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PetroDollar System In Trouble As Saudi Arabia Continues To Liquidate Foreign Exchange Reserves

PetroDollar System In Trouble As Saudi Arabia Continues To Liquidate Foreign Exchange Reserves thumbnail

The U.S. PetroDollar system is in serious trouble as the Middle East’s largest oil producer continues to suffer as the low oil price devastates its financial bottom line.  Saudi Arabia, the key player in the PetroDollar system, continues to liquidate its foreign exchange reserves as the current price of oil is not covering the cost to produce oil as well as finance its national budget.

The PetroDollar system was started in the early 1970’s, after Nixon dropped the Gold-Dollar peg, by exchanging Saudi Oil for U.S. Dollars.  The agreement was for the Saudi’s only to take U.S. Dollars for their oil and reinvest the surpluses in U.S. Treasuries.  Thus, this allowed the U.S. Empire to continue for another 46 years, as it ran up its ENERGY CREDIT CARD. 

And run up its Energy Credit Card it most certainly did.  According to the most recent statistics, the total cumulative U.S. Trade Deficit since 1971, is approximately $10.5 trillion.  Now, considering the amount of U.S. net oil imports since 1971, I calculated that a little less than half of that $10.5 trillion cumulative trade deficit was for oil.  So, that is one heck of a large ENERGY CREDIT CARD BALANCE.

Regardless… the PetroDollar system works when an oil exporting country has a “SURPLUS” to reinvest into U.S. Treasuries.  And this is exactly what Saudi Arabia has done up until 2014, when it was forced to liquidate its foreign exchange reserves (mostly U.S. Treasuries) when the price of oil fell below $100:

So, as the price of oil continued to decline from the mid 2014 to the latter part of 2016, Saudi Arabia sold off 27% of its foreign exchange reserves.  However, as the oil price recovered at the end of 2016 and into 2017, this wasn’t enough to curtail the continued selling of Saudi’s foreign exchange reserves.  The Kingdom liquidated another $36 billion of its foreign exchange reserves in 2017:

According to the Zerohedge article, Economists Puzzled By Unexpected Plunge In Saudi Foreign Exchange Reserves:

The stabilization of oil prices in the $50-60/bbl range was meant to have one particular, material impact on Saudi finances: it was expected to stem the accelerating bleeding of Saudi Arabian reserves. However, according to the latest data from Saudi Arabia’s central bank, aka the Saudi Arabian Monetary Authority, that has not happened and net foreign assets inexplicably tumbled below $500 billion in April for the first time since 2011 even after accounting for the $9 billion raised from the Kingdom’s first international sale of Islamic bonds.

….. Whatever the reason, one thing is becoming clear: if Saudi Arabia is unable to stem the reserve bleeding with oil in the critical $50-60 zone, any further declines in oil would have dire consequences on Saudi government finances. In fact, according to a presentation by Sushant Gupta of Wood Mackenzie, despite the extension of the OPEC oil production cut, the market will be unable to absorb growth in shale production and returning volumes from OPEC producers after cuts until the second half of 2018. Specifically, the oil consultancy warns that due to seasonal weakness in Q1 for global oil demand, the market will soften just as cuts are set to expire in March 2018.

The Saudi’s have two serious problems:

  1. As the Saudi’s cut their oil production due to the OPEC agreement, the U.S. shale energy companies ramp up production because they are able to produce oil by shifting any losses to Brain-Dead investors looking for a higher yield.  This destroys the ability for OPEC to drain global oil inventories, so the oil price continues to trend lower.  Which means the Saudi’s may have to liquidate even more foreign exchange reserves in the future on lower oil prices.  Rinse and Repeat.
  2. The Saudis are planning a 5% IPO – Initial Public Offering in 2018 of their estimated $2 trillion of their oil reserves and are hoping to get $200 billion.  However, energy analysts Wood Mackenzie estimates that the value of the reserves are more like $400 billion, not $2 trillion.  This is due to all the costs, royalties and 85% income tax to support the Saudi Government and the 15,000 members of the Royal Saudi Family.  Thus, Wood Mackenzie doesn’t believe there will be much in the way of dividends left over.

