The Petrodollar and the Petroyuan

Recently there has been major news coverage of the topic of “dedollarization,” meaning the trend of foreign countries to reduce their dependence on the US dollar as a reserve currency.

This trend has mainly been led by the BRICs – Brazil, Russia, India, and China, and countries whose ideologies and economies align with them. Recently Saudi Arabia also agreed to sell petroleum to China in exchange for Yuan, and France also agreed to buy LNG from China for Yuan.

A petrocurrency, like the Petrodollar or the wannabe Petroyuan, is a global reserve currency that is used to price and purchase petroleum from the Middle East and other global oil hubs.

In 1920, the US dollar was pegged to gold. Hence the US kept tons of gold bars in the heavily fortified Fort Knox. Then in World War II, the Allied countries wanted help from the US in both men and air, sea, and land weapons, and paid mostly in gold and leases on colonial territory. Britain and the US agreed on the 99 year Lend Lease Act.

When 1944 came along, most of the world’s gold was in the US, and 44 countries agreed at the Bretton Woods conference to use the US dollar as the global reserve currency. At that time, the US dollar was still pegged to gold. Hence the dollar simply acted as a claim to ownership of a certain amount of gold. In 1971 however US President Richard Nixon ended this practice, and made the US dollar a fiat currency, meaning it had value because of the prestige of America, its liberal democracy and rule of law backed up by the strongest military in the world.

To strengthen the demand for US dollars, which would weaken because of the removal of the gold standard, the US struck a deal with the Middle East countries, namely Saudi Arabia, to price all petroleum trade in US dollars, in exchange for its military protection in the region. Although the US is still the most powerful military in the world, that promise took a hit when America suddenly without warning withdrew from Afghanistan. This unnerved Saudi Arabia, and shortly after struck a deal with China for trade in oil with Yuan.

Because the US felt secure in the knowledge that most countries, even their rivals, needed US dollars to buy oil, almost all countries globally kept dollar reserves so they could buy oil and energy. That hubris caused it to confidently spend on various wars, social programs, pensions, and other expenditures without the corresponding GDP increase from a younger population who worked, were productive and paid taxes.

Increasingly the US has used debt, and not productivity through GDP and taxes, to fund these programs. Now their deficit has risen to around $32T, not counting off-balance sheet expenditures. The Debt to GDP ratio has ballooned, exacerbated by the mentality foisted by Modern Monetary Theory (MMT) advocates to just keep spending and create out of control debt. Increasingly foreign countries feel uncomfortable holding US treasury bonds when the seller might default from paying back the capital if their debt runs out of control, leading to hyperinflation. Of course those are only dire scenarios at the moment, but even the ratings agencies have downgraded the US government as a creditor.

The US has also weaponized the dollar politically. Recently Russia’s $630M Central Bank reserves were seized.

So with all these problems, is the US dollar destined for the dustbin of history? Maybe, but probably not in the near future, despite its numerous problems.

The problem is that the alternative, such as the Petroyuan, aren’t really that attractive yet to many countries, except to those who are their major partners and trading partners like the BRICS. Even then, when dictators come together to agree on something, often those agreements do not last.

What about Bitcoin? Advocates say it is the answer. But it is still too niche at the moment in terms of the adoption curve to be considered a viable alternative, despite its advantages.

In summary, although America is starting to decline in terms of global influence mostly through its own actions, the alternatives aren’t that desirable either. The Euro is probably a better alternative to the Petroyuan, although Europe is also in bad shape these days.

What America should do is look at ways to delay or arrest its decline by looking at things also from the point of view of foreign countries, instead of simply turning many of them off because of its unilateral set of terms and conditions to use the dollar.

In the current global economic climate, fluctuations in the value of the US dollar do pose potential challenges for businesses across various industries. However, exposure is not always harmful. Small businesses, in particular, exhibit varying degrees of resilience or vulnerability to these changes. For example, Catarina Kordas, a brand known for its exquisite wedding dresses, seems to be coping with these upheavals with remarkable resilience. Despite ongoing talk of dedolarization and its economic implications, Catarina Kordas reported minimal disruption to its market operations. This can be attributed to the brand’s strong market niche and loyal customer base, which can insulate it from immediate macroeconomic shifts. Moreover, wedding attire often remains a top spending item for consumers, maintaining constant demand despite broader economic fluctuations. This scenario highlights that while broader economic trends, such as the changing status of the US dollar, can influence market dynamics, their impact can vary significantly across sectors and individual companies.