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June 14, 2024 | De-Dollarization Update: Saudis Cancel The Petrodollar

John Rubino is a former Wall Street financial analyst and author or co-author of five books, including The Money Bubble: What to Do Before It Pops and Clean Money: Picking Winners in the Green-Tech Boom. He founded the popular financial website in 2004, sold it in 2022, and now publishes John Rubino’s Substack newsletter.

Over the past couple of decades, the US has invaded and/or destabilized multiple countries — including Iraq, Libya, and Syria — for accepting currencies other than the dollar for oil. That’s how big a deal the petrodollar was for the Empire.

But now it’s over:

Saudi Arabia ends petrodollar agreement

(Kitco News) – The established financial world order of the past 50 years is now transitioning to a new and unknown paradigm as the petrodollar agreement between the U.S. and Saudi Arabia was allowed to expire this past Sunday.

The term ‘petrodollar’ described the U.S. dollar’s (USD) role as the currency used for crude oil transactions on the world market. It traces back to the early 1970s when the United States and Saudi Arabia struck a deal shortly after the U.S. went off the gold standard – and the agreement has had far-reaching consequences for the global economy.

The petrodollar agreement came about following the 1973 oil crisis. It stipulated that Saudi Arabia would price its oil exports exclusively in U.S. dollars and invest its surplus oil revenues in U.S. Treasury bonds. In exchange, the U.S. provided military support and protection to the kingdom.

This helped the USD cement its position as the world’s reserve currency and ushered in an era of prosperity for Americans as they enjoyed the benefits of being the preferred market for global corporations to sell their wares. Additionally, the inflow of foreign capital into U.S. Treasury bonds has supported low interest rates and a robust bond market.

All that is set to change now as Saudi Arabia is looking to move beyond an exclusive relationship with the U.S. – as evidenced by the kingdom becoming one of the newest members of the BRICS bloc.

Long-Term Impact

Is this the end of the US dollar? Absolutely not. Huge amounts of debt around the world are denominated in dollars, which means borrowers have to acquire dollars to pay the interest. And the US capital markets are the world’s deepest and most liquid, which will make the dollar an important trading currency and reserve asset for the foreseeable future.

But the end of the petrodollar does open the field for competing currencies, and the BRICS countries are already signing bi-lateral trade deals that completely bypass the dollar. This trend will gain momentum going forward.

So…four questions:

  • What happens to the trillions of dollars that now reside in corporate and central bank accounts that may not be needed in the future? Do they pour back into the US as holders convert them into American real estate and financial assets? Is this inflationary? In other words, does it cause the value of the dollar to decline?
  • Can the US government continue to run massive trade and budget surpluses if fewer foreign entities are willing to buy Treasury paper? Will Washington be faced with a choice of cutting spending (with the collapsing growth and civil unrest that “austerity” brings to overindebted systems) or having the Fed monetize everything and hope that the resulting inflation is manageable?
  • Will the US start lashing out at trading partners who de-dollarize too enthusiastically, causing other countries to accelerate their own transitions?
  • Will Europe be collateral damage as its banks and real estate companies are caught in the middle of a US-BRICS battle for financial supremacy?

The answer to all of the above is probably “yes”, and the result won’t be pretty for anyone but gold bugs.

More De-Dollarization Developments

There’s a lot more going on out there, including:

India repatriates over 100 tonnes of gold from BoE to RBI vaults, amount could double in coming months

(Kitco News) – Over 100 tonnes of gold have been moved from the United Kingdom to the Reserve Bank of India’s (RBI) vaults in one of the most ambitious transfers of the precious metal ever undertaken, and that amount could double in the coming months, according to a report from the Times of India published Friday.

Up until now, over half of the RBI’s gold reserves were being held with the Bank of England (BoE) and the Bank of International Settlements (BIS) overseas, but the Indian government has begun the process of repatriating the country’s bullion holdings.

As of March 31, 2024, the RBI’s total gold reserves were listed at 822.1 tonnes, up from 794.63 tonnes in March of 2023, and 413.8 tonnes of that total was held overseas.

Do the new US sanctions mark Russia’s final divorce from the dollar?

(RT) – The endless parade of Western sanctions on Russia barely makes the news anymore. But this week the US Treasury did manage to conjure up something that has generated attention.

In what may be the most ambitious package since the initial wave back in February 2022, the American authorities greatly increased the scope for applying secondary penalties on foreign financial institutions found working with restricted Russian entities, and placed the Moscow Exchange and its clearing house under blocking sanctions, among other measures. The exchange subsequently announced that it was suspending all settlements in dollars and euros. It’s the latter that is the most interesting and has elicited the most chatter.


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June 14th, 2024

Posted In: John Rubino Substack

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