That being said, I highly doubt the Saudi’s have the 266 billion barrels of oil reserves stated in the new 2016 BP Statistical Review.  The Saudi’s produce about 4.5 billion barrels of total oil liquids per year.  Thus, their reserves should last them nearly 60 years.

Now… why on earth would Saudi Arabia sell a percentage of its oil reserves if it has 60 more years of oil production in the future????  Something just doesn’t pass the smell test.  Is it worried about lower oil prices, or maybe it may not have all the reserves that it states?

Either way… it is quite interesting that Saudi Arabia continued to liquidate its foreign exchange reserves in April even though the price of oil was above $53 for the majority of the month.  I believe the Kingdom of Saud is in BIG TROUBLE.  That is why they are trying to sell an IPO to raise much needed funds.

As Saudi Arabia continues to liquidate more of its foreign exchange reserves, it means serious trouble for the PetroDollar system.  Again… without “SURPLUS” funds, the Saudi’s can’t purchase U.S. Treasuries.  Actually, for the past three years, Saudi Arabia has been selling a lot of its U.S. Treasuries (foreign exchange reserves) to supplement the shortfall in oil revenues.

If the oil price continues to trend lower, and I believe it will, Saudi Arabia and the PetroDollar system will be in more trouble.  The collapse of the PetroDollar system would mean the end of the U.S. Dollar supremacy and with it, the end of gold market intervention.

SRSrocco



34 Comments on "PetroDollar System In Trouble As Saudi Arabia Continues To Liquidate Foreign Exchange Reserves"

  1. onlooker on Sat, 17th Jun 2017 11:33 am 

    The real problem is not petrodollar or reserve or Economics. It is too many people on the planet. Too many people with unrealistic materialism expectations and a faltering web of life and the change in habitat ushered in by climate change and worsening environmental trends

  2. Midnight Oil on Sat, 17th Jun 2017 12:06 pm 

    What goes around comes around…
    Maybe Trump can give the KSA some more weapons
    Like in person with the US Fleet and a division or two of Marines…
    What is OUR OIL doing under YOUR SAND..
    This ain’t going to end well…
    War drums are beating louder all the time…

  3. bobinget on Sat, 17th Jun 2017 12:27 pm 

    MNO
    (correction) WE are Selling weapons to all sides.

  4. MASTERMIND on Sat, 17th Jun 2017 12:29 pm 

    Collapse of Global Civilization by 2020-Irrefutable Evidence

    https://www.reddit.com/r/collapse/comments/6g2d7j/collapse_of_global_civilization_by/

  5. Apneaman on Sat, 17th Jun 2017 1:01 pm 

    Irrefutable Evidence as opposed to refutable evidence?

    Once evidence is irrefutable it transforms and is called proof.

  6. Outcast_Searcher on Sat, 17th Jun 2017 1:37 pm 

    I have no problem with the article overall. I question the timing of the Saudi sale of some of its oil rights, and the reserve status of much of OPEC, given how opaque and non-credible many of their “disclosures” on reserves are.

    My problem is with the idea that for the US, the petro-dollar has significant (if ANY) impact in the modern world.

    There is a gigantic, well regulated, foreign currency exchange system, with the modern safeguards like a trading clearinghouse, etc.

    In such a world, there is NO need to hold ANY net dollar reserves (in reality) to buy and sell oil. Any such dollar requirements can be easily and fully hedged via the foreign currency exchange markets. (Don’t like dollars, hold whatever major currencies you prefer, instead, and exchange that mix as often as you want).

    I think this idea that the petrodollar props up the US dollar is now a complete myth.

    Wjat was a meaningful advantage in, say, the computer and trading technology of the 70’s is for all practical purposes, a non-issue in the day of HFT being commonplace.

    In fact, I’ll go a step further and say I think this is an example of an economic non-issue that doomers like to trot out as something to worry a lot about, because they believe it makes the threat of short term economic doom more palpable. (But in fact, it makes their economic prognostications less credible in general).

