China, Russia, and the End of the Petrodollar

[Christians4LessGvt]

China, Russia, and the End of the Petrodollar

By John Rubino - 10/09/2012
 
Say you're an up-and-coming superpower wannabe with dreams of dominating your neighbors and intimidating everyone else. Your ambition is understandable; rising nations always join the"great game", both for their own enrichment and in defense against other big players.

But if you're Russia or China, there's something in your way: The old superpower, the US, has the world?s reserve currency, which allows it to run an untouchable military empire basically for free, simply by creating otherwise-worthless pieces of paper and/or their electronic equivalent. Russia and China can't do that, and would see their currencies and by extension their economies collapse if they tried.

So before they can boot the US military out of Asia and Eastern Europe, they have to strip the dollar of its dominant role in world trade, especially of Middle Eastern oil. And that's exactly what they're trying to do.

China And Russia Are Ruthlessly Cutting The Legs Out From Under The U.S. Dollar

China and Russia are not the "buddies" of the United States.  The truth is that they are both ruthless competitors of the United States and leaders from both nations have been calling for a new global currency for years.

They don't like that the United States has a built-in advantage of having the reserve currency of the world, and over the past several years both countries have been busy making international agreements that seek to chip away at that advantage.

Just the other day, China and Germany agreed to start conducting an increasing amount of trade with each other in their own currencies.

You would think that a major currency agreement between the 2nd and 4th largest economies on the face of the planet would make headlines all over the United States.

Instead, the silence in the U.S. media was deafening.

However, the truth is that both Russia and China have been making deals like this all over the globe in recent years.  I detailed 11 more major agreements like the one that China and Germany just made in this article: "11 International Agreements That Are Nails In The Coffin Of The Petrodollar".

A few of the things that will likely happen when the petrodollar dies:

-Oil will cost a lot more.

-Everything will cost a lot more.

-There will be a lot less foreign demand for U.S. government debt.

-Interest rates on U.S. government debt will rise.

-Interest rates on just about everything in the U.S. economy will rise.

So enjoy going to "the dollar store" while you can.

It will turn into the "five and ten dollar store" soon enough.

Some Thoughts

Snyder goes on to note that both China and Russia are accumulating gold, which will protect them from the coming currency crisis and give the ruble and yuan greater legitimacy in global trade. In Jim Rickards' book Currency Wars, he tells the story of financial war games conducted by the US military, in which one of the scenarios was a Russian gold backed currency that challenged the dollar. We're apparently not far from that plan becoming feasible.

The US spends a big chunk of its $700 billion a year defense budget on dominating the Middle East in order to force the trading of oil in dollars. Let that trade be diversified into several currencies and the demand for petrodollars goes way down. Central banks and global corporations will sell part of their dollar holdings, sending the dollar's exchange rate into a tailspin. This in turn will make it harder for the US to finance its military empire/welfare state.

The net result: America becomes Spain, no longer able to simply whip out the monetary credit card to cover its overspending. We'll have to live within our means, cutting maybe $3 trillion a year in government largesse (including the growth in unfunded entitlements liabilities).

Cuts on this scale can't be accomplished smoothly, as Europe is discovering. So in this scenario the coming decade will be even messier than the last one, with "Occupy" movements shutting down cities and every election producing incumbent massacres. A combination of higher prices for necessities and lower wages will demote much of the middle class to "working poor."

Meanwhile, China and Russia will reap the rewards of stronger currencies, and will divide (or share) control over their part of the world. It's hard to know who to feel sorrier for, Americans who thought they could depend on government programs for a middle class lifestyle, or the neighbors of China and Russia who will see the relatively light hand of the American empire replaced with something far more atavistic.

http://www.financialsense.com/contributors/john-rubino/china-russia-end-petrodollar

[Xavier_Onassis]

The Chinese are net importers of oil and have LOTS of dollars. It is doubtful that they would want those dollars to be worth LESS. Also, note that the US has been constantly griping that the Chinese Yuan is overvalued and worth MORE in dollars than the stuff they sell us.

