The Cardinal Sin Of International Finance

Tyler Durden's picture

Authored by Nick Giambruno via InternationalMan.com,

As Doug Casey has correctly noted, the prime directive of any organism - whether it’s an amoeba or a person or a corporation or a government - is to survive.

That’s why the US government protects the petrodollar so zealously. It needs the system to survive.

Why Everyone Uses the US Dollar… for Now

In the 1970s, the US government struck a series of deals with Saudi Arabia, creating the petrodollar system. The US promised to coddle and protect the Saudi kingdom. And, in exchange, Saudi Arabia would use its dominant position in OPEC to ensure that all oil transactions happened in US dollars.

 

Until recently, virtually anyone who wanted to import oil from any country needed US dollars to pay for it.

 

The dollar is just a middleman here. But countries and businesses use it in countless transactions amounting to trillions of dollars that have nothing to do with US products or services.

 

Plus, if foreign countries are already using dollars for oil, it’s just easier to use the dollar for other international trade. That’s why, in addition to oil sales, the US dollar is used for about 80% of all international transactions.

World leaders who have challenged the petrodollar recently have ended up dead…

Take Saddam Hussein and Muammar Gaddafi, for example. Each led a large oil-producing country—Iraq and Libya, respectively. And both tried to sell their oil for something other than US dollars, before US military interventions led to their deaths.

In October 2000, Saddam had started to sell Iraqi oil for euros only. Iraq said it would no longer accept dollars for oil because it did not want to deal “in the currency of the enemy.”

A little over two years later, the US invaded. Immediately after Baghdad fell to US forces, all Iraqi oil sales were switched back to dollars.

Thanks to WikiLeaks’ release of Hillary Clinton’s emails, we know that protecting the petrodollar—not humanitarian concerns—was a primary reason for overthrowing Libya’s Gaddafi.

According to her leaked emails, the US (and France) feared that Gaddafi would use Libya’s vast gold reserves to back a pan-African currency. This gold-backed currency would have been used to buy and sell oil in global markets. Also, it would have likely displaced a version of the French franc that’s used in Central and Western Africa.

The US and France backed a rebellion, both militarily and financially, that overthrew Gaddafi in 2011.

After Gaddafi’s death, plans for the gold-backed currency—along with Libya’s 4.6 million ounces of gold—vanished.

Of course there were other reasons the US toppled Saddam and Gaddafi. But protecting the petrodollar was a serious consideration, at the very least.

Putin Is a Tougher Adversary

The dollar’s special status gives Uncle Sam tremendous leverage. So it’s no surprise that Russia wants to undermine the petrodollar system.

Russian President Vladimir Putin summed it up this way:

Russia shares the BRICS countries’ concerns over the unfairness of the global financial and economic architecture, which does not give due regard to the growing weight of the emerging economies. We are ready to work together with our partners to promote international financial regulation reforms and to overcome the excessive domination of the limited number of reserve currencies.

Essentially, Putin is saying they all want to ditch the dollar.

That’s largely because the US uses the dollar as a political weapon. For example, the US tried to sanction Russia for its actions in Crimea and Ukraine. These sanctions made it harder for Russia to access the US dollar–based financial system. So of course Russia is going to push for an alternative.

Shortly after the sanctions, Russia struck a massive deal to sell oil and gas to China for yuan. The deal totally bypassed the US financial system… and any sanctions.

China’s Permanent Bypass Around the US Dollar

Russia is the world’s largest energy producer. China is the world’s largest energy importer. Normally, they would trade with each other exclusively in US dollars.

But, as I’ve told you in recent weeks, China is now introducing a more permanent way around that.

I call it China’s “Golden Alternative” to the petrodollar. It’s a streamlined way for Russia and everyone else to sell oil to China for yuan—or effectively gold.

China’s “Golden Alternative” to the Petrodollar

China is launching a practical and attractive alternative to the petrodollar system. It will allow anyone in the world to trade oil for gold. It will also totally bypass the US dollar.

