Is the petrodollar dead? Well, in general, not yet, but the nails in his coffin are hammered right now, in the minutes when you read this article. For decades, most countries in the world used the US dollar to buy oil and trade with each other. In effect, the US dollar acted as a true global currency. Virtually every country on Earth needed piles of dollars for international trade. This made inevitable a huge demand for US dollars and US government debt. The demand for dollars kept prices and interest rates low and gave the American government enormous power and influence throughout the world. Today, US dollars account for more than 60 percent of all foreign exchange reserves in the world. But times are changing. Over the past few years, a whole series of international agreements have been concluded that have reduced the importance of the dollar for international trade. The mainstream media in the United States is strangely silencing all of these agreements, but the truth is that they set the stage for a fundamental change in the way that trade is conducted throughout the world. When the petrodollar dies, it will have an absolutely apocalyptic effect on the American economy. Unfortunately, most Americans are completely unaware of what is happening with the dollar.
One of the reasons why the Federal Reserve System got away with flooding the financial system with US dollars was because the rest of the world absorbed most of those dollars. The rest of the world needed a huge amount of dollars to trade among themselves, but what happens if they no longer need dollars?
Will we see the inflationary tsunami when the demand for the dollar collapses?
The power of the US dollar is one of the pillars holding onto our economy. As soon as this backup is removed, we will have huge problems.
So - 11 international agreements that are hammered into the coffin of petrodollar ....
No. 1 China and Russia
China and Russia decided to start using their own currencies in trading among themselves. Quote from the article in the China Daily about this important agreement ....
China and Russia decided to abandon the US dollar and switch to using their own currencies for bilateral trade, this was announced late on Tuesday by Chinese Prime Minister Wen Jiabao and his Russian counterpart Vladimir Putin.
Chinese experts said that this movement reflects closer relations between Beijing and Moscow and is aimed not at challenging the dollar, but at protecting their own economies.
“When making settlements, we decided to use our own currencies,” Putin said at a joint press conference with Wen Jiabao in St. Petersburg.
These two countries, for bilateral trade, were accustomed to use other currencies, in particular dollars. But, with the beginning of the crisis, high-ranking officials on both sides began to consider other opportunities.
No. 2 China and Brazil
Did you know that China is the largest trading partner of Brazil?
The largest economy in South America has just signed an agreement on currency exchange with Asia's largest economy. Quote from a recent BBC article ....
In order to counter the global financial crisis and strengthen trade relations, China and Brazil concluded an agreement on currency exchange.
This will allow their central banks to exchange local currencies for up to 60 billion Reals or 190 billion yuan ($ 30 billion; £ 19 billion).
These amounts can be used to strengthen gold reserves in times of crisis or for the development of bilateral trade.
No. 3 China and Australia
Did you know that Australia is Australia's largest trading partner?
Australia also recently concluded a huge currency exchange agreement with China. Quote from a recent article in Financial Express ....
The Reserve Bank of Australia reported that the Central Banks of China and Australia, in order to ensure the movement of capital between trading partners, have signed a currency exchange agreement worth 30 billion Australian dollars (31.2 billion USD).
“The main objectives of the currency exchange agreement are to support trade and investment between Australia and China, especially in local currencies, and to strengthen bilateral financial cooperation,” said a statement published on the RBA website. “The agreement reflects increasing opportunities for the development of trade and investment between the two countries with settlements in Chinese renminbi.”
China is expanding the range of countries with which currency exchange agreements have been concluded, as this contributes to the international use of the yuan, and the agreement with Australia follows similar agreements signed with South Korea, Turkey and Kazakhstan. China is Australia’s largest trading partner and accounts for about a quarter of Australian sales abroad.
No. 4 China and Japan
The second and third world economies decided that they should start moving towards using their own currencies by trading with each other. This is an incredibly important agreement, but it was almost completely ignored by American media.
According to a Bloomberg report, it is expected that this agreement will strengthen ties between the two Asian giants ....
The Japanese government said that Japan and China would facilitate the direct exchange of yen and yuan, without using the dollar, and encourage market development for companies involved in the exchange.
The Japanese government, in a statement yesterday, after the meeting in Beijing of Prime Ministers Eshihiko Noda and Wen Jiabao, said that next year Japan was also going to buy Chinese bonds and allow them to invest in renminbi from China. The development of direct exchange yen - renminbi should reduce currency risks and trading costs.
China is Japan’s largest trading partner with 26.5 trillion yen ($ 340 billion) in bilateral transactions last year, a decade ago that was 9.2 trillion yen.
No. 5 India and Japan
But not only China concludes currency exchange agreements. According to Reuters, India and Japan also agreed on a very large currency transaction ....
Japanese Prime Minister Eshihiko Noda said Wednesday that India and Japan had agreed on a currency exchange line worth 15 billion USD. This is a positive move for the troubled Indian rupee, Asia’s worst performing currency this year.
No. 6 "Oil for Junk": how India and China buy oil from Iran
Iran still sells a lot of oil. It simply does not exchange oil for US dollars in such quantities as before.
So how does Iran sell its oil without using dollars?
A recent article in Bloomberg detailed what exactly countries like China and India give in exchange for Iranian oil ....
Iran and its leading oil buyers, China and India, are finding ways to circumvent the financial sanctions of the US and the European Union imposed on the Islamic republic, they agree to exchange oil for local currency and goods including wheat, soybeans and consumer goods.
