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Page added on May 1, 2016
Taking The ‘Petro’ Out Of The Dollar
Saudi Arabia has been in the news recently for several interconnected reasons. Underlying it all is a spendthrift country that is rapidly becoming insolvent.
While the House of Saud remains strongly resistant to change, a mixture of reality and power-play is likely to dominate domestic politics in the coming years, following the ascendency of King Salman to the Saudi throne. This has important implications for the dollar, given its historic role in the region.
Last year’s collapse in the oil price has forced financial reality upon the House of Saud. The young deputy crown prince, Mohammed bin Salman, possibly inspired by a McKinsey report, aims to diversify the state rapidly from oil dependency into a mixture of industries, healthcare and tourism. The McKinsey report looks like a wish-list, rather than reality, particularly when it comes to tourism. The religious police are unlikely to take kindly to bikinis on the Red Sea’s beeches, or to foreign women in mini-shorts wandering around Jeddah.
It is hard to imagine Saudi Arabia, culturally stuck in the middle ages, embracing the changes recommended by McKinsey, without fundamentally reforming the House of Saud, or even without a full-scale revolution. Nearly all properties and businesses are personally owned or controlled by members of the extended royal family, not the state, nor by lesser mortals. The principal exception is Aramco, estimated to be worth $2 trillion.
The state is subservient to the House of Saud. It is therefore hard to see how, as McKinsey recommends, the country can “shift from its current government-led economic model to a more market-based approach”. The country is barely government led: a puppet of the Saudis is more like it. But the state’s lack of funds is making it increasingly desperate.
It was for this reason the Kingdom recently placed a $10bn five-year syndicated loan, the first time it has entered capital markets since Saddam Hussein invaded Kuwait. It proposes to raise a further $100bn by selling a 5% stake in Aramco. The financial plan appears to be a combination of this short-term money-raising, contributions from oil revenue, and sales of US Treasuries (thought to total as much as $750bn). The government has, according to informed sources, been secretly selling gold, mainly to Asian central banks and sovereign wealth funds. Will it see the Kingdom through this sticky patch?
Maybe. Much more likely, buying time is a substitute for ducking fundamental reform. But one can see how stories coming out of Washington, implicating Saudi interests in the 9/11 twin-towers tragedy, could easily have pulled the trigger on all those Treasuries.
Whatever else was discussed, it seems likely that this topic will have been addressed at the two special FOMC meetings “under expedited measures” at the Fed earlier this month, and then at Janet Yellen’s meeting with the President at the White House. Yesterday’s holding pattern on interest rates would lend support to this theory.
The White House’s involvement certainly points towards a matter involving foreign affairs, rather than just interest rates. If the Saudis had decided to dump their Treasuries on the market, it would risk collapsing US bond markets and the dollar. Through financial transmission, euro-denominated sovereign bonds and Japanese government bonds, all of which are wildly overpriced, would also enter into free-fall, setting off the global financial crisis that central banks have been trying to avoid.
Perhaps this is reading too much into Saudi Arabia’s financial difficulties, but the possibility of the sale of Treasuries certainly got wide media coverage. These reports generally omitted to mention the Saudi’s underlying financial difficulties, which could equally have contributed to their desire to sell.
While the Arab countries floated themselves on oceans of petro-dollars forty years ago, they have little need for them now. So we must now turn our attention to China, which is well positioned to act as white knight to Saudi Arabia. China’s SAFE sovereign wealth fund could easily swallow the Aramco stake, and there are good strategic reasons why it should. A quick deal would help stabilise a desperate financial and political situation on the edges of China’s rapidly growing Asian interests, and keep Saudi Arabia onside as an energy supplier. China has dollars to dispose, and a mutual arrangement would herald a new era of tangible cooperation. The US can only stand and stare as China teases Saudi Arabia away from America’s sphere of influence.
In truth, trade matters much more than just talk, which is why a highly-indebted America finds herself on the back foot all the time in every financial skirmish with China. Saudi Arabia has little option but to kow-tow to China, and her commercial interests are moving her into China’s camp anyway. It seems logical that the Saudi riyal will eventually be de-pegged from the US dollar and managed in line with a basket of her oil customers’ currencies, dominated by the yuan.
