Last Sunday, a major event occurred in the international economic and financial system of this century, which may affect the entire US dollar system, threaten the international reserve currency status of the US dollar, and then push up domestic inflation and borrowing costs in the United States, affecting every ordinary person who holds US dollars or assets denominated in US dollars. The financial rules and investment logic that we have followed for many years are facing a reshuffle. On June 9, 2024, the 50-year petrodollar agreement between Saudi Arabia and the United States was announced to end, and Saudi Arabia decided not to renew the contract. The withdrawal of this global financial and settlement system, which has been in operation for more than half a century, marks a huge shift in the global economy. In today's video, let's find out what happened, where it came from, and how it will affect the future economy, especially how it will affect the lives of each of us and the wealth of future generations. The Coin World article specializes in sharing financial knowledge that cannot be learned in the currency circle, so that you can be free and open the door to wealth for you.
When we think of global trade, the first thing that comes to mind may be some kind of commodity, such as cars, mobile phones, chips, corn, wheat, etc. But there is one commodity that has dominated everything from beginning to end. Almost all major countries want to control this commodity. The manufacturing and energy industries cannot do without it. This commodity is oil. When it comes to currency, most people will think of the US dollar. This is a reason. In terms of international trade and value storage, the US dollar has an absolute dominant position, but it was not originally like this. To understand the origin of things, we have to go back hundreds of years. Between 1720 and 1815, if you asked someone what currency was, the answer you got must be the French livre, also known as the French pound. Because France was a strong country during this period and played an important role in international trade, the French pound had the status of a world reserve currency during this period. But if you asked someone what currency was between 1815 and 1920, they might say it was the British pound, because the British pound was the world reserve currency during this period. After the end of World War II, the creation of the Bretton Woods system changed everything. Because everyone would say that currency is the US dollar, the US dollar became the world's universal currency and reserve currency under this system. At that time, the United States was almost the world's only superpower, owning 73.4% of the world's gold reserves.
The dollar's status as the world's reserve currency has given the United States two superpowers: the first is economic stability, which is the basis of international trade. Buying and selling goods and services between multiple countries requires a common international settlement currency that cannot fluctuate in value too much. At that time, the only country with the strongest and most stable economy, the largest gold reserves, and the ability to endorse the value of its currency was the United States. The second superpower is that countries that own dollars will benefit from rising prices of dollar-denominated assets, including one of the safest investments - U.S. Treasury bonds. So many countries convert their wealth into dollars and then use dollars to buy assets to protect their wealth from inflation and other currency fluctuations. This is one of the important reasons why countries including Japan and the mainland hold U.S. Treasury bonds and other U.S. assets. But this is just a superficial superpower. The dollar has also unknowingly gained another ability, which is the power to control the world's energy.
On August 15, 1971, Nixon announced that the dollar would be separated from gold and stopped being freely convertible. The original word "US dollar" ceased to exist from that day on, because the dollar could not be freely converted into gold at the originally set value, and gold and the dollar were decoupled. So how to continue to ensure that all countries in the world still need the dollar, so that the United States can continue to export inflation, buy world assets, and make itself richer? We must find another value anchor after gold, and this new anchor must be a commodity that all countries in the world need. Yes, this commodity is oil. It was during the oil crisis, and all countries realized the importance of oil. On June 8, 1974, US President Nixon sent Secretary of State Kissinger to Saudi Arabia for a secret meeting with the Saudi king. The meeting was held on the battleship Quincy, and almost no video records were retained. On the same day, the United States signed the Petrodollar Agreement with Saudi Arabia, the world's largest oil producer. The agreement stipulates: First, oil will be priced in US dollars, which can ensure a sustained and stable international demand for the US dollar. Second, after earning dollars, oil-producing countries need to use the surplus dollars to buy U.S. Treasury bonds, allowing the dollars to flow back into the U.S. economy. Third, in exchange, the United States will provide military protection to Saudi Arabia to prevent it from being threatened by its neighbors. From then on, "U.S. dollars" became "black gold."
Why do you say that? Think about it, all countries in the world need oil, and they must use dollars to buy oil, so every country needs more dollars, and the result is that the dollar strengthens the status of the world's reserve currency. Holding the dollar system has kept domestic inflation in the United States down, because inflation can be exported abroad through the dollar. At the same time, the continued strength of the U.S. Treasury market allows the United States to issue bonds at will without scruples and borrow money from other countries for consumption. In terms of international trade, the United States also has an inherent advantage because the United States can withstand a serious trade deficit. Anyway, the petrodollars will be recycled into the U.S. economy and then used to purchase foreign goods and services. All these advantages keep domestic interest rates in the United States relatively low, which in turn stimulates the U.S. economy. This is simply letting the U.S. economy hang! In fact, the United States has paid almost no price, and countries around the world are contributing to the construction of the U.S. economy, allowing the U.S. economy to prosper for another 50 years.
But 50 years after the petrodollar agreement came into effect, all this came to an abrupt end. On June 9, 2024, Saudi Prime Minister Salman announced the end of the 50-year petrodollar agreement and that it would not be renewed. Many people did not pay attention to this news, but in my opinion, this is probably the most important thing in the international financial and trade system of this century, and it will rewrite the international monetary and financial system in the next 50 years.
In fact, the end of the petrodollar is just part of a larger trend. Many countries have gradually abandoned the use of the US dollar in international settlements and oil transactions. Saudi Arabia, the world's largest oil producer, is applying to join the BRICS. At the same time, more and more developing countries are choosing to abandon the US dollar in bilateral trade. Under this double blow, many people have predicted that the United States' global financial dominance is about to end. But the question is, what does all this mean?
