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The Dollar Saga Continues

The Dollar Saga Continues thumbnail

There are several headwinds to the present and future value of the Dollar. The casual observer might think that it has to to with the government shutdown, or the petty politics in Washington. With the latest shutdown ending hours ago, the next potential shutdown lies just weeks ahead. While both of those things are currently influencing our currency, there are other significant events happening worldwide to cause our monetary malaise, that have little to do with domestic politics. In this article we will discuss the recent downgrade of US credit to BBB+, the reduction of US Dollar reserve assets held internationally, and the reduced use of the Dollar in global trade. Against this backdrop, precious metals have begun to shine brightly.

Due to the ongoing reduction in the value of the US Dollar on the world stage, it has become far less popular for foreign governments to hold Dollars as a reserve asset. China and Japan collectively hold 36% of the outstanding US Treasury debt, which is the smallest percentage they have held in 18 years.

Normally, rising interest rates serve as a magnet for foreign capital. But instead, the Dollar is losing more ground than what can be made up by higher interest rates currently available. While the 10-yr Treasury is yielding more than comparable government debt in Europe or Asia, the losses incurred when converting back into local currency (such as the Yen, for the Japanese) exceeds the yield earned on the US Treasuries. This means that purchasing or owning US Treasuries is an expense, rather than a source of income, for many foreign nations.

Belt One Road Meeting

This reduction of US Dollar assets is not limited to China and Japan, however. In October 2016, the IMF included the Chinese Yuan in the composition of world money, known as the SDR. Last summer, the European Central Bank (ECB) purchased $500,000,000.00 worth of Yuan to diversify their reserve assets. This has been followed by announcements and purchases of Yuan by Switzerland, France, and Germany, among others. In each case, US Dollars or Treasuries were liquidated to reduce Dollar reserves, and increase Yuan reserves.

While the Dollar comprised 70% of reserves as late as 2001, it was reduced to 60% by the end of 2012. Since that time, the Dollar has played a major, but less significant role as either a reserve c

urrency, or in world trade. While the Yuan’s reserve role has increased by 19% in the last year, the Dollar’s reserve role has been reduced to slightly over half of what it had been initially. This trend seems poised to continue. While we produce 24% of world economic output, we comprise over 50% of world financial reserves. These numbers appear ready to reconcile further.


Another of the reasons for the Dollar playing a diminished role in world trade has to do with perceived abuses of reserve currency status, on the international scene. The US State Department has often used the threatof sanctions, or confiscation of Dollar assets, as a technique to modify the behavior of various nations. This has helped to force alternative mechanisms of trade to the forefront, in order to bypass the effects of sanctions or other economic penalties. A prime example of this is evident in the “Belt and Road Initiative”, sponsored largely by China. This initiative benefits 70 nations, and 62% of the world population, but not the United States. There have al-ready been $ 5 Trillion worth of contracts and projects started, with the potential for up to $ 26 Trillion, between nations that are bypassing the Dollar, and the services of US corporations. That is a lot of trade and business for the US to be missing out on, and this trend looks like it will continue.

Helping to fuel the “Belt and Road Initiative”, is a series of pipelines constructed as a joint Chi-na-Russia project. These pipelines are already facilitating 30,000,000 tons of oil trade between the 2 nations, completely outside the realm of the petro-dollar (no dollars are traded hands for these oil purchases). With China as the largest energy importer, this is also a significant amount of energy trade each year that no longer uses American Dollars.  China is set to expand the ability to trade oil for Yuan with other nations as well, by the means of a new Yuan-denominated oil contract. Trading oil for Yuan has already started unofficially, between some nations in Africa and South America. The Yuan/oil futures contract expects to begin trading in March 2018, at which time any nation will be able to purchase oil with Yuan, instead of Dollars. This will further decrease the need for foreigners to hold Dollars as a reserve asset.


You might remember hearing about US debt being downgraded from AAA to AA+ by the American rating company (S&P), back in 2011. But you might not know that we have been down-graded 4 times, and currently maintain a BBB+ rating with some foreign ratings agencies. This puts our credit worthiness below that of countries like Botswana or Russia, and similar to Colombia or Peru. The most recent downgrade occurred last week, by a nation that holds $ 1.19 Trillion of US Treasuries in reserve. Significantly, their outlook for the ability of the US to pay its’ debt has been changed to “negative”, which might help explain why they are diversifying into gold and other assets.

As we mentioned recently in our article on tax reform , the benefits of tax reform might not outweigh the effects of a falling currency. Some of the reasons we have been downgraded to BBB+ are related to the tax reform plan. But regardless, the effects we are seeing already match those we warned about. Thankfully, we can still protect ourselves. While assets such as stocks are trading at all-time highs, precious metals began consolidating last year, and appear poised to continue to gain in 2018. Perhaps it is time to consider converting more descending paper assets into ascending metals.

