By New Silk Strategies staff
Those rare news outlets that dare report the details of Russian and Chinese economic infrastructure projects are now exploding with news that the Chinese are about to force the Saudis into using the Chinese yuan (RMB) to settle their debts for oil sold to China. At the time of this writing, no one knows if the reports are true. Many of them are coming from gold sellers.
The forum participants at Russia Insider and RT, for example, are almost all jubilant at such news because they believe that if the dollar collapses, the US will be hard put to wage more wars.
Firstly, what are these reports based on? Is there a risk of collapse at all?
Yes, the risk is there and most analysts believe it hinges on the Saudis, who have never been less stable.
Crown Prince Mohammed bin Salman has jailed hundreds of his kinsman and seized most of their assets. He has also recently agreed to purchase not only American air defence systems of the Patriot type but also the Russian S-400 system.
This was wise because the Patriot system is said to be designed so as not to permit the targeting of US-made missiles or planes, while the Russian system has no such qualms.
Likewise, the Russian system is said to be designed so as not to shoot down Russian missiles and planes.
These assumptions may or may not be accurate. But it is safer for the Saudis not to take any chances, and therefore they apparently will be installing both systems.
But what worries the West the most is the Saudis’ rapprochement with China and Russia in the military and economic spheres, respectively, leading to a strong suspicion that China may be effectively pressuring the Kingdom to accept RMB (renminbi, or yuan) in payment for its oil. China has successfully pressured, or persuaded, other countries, such as Venezuela and Iran, to accept non-dollar settlements for international trade. Venezuela obstinately refuses the US dollar. If the Saudis succumb to this kind of pressure, many economists and investors believe the petrodollar could be in trouble.
Some believe without the support that the Saudis have been providing both by demanding only US dollars in settlement for their oil trade and by keeping their cash reserves in the form of dollar-denominated treasuries, the USD would collapse. But we have investigated the accuracy of this belief and have arrived at some surprising findings.
So if the Saudis turn against the US and drop the dollar prop, will the dollar truly just wither and die?
Well, remember that the main effect of the Saudi “prop” is psychological. Ever since the 1974 when Richard Nixon signed the first petrodollar deal with King Faisal, there has been a strong belief among Western observers that without this prop, and absent the gold standard, which was abolished in the early 70s, the dollar will enter free fall.
However, it was not the Saudi prop but rather investors’ and economists’ faith in said prop that held the USD aloft. The US and many of its trading partners will not give up their beloved buck without a fight. Their faith will not wither overnight.
Further, what currency could supplant the dollar?
The Russians and Chinese have both been on a gold buying spree for years and it is clear they are seeking a gold prop in analogy to the Saudi oil prop.
But remember that the now-defunct US gold standard, which Russia and China may be emulating, was based on a promise that the buck would be backed by gold. That is, if a holder of a certain amount of US dollars (above a legal threshold) so desired, he could demand the equivalent amount of gold in exchange for his dollars. This system, eventually failed because too many users were demanding their physical gold and the supply got dangerously low. Now if the Chinese, for example, should decide to offer a similar deal to users of the RMB, that would no doubt work for a while, just like the US Bretton Woods system did. But such a Chinese-implemented system could suffer from the same problem – though it is important to note that, under the Bretton Woods system, the dollar was overvalued with gold pegged at $35 per ounce. Or to state it differently, gold was undervalued at that level. The Chinese should be able to avoid this pitfall with proper pricing.
However, Chinese monetary experts believe that it is not so much an external backing but a strong economy and especially, the use of a given currency in international settlements that lends said currency its value. As China’s economy grows stronger, the US economy is declining. In fact, there seems to be no interest in Washington or Wall Street in growing the US economy on sound honest principles. For example, Trump and the US Congress seemed to be working in tandem on a plan to use Russian sanctions as a way to build the US economy. This ties in with the US’s zero-sum philosophy, ie, the notion that there is a specific amount of wealth in the world, and there can only be loser and winners – no such thing as a win-win situation, the kind targeted by the Chinese. Specifically, the US hoped to use sanctions against individuals who were invested in the Russian Nord Stream II gas pipeline so as to stop the project and force Europe to buy grossly overpriced fractionally distilled (fracked) liquefied natural gas delivered by ship, inherently costly processes that, to say nothing of the up-front costs of fractional distillation, required special liquefaction and re-gasification and storage systems paid for by the suckers who bought the gas in Europe. Trump’s speech in Poland, where a weak-minded government was sold this white elephant, was designed to set the stage for the sanctions to take effect. (We had shown here that the US gas would be at least 15% more expensive than gas piped from Russia. However, that was computed based on US LNG heavily discounted because of over-extraction. It’s probably worse than that in the long run).
Fortunately, the EU Commission grew a pair and stood up to the US in a historic move and the US wound up not selling its gas to a captive customer as it had hoped to. Further, attempts to punish the investors did not stop the Nord Stream II project.