U.S. sanctions against Russia, the Russian threat to "Crash the U.S. economy", the status of the U.S. dollar as the 'World Reserve Currency' and the Petrodollar: An analysis.
70 2014-03-07 by Three_Letter_Agency
Consider the following headline by AFP: "Russia warns it could ‘crash’ U.S. economy if sanctions enacted over Ukraine crisis".
This news has brought derisive comments across reddit, such as this top upvoted comment in a thread in r/collapse: "BAHAHA Russians have no economic leverage on the US. What are you talking about Putin? China isn't going to follow you over this dumb little excursion. They have a massive investment in the US prospering. Silly Putin."
It seems that people don't have a full understanding of just how important the Russia dropping the USDollar as its reserve currency would be.
First, lets review some history.
Right now, the US dollar makes up nearly two-thirds of global currency reserves. The status was formalized in 1944 with the Bretton-Woods System, a post-war agreement between 44 allied nations to tie the exchange rate of their currencies to the US dollar. At the time, it made sense; the Dollar was tied to the gold standard and the United States was economically dominant where most of the European economies were in shambles.
In 1971, the Nixon formally took the US Dollar off of the gold standard, ending the Bretton-Woods System. There was simply too much money being spent on the Vietnam War and the bloating programs of Lyndon B. Johnson's 'Great Society' for the standard to be practical, and nations such as France were gradually exchanging their reserves of Dollars for physical gold, reducing the US's economic influence.
What occurred next is known as 'Nixon Shock': The United States entered a recession and growth slowed from 7.2% to -2.1%. There was too much money being spent to tie down the value of the dollar to a specific number, although the process was tried for a couple years under the 'Smithsonian Agreement'.
In 1973 Henry Kissinger, then the Secretary of State and National Security Adviser, hatched a plan to maintain the status of the US dollar as the worlds reserve currency and traveled to Saudi Arabia. An arrangement was made whereby the Saudis would sell their oil in USD, and then invest some of their surpluses in US debt securities, a process known as petrodollar recycling.
The agreement was mutually beneficial, the United States brought stability to the dollar and allowed it to remain as the global reserve currency, and the United States began providing significant military protection from that point forward, in terms of arms sales, military bases and more, from that point forward.
By 1975, the rest of OPEC had followed suit. Thus, the petrodollar was born, and it is the reason that the US Dollar accounts for nearly 2/3rds of the worlds currency reserves.
And as of right now, nearly every commodity in the world is priced internationally in U.S. dollars!
Where does Russia fit in?
Russia is the ringleader of an economic association of countries known as BRICS: Brazil, Russia, India, China, and South Africa. All in all, these countries represent 21% of world oil output.
Russia also has some other relevant allies, namely, Iran and Syria. Iran is the fourth largest crude oil producer in the world, at 5% of production.
Beyond simply accounting for over a quarter of the worlds oil production, they represent the worlds largest emerging economies and significant holders of the US dollar as the world reserve currency.
What would happen if these countries and more allies switched away from the US dollar as the global reserve currency?
Foreign nations would send their reserves of the dollar back to the United States in exchange for whichever currency replaced it in oil sales.
The Fed would no longer be able to print money at will to solve our monetary problems. For example, they are currently adding 85 billion a month to our money supply, which through the process of fractional reserve banking ends up as 850 billion new dollars. Without strong international demand this would be devastating for inflation.
The Fed would have no choice but to shrink the money supply. This would lead to hyperinflation, and the price of oil in the US would skyrocket. When oil prices greatly increase, so does everything else, as oil is essential for our goods transportation infrastructure.
Banks would have to raise their interest rates, because the fed would be forced to raise the Federal Funds Rate. Money exchange would slow to a crawl, everyone currently with an adjustable rate debt would be in deep trouble, and massive layoffs would occur.
The American economy would forever have to be tremendously smaller due to the smaller money supply.
The chain reaction of a smaller money supply would cause the defaulting on many, many loans and possibly facilitating the collapse of the entire banking system.
