[Pops]

Pops – Since I’m not a global macro-economics guy so I know I'm treading on thin ice. OTOH I didn’t say anything about the yuan becoming a reserve currency.

No, Tanada did.

A big deal has been made about the dollar losing it's reserve status as long as I've been paying attention. I think it has to do with the whole "the US is going to collapse to a smoking ruin any minute" meme. I was explaining why I didn't think that (reserve status) has anything to do with this (china/iran deals)

As far as buying oil in RMBs, yuan or glass beads, I think it's the least of our worries but I'm no expert in macro, micro or any other cro.

As you know, the majority of oil purchases are via long term private contract using formulas based on the spot and futures markets for price discovery but not transacted through the spot market. Oil isn't homogenous and has all sorts of plusses and minuses depending on the buyer, there are various FOB locations, terms, side deals and who knows what are plugged into the pricing formula so why not exchange rates?

For a long time oil exporters have wanted oil denominated in US$ because they wanted to invest them here. Obviously that made for more investment in the US and some small advantage for us because we didn't need to convert our dollars to sheckels or whatever to buy oil.

But if they (exporters) decide they want to invest in China instead of the US I suppose the fact that most spot and futures markets are priced in dollars wouldn't pose an insurmountable mathematical hurdle. Obviously liberalizing the yuan to be fully convertible is a step in the direction of making that conversion more comfortable - but again this (Iran sanctions) doesn't have a whole lot to do with that (Yuan convertibility).


Also tho, I agree with you completely that China is perusing a very rational and pragmatic energy policy that has supply at the top of a priority list that could be titled Peak Oil To Do, while we dumbass Americans are busying ourselves drilling stripper wells and blowing trillions "liberating" oil fields for China to exploit.


I just found this for further reading on pricing, it is more recent than anything I've read.
An Anatomy of the Crude Oil Pricing System

[Tanada]

Yup, that was me. The UK was the World Reserve Currency until the 1920's, they had a world spanning Empire and massive influence making the Pound Sterling a defacto world currency. You could use British pounds anywhere money was used because everyone was willing to trade local dollars and/or goods for it.

World War I put them into debt to an up and coming nation known as the USA and by the outbreak of World War II they had not been able to pay off their earlier debt, so the USA became the defacto leader of the 'free' world, everywhere people spoke English the Dollar was good, and in countries where American tourists were welcome the Dollar made tourists rich in comparison to the indigenes. The USA freely lent money to almost anyone who asked, and the governments who borrowed money deposited it to use as collateral for purchases and other loans. Pretty soon the USA dollar was 'as good as gold' and became the accepted reserve currency for most of the world.

Fiat money is only valuable if sensible people are running the printing presses and/or digitizing machines that create more money from nothing. If the holders of USA currency come to believe that the people running the presses and computers controlling the supply of USA dollars are not sensible and self restrained then the switch away from the USA Dollar can happen quite rapidly. After all the vast majority of Dollars now held in 'reserves' are no long physical paper or coins, they are just numbers on a computer generated ledger sheet. By using those digital dollars to buy physical assets like say oil refineries and oil production contracts the country doing the purchasing is lowering their risk of too many USA digital dollars chasing too few BBL of physical oil in a declining world supply. If a foreign government starts selling dollars on the open market the US Federal Reserve has to buy them up if nobody else wants them, otherwise the value of the dollar will shrink. The first way to buy them is with USA reserves of foreign currency, most of which are also digital holdings so they will just switch from one ledger to another. If there are not enough foreign holdings to buy up the supply of dollars for sale then the Fed will have to switch to exchanging physical assets, like the gold in the deep storage vault under the New York branch of the Federal Reserve. Again this would be mostly a paper transaction switching the gold from one account to another countries account.

If that still isn't enough then things can go splat off the fan rather quickly, but I doubt that will happen as nobody wins in that scenario and all the reserve banks on Earth are very aware of that fact.

[ROCKMAN]

Thanks Tanada. Makes me wonder if the Chinese are funding these projects with established cash reserves or just creating digital yuan.

And to share the excitement as I'm posting I'm watching a well turn to the right in S Texas and eating Vienna sausage and crackers. The oil patch doesn't get more exciting then this. LOL

[sparky]

.
The yuan is not a reserve currency , it's an arbitrage currency
It give Brazil , south Africa and now Australia a credit line to buy stuff in China by-passing the U.S. dollar
but it cannot be traded or exchanged
It make the U.S. reserve bank very nervous some kind of by-pass from the toll booth
the BRICS countries have been trying to set up an alternative network but so far only China has
the trading muscle

[ROCKMAN]

They might not be able to trade it for another currency but they are trading it for guaranteed access to billions of bbls of
future oil. Oil they won't be paying for in US dollars. So might not be a reserve currency but the yuan is allowing they to remove a lot of future oil from the market while supplying the oil exporters with billions of yuan they can swap back to China locking up more of their export market. Sounds like a dang effective plan for a country with no reserve currency.

