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.

 

 

 

 

Ben Bernanke and the Case of the Missing Jobs

by Gary North

Bernanke’s speech on March 26 began with a familiar analytical error. Specifically, he continued to give the impression that the Federal Open Market Committee (FOMC) is the cause of today’s low short-term interest rates. It isn’t. The .25% rate is the result of Federal Reserve policy, but not FOMC policy. The FED pays commercial banks .25% on excess reserves. If it did not pay an interest rate of .25%, the rate would be even lower. He always gives the impression that, without the FED’s intervention, rates would be higher.

 

The causes of today’s low rates are the widespread decisions of commercial bankers to hold excess reserves with the FED, which is what the FedFunds rate reflects. Banks are not borrowing overnight money from other banks in order to meet bank reserve requirements set by the FED. They do not need the money. They have plenty of excess reserves. So, because there is no rival demand for this money, banks put their money with the FED, which pays .25%. Better to earn something than nothing.

THE LABOR MARKET

His speech focused on the rate of unemployment, as well it should. This rate is also called the “Presidential incumbent’s chance in election years.” In the post-World War II era, an unemployment rate above 7% at the time of the election is the kiss of death.

Bernanke said this: “We have seen some positive signs on the jobs front recently, including a pickup in monthly payroll gains and a notable decline in the unemployment rate.” The unemployment rate is 8.3%. “That is good news.” For Republicans, yes. Not for Obama.

 

Importantly, despite the recent improvement, the job market remains far from normal; for example, the number of people working and total hours worked are still significantly below pre-crisis peaks, while the unemployment rate remains well above what most economists judge to be its long-run sustainable level.

 

Correct on both points. “Of particular concern is the large number of people who have been unemployed for more than six months.” Also correct. Not having anything else to do, they are likely to vote in November.

He raised the question of whether this unemployment is cyclical or permanent. He defines “cyclical” as every Keynesian does, that is, incorrectly: the result of a temporary lack of aggregate demand. “Is the current high level of long-term unemployment primarily the result of cyclical factors, such as insufficient aggregate demand. . . .?”

The cause of high unemployment is not insufficient aggregate demand in general. Rather, it is the high aggregate demand to stay home and watch TV. The problem is that some of the unemployed workers refuse to work for lower (non-labor union) wages. They do not want available jobs. Other unemployed workers are no longer worth the minimum wage. They cannot find jobs. All of them are getting paid not to work by the federal government’s unemployed workers’ bailout program, called unemployment insurance, which the government keeps extending.

He also mentioned “a worsening mismatch between workers’ skills and employers’ requirements.” He did not mention the key phrase, which every economist should always use when discussing gluts: “at the prevailing market price.” Had he done so, his audience would have expected him to discuss prevailing market wages in specific labor markets. He did not want to do this. To do so would point to the causes of unemployment: government interference with wages.

 

If cyclical factors predominate, then policies that support a broader economic recovery should be effective in addressing long-term unemployment as well; if the causes are structural, then other policy tools will be needed. I will argue today that, while both cyclical and structural forces have doubtless contributed to the increase in long-term unemployment, the continued weakness in aggregate demand is likely the predominant factor. Consequently, the Federal Reserve’s accommodative monetary policies, by providing support for demand and for the recovery, should help, over time, to reduce long-term unemployment as well.

 

Bernanke was justifying the FED’s inflationary policies, which bankroll the Federal government, which in turn spends the newly counterfeited money to “increase aggregate demand.” This has been the Keynesian solution ever since 1936. It will be the Keynesian solution forever. The Keynesian sees unemployment in terms of insufficient aggregate demand, which means insufficiently large federal deficits and insufficiently inflationary central bank policies.

Jobs are increasing in the private sector, he said. Layoffs are moderating in the public sector. But currently, hours worked are 4% less than in 2007. The job market remains weak, he said. Private sector employment is down by 5 million jobs. But the population has increased. The unemployment rate was 3 percentage points above its average over the past 20 years. Let me put it another way. The difference between 8.3% and 5.3% is 3 percentage points. What percent of 5.3% is 3%? It is about 57%. That means that the present unemployment rate is 57% above what has been normal for 20 years. Put this way, the present unemployment rate in 2012, over three years after the recession began, is a disaster.

“Moreover, a significant portion of the improvement in the labor market has reflected a decline in layoffs rather than an increase in hiring.” In short, the job-creation process is not recovering. “Taking the difference between gross hires and separations, the net monthly change in payrolls during this period was, on average, less than 100,000 jobs per month – a small figure compared to the gross flows.”

OKUN’S NON-LAW

We need more hiring, he said. Quite true. How will this come about? With more rapid economic growth. Terrific. How will this growth take place?