Future currency policies pursued by both China and Saudi Arabia and their interaction will affect the dollar. China wants to use her own currency for trade deals, but must not flood the markets with yuan, lest she loses control over her currency. The internationalisation of the yuan must therefore be a gradual process, supply only being expanded when permanent demand for yuan requires it. Meanwhile, western analysts expect the riyal to be devalued against the dollar, unless there is a significant and lasting increase in the price of oil, which is not generally expected. But a devaluation requires a deliberate act by the state, which is not in the personal interests of the individual members of the House of Saud, so is a last resort.
It is clear that both Saudi Arabia and China have enormous quantities of surplus dollars to dispose in the next few years. As already stated, China could easily use $100bn of her stockpile to buy the 5% Aramco stake, dollars which the Saudis would simply sell in the foreign exchange markets as they are spent domestically. China could make further dollar loans to Saudi Arabia, secured against future oil sales and repayable in yuan, perhaps at a predetermined exchange rate. The Saudis would get dollars to spend, and China could balance future supply and demand for yuan.
It would therefore appear that a large part of the petro-dollar mountain is going to be unwound over time. There is now no point in the Saudis also hanging onto their US Treasury bonds, so we can expect them to be liquidated, but not as a fire-sale. On this point, it has been suggested that the US Government could simply block sales by China and Saudi Arabia, but there would be no quicker way of undermining the dollar’s international credibility. More likely, the Americans would have to accept an orderly unwinding of foreign holdings.
The US has exploited the dollar’s reserve currency status to the full since WW2, leading to massive quantities of dollars in foreign ownership. The pressure for dollars to return to America, when the Vietnam war was wound down, was behind the first dollar crisis, leading to the failure of the London gold pool in the late sixties. After the Nixon Shock in 1971, the cycle of printing money and credit for export resumed.
In the seventies, higher oil prices were paid for by printing dollars and by expanding dollar bank credit, in turn kept offshore by lending these exported dollars to Latin American dictators. That culminated in the Latin American debt crisis. From the eighties onwards, the internationalisation of business was all done on the back of yet more exported dollars, and wars in Iraq and Afghanistan echoed the earlier wars of Korea and Vietnam.
Many of these factors have now either disappeared or diminished. For the last eighteen months, the dollar had a last-gasp rally, as commodity and oil prices collapsed. The contraction in global trade since mid-2014 had signalled a swing in preferences from commodities and energy towards the money they are priced in, which is dollars. The concomitant liquidation of malinvestments in the commodity-exporting countries has been contained for now by aggressive monetary policies from China, Japan and the Eurozone. The tide is now swinging the other way: preferences are swinging out of the dollar towards oversold commodities again, exposing the dollar to a second version of the gold pool crisis. This time, China, Saudi Arabia and the BRICS will be returning their dollars from whence they came.
In essence, this is the market argument in favour of gold. Over time, the price of commodities and their manufactured derivatives measured in grams of gold is relatively stable. It is the price measured in fiat currencies that is volatile, with an upward bias. The price of a barrel of oil in 1966, fifty years ago, was 2.75 grams of gold. Today it is 1.0 gram of gold, so the purchasing power of gold measured in barrels of oil has risen nearly three-fold. In dollars, the prices were $3.10 and $40 respectively, so the purchasing power of the dollar measured in barrels of oil has fallen by 92%. Expect these trends to resume.
This is also the difference between sound money and dollars, which has worked to the detriment of nearly all energy and commodity-producing countries. With a track-record like that, who needs dollars?
It is hard to see how the purchasing power of dollars will not fall over the rest of the year. The liquidation of malinvestments denominated in external dollars has passed. Instead, the liquidation of financial investments carry-traded out of euros and yen is strengthening those currencies. That too will pass, but it won’t rescue the dollar.
37 Comments on "Taking The ‘Petro’ Out Of The Dollar"
Davy on Sun, 1st May 2016 5:31 am
More of the conflicting policies of the Chinese. You can’t have things both ways. You can’t have a dollar like reserve currency and Yuan controlled one like the Chinese do currently. These are incongruous policies. We only need to look at what has occurred with the Yuan and Chinese markets over the past several months to see this play out. The next crisis in China is another overheated commodities market from the recent creation of a $Trillion in credit this with an unstable bond market is surely going to pressure the Yuan once again.