 

Here’s how it will work…

 

The Shanghai International Energy Exchange (INE) is introducing a crude oil futures contract denominated in Chinese yuan. It will allow oil producers to sell their oil for yuan.

 

Of course, China knows most oil producers don’t want a large reserve of yuan. So producers will be able to efficiently convert it into physical gold through gold exchanges in Shanghai and Hong Kong.

Bottom line, two of the biggest players in the global energy market are totally bypassing the petrodollar system.

Informed observers say Russia is already converting a large portion of its yuan earnings to gold.

Of course, other countries are interested in sidestepping the US financial system and US sanctions, too. China’s Golden Alternative will give anyone the option to do just that.

This will make the US dollar a much less effective political weapon.

Other countries on Washington’s naughty list are enthusiastically signing up. Iran, another major oil producer, is accepting yuan as payment. So is Venezuela, which has the world’s largest oil reserves.

I think others will soon follow. From the perspective of an oil producer, it’s a no-brainer.

With China’s Golden Alternative, an oil producer can participate in the world’s largest market and try to capture more market share. It can also easily convert and repatriate its proceeds into gold, an international form of money with no political risk.

But this doesn’t apply to one critical holdout… Saudi Arabia.

Twisting the Saudis’ Arm

Saudi Arabia is the world’s largest oil exporter. A lot of that oil goes to China, the world’s largest importer.

Beijing still reluctantly pays for Saudi crude in US dollars. The Saudis won’t have it any other way, at least for now.

This bothers China. It can only import Saudi crude by obtaining and then using US dollars. And that, of course, means it has to stay in Washington’s good graces.

Trump’s Treasury secretary really drove this point home recently. He threatened to kick China out of the US dollar system if it didn’t crack down on North Korea.

China would rather not depend on an adversary like this. This is one of the main reasons it’s launching the Golden Alternative.

Saudi Arabia, however, refuses to participate. It won’t sell its oil in anything but US dollars because that would break its longstanding petrodollar agreement with the US.

When China, Russia, and others trade oil for yuan, it’s a significant blow to the petrodollar. But if Saudi Arabia switched to yuan, it would take out the petrodollar… and cause an immediate financial panic in the US.

The truth is selling oil for yuan would cost Saudi Arabia a whole lot.

It would immediately lose American diplomatic and military protection. Then the media and think tanks would quickly start pounding the table for the US military to force democracy on Riyadh.

Last year Trump said, “If Saudi Arabia was without the cloak of American protection, I don’t think it would be around.”

He’s absolutely correct.

Of course, the Saudis know all of this. So they’ve been on a short leash… until recently.

In a surprise move, Saudi King Salman recently became the first sitting Saudi monarch to ever visit Russia.

Until recently, the visit would have been unthinkable. Saudi Arabia has been one of the US’ closest allies since the petrodollar system started in the 1970s.

Meanwhile, Russia and Saudi Arabia have been enemies for decades. Most recently, the Saudis and Russians have been on opposite sides of the Syrian Civil War.

That’s why King Salman’s historic visit to Moscow is so remarkable. The Saudis are clearly hedging their bets against the US and the petrodollar system.

Saudi Arabia is now drifting closer to Russia.

The Saudis have committed to invest up to $10 billion in various Russian sectors. But, even more significantly, they’ve agreed to buy the S-400 missile system, Russia’s top line air defense system, as part of a $3 billion weapons purchase.

This deal signals a geopolitical earthquake. The Saudis have never bought Russian military equipment before.

Ever since the birth of the petrodollar, the Saudis have depended on American military protection. After all, it’s what they get in return for pricing their oil in dollars.

The S-400 system deal suggests the Saudis are hedging their bets. First, they’re not buying an American system. Second, they’re buying a Russian system that’s capable of deterring an American attack.

Saudi Arabia is making significant moves to give itself alternatives to American protection.

At the same time, China is cutting back on Saudi crude.

