11 International Agreements that spell the end of the petrodollar systemSubmitted by Ian56 on Wed, 07/18/2012 - 11:42
#1 China And Russia
China and Russia have decided to start using their own currencies when trading with each other. The following is from a China Daily article about this important agreement....
#2 China And Brazil
Did you know that Brazil conducts more trade with China than with anyone else?
The largest economy in South America has just agreed to a huge currency swap deal with the largest economy in Asia. The following is from a recent BBC article....
#3 China And Australia
Did you know that Australia conducts more trade with China than with anyone else?
Australia also recently agreed to a huge currency swap deal with China. The following is from a recent Financial Express article....
So what does all of this mean?
It means that the days of the U.S. dollar being the de facto reserve currency of the world are numbered.
So why is this important?
In a previous article, I quoted an outstanding article by Marin Katusa that detailed many of the important benefits that the petrodollar system has had for the U.S. economy....
The "petrodollar" system was a brilliant political and economic move. It forced the world's oil money to flow through the US Federal Reserve, creating ever-growing international demand for both US dollars and US debt, while essentially letting the US pretty much own the world's oil for free, since oil's value is denominated in a currency that America controls and prints. The petrodollar system spread beyond oil: the majority of international trade is done in US dollars. That means that from Russia to China, Brazil to South Korea, every country aims to maximize the US-dollar surplus garnered from its export trade to buy oil.
The US has reaped many rewards. As oil usage increased in the 1980s, demand for the US dollar rose with it, lifting the US economy to new heights. But even without economic success at home the US dollar would have soared, because the petrodollar system created consistent international demand for US dollars, which in turn gained in value. A strong US dollar allowed Americans to buy imported goods at a massive discount – the petrodollar system essentially creating a subsidy for US consumers at the expense of the rest of the world. Here, finally, the US hit on a downside: The availability of cheap imports hit the US manufacturing industry hard, and the disappearance of manufacturing jobs remains one of the biggest challenges in resurrecting the US economy today.
So what happens when the petrodollar dies?
The following are some of the things we are likely to see....
-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.
And that is just for starters.