  7. makati1 on Sat, 17th Jun 2017 7:52 pm 

    Outcast, how much is the oily industry paying you for your “opinion”? The Petrodollar has been all that has kept the U$ alive for the last 30 years. When it goes, so goes the Empire. The sooner the better.

  8. Outcast_Searcher on Sat, 17th Jun 2017 8:47 pm 

    makatti1 — I know you constantly economic armageddon predicting doomers (who are constantly wrong, at least in the short term) hate it when someone doesn’t share in your view of imminent doom.

    Tough. That doesn’t mean I have anything more to do with the oil industry than the average American with an ICE.

    In fact, I have much less to do with it since I only drive 4000 miles a year, use only 500 KWH of electricity a month on average, buy a lot less consumer crap than most people, etc.

    How many times and how many years does your ilk keep getting to be dead wrong on the economy, month after month, hand-wringing post after post, and be considered credible?

    I think YOUR account is long overdrawn on that front.

    But keep telling yourself I must be an oil industry shill if it lets you live out your fantasy of ecomomic doom in your head.

    Meanwhile, the world moves on.

    BTW, I’ve never seen ANYONE give a reasonable explanation of why the petrodollar matters today to the US, since massive currency hedging markets exist.

  9. JuanP on Sat, 17th Jun 2017 9:00 pm 

    I only keep as few dollars as possible. I have been selling all my dollars for years now. I focus my investment on healthcare, food, water, land, safety, tools, materials, metals, and also invest in people and community. You are only as safe as your neighbors. I have never invested in this financial system because I have always been of the opinion that it wouldn’t last until my old age. I am almost 48 now and I think that there is no way that the global financial system will last another 17 years. This sucker is going down and it won’t stop until it hits the bottom. I’ve seen it happen at a national and regional scale and it is a scary thing to live through.

  10. makati1 on Sat, 17th Jun 2017 9:32 pm 

    JuanP, you are the smart one. Outcast is still in denial. He thinks he uses very little oil, but he does not think. He seems to believe that the current financial system cannot crash and burn because it has not happened … yet. He has no idea how the Petrodollar works or he would not say “it doesn’t matter”. Many Americans are in for a very painful education soon.

    I never hold USDs longer than it takes to transform them into other currencies and items of value. Real value. Not paper.

  11. makati1 on Sat, 17th Jun 2017 9:34 pm 

    JuanP, BTW: I like your statement: “You are only as safe as your neighbors.” So true! We are working with out farm neighbors to build a road accessing not only our own property but theirs also. Not to mention other help as it becomes needed. I wonder how many Americans even know who their neighbors are or what they are like? Their beliefs, views, needs, etc. Few, I bet. Most Americans are strangers in their neighborhood. Filipinos know and interact with each other. They help one another even if their means are small. Another reason why the Ps has a better chance in the future than the U$.

  12. anarky321 on Sun, 18th Jun 2017 12:13 am 

    i don’t like it when people use misleading scales on graphs, if you can’t make your point with legit scales then you don’t have one

  13. Davy on Sun, 18th Jun 2017 6:33 am 

    The petro dollar does not have the significance it once had. We are now in a new normal of repression easing, and managed bubbles. I say managed bubbles but really we know how to make them we still don’t know how to manage them and continue them at healthy levels. We are now beyond the dollar as it was pre 08 and in a time of Pax Americana. We now are in a new world order and China is now one of the most important aspect of this new order.

    China is now the credit impulse for the global economy. China is in fact one huge bubble ready to blow apart and take us all with it. The dollar is now just a conduit and its problems a symptom of this new order. Our new order is all about the moral hazard of malinvestment from improper allocation of resources I.E. a Ponzi. We are attempting to continue something that is ready to change. This is what happens to Ponzi arrangements near their end. When you build something without a foundation it fails. Ponzi arrangements are special in this regards. They are a lie. They produce and appear solid but they are basically a lie realized. We are now there globally. We are at debt levels and levels of unfunded liabilities that are a lie. This is now a fabric and cannot be changed because as we know Ponzi’s once initiated will end and end in tears.