A few years ago, Saudi oil made up over 25% of Chinese oil imports. They were Beijing’s No. 1 supplier. Today, the Saudis’ market share has dropped below 15%.

In other words, the Saudis are losing massive market share and getting pushed out of the biggest oil market in the world. This is mainly because they refuse to sell oil to China in yuan.

China has made itself clear. It’s willing to expand business with anyone who will accept yuan as payment.

Today, Russia has overtaken Saudi Arabia as China’s top supplier. Its share of the lucrative Chinese market has grown from 5% to over 15%.

Russia’s enthusiastic acceptance of yuan as payment is the main reason for this shift.

In the meantime, Angola, an African oil producer, has also come on board. The country now accepts yuan as payment for its oil exports to China. It even made the Chinese yuan its second legal currency in 2015.

Chinese imports from Angola have shot up since. It’s now China’s No. 2 supplier, after Russia.

None of this bodes well for the petrodollar system.

The Saudis have two choices… rip up the petrodollar or get shut out of the world’s most lucrative oil market.

One way or another—and probably soon—the Chinese will find a way to compel the Saudis to accept yuan. The sheer size of the Chinese market makes it impossible for Saudi Arabia to ignore China’s demands indefinitely.

What to Watch For…

China might not convince the Saudis to ditch the petrodollar system tomorrow. But it’s making significant progress.

A few months ago, Saudi Arabia announced it was willing to issue Panda bonds to finance its government spending deficit. (Panda bonds are yuan-denominated bonds from non-Chinese issuers that are sold in China.)

This is remarkable. The Saudis’ currency is pegged to the US dollar. Up until this point, they’ve exclusively used US dollars for all of their major financial initiatives.

Issuing debt in yuan—instead of US dollars—is a significant move. It means Saudi Arabia is drifting closer to China.

Also, the Saudis recently inaugurated the massive Yasref refinery in the Saudi city of Yanbu. The refinery is an $8.5 billion joint venture between Saudi Aramco and China’s Sinopec.

These are noticeable steps. But the Saudis still haven’t given China what it really wants—oil for yuan.

However, it could happen soon…

The Largest IPO in History

In the coming months, the Saudis plan to float a 5% stake in Saudi Aramco, the state oil company.

Saudi Aramco is the most valuable company in the world. It will likely be the biggest equity offering ever. It could triple, or even quadruple, Alibaba’s current record initial public offering (IPO) of $25 billion.

The IPO’s success will depend on Saudi Arabia recruiting big cornerstone investors. But so far, Western investors haven’t shown a lot of enthusiasm.

For China, however, it could be the perfect opportunity to buy political influence in Saudi Arabia.

If China bought a large stake in the Aramco IPO, it would help cement its relationship with Saudi Arabia. It would also put more distance between the Saudis and the Americans.

And critically, it would give the Chinese more leverage to compel the Saudis to accept yuan for oil.

China is in the process of negotiating not just a 5% stake, but potentially a larger one.

Bottom line…the Saudis haven’t made a clean break with the US yet. However, they are drifting toward China financially and Russia militarily.

The Saudis are clearly setting up the option to dump the petrodollar.

If the Saudis sell oil to China in yuan, it would kill the petrodollar overnight. However, short of that, things still look very dire for the petrodollar.

The petrodollar system is facing serious erosion, thanks in large part to China’s Golden Alternative. That’s already baked into the cake.

And with that, severe inflation in the US is a certainty.

This will likely be the tipping point…

After the collapse of the petrodollar, the US government will be desperate enough to implement capital controls, people controls, nationalization of retirement savings, and other forms of wealth confiscation.

I urge you to prepare for the economic and sociopolitical fallout while you still can. Expect bigger government, less freedom, shrinking prosperity… and possibly worse.

It’s probably not going to happen tomorrow. But we know where this trend is headed.

It’s possible that one day soon, Americans will wake up to a new reality. Once the petrodollar kicks the bucket and the dollar loses its status as the world’s premier reserve currency, you will have few, if any, options.