The Chinese currency does not have what it takes to dethrone the dollar. The decline, decay and eventual end of globalism as we know it will dethrone the dollar. This will happen in lockstep with other currencies as they decline and decay. This is how global currencies interact. Movements of currencies are a zero sum gain eventually. The foreign exchange markets are the most arbitraged of any market. Unnatural polies are quickly extinguished by speculators. The markets are so large even the Fed cannot control it. The amounts dwarf the Fed’s balance sheet. China has blown through a huge amount of foreign reserves in the last round of currency instability. The next round is within months. China has huge imbedded bad debt in banking, industry, and property. You can’t have your money and spend it. They will soon be fighting fires in these areas as bad debt surfaces.
We can talk down the dollar and its petrodollar position. It is the nature of the petrodollar phenomenon that in times of low oil prices the petrodollar will diminish not increase. That is the nature of that economic arena. What you can’t do is talk up the Yuan as a replacement until that currency becomes fully convertible and without the strict controls the Chinese still maintain over the currency. It would take a HUGE global currency and investment reorganization for a reserve currency Yuan that are frankly more than the global financial system is capable of now and probably ever capable of. The US would have to be part of any process. This part of the global system is already in a slow meltdown with huge instabilities from central bank polices that have run their course and or run amok. Debt instabilities are destabilizing the entire system. No currency is immune from this. No currency is in a position to change much.
We are going to see China increase the use of the Yuan at the same time they maintain control within an envelope of influence. The Chinese economy is too dangerously overextended in too many ways to let its currency free. This will prevent the yuan from ever replacing the dollar in the current global arrangement. Who knows what is next but it is more likely globalism will devolve than evolve. China is the biggest trading nation and because of that its currency will grow in use and influence but it will do this within that trading circle. It is in no position to become a reserve currency at the moment and likely never.
onlooker on Sun, 1st May 2016 6:53 am
Two problems I also see with China gaining economic hegemony is that the West will be reluctant to cede power and will impede this situation, by denying market expertise and venture capital. Also, the resources/oil situation is deteriorating and that will introduce inflationary pressures into the already deflationary momentum. So as others have said we have the development Stagflation conditions whereby the world economy is flat and under producing while purchasing power of consumers is being eroded via inflation and relative currency devaluation. Demand can only be then destroyed in one way by rising prices. Rising prices is pernicious to the interests of the biggest manufacturer and trader namely China.
makati1 on Sun, 1st May 2016 7:41 am
Onlooker, what “market expertise”? What “venture capital”? You are thinking that they have no idea how to manage their economy/investments/banking? I would say that they are light years ahead of the West in ALL of those areas. If they were no threat to the US, there would not be the constant propaganda war against China and Russia. Both hold the power to destroy the US anytime they choose. China financially and Russia Militarily. And they know it.
The West is sitting on the biggest financial bubble of all time, not to mention an un-payable debt, and they are out of ‘air’ to keep it inflated. China has trillions of USDs to burn up before these dollars become toilet paper. Russia and India are burning theirs as fast as they can without collapsing the whole Wall Street casino. Ditto Saudi Arabia and a host of other countries. Stupid they are not.
If you think there has not been high inflation in the Us for the last 10-15 years, you are not paying attention. A major devaluation of the Chinese currency is in the near future. Ditto for all of the other trading countries of the world, except the Us. Wait and see. I hope you are getting prepared. It may happen before the elections, IF there are elections.
onlooker on Sun, 1st May 2016 7:54 am
Yes Mak but the central point is that a collapse of the US economy will take China with it and by extension the rest of the world. The debt contagion of massive defaults of US companies will spread like wildfire. Plus, China has not been able to find an alternative to the US market for all its goodies. When I spoke of inflation I meant worldwide. A devaluation will only spur even more inflation. Plus, the western banks still hold the key to liquidity as the whole Central Bank regime is worldwide and changes in monetary policy affect everyone including Eastern countries. In short, the world is too merged economically especially the key players for a central component like the US to collapse and not create massive perturbations all over the planet. As for Russia militarily vanquishing US, I think we all deep down know that a Thermonuclear War now or in the future would have to winners unless you count ashes and rubble as winners.
onlooker on Sun, 1st May 2016 7:55 am
have no winners.
makati1 on Sun, 1st May 2016 8:32 am
Perhaps that would be a good thing? End globalization forever. But, I doubt they are going to do that. They are just going to keep sending those USDs home to wreck the Us economy. It will impact their own to an acceptable level, I think. The Us is being pushed out of global trade with most of the world these days. You would have to be a hermit with no internet connections to not see it. Trade with the Us is dropping from all countries, not just China. And will continue to do so.
