Chapter 11: Twilight of the Petrodollar
Before World War I, the British Pound was the world’s premier currency because of the success of British entrepreneurs. British products had a big competitive advantage in export markets as the system of manufacturing they developed was more efficient than the small craft shops it was replacing. Other countries sold raw materials to Britain and Britain does the value-adding to those raw materials. Britain became “the workshop of the world”. The world wanted to buy British products but to buy them they needed British currency, so everyone wanted that currency too. British also accumulated many colonial possessions. People needed pounds for transactions that was too through bank in London which was becoming the world’s undisputed financial center. But this didn’t last long as competition in market was increasing as other countries entered the age of industry.
After World War I, Britain was in all debt and U.S.A. came out of the war with huge gold holdings due to exporting foods and other goods to countries at war. Due to this, the dollar began to emerge as reserve currency in the eyes of the world.
After World War II, Britain’s physical damage and added debt finished off the pound as an international currency. Britain reverted to being a small but prosperous country but not with the same dominance and U.S. picked up the position that Britain had lost. U.S.A took this opportunity making dollar clearly the world’s reserve currency. In 1973, a deal between the U.S.A. and Saudi Arabia pitched the dollar as the most practical currency for buying and selling crude oil. This allowed the U.S. to import the world’s oil essentially for free. Now, since everyone needed oil so everyone needed dollars. Now if you want to sell anything in an export market or to buy from another country as now dollars are gladly acceptable as the seller could use them to buy anything.
The strong value of dollar allowed Americans (petrodollar system) to import goods cheaply resulting in subsidized prices for people of U.S.A. This hammered the U.S Manufacturing industry also this system allowed the U.S to exploit the dollar’s status as the world’s reserve currency and U.S. was spending more in other countries compared to what others were spending in U.S. This arrangement however looks like very unsustainable but the petrodollar system has allowed it to go on for long that it seems normal and natural which was not, this was also making U.S low on capacity to recover from shocks. However, U.S will use any means to try to counter threat to dollar influence over other countries. This can be very well justified by U.S invasion of Iraq, as the threat came to petrodollar from Saddam Hussain who wanted to use euros instead of dollars. Similarly, the uprising in Libya where Qaddafi was murdered due to his view of using a new currency-gold dinar instead of dollar or euros by the African and Arab nations for selling crude oil.
DARTS AT THE DOLLAR
Russia and china being powerful economies and military power have encouraged the abandonment of the dollar by introducing trade facilities without using U.S currency. This was first done in 2010 when china and Russia agreed to settle certain trades in Rubel and yuan. This was followed by China and Japan where Japanese government agreed to buy 65 billion yuan worth 10 million $. Further in2013 China announced that China’s banking system was ready for any country in the world who wanted to buy or sell crude oil using yuan. Similar mechanism was established between China-Brazil, China-Australia, China- UAE, China-South Korea, China -Switzerland. Other countries are also following the lead after Russia and China.
The BRICS Nation also took a huge step in this direction to protect themselves against short-term liquidity pressures and international financial shocks however, which currency is involved is not known but they are disengaging themselves from BIS and IMF.
THE DOLLAR SHOOTS ITSELF
The U.S is aiding the DE-dollarization of the world by using sanctions asking other countries to avoid Iranian oil import to discourage Iran from developing nuclear weapons although this was broken by Putin as he suspended some elements of the sanctions. U.S however do not want military attack because Iran is not that easy as Iraq was because of his allies like Russia and Iraq’s geographical location.
However, this sanction has not impacted Iran very much because oil is highly able to be replaced once it leaves the country it is very difficult to track origin country and also the tanker carrying it. So, they are still exporting oil without being noticed.
Iran has proven that sanctions can be evaded, but at a cost as they have to insure their ships, additional freight cost, generous credit terms, costing them dollars costing 5$-8$ per barrel. Also, the sanction forced SWIFT to refuse wire transactions to and from Iranian banks but countries have found alternatives to dodge these sanctions as they cannot let their economies get effected only to get pat on the back from U.S. Countries like India is buying oil from Iran for rupees and gold also China and South Korea is doing the same.Also, countries like turkey ran oil payments through a so called golden-loop which was later banned by Obama administration. Barter is also being used by Russia and Iran, exchange of goods in place of oil worth 1.5 billion $ per month. The US government has demanded Russia to back out from these proposals saying it will take tighter action as seizing the oil vessels sent to Russia by Iran however this will push US -Russia relations past the breaking point. However, these sanctions are helping Iran to learn how to live without dollars and others are learning.