 

Read more

Jim Rickards: Dollar Collapse Model

Brics’ move to unseat US dollar as trade currency

Thandeka Gqubule and Andile Ntingi

South Africa will this week take some initial steps to unseat the US dollar as the preferred worldwide currency for trade and investment in emerging economies.

Thus, the nation is expected to become party to endorsing the Chinese currency, the renminbi, as the currency of trade in emerging markets.

This means getting a renminbi-denominated bank account, in addition to a dollar account, could be an advantage for African businesses that seek to do business in the emerging markets.

The move is set to challenge the supremacy of the US dollar. This, experts say, is the latest salvo in the greatest worldwide currency war since the 1930s.

In the 30s, several nations competitively devalued their currencies to give their domestic economies an advantage over others.

And this led to a worldwide decline in overall trade volumes at the time.

The north will be pitted against the entire south in a historic competitive currency battle – whose terrain has moved to the Indian capital New Dehli – where the Brics (Brazil, Russia, India China and South Africa) nations will assemble next week.

China seeks to find new markets for its currency and to lobby to internationalise it throughout the Brics states.

For China this is not a new game. In 2009, senior Chinese banking officials issued a statement that the international monetary system was flawed owing to an unhealthy dependence on the US dollar and called for a “super-sovereign” international reserve currency.

Experts say Beijing’s first step is to internationalise its currency (by expanding its reach beyond China), liberalise it (to allow its value to be determined by the market instead of actively managing it as they currently do) and then make it a reserve currency for many nations in the developing world.

Africa’s largest bank, Standard Bank, says in a research document: “We expect at least $100 billion (about R768 billion) in Sino-African trade – more than the total bilateral trade between China and Africa in 2010 – to be settled in the renminbi by 2015.”

The bank anticipates that the use of the renminbi will lower transaction costs in Africa, thus lowering the barriers to doing business.

It also says that the Chinese will be more successful in transacting in renminbi in Africa than anywhere else because most currencies are weak and somewhat localised.

Not only will the US dollar be challenged, but also the entire international financial regime – led by the World Bank and the International Monetary Fund – which has been dominant since the end of World War II.

South Africa’s place in the emerging international financial regime is set to be enhanced.

Zou Lixing, vice-president of the Institute of Research of the China Development Bank, told the Brics preparatory meeting recently that “although the economic aggregate of South Africa is small relative to the Brics, South Africa provides a gate for the Brics to get access to the huge African market”.

Read more

Will Bernanke Become ‘Hurricane Ben’?

by Gary North on 

This report will deal with quantitative easing (QE). To prepare you for this report, I ask you to watch a short video. It is under 3 minutes. This video is the best thing I have seen on quantitative easing. I wish Bernanke would be this forthright, but I suppose this will never happen.

I will assume from this point on that you have seen the video. If you deal with colleagues who have been confused about what QE really means, forward it to them.

The problem with the video is this: the economics profession, the financial services industry, the financial media, and Paul Krugman have not been able intellectually to make the connection that the interviewer did. He did it effortlessly, but the professionals who are paid to explain things to the public are on the payrolls of special-interest groups that have a direct financial stake in the continuation of the present system. When men are paid very well to see things in a particular way, they become impervious to alternative explanations of causes and effects.

FROM HELICOPTER TO HURRICANE

Bernanke became famous in 2002 because of a line in a speech that he delivered in late 2002. It was on combating price deflation. He described policies that in fact were being implemented as he spoke: Bush’s huge (in those days) Keynesian deficit and Greenspan’s monetary expansion.

 

In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman’s famous “helicopter drop” of money.

The line led to his description as Helicopter Ben. There are cartoons and Photoshopped images all over the Web that use this as their theme.. He will always be known by these images. No other Federal Reserve Board chairman has achieved such poster-child status.

The problem with the helicopter image is that it does not convey the serious nature of the threat. Picturing a bearded man tossing bills out of a helicopter is amusing.

Continue reading

Saudi Arabia And China Team Up To Build A Gigantic New Oil Refinery – Is This The Beginning Of The End For The Petrodollar?

From The Economic Collapse

Saudi Arabia And China Team Up To Build A Gigantic New Oil Refinery - Is This The Beginning Of The End For The Petrodollar?

