So what’s the long term consequences of lost of Petrodollar?
And how will that effect strength of American dollar?
Thoughts?
Fuel will become more expensive in dollars because of exchange rates across the basket of currencies which will now be used to settle trade in energy.
it won’t be replaced by the ruble.
Nothing. The dollar as the monopoly currency of petroleum trading has been on the decline for decades. It is meaningless to the value of the dollar. The fact that Russia gives Iran rubles instead of dollars (because it has no dollars) doesn’t impact the value of any third currency.
Whatever Iran gives Russia in exchange for oil, Russia has to convert to rubles to use within their own domestic economy. There was a time when they could have converted it to a more stable dollar but that time ended when we put such strict sanctions on them and their central bank.
The dollar was the monopoly currency, Nations will now settle directly in other currencies without having to consider their exchange rates to dollars. And countries once required to settle in actual dollars will now be able to settle the trade in other currencies.
No, but it will be replaced.
Reminbi?
Either that or Euro I guess.
In a vacuum? It means nothing.
If that is all that happens. There will be no significant consequences.
The US Dollar holds “special status” in two ways
- As the currency most often used in world trade. The end of the petrodollar might be the beginning of the end of that.
- As the world’s reserve currency. That one is far more important.
Basically “which currency is used for trade,” matters a lot less.
The fact that the Saudis, the Chinese, the Japanese and everyone else, hold our bonds and dollars, is far more important. That is not under threat here.
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The British Pound used to be both the world trade currency and the world reserve currency. (2nd one is way more important.) The pound lost both statuses (stati??) slowly and as a result . . . nothing. Britain remained a wealthy first-world country and on any given day most folks would have to check to see if the British are a little more, or a little less wealthy than the residents of other G-7 countries.
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Right, which gives those countries the ability to trade oil without needing dollars. Which has no impact on the value of the dollar. For the most part nations are simply moving reserve account balances from country A to country B when they trade in petrodollars anyway, which has no impact on the value of the dollar. It just moves reserve balances.
To be clear, I’m not trying to debate the value of a dollarized system etc… Simply talking about the transactional realities of oil trade as I understand it. At least for me it’s a fascinating question.
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If a person is worried about (or making predictions about) dollar stability, I am 80% certain these are the two lines to watch. If one or both of them them fall quickly (more quickly than they once fell for the British pound,) then it could spell trouble.
So far so good,
Good to be in these discussions with you again! One thing that’s happened to me over the past decade or so: Watching fed policy, other central bank policy and the economy in general has made me far more circumspect about what I think I know - which makes me appreciate your 80% level of certainty 
There are two ways I see that securities held overseas / by foreigners could decline:
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They mature and are not replaced with more securities. In the near term this is hard to imagine, especially considering how well the current issues pay. In the long term it’s been the slow process of world reserves falling from something like 80% dollars to something closer to 60%. As a slow burn I don’t think it has serious consequences.
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Foreign holders trade them to US holders. In that scenario the US holder gets the bond and the foreign holder gets… dollars. Which can buy things denominated in dollars.
I assume in the case of #2 this could show up as a decreased demand for dollar assets, decreasing their price? Which would of course be bad for US asset.
(Also FRED is the greatest product the government has created in centuries! Assuming you consider the Fed to be government)
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The Yuan is the only thing that threatens it, but it will be years before it happens if ever.
I expect oil and other major trade to go to special drawing rights basket settlement. As the Chinese currency becomes a larger position in that basket, it is our currency that will take the hit. As an importing nation, that will make things expensive for us. It will also shift treasury as a reserve asset demand.
not having to pay for oil in dollars will decrease demand for dollars. Part of the dollars strength has been the crutch of demand created by this arrangement. A weaker dollar is less attractive. I do not see how this cannot effect the dollars status as the worlds reserve currency.
The way I see it, its still going to take some time, but China is working hard to topple the dollar. I don’t think they can succeed with the yuan; but a BRICS currency could and this will create demand for one… possibly crypto.
This conversation can get very complex very quickly. I’m not sure “not having to pay for oil in dollars will decrease demand for dollars” is correct.
Trading oil in dollars simply moves dollars from one nation’s reserves to anothers. So what was once a reserve deposit in, say, Iran is now a reserve deposit in China. They both use dollars as a currency reserve. If Iran chose to buy oil from China with another currency it would need to convert THAT currency to something China will hold. It doesn’t impact the overall number of dollars in circulation nor the demand for those. Of course in the long run Iran could choose not to hold dollar reserves.
Again, hard to decipher the complexities but I can certainly see a world in the medium-term future where China is the counterpoint of a yuan-based trade union akin to what the the west created with the dollar after WW2. Strictly as a currency regime I don’t think it threatens the dollar - China could demand trade in a currency of their choice but they have quite the vested interest in ensuring the long term value of US currency.
^That’s quite an interesting thought. I’ve honestly never understood why SDR’s aren’t in more common use. Will be interesting to see if the SDR issuers allow Russia to participate (I suspect that’s already been settled. I just don’t know the answer!)
At the same time the Saudi’s made the dollar the unit-of-exchange for oil, they also decided to store their long term wealth in the form of dollars and bonds (which are the same thing).
At that moment pretty much every other nation did pretty much the same thing, (made the dollar their reserve currency.)
If the dollar is no longer the unit of exchange will have little or no impact by itself. In a vacuum it means nothing. If that also leads to the dollar losing its status as reserve currency, and loses it quickly, then bad thing might happen.
Losing the petrodollar status means nothing unless it also leads to other things. We’ll see.
The two little green curves below each represent a change from the past. If enough of those pile-up quickly then we’ll have a problem
and the next time they purchase they have to get more dollars; hence, creating demand for dollars. Less demand=less value and if we don’t do something to control the money supply it will get worse. The more it gets worse, the more others will seek a different reserve speeding up the problem.
How many dollars do you have in the bank?
What about bonds?
What portion of that is specifically for buying gas?
If I gave you all your gas for free, forever and ever, how much would your personal demand for dollars change? (Not much I think.)
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