[Tanada]

.
The yuan is not a reserve currency , it's an arbitrage currency
It give Brazil , south Africa and now Australia a credit line to buy stuff in China by-passing the U.S. dollar
but it cannot be traded or exchanged
It make the U.S. reserve bank very nervous some kind of by-pass from the toll booth
the BRICS countries have been trying to set up an alternative network but so far only China has
the trading muscle

Yet.

The Yuan is not a reserve currency yet, but IMO from looking at the history of how things in the world really work compared to how people expect them to work it is only a matter of time. The Peoples Republic of China will be the superpower of the 21st century, just as the United Kingdom was for the 19th Century and the United States were for the 20th. Our time in the sun is fading while theirs continues to brighten.

I am not saying that is my preference, nor am I saying it is inevitable, but IMO all the trend lines are now going in that direction and nobody is doing anything to change that. The PRC is working very hard to become the dominant economic power of Asia and the Pacific Rim, from there it is a small step to recognition as the leading superpower instead of the weaker power. When the head of the PRC government calls Germany and gets them to go along with the PRC instead of the USA the transition will be finished. Right now the USA still has a great deal of power and influence, but for how long?

[radon]

But China has said they want to have a global currency, not sure if that has changed since '09 or whenever. That currency would be issued by the IMF, it has a name I can't remember.

Special Drawing Rights. Strauss-Kahn and others at the IMF championed the cause as public figures, but then he was removed with the help of the maid scandal, and the discussions were immediately erased from the public view. The global currency would mean that the issuers of the US dollars would no longer have the autonomy, and being a group of private individuals they did not want this to happen. Now they are kicking off others involved from the international institutions (excel scandal). Obama administration reportedly no longer includes representatives of the "global currency" group from the investment banks, though it used to in the past. I am no expert on the subject, but this is what the gossip is.

[ROCKMAN]

Radon - But you appear to know a lot more than me so what would those Special Drawing Rights accomplish? I gather it would have made it easier to conduct oil commerce without the US dollar Iinvolved?

[radon]

I do not know the details really, once I come across something with further details I will post them.

My understanding of the explanation behind the global currency is that it would accomplish the same that the creation of FRS accomplished back in the very beginning of 20th century in the US. Back then, the US was in crisis, and paper money were printed by various banks independently of each other. Being individually of limited size in terms of capital, these banks could not afford to take upon the risks of the manufactures and did not want to lend them money, thus dooming the US economy to further declines. Establishment of FRS enabled the bankers to take upon greater risks and resume lending to the manufactures, because they now acted in accord and the depth of their aggregate capital could now absorb substantially larger risks. This spurred growth and the economy fared well up until the next depression back in 1930s.

So, today's independent central banks would be an analogy to the US independents at the pre-FRS era, and the IMF with the Special Drawing Rights (SDRs) would be a prototype of a global FRS. Today, the capital is stuck in the banks, the banks do not want to lend the money to the manufacturers, because the global demand is falling, financial returns are declining and risks are growing. Hence the capital is frozen in the financial assets. In another thread, AntiDoomer is hailing the new heights of SP500, what he forgets to mention though is that these heights are held at very thin trading volumes and with the use of unprecedented levels of leverage. Money, currently printed in abundance, have nowhere else to go actually; these heights do look surrealistic.

With the help of SDRs, the IMF would have a financial muscle to resume lending to the manufactures on a global scale, thus boosting the growth and preventing/mitigating the crisis, just as the FRS did on the US local scale back in 19xx's.

Again, I am not a specialist in the area and I am just relaying the story as I understood it. And I have quite a vague idea about the US history of the first half of 20th century (I am not a US resident).

So this whole arrangement is not aimed solely at the oil trading settlements, even though one the most important consequences of its implementation would be the possibility of use of SDRs for settling the oil trades (possibly the most important one).

[ROCKMAN]

radon – Yep dangerous ground for me to tread but if being wrong bothered me I would have given up geologic interpretation long ago. LOL.

Simple situation: Iran and China. Iran accepts the yuan for payment for oil and China accepts yuan in payment for exports to Iran. Neither the Chinese or Iranian currencies are reserve currencies. So what? The Chinese get the Iranian oil (perhaps at a nice discount since there is a limited sales market) and the Iranians get the Chinese imports as if the US dollar doesn’t even exists let alone holds the sacred status of a global reserve currency.

