OT: Petrodollar- any other macro guys out there

[appalachiatiger]

how do we protect the dollar against the lower demand or end of the petrodollar?

Prominent Malaysian lawyer and author Matthias Chang

A few weeks ago, I had a private high-level discussion with some experts in geopolitics, economics and global finance and I had only one objective for participating in the discussion ? to find out what was not said and or avoided in the discussion by the participants.

I learned early in my political career as a student anti-war activist that more can be learned from anyone and in any situation by what has not been said and avoided than from all the hours of lengthy dialogue. In most cases, I already knew the positions of the participants on the subject matter of the discussion from their writings, interviews, press statements, their educational backgrounds and their careers. Usually anything that is being said in a discussion reflects the latest position on the participant's previously declared stance on the subject matter.

And quite often, what has been revealed through discussions may not necessarily reflect the entirety of the participant's stance. The difficulty is to be conscious of what the participant has not said and detect what are his reservations and why the reluctance to disclose his thoughts on the matter. In the day-long discussions, I had only intervened twice and I took no more than ten minutes at the most to elicit the reaction that I had anticipated.

The first intervention was in relation to the inevitable implementation of the "Bail-In" (the confiscation of depositors' monies in financial institutions to pay the bondholders / other creditors) to rescue the Too Big To Fail Banks (TBTF), the template being taken from the Cyprus experience for which all the relevant global central banks and institutions such as BIS, IMF, the World Bank have prepared the groundwork.

No response whatsoever. It was a minefield no one wanted to venture near! The second intervention goes to the very core of the present financial system which is anchored on the "Petro-Dollar". Again, no response save a cursory deflection, "I don't know about the petro-dollar", and the discussion veered off to an irrelevant and an unrelated matter.

I have always known that it is most difficult to tell the truth to "Power" and the vested interests. Once a message is released, it takes on a life of its own and it is not easy to suppress the message in the present inter-connected globalised world. That being the case, it is better to shoot the messenger. I am not saying here that I have been shot. It will take more than a bullet to get rid of me. But, you do get my point.

I do apologise for this rather long preface to the meat of this article. What I am trying to tell you is that truth will always emerge in unexpected circumstances. And as many philosophers have said, "God works in mysterious ways".

I have written many articles on the Petro-Dollar being the lynch-pin of the US Dollar fiat money system and that once trade in oil is no longer denominated in the US Dollar, the bells will toll for the demise of the US Dollar and the global fiat money system. The renowned financial analyst and author, James Rickards has written two best sellers, "The Currency Wars" and now his latest, "The Death of Money". And in his recent interview by Max Keiser, he explained that during the Cold War, the "M.A.D. Doctrine" (Mutually Assured Destruction) prevented a nuclear war between the two superpowers, the Soviet Union and the US, as if one superpower were to launch a pre-emptive first strike, there would be enough nuclear missiles remaining in the targeted superpower to retaliate with an equally devastating Second Strike.

In the last few months, we have witnessed a variation of the nuclear M.A.D. Doctrine and for which I have been warning for as long as I can remember but my ringing of the alarm bells have fell on deaf ears.

The "Financial Nuclear Weapon" (the sale of oil in a currency other than the US dollar) which was previously deployed by Saddam Hussein resulted in the total destruction of Iraq, but it failed to deter other countries pissed off with the highhandedness of the Global Policeman.

Libya made another attempt and it resulted in the destruction of the country and the brutal murder of its leader Muammar Gaddafi. Next was Iran. The US and the global financial war party found it much more difficult to isolate and annihilate Iran, even when she was threatened with outright nuclear attack by US and the rabid Israel. And in spite of unprecedented sanctions against Iran (which constitute economic warfare and are war crimes in itself), Iran stood defiant.

The leading members of BRICS (Brazil, Russia, India, China and South Africa) Russia and China restrained themselves so as to preserve global stability. However, the war party faction of the Obama regime (the leftovers of the Bush regime) took such restraint as weakness and went on a spree of regime change throughout the world to undermine the growing strength of BRICS.