It is not an understatement to declare that the Petrodollar system is necessary for the maintaining of the Political and Financial elite of the United States.
There are indications that Russia and China have been planning the switch for some time now, such as China consistently making moves to settle trades in Yuans, as well as speculation regarding their gold buying, though I don't know enough about that particular topic to say anything concrete.
And when Russia says they are prepared to weather the storm and emerge victorious from the switching of the world reserve currency, that is not a statement we should disregard.
Today's sanctions truly could be one of the first dominos that that leads to a complete economic collapse scenario in the US and perhaps the wider western world. Remember, it is not who actually produces the oil that is important, but the fact that the oil is sold in U.S. dollars. With such a sizable amount of powerful economies, representing not only 25% of oil production by also a significant portion of oil buying and economic leverage. It would, without exaggeration, EASILY cause the U.S. economy to crash from its already precarious position. The ultimate result would likely be wider warfare.
Thoughts?
33 comments
26 Three_Letter_Agency 2014-03-07
More information: The history of Petrodollar Warfare
Iran takes the concept of 'Petrodollar Warfare', the idea that the United States is going to war to protect the selling of oil in USD, as a fact. They are under the (quite correct) impression that the international standard of selling oil in USD is a form of neo-imperialism and have taken concrete action to move away from the Petrodollar.
Consider the following:
First it was Iraq in the year 2000. Iraq, which has the largest oil reserves in the world, decided to switch to the Euro in an effort to rebuke the United States for their hardline economic sanctions. Three years later, the United States invaded and caused a regime change, and within months Iraq returned to selling its oil in USD. (PDF Warning)
Libya, with the ninth largest oil reserves in the world, presented a threat to the petrodollar in 2010. Muammar Gadaffi proposed the creation of an African currency called the gold dinar, which would be used for their oil transactions. It was not long before a 'No-Fly Zone' was imposed on Libya and the Gaddafi was removed from power. After the revolution, it took just weeks for the new ruling class to establish a private central bank and continue the selling of oil in dollars.
Syria switched to the Euro for oil sales in 2006. Where are they today?
It is safe to say that the United States would not hesitate to start or provoke a war to maintain their status quo as global economic elite. Stay alert!
8 rockytimber 2014-03-07
War is not always the first option to maintain the status quo. Don't forget to watch places like Turkey and Azerbaijan. Syria as well is a front on the war with Russia. And yes, it has been an attack on Russia, but on the edges.
Someone is going to control the plantations and financial assets of the planet. Its us (U.S.) or its Russia, China, Iran, from the point of view of the western elite, the western club of the rich.
Like the assets of Ukraine have not already been assessed, like westerners haven't been drooling for their chance for decades.
Also, Russia used to be the biggest player in the black market global opium trade. After their loss in Afghanistan, now it is western interests in control of the black market opium trade, primarily US interests. That is quite a jewel. And it is also packed with risk takers. So, additional risk taking of brinksmanship with Russia is in the cards, and Syria will pop up again in the headlines, and also Turkey. What plantation do you live within? What speck of land isn't part of someones plantation anymore?
2 Ian56 2014-03-07
Yep.
1 SpyVSHorse 2014-03-07
I like your ideas, but think the cart may be leading the horse.
Maybe countries that make rash, unwise financial decisions also make rash, unwise internal governance decisions? The countries that moved away from the dollar did so in desperation of sanctions and only as an act of defiance. Their people were the true ones to suffer. So by moving away they compound their bad leadership with a restless populace that wants revenge, thus civil war.
In the case of Iraq, you're probably right on. But Syria and Lybia don't seem to feel right to me.
3 MaryLS 2014-03-07
Sounds like the current situation in the US to me.
2 SpyVSHorse 2014-03-07
Exactly!
Just think about how many jobs you've had where management is insane with power. Now imagine they have tanks.
16 Elevator829 2014-03-07
If russia does this and china joins in, I have no doubt that the US will go to war all over the world in order to get petrodollar status again. No doubt the economic collaps would finally bring about marshall law and the DHS will finally get to use their army they've been building. Im sure the job market will adjust so that joining the military will be one of the few options we have to make a decent living... I cant even begin to comprehend the propoganda campaign that will ensue...
