Friday, March 15, 2013

The US Petrol Dollar Will End

For over sixty years the US dollar has reigned supreme. Since the end of WWII and the creation of Bretton Woods it has been the US dollar that powers commerce. Whatever resources a country might buy in the world market they almost always are priced in dollars. This has been especially true with oil, arguably the most important commodity of the 20th & 21st century. The result is that there is an outsized demand internationally for our currency and this demand gives us extraordinary privileges. The demand for dollars increases the demand for US Treasuries, and the high demand for Treasuries has meant a lower than "natural" levels of interest rates during the last sixty years.

Just how big is foreign demand for US dollars? This from the St. Louis Fed:

 (The) U.S. currency—unique among the world's currencies—is widely held as a store of value and used as a medium of exchange outside its home country. Although some U.S. currency has flowed out of the United States since before the Second World War, outflows accelerated during the 1970s. Today, the Treasury and Board of Governors staffs estimate that nearly 60 percent of all U.S. banknotes in circulation, or close to $500 billion, is held outside the United States.

But what would happen if it all ended? What if demand for 60% of our currency disappeared?

Impossible? Not by a long shot. I've already documented how the US Fed is buying 90% of all new Treasury issuance. Part of that is to push interest rates to extraordinary lows. But part of that is a decrease in demand for US Treasuries and dollars by one of our largest trading partners: China.

China is setting up its own oil futures exchange.

The SHFE has "reached a consensus" with the State Administration of Foreign Exchange (SAFE) to have a currency quota for overseas participants, Yang Maijun, the exchange's general manager, was quoted as saying.
His comments suggest the approval of the crude oil futures contract is gathering pace and it could be launched later this year, after being delayed from 2012.
Chinese yuan cannot be freely converted. An approval from SAFE would allow crude oil investors to convert the currency freely within set limits.
The sour crude oil contract could be priced in either the yuan or the U.S. dollar, the SHFE has previously said.
The contract, when launched, will be the first commodities futures that will be open to foreign investors and comes as China is eager to exert more pricing influence on oil, for which it is the world's second-largest consumer after the United States.
SHFE officials have said the exchange will gradually open up other futures contracts, such as copper and aluminium, to foreign investors after the crude oil contract is launched.
The bourse currently offers nine futures contracts, including copper, aluminium, rubber, fuel oil, gold, rebar and zinc.

China is clearly setting up the infra structure to transition from the US petrol dollar to a Chinese petrol Yuan, along with all other resources China will need to continue its growth.

In the future, a Yuan market for physical gold will be key also, once they have bought all the gold they need to adequately back the, what I believe will be, a gold backed Yuan. Why? Because they are able to buy it now by the hundreds of tons at a price below its intrinsic value thanks to Western gold price suppression. When they are sure they have enough to credibly back their Yuan they will likely want to see gold's true value reflected in markets. The only way to do that will be a physical bullion only market where price discovery is independent from "paper gold" in the form of ETF's or bank created derivative contracts.

When that happens the game is up. The dollar will plunge and buying anything from other countries will skyrocket. And that includes the 45% of our oil.

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