While it is true that the will probably slowly shift during the coming decades to some degree of de-dolarization, it is not going to happen overnight and neither is the expiration of this agreement a prime mover of that. Freezing Russia's sovereign assets was far more consequential as it eroded the trust on the westerns financial system somehow.
But all those upcoming powers like China, India have a vested interest in the continued survival of the dollar, as they hold (both the states and private companies) vast amounts of assets tied to the dollar. They may try to reduce their exposure a bit, but they know that they can't do a firesale of US bonds as it would obliterate a lot of their wealth.
Things will keep running as today probably for the next 20 years. Meanwhile the US will have the chance to re-industrialize itself as the dollar gradually weakens.
And this leads us to the other dollar's secret. NOBODY wants to hold the world's reserve currency anymore. It may be good to make your rich absurdly rich, to sustain absurdly high levels of consumption fueled by imports, but it inexorably erodes your industrial base.
The dollar has been the reserve currency for a long time because (1) the US has been a big promoter of liberalization and world trade, but really most importantly, (2) despite various conflicts, the US currency has been consistent and stable for decades, and everyone who values stability is going to want to park their value in a currency that continues to be boring. So far, the US has been able to scratch that itch because it’s been the same government that has been predictably the same for nearly 250 years.
Now it doesn’t mean the world’s reserve currency won’t change over time but if it does, it’s because some other country or group of people have managed to establish themselves as equally boring for decades. And by the time that happens, the world will have already changed significantly already.
Really, the reason the US Dollar has held for so long is because the rest of the world has had a lot of instability (think world wars, governance changes, unions of countries formed or abolished, etc.). The US hasn’t even had a change in states in 60 years.
This is an exaggeration. There have been at least 3 drastic shocks to the United States currency in that time. The secession of the southern states, who adopted their own currency. Leaving the silver standard for the gold standard. And devaluing the dollar then leaving the gold standard unilaterally in the 1970s.
Yes and no. What you're not comsidering is the obligation of The US Federal Reserve (aka The Fed). While dollars are international, The Fed's only concern is the US and US citizens. That is, often enough The Fed makes decisions that achieve this ends, but screws the rest of the world. Such decisions become self-serving to the USA's power, influence, etc. That decision undermines other countries, economies, etc.
So yeah, the USD is stabler, and The Fed helps to see to that.
People seem to think we are still living in the past, where the US alone accounted for more than 40% of the global GDP and was the single most important trade partner of every country outside the former communist block.
It is a different world now. The BRICS GDP in Purchase Power Parity terms has surpassed the G-7, their growth rate is also bigger.
Yeah. it is not the end of the world. Things won't change everyday, zero-hedge doomers are a bunch of crazy scammers shorted as fuck. But the situation is dynamic and requires attention.
> They can't do a firesale of US bonds
they aren’t buying a lot of new American bonds and keeping the bond market strong with private buyers. It is why the fed buying treasury bills in the quantities they do is troubling.
Interest rates aren’t going to back zero, they will drop from the current highs but interest will remain positive.
The debt to GDP ratio has jumped massively in last 40 years from 30 % to 60% in 2000s and now 120%, that is an impressive amount of spending considering how large the US economy is . [1]
At some point the either spending on programs have to be cut or taxation has to increased, or inflation has to be allowed to increase significantly to service it.
The policy paralysis in Washington almost by design will not allow for either of the first two solutions to happen which would be internal to the country, so likely in next 20-30 years we are looking at runaway inflation .
At the point dominoes will be too late to control, if dollar no longer is a strong reserve currency , interest rates will go up , either we default or massively rebalance the economy after getting a bail out (! No country or institution like IMF is large enough to remotely even attempt bailing out America ) .
The pain will be global of course , but nobody will be able to do anything about it.
[1] In itself the ratio is not a problem, In OECD countries high numbers can work for long while, Japan holds 250% + of debt to GDP ratio famously , but now after 30 years of weird economics they are slowly being forced to raise interest rates positive or face the yen falling and it will be costly either way
One of my missions-for-fun on HN is to figure out why anyone cares about Japan's debt:GDP ratio. The country is a net creditor [0]. The US is the worlds largest debtor by an order of magnitude in absolute terms, and up there with just outside the beyond-hopeless tier of debtors. Superficially the two countries seem to be incomparable. Japan's credit position is almost an anti-US on net, relative to GDP. Why would we look at a creditor to figure out how a debtor's default would work?