    The petro dollar comes from a different period. It is still present and important but it is no longer a driving force in the world economy. Debt and malinvestment is. This debt and malinvestment is being extended and pretended in a global Ponzi of debt promises that will never be realized. It is a game of confidence that one cannot leave. Once confidence has been breached game is over. Currently there is a little and a lot of anxiety which creates an eerie calm. Some are not worried at all and some very worried but have no clue where to go so everyone is setting on their hands. This is a classic case of a slow boil. Forget the petro dollar as a force. It is part of a force. The real force is the global economy itself and a global debt bubble. This now has a life of its own. The Fed, PBC, and ECB are but pawns of this process. This is now about the debt and credit not oil.

  14. twocats on Sun, 18th Jun 2017 7:31 am 

    I agree with outcast (partly) – reserve currency not as important in a world where central bank printing is multi-national (FED, ECB, BOJ, BOE, SNB, BOC, RBA, China, Taiwan, Sweden, South Korea).

    Also hard to eliminate US when we are one of the largest producers of oil, economic production, and like to invade people who look at us funny.

    Ironically, the DOOM delay syndrome that outcast mocks is a DIRECT result of the very thing that has made reserve currency a non-issue. So he sort of contradicts himself within his statement.

  15. twocats on Sun, 18th Jun 2017 7:37 am 

    to clarify – the CB mad-print and ZIRP (and HFT) ARE the things that are kicking the global-economic-collapse-CAN down the road, while simultaneously making the world ever more uniform and fragile. if any of these processes stop it would spell an economic depression of COLOSSAL proportion.

    … but it won’t. so then the OTHER question that deserves debate: can anything else bring about an artificial economic collapse?

    Of that I’m not so certain. We may have to wait until either CLIMATE rises or EROEI falls enough to buckle this highly crystallized global economy.

  16. shortonoil on Sun, 18th Jun 2017 7:47 am 

    The US imports about 6 million barrels a day of crude, and exports about 6 million barrels a day in finished product. Every one of those barrels are bought and sold with dollars. The rest of the world either has to accepts dollars for crude, or have dollars to buy the products that keep their economies alive. No one else in the world has the capacity to purchase 6 million barrels a day; no one has the capacity to produce 6 million barrels of additional finished product. Without US dollars their economies would wither and die; the US has the greatest, and most sophisticated refining capacity in the world.

    Without the world’s reserve currency the US would not be able to buy the quantity of oil it is now buying; it has a negative balance of payment. There is no surplus of yuan or rubles in its Treasury. It would have no way of paying for it. It now uses its “oil credit card” better known as the FED printing press. When the US loses its reserve currency status a good sized portion of the world’s oil production will go with it, and oil is what makes the the world run.

    http://www.thehillsgroup.org/

  17. makati1 on Sun, 18th Jun 2017 7:54 am 

    Oh really, Twocats, the ‘can’ has an infinite road to be kicked down? Interesting! You need to tell that to the thousands losing their jobs every day. The thousands losing their homes. The millions having to chose between eating and needed meds. Need I go on?

    The fact that the U$ has ZERO reserves and a huge $20,000,000,000,000.00 DEBT doesn’t matter?
    The fact that your retirement is nothing but lies doesn’t matter?
    That the drug problem is going off the charts doesn’t matter?
    That the infrastructure that is necessary for a Western lifestyle is fast crumbling, doesn’t matter?
    Need I go on?

    Reserves ARE important. The fed printing presses are smoking and you can hear the gears grinding to dust. The ability to keep the lies going is becoming impossible. The cost of living is fast approaching the substitution of dog food for ground beef moment. Other countries are selling their reserves(savings) to keep their countries afloat. China is building an economic highway with its reserves. Only someone who has no savings for a rainy day would say that savings(reserves) are not important.

  18. Jef on Sun, 18th Jun 2017 8:13 am 

    The dollar is the worlds reserve currency aka petro dollar for one reason and one reason only …

    The US Military

    Bigger than all others combined.
    1000 bases in every corner of the world.
    Proven just crazy enough to bomb anybody anywhere back into the stone age.