Russia after getting sanctions against them have started a project called double eagle to build a new payment system that will be alternative to SWIFT that would price oil in terms of gold and BRICS nations are looking forward to it.
THE TIDE OF COMMERCE
High economic growth of countries outside U.S, because of increase in consumerism in developing countries over the last two decades has lead to undermining the dollar’s value.
In 2009, china became the biggest trading partner of African countries mainly in energy sector making heavy investment in countries like Nigeria Angola Mozambique and Zimbabwe which also agreed to make yuan as one of their official currencies.
Also purchase of gold in huge quantities by China Russia Iraq and Brazil which is the historical choice for stability in financial turmoil has led an impact on changing business from dollar to gold.
BACK TO RIYADH
The importance of dollar depends on petrodollar system which depends on Saudi Arabia which is shifting its interest towards eastern countries. Import of oil by china from Saudi has increased 58 times in last two decades from 1.28 billion to 74 billion $. The relation between China and Saudi is growing strong day by day however they still trade in US Dollars but for how long is the question. Although Saudi Arabia is still loyal to America because of there promise to save monarchy in case of insurrection but the Obama’s administrationis being constantly viewed as clueless about the activities going on in middle east by the Saudi Arabia which has led to disappointment by Riyadh(capital of Saudi Arabia). Many Saudis also accuse U.S of betraying anti Assad rebels in Syria and also the Riyadh was angry from Obama administration when they decided not to attack Assad forces after their chemical weapon attack.
Putin on the other hand sees all the unfolding and knows that the Saudi participation in Double eagle system can help them dethrone U.S Dollar much easily.
And since China and Russia are working so closely the Chinese Saudi relationship will help Russia to get closer to Saudi.
However, everything depends on Saudi on whose side it will take if Russia presents itself as a reliable protector the Saudi’s will ditch America and Putin will make his way.
Chapter 12: Post-Petrodollar America
The last section deals with how the financial tsunami is approaching the west especially the U.S.A. the most important three factors that convince that undoing of dollar will be abrupt and disturbing. Firstly, compared to British pound which has no significant competition in those days now the economies like Russia,China poses threat as they have ability to build a dollar less system easily. Secondly computing capacity now will make it easier to leave dollar system since it is now easy for a big company to run a multiple currency accounting system. Thirdly, the volume of assets that will be avoided will be of size something never seen before as US has over abused its position of issuing world’s reserve currency
Since every country now has been catching up in modernization U.S is no longer the same as it was after the two world wars compared to others. On the other side US is still the biggest military power on the planet with its capabilities to rain death on any part of the earth, but it comes with drawbacks damaging the dollar. First is the cost they have spent on the military is too huge and second no country likes being pushed around so these things work to soften the dollar for its attackers.
The exit of US Dollar will run on two tracks dumping of US dollars and the second effects of diminished demand for dollar.Both of these will ruin U.S.A economic system. The higher rates of price inflation will run in the second stage of the process. This will not be just any financial news but will change how Americans live. Living standards of the people will decrease and imported goods will become more expensive.
ON THE FAST TRACKS
If the petrodollar fades up relatively rapidly instead of slowly fading away it will cause more and more trouble the interest rates will become very high the homeowners with adjustable rate mortgages will be crushed and stock market will become more violent as never seen before. Even if federal reserve mints new money out of thin air to help it will further depress the exchange value of dollar making imported goods even more expensive.
U.S Banks would be in trouble pushing many institutions for insolvency. The last option with the U.S government would be to default on debt held by foreigners, which will lead to panic, chaos or no word even invented to describe it.
From all this chaos the international trade will not stop but it would either switch to Rubel and yuan which are the top candidates although it is very difficult that only one currency will replace dollar as dreamt by Vladimir Putin. Another option is that gold would recover its historical role in international trade.
The government of U.S.A can still avoid this by:
• Stopping runaway government spending.
• Stop accepting invitation to help in others conflict.
• Stop allowing regulation to change development of domestic energy resources.
WHAT CAN COMMON PEOPLE DO
• Trading dollars for natural reserve currency that is gold.
• Open an account with a non – U.S Bank keeping some amount in foreign currency like Rubel or yuan.
• Don’t buy stocks of small gas, uranium which are highly volatile and bet on right people for winning big with junior.
• Also bringing Modern Technology to old fields.
Except more fightbetween west and Russia making access to energy more valuable than today. Although understanding from reality is key to make profits from Putin’s vision.