Russia dumping U.S. Treasuries in reaction to U.S. sanctions? Or has it already happened? The dawn of PetroGold replacing the PetroUSdollar?
Reading about the Petrodollar is incredibly disturbing to someone like me, who already manages to be incredibly disturbed about presidential executive orders, the unjust Department of Justice, broken borders and corrupt members of Congress. The Petrodollar forces one to understand that not much else matters to a U.S. citizen but understanding our failed monetary policy. After many decades of rendering the US dollar worthless, other than its stature as the world’s oil and gas currency, much of the world is ready to pounce. Bringing down the U.S.A. goes far beyond Islamic terrorists. Today, we are a weak and financially devastated country. The Petrodollar is vulnerable. We can’t change it with the current administration, and probably not with a new administration no matter which party wins — but we should be thinking of the few candidates we might believe bold enough to turn the world view of the U.S. around through strength of policy. Unless and until then, we can’t protect ourselves from it. The lesson: foreign policy matters. If you have avoided learning about the Petrodollar — victim of the ‘eyes glazed over’ syndrome, the following may be a quick primer.
Jim Sinclair argues that Russia has a much scarier financial attack which Russia can use against the U.S.
Specifically, Sinclair says that if Russia accepts payment for oil and gas in any currency other than the dollar – whether it’s gold, the Euro, the Ruble, the Rupee, or anything else – then the U.S. petrodollar system will collapse:
Indeed, one of the main pillars for U.S. power is the petrodollar, and the U.S. is desperate for the dollar to maintain reserve status. Some wise commentators have argued that recent U.S. wars have really been about keeping the rest of the world on the petrodollar standard.
The theory is that – after Nixon took the U.S. off the gold standard, which had made the dollar the world’s reserve currency – America salvaged that role by adopting the petrodollar. Specifically, the U.S. and Saudi Arabia agreed that all oil and gas would be priced in dollars, so the rest of the world had to use dollars for most transactions.
But Reuters notes that Russia may be mere months away from signing a bilateral trade deal with China, where China would buy huge quantities of Russian oil and gas…
In any event, a switch to pricing petroleum in anything other than dollars exclusively – whether a single alternative currency, gold, or even a mix of currencies or commodities – would spell the end of the dollar as the world’s reserve currency. [Zerohedge says Russia has already dumped U.S. Treasuries – read more here]
How the US Petrodollar works:
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.
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. Read the answer here.
Today’s Russia is not governed by an alcohol addict named Jeltsin. Putin, with his roots in the KGB, clearly does not feel any intimidation by the US cabal. By contrast, his answer to the US warnings goes straight to the Achilles heel of the US: the US Dollar based global oil system, also known as “Petrodollar.”…
Indeed, no country is immune to the global currency war. It is a farce to say there is no currency war, like Goldman Sachs want us to believe (see here) or our political leaders as represented in the G20 (see here).
Russia, just like China, has been piling up their gold reserves for several years now. They really did so for a reason. As the following chart shows, Russia has been positioning itself for the nasty effects of the currency war which has been in the making for several years now. That’s in sharp contrast with countries like the US who have shown a preference for unlimited easy money.
How this will end, nodoby knows. What seems to be proven once again, is that gold equals strength. The petrodollar system is based on one, and only one, thing: trust. As soon as trust fades, the whole system collapses. That is the unspoken Achilles heel of the US. Unexpectedly, Russia is now in the position to touch this Achilles heel. Is this the trigger that will lead to a collapse of trust in the US dollar, as predicted for a long time by people like Jim Rickards and Peter Schiff?
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 or in 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.
“The shift away from the U.S. is a major one,” the source said. “Saudi doesn’t want to find itself any longer in a situation where it is dependent.”