[0] https://en.wikipedia.org/wiki/Net_international_investment_p...
Because they’re deficit spending.
No, I think the way to continued prosperity are the old principles: Free Markets, Liberal governance, Property Rights, Fighting corruption, and Ensuring robust multilevel competition in the marketplace.
In watching the Netflix doc on the eise of the Nazis, it enlightening how many actions (and inactions) of the USA contributed to the rise of the Nazis. No doubt Hilter & Co were an evil bunch but in terms of popular support and rising to power, they did not do it alone. They had plenty of help.
Wealth and power are hard to distinguish at this scale. Suppose PRC were to a) instigate a global crash of USA Treasury assets and b) offer to swap USA debt for PRC debt for preferred clients. Rather than watch their UST holdings evaporate, most global wealth managers would take the deal. And then RMB does become #1 reserve currency overnight...
Yes it would be terribly "expensive" for PRC in nominal terms, but what is the price of global financial hegemony?
- Deindustrialization
- Massive Wealth Concentration
- A housing crisis due to asset inflation
- Unemployment and/or subemployment.
China is still a bit communist. The government rules their wall street, not the other way around.
I am highly uneducated in this realm, but would this even be possible as the Yuan is a nonconvertible currency?
But the Europeans would prefer the Euro and the Japanese the Yen,[1] because it is beneficial for their own economies.
In the past period of energy price inflaction one could observe quite for awhile that the exchange rates favoured the US-dollar over the euro although inflation in the USA was higher than in the EU. The best explanation I came across for this phenomenon was the petrodollar: Importers from the EU needed to exchange a lot of euro into dollars to pay for oil. As a result, the exchange rate shifted increasingly against the euro, which made energy costs within the EU even more expensive, which gave the USA a competitive advantage.
Importing countries therefore have a great incentive to conduct oil transactions in their own currency. This will not lead to the dollar losing its supremacy in oil trading overnight. But I expect its share of trading volume to gradually decline.
[1] Some import figures of oil from Saudi Arabia from 2022 for context: EU 25.8B US$ and Japan 39.8B US$, which together was almost the same as China 65.0B US$. (However, the figures fluctuate considerably from year to year.) Source: https://tradingeconomics.com/european-union/imports/saudi-ar... https://tradingeconomics.com/japan/imports/saudi-arabia/crud... https://tradingeconomics.com/china/imports/saudi-arabia/crud...
https://www.reuters.com/world/us-saudi-arabia-close-finalizi...
[1] https://en.wikipedia.org/wiki/List_of_countries_by_stock_mar...
[2] https://www.icmagroup.org/market-practice-and-regulatory-pol...
Yuan which is held to a fixed exchange rate that could change at any time? Not to mention the capital controls.
Euro? Yen? Australian dollar?
USD doesn’t have to have some special agreements to make it the safest currency to hold.
How, exactly? We have spent the last two years building a watertight legal justification for doing so. Nothing was arbitrarily taken, and they are still earning interest on that balance. But if you break international law, you will face international legal consequences, under due process of the law that you agreed to abide by through taking part in our system.
The thing is. Does it matter? Can the US and its partners really enforce it? How do you expect other countries that are not in the western club to react? As I said in other comments, we no longer live in the world where the US is the single biggest commercial partner of every country in the world, we don't live anymore in a world where the US alone is 40% of the global GDP. Those days are over.
Of course the international finance system is complicated so maybe there still is enough of a payoff to holding US dollars, we're seeing something of an exploratory process here as China, Russia and probably India start testing the system. It might hold.
If anything, this is another of many shots across the bow that Pax Americana is, in fact, on notice.
It's our (the west's) era to lose.
Also the US can leverage another countries reserves against them
Re-shoring industry is essential for the US to keep itself as a major player in the future multi-polar world.
Is this one of those events that turn out to have been "much ado about nothing"? I'm not an expert in this area, curious if anyone has more insights into this.
It's been slow, and one can argue, visible now in the long term "in the graphs". Recovery from COVID was slow. There's a creeping cost-of-living crisis, productivity has been stagnant, investment low, etc. Some might attribute this at least in part to Brexit, some may not, but the truth is, wether Brexit played a role or not, this is how it would surface— slowly, and in the charts.
