April 25, 2016
By: Bobby Casey, Managing Director GWP
If you’ve been following us just in the past two years, you know we’ve been pointing out patterns of global behavior not only BY the United States, but TOWARD the United States. Patterns being the key word here.
America’s war mongering politicians have even pointed out that other countries don’t like the US all that much. They are right, of course, but they use that as an excuse for military expansion when that’s not how other countries seek to retaliate or strike.
Practically speaking, it would take the next nine largest militaries in the world to even match American military might. The next global war will not be with bullets and bombs. It will be with and about money.
In the event that this slipped by unnoticed, allow me to share a brief recap of our own coverage of this new “war on America”:
- “Working Around the US” – Russia and China openly trying to find ways to avoid the dollar, and build alternate routes, rating systems, and trade agreements.
- “Global Response to the USD” – Brazil, Russia, India, China, and South Africa set up BRICS or the NDB (New Development Bank) to provide liquidity protection to member countries… of which the US is not among them. Despite their 20% holdings in the global economy, they only hold 11% of the votes in the IMF.
- “Tightening Fists Around Sand” – More countries are avoiding the USD or entertaining the option such as Australia, Japan, and Germany. The alternative structures and agreements are growing, resulting in billions of dollars in trade that doesn’t involve the USD.
- “China Officially Added to IMF Basket” – Then this just happened at the end of last year. The one thing China has going for it is – which happens to be a MAJOR geopolitical selling point – it’s NOT the USD, nor is it the Euro. That might very well be enough to elevate it in the ranks.
This brings us to now. What has China done since that little IMF promotion? For starters, just a few days ago on (April 19th), China initiated a new Yuan denominated gold price at the Shanghai Gold Exchange (SGE), setting their benchmark at 257.97 yuan per gram.
She seeks to play with the big boys in the physical gold market. This benchmark takes their bullion trade from primarily spot to derivatives, which should increase the appeal of trading yuan denominated gold. Time will tell. While this was a bold move, it wasn’t unforeseen. Back in 2013, we pointed out how China was buying up gold at an almost fiendish pace (“China’s Recent Monetary Moves”). And now we see why.
A few days before the gold announcement, China signed an impressive deal with the most highly populated OPEC nation, Nigeria, to “increase their domestic and international transactions using the yuan rather than the long-standing petro-dollar”. (Source: Roguemoney.net)
“In a deal forged on Sunday between The Industrial and Commercial Bank of China Ltd and the Central Bank of Nigeria, the two nations came to terms for the free flow of Chinese currency within the Nigerian economy, and to have the African oil nation hold the RMB as part of their currency reserves.”
Talk about a win-win: both avoid the USD, Nigeria gets a boost in its economy as well as its currency, and China gains a little more “street cred” in the global market.
Here are the OPEC countries: Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela. How much loyalty do you think these countries have to the United States? At best the “allies” of the bunch are precarious. For now, it is safe to say that Venezuela, Iran, and Nigeria are not in America’s pocket any longer.
The USD is in crappy shape. It is the petro-dollar that is propping it up right now. Without global demand for the USD, the US currency will be in freefall. It was dangerously close to that very situation in the 70’s.
We mentioned the Bretton Woods Agreement before. It was an agreement forged in the 40’s post WW2 to set up an exchange rate system backed by gold. The US had the highest gold reserves in the world, was the strongest economy, and positioned itself as the world’s reserve currency. The incentive to hold USD as a reserve was obvious: gold.
That was all fine and dandy until our expanding warfare and welfare states, along with the monetization of debt by the Federal Reserve, resulted in the rapid sell off of our gold reserves. “It dropped from 706 million ounces at the end of WWII to around 286 million ounces in 1971.” (Source: Zerohedge)
Nixon ended the agreement and officially terminated our currency for gold exchange. By essentially defaulting on the gold-backed dollar, there was little reason for other countries to hold USD reserves, leaving the US economy slipping off the slope.
Meanwhile, there’s OPEC saying they need to maintain their real value for oil, offering to accept gold for oil. The US needed a way to incentivize other countries to continue holding the USD as its primary reserve currency.
Enter the petrodollar in the 1970’s.
The petrodollar is an artificial demand for USD as a reserve currency to purchase oil. I had it backwards at one point, thinking that the petrodollar was a result of the US being a reserve currency, which was just a residual effect of WW2. Wrong. The USD was a reserve currency after WW2, when it was backed by gold. The petrodollar is literally the propping up of the USD after the gold backing was stripped away… or should I say squandered away.
Saudi Arabia has a very large petroleum reserve, considerable dominance in OPEC, and of course they are easily corruptible. That trifecta made them ripe for the picking, and the US brokered several agreements that resulted in the petrodollar.
Yes, the petrodollar was born out of thin air in a dirty quid pro quo between Saudi Arabia and the US. To read about it on Investopedia or Wikipedia you’d think everyone can have a petrodollar if they just trade oil. It’s just money backed by oil right? Not even remotely.
Saudi Arabia agreed to only trade their oil in USD, and would persuade the other OPEC nations to do the same. That way, a new global reliance on the USD would emerge. In order for a country to buy oil from Saudi Arabia, they must first buy USD.
In exchange, the US does Saudi Arabia a few solids like rebuild its infrastructure and provide some outside protection.
Obviously the conditions for this agreement are deteriorating, to say the least. America and her politicians are speaking out against Saudi Arabia more, and calling for a democracy there. Both of which pose a very serious threat to the House of Saud, and both of which run contrary to the petrodollar deal.
“The petrodollar system has allowed the U.S. government and many U.S. citizens to live way beyond their means for decades. It also gives the U.S. unchecked geopolitical leverage. The U.S. can exclude virtually any country from the U.S. dollar-based financial system…and, by extension, from the vast majority of international trade.” (Source: Zerohedge)
This is a SERIOUS source of resentment and global grievance against the US. The US has taken this for granted and often has taken it to the point of abusive. Rest assured the only government that hates Americans for their freedoms is the US government. The rest of the world hates them for their imperialism and petrodollar.
Saudi Arabia’s own welfare and warfare states are running amok as well. So with our one crucial lynchpin becoming panicked, and other OPEC countries working around the petrodollar arrangement, how long until this whole thing falls apart? And when it does, can we expect similar desperate actions taken by the EU and South America such as capital controls, expropriation of private funds, another wave of gold or asset confiscation like the one we had from 1933-1974, or even harsher travel restrictions?
Understanding how delicate the US economic situation is might help some people realize the inevitable peril of this economy. I used to think the ship could right its course, but no one had the guts to do it. Now, guts notwithstanding, there’s no turning this around. The fact that the fate of the USD is in the hands of none other than Saudi Arabia should have every American rethinking their holdings in USD and within US borders.
China is moving up in the world. It’s gaining on the United States. Arguably, the US is simultaneously slipping and losing ground. China is one piece in the game. The bigger picture is the days of US dominance are numbered. The smoke and mirror game is about up for the once great nation. It looks like this year is going to be quite eventful, and some major game-changers are afoot.
If this has you at least THINKING about what you could do to protect yourself from the fallout, please click here to schedule a consultation to see if there is a strategy that might suit you.