According to Indian officials, India, the second largest oil importer from Iran, opened a rupee account in a state-owned bank in order to pay as much as 45 percent of Iranian bills. Mahmoud Bahmani, head of the Central Bank of Iran, told 28 in February that China, Iran’s largest oil client, is already paying some of its oil debts through barter. According to media reports from Pakistan and Russia, Iran is also trying to exchange oil for wheat from these two countries.
No. 7 Iran and Russia
According to Bloomberg, Iran and Russia decided to abandon the US dollar in bilateral trade and use their own currencies to do this ....
Iranian state news agency Fars reported, quoting Seyed Reza Sayyadi, the Iranian ambassador to Moscow, that Iran and Russia replaced the US dollar with their currencies in bilateral trade.
The proposal to switch to the ruble and rial was made by Russian President Dmitry Medvedev at a meeting with his Iranian counterpart, Mahmoud Ahmadinejad, in Astana, Kazakhstan, at a meeting of the member countries of the Shanghai Cooperation Organization, the ambassador said.
No. 8 China and Chile
China and Chile have recently signed a new agreement that will sharply increase the volume of trade between the two countries, and will also likely lead to a significant exchange of currencies between them ....
A quote from a recent report describing this new agreement between China and Chile ....
Wen Jiabao called on both countries to expand trade in goods, promote trade in services and mutual investments, and double bilateral trade in three years.
The Chinese leader also said that the two countries should increase cooperation in the mining industry, expand trade in agricultural products and promote cooperation in the production and processing of agricultural products and agricultural technologies.
China would like to be an active participant in the construction of Chile’s infrastructure and, together with this country, to promote the development of the transport network in Latin America, said Wen.
At the same time, Wen proposed that the two countries begin currency exchange and increase the volume of settlements in the renminbi.
No. 9 China and United Arab Emirates
According to CNN, China and the United Arab Emirates recently agreed to sign a very large currency exchange agreement ....
In January, Chinese Prime Minister Wen Jiabao visited the United Arab Emirates and signed a currency exchange agreement for 5.5 billions of US dollars in order to expand trade and investment between the two countries.
No. 10 China and Africa
Did you know that China is today Africa’s largest trading partner?
For many years, the US dollar has been dominant in Africa, but now the situation has changed. The report of the largest bank in Africa - Standard Bank, states the following ....
“We expect that by 2015, at least $ 100 billion (about 768 billion South African rand) in China-Africa trade - more than all bilateral trade between China and Africa in 2010 year - will be paid in renminbi.”
No. 11 Brazil, Russia, India, China and South Africa
The BRICS countries (Brazil, Russia, India, China and South Africa) are becoming an increasingly significant factor in the global economy.
A recent agreement between these countries sets the stage for more and more use of their own currencies, rather than the US dollar, to trade with each other. Quote from a news source in India ....
The five major emerging economies - Brazil, Russia, India, China and South Africa - are going to give even greater economic impetus to their group by signing at the fourth summit of their leaders on Thursday two agreements on the development of trade within BRICS.
The two agreements that will allow lending services in local currency to firms of the BRICS countries will be signed in the presence of the leaders of these five countries, Sadhir Vyas, secretary of economic affairs of the Ministry of Foreign Affairs, told reporters.
Contracts are expected to increase trade between the BRICS countries, which grew by 28 percent over the past few years, but with the current $ 230 billions, it remains well below the potential of the five economic powers.
So what does all this mean?
This means that the days of the US dollar, as the de facto global reserve currency, are numbered.
But why is this so important?
In the previous article, I quoted a wonderful article by Marin Katus, which detailed many of the important advantages that the petrodollar system possessed for the US economy ....
Creating a system of "petrodollar" was a brilliant political and economic move. He made oil money all over the world flow through the US Federal Reserve, creating ever-growing international demand for both the US dollar and American debt, essentially allowing the United States to own much of the world's oil for free, because the value of oil was nominated in the currency that States controlled and printed. The petrodollar system has spread far beyond the oil, because most of the calculations in international trade are carried out in US dollars. This means that all countries, from Russia to China, from Brazil to South Korea, strive to maximize the reserves of the US dollar derived from export trade in order to buy oil.
The United States received many benefits from this. When oil consumption in 1980-s increased, along with it, the demand for the US dollar increased, thereby raising the American economy to new heights. But even without economic success at home, the US dollar would still skyrocket, because the petrodollar system created constant international demand for US dollars, which, in turn, increased in price. A strong US dollar allowed Americans to buy imported goods at a huge discount — the petrodollar system essentially gave subsidies to American consumers at the expense of the rest of the world. And then the negative aspects of the system appeared: the availability of cheap imports hit hard the American manufacturing industry, and the disappearance of production jobs remains one of the biggest problems in the revival of the American economy today.
What happens when the petrodollar dies?
Below is a listing of some things that we are likely to see ....
- Oil will cost much more.
- Everything will cost much more.
- Foreign demand for US government debt will be much less.
- Interest rates on US government debt will rise.
- Interest rates on almost everything in the American economy will rise.
And this is just for starters.
As I wrote earlier, the Federal Reserve is not going to save us. Ben Bernanke can't wave his wand and make it OK. Fundamental changes in the global financial system are taking place right now, and Bernanke is unable to stop them.
We shouldn't have gotten into such debts. Until now, we have come out of the water, but when the demand for US dollars and American debt runs out, it will be very painful.
Keep your eyes and ears open for News similar to those to which I referred above. The end of the petrodollar will be a very significant landmark on the road to the complete collapse of the American economy.
So what do you think about the fate of the US dollar? What awaits him ahead?
Please feel free to leave your comment below ....
From the translator: in one of the comments to the article it is said that “the future of the American economy will look something like this ...”