I would not bet that the Central Banks hold the keys to the world financial situation. They seem to have lost them in the last few years. I look for China to announce a gold backing of their yuan and then it is game=over as the Us has no gold of their own to back their toilet paper.
The Russians and Chinese are playing a long game. The Us has no game.
Nuclear war is inevitable. Who said sanity had anything to do with it? look at the psychopaths running Washington today? Sane? LMAO The US has already told the world that they will strike first, when and if they decide to. I think Russia will push the button first, if pushed too far. There was some sanity during the Cold War, but that too is gone from the West.
Nothing would surprise me in today’s world. Nothing.
onlooker on Sun, 1st May 2016 8:38 am
The problem Mak also is that the US as always acted like a bully/empire and others are fed up with it and want to bring the US down. So your not alone is wishing the downfall of the US.
makati1 on Sun, 1st May 2016 9:00 am
I know it will hurt my family and friends, but that is coming anyway. Their life will be shorter, and more brutal than mine was, no matter what happens.
We have pushed over the first domino of the chain reaction to extinction. How the last domino does it is immaterial. Slowly by economic decline, rampant disease, famine, etc. or a nuclear exchange that ends it all in minutes. There will be no humans alive on earth in 2100. None. Maybe not even in 2050.
For my family and friend’s sake I hope I am wrong. But for the Us as a whole, they deserve what is coming. And the rest of the world will cheer.
Davy on Sun, 1st May 2016 9:25 am
You have to be blind to believe the things Makati Bill said above. Those of you that are new to this board do not realize how bad Makati Bill’s message of a collapsed US and a rise of an Asian economic dominance based on the Brics failed. It has failed miserably and yet he still preaches the message.
There are others on this board who are not extremist who understand the reality of what makes the global economy tick. It only takes asking Makati Bill to back up his assertions for example the US is being pushed out of global trade or the absurdity of a gold backed Yuan. These are his dreams and fantasies that reflect on his hatred and resentment of the US. If you understand what these assertions really mean you understand he is clueless to global economic realities.
The US is in a collapse process but so is the rest of the world. China is in the worst possible situation with huge amounts of bad debt and a global economy now wanting less of its overproduced industrial commodities and cheap trade goods. China is nearing an economic and political meltdown that will take the global economy down with it especially the US who is far too exposed to anything bad globally to decouple from those problems.
BTW Makati Bill is a parody of the infomous Baghdad Bob. So fitting.
geopressure on Sun, 1st May 2016 9:54 am
I was saying this 7 days ago… It sure looks like the Petrodollar has quietly been pushed aside in favor of the next big thing – the Next dominant global currency…
That is a HUGE revenue source that our Federal Government has lost…
The good news is that Obama can no longer manipulate the price of crude oil by raising interest rates or limiting Treasury Auctions…
onlooker on Sun, 1st May 2016 10:09 am
http://www.businessinsider.com/chinas-debt-explosion-threatens-financial-stability-2016-4
FITCH: China’s debt explosion threatens financial stability
geopressure on Sun, 1st May 2016 11:49 am
Onlooker; There are entire teams of financial reporters sitting around in think tanks dreaming up new ways to write negative articles about Chine & Russia & the Oil Outlook…
penury on Sun, 1st May 2016 12:00 pm
To be quite honest it does not matter whether China or the U.S. economies are the first to fall, the EU can fall G,B, can fall, the world is awash in fiat paper which has no intrinsic value, they will all fall, if by fall you mean that they have no commercial value. When people start demanding value for their fiat the entire world economy will fall. The question is will the currency fall or the war break out. Whichever happens first will get the blame, but the fault is the debt ridden world.
GregT on Sun, 1st May 2016 12:40 pm
Globalism is on it’s way out people. Economies are going to become more localized, and the days of large scale cross-oceanic trade are numbered. The key resource that fuels modern industrial society is oil. The US would not be starting wars half way around the world if the majority of the remaining cheap oil was on the North American continent. If that was the case, the resource wars would be fought on our own soil.
Davy on Sun, 1st May 2016 12:49 pm
Will a new Chinese financial crisis crush oil prices lower?