    Any other currencies with that kind of backing? NO!

    Will the US allow someone, anyone to take that status away from them? F#@K NO!

  19. Davy on Sun, 18th Jun 2017 8:57 am 

    Do the math. What is the petro dollar levels compared to the global debt levels. This should be all you need to understand as to why the petro dollar is now irrelevant.

  20. shortonoil on Sun, 18th Jun 2017 10:01 am 

    “Will the US allow someone, anyone to take that status away from them? F#@K NO!”

    That strategy is getting ever more expensive. Iraq was over $3 trillion; never mind the half million lives. The US over dependance on oil has driven it into a cul-de-sac. What is the price tag going to be when Saudi Arabia implodes over the next few years? WWIII is not going to a low budget operation.

  21. onlooker on Sun, 18th Jun 2017 10:31 am 

    The hegemony of the US is over. But so is humanities hegemony over the forces of Nature. This century is bringing apocalypse. The four horsemen: Death, Plague, Famine and War. But a not symmetrically for awhile. The poor South will be besieged much more than the North. Until AGW and Nuclear meltdowns decimate living conditions everywhere

  22. MASTERMIND on Sun, 18th Jun 2017 10:34 am 

    The US military is a joke. Open homo’s and transgenders everywhere. Woman in combat. LOL its just one big welfare hub for the least brightest citizens of Dumberica.

  23. MASTERMIND on Sun, 18th Jun 2017 10:39 am 

    We have run out of cheap energy –Oil companies are not replacing reserves – they are shutting down exploration — because the market will not accept 120 oil…. it collapses the economy. So what is going to happen is that the financial system is at some point going to collapse. It is the operating system of the global economy and civilization.

    They will do everything they possibly can trying to fend off another 2008 moment — they will print and stimulate and bail and loan…. they will use every bullet in the box … they will throw the empty gun at this — then their will rip off the kitchen sink and throw it too.

    I guarantee you they will do ‘whatever it takes’ to hold this moment off for as long as possible.But the moment will arrive — that is guaranteed.

    And when it does there will be nothing left to throw — the shops will be looted and emptied — the electricity will go off… the violence and disease and suffering and starvation will follow. Global trade will completely stop — factories will close — spare parts to run the system will not be available — all energy sources will cease to operate — refineries will shut down — oil rigs will go offline — everything – and I mean everything will stop on a dime.

    Then chaos will reign.

    And you will be dead – I will be dead – and the central bankers will be dead

    https://www.reddit.com/r/collapse/comments/6g2d7j/collapse_of_global_civilization_by/

  24. bobinget on Sun, 18th Jun 2017 10:43 am 

    Read more: Countries That Use The U.S. Dollar | Investopedia http://www.investopedia.com/articles/forex/040915/countries-use-us-dollar.asp#ixzz4kMrMTCxI
    Follow us: Investopedia on Facebook

    United States of America

    Federal Republic

    North America

    318,636,000

    $16.8 Trillion

    Commonwealth of Puerto Rico

    Unincorporated territory of the U.S.

    Northeastern Caribbean

    3,579,000

    $103.1 Billion

    Ecuador

    Independent country

    Northwestern South America

    15,792,000

    $94.5 Billion

    Republic of El Salvador

    Independent country

    Central America

    6,126,000

    $24.3 Billion

    Republic of Zimbabwe

    Independent country

    Southeast Africa

    13,348,000

    $13.5 Billion

    Guam

    Unincorporated territory of the U.S.

    Western Pacific Ocean

    161,000

    $4.9 Billion

    Virgin islands of the United States

    Insular area territory of the U.S.

    Caribbean

    104,000

    $3.8 Billion

    Democratic Republic of Timor-Leste

    Independent country

    Maritime Southeast Asia

    1,202,000

    $1.6 Billion

    American Samoa

    Unincorporated territory of the U.S.

    South Pacific Ocean

    54,500

    $711 Million

    Commonwealth of the Northern Mariana Islands

    Unincorporated territory of the U.S.