Just sounds like the US sanctions against Iranian oil exports created a Chinese wet dream. And when the Chinese use US dollars (that we gave them as interest payments) to pay for their share of those 400,000 bopd of Saudi oil that will be run thru the new Red Sea refinery with the products probably exchanged for euros? It doesn’t seem that the US being the big reserve currency dog on the block doesn’t prevent us from losing access to a big chunk of exported oil. And that’s just one of the many refinery angles China is playing across the globe.

[radon]

Well this entire situation as you described is actually being seriously discussed. China trades everything in yuans, the EU in euros, and the world falls apart into several big currency zones: US dollar zone, euro zone, yuan zone and a few others possibly. Inter-zone trade will diminish substantially, de-globalisation will kick in. This is the third alternative scenario (the first one is the US dollar as the global currency, that is what we have now; the second is the IMF with SDRs as the global central bank).

What is often forgotten is that the situation of the last 20 years with a single world reserve currency is unique to the last 20 years of the human history. Immediately prior to that, the world was divided into a US dollar zone and a rouble zone, which was huge - it was like a forth of third of the world (though it was quite smaller than the US'). The Soviet Union did not run substantial trade deficits, instead it lent to or invested in other countries within the zone. China apparently is doing the same while building the yuan zone - setting up refineries, investing in infrastructure etc. The SU did the same in Africa and elsewhere back in the middle of 20th century - huge dam in Egypt and all sorts of things here and there. At least for a while it should work, as the experience shows.

Prior to WWII the world was divided between Britain, the US, Germany, Japan and may be some others. Correct me if I am wrong, but a global reserve currency, as such, did not exist. If any country wanted to have reserves, it tried to accumulate gold or other tangibles. And so on and so forth.

The current global US dollar system implies a certain international division of labor - some territories supply raw materials (Middle East, FSU, Africa etc), some run lower-end manufacturing and other low-value industries (China, India) etc. The "golden billion" countries sit atop the value added chain - they run high-end manufacturing, financial services and services in general, high tech. A dissolution of the world's single currency zone into several ones would lead to each currency zone having to build the entire value chain (except absent raw materials) within its borders.

For the "golden billion" this will mean that substantial chunks of population will become poorer as they will have to give up lucrative high-end jobs and take upon poorer rewarded "Chinese"-type ones. This process is underway, as manufacturing began migrating back to the US from China, and Southern/Central Europe are going through "austerity' (actually, a euphemism for this process). China, on the contrary, has been benefiting from it, and will benefit at least for a while, as it finalizes the absorption of the high end of the value chain.

Overall, this will be a regress, because the new separate currency markets will be smaller than a single global one, and therefore, arguably, less potent in terms of innovation and investment. But a regress looks inevitable anyway. Hopefully, it will be cyclical.

In addition, this new divided world will be a more dangerous place as the new zones will compete for the resources, as the experience of the first half of the 20th century confirms.

Alternatively, the US+ may try to maintain their dominance and income levels, but given the realities, they will not be able to do so other than by making other parts of the world (substantially) poorer. This will make the world a far more dangerous place for everyone outside the "golden billion", but in this case China will probably be a stabilizing counter-force, until itself becoming everyone's headache. China no longer needs the US, as the Chinese have effectively built the entire value chain already, and are able to produce everything that they need on their own, including the most sophisticated things (they are even growing their high-end military exports). That's why the US will have hard time taking upon China.

In fact, the status of a "reserve" currency requires only one thing - ability to supply everything that a potential consumer may need to buy, including vital goods, in sufficient quantities. Why would you hold a pile of foreign currency banknotes stashed in your safe box? When you are sure that you can buy everything you want using them. The degree of labor division has progressed so much in China that they can sell you anything that you will ever need. The Chinese no longer need the US consumers to run the economy.

Regarding the refineries - a while ago we had a discussion that the Iran sanction would likely be circumvented with the help of intermediaries. So what we have now - Iran sells oil to China using yuan as you described, China refines and sells (Chinese) products to the US. Everyone is happy - the US have the sanctions intact and get fuel, Iran sells oil and gets revenue, China is benefiting from others' chest-beating and goes on building the yuan zone. Yeah. Again, the rumors are that the Chinese do intend on building the yuan zone and already discuss it openly in, eh, private circles.

Also, refining capacity is a strategic asset, that, in particular, feeds the military in times of conflict. From this perspective, the world's refining capacity does not matter when making the strategic development plans.

