Beneath the Surface
De-Dollarization Update: Saudis Cancel the Petrodollar
June 17, 2024 • 6 minute, 52 second read
“Who controls the food supply controls the people; who controls the energy can control whole continents; who controls money can control the world.”
– Henry Kissinger
[Special Reminder: In case you missed our recent announcement, The Essential Investor has merged with legacy contributors to Agora Financial. The new, larger, more inclusive project is called The Grey Swan Investment Fraternity. If you’re interested in the scope and benefits of our new endeavor, please see what prompted us to merge here. If you’ve been a member of The Essential Investor, please keep an eye out for your new benefits.]
June 17, 2024 – Today, John Rubino takes a look at news that came just as we were gathering for a Grey Swan meeting of the minds on Friday.
The House of Saud has declared, more or less, they don’t care which currency they price their oil in.
The announcement could be devastating… and could serve as a catalyst for any number of Grey Swan events… as we’ve clearly laid out here.
While, it’s not the immediate ‘death of the dollar’, which so many will dismiss as “gloom and doom.” But it does signal the continued erosion of confidence, globally, in the currency most Americans earn, spend, save and plan in. Enjoy ~~ Addison
De-Dollarization Update: Saudis Cancel the Petrodollar
John Rubino, John Rubino’s Substack
Over the past couple of decades, the US has invaded and/or destabilized multiple countries — including Iraq, Libya, and Syria — for accepting currencies other than the dollar for oil. That’s how big a deal the petrodollar was for the Empire.
But now it’s over.
Kitco News reports that he established financial world order of the past 50 years is now transitioning to a new and unknown paradigm.
That’s because the so-called petrodollar agreement between the U.S. and Saudi Arabia was allowed to expire last week.
The term ‘petrodollar’ simply means the U.S. dollar serves as the worlds’ currency for crude all oil transactions on the world market.
It traces back to the early 1970s. That’s when the United States and Saudi Arabia struck a deal after the U.S. left the gold standard. The agreement has had far-reaching consequences for the global economy.
The petrodollar agreement came about following the 1973 oil crisis. It stipulated that Saudi Arabia would price its oil exports exclusively in U.S. dollars.
Plus, Saudi Arabia agreed to invest its surplus oil revenues in U.S. Treasury bonds. In exchange, the U.S. provided military support and protection to the kingdom.
This helped the USD cement its position as the world’s reserve currency. It also ushered in an era of prosperity for Americans.
Why? They enjoyed the benefits of being the preferred market for global corporations to sell their wares. Additionally, the inflow of foreign capital into U.S. Treasury bonds has supported low interest rates. It’s helped make the U.S. Treasury considered the only global “risk-free” asset.
All that is set to change now as Saudi Arabia is looking to move beyond a dollar-based trading and investment policy.
That’s evidenced by the kingdom becoming one of the newest members of the BRICS bloc. This bloc is working on its own potential currency, although details are still scant.
Long-Term Impact
Is this the end of the US dollar? Absolutely not.
Huge amounts of debt around the world are denominated in dollars, which means borrowers have to acquire dollars to pay the interest. And the US capital markets are the world’s deepest and most liquid, which will make the dollar an important trading currency and reserve asset for the foreseeable future.
But the end of the petrodollar does open the field for competing currencies, and the BRICS countries are already signing bi-lateral trade deals that completely bypass the dollar. This trend will gain momentum going forward.
So…four questions:
- What happens to the trillions of dollars that now reside in corporate and central bank accounts that may not be needed in the future? Do they pour back into the US as holders convert them into American real estate and financial assets? Is this inflationary? In other words, does it cause the value of the dollar to decline?
- Can the US government continue to run massive trade and budget surpluses if fewer foreign entities are willing to buy Treasury paper? Will Washington be faced with a choice of cutting spending (with the collapsing growth and civil unrest that “austerity” brings to overindebted systems) or having the Fed monetize everything and hope that the resulting inflation is manageable?
- Will the US start lashing out at trading partners who de-dollarize too enthusiastically, causing other countries to accelerate their own transitions?
- Will Europe be collateral damage as its banks and real estate companies are caught in the middle of a US-BRICS battle for financial supremacy?
The answer to all of the above is probably “yes”, and the result won’t be pretty for anyone but gold bugs.
More De-Dollarization Developments
There’s a lot more going on out there.
Kitco also reports that over 100 tonnes of gold have been moved from the United Kingdom to the Reserve Bank of India’s (RBI) vaults.
That marks one of the most ambitious transfers of gold ever seen. What’s more, the amount could double, according to the Times of India.
Over half of the RBI’s gold reserves were being held with the Bank of England (BoE) and the Bank of International Settlements (BIS) overseas.
Now, it’s clear that the Indian government has begun the process of repatriating the country’s bullion holdings. That’s similar to Germany moving its gold reserves from the Federal Reserve Bank’s vault in New York throughout the 2010s.
As of March 31, 2024, the RBI’s gold reserves were listed at 822.1 tonnes, up from 794.63 tonnes in March of 2023. Of that, 413.8 tonnes of l was held overseas.
Finally, Russia continues down the path of de-dollarization, following news of a new round of US sanctions last week.
Do the new US sanctions mark Russia’s final divorce from the dollar?
As RT reports, the endless parade of Western sanctions on Russia barely makes the news anymore.
But last week, the US Treasury did, in what may be the most ambitious package since the initial round of sanctions back in February 2022, expand the scope for applying penalties on foreign financial institutions found working with restricted Russian entities.
Plus, it placed the Moscow Exchange and its clearing house under blocking sanctions, among other measures.
The exchange subsequently announced that it was suspending all settlements in dollars and euros. It’s the latter that is the most interesting and has elicited the most chatter.
~~ John Rubino, John Rubino’s Substack
| A new event is unfolding that’s about to blindside most Americans. It will upend the financial order of the past 50 years. And it will be the ultimate October surprise that could even reshape politics as we know it… |
Worthy of note: The Western media has gone all in. The Russian stock exchange’s move to end dollar and Euro trading is being perceived as an attempt to avoid a mass exodus out of the ruble… rather than “Putin’s Gambit” – a further push to de-dollarize the global banking system.
Biden’s 10-year security agreement with Ukraine, signed Friday at the G7 summit in Apulia, Italy, also comes replete with a Gang of Seven-backed $50 billion loan, er, guaranteed with interest on seized Russian assets…
“The world appears to be picking sides for World War III,” was just one comment overheard at a Grey Swan meeting of the minds on Friday.
Got gold?
So it goes,
Addison Wiggin
Founder, The Wiggin Sessions
P.S.: How did we get here? An alternative view of the financial, economic, and political history of the United States from Demise of the Dollar through Financial Reckoning Day and on to Empire of Debt — all three books are available in their third post-pandemic editions.
(Or… simply pre-order Empire of Debt: We Came, We Saw, We Borrowed, now available at Amazon and Barnes & Noble or if you prefer one of these sites:Bookshop.org; Books-A-Million; or Target.)
Please send your comments, reactions, opprobrium, vitriol and praise to: addison@greyswanfraternity.com