The sad truth is, most people have no idea how bad things could get, let alone how to prepare…

Yet there are straightforward steps you can start taking today to protect your savings and yourself from the financial and sociopolitical effects of the collapse of the petrodollar.

We recently released a special Guide to Surviving and Thriving During an Economic Collapse. Click here to download the PDF now.

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jamesmmu's picture
Is Your Money in a Reputable Bank? – Municipal Bankruptcies & More on the Way!

http://investmentwatchblog.com/is-your-money-in-a-reputable-bank-municip...

peddling-fiction's picture

They know they are committing a grave sin, but write it away.

https://en.m.wikipedia.org/wiki/Loans_and_interest_in_Judaism

The combination of loans and interest in Judaism is a complicated and detailed subject. The biblical Hebrew terms for interest are neshekh (Hebrew???‎‎), literally meaning a bite, and marbit/tarbit (?????‎/?????), which specifically refers to the gain by the creditor;[1] neshekh referred to interest that was charged by deducting it from the loaned money itself, before the loaned money was handed over to the debtor, while marbit/tarbit referred to interest that was charged by adding it to the amount due to be repaid.[2] The word marbit/tarbit, which referred to the form of interest more familiar in modern times, became ribbit (?????), in later Hebrew, and hence in modern Hebrew. Similar to the Arabicword Riba used in the Quran.

The Torah and Talmud encourage the granting of loans if they do not involve interest. But the halakhah [applicable Jewish law] regarding free loans apply only to loans made to other Jews. It is permissible to make loans with interest to non-Jews.[3] Charging interest is classed in the Book of Ezekiel as being among the worst sins,[4] and is forbidden according to Jewish law. The Talmud dwells particularly on Ezekiel's condemnation of interest,[5] where Ezekiel denounces it as an abomination, and metaphorically portrays usurers as people who have shed blood.

Dickweed Wang's picture

So in short Jewish religous texts say it's o.k. to screw anyone thats not a Jew . . . tell us something we don't already know.

And they wonder why they've been kicked out of 200 countries in the last 2000 years.

Antifaschistische's picture

If China would stop their "my penis is bigger than your penis" games with Japan, Korea and Taiwan...and treat them all like the distant family that they actually are (yes, families fight sometimes) then it would be all over...done...finished.   They could form a trading union that would dominate the planet.  Singapore, Philipines, Vietnam, India(?) would follow and the Petrodollar would be toast.

but that won't happen....because pride (mian, "face") will come before any rational economic strategy.

...like, I won't talk to him until he apologizes for what happened 80 years ago!!

unfortuate for them.....good for me.  All my income is in US Dollars.   thank you all.  happy thanksgiving.

Brazen Heist's picture

Cryptocurrencies bichez. Use them to bypass US sanctions and capital controls.

Mwahahah

ThePhantom's picture

systems of dependance .....

Clock Crasher's picture

We will have to off set any petro dollar losses with more nuclear weapons and crack teams of single use disposable special operations units. 

Long WWIII 

Akzed's picture

Last year Trump said, “If Saudi Arabia was without the cloak of American protection, I don’t think it would be around.”

 

I think the family this was directed to got the message.

shovelhead's picture

Saudi's will become state sponsers of terrorism in the near future.

redmudhooch's picture

One thing I should like to say on this day which may be memorable for others as well as for us Germans: In the course of my life I have very often been a prophet, and have usually been ridiculed for it. During the time of my struggle for power, it was in the first instance the Jewish race which only received my prophecies with laughter when I said that I would one day take over the leadership of the state, and make it that of the whole nation, and that I would then, among many other things, settle the Jewish problem. Their laughter was uproarious, but I think that for some time now they have been laughing on the other side of their face. 

Today, I will once more be a prophet: If the international Jewish financiers in and outside Europe should succeed in plunging the nations once more into a world war, then the result will not be the bolshevization of the earth, and thus the victory of Jewry, but the annihilation of the Jewish race in Europe, for the time when the non-Jewish nations had no propaganda is at an end. National Socialist Germany and Fascist Italy have institutions which enable them, when necessary, to enlighten the world about the nature of a question of which many nations are instinctively conscious, but which they have not yet clearly thought out.