The largest oil exporter in the Middle East has teamed up with the second largest consumer of oil in the world (China) to build a gigantic new oil refinery and the mainstream media in the United States has barely even noticed it.  This mammoth new refinery is scheduled to be fully operational in the Red Sea port city of Yanbu by 2014.  Over the past several years, China has sought to aggressively expand trade with Saudi Arabia, and China now actually imports more oil from Saudi Arabia than the United States does.  In February, China imported1.39 million barrels of oil per day from Saudi Arabia.  That was 39 percent higher than last February.  So why is this important?  Well, back in 1973 the United States and Saudi Arabia agreed that all oil sold by Saudi Arabia would be denominated in U.S. dollars.  This petrodollar system was adopted by almost the entire world and it has had great benefits for the U.S. economy.  But if China becomes Saudi Arabia’s most important trading partner, then why should Saudi Arabia continue to only sell oil in U.S. dollars?  And if the petrodollar system collapses, what is that going to mean for the U.S. economy?

Those are very important questions, and they will be addressed later on in this article.  First of all, let’s take a closer look at the agreement reached between Saudi Arabia and China recently.

The following is how the deal was described in a recent China Daily article….

In what Riyadh calls “the largest expansion by any oil company in the world”, Sinopec’s deal on Saturday with Saudi oil giant Aramco will allow a major oil refinery to become operational in the Red Sea port of Yanbu by 2014.

The $8.5 billion joint venture, which covers an area of about 5.2 million square meters, is already under construction. It will process 400,000 barrels of heavy crude oil per day. Aramco will hold a 62.5 percent stake in the plant while Sinopec will own the remaining 37.5 percent.

At a time when the U.S. is actually losing refining capacity, this is a stunning development.

Yet the U.S. press has been largely silent about this.

Very curious.

But China is not just doing deals with Saudi Arabia.  China has also been striking deals with several other important oil producing nations.  The following comes from a recent article by Gregg Laskoski….

China’s investment in oil infrastructure and refining capacity is unparalleled. And more importantly, it executes a consistent strategy of developing world-class refining facilities in partnership with OPEC suppliers. Such relationships mean economic leverage that could soon subordinate U.S. relations with the same countries.

Egypt is building its largest refinery ever with investment from China.

Shortly after the partnership with Egypt was announced, China signed a $23 billion agreement with Nigeria to construct three gasoline refineries and a fuel complex in Nigeria.

Essentially, China is running circles around the United States when it comes to locking up strategic oil supplies worldwide.

And all of these developments could have tremendous implications for the future of the petrodollar system.

If you are not familiar with the petrodollar system, it really is not that complicated.  Basically, almost all of the oil in the world is traded in U.S. dollars.  The origin of the petrodollar system was detailed in a recent article by Jerry Robinson….

In 1973, a deal was struck between Saudi Arabia and the United States in which every barrel of oil purchased from the Saudis would be denominated in U.S. dollars. Under this new arrangement, any country that sought to purchase oil from Saudi Arabia would be required to first exchange their own national currency for U.S. dollars. In exchange for Saudi Arabia’s willingness to denominate their oil sales exclusively in U.S. dollars, the United States offered weapons and protection of their oil fields from neighboring nations, including Israel.

By 1975, all of the OPEC nations had agreed to price their own oil supplies exclusively in U.S. dollars in exchange for weapons and military protection. 

This petrodollar system, or more simply known as an “oil for dollars” system, created an immediate artificial demand for U.S. dollars around the globe. And of course, as global oil demand increased, so did the demand for U.S. dollars.

Once you understand the petrodollar system, it becomes much easier to understand why our politicians treat Saudi leaders with kid gloves.  The U.S. government does not want to see anything happen that would jeopardize the status quo.

Read more

Currency war update

Faber Exposes Unprecedented Perils of Our Currency Crisis

Posted by Brittany Stepniak - Tuesday, March 20th, 2012

According to Dr. Faber, there are some rather dire unintended consequences associated with the U.S. currency crisis.

Moreover, Marc Faber asserts that downward spiraling inflationary trends all across the globe maintain a direct correlation with the Federal Reserve’s money printing policies.

While we’re all aware of the danger of printing too much fiat money, Faber stresses that the world’s fiat currencies are in greater danger than any of us realize…

Here’s how Faber views inflation:

If you start to print, it has the biggest impact. Then you print more — it has a lesser impact, unless you increase the rate of money printing very significantly. And, the third money-printing has even less impact. And the problem is like the Fed: They printed money because they wanted to lift the housing market, but the housing market is the only asset that didn’t go up substantially.

In general, I think that the purchasing power of money has diminished very significantly over the last ten, twenty, thirty years, and will continue to do so. So being in cash and government bonds is not a protection against this depreciation in the value of money.

Additionally, Faber explains how the Fed can’t possibly forecast the economy with accuracy because they are “academics,” and have “never worked a single day in their lives.”

Essentially, they lack the experience to understand the big picture.

