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Is There A Little-Known "X-Date" For The Dollar Debt Bomb?

Posted by Dirk Watters on

China is expected to launch its first yuan-denominated oil contracts next month, and that will mark the beginning "X-Date" for the dollar kill switch.

Summary:

  • The US dollar enjoys a special privilege in the world due to its dominance in the global oil trade.
  • The agreement that created this dominance was predicated on the United States being the largest oil importer in the world, which is no longer the case.
  • China is rolling out a new gold-backed yuan oil contract next month as part of its attempt to replace the US dollar's dominance.
  • If the dollar loses its privileged status, it will likely lead to inflation and rising interest rates according to FED chairman Jerome Powell, along with difficulty maintaining the current standard of living for retirees.
China may trigger the U.S. Dollar kill switch

Oil is like a coin: one side is economics and the other is geopolitics, and the two are inseparable.

The petrodollar came into existence in 1973 in the wake of the collapse of the international gold standard which was created in the aftermath of World War II under the Bretton Woods agreements.

These agreements also established the U.S. dollar as the reserve currency of the world.

The Nixon Administration understood that the collapse of the gold standard system would cause a decline in global demand for the U.S. dollar.

Maintaining that artificial demand for the dollar was vital for the United States' economy.

So the United States under Nixon struck a deal in 1973 with Saudi Arabia.

Under the terms of the deal, the Saudis would agree to price all of their oil exports in U.S. dollars exclusively and be open to investing their surplus oil proceeds in U.S. debt securities.

In return, the United States offered weapons and protection of Saudi oilfields from neighboring countries including Israel.

In 1975, all of the OPEC nations agreed to follow suit. Maintaining the petrodollar is America's primary goal. Everything else is secondary.

The dollar system provides at least three immediate benefits to the United States.

1: It increases global demand for U.S. dollars.

2: It increases global demand for U.S. debt securities.

3: It gives the United States the ability to buy oil with a currency it can print at will.

In geopolitical terms, the petrodollar lends vast economic and political power to the United States.

China hopes to replicate this dynamic.

A rising China is eyeing the benefits of having its own currency play a larger role and supplant the petrodollar in global trade.

The initial focus of that trade is oil trade.

There are indications that the Chinese are now accelerating their long-term plan to dethrone the petrodollar. Right now, China is the number one exporter on the globe, the largest crude oil importer in the world and also the world's largest economy with a GDP of $19.42 trillion in 2015 (compared to $17.95 trillion for the U.S.), based on purchasing power parity (PPP).

The Chinese scored a major success for their currency last year when the International Monetary Fund (IMF) included the yuan in its Special Drawing Right (SDR)

China is dominating Oil imports

In the aftermath of the Second World War, the U.S. accounted for 50 percent of the global economy.

But by 1980 this had declined to 22 percent. Three decades of double-digit Chinese growth has reduced the U.S. share to 16 percent today.

China is currently growing three times faster than the U.S. and is accelerating the planned"X-Date" for the Chinese Dollar Kill-Switch.

Senior government officials in Beijing reviewing the nation's foreign-exchange holdings have recommended halting purchases of U.S. Treasuries warned Bloomberg.

China holds the world's largest holdings of U.S. Treasury reserves, at $3.1 trillion. Despite this looming Chinese kill-switch threat, a top Treasury official signaled confidence in the U.S. government debt market, which at $14.5 trillion is the world's largest. "It's a complicated chess game as with everything the Chinese do," said Charles Wyplosz, a professor of international economics at the Graduate Institute of International and Development Studies in Geneva. " For years they have been bothered by the fact that they are so heavily invested in one particular class of U.S. bonds, so it's just a question of time before they would try to diversify." China Dumping Treasuries  

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