    Western Pacific Ocean

    51,500

    $682 Million

    Federated States of Micronesia

    Six Sovereign Countries

    Subregion of Oceania

    101,000

    $316.2 Million

    Republic of Palau

    Island Country

    Western Pacific Ocean

    16,900

    $247 Million

    Marshall Islands

    Island Country

    Near Equator in the Pacific Ocean

    53,800

    $191 Million

    Source: Encyclopedia Britannica, Inc. Britannica Book of the Year (2015)

    Next question: How many countries peg their currency to the dollar?
    https://en.wikipedia.org/wiki/Currency_substitution

    Definition: A dollar peg is when a country maintains its currency’s value at a fixed exchange rate to the U.S. dollar. The country’s central bank controls the value of its currency so that it rises and falls along with the dollar. The dollar’s value fluctuates because it’s on a floating exchange rate.

    There are at least 66 countries that either peg their currency to the dollar or use the dollar as their own legal tender.

    http://www.investopedia.com/articles/forex/061015/top-exchange-rates-pegged-us-dollar.asp

    One simple fact: There’s just more USD’s floating around than any other.

    If the fact that POTUS is the world’s laughing stock hasn’t effected USD value, nothing will.

  25. Apneaman on Sun, 18th Jun 2017 10:43 am 

    Energy Nonsense From the Wall Street Journal

    Art Berman ,

    Contributor

    https://www.forbes.com/sites/arthurberman/2017/06/18/energy-nonsense-from-the-wall-street-journal/#5f1a69a3338a

  26. onlooker on Sun, 18th Jun 2017 10:46 am 

    And you will be dead – I will be dead – and the central bankers will be dead– Don’t underestimate the unequal and uneven nature collapse as the already wealthy and powerful remorselessly leverage their power and wealth to be the last men standing

  27. bobinget on Sun, 18th Jun 2017 11:14 am 

    Saudi Arabia got where it is today because of it’s
    battles with Iran for Islamic leadership.
    #1 Syria.. (lost)
    #2 Yemen.. (losing)
    #3 Abrogating it’s OPEC responsibility in 2014.
    (raised production, forcing prices lower, causing Bedlam, starvation, in Muslim, oil dependent states. Driving African countries to near bankruptcy, bringing South Sudan, Yemen, into the BIGGEST humanitarian disaster on the planet, ever.

    The Government of Venezuela defaulted on its loans to Russia on Friday. When, not if, oil prices move higher, China will pressure Venezuela to honor its agreement for 250,000 BB p/d to begin to repay 45 Billion in loans. With Russian oil workers out of the picture, Venezuela will hardly be able to satisfy domestic demand much less keep its position as USA’s fourth largest supplier.

    When it feels the time is right, China will move to
    replace the current government with it’s own puppet leadership. When, not if Venezuela’s gargantuan crude oil comes back on line, it will be China, not Saudi Arabia determining world’s oil prices.

    With three ‘lost’ wars to build on, KSA tries to bully Qatar to get with the Saudi program, ‘or else’.
    Embargoes are unfriendly acts. Blockades are acts of war. (casus belli)

    UAE and KSA have been methodically trying to starve rebel tribes in Yemen into submission.
    That’s called genocide.

    Because South Sudanese, Yemeni are blackish, the world looks the other way.
    This won’t be the case for doubling down Saudi Arabia.
    (who incidentally, Never cut EXPORTS as promised) In point of fact, in order to punish Iran further KSA exported more crude from floating storage.

  28. TheNationalist on Sun, 18th Jun 2017 11:19 am 

    But but but…. The tea towel heads have god on their side and are used to hot weather!
    I just farted in their general direction!

  29. Davy on Sun, 18th Jun 2017 12:10 pm 

    “When it feels the time is right, China will move to replace the current government with it’s own puppet leadership. When, not if Venezuela’s gargantuan crude oil comes back on line, it will be China, not Saudi Arabia determining world’s oil prices.”

    Wow what a fruit loop. lol.