I don't know how big a deal this news is on the markets, especially given everyone's already trying to shift to renewables. And it might have been predicted in advance, unlike Brexit where the markets expected Remain.
"My grandfather rode a camel, my father rode a camel, I drive a Mercedes, my son drives a Land Rover, his son will drive a Land Rover, but his son will ride a camel."
Whether or not anyone actually said it, it seems to be more and more likely as oil verrrry slowly becomes less and less relevant.
Bridges aren't typically their target.
https://en.wikipedia.org/wiki/Alleged_Saudi_role_in_the_Sept...
Look at COVID crisis, we are yet to fully understand the consequences of the government monetary actions
It's not a falling meteor, it's an trade/agreement/commercial change.
The impact of this takes months or even years to fully develop, and cascades with other factors.
Geopolitical stuff, with some exceptions, tends to unravel over years or decades.
This is a sizable event, and it will likely have quite an impact, but unless they renegotiate it , it's going to be a decades long thing.
It is possible that this is one of those few scenarios, where it is a 'good thing' that world is distracted by Ukraine/Russia war and Israel/Palestine; oh and elections.
Full disclosure: I asked uncensored llama, but its predictions seemed off to me.
It is no different than China divesting US treasuries. There were people that asserted this would be apocalyptic but there was nothing substantive behind those fears. And then it actually happened and no one noticed.
The Us is now a massive producer of oil, but it is not a massive net exporter of it, because it consumes a lot. So, when the big net exporters of oil decide to accept other things in payment in lieu of the USD it inevitably has a depressing effect on the global demand for the dollar.
I could imagine negotiations going on behind closed doors. The USA is still a gorilla with firepower that can be used as leverage. But MBS is an unstable egomaniac who probably doesn't respond well to threats... My guess is China is trying to woo him, although China doesn't seem to do "diplomacy by aircraft carrier", at least not outside its own seas. I wonder if Putin has any influence, at the moment he can only be China's little brother, and besides, he's friends with Iran and S.A. and Iran aren't friends...
https://www.cnbc.com/2024/06/13/opec-calls-for-more-fossil-f...
https://www.iea.org/news/slowing-demand-growth-and-surging-s...
https://about.bnef.com/blog/electric-cars-have-dented-fuel-d...
This is true, but also misleading. The fact we're getting off of oil, doesn't mean we're doing it fast enough, or that less oil is being consumed today than in the past. At least when measured in TWh of oil consumption per year, we're still up and to the right [1].
[1] https://ourworldindata.org/grapher/oil-consumption-by-countr...
Consumer vehicles are increasingly electrifying, but that shouldn't be used as a metric to assume oil consumption is decreasing. At least 4 reasons why the correlation isn't that strong:
- Consumer vehicles are only a percentage of the transportation sector. A lot of oil is used by the transportation industry. Electric trucks are still not widely available. Electric trains for cargo aren't growing quickly enough. Electric planes and ships are still not viable for transport.
- Electricity can be generated from oil. Assuming that more electric vehicles means less petrol consumption ignores the fact the increased electricity demand could be covered by petrol. What's correct here is to both grow electric vehicle usage, and production with renewables.
- The economy and population keep growing. If half of cars sold are electric, but you're selling twice the number of cars total vs 10 years ago, you're selling the same amount of petrol cars.
- There's plenty of demand for oil not as a source of energy, but as a material (for plastics, asphalt, other chemicals, etc)
https://www.ceicdata.com/en/indicator/united-states/oil-cons...
and expected to get higher:
https://www.statista.com/statistics/271823/global-crude-oil-...
(the dip is Covid)
Meanwhile:
https://eu.usatoday.com/story/money/personalfinance/2023/11/...
https://nymag.com/intelligencer/article/a-once-unthinkable-q...
https://edition.cnn.com/2024/04/02/business/tesla-sales/inde...
https://www.business-standard.com/economy/news/ev-sales-decl...
It’s destroying demand at a massive clip, if the IEA is to be believed [1]. With Riyadh’s elevated break-even price [2] that doesn’t leave them a lot of time.
[1] https://www.axios.com/2024/06/12/oil-peak-demand-iea-project...
https://www.statista.com/chart/30754/byd-passenger-car-sales...
https://electrek.co/2024/05/29/byds-workforce-nearly-doubles...
https://electrek.co/2024/05/15/byd-just-hit-new-weekly-ev-sa...