The straw that broke the camels' back was the unbridled and reckless coup against the elected President of Ukraine by US and NATO and orchestrated by the US State Department and led by the war-monger Victoria Nuland. She openly admitted on CNN that the US had disbursed through such organisations as the National Endowment for Democracy (NED) over US$ 5 Billion to facilitate the coup with the support of the oil giant Chevron.

This was an unprecedented treachery as a few weeks before the bloody coup, the relevant stakeholders entered an agreement to preserve the sovereignty and territorial integrity of Ukraine brokered by Russia and endorsed by the EU. Victoria Nuland could not and would not accept the check-mate and so she launched the bloody coup giving no choice to Russia to support the self-determination of Crimea where the majority of the citizens were Russians and where Russia's Black Sea fleet was located.

The US blatantly threatened Russia in her own backyard. The rest as they say is history.

The infantile and moribund Obama regime, followed sheepishly by member countries of the EU, with Britain playing the "bellboy" declared that sanctions would be imposed on Russia, an act of extreme provocation. This unnecessary provocation was made in spite of the fact that the most brutal sanctions could not break the tenacity of the Iranians. As expected, Russia took no notice of the provocations by the US. Peeved that the bully theatrics had no effect, JP Morgan as the financial proxy stopped a money transfer from the Russian Embassy in Kazakhstan to insurance agency Sogaz. The simple message to Russia was ? "Kow-Tow to the US War Party or face financial and economic ruin". If this is a pre-emptive financial nuclear strike by the US, it is a badly calculated move. Someone in the State Department as well as CFR etc. have neglected to tell Obama (and I am being generous here as I am refraining from calling it a most stupid gambit ever) that in a poker game when the opposite side is holding all the Aces, one do not make any calls when one is holding a weak hand! The fun has now started and the world will soon see the bankruptcy of the US financial empire grounded on the Petro-Dollar.

Russia has launched a devastating counter-strike. But, the silly Obama announced that he will impose a new phase of sanctions against Russia! I will leave it to you to draw the relevant conclusions when you have finished reading the below brilliant analysis by Tyler Durden of Zero Hedge of the just declared financial nuclear war.

I quote: US Threatens Russia Over Petrodollar-Busting Deal

On the heels of Russia's potential "holy grail" gas deal with China, the news of a Russia-Iran oil "barter" deal, it appears the US is starting to get very concerned about its almighty Petrodollar

*U.S. HAS WARNED RUSSIA, IRAN AGAINST POSSIBLE OIL BARTER DEAL

*U.S. SAYS ANY SUCH DEAL WOULD TRIGGER SANCTIONS

*U.S. HAS CONVEYED CONCERNS TO IRANIAN GOVT THROUGH ALL CHANNELS

We suspect these sanctions would have more teeth than some travel bans, but, as we noted previously, it is just as likely to be another epic geopolitical debacle resulting from what was originally intended to be a demonstration of strength and instead is rapidly turning out into a terminal confirmation of weakness. As we explained earlier in the week, Russia seems perfectly happy to telegraph that it is just as willing to use barter (and "heaven forbid" gold) and shortly other "regional" currencies, as it is to use the US Dollar, hardly the intended outcome of the western blocakde, which appears to have just backfired and further impacted the untouchable status of the Petrodollar.

"If Washington can't stop this deal, it could serve as a signal to other countries that the United States won't risk major diplomatic disputes at the expense of the sanctions regime,"

And here is Voice of Russia, "Russia prepares to attack the Petrodollar": The US dollar's position as the base currency for global energy trading gives the US a number of unfair advantages. It seems that Moscow is ready to take those advantages away.

The existence of "petrodollars" is one of the pillars of America's economic might because it creates a significant external demand for American currency, allowing the US to accumulate enormous debts without defaulting. If a Japanese buyer want to buy a barrel of Saudi oil, he has to pay in dollars even if no American oil company ever touches the said barrel. Dollar has held a dominant position in global trading for such a long time that even Gazprom's natural gas contracts for Europe are priced and paid for in US dollars. Until recently, a significant part of EU-China trade had been priced in dollars.