There are really only three positions:

1. The exchange rate between the dollar and the yuan is equitable and as it should be.
2. The exchange rate between the dollar and the yuan is unfair and should be changed so one gets more yuan to the dollar.
3. The exchange rate between the dollar and the yuan is unfair and should be changed so one gets more dollars to the yuan.

The Mitt Twit favors option two, which means that Chinese exports would cost MORE. It also seems to be what the author of this article opposes.  The result would be that the Chinese would get more oil for their yuans, and that the Wal*Mart customer would pay more for all the Chinese merchandise than before.  But the Chinese have an abundance of dollars, and the oil producers do not really want yuans, because fewer people will accept yuans in payment.

If the Russians are "ruthless competitors" of the US, why is it that no matter where I go in the world, I never, ever see a Russian product? At present, I own only three Russian-made items: one necktie I got from a catalog store in the 1990's and a green t-shirt that says "Made in Russia" on the label, and a poorly made Pepsi-Cola T-shirt that tells the world in Russian letters that St. Petersburg loves Pepsi. The latter I found in yard sales.

What is it that the Russians ruthlessly compete with the US on? I have seen cheap small tractors at Northern Hydraulic before, but they were from Belarus.

I really, really doubt that the US will have the minimal clot that Spain does. Of course, Spain uses Euros. Spain has no exchange problems that the other Euro countries do not share.

This is yet another gloom and doom story that seems to raise more questions than it answers.

Our major oil vendors are Mexico, Canada and Venezuela. I really doubt that we will reach a time in which they will refuse US dollars.

[Plane]

  I can imagine the Euro taking over the Dollars position as the main exchange currency for oil.

  I don't think this would be bad for Russia, they have plenty of business in Europe and no problem exchanging .

  As long as Russia sells a lot of fossil fuel to Europe that exchange will be in the currency of their choice.

  But then neither Russia nor Europe will have the ability to determine the relitive worth of the Euro , this is a power distributed
across all potential acceptors of """"Euro""" as payment.

     Dollars are still popular , but how much a Dollar is worth depends a lot on how many dollars it takes to buy a barrell of oil, this poses a quandry to an oil seller that wants lots of dollars , vs an oil seller that already has a lot of dollars.

[Xavier_Onassis]

I see no problem with the Russians and Europeans using Euros to purchase Russian gas and oil. It would seem the natural, logical thing to do.

The thing about the original post is that it seems to claim that the upwards revaluation of the yuan, presented as a GOOD thing by the right wingers and even some others, is presented as a BAD thing in the purchase of oil.

That just does not make sense.

[Plane]

I see no problem with the Russians and Europeans using Euros to purchase Russian gas and oil. It would seem the natural, logical thing to do.

The thing about the original post is that it seems to claim that the upwards revaluation of the yuan, presented as a GOOD thing by the right wingers and even some others, is presented as a BAD thing in the purchase of oil.

That just does not make sense.

I guess I agree with you in this case, that article was unessacerily alarmist, and skewed by a misunderstanding of the Dollar.

But , lots of things gring good in one hand and bad in the other.

[Xavier_Onassis]

Romney claims that he is going to created jobs by "cracking down on China". I really do not see how this would work. If the Chinese sell their products at a highers price here, then some Americans will have to spend more on the products they buy. That would mean a reduction in disposable income, and that, in turn would tend to shrink the US economy.

When I go to shopping, I see a man's shirt Made in China, $14.99 at the Wal*Mart, a largely indistinguishable man's shirt at Bloomingdale's in Aventura Mall, priced $59.99, but "on sale" at $39.99, also Made In China, and if I go to the cheapo "wholesale" shops on 20th St., I see mostly identical men's shirts on sale at $9.99. My experience has been that the buttons are lore likely to come off of these shirts, and they could be factory seconds with minute defects. It is always a good idea to examine all the cheapest items carefully, but some are just as useful and well made as the most expensive models.

If the US actually did manage to get the Chinese to raise prices, I predict that all these shirts would simply be made in Vietnam, Malaysia, Indonesia, Bangladesh or Pakistan. I fail to see how this could possibly add manufacturing jobs.

Romney's "crack down on China" remark therefore seems to me to be an appeal to racists who dislike foreigners in general and Chinese in particular. I have noticed than many people buy stuff and are unaware of where it was made until they get it home, if at all.