And the average age of U.S. automobiles is 13 years.
EV/hybrid's effect on current oil consumption is 2% at the very, very most.
Gasoline is the most-consumed petroleum product in the United States. In 2022, consumption of finished motor gasoline averaged about 8.78 million b/d (369 million gallons per day), which was about 43% of total U.S. petroleum consumption.
OK, but what's the median age of U.S. automobiles? I think that's a more relevant merasure.
The petrodollar was about creating a massive market for USD despite us having a massive trade deficit. Every country that wanted to buy oil had to hold USD and US treasuries to buy the oil.
This cemented the USD as the world currency therefore financing our budgetary (as opposed to trade) deficit with cheap interest rates.
Its not even the wrong facts, it's that you could just Google it and still present as this authority you want to be, but actually be correct.
Most oil produced in the US is refined and used in the US. For a long time US oil couldn't be sold overseas. I don't know who would have been refining that oil if not for the US, given they literally couldn't sell it internationally.
The US produces around 12 million barrels of oil a day. The US exports under 4 million barrels a day. What do we do with the other 8 million barrels??
The US is clearly the heavyweight globally in terms of both oil production and refining.
Regarding currency, US will be fine pretty much whatever happens - there is no other currency that is not controlled, in large supply, and globally accepted.
(Not that I don't believe you, I hadn't heard it before.)
What if gasoline prices start soaring in the US, putting US prices on parity with the rest of the world? Remember the financial collapse of 2008? That didn't happen overnight either - it took a couple of years for everything to unfold and collapse.
The second thing that would happen is people would start buying more hybrid and electric cars.
I have no idea what will happen to the price of oil. I do think that in general people who say things like "finally the US will start paying its bills!" are often not very sophisticated investors. They don't have finance degrees, work on wall street, or have long history as investors. Not that that precludes them from being right! But they could also just be people with an axe to grind and little to lose.
If the agreement was extremely inconvenient the Saudis would surely have found a way around it. Rare is the economic agreement that stands against efficiency.
There’s a meme going around certain circles that the USD is doomed and everyone is going to use….Yuan, Rubles? The Euro? Yen?
It simply isn’t plausible. The USD wins out because it is very useful. I write this as a non-American who transacts business mostly in USD, including with non-American contractors and companies.
The US may or may not have to pay its debts but this pact does not seem very relevant.
Many people (usually envious ones) want the USD dominance to go and repeat the meme/lie to the point of believing it themselves.
It’s just a new way of ranting, and this topic is very common with conspiracy theorists.
The losers here are the middle eastern countries that didn’t sufficiently diversify.
Then all of the fracking fields that are already permitted would be fired back up and there would be low-skill/no-skill workers making 6-figure salaries again in the fields in the Dakota's.
"May you live in interesting times" as the (apocryphal) Chinese malediction says.
edit : added missing "discretionary". My mistake (you know, a simple honest error, not a "lie" or whatever).
This is not true. Revenue was $4.44 trillion in 2023 [0] and debt interest was $650 billion [1].
[0] https://fiscaldata.treasury.gov/americas-finance-guide/gover...
[1] https://www.crfb.org/blogs/2023-interest-costs-reach-659-bil...
Revenue for 2023 was $4.4T[0], debt servicing cost was $624B. This year it's projected to be in the ~800s.
[0]: https://www.statista.com/statistics/216928/us-government-rev....
They’re both massively deficit spending.
That is no where close to true, interest on debt last year was 985b, tax revenue was 3.29t
For a petrodollar specifically, or petroyuan in the future, the idea could be that the largest manufacturer is going to be the largest consumer of energy for manufacturing. In the past this was the United States which is why the Saudi petrodollar, while overhyped, made sense after the Nixon shock.
China has played a key role using its increasingly gold backed currency to settle transactions for sanction reasons and is expanding it to others.
It will take time for this change to happen and before long it will be interesting what kind of result this has on funding U.S. Govt debt, if more business is done in yuan than the dollar. All it will take is China loosening controls.
The other reason the dollar has been so resilient has been the U.S. Navy providing the backbone to defense agreements. Now China also has a comparable number of ships that will move out of the South China Sea and play an international role with a yuan reserve currency, this advantage isnt what it used to be.