  30. Anonymouse on Sun, 18th Jun 2017 12:50 pm 

    No matter what the exceptionalist\denailist’s here claim, the dollars-for-oil system is about the only thing keeping the amerikan empire in ‘business’ these days. The uS has, and will continue to murder any world leader, or invade(on false pretexts of course) countries that challenge that system.

    The collapse of the petro-dollar system, will mark the end amerikan terrorism and meddling around the world. The double digit IQ amerikans here may not be capable of grasping this, but their ignorance on the matter is immaterial.

  31. Baptized on Sun, 18th Jun 2017 1:14 pm 

    Saudi Arabia has many problems, many stated above. But I do believe that a positive in there mind is to limit liability to U.S., i.e. treasury bonds. They want to lower them, not like the article claims that they are having to.

  32. Davy on Sun, 18th Jun 2017 7:05 pm 

    “China’s “Ghost Collateral” Arrives In Canada, “Heralding A Crisis”
    http://www.zerohedge.com/news/2017-06-18/chinas-ghost-collateral-arrives-canada-heralding-crisis

    “China’s “ghost collateral” problem, or collateral that was either rehypothecated between two or more loans, or simply did not exist, had not only not gone away but was still as prevalent as ever if not worse. The report, a continuation of extensive reporting conducted on this site, said that 60% of all loans issued in China’s system are backed by property, and that China’s property values are “wildly misleading, which is part of the reason that China’s credit rating was recently downgraded.” Reuters reported that Chinese lenders are prone to fraud with loan officers turning a blind eye to the quality of collateral and knowingly accepting dubious and even fraudulent documents.”

    “As Cooper notes, “as a result of the flood of money pouring from Mainland China into Vancouver real estate in recent years, some financial experts say they believe Canadian banks are directly exposed to shadow lending in China and the risks of so-called “ghost collateral”, collateral that may not exist or is used continuously to secure loans for multiple borrowers.” And the stunner: “Postmedia confirmed that Canadian banks are allowed by the federal regulator, the Office of the Superintendent of Financial Institutions, to accept collateral from China to secure real estate mortgages in B.C.”

    “According to a December 2016 Bank of Canada report, shadow lenders now account for $1.1 trillion in debt — about half as much as the traditional banking sector — and that over the past decade “these new players have become more important and have changed the face of the Canadian mortgage market … (as) tightening bank regulation can lead to migration of activity from the traditional banking sector to the shadow banking sector.” Just like in China, Canada’s shadow lenders are non-bank lenders that boost the supply of credit in Canada’s financial system without facing bank regulation or oversight. “Critics say shadow banking is vulnerable to loose lending standards, mortgage fraud, money laundering, and collateral that is overly leveraged (also called re-hypothecated) — meaning debt backed by property assets is used over and over again by related lenders to issue more home loans, in ever riskier chains of debt.”

  33. makati1 on Mon, 19th Jun 2017 12:09 am 

    bobInget, “If the fact that POTUS is the world’s laughing stock hasn’t effected USD value, nothing will.”

    Really? Do you mean that when (not if) the Stock Market Casino crashes, the dollar will still be strong? Hmmm. I think that you need to rethink that last sentence. I see that event as the last nail in the USD’s coffin.

  34. shortonoil on Mon, 19th Jun 2017 10:45 am 

    2017 will be the third year that world oil producers have cut Capex spending. According to the IEA 2016 was 25.4%, and 2017 is estimated to be about a third. 2017 will be $150 billion or almost $5 per barrel produced. Producers are compensating for declining price by cutting Capex. Saudi Arabia, having very old and mature fields, has little leeway to adjust for price declines by cutting their Capex. For that reason alone it can be expected that the Saudis will need to continue to draw on their SWF to make expenses. It can also be expected that from this point forward Saudi Arabia will not be playing much of a role in the dollar recycling process. As more oil producers find themselves in a similar position, having to sell US Treasuries rather than buy them, there will be downward pressure on the dollar. A declining dollar will make US imports more expensive, and exports less competitive. One of the US’s major export items, finished petroleum products, could soon find its self in serious trouble. Because the US economy is already in the late stages of its credit cycle its economy is likely to be quite negatively effected from a decline in the Petrodollar recycling process.

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