known unknowns

KNOWN UNKNOWNS

Sorry for the title, I got done with The Black Swan last week ( surprisingly, a very entertaining read-although I’d have to read it another two times minimum to truly grasp all of it ) and it is stuck in my head.  I’ll be reminding you today about the serious issue of the demise of the PetroDollar, and what we know about those consequences is a known unknown.  We know it is going to be bad, but have idea how bad, for how long or even when that starts, if it hasn’t already.  Okay, I just came across yet another dry random statistic that should just be one of a few thousand but which keeps nagging at me constantly ( if I’m getting a nagging feeling, you’re guaranteed to get an article ).  And here it is: in 2000, the amount of foreign reserves in dollars was 55%.  In 2013, that amount was down to 33%.  Okay, boring, right?  Move on to how more of our corn crop is now ethanol or how this is the sixth ( or whatever ) year of Californian drought, or something.  Well, not so fast.  Foreign reserves are other countries holding our currency.  So, you’re thinking that, big deal, trade is down ( no reason to hold as much currency if they will buy less from us ).  As usual.  But foreigners were not holding our dollars, and they are not holding those non-dollars for trade with us, per se. 

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Kissinger saved our asses in the 70’s by convincing the Saudi’s to price their oil in US Dollars