The only real alternatives today are the Euro and to a lesser extent the Japanese Yen, and they have their own issues (in particular, the Eurobond market is fragmented between its member states and while the EU does issue its own bonds, it’s not institutionally or politically designed to issue at massive levels). Even Russia, which tried to bypass sanctions and sell oil direct to India was left with either collecting in rupees (that it couldn’t really spend much of) or in rubles (which India had a hard time finding a market to trade rupees for).
But again, don’t underestimate the basics of recourse in rule of law. You can own shit tons of US Treasuries and still speak ill of or go against the US government or its leaders. Do you think Saudi Arabia or anybody else wants have to bend the knee to anybody else?
You are likely correct in other parts of your reply. Only time will tell. I think the trending direction is clear...
Also, rule of law in the U.S. just isn't what it used to be. Many other countries have seen what the U.S. has done with Russian money kept in Western banks.
If you mean crying is a recourse, otherwise this is an understatement.
There's no recourse.
China is working hard to build an effective blue-water navy. They'll probably accomplish it eventually but for now they have virtually zero power projection or expeditionary capability. They struggle to even sustain a small surface action group in the Middle East.
And unlike other regions, quantity is just not possible due to environmental constraints so they must rely on Western high tech
The Saudi's want nothing to change but people think EV sales is a threat (couldn't be further from the truth).
https://en.wikipedia.org/wiki/United_States_involvement_in_r...
But here there are some glaring mistakes and omissions in the article:
1. Saudi Arabia has already been trading oil in other currencies for some years now. Have they been violating their own protection deal?
2. Or was the deal never put on paper and more of a “gentleman’s agreement” to begin with?
3. The suggestion is made that the end of this deal will mean a declining US dollar. The fact is that the dollar has been declining for a while already and this hasn’t sped up after the end of this “deal”.
Also, for context: https://news.ycombinator.com/item?id=40674426
It’s a TipRanks article syndicated by Nasdaq. Sort of like what Fortune did to its brand.
>the petrodollar is nothing like the gold standard, where a dollar was pegged to a specific amount of gold.
>in effect it was still backed by something tangible.
I expect for the foreseeable future, with a few hundred dollars you will still be able to drive your Corvette (or other pleasure craft) around for quite a pleasurable tour.
The thing that changes is the number of miles you can go according to the present asset value of your fuel at any one time.
People got accustomed to that part of it a long time ago, after Nixon sacrificed the currency to the Saudis.
With complete discharge as a petrocurrency, that could end up with some place other than the US, one which average income is abysmal by comparison, being fully able to collectively purchase more Corvettes for cash than Americans because of debt levels relative to tangible assets.
Saudi Arabia oil exports are 200B USD/year, give or take. The world has a GDP of ~100T USD, how much of that is traded in US dollars? We could put an estimate based on total currency reserves, of which USD is about half of that. 200B out of 50T is "merely" 0.05% ...
Sure, they may be one of the single major traders of USD, but at 0.05% what this tells you is that the USD is extremely diversified, and that's good!
(Also, this is implying Saudi Arabia bins the whole deal overnight, which is very unlikely to happen)
We are the world’s largest oil producer [1].
[1] https://en.m.wikipedia.org/wiki/List_of_countries_by_oil_pro...
https://www.nakedcapitalism.com/2024/06/dollar-doomsters-hav...
> So at this point, the most likely next regime is of fragmentation, of multiple major currencies used for trade and investment rather than a dominant currency. [...] So this remains an unsettled area. Stay tuned.
And I agree. I don't think the Renminbi will necessarily take over, but I also don't think the dollar will maintain the strong dominance it has on global trade and as a reserve currency.
"I’ve argued that dollar-euro financial hegemony won’t be replaced as a result of these sanctions, simply because none of the alternatives is ready to replace it. But ..."
https://www.noahpinion.blog/p/dont-worry-about-de-dollarizat...
I think the system is stable instable:
Dollar Inflation will continue. China will continue to have problems investing its trade surpluses sensibly. Western policy towards Russia and China will become even more hostile, but it will not come to a big bang.
At some point, we will realize that we have to solve the problems together, perhaps the Bancor will be introduced after all.
