RIP Uncle Sam - How to survive the Post-America World Pt 2
/By martin Erasmuson
Back in November 2016 I wrote the first blog of the same title: ‘How to survive the Post-America World’. Before we turn our attention to that question, let’s address the implied question: ‘why would the United States collapse’?
In answering that question, it is useful to follow the money. Much of that dollar-train ends with China which is poised to push the United States off the global financial pedestal which they’ve dominated for nearly a century. How might that happen? In exploring that question, a good question might be: ‘How is it that the U.S. Dollar seems to be impervious to events like the 2008 global financial crisis (GFC)? The US substantially survived the GFC by just printing more money. And by more, I mean a lot more. As CNBC journalist Jeff Cox puts it; “The numbers are daunting if not shocking: [since 2008] US$12.3 trillion of money printing [quantitative easing], nearly $10 trillion in negative-yielding global bonds since [the GFC] in 2008”. Basically, the US has been running the printing-presses night and day for almost a decade, yet still the U.S. dollar remains high. How do they do that?
Mostly because the U.S. Dollar is the international default unit of currency. i.e. if you want to do business around the world, particularly buying or selling oil, you need U.S. Dollars. While the US looks to control as much of the world’s oil reserves as it can, and it does a pretty good job of that, what it can’t control physically with US troops (in Russia, Iran or China), it can do so financially by controlling the currency (U.S. Dollars) that oil is traded in. That’s why the U.S. dollar is frequently described as the ‘Petrodollar’. Such is the global demand for U.S. dollars for trade, it can literally keep printing a $12.3 trillion mountain and no one bats an eyelid.
Until someone challenges that status quo. When that happens, the US ‘banks the farm’ on maintaining global dominance of the U.S. Dollar. Then they have no problems going ‘all in’ to protect the status quo. Examples? In the last 15 years two major oil-producing counties attempted to challenged that, with both revealing plans to drop the U.S. Dollar in trading their oil: Libya and Iraq. It didn't go so well for them. Conspiracy theory I hear you say!
Let’s start with Libya. In January 2016 the US State Department released over 3,000 Hillary Clinton emails. According to journalist Brad Hoff, those emails show that Libya’s plan to drop the U.S. dollar and create its own gold-backed currency was the real motive for the US and NATO’s intervention.
Much has been written on the Iraq wars. History has already proven that the whole ‘weapons of mass destruction, (WMD) pretext was a sham. So what was the reason, the excuse for the US to go to war? Journalist Ron Paul, way back in 2006 reported “Saddam Hussein demanded Euros for his oil. His arrogance was a threat to the dollar; [while pitched as a threat to regional security, Iraq’s] lack of any military might was never a [real] threat… There was no public talk of removing Saddam Hussein because of his attack on the integrity of the dollar as a reserve currency by selling oil in Euros. Many believe this was the real reason for [the US] obsession with Iraq [and] played a significant role in [the US’s] motivation to wage war.” Back in 2006, Ron Paul also suggests, both Iran and Venezuela had similar ideas for ditching the U.S. Dollar, swiftly dropped on seeing the demise of Saddam Hussein.
Roll forward a decade and the list of countries looking to drop the U.S. Dollar as an oil trading currency now looks like this: Russia, China, Iran and Venezuela. Is it just coincidence that those are the same four countries the US will have us believe are a threat to Western Civilization as we know it and are subject to US sanctions?
As Ron Paul suggests, while Libya and Iraq were never any military threat to the US or their proxy NATO, the same cannot be said of Russia and China. While both rank behind the US in military and economic capability, that is changing fast. Wikipedia (November 2017) has China's economy as the world's second largest, the world's largest economy by purchasing power and the world's fastest-growing economy. China dominates global manufacturing and, according to Gartner, is poised to displace California’s Silicon Valley of their half-century technology dominance. That will see toe-to-toe battles between China and US Tec Giants: Amazon vs Alibaba Group; Apple vs Huawei; Apple Pay vs Ai Pay. And the numbers suggest some of those battles have already been won by China. Fortune predicts China will overtake the U.S. as the world's largest economy before 2030 (And possibly much sooner if the thesis in this blog prove correct).
So what? The U.S. Dollar is still the default international currency isn’t it? China might eventually dominate global manufacturing and by extension trade, but they, like other countries, will have to underwrite that trade in the worlds default currency, U.S. dollars. So, the US still has control right?
Well that might be about to change. China is poised to invite countries to trade oil in their Chinese, yuan. And to do that countries will need/want to buy yuan. Lots of yuan. Yeah right! ‘Why would anyone invest in yuan’ I hear you say? Because China will back yuan with gold. Basically, China will return to the ‘Gold Standard’ in which the standard economic unit of account (yuan) is based and backed by gold. Up until the early 1900’s many countries underwrote their currency with gold. Under the Gold Standard a country’s currency was effectively a promissory note for gold. In practice that would mean if you have a Billion in yuan, China will exchange your yuan for physical gold on demand (Do a Google search with “yuan china gold”, you’ll be presented with a bunch of articles).
‘Supplementary question’? “Wouldn’t China need a lot of gold to pull that off”? Yes, they’ll need a lot of gold; like literally truck loads. (And the questions keep coming……..) ‘So how much gold does China need/have’? Back in Feb 2016 CNN reported that “Gold imports to China have surged over 700% since 2010” and goes on to say: “China now [Feb 2016] consumes about 40% of the gold that comes out of the ground [anywhere on the planet] every year”. In October 2017 a Reuters article suggested “China’s proven gold reserves reached 12,100 tonnes at the end of 2016”. At the time of writing this blog, November 2017, gold was trading for US$1,278.40 an ounce, or US$45,094.27 a kilogram. (I’ll let you do the rest of the math to work out the value of 12K tonnes).
Back to those four ‘threat-to-civilization-as-we-know-it’ countries: Russia, China, Iran and Venezuela. What happens if they all ditch the U.S. dollar and switch to the yuan as their oil trading currency? Of the planets 80 million barrel per day total oil production, those four countries produce around 25%. What if we add to that reports from Saudi Arabi where the Kingdom’s Crown Prince Mohammad bin Salman bin Abdulaziz Al Saud is looking at options to end its 40 plus year reliance on the U.S. dollar. Then you could have nearly 40% of the worlds total oil trade moving away from U.S. Dollar. (On the day I was completing this blog, China’s President Xi Jinping announced that China supports Saudi Arabia’s efforts to safeguard national sovereignty and achieve greater development. This all poses further risk of the U.S Dollar collapsing)
Unlike Libya and Iraq, the US has less options at their disposal in combating China and Russia, least of all their preferred ‘Gunboat Diplomacy’. It doesn’t stop there for the US. The launch of the Asian Infrastructure Investment Bank (AIIB) in 2015, mostly backed by China, Russia and India directly challenges the US-dominated World Bank. Add to that predictions from commentators like Tony Seba that the Internal Combustion Engine (ICE) will be obsolete (and with it the oil industry) by 2030, the whole oil/U.S Dollar/Petrodollar may be consigned to history along with the ICE itself making the debate in this blog moot anyway. Either way, it’s 'Brown Trousers' time for the United States and by extension, the rest of the planet.
I keep threatening to explore the opening question in the title of this blog; what will happen if the United States collapses, and I will soon. That said, while the evidense presented in this blog suggests that inevitable demise (as inconvenient and alarming as that is), I’m far less certain about what the effect that will have on the rest of the world. In that regard, I’m curious of readers thoughts, suffice to say, it is unlikely the US will go quietly.