Lately, China has led the BRICS efforts to dislodge the dollar from its position as the main global currency, but the "sanctions war" between Washington and Moscow gave an impetus to the long-awaited scheme to launch the petroruble and switch all Russian energy exports away from the US currency.

The main supporters of this plan are Sergey Glaziev, the economic aide of the Russian President and Igor Sechin, the CEO of Rosneft, the biggest Russian oil company and a close ally of Vladimir Putin. Both have been very vocal in their quest to replace the dollar with the Russian ruble. Now, several top Russian officials are pushing the plan forward.

First, it was the Minister of Economy, Alexei Ulyukaev who told Russia 24 news channel that the Russian energy companies must ditch the dollar. "They must be braver in signing contracts in rubles and the currencies of partnercountries," he said.

Then, on March 2, Andrei Kostin, the CEO of state-owned VTB bank, told the press that Gazprom, Rosneft and Rosoboronexport, state company specialized in weapon exports, can start trading in rubles. "I've spoken to Gazprom, to Rosneft and Rosoboronexport management and they don't mind switching their exports to rubles. They only need a mechanism to do that", Kostin told the attendees of the annual Russian Bank Association meeting.

Judging by the statement made at the same meeting by Valentina Matviyenko, the speaker of Russia's upper house of parliament, it is safe to assume that no resources will be spared to create such a mechanism. " Some 'hot headed' decision-makers have already forgotten that the global economic crisis of 2008 ? which is still taking its toll on the world ? started with a collapse of certain credit institutions in the US, Great Britain and other countries. This is why we believe that any hostile financial actions are a double-edged sword and even the slightest error will send the boomerang back to the aborigines," she said. It seems that Moscow has decided who will be in charge of the "boomerang". Igor Sechin, the CEO of Rosneft, has been nominated to chair the board of directors of Saint-Petersburg Commodity Exchange, a specialized commodity exchange.

In October 2013, speaking at the World Energy Congress in Korea, Sechin called for a "global mechanism to trade natural gas" and went on suggesting that " it was advisable to create an international exchange for the participating countries, where transactions could be registered with the use of regional currencies ". Now, one of the most influential leaders of the global energy trading community has the perfect instrument to make this plan a reality. A Russian commodity exchange where reference prices for Russian oil and natural gas will be set in rubles instead of dollars will be a strong blow to the petrodollar.

Rosneft has recently signed a series of big contracts for oil exports to China and is close to signing a "jumbo deal" with Indian companies. In both deals, there are no US dollars involved. Reuters reports, that Russia is close to entering a goods-for-oil swap transaction with Iran that will give Rosneft around 500,000 barrels of Iranian oil per day to sell in the global market. The White House and the russophobes in the Senate are livid and are trying to block the transaction because it opens up some very serious and nasty scenarios for the petrodollar. If Sechin decides to sell this Iranian oil for rubles, through a Russian exchange, such move will boost the chances of the "petroruble" and will hurt the petrodollar.

It can be said that the US sanctions have opened a Pandora's box of troubles for the American currency. The Russian retaliation will surely be unpleasant for Washington, but what happens if other oil producers and consumers decide to follow the example set by Russia? During the last month, China opened two centers to process yuan-denominated trade flows, one in London and one in Frankfurt. Are the Chinese preparing a similar move against the greenback? We'll soon find out.

 

[Trading Tiger]

Never heard of a petrodollar, what is it?

Can you eat it? Drink it? Shoot it out of a gun?

No???

Not worried in the least.

 

[pharout73]

There are two ways to look at currency 1) trade currency and 2) reserve currencies. The first are currencies which are used to transact business ( yuan rising / dollar falling in use as Chinese economy expands). This is totally temporary as it is really a vote on economic transactions. This is where the dollar would be hurt by less need to buy oil in dollars.

A reserve currency is one that you would hold over time and is typically traded and managed. This is often matched with holdings of debt to hedge currency risk.This is a vote of dependability / trust and this is where the US is a powerhouse, as it is a measure of what country you trust long term (cleanest dirty shirt in this case).