16 Comments on "The Dollar Saga Continues"

  1. Cloggie on Fri, 26th Jan 2018 5:59 pm 

    The dollar lost 8 euro cent in value in merely 3 months.

  2. Outcast_Searcher on Fri, 26th Jan 2018 7:45 pm 

    Gee, a metals seller saying sell dollars and buy the metals they sell.

    How original. This has been the steady drumbeat of such folks for the 35ish years I’ve been paying attention.

    And yes, over that time, metals have appreciated somewhat.

    Of course, the dollar with compounded interest from, say, a money market account over those years has grown a similar amount.

    At 89, the dollar is about where it was in some years of the previous 4 decades, and isn’t all that far below the average price during those decades.

    Plus, over time, these things tend to be self regulating. A weaker dollar is more competitive vs. stronger foreign currencies.

    But by all means, doomers and sellers of metals love to talk dollar doom.

    Disclosure: I’ve held plenty of dollars and stocks, and a meaningful amount of inflation hedging in gold and silver for the past 35ish years. Since we can’t see the future, being diversified is prudent.

    My favorite investment over time is solid stock indexes, which pay dividends and grow well vs. inflation over the long haul.

  3. iamwhoiamifyouknowwhatimean on Sat, 27th Jan 2018 12:04 am 

    The Dollar’s getting replaced a bit at a time with a lot more trade occurring in non-USD denominations, with the value of the dollar declining accordingly. But Trump and Mr. Munchies think that’s great and told the other heads of state that at Davos plus they want all countries to adopt a trickle down policy. Isn’t that just great, as many more people worldwide become homeless. Also Lobbying in DC at its highest level ever. We the people are getting the shaft.

  4. MASTERMIND on Sat, 27th Jan 2018 12:14 am 


    I agree. And as much as I hate Trump it really doesnt matter at this point the global economic collapse is coming and in ten years you will be dead or sooner! Enjoy your time now and ignore politics! Trump will be eating boiled rat like everyone else ahead shortly

  5. Davy on Sat, 27th Jan 2018 5:03 am 

    “The Dollar’s getting replaced a bit at a time with a lot more trade occurring in non-USD denominations, with the value of the dollar declining accordingly. “
    The value of trade in non-USD is still relatively small. The value of the dollar is not directly related to this and there are other factors more important to a value decline. Currencies are somewhat zero-sum-gain. In the current global economic situation currencies cannot fluctuate much outside a range without all currencies being in disequilibrium. This is the case with major currencies and especially the dollar. We are a late term civilization without much room for decoupling and rearranging.

    “But Trump and Mr. Munchies think that’s great and told the other heads of state that at Davos plus they want all countries to adopt a trickle down policy.”
    The US is playing economic nationalism card currently. It is a bargaining ploy. The US is not in the position to push this dollar trade issue too far. The rest is just jawboning. Trump is good at jawboning.

    “Isn’t that just great, as many more people worldwide become homeless. Also Lobbying in DC at its highest level ever. We the people are getting the shaft.”
    I would not take this personal. This is how civilization decline and fail. This is a self-organizing systematic unfolding. None of these politicians are significant in this process. They all have their petty special interests that are not real powers. The reason the common man is getting the shaft is bigger than this political/economic process. The real reason this is occurring is overshoot of consumption and population. It is a system in overextension and ready to break to a lower level of affluence and productivity. We would love to lynch some of these guys but it would change the equation little. There is no changing a train wreck that is systematically necessary.

  6. Go Speed Racer on Sat, 27th Jan 2018 5:33 am 

    I prefer my rats fried.

    Trump prefers his rats shish-ke-bab, on solid gold poker sticks.

  7. Go Speed Racer on Sat, 27th Jan 2018 5:37 am 

    Doesnt matter if the dollar is tanking,
    since we’re all going to use Bitcoin
    from now on. At $18,000 per coin.

  8. Mad Kat on Sat, 27th Jan 2018 5:41 am 

    Go, I never tried rat, but maybe in the future? I have eaten tree rats (squirrels) and they are yummy. Maybe fried rat would be ok too. Or maybe Bar-B-Qued? I understand that fried mice were a favorite in old Rome. lol

  9. Cloggie on Sat, 27th Jan 2018 9:51 am 

    William Engdahl – “Russia and China Are Dead Serious About Ditching the Dollar”

  10. Davy on Sat, 27th Jan 2018 10:19 am 

    Sure they are but they do not have what it takes to get the job done. If they did it would have been done already. This is just more anti-dollar hype when the real villein is a corrupted globalization that China, US, Europe and Japan are stuck with.