At the moment the Jews in certain countries may be fomenting hatred under the protection of a press, of the film, of wireless propaganda, of the theatre, of literature etc., all of which they control. If this nation should once more succeed in inciting the millions which compose the nations into a conflict which is utterly senseless and only serves Jewish interests, then there will be revealed the effectiveness of an enlightenment which has completely routed the Jews in Germany in the space of a few years. The nations are no longer willing to die on the battlefield so that this unstable international race may profiteer from a war or satisfy its Old Testament vengeance. The Jewish watchword 'Workers of the world unite!' will be conquered by a higher realization, namely, "Workers of all classes and of all nations, recognize your common enemy"

-Adolf Hitler

serotonindumptruck's picture

The USA may be forced to abandon their KSA alliances, but it seems unlikely that they would attack Saudi Arabia in a military sense.

The Death of Empire is always an ugly thing, and the dying empire historically lashes out and attacks its perceived adversaries, which typically results in the empire being utterly defeated, both militarily and politically.

The social decay that is so readilly apparent within the USA is gaining steam, and a collapse of empire from within (civil war) will no doubt accelerate the impetus to declare war on any outside adversaries.

The recent purchase of the Russian S-400 missile system by the KSA would only marginally match the current military capability of Iran, which has already deployed such technology to their border regions.

It might also be important to bear in mind that the Saudis have not taken delivery of this advanced missile system, and they may never have that opportunity, as significant geopolitical events are clearly becoming much more frequent.

shovelhead's picture

The real question is will women be driving those mobile missile launchers?

serotonindumptruck's picture

Unlikely.

Women rely on emotional imperatives, which serve to guide their flawed and inappropriate decision-making process.

Logic and military protocol are a distant second.

VWAndy's picture

  Or they want to destroy the country with its own coin. Aint that some shit?

NuYawkFrankie's picture

The Planetary Parasite's days are numbered.

galant's picture

The observation that all organisms are programed to survive, offered as an analogy for the defence of  petro-dollar, is not very helpful unless it is compared with cancer cells that relentlessly divide until they destroy the host. That better explains growing worldwide distaste for the petro-dollar.

Mustafa Kemal's picture

"Trump’s Treasury secretary really drove this point home recently. He threatened to kick China out of the US dollar system if it didn’t crack down on North Korea."

For a country who is supposedly desperate to maintain the petrodollar, much evidence, such as above, indicates quite the opposite. I feel the deep state in the US is actually part of driving the death of the petrodollar.

Big changes coming. Going to be good for Au and BTC, not so good for peace and prosperity.

Regarding 

"the prime directive of any organism - whether it’s an amoeba or a person or a corporation or a government - is to survive."

This sounds correct but is not the behavior of empires in decline. Instead of fighting to survive, they eat themselves

earleflorida's picture

City of London : King of FX market and = USSA in 'Seigniorage Trade'

UK's City of London joins the 'Asian Infrastructure Investment Bank' mar/2015...--- this China led financial institution will eventuall rival/surpass the USSA dominated IMF and home-grown usery World Bank.

Problem is BIS which is basically a ussa instrument of sanctions before moar drastic measures?

https://www.bis.org/publ/rpfx16.htm

https://www.cityam.com/article/1378429771/london-still-number-one-forex-...

Note: London's FX give the country's GPD a sizable boost in net trade balance,.. as the FRB/Treasury make money off the US $$ Petro Trade (that is our cost of cheap  usa debt moar than offsets trade deficits.  All global finance works around the almighty dollar in the world today, as it has since 1944!

earleflorida's picture

addendum::   'The Temptaion of dollar Seigniorage' (jan/2009 [2007-08 financial crisis]... note date?)

https://www.atimes.com/atimes/Japan/KA23Dh01.html 

koan's picture

“If Saudi Arabia was without the cloak of American protection, I don’t think it would be around.”