It is interesting that people often use trade currency trends to make the case that there is a decrease in US reserve currency demand. While, there will be some, I expect that people will trade out of other currencies to get dollars or dollar denominated assets. Would you really want to hold ruble notes ( can you say confiscation)? or yen ( demographic nightmare)? or Euro (had to tell if there will be a Euro due to economic differences)...or yuan (230% debt to GDP?)....

As for me I prefer to have a diverse portfolio of mostly dividend paying stocks / REITS / MLP's with some (10%) gold / silver holdings along with agricultural companies / timber. I like big companies that have operations worldwide as it lowers overall currency risk as some ops benefit from dollar strength and some lose. I also hold foreign dividend payers If you really are obsessed with an alternative to the dollar buy a basket of government debt from countries like Canada, England, Germany, Norway, Australia etc. and an emerging market debt fund but that is not what I do.

If you want a great book on portfolios get "The Ivy Portfolio" by Meb Faber and forget about the dollar vs. every other currency.

 

[appalachiatiger]

The number one American export is U.S. dollars.

It is paper currency that is backed up by absolutely nothing, but the rest of the world has been using it to trade with one another and so there is tremendous global demand for our dollars. The linchpin of this system is the petrodollar. For decades, if you have wanted to buy oil virtually anywhere in the world you have had to do so with U.S. dollars.

But if one of the biggest oil exporters on the planet, such as Saudi Arabia, decided to start accepting other currencies as payment for oil, the petrodollar monopoly would disintegrate very rapidly. For years, everyone assumed that nothing like that would happen any time soon, but now Saudi officials are warning of a "major shift" in relations with the United States.

In fact, the Saudis are so upset at the Obama administration that "all options" are reportedly "on the table". If it gets to the point where the Saudis decide to make a major move away from the petrodollar monopoly, it will be absolutely catastrophic for the U.S. economy.

The biggest reason why having good relations with Saudi Arabia is so important to the United States is because the petrodollar monopoly will not work without them. For decades, Washington D.C. has gone to extraordinary lengths to keep the Saudis happy. But now the Saudis are becoming increasingly frustrated that the U.S. military is not being used to fight their wars for them. The following is from a recent Daily Mail report...

Upset at President Barack Obama's policies on Iran and Syria, members of Saudi Arabia's ruling family are threatening a rift with the United States that could take the alliance between Washington and the kingdom to its lowest point in years.

Saudi Arabia's intelligence chief is vowing that the kingdom will make a 'major shift' in relations with the United States to protest perceived American inaction over Syria's civil war as well as recent U.S. overtures to Iran, a source close to Saudi policy said on Tuesday.

Prince Bandar bin Sultan told European diplomats that the United States had failed to act effectively against Syrian President Bashar al-Assad and the Israeli-Palestinian conflict, was growing closer to Tehran, and had failed to back Saudi support for Bahrain when it crushed an anti-government revolt in 2011, the source said.

Saudi Arabia desperately wants the U.S. military to intervene in the Syrian civil war on the side of the "rebels". This has not happened yet, and the Saudis are very upset about that.

Of course the Saudis could always go and fight their own war, but that is not the way that the Saudis do things.

So since the Saudis are not getting their way, they are threatening to punish the U.S. for their inaction. According to Reuters, the Saudis are saying that "all options are on the table now"...

Saudi Arabia, the world's biggest oil exporter, ploughs much of its earnings back into U.S. assets. Most of the Saudi central bank's net foreign assets of $690 billion are thought to be denominated in dollars, much of them in U.S. Treasury bonds.

"All options are on the table now, and for sure there will be some impact," the Saudi source said.

Sadly, most Americans have absolutely no idea how important all of this is. If the Saudis break the petrodollar monopoly, it would severely damage the U.S. economy. For those that do not fully understand the importance of the petrodollar, the following is a good summary of how the petrodollar works from an article by Christopher Doran...