12 Three_Letter_Agency 2014-03-07
As far as the DHS goes and furthermore their program to provide military tech to local police, its like they've been planning for this all along...
2 destraht 2014-03-07
I think that certain influental parties were planning for this since at least the mid-nineties and after committing to it for years they made it the only option for the West. Now who wants to have an orderly and arranged loss of empire when they can just quadruple down?
2 trilateral_agent 2014-03-07
| If russia does this and china joins in...
It seems likely that if Russia dumps their reserves, the value of the US dollar will be damaged. China will not want to be holding onto ANY US dollars if Russia is going to sell, so China will want to sell them off as quickly as possible while they can get a higher price for them.
I haven't found exact figures, but in 2012, China allegedly held 70% of their $3.3 trillion US dollars worth of foreign exchange reserves in US dollars.
Also, here's some background and a slightly different perspective on the Russian foreign exchange:
http://www.zerohedge.com/contributed/2014-03-04/russia-and-its-dollar-reserves-going-nowhere-fast
14 PublicIntelAnalyst 2014-03-07
My memory isn't real accurate on this, but I seem to recall that Kaddafi was operating in gold Dinars and was, shortly before the overthrow of Libya, in talks with BRICS nations (specifically China) about dropping the US dollar from their trade agreements - or something along those lines.
Seems sort of relevant to your "I don't know enough about that particular topic" disclaimer. Might be worth researching. (as I said, my memory is pretty sketchy on the details of that)
9 Three_Letter_Agency 2014-03-07
yes, and I remember furthermore that he wanted to unite the islamic nations of Africa under the gold dinar as well. I'll find some good sources and include it in future analysis.
6 [deleted] 2014-03-07
Saddam Hussein wanted to switch his oil transactions from greenbacks to euros. We all know how that story ends.
2 Erus00 2014-03-07
Gadaffi was actually staunchly against fundamental islam.
2 Three_Letter_Agency 2014-03-07
But he also argued that the islamic countries should ignore their differences to create a union to oppose western imperialism.
2 Erus00 2014-03-07
Well, yes and no. The United States of Africa.
Many northern countries were interested but not so much the southern countries. Of the northern countries that were interested: Zimbabwe is about 85% Christian, Eritrea is about 50% Christian and 48% Islam, Ghana is about 70% Christian, Cape Verde is 80% Catholic and Senegal is mostly Islam.
1 Three_Letter_Agency 2014-03-07
you are right, I was thinking of his proposal for the gold dinar, which according to wikipedia, "Muammar al-Gaddafi was openly advocating the creation of a new currency that would rival the dollar and the euro. In fact, he called upon African and Muslim nations to join an alliance that would make this new currency, the gold dinar, their primary form of money and foreign exchange. They would sell oil and other resources to the US and the rest of the world only for gold dinars.”
2 destraht 2014-03-07
Gaddafi had a big epic plan for North Africa with gold, water and oil. I don't think that it would have taken very long for it to the region to have generated enormous wealth. I subscribe to the idea that humans are so productive that when under an efficient system they can make "50 years of progress" in as little as a decade.
3 MaryLS 2014-03-07
Sadam also started using some other currency in exchange for oil. I think the petrodollar issue is central to the current problems in the US economy. They simply cannot afford to have anything other than US dollars used for oil commerce, but at this point they also do not have much clout for keeping the dollar standard.
4 StringyLow 2014-03-07
One thing I would like to emphasize is that this action would make the Fed powerless. Without demand for T-bills, the bank system would enter a tailspin.
Returning to government-issued money instead of Fed-issued money has to be considered.
4 Cottonballs2012 2014-03-07
Don't the banks own Russia just like they do every other country in the world? Why would they let Russia do that?
5 TechNarcissist88 2014-03-07
The theory is that Russia is beyond control of the deep circles of power over here in the West. Like China, they play along while trade is beneficial to them, but it seems they still run in different circles. Hence the demonization and overtures of direct rather than proxy war.
