“I can’t imagine anything more disastrous to our country than if the dollar lost its reserve-currency status.”
– Sam Zell
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June 18, 2024 – Today, we continue our look at the U.S. dollar.
The “end” of the petrodollar, which prices oil in U.S. dollars globally, is upon us. While that may not mean much, it’s part of a gradual de-dollarization trend.
An alert reader notes that there was no actual 50-year petrodollar agreement. Author David Wright has apparently meticulously sifted the archives and cannot find one.
That said, there has been an implied one that encouraged international payments to be priced in dollars because it was more efficient given the Bretton Woods exchange rate system had already cemented the dollar as the world’s reserve currency.
The 1974 agreement which gets referred to as the petrodollar agreement, was, in fact, a security deal between the U.S. and Saudi Arabia. The U.S. agreed to large-scale sales of technological weapons for defense — think F-16s and the rock band the Clash — and became a stalwart ally in the Middle East during a period of rising Arab nationalism. In exchange, Saudi Arabia agreed to invest its oil profits in U.S. treasuries.
At its height in the 1980s, Saudi Arabian treasuries peaked at nearly 30% of all U.S. debt held as a store of wealth by foreign nations. You may recall, the 1980s was the decade in which U.S. debt began to skyrocket.
Since then, the United States’ national debt has been, well, exploding. The official figure for the Saudi holdings in Treasurys is $136 billion, which now accounts for less than 1% of the $35 trillion Uncle Sam, the beggar, owes to the rest of the world … and U.S. investors like you and me.
History shows that we end the dominance of a world reserve currency not with a bang, but with a series of slow moves.
The end of the “petrodollar” is signified in this case, by Saudi Arabia joining mBridge, the cross-border central bank digital currency project involving the central banks of China, Hong Kong, Thailand and the U.A.E.
For now, mBridge does not plan to support dollar payments.
The dollar’s status as world currency is death via a thousand cuts. Fittingly, perhaps, that descriptive phrase joined the English language by way of metaphor regarding an Imperial Chinese torture method.
In psychology today, “death by a thousand cuts,” has come to be defined as “a major negative change which happens slowly in many unnoticed increments not perceived to be objectionable.”
Our friends at Casey Research examine a few of swipes of the razor, below. Enjoy ~~ Addison
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Dollar’s Reign May Not Last Much Longer (If History Is Any Guide)
Lau Vegys, Doug Casey’s Crisis Investing
Today’s chart ties into the de-dollarization trend we’ve been talking about a lot lately in these pages.
When most people around the world think about money, they’re probably thinking of the U.S. Dollar. That’s because the greenback is the world’s primary reserve currency. This, of course, is in no small part thanks to its dominant role in global oil trade.
But the U.S. Dollar hasn’t always held the throne. If you look at the graph below, you’ll see that the history of the world’s reserve currencies began with the Portuguese Real in 1450 (and has continuously shifted from one currency to another since then).
This coincided with the Age of Discovery in the 15th century when Portuguese navigators like Vasco da Gama opened new sea routes to Africa, India, and Asia. Portugal’s expanding maritime empire and colonial territories gave it control over key trade routes and access to plenty of gold and silver.
For centuries that followed, those who dominated commerce and had the most gold made the rules. Unlike today’s U.S. Dollar, these currencies weren’t fiat abstractions; they were literally made of precious metals or backed by them. They were money.
And so, around 1530, the Spanish took over, followed by the Dutch about a century later, and then the British, all the way to the Bretton Woods Conference in 1944. That’s when a new system was established (solidifying the dollar’s global dominance that began after WWI), tying almost every nation’s currency to the U.S. Dollar at a fixed rate… and the dollar to gold at $35 an ounce.
Alas, the dollar’s tether to gold wasn’t meant to last. ~~ Lau Vegys, Doug Casey’s Crisis Investing
So it goes,
Addison Wiggin
Founder, The Wiggin Sessions
P.S.: Interestingly, if you take another look at the chart above, Lau suggests you’ll see that these currencies managed to hold their status as global reserves for about 94 years on average.
With the U.S. Dollar already counting over 100 years of its own preferred status, it stands to reason the buck is a little long in the tooth. The general state of the U.S. and the pressure from BRICS do not give me much confidence that this isn’t the case.
P.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