In a nutshell, any country that wants to purchase oil from an oil producing country has to do so in U.S. dollars. This is a long standing agreement within all oil exporting nations, aka OPEC, the Organization of Petroleum Exporting Countries. The UK for example, cannot simply buy oil from Saudi Arabia by exchanging British pounds. Instead, the UK must exchange its pounds for U.S. dollars. The major exception at present is, of course, Iran.

This means that every country in the world that imports oil?which is the vast majority of the world's nations?has to have immense quantities of dollars in reserve. These dollars of course are not hidden under the proverbial national mattress. They are invested. And because they are U.S. dollars, they are invested in U.S. Treasury bills and other interest bearing securities that can be easily converted to purchase dollar-priced commodities like oil. This is what has allowed the U.S. to run up trillions of dollars of debt: the rest of the world simply buys up that debt in the form of U.S. interest bearing securities.

This arrangement works out very well for the United States because we can wildly print money and run up gigantic amounts of debt and the rest of the world gobbles it all up.

In 2012, the United States ran a trade deficit of about $540,000,000,000 with the rest of the planet. In other words, about half a trillion more dollars left the country than came into the country. These dollars represent the number one "product" that the U.S. exports. We make dollars and exchange them for the things that we need. Major exporting countries (such as Saudi Arabia) take many of those dollars and "invest" them in our debt at ultra-low interest rates. It is this system that makes our massively inflated standard of living possible.

When this system ends, the era of cheap imports and super low interest rates will be over and the "adjustment" to our standard of living will be excruciatingly painful.

And without a doubt, the day is rapidly approaching when the petrodollar monopoly will end.

Today, Russia is the number one exporter of oil in the world.

China is now the number one importer of oil in the world, and at this point they are actually importing more oil from Saudi Arabia than the United States is.

So why should Russia, China and virtually everyone else continue to be forced to use U.S. dollars to trade oil?

That is a very good question.

In fact, China has been making a whole lot of noise recently about the fact that it is time to start becoming less dependent on the U.S. dollar. The following comes from a recent CNBC article authored by Michael Pento...

Our addictions to debt and cheap money have finally caused our major international creditors to call for an end to dollar hegemony and to push for a "de-Americanized" world.

China, the largest U.S. creditor with $1.28 trillion in Treasury bonds, recently put out a commentary through the state-run Xinhua news agency stating that, "Such alarming days when the destinies of others are in the hands of a hypocritical nation have to be terminated."

But you very rarely hear anything about this on the evening news, and most Americans do not understand these things at all. The fact that the U.S. produces the de facto reserve currency of the planet is an absolutely massive advantage for us. According to John Mauldin, this advantage allows us to consume far more wealth than we actually produce...

What that means in practical terms is that the United States can purchase more with its currency than it produces and sells. In theory those accounts should balance. But the world's reserve currency, for all intent and purposes, becomes a product. The world needs dollars in order to conduct its trade. Today, if someone in Peru wants to buy something from Thailand, they first convert their local currency into US dollars and then purchase the product with those dollars. Those dollars eventually wind up at the Central Bank of Thailand, which includes them in its reserve balance. When someone in Thailand wants to purchase an imported product, their bank accesses those dollars, which may go anywhere in the world that will take the US dollar, which is to say pretty much anywhere.

And as Mauldin went on to explain in that same article, a significant amount of the money that we ship out to the rest of the globe ends up getting reinvested in U.S. government debt...

That privilege allows US citizens to purchase goods and services at prices somewhat lower than those people in the rest of the world must pay. We can produce electronic fiat dollars, and the rest of the world accepts them because they need them to in order to trade with each other. And they do so because they trust the dollar more than they do any other currency that is readily available. You can take those dollars and come to the United States and purchase all manner of goods, including real estate and stocks. Just this week a Chinese company spent $600 million to buy a building in New York City. Such transactions happen all the time.

