Things That Make You Go Hmm… Like The Death Of The Petrodollar, And What Comes After
By Tyler Durden
Excerpted from “Get It. Got It. Good” by Grant Williams, author of “Things That Make You Go Hmm…”
The story begins in the 1970s when Henry Kissinger and Richard Nixon struck a deal with the House of Saud — a deal which gave birth to the petrodollar system.
The terms were simple The Saudis agreed to ONLY accept U.S. Dollars in return for their oil and that they would reinvest their surplus dollars into U.S. treasuries.
In return, the U.S. would provide arms and a security guarantee to the Saudis who, it has to be said, were living in a pretty rough neighbourhood. As you can see, things went swimmingly (chart below)
Saudi purchases of treasuries grew along with the oil price and everyone was happy. (We’ll come back to that blue box on the right shortly)
The inverse correlation between the dollar and crude is just about as perfect as one could expect (until recently that is… but again, we’ll be back to that).
And, as you can see here, beginning when Nixon slammed the gold window shut on French fingers and picking up speed once the petrodollar system was ensconced, foreign buyers of U.S. debt grew exponentially.
Having the world’s most vital commodity exclusively priced in U.S. dollars meant everybody needed to hold large dollar reserves to pay for it and that meant a yuuuge bid for treasuries. It’s good to be the king.
By 2015, as the chart on the next page shows quite clearly, there were treasuries to the value of around 6 years of total global oil supply in the hands of foreigners (if we assume a constant 97 million bpd supply which I think is a pretty reasonable estimate).
Now… with that brief background on the petrodollar system, here’s where I need you to stick with me. I promise you it’ll be worth the mental effort
Ready? Here we go.
Now, back in 2010, then-World Bank President Robert Zoellick caused something of a commotion when he suggested that an entirely new global monetary system maybe wasn’t such a bad idea.
The system he had in mind involved a freely-convertible Yuan and, controversially was constructed around gold as its central reference point:
(Robert Zoellick, November 8, 2010): …the G20 should complement this growth recovery programme with a plan to build a co-operative monetary system that reflects emerging economic conditions. This new system is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves towards internationalisation and then an open capital account.
The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.
In seemingly unrelated news, two years later, Iran began accepting Yuan in payment for its oil amid US sanctions. The transactions were conducted through Russian banks:
(Financial Times, May 2012): Iran is accepting renminbi …read more
Source: Things That Make You Go Hmm… Like The Death Of The Petrodollar, And What Comes After
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