“Consensus Forming: China Heading Back Into Financial Crisis”
http://dollarcollapse.com/debt/consensus-forming-china-heading-back-into-financial-crisis/
“China has an historic Credit problem. It as well suffers from an unfolding “money” fiasco of epic proportions. My analytical framework attempts to differentiate the two, as each comes with its own set of (related) issues. A Credit Bubble is a self-reinforcing but inevitably unsustainable expansion of debt. Money (the contemporary variety) is a financial claim perceived as a safe and liquid “store of nominal value.” Importantly, systemic risk expands exponentially when risky borrowings are financed by an expansion of “money-like” instruments/financial claims. This typically occurs late (“terminal phase”) in the Credit Bubble Cycle.”
“If the critics of China’s recent let-it-all-hang-out financial excess are right, a crisis of some sort is coming to a market near you. For instance, a fair bit of that Q1 $1 trillion went to boosting Chinese stockpiles — and therefore the price of — oil…”
“Based on supply/demand fundamentals, oil and iron ore remain in massive gluts. So when China’s stockpiling ends — as it mathematically must — these markets will lose a lot of their exuberance. The question then becomes, how many speculators will default on their loans, and what kind of banking trouble will ensue? That’s unknowable, but it’s safe to assume, given the numbers involved, that the rest of the world will find it distressing.”
GregT on Sun, 1st May 2016 1:17 pm
In the end, the only thing that will matter is which nations still have access to the remaining affordable oil. It is the energy that matters. Not the money. Money is a claim on future production. Production requires energy. China and the US are attempting to solve the problem in two entirely different ways. China is reaching out with trade agreements. The US is reaching out with bloodshed and war.
Boat on Sun, 1st May 2016 1:24 pm
“Based on supply/demand fundamentals, . So when China’s stockpiling ends — as it mathematically must — these markets will lose a lot of their exuberance”
Oil and iron ore remain are in gluts, most commodities are also. Interests rates are still down for much of the world.
The ingrediants for growth are now in place.
GregT on Sun, 1st May 2016 1:30 pm
“The ingrediants for growth are now in place.”
Infinite exponential growth in a finite environment is a physical and mathematical impossibility. We have already passed the last doubling of the global economy, and with that, our population numbers.
And that would be ingredients Boat. Not “ingrediants”. That word does not exist in the English language.
Boat on Sun, 1st May 2016 1:41 pm
A very limited war supported by the free world to eradicate actors who would kill over religious ideology.
Trump is right about one thing. China, Europe, Japan etc should pay much more of the costs to keep trade moving freely.
GregT on Sun, 1st May 2016 1:51 pm
Trump is a bag of hot air Boat. The entire world is watching this US presidential election cycle in utter disbelief. A very sad reflection on the US of A.
Boat on Sun, 1st May 2016 2:21 pm
We all live in a glass house. It is what it is. 7 billion people, 7 billion different opinions.
Davy on Sun, 1st May 2016 2:59 pm
The Chinese are solving the problem by raping their peasants and taking that ill gotten gains to places like Vancouver to be laundered. I would call that war on its own people.
apneaman on Sun, 1st May 2016 3:04 pm
Davy, sounds real worried that mak might influence new readers.
That’s why he is warning them. Davy cares about other.
It’s how they raise em up in 1%er families. Benevolent rulers.
Like in the movies and fairy tales.
shortonoil on Sun, 1st May 2016 3:08 pm
China is bleeding to death. She now has to enforce capital controls with the point of a gun. The PBOC is now having to print trillions of Yuan to make up for the cash flow that is leaving the country. When a society’s rich are leaving by the boat load, and taking their money with them, you can be pretty sure that things are not going very well. Like Davy said, the PetroDollar will fall, but it won’t be the Chinese that kill it.
Boat on Sun, 1st May 2016 3:49 pm
When will the petrodollar fall?
Anonymous on Sun, 1st May 2016 3:52 pm
The central idea here being promoted here, that the ‘saud’s will abandon the dollar(voluntarily), is false. The ‘sauds’ know full well if they tried to abandon the uS toilet paper-for-oil program, that they would get the Iraq treatment. IE, invasion and takeover of arabian oil by uS corporations. Along with permanent uS\uk\jew military occupation in the ‘holy land’.
It is of course, not impossible arabian oil could be sold for real currencies in the future, who can say? But what IS certain, is the house of SAUD, will never do anything like that voluntarily. They are as loyal to their amero-zionist masters as you are going to find-ever. They may not think much of the fat, oafish infidels personally, but the also know what side their bread is buttered on too. Their entire existence relies on two things. Petro-dollars, and uS military support for their regime. And related to this, keeping the americans from directly occupying Arabia, at least in an open obvious way.