[ROCKMAN]

radon - See...as I said: you understand this very well. It seems the US still has one big advantage: food. We swap a lot of ag products for US dollars with the rest of the world. But it also makes one wonder about China's aquisition of ag lands around the world. I've assumed it was done for their own consumption. Now I wonder if they aren't also looking, at least in part, to use that export capability in a way similar to how they are playing the refinery gain. The US has a significant amount of leverage from ag exports with many countries especially in the ME. What happens if China becomes the primary source of grain for Libya (or any other oil exporter): China buys oil from Libya with yuans and refines it next door in Egypt's new and efficient largest refinery every built there...built by the Chinese. China sells wheat from its African ag lands to Lybia in exchange for those yuans it used to buy that oil with. And China then sells the refinery products for euros. Again not a single US dollar involved.

And, as you point out, the Chinese expansion into arms sales. A market the US has dominated for decades not only recovering foreign owned US dollars but garnering political influence. How long before the Saudis begin replacing their US built air force with Chinese air craft. That would seem a tad more impactful than the millions of AK's China has sold to the rest of the world.

As far as exporting military influence I wonder how many folks know that China now has its first air craft carrier? Bought it from the Russians. I can only assume the Chinese have paid attention to how the US has exported its enfluence via our air craft carrier force.

[radon]

Yes, little to add to this, if anything.

The US has the "strategic depth" in all aspects needed to maintain autonomy - territory, resources, vital staples, population - therefore the fears, that some express, that China could "override" the US are misplaced. At worst scale back a bit and then grow out again because many in the world (though not all) will likely be missing Pax Americana. Unless the US goes on rampage worldwide, of course.

[ROCKMAN]

radon - In case you haven't seen it that's why I occasionally toss out the "MADOR" concept similar to the MAD concept of the Cold War. In this case it would be the Mutually Assured Distribution Of Resources. While the US and China may be competitors on in some areas each benefits from the other remaining viable. In the end we might see cooperation between the two at a detriment to some of our historic "allies".

[sparky]

.
A bit of comic relief , the G7 finance minister just had a meeting
the final communique
"Finance ministers and central bank governors of the Group of Seven rich economies have reaffirmed a commitment not to seek to depreciate their currencies for domestic gain."

this in a middle of a currencies war !!
And while the Bank of Japan is out easing the U.S. by flooding the world with trillions of Yens
getting it to drop by 30% in days

"they were reassured by Japan that its revolutionary new economic strategy was not intended to weaken the yen."

The financial papers are agash , meanwhile Mr Bernanke , after having pumped an ocean of greenback to refloat the U.S. Titanic is warning of "possible speculative bubbles" .....no kidding !1

junk bonds are now trading at 5% return , a few years back that was treasury bonds value

[Tanada]

T-bills have become essentially money losers quite a while ago, that is why the FED has been digitizing money out of thin air and buying them up. No sane person wants to have a heavy portion of them in their portfolio at this point.

All these factors added together give Iran excellent reasons to want to trade in Yuan, and they give the PRC excellent reasons to divest in all the currencies currently deflating like popped balloons.

[ROCKMAN]

Had not thought of that angle: better for the Chinese to spend every penny of foreign currency they have to buy oil in the ground (even though proved oil reserves are selling for a premium) and expaning their refining infrastructure insteady of sitting back and watching the value degrade. Makes me wonder if the Chinese are starting to feel that investing in a few hundred $billion in oil reserves and refineries is a better long term investment than T-bills.

[sparky]

.
Yes there is some very serious stuff going on ,
like Churchill once said about the soviet politburo , it's like watching bulldogs fighting under a carpet.
basically money is not worth very much now and there is a scramble to find real value .
it's like a horse race at Randwick race course ,
the point is not to work out the fix , but which one of many fixes is going to stick

[ROCKMAN]

sparky - I still like my analogy to the two guys running away from a bear. In this modification, regarding the future distribution of energy resources, I see a three man race with that bear: the US, China and the rest of the world. As with the bear it isn’t a question of how fast the bear can run but who can run faster. The US is running a good race thanks to being able to print global reserve money at will and the Chinese are keeping afoot by expanding access to long term oil and products via refining expansion. The rest of the world appears to be falling behind…food for that hungry energy bear. And when that bear gets hungry again we’ll be back to a two-man race. Probably decades ahead but it seems inevitable.

[sparky]

.
Europe being mauled is definitely on the cards ,in your analogy Japan would be in a sack race
China has the advantage of controlling her population with an Iron hand if it come to grief ,
as for the unending printing of greenbacks , few of them seems to appear in the street
have you noticed extravagant public spending in your area or is it disappearing in some wall street hole