Brazil and India I see as wildcards, and South Africa is a strong foothold in everyone's favorite up-and-coming continent
1 Cottonballs2012 2014-03-07
Thanks.
1 Three_Letter_Agency 2014-03-07
The very top of the banking structure is immune because it is protected by governments (central banks) and owns the worlds debt. It would likely be at the forefront of any currency or economic reform, and not only come out unscathed but more powerful. It would also benefit from the debts of any wars that resulted in a collapse.
3 godiebiel 2014-03-07
Russia alone can only pressure the EU (Germany with gas, UK with its oligarchs, French with army deals, and Italy - elite consumer market). Directly Russia cannot afflict economically the US, though geopolitcally Russia is an invaluable ally; UNSC veto, transportation of troops and equipments to/from Afghanistan, Assad, and Iran nuclear deal.
Your considerations requires that other members would follow Russia in pressuring, most importantly China, then yes, this would be a different paradigm entirely. If China single-handedly decided to dump its Treasury bonds, then we would see a collapse of the dollar and the American (possibly even global) economy.
For the time-being EU and China supassed the US as main trade partner for Brazil and India. Also the US is already producing surplus gas through fracking (which it wants to compete for the EU market), oil imports are declining (higher domestic production, and ethanol).
3 orrery 2014-03-07
BRICS
3 [deleted] 2014-03-07
Wasn’t there a prediction by someone that it would collapse in March? My bets March 3/22.
Prediction: http://www.youtube.com/watch?v=GOx2JtY9-u8
3 BigmanThor 2014-03-07
It I worth bearing in mind here the hypothetical discussion that has been held amongst various "gold bugs" over the last few years that Russia could, in conjunction with China, install a new gold backed currency and demand that any energy exports is paid for by this new currency. This would deliver a massive blow to the petrodollar as Europe would have no other option than to agree and use the new currency for their energy imports from Russia. As the Euro is, in theory, backed by gold deposited in the ECB by the member states they could easily follow suit. The US would then be forced to follow, with devastating effects on the government/financial system which relies on printing of dollars trough QE to maintain a budget deficit. As any discussion of the monetary system, things easily get a bit dry, but thought worth mentioning that the theory is already there.
3 Ian56 2014-03-07
The greatest threat to US National Security a new Global Reserve Currency Updated 10/14 http://ian56.blogspot.com/2012/02/the-greatest-threat-to-us-national.html
A Message to the American People from History. A brief comparison of the American and British empires. The mistakes of history are oft repeated Updated 04/26 http://ian56.blogspot.com/2012/08/a-message-to-american-people-from.html
The very deliberate strategy by the Federal Reserve to engineer a major global depression. It looks like it was Greenspan's plan all along. Updated 03/19/13 http://ian56.blogspot.com/2011/11/ultimate-bear-post.html
2 metapop 2014-03-07
Great analysis. My conclusion: invest in bitcoin now
1 ChuanFaFist 2014-03-07
Now the switch is happening.
1 Three_Letter_Agency 2014-03-07
A half year after I posted this, yes it is beginning. I ought to update this and repost it
1 ChuanFaFist 2014-03-07
Definitely. I saw the news today and did a reddit search for "petrodollar" and came up with your post.
Not sure what the next year will look like, but I don't think Putin is going out like Saddam and Gaddafi. He's not a tinpot dictator.
5 TechNarcissist88 2014-03-07
The theory is that Russia is beyond control of the deep circles of power over here in the West. Like China, they play along while trade is beneficial to them, but it seems they still run in different circles. Hence the demonization and overtures of direct rather than proxy war.
Brazil and India I see as wildcards, and South Africa is a strong foothold in everyone's favorite up-and-coming continent
1 Three_Letter_Agency 2014-03-07
The very top of the banking structure is immune because it is protected by governments (central banks) and owns the worlds debt. It would likely be at the forefront of any currency or economic reform, and not only come out unscathed but more powerful. It would also benefit from the debts of any wars that resulted in a collapse.