And there is one other item those dollars are used to pay for: US Treasury bonds. We buy oil and all manner of goods with our electronic dollars, and those dollars typically end up on the reserve balance sheets of other central banks, which buy our government bonds. It's hard to quantify the exact amount, but these transactions significantly lower the cost of borrowing for the US government. On a $16 trillion debt, every basis point (1/10 of 1%) means a saving of $16 billion annually. So 5 basis points would be $80 billion a year. There are credible estimates that the savings are well in excess of $100 billion a year. Thus, as the debt grows, the savings also grow! That also means the total debt compounds at a lower rate.

Unfortunately, this system only works if the rest of the planet has faith in it, and right now the United States is systematically destroying the faith that the rest of the world has in our financial system.

One way that this is being done is by our reckless accumulation of debt. The U.S. national debt is now 37 times larger than it was 40 years ago, and we are on pace to accumulate more new debt under the 8 years of the Obama administration than we did under all of the other presidents in U.S. history combined. The rest of the world is watching this and they are beginning to wonder if we are going to be able to pay them back the money that we owe them.

Quantitative easing is another factor that is severely damaging worldwide faith in the U.S. financial system. The rest of the globe is watching as the Federal Reserve wildly prints up money and monetizes our debt. They are beginning to wonder why they should continue to loan us gobs of money at super low interest rates when we are beginning to resemble the Weimar Republic.

The long-term damage that we are doing to the "U.S. brand" far, far outweighs any short-term benefits of quantitative easing.

And as Richard Koo has brilliantly demonstrated, quantitative easing is going to cause long-term interest rates to eventually rise much higher than they normally should have.

What all of this means is that the U.S. government and the Federal Reserve are systematically destroying the financial system that has enabled us to enjoy such a high standard of living for the past several decades.

Yes, the U.S. economy is not doing well at the moment, but we haven't seen anything yet. When the monopoly of the petrodollar is broken, it is going to be absolutely devastating.

Just check out what happened in Detroit recently. The new police chief was almost carjacked while he was sitting in a clearly marked police vehicle...

Just four months on the job, Detroit's new police chief got an early taste of the city's hardscrabble streets.

While in his patrol car at an intersection on Jefferson two weeks ago, Police Chief James Craig was nearly carjacked, police spokeswoman Kelly Miner confirmed today.

Craig said he was in a marked police car with mounted lights when a man quickly tried to approach the side of his car. Craig, who became police chief in June, retold the story Monday during a program designed to crack down on carjackings.

Isn't that crazy?

These days, the criminals are not even afraid to go after the police while they are sitting in their own vehicles.

And this is just the beginning. Things are going to get much, much worse than this.

So let us hope that this period of relative stability that we are enjoying right now will last for as long as possible.

The times ahead are going to be extremely challenging, and I hope that you are getting ready for them.

 

[pharout73]

You give no solution.... You asked for advice and respond with just more " dollar collapse info". I read them too...many are alarmist and espouse a viewpoint that is risky like just buy gold and silver.

If you think wage inflation is the answer then you also believe that there is no excess capacity worldwide. The last 20 years have been built on debt and almost every nation is guilty and has created false demand. China builds vacant cities that create jobs but have no buyers. Japan prints money, the saudi's pay off their citizens for peace on and on.


Here is a good question, the American consumer debt has gone down since 2009, good thing right? We'll maybe the fact that most of it is due to mortgage debt forgiveness which is paid for by the banks and eventually everyone. We need to learn to live a simpler life.

My view is we are headed for more of the same for the at least the next 5 years.... Work hard, limit debt, save, invest only in companies that pay you back, build a gold position, own businesses that are local and necessary, if you worry about oil then buy oil produces like COP, do some disaster prep....

But live life. Worry about what you control. Just my view.

 

[appalachiatiger]

the fed is trying to push overall inflation up another 2%

i just believe the best way to do that is for employers to give yearly salary increases to at least match inflation

those that go above and beyond job duties and are more valuable should receive a slightly higher increase over inflation

those that are not performng need to be released and being in fresh blood.

if companies do that over and over they would be better off and employees would be better off

why wait around and let the govt have the answers

politicians are too afraid to vote on anissue because it might cost THEM personally- these are our leaders lol