He means the Saud royalty, they would go the way so many other "royals" have in the ME, headless.

slipreedip's picture

Slowly at first....and then all at once.

Herdee's picture

What it will mean is this: As the world starts to use other currencies instead of American dollars, all those dollars are eventually going to rush back into the States. Hyperinflation will result. It won't be because the economy is doing good like people think. It'll be this way because the dollar will go all to shit and commodities and everything else will inflate in price dramatically. Initially everyone thinks it's great that everything is going up and everyone has more dollars. It'll give the impression through "money-illusion" that everthing is getting better, but it's not. Eventually as time goes by, people will start to understand that their money system supported by the paper currency is becoming worthless. It won't buy much any longer. As they hold onto their dollars for longer prices keep rising. The time will come when everyone decides to get rid of it all and spend because if they don't it'll be more expensive not next month or next week as it starts out but the next day. Hyperinflation is the endgame for America as the world watches their deficits climb out of control by trillions, everyone will dump the dollar. the $100 trillion dollar note will be the note used to try to buy a loaf of bread. The merchant will just laugh at you.

IronForge's picture

Probably not.  I do not think KSA will switch from selling Petroleum in USD to CHY.

The Hegemony would most likely stage a False Flag to install a "Puppet" Ruler and/or Form of Govt (e.g.,  via Color/Seasonal Revolutions) friendly to them in order to preserve the PetroDollar.

The Hegemon themselves may concede to allow for EUR and or GBP to be included in the Petrol Contracts.

Fed-up with being Sick and Tired's picture

Wait a minute, anyone can buy Gold on those exchanges, right?  WITH ANY CURRENCY?

To Hell In A Handbasket's picture

The USSA public has ridden the back of Jewish ursary and benefited greatly, that subconsciously they love the perks of the Petrodollar and world reserve currency status, while castigating the Jewish bankers. The average USSA citizen has no fucking idea, what is about to hit them when these privileges end. No fucking idea. 

I repeatedly read the same narrative by American Zerohedgers. We must end the disadvantaged trade arrangements with China, because  USSA the jobs are exported etc etc. All good valid points and truthful, but how many of these same people talk about there advantages of world reserve currency status and the Petrodollar scam? This article claims 80% of world trade is done in dollars. 90% of the Trumpettes on ZH, have no fucking idea how this privileged translate into real life. This allows the USSA to print and export most of their inflation abroad.

The USSA is a nation used to being subsidised by the rest of the world, due to the dollar. It has allowed it to be 5% of the world population, while using 24% of the worlds resources. Believe me, when this perk ends, you American fuckers will become GREEN. A nation built on the back of other nations is not a long term and sustainable model. USSA instigated wars have unmasked this reality. Killary and her R2P emails with Blumenthal, explained the importance and why Gaddaffi had to go. To protect the lie. 

Who has destroyed the USSA? "Workers of all classes and of all nations, recognise your common enemy"

-Adolf Hitler

While a Trump supporter believes their enemy, is the NFL, ESPN, the knee bending niggers and Muslims. Fucking retards.

You Only Live Twice's picture

The USA benefits for now of the priviledges, but the people to whom it truly matters are the private shareholder families of the Fed. The same families that own and control most of the central banking system.

However, they see the writing on the wall, and when the day comes, they will leave the USA out to dry. For those who read the Rothschild Bank in England's annual report in 2017, you will notice that they are selling massively their US treasuries position (I think that they sold 63% if my memory is good) and moving the money to Asia. Once they have safely moved their wealth and interests elsewhere, they won't care and will allow the USA to collapse.

The Middle East alliances that keep the petrodollar afloat are fracturing and the prolonged period of low Oil prices is slowly tearing the petrodollar system apart. Eventually, as a means of self-preservation, they will agree to ditch the petrodollar together. When that day comes, and it is closer, the debt comes home to roost in the USA and the consequences will be dire.