They aren’t businessmen balancing books; they don’t go shopping and spend time at the local pub; they don’t need to sell products or services to make a living for themselves… The are paid by the government and lack an insider’s understanding of the way the U.S. economy truly functions.

Perhaps this is why they print money and their naive idealism lets them believe it will bring wealth back into our nation.

Unfortunately, that’s simply not true. If it were, every country in the world would thrive in prosperity and live happily ever after.

There are no Utopian societies. Printing endless amounts of paper money won’t change that fact.

And the unintended consequences of firing up the printing presses time and again will lead to unprecedented hardships in America — and across the globe.

Again, Marc Faber tackles this issue stating:

We know one unintended consequence, and this is that the middle class and the lower classes of society, say 50% of the US, has rather been hurt by the increase in the quantity of money in the sense that commodity prices in particular food and energy have gone up very substantially. And, since below 50% of income recipients in the US spend a lot, a much larger portion of their income on food and energy than, say, the 10% richest people in America and highest income earners, they have been hurt by monetary policy. In addition, the lower income groups, if they have savings, traditionally they keep them in safe deposits and in cash because they don’t have much money to invest in the first place. So the increase in the value of the S&P hasn’t helped them, but it helped the 5% or 10% or 1% of the population that owns equities. So it’s created a wider wealth inequality, and that is a negative from a society point of view.

Amidst extreme currency devaluation, this crisis has the potential to lead to malinvestment which will, in turn, create asset bubbles that’ll explode in chaos when the bubbles burst.

Continue reading

China yuan could be reserve currency with reform: IMF

BEIJING (Reuters) - China’s yuan could become a reserve currency in future if the country undertakes further economic reform, International Monetary Fund managing director, Christine Lagarde, said in a speech on Sunday.

The IMF chief, speaking to a gathering of leading Chinese policymakers and global business leaders, added that China needed a roadmap for a stronger, more flexible exchange rate system.

China operates a closed capital account system and its yuan currency is tightly controlled, although Beijing has said it wants to increase the international use of the yuan to settle cross border trade and has undertaken a series of reforms in recent years to that end.

(Reporting by Koh Gui Qing; Writing by Nick Edwards; Editing by Jonathan Thatcher)

Analysis: Turning point in the currency war

By Mike Dolan

LONDON | Wed Mar 21, 2012 3:01am EDT

(Reuters) – A counteroffensive of sorts may be underway this year in what has seemed like a one-sided “global currency war” as developing economies slow, western money-printing pauses and the heat comes out of pumped-up emerging marketcurrencies.

The three-year-old “war”, as Brazil dubs the devaluationist policies of developed nations seeking relief from home-grown credit crunches, may well just come full circle and burn itself out as a result.

But the reverse course of emerging currency depreciation carries its own significant risks, from skewing investment decisions to aggravating trade diplomacy.

What’s more, it’s Japan’s success this year in finally weakening its supercharged yen, by fresh rounds of money-printing from its central bank, which may prove pivotal by disturbing the delicate balance in Asia.

Some economists warn the yen’s more than 10 percent retreat since January is already forcing China’s hand on its own controversial policy of yuan capping in a way that could cause consternation in Washington in an election year.

Far from seeing a sharply rising yuan emerge from China’s policy of greater exchange rate flexibility – core U.S. and multilateral demands – the yuan has actually weakened this year as China’s economy and inflation rates slow, its trade account worsens and fears of a “hard landing” there persist.

Even though the tightly-controlled yuan has gained more than 10 percent against world currencies over the past five years, it’s one of the few major emerging market currencies to remain lower against the U.S. dollar so far in 2012. Bouncing back smartly from a dire 2011, Russia’s rouble, India’s rupee, Mexico’s peso and South Africa’s rand are all up 5-10 percent.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

BRIC currencies since 2007: link.reuters.com/guv27s

Currency performance in 2012: link.reuters.com/tak27s

Chinese yuan vs Japan yen: link.reuters.com/raj46s

China trade in deficit: link.reuters.com/gar96s

Japan exports to China vs US: link.reuters.com/daj46s

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

China recorded its biggest trade deficit in more than a decade in February and signs of slowing economic activity are mounting in everything from real estate prices to ore demand to foreign direct investment. But if it allowed or engineered a lower yuan, then it’s unlikely the other emerging giants – never mind the west – could ignore that.

Long-term global markets bear and Societe Generale strategist Albert Edwards says it’s vitally important global investors put the possibility of a weaker Chinese yuan on their radars because consensus thinking is disregarding the risk.

Continue reading

Follow

Get every new post delivered to your Inbox.

Join 4,931 other followers