The ‘sauds’ keep their people fat, lazy and more-or-less content, and the infidels at bay (well, at least, it appears that way). And petro-dollars are the glue that holds it all together….
Truth Has A Liberal Bias on Sun, 1st May 2016 9:15 pm
Fuck are you clowns ever retarded. The whole worlds going to smashed shit and you goofs are debating whether or not USA or China is on top. Fucking asshats. ‘Merikans gotta be the most retarded humans ever to walk the planet. I’d laugh myself silly if North Korea nuked you. I hope they do. That’d make my fucking day.
GregT on Sun, 1st May 2016 9:27 pm
“When will the petrodollar fall?”
Collapse is a process Boat, not a moment in time.
makati1 on Mon, 2nd May 2016 12:45 am
Anonymous, until they switch to yuan and then the yuan is the glue. Or maybe the Euro or even gold. They are not fools. The US is dying and only brainwashed, flag waving Americans don’t see it.
joe on Mon, 2nd May 2016 1:56 am
The whole system of global trade is enduring a period of stress, brought on mainly by a slowing of the anomalous period of economic growth in the last 20 years as China was industrialised then suburbanised during the liberal dream of globalisation and multiculturalism which it seems is poised to have a much more powerful and enduring negative influence than liberals intended of believed possible as western communities divide and become more governable in the imperial system of the creation of 7-10 super – states. All of this is nonsense because the current systems are nothing more than old systems with new names. They survive because the elites in these zones are lucky enough to live in an era where there is abundant enough energy and thus wealth for them to entertain these dreams. We cant imagine for a second the result of any weakening of the underlying infrastructure of the existing system. Electric cars for example powered by electricity from new fracked gas powered power stations may make it possible for global regions to reduce the need to trade and thus the need to integrate is diminished. The only question worth asking is do we want to destroy the planet long term.
Humans nature being what it is, the answer will probobly be “no, lets not destroy the earth, but i’ll just take a little for myself”. The human instinct is to provide for ones own family, but worry about the world as a secondary but important issue. Best illustration was John Kerry bringing his grandkid to signing Paris agreement. Historic as it is, its full of irony. Would this 1%er take dollars out of her future or limit her, to save the world? A reduction in living standards is needed to prevent catastrophe, thats the secret, and the oil price will be a symptom of that future.
adonis on Mon, 2nd May 2016 2:18 am
has anyone heard about the ‘shanghai accord’ possibly the next effort by the central banks to grow the worlds economy using alternative currency instead of us dollar might buy us x no. of years what are your thoughts gentlemen?
makati1 on Mon, 2nd May 2016 3:47 am
adonis, the only ‘alternate’ currency that would work is gold. Paper is paper. Ones and zeros in a machine is even less. Both are subject to instant loss of purchasing power or government control. Only gold, and to some extent silver, is and has been considered a safe holder of value over time and troubles. It is in our genes, so to speak. Asia knows this and is buying up all they can afford. The West is selling theirs to pay the bills. Interesting times ahead.
geopressure on Mon, 2nd May 2016 4:04 am
Adonis, that is propaganda aimed at making you believe that the rise of the petri-Yuan is somehow good for U.S.
Who put that propaganda out is still up in the air… Practically all countries have a vested interest in seeing the US Economy prosper. Perhaps none more so that the oil exporting nations & China…
Davy on Mon, 2nd May 2016 6:50 am
There are no alternatives to what we created and there is no going back and soon no going forward. Gold is the real currency of the world. It is the traditional currency of the world. Gold has a vital place as a currency/wealth insurance. Gold cannot take the place of fiat currencies in the current arrangement. We could possibly see some influence of gold on currencies but that would be problematic because that currency would skew and we know how that destabilizes the whole system if that currency is a major one. Today the global trading system must have currencies working in a tight band or trade and investment goes haywire. There is not enough gold and precious metals to represent the current population needs for currency. There is not enough to represent cumulative notional physical value represented today by fiat currency.
I referenced an article from ZH last week that was discussing how the central banks should start buying gold as a QE tool. By forcing up gold’s price it is thought that will stimulate inflation in a roundabout way in the general economy. It is crazy we got to this point. It is crazy we are so interconnected and abstractly digital. It is crazy that there is no turning back for 7BIL people to remain whole. If we try to change the system in any meaningful way the consequences and unintended consequences at this point will destabilize and destroy the system because it is unstable and in disequilibrium. If you destabilize and destroy this system billions will die in short order of a few years. This is because distribution of food and oil will not occur. We are a transport and oil based civilization that can’t be changed.
