading partners in the world, China and Saudi Arabia, are still using the petrodollar in their transactions. How long this will persist is a very important question. China imported 1.4 million barrels of oil a day from Saudi Arabia in February, a 39% increase from a year earlier, and the two countries have teamed up to build a massive oil refinery in Saudi Arabia. As the nations continue to pursue increased bilateral trade, at some point they will decide that involving US dollars in every transaction is unnecessary and expensive, and they will ditch the dollar.

Read more

Eurozone’s banks cutting dollar businesses [Sober Look]

As predicted back in February, European banks are beginning to exit their dollar businesses. They’ve reduced dollar denominated loans and sold dollar assets.

MarketWatch/Business Wire: This reduced appetite for MMF funding has likely contributed to a significant dip in Eurozone bank lending to project and trade finance, sectors that historically have largely been USD-denominated.

That in turn has led to a reduced need for the Fed’s dollar swap facility, which has fallen off sharply.

Fed Liquidity Swap Facility

Read more

India not Caving to the U.S. on Iran [alphavn]

Unlike Turkey and Japan, who have played ball just enough to still be able to buy Iranian oil but avoid U.S. sanctions, India is pretty much moving ahead unilaterally, and publicly, flouting the American’s desire to isolate Iran.

Clearing the way for oil refiners to pay Iran in Indian rupee, the Union Budget has exempted the payments made for crude oil purchased from the Persian Gulf nation, from any local tax.

Iran had in January agreed to accept 45 percent of the value of its oil exports to India in Indian rupees but the scheme could not be implemented due to taxation issues.
It was feared that the money paid to National Iranian Oil Co (NIOC) may be considered as income generated by Iranian firm in the country and liable to be taxed. The withholding tax was up to 40 percent, which neither NIOC nor the Indian refiners wanted to pay.

Turkey continues to play both sides in this moving billions of dollars for the Indians to Iran as an intermediary.  For how long though, apparently is up to the U.S. State Department as Turkey has made it clear that once the pressure gets too high, they will cut India off.

Talks between the U.S. and India began on Monday with this issue front and center in the negotiations.  Given the current climate after the BRICS Summit and this latest move to allow refiners the tax exemption its pretty obvious that India’s stance is quite resolute, a stance the Americans do not generally tolerate from their allies.

Read more

The Decline And Fall Of The USD

JULIAN D.W. PHILLIPS

The SWIFT Settlement System

In our previous article we looked at whether the U.S. Dollar was headed for a major fall or not. We demonstrated how the dominance of the U.S. dollar was almost entirely dependent on the grip it had over oil producers and this allowed the oil price to be designmnated in the U.S. dollar. The U.S. has gone to war in Kuwait and Iraq over this issue under the guise of destroying “weapons of Mass Destruction” as it appears on the verge of doing in Iran. It is no coincidence that Iran has long since ceased using the dollar to price its oil. It has also eliminated the U.S. dollar from its reserves. But of greater importance to the emerging world has been the use of the Belgian-based SWIFT system of international settlements. Not only has the move stopped the sale of Iranian oil, but it has also interfered with an important source of oil to the emerging world.

Right now there are ongoing discussions between the BRICS (Brazil, Russia, India, China and South Africa) countries over ther use of the SWIFT system of international settlements as a ‘weapon’ against Iran. The full extent of the impact of this appears to have been ignored. With China and India as two of Iran’s clients, they found that the U.S. could hurt them considerably with this action. If they can hurt them in this way, then they can hurt them the same way on other issues. So the question that the BRIC nations are now asking is, “Must we be subject to the financial will of the U.S.?”

The question has long-term implications that could affect these nation’s freedom of financial activity. The question demands to see just how powerful the U.S. really is. It is very clear to these emerging nations that if they are to keep on growing, unfettered by the U.S. will, they must set up a system that is not vulnerable to U.S. influence and to reduce the influence of the dollar itself.

What is being realized slowly is that the actions that come out of this conference may well mark a watershed in the shift of power from West to East and the significant reduction in the power of the U.S. as the globe’s main financial influence. Consequently, these nation’s will have to lower the influence of the U.S. dollar on their affairs if they are to achieve real financial independence. This has to be a future and extremely negative influence on the international value of the U.S. dollar.

While the SWIFT settlement system is a Belgian-based international banking settlement agency, the U.S. influence over it was sufficient to halt all Iranian interbank transfers. It is not the system that is faulty but the influence of the U.S. over it that is the danger to the BRIC nations.

China, the Rising Dragon

China, for the last two years has been moving to expand the influence of her currency around the globe, initially with her main trading partners. She has been developing her banking system, using the Yuan in a limited way in her trade with outside nations, from whom she imports a great deal and is developing her monetary systems so that the Yuan will become a global reserve currency one day.

That day is still expected to take up to a decade to achieve, but as history has shown so far, China is moving far faster than all expectations have thought. Nation by nation, strategic item by strategic item, China has been introducing the Yuan as the payment currency in a series of ‘swap’ arrangements. The latest is Australia with South Africa coming on stream by 2015. This will take the Yuan deep into the heart of Africa. By then we fully expect to see the Yuan an internationally acceptable currency in which to deal.

Her progress to date has targeted growth-markets, mainly other rapidly developing economies, as well as the whole Asian continent, and no longer just the U.S. and Europe. One of her key strategies through the Shanghai Cooperation Organization is to build a pan-Asian security and trade bloc in partnership with Russia. The last element of this 10-year old plan is to settle cross-border trade without using the West’s financial system. China expects to play a major part with her currency, which explains why she is adding to her gold reserves. The relevance of gold is that China will have to show to the people of Asia that her currency has better long-term prospects than the dollar, which goes some way to explaining why so many of the countries associated with the S.C.O. are now also accumulating gold.

To date, China has had to be extremely careful in moving away from the dollar, for the value of over $3.18 trillion in her reserves needs to be maintained. A sudden withdrawal would badly damage this, which China cannot afford right now. At worst, a global systemic collapse of the monetary system could happen if the evolution away from the dollar were handled badly.

The latest moves by the U.S. are deeply disturbing to China, as they have the power to directly hurt the spread of the Yuan on a global basis, if the U.S. so decides. Consequently, China is threatened right now! China has been working on alternatives so far, but the moves on the SWIFT system by the U.S. have made the issue urgent as she now faces a security threat. As China continues to develop, she will face a massive demand to be able to provide financing for expensive capital goods. China can no longer afford to depend on the U.S. dollar as the financing currency for its goods, as it is technically possible, although unlikely, at the moment, to face threats from the U.S. even on this subject.

It is clear to the BRICS nations that they need to set up institutions at the heart of the present world financial systems to act as an alternative to the World Bank and the International Monetary Fund and perhaps a replacement to the SWIFT system for transactions with the emerging world. It will not be sufficient to just have an important role in the developed world institutions. It will also be inappropriate to rely on the U.S. dollar as the currency of the emerging world as it is now.

Gold is Critical to any Change in Currencies on the Global Monetary Scene

Perhaps the largest flaw in the current global monetary system is its reliance on foreign acceptance of national currencies. When the U.S. was unquestionable and unchallengeable, there was no doubt that it ruled the global monetary system completely.

Read more

BRICS summit videos

The BRICS summit has wrapped up in India. Creating an alternative global lender and stepping away from the dollar as a reserve currency were among their main objectives.

 

 

 

 

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