First, domestic inflation in the United States. The most direct consequence of the collapse of the petrodollar system is that the U.S. dollar will weaken. Saudi Arabia can use any currency to price oil. Countries around the world no longer need dollars to buy oil. Other currencies can also be used, which will of course reduce the demand for the U.S. dollar. Historically, the petrodollar system has strengthened the status of the U.S. dollar as an international reserve currency, but now the entire trend has reversed. A weaker dollar will lead to higher prices for imported international goods and services in the United States, pushing up domestic inflation in the United States. This inflationary pressure is likely to cause the Federal Reserve to respond by raising interest rates. Borrowing costs in the United States will become higher, business will decrease, borrowing will decrease, investment and the stock market will face downward pressure, and the domestic unemployment rate will increase, just like the inflation surge during the epidemic. However, the inflationary pressure caused by the decoupling of the petrodollar will continue for quite a long time.
Second, curb the issuance of US debt. The end of the petrodollar system will lead to a decrease in the demand for US Treasury bonds. Saudi Arabia can no longer receive US dollars for selling oil, so naturally the US dollar reserves will decrease, and thus the demand for purchasing US Treasury bonds will also decrease. At the same time, Saudi Arabia is no longer obliged to buy all its fiscal surplus dollars into US Treasury bonds, and can purchase other assets as investment options. This trend is not only happening to Saudi Arabia, but also to other oil-producing countries. With the reduction in demand for US debt, the United States will naturally not be able to issue Treasury bonds as it does now and borrow money from other countries to fill its fiscal deficit. Therefore, the cost of borrowing in the United States will rise, pushing up interest rates, and the economy will slow down until it is completely shut down.
Third, the transfer of international financial hegemony. The decoupling of the US dollar from oil will also indirectly boost the influence of developing countries, especially China. China has always wanted to promote the renminbi to the world as one of the world's reserve currencies. In this way, China can do what the United States can do, such as exporting inflation. If the renminbi occupies a place in the world's reserve currency options, its influence on the international economy and finance will be qualitatively improved. The abdication of the US dollar will lead to a multipolar international financial and settlement system in the world. As of August 2023, the Bank for International Settlements estimates that 90% of currency exchanges, 85% of international trade and financial futures, and 75% of Asia-Pacific transactions are in US dollars, and this proportion is likely to gradually decline in the future. Instead, bilateral trade between the two countries will be settled in their own currencies, gradually achieving de-dollarization.
Fourth, crude oil prices. The current international crude oil market can be priced in any currency, which leads to greater volatility and uncertainty in crude oil prices. Because the exchange rate fluctuations between currencies are very large, oil prices are already difficult to predict, and now they have become unpredictable. Countries whose economies are heavily dependent on oil imports, such as Japan and EU countries, will face higher oil prices and economic fluctuations, which will increase the difficulty of fiscal budgeting and economic regulation.
Fifth, cryptocurrency and digital currency. Saudi Arabia has announced that it has begun to study the use of Bitcoin as an international payment method, and has officially joined Project and Bridge, an inter-country digital currency settlement system led by the Swiss Bank for International Settlements (BIS), hoping to replace the SWIFT international settlement system dominated by the US dollar. To put it bluntly, Saudi Arabia has blacklisted the United States, joined a new circle of friends, and said goodbye to the United States.
If all of the above possibilities eventually happen, what will be the outcome for the United States?
All this is because the United States has lost its most important export commodity, the dollar, because no other country is willing to help the United States absorb inflation and make the United States richer. So how will the United States respond? In addition to the most traditional solution - starting a war, the United States can also raise interest rates to attract more funds to be deposited in the United States. However, there is an upper limit to the increase in interest rates. If the interest rate is too high, it will begin to affect the US economy, consumers and small and medium-sized banks, as well as the borrowing capacity of individuals and enterprises, affecting economic development. So on the surface, the United States has no response plan. But let's open our minds. Maybe the United States has already thought of a countermeasure and found the next anchor point for the dollar, such as high-end chips. All countries need high-end chips, and the United States has control over it. The chips are priced in US dollars and settlements must be in US dollars. Then after the "US dollar" and the "petrodollar", the third "chip dollar" era will be born. Of course, this is just a pure brain hole. At present, the United States has no better solution.
So, will the United States never recover from this? About 59% of the world's foreign exchange reserves are in US dollars, 20% in euros, and only 3% in mainland currency. 90% of foreign exchange transactions use US dollars. According to the Atlantic Council, 73 central banks will reduce their holdings of mainland currency in the next 12 to 24 months and buy US dollars and gold instead. A year ago, less than 20 central banks wanted to reduce their holdings of mainland currency. The United States is currently the only superpower in the world, and its economic and military strength is undoubtedly the world's number one. But how long this situation will last, I really can't guess. What we can see is that the world's dependence on the US dollar has been gradually decreasing, and this trend is likely to continue in our lifetime. But if you ask whether the US dollar will be replaced by another currency? I don't think it will happen in the short to medium term, 10 to 20 years.
Actually, I personally don't really care, because I can't change this trend. I can only follow the trend, change myself, and focus on what I can control. For ordinary people, what we hope for is to live a stable life, make money from investment, and not let our wealth shrink or lose everything due to investment failure. I will continue to invest in the stock market, buy index funds, reinvest the dividends, buy more index funds, and follow the overall economic market.
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