Zero Hedge put out a piece yesterday entitled “Petrodollar Alert: Putin prepares to announce ‘Holy Grail’ gas deal with China.” In this article, the “Tylers” are suggesting that Russia will be “turning east” toward China with sales of oil and gas. I have since read many comments on this subject, some of which seem to imply that even if they do announce a deal (I would give VERY high odds that they will) that it will not be of much significance. I strongly disagree.
In my opinion, Russia holds the cards here and the other players at the table are in cahoots with them. The old saying that “if you don’t know who the sucker is at the table…then you are probably him” is the way I see this. We are playing with the rest of the world and sitting at a table with Russia, China, India, Brazil, Iran, Israel and Saudi Arabia. I don’t believe that Eastern Europe really wants to play this game. Germany for example has already seen a 40% increase in the cost of gas to Ukraine, are they willing to speak up against Russia…with the result being 40% 2×4 across the forehead? Or even worse, what if the gas supply was actually shut off at the source? Yes I know, we will have warmer weather soon but winter always follows summer sooner or later and the Germans know this.
It is said that Russia’s “trade” with China is just too small to affect the petrodollar, again I strongly disagree. It is said that Russia “needs” or “has to have” $100 oil to survive…NO, NO, NO! If Russia doesn’t have $100 oil then what is the worst case scenario? They default right? Please take a step back and think this one through. We live in an entirely interconnected financial system, one that is fragile to say the least. If you don’t believe this then why have western central banks had to perform “life support” measures in the form of “QE” ever since 2008? If Russia doesn’t have $100 oil and cannot pay their bills, does this mean that Russia will “dry up and blow away?”
Do you see what I’m getting at here? Russia blew up in a total financial collapse, bankruptcy, black hole or whatever you’d like to call it back in 1990. They know hard times, they have lived hard times…and yet they survived. If Russia were to default, who would they be defaulting “on?” Western banks? How many “CDS” (credit default swaps) are outstanding? Who were the “sellers” of this “insurance?” Western banks again? The current financial “system” in the West is a daisy chain, it is a Ponzi scheme. It is old, weak, fragile, and decrepit or however you’d like to describe it. What I am saying here is that it is the WEST that is in danger not the EAST. Will the East walk away unscathed? No of course not. I am not saying this. What I am saying is that we have more to lose and our standard of living has much further to fall than theirs.
Russia could (I believe will) announce their deal with China and it will be “settled” in something OTHER THAN dollars. This on its own will be enough to destroy the “petrodollar.” Yes I know I’m being overly dramatic again right? No, if Russia and China can “do it” then so can other nations. Other nations “with” Russia and or China…and even amongst themselves. I purposely did not mention Saudi Arabia prior in this article but I might as well do that now. As you recall when I discussed this topic two weeks ago, I mentioned that our relations with Saudi Arabia were at lows not seen in my lifetime. I also mentioned that Saudi Prince Salman was to meet last weekend with the highest Chinese officials including their President. Do you think that this was 4 days of “afternoon tea” asking how the family is? Or maybe the subject of “oil” came up? “Oil” as in the Saudis supplying it and the Chinese using it AND then paying for it with “something.” “Something” …other than dollars?
The writing is on the wall and this is so obvious to me that I cannot believe there is even any debate as to where all of this is going. We have ticked off the rest of the world through bad deals, bullied deals, we’ve spied on everyone and toppled ruler after ruler whenever they got the bright idea that they did not want to accept dollars…for oil. Can we do this with Russia? Can we do this with our largest creditor China? Can we do this with Saudi Arabia if their trading partner is China? We cannot even rely on backing from Israel anymore because our “goals” do not seem to be aligned as they once were.
It is obvious to me that the U.S. is headed down a one way street that ends in a dead end of “isolationism.” We are heading toward the world going “full backlash” on us and we will be “isolated” just as the school bully does after he is beaten. Trade partners will look elsewhere to sell their goods and require payment in something other than dollars.
If I had to guess, I would say that these decisions have pretty much already all been made. The only thing left is for “us” to be informed of them. I completely agree with how both Jim Sinclair and Zero Hedge have described the situation. Jim calls this the “nuclear option” for Russia while the Tylers call a Russia/China deal “the holy grail.” The bottom will fall out of the dollar as they will be “sold” all over the world. Unlike Treasury securities where the Fed can and has stepped up to purchase, how will they absorb these dollar sales? By “printing dollars to buy unwanted dollars?” Sorry, it doesn’t work like this because our only “manufactured item” (dollars) will only become that much more plentiful. Because we are the reserve currency, we do not hold much in the way of foreign currency reserves. We don’t hold lots of euros, pounds, yen or more importantly Yuan…why should we…we are the reserve currency right? This is a problem and will soon be seen as a problem, a BIG one!
If you remember history, Treasury Sec. John Connally once made the comment back in the early 1970’s that “it may be our dollar but it’s your problem” and he may have been correct…back then. The difference today is that we no longer are the manufacturing heavyweight of the world and we have levered our financial system unlike any other in all of human history. “The dollar” is ours and it is our problem. In fact, from the viewpoint of the rest of the world…it’s THE problem!