  11. MASTERMIND on Sat, 27th Jan 2018 10:23 am 

    Our collapse is like snow accumulating on a mountain side. Nobody knows what will be the snowflake that starts the avalanche nor when it will start. We just know it will happen.

  12. print baby print on Sat, 27th Jan 2018 1:33 pm 

    I agree with you this game print baby print is not only the $ story they are all the same

  13. bobinget on Sat, 27th Jan 2018 1:55 pm 

    The Future?

    For Davy

    Venezuela – January 2018 a tough month (PDVSA “unofficially” bankrupt)
    Yesterday, one of Venezuela’s attorney general (the one appointed by the ANC) said that PDVSA was technically bankrupt. Meaning, it had no ability to pay the legally obligated pending receipts and payment requests. The ANC is the group that Maduro selected to rewrite the Venezuela constitution. The ANC attorney general said that the old president of PDVSA was to blame for the bankruptcy. Instead of Hugo Chavez and Maduro who essentially took every dime they could from the company to use for political and economic purposes. And who forced the company to more than double it’s payroll and hire Chavez loyalists who were then put in high management positions.

    W/O condensates Venezuela can’t ship extra heavy crude.

    On inflation:

    The year of 2017 ended with 1 dollar worth about ~120,000 BsF (it varied a lot over the holidays)

    January 8th, 1 dollar buys $143,000 BsF.
    January 19th, 1 dollar buys $212,000 BsF.
    January 26th, 1 dollar buys $267,000 BsF
    To put it in perspective, it is usually only possible to buy eggs on the black market (farmers stall). Currently, a carton of 30 eggs cost about 400,000 BsF. The minimum wage is about 8,300 BsF per day.

    So, with a three more work days in January, by the end of January, 1 dollar will buy more than twice the number of BsF it did at the start of the month. If BsF keep depreciating against the dollar at this rate, by the end of 2018, 1 dollar would buy ~500,000,000 BsF.

    A halving of value every month leads to very rapid inflation. Where $1 US dollar buys:
    120,000 BsF (end of Dec 2017)
    240,000 BsF (halving in value end of Jan)
    480,000 BsF (halving in value end of Feb)
    960,000 BsF ( halving in value end of Mar)

    491,520,000 BsF (halving in value end of Dec 2018). (30)

    As I’ve been saying for two years Venezuela is teetering on the edge of failure.

    Hyper inflations always burn out eventually.
    In the past, nations would simply throw out worthless currency and replace it w/USD’s

    Venezuela is unlikely to do so. Instead, watch for
    the ‘Petro’ indirectly backed by Chinese yuan and
    oil. Venezuela didn’t invent crypto currencies. First since mid 20th century to back-up coins w/ something useful in everyday life.

    As Venezuela becomes a failed state, China and Russia will in a real sense of the word ‘take charge’.

    In a real sense loonies are backed by AG products,
    Oil, lumber, metals.

  14. Davy on Sat, 27th Jan 2018 3:15 pm 

    “As Venezuela becomes a failed state, China and Russia will in a real sense of the word ‘take charge’.”

    Sure bob, keep preaching your fantasies like nedernazi and billyT. You guys need to start an old man club and talk your goofy shit together and see who’s imaginations are the biggest.

  15. Davy on Sat, 27th Jan 2018 3:24 pm 

    Bob, no word in this article of China coming in and taking over:

    “In Venezuela, “We Loot Or We Die Of Hunger”

    “While we have reported on previous incidents of looting, analysts are starting to fear that the current wave could linger amid the Venezuela’s economic freefall into a Mad-Max-like dystopia – very different from the promised-land of socialist utopian success promised by Bernie Sanders and his Latin American predecessors. It is clear that amid desperate food shortages Venezuelans are picking up new survival skills. “It makes you want to cry,” said Luis Felipe Anatael in a telephone interview with The Guardian. “I think we are headed for chaos.” A hungry mob took just 30 minutes to pick clean his grocery store in the eastern city of Puerto Ordaz, hauling away everything from cold cuts to ketchup to the cash registers.”

  16. Cloggie on Mon, 29th Jan 2018 12:12 am 

    Barry Eichengreen predicts that within ten years the US has lost dollar dominance and that there will be three competing currencies: dollar, euro and yuan:

    As a consequence it will be very difficult for the US to keep financing its large deficits and it will end US dominance.

    Der Spiegel fears a repetition of the thirties and the outbreak of trade wars.

    For the US much is at stake: standard of living, military, financing deficits.

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