US Trying to Cut Off Iran’s Access to Gold:
The US is moving to broaden its ‘blockade’ efforts of Iran to the movement of pure gold into the Islamic Republic. The US-led embargo of Iranian crude succeeded in slowing the flow of petrodollars into the nation but as Foreign Affairs committee chairman Edward Cohen remarked, there is “no question that there is gold going from Turkey to Iran.” While the official line from US elite such as Bernanke remains that ‘gold is not money’ it appears that increasingly other nations would disagree, as Cohen admitted, “in large measure what we’re seeing is private Iranian citizens buying gold as a protection against the falling value of Iran’s currency.” It would seem somewhat self-evident that the US is admitting, by attempting to embargo this gold flow, that outside the US, the Dollar is becoming increasingly irrelevant (see China’s gold demand); and that for many countries the petrodollar no longer exists, having been replaced by ‘Petrogold’.
In early 2014 the U.S. lifted the above mentioned sanctions on Iran.
In the early 1970s, the final vestiges of the international gold-backed dollar standard , known as the Bretton Woods arrangement, had collapsed. Many foreign nations, who had previously agreed to a gold-backed dollar as the global reserve currency, were now having serious mixed feelings toward the arrangement. Nations like Britain, France, and Germany determined that a cash-strapped and debt-crazed United States was in no financial shape to be leading the global economy. They were just a few of the many nations who began demanding gold in exchange for their dollars.
Despite pressure from foreign nations to protect the dollar’s value by reining in excessive government spending, Washington displayed little fiscal constraint and continued to live far beyond its means. It had become obvious to all that America lacked the basic fiscal discipline which could prevent a destruction of its own currency. Source
Why are nations willing for their currencies to be dependent upon the U.S. Dollar?
The answer is quite simple.
The U.S. Dollar would be pegged at a fixed rate to gold. This made the U.S. dollar completely convertible into gold at a fixed rate of $35 per ounce within the global economic community. This international convertibility into gold allayed concerns about the fixed rate regime and created a sense of financial security among nations in pegging their currency’s value to the dollar. After all, the Bretton Woods arrangement provided an escape hatch: if a particular nation no longer felt comfortable with the dollar, they could easily convert their dollars holdings into gold. This arrangement helped restore a much needed stability in the financial system. But it also accomplished one other very important thing. The Bretton Woods agreement instantly created a strong global demand for U.S. dollars as the preferred medium of exchange.
And along with this growing demand for U.S. Dollars came the need for… a larger supply of dollars.
Now, before we continue this discussion, stop for a moment and ask yourself this question: Are there any obvious benefits from creating more dollars? And if so, who benefits?
First, the creation of more dollars allows for the inflation of asset prices. In other words, more dollars in existence allows for a rise in overall prices…
The United States government benefits from a global demand for U.S. dollars. How? Because a global demand for dollars gives the Federal government a “permission slip” to print more. After all, we can’t let our global friends down, can we? If they “need” dollars, then let’s print some more dollars for them…
Raising taxes and and making meaningful spending cuts can be political suicide. Borrowing money is a politically convenient option but you can only borrow so much. That leaves the final option of printing money. Printing money requires no immediate sacrifice and no spending cuts. It’s a perfect solution for a growing country that wants to avoid making any sacrifices. However, printing more money than is needed can lead to inflation. Therefore, if a country can somehow generate a global demand for its currency, it has a “permission slip” to print more money. Understanding this “permission slip” concept will be important as we continue.
Finally, the primary beneficiary of an increased global demand for the U.S. Dollar is America’s central bank, the Federal Reserve. If this does not make immediate sense, then pull out a dollar bill from your wallet or purse and notice whose name is plastered right on the top of it.
Have you ever asked yourself why the U.S. Dollar is called a Federal Reserve Note?
Once again, the answer is simple.
The U.S. Dollar is issued and loaned to the United States government by the Federal Reserve.
Because our dollars are loaned to our government by the Federal Reserve, which is a private central banking cartel, the dollars must be paid back. And not only must the dollars be paid back to the Federal Reserve. They must be paid back with interest!
And who sets the interest rate targets on the loaned dollars? The Federal Reserve, of course.
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