Our financial system is destabilized because we have forced the system just like the climate. We have pushed debt far too far. We have not realized bad debt as we should have. This bad debt is malinvestment, overcapacity, and unproductive development. The bad debt is in an indirect way is our exploding population which is a responsibility we cannot handle. Instead of more people being productive this more people condition is destroying our productive base. In this situation gold will have no use. Gold cannot make a meaningful impact on such a distorted systematic condition. Gold may have a place in the aftermath but that is another story that would in any case be speculation and fantasy because does anyone have any clue what is next?
shortonoil on Mon, 2nd May 2016 8:14 am
“When will the petrodollar fall?”
Collapse is a process Boat, not a moment in time.”
The present civilization arose in conjunction with the discovery of how to obtain an enormous supply of energy. It obviously would not have attained the complexity that it has without it. That supply of energy is very heavily dependent on its ability to extract and process fossil fuels at a high net energy gain. As a result of depletion the vast majority of that high net energy source has been used. It is now struggling to obtain what ever quantity of that source that may still remain.
Like an animal that can not acquire sufficient food to feed itself, it dies in stages. If a predator does not find it first, its bodily functions begin to fail one by one. In time its blood flow slows, its liver ceases to function, and at some point its heart stops. The time to die is very dependent on the size of the animal. Most of the views here, regarding this civilization, are expecting a predator. Although possible, it is not very likely to occur.
The modern industrial beast is dying in stages. It blood flow, world trade has slowed to a crawl. Its processing organ, the banking and financial system, has calcified to a point where it must become parasitic to the rest of the organism to ensure its own survival. Its heart, growth and technological development, has reduced its operation to the creation of a new iphone.
While dying it may trash violently in its death throes. As organized control systems, governments, no longer have the energy to maintain themselves, the individual cells will begin to compete for what ever sustenance that may remain. The strongest will prevail by destroying competitors, or letting them die.
The modern industrial beast has not used its food supply very wisely. It gorged itself in a feeding orgy; a competition to see which cell could become the most obese the fastest. Although the chances of the entrance of a predator still remain small, the vultures are circling. When they begin to land, the beast is about to die.
JuanP on Mon, 2nd May 2016 8:37 am
US onshore production sees deep decline, http://oilprice.com/Latest-Energy-News/World-News/US-Onshore-Production-Sees-Deep-Decline-Can-Offshore-Offset-It.html
joe on Mon, 2nd May 2016 3:15 pm
I reckon the decline will happen very quickly. Decline will set in, people will become more immobile, they will turn to alternatives but they wont work. When they get hungry enough those who are healthy will move, the ones who cant will be ‘provided’ for by the government in a system of empathetic neglect. Then wash rinse repeat until sustainI reckon the decline will happen very quickly. Decline will set in, people will become more immobile, they will turn to alternatives but they wont work. When they get hungry enough those who are healthy will move, the ones who cant will be ‘provided’ for by the government in a system of empathetic neglect. Then wash rinse repeat until sustainable energy supplies match demand and a new equilibrium exists. Happily we should hope a lower population with high tech with more sustainability would be the best outcome. A managed population of a few hundred million should be the realistic goal. But it has to be a decline which at least appears organic. As i always have and continue to believe, decline will manifest itself as a series of uncontrollable pandemics. They dont even have to do anything. Public health in the west is in freefall as the systems cant handle the masses of jobless immigrants and elderly swap the meager resources put into them. At some point as the decline in investment in new antibiotics has its eventual impact, the resulting spread of superbugs and resistent diseases will do the work the elite need done without them having to do anything.able energy supplies match demand and a new equilibrium exists. Happily we should hope a lower population with high tech with more sustainability would be the best outcome. A managed population of a few hundred million should be the realistic goal. But it has to be a decline which at least appears organic. As i always have and continue to believe, decline will manifest itself as a series of uncontrollable pandemics. They dont even have to do anything. Public health in the west is in freefall as the systems cant handle the masses of jobless immigrants and elderly swap the meager resources put into them. At some point as the decline in investment in new antibiotics has its eventual impact, the resulting spread of superbugs and resistent diseases will do the work the elite need done without them having to do anything.