THE END OF THE PETRODOLLAR SYSTEM

Gordon T Long

Global Macro Research | Macro-Technical Analysis

TIPPING POINTS

US DOLLAR

THE MEDIA IGNORES THE COLLAPSE OF THE PETRODOLLAR?

The WSJ is reporting that “Saudi Arabia is in active talks with Beijing to price some of its oil sales to China in yuan,” a move that would cripple the petrodollar’s dominance of the global petroleum market. It would additionally mark a major geopolitical shift by the world’s top crude exporter toward Asia.

Though the report received little coverage it must be fully understood to be a move aimed squarely at the heart of the US financial system and the US status as the global reserve currency. The US has taken advantage of the dollar’s reserve status by printing as many dollars as needed to fund out of control government deficit spending for the past decade. Let me explain

why this is profoundly important!

WHY IS THIS IMPORTANT!

- The Petrodollar has allowed the US Consumer to consume more than it produced since its inception in the 1970’s.
- The Petrodollar has allowed the financing of the massive US Twin Deficits.
- The Petrodollar has aided in keeping Interest rates in the US low, thereby facilitating it becoming a 70% dependent Consumption economy.
- The Petrodollar has allowed the US to export Inflation rather than be controlled by it.
- The Petrodollar has allowed the US to enjoy what President General Charles DeGaule referred to as “Exorbitant Privilege”.

The Petrodollar as a consequence has become the Achilles Heel of America.

China, Russia, the BRIICS and US enemies know this!

Dollars as a consequence will now begin returning to the US as claims as the US Dollar note is an IOU. This will result in more dollars chasing the same amount of US Goods. This will be highly Inflationary.

THE QUESTION: Who is going to Buy the US Debt?

To answer that question we need to understand the basis of the Petrodollar.

WHAT IS THE PETRODOLLAR?

The Petrodollar is a term used to describe the fact that oil bought and sold anywhere in the world was to be conducted in US Dollars based on an agreement reached in the 1970’s between Saudi Arabia and the US.

What Was the Commitment?

1. All Oil in the world sold in US dollars.
2. Dollars from Oil sales would be primarily steered back into US Treasury debt as sovereign FX Reserve holdings.
3. The US would supply Military support and security to the King of Saudi Arabia.
4. This understanding was extended to other OPEC nations that followed similar rules.

Why Was it Needed?

1. It was needed to control energy inflation in the US which was the center of High Inflation and Stagflation in the 1970’s.
2. It was needed to ensure that growing US debt was financed.
3. It was needed to keep interest rates manageable in a growing and increasingly consumption lead US economy.

IT HAS ALLOWED THE US TO INCREASINGLY

CONSUME MORE THAN IT CONSUMES FOR THE LAST 5 DECADES

WHO WILL NOW BUY THE US DEBT?

Foreign investment can no longer be counted on to finance the US Debt and its other obligations (unfunded liabilities and contingent liabilities).

Foreign Holdings of US Treasury Debt has fallen significantly as a percentage of US Treasury Debt since the 2008 Financial Crisis..

Foreign Official Capital Inflows have also fallen since the 2008 Financial Crisis (blue at bottom below). Meanwhile US Budget Spending has increased.

Foreigners are not only not buying US Debt, many in fact are selling it! They are selling it for various reasons. Russia as an example has completely sold all US Treasuries because of ongoing sanctions and the threat of sanctions. Other countries are in similar situations, as the US has weaponized the dollar as a tool of US Foreign Policy. Others are selling because they are increasingly transacting trade between other countries through trade agreements using their own currencies, the Euro or the Yuan.

DEBT MONETIZATION

The primary buyer of US Debt for nearly a decade has been the US Federal Reserve. In other words we are buying our own debt by creating “money” to buy it through various versions of Quantitative Easing (QE). Though it is argued this is not debt monetization, since the government has actually never sold the debt after years of holding it, in reality that is what is happening. This can only lead to one thing – a devaluation of the US dollar at some point.

A MAJOR DEVALUATION OF THE US DOLLAR LIES AHEAD

IT’S ACTUALLY MUCH WORSE THAN WE THINK

How much debt must the US finance in the way of shorter roll-overs and new issuance? It is much more than the ~$30T reported. Soon the unfunded liabilities of Social Security and Medicare will require funding. Additionally loan guarantees as “contingent liabilities” could come due as a result of Geo-Political events and consequences.

$30T = US DEBT
$84T = US DEBT INCLUDING ENTITLEMENTS (Unfunded Balances but current payments held in US Treasuries)
$212T = FISCAL GAP which includes “Contingent Liabilities” which the US has financial guarantees out for other nations debts

THE CLINTON “SLIGHT OF HAND MIRACLE” THAT SOON WILL ABRUPTLY BEGIN COMING DUE

The Clinton Miracle shown below was a result of changing the accounting of Social Security and Medicare payments (became revenue) and accrued costs (became off balance sheet unfunded liabilities) as Clinton took the US to a “Paygo” System. The liabilities didn’t go away!

US TWIN DEFICIT & CURRENT ACCOUNT PROBLEMS

The US Dollar tracks closely the US Twin Deficits (Trade and Fiscal Deficits) and US Current Account trends over the longer term.

All three are in serious decline with the US dollar as yet not “catching down” to them.

At some point the “gap” will be closed …. and likely violently!

FUTURE OF FIAT CURRENCIES

Pressures mount on Fiat Currencies around the world as we transition from Fiscal Abuse to Lost Confidence in them as sustainable “stores of value”.

CONCLUSION

We just had one of the most significant announcements impacting the US Dollar in decades with the collapse of the Petrodollar, and yet at the same time I have never seen the dollar close at exactly the same price (to the penny) for three days in a row: Monday $98.88, Tuesday $98.88, Wednesday $98.88?

Also, there was not a single question on it at the FOMC presser where questions were clearly submitted in advance, which then Chairman Powell had notes to answer the approved questions. He actually flipped the pages of his podium binder to a selected page to answer the pre-screened questioners’ question.

Clearly in our estimation (we have witnessed this before – after the fact), the Federal Reserve has authorized the unlimited issuing of Dollar Currency Swaps to any global central bank to stabilize the potential fallout of the PetroDollar Collapse. It is in the best interest of any Central Bank holding US$ FX reserves to protect their value (until they can get out of them). The price was set for the SWAPS at $98.88. Yesterday’s FOMC Presser was a staged cover.

There can also be little doubt that the PPT was also involved in the strange supporting market movements before, during and after Powell’s Presser. (edited)

This was “controlled public narrative”.

It is how the US government now acts!

A US RECESSION COMETH

All of the above along with an ineffective political response to the Ukraine conflict will push the US into a Recession in 2023 or earlier.

DURING THE LOOMING NEXT RECESSION RUSSIA, CHINA and BRIICs will likely make their next push for a New World Order.

Not every recession is led by a 50% rise in crude.

But every 50% rise in crude has led a recession.

Jim Bianco biancoresearch.eth

@biancoresearch

Yield Curve is now Flat and Nearing Inversion

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