I wrote recently about the petrodollar system whereby all oil sales around the world are priced and transacted in US dollars, and about how this is a major part of the US dollar’s status as global reserve currency. I also wrote about how the events of the past few weeks could mark the beginning of the end of the dollar-dominated global economic order.
Well, that appears to be in motion. Saudi Arabia has set the world down the path away from the petrodollar:
Saudi Arabia is one of the world’s most important oil producers. China is the world’s largest oil importer by barrels per day.
This is quite a big deal, and not only because of the currency aspect, but also because it shows the Saudis spurning the US and embracing the Chinese, who as we all know are aligned with Russia.
You’re already seeing the contours of the new world order emerge: it’s America and Europe against, essentially, Asia—China, Russia, India, Iran and now, apparently, Saudi Arabia, at least to some extent. The Saudis and the Iranians despise each other, but then again so do India and China to a large extent. And China and Russia have never been the best of friends.
None of that matters though, as long as they all despise the US more than they despise one another. They appear unified around the common cause of working toward America’s downfall, and as long as that is their priority, they’ll probably be perfectly able to work together.
The next step is for the Russians to price their oil sales to China in yuan—then eventually most of Asia will move away from the petrodollar.
Also keep in mind that the move away from the dollar will feature a ton of selling in US treasuries, causing interest rates to spike and US government debt becoming vastly more expensive to service.
In other words, without nearly bottomless demand for US government debt, suddenly America is no longer able to live in its fantasyland of deficit spending and debt-fueled expansion.
The past 20 years or so have been an illusion of prosperity built on the back of soaring government, corporate and consumer debt—enabled by both ultra low interest rates and insatiable global demand for treasuries.
We cannot really afford the government we have. We cannot afford all these social programs and all this defense spending, and all the bullshit pork the politicians toss in.
It’s enabled by deficit spending, money printing, and low interest rates. But once those interest rates start to go up, and demand for government debt dries up, suddenly we’ll no longer be able to live beyond our means like we have been the past 20 years.
Do you know why we’ve been able to print all this money for so long? Because we’re the reserve currency. Demand for dollars is (was) insatiable, and global. That demand for dollars takes the form of demand for US treasuries, because holding dollars is not profitable, but holding treasuries is. Nations that hold dollars use those dollars to buy treasuries, because treasuries pay interest.
But once demand for dollars dries up, we can no longer print money and accumulate debt freely. We’ll basically become Greece, a perpetual debtor nation that continually has to be bailed out by the EU.
Our lifestyle of the past 20 years has been an illusion. Most of it has been funded by massive amounts of debt. We can’t really afford the society we’re living in. Almost everything you see in America is an illusion—the neighborhoods full of McMansions popping up, the stock market millionaires, the extravagance of American colleges, the trillion dollar corporations, the tech unicorns, and last but not least, our government that is all things to all people. It’s all been enabled by rampant debt accumulation at low interest rates.
Again: we can’t really afford any of this. We are not as rich as we think we are, when we consider how much of modern America has been funded by debt.
Eventually the bill will come due. And I can’t even begin to imagine the economic pain this country will endure when the rest of the world loses faith in the US dollar.
You have to understand: there is basically no one alive today that knows what it’s like to live in a world where the US dollar is not the reserve currency. The dollar has been the reserve currency since 1944–78 years.
It’s all we know.
Interest rates have been rock-bottom for the better part of the past 20 years.
It’s all going to come to an end soon, this dollar backed global financial system. We’re already seeing the beginning of the end of the petrodollar system.
It’s time to prepare for the trouble ahead. Minimize debt levels as much as possible. People who have no debt will be able to weather the storm the best. Prioritize hard assets like real estate and gold. And maybe even think about becoming self-sufficient in terms of food—buy a few chickens, or start a robust garden, at least.
It could even get to the point where many of us can’t even afford to heat our homes. I really don’t know.
No nation’s reserve currency status is ever permanent. The Dutch guilder, the British pound—reserve currencies of the past—all rose and fell, and were ultimately replaced by something else. The dollar will eventually lose its reserve currency status, and I don’t think many of us are prepared for that.
I really can’t even begin to predict what the process of America losing reserve currency status will entail. All I know is it will result in tremendous economic pain for us, and probably a sharp decline in living standards. And we have no idea what lengths our government will go to to preserve the dollar’s global preeminence. It might even go to war with Russia or China out of desperation.
But the bottom line is that it appears we’re at the beginning of the end of the dollar’s run of dominance. I hope I’m wrong for all our sakes.