This dollar=oil relationship has been used as the argument for US dominance for a long time. Or, used to explain how the US maintains dominance. And consequently, this is also used as the boogie man in many theories about a US collapse.
So doom scenario would be Saudi, Russia, China forming some new Oil market that does not use US Dollars.
The dollar’s dominance was won at Bretton Woods (decades before the petrodollar) on the back of WWII.
The petrodollar was a contributor to dollar hegemony from the 1970s through the 2000s. But the combination of the USSR falling and American energy independence thoroughly ruined it as an explanatory factor for dollar and Treasury pricing and utilisation in the post-crisis landscape.
Having done a little more digging, I could find lots and lots of pieces about this topic, but I could not even one coming from a recognizable journalistic source. (Far from the top of search results was a piece that seemed to have some value: it noted the wave of coverage of the purported end of this pact despite the fact that no such pact existed. It also identified a possible connection between pushing this story, which makes the dollar sound endangered, and attempting to promote cryptocurrency.)
Lots of HN commenters taking this at face value. To me, the overall situation looks like an object lesson in basic critical media literacy.
It's monetary policy, international finance and geopolitics. Famous HN fortes.
(For the avoidance of doubt, only one of those is even remotely something I have competence in.)
US/Canada produce way more oil and gas than Saudi Arabia and are now exporting significant amounts of energy.
With China now shrinking, we are likely somewhere around (or past) peak global gasoline demand, with strong, but slowly diminishing demand into the mid-2030s.
The Saudis will remain a supplier of cheap oil to their trading partners, but they are sitting atop an asset that can be thought of as a perishable good as the world moves toward greater electrification.
The size and shape of the global economy is very, very different than the 1970s. GE, GM, Aramco and Exxon have been replaced by Amazon, Google and NVIDIA. These companies are global juggernauts, and will ensure healthy demand for US currency well into the future.
There are a lot of diplomatic cables from the 1970s about the origins of the concept (petrodollar recycling), but fundamentally it was that the Gulf Arab states had few options about where to put their oil money, and so most of it went back to western banks and international loan programs or into expensive property investments and financing Uber by at least $3.5B and so on. In exchange, they get their security guaranteed by US military and economic power. See [1] for a fascinating and well-written history of the period when the deal was implemented.
However, it does seem Iran under the Shah was the first big petrodollar recycler, and he'd already invested a billion dollars each in Britain and France by 1974, which is part of why the Iranian revolution came as such a shock in Washington (and also accounting for the U.S. and Britain and France and Germany pouring material support and loans into Saddam's regime in Iraq as he went to war to seize Iranian oilfields in the early 1980s).
Regardless there's no formal pact I've ever heard of on this, it's more some kind of diplomatic agreement, possibly enforced by the threat of freezing assets for various reasons real or pretend. The problem now is, what if the Gulf states decide they want to put those reserves into big domestic infrastructure projects? what if a majority of contracts going to Chinese firms, who seem better at large-scale solar PV and high-speed trains than the US or Europe does? Will Uber rates have to go up?
[1] "The Oil Kings: How the U.S., Iran, and Saudi Arabia Changed the Balance of Power in the Middle East" by Andrew Scott Cooper.
Oil has been bought in every currency on the planet for a very long time.
The dollar clearing system is a transit route, not necessarily a destination. Buyers buys things with the currency they have, and sellers end up holding the currency they want to hold. Those involved in FX make a turn causing that match to happen. Otherwise the transaction never happens in the first place.
The expiration of the agreement merely means that Saudi now has the option to move its oil retained profits out of US Treasuries and into something else, which may very slightly affect the yield curve.
I think the dollar will still be the de-facto reserve currency in 20 years, but it will be more as a medium of exchange rather than a true "reserve" currency for central banks. Central banks are buying gold like crazy.
Comparatively speaking, the dollar is pretty stable. But, the inflation genie is out of the bottle. The USA keeps deficit spending like there's no tomorrow, and is on an unsustainable path. If tax receipts don't increase, we will have to print our way to debt servicing.
Also, the western global hegemony is shifting. Many non aligned countries frankly don't care about the wests causes; they simply want cheap energy and to grow themselves out of poverty. The middle east is facilitating all this for southeast asia and the like.
TL;DR the dollar will remain, but it will be an intermediary exchange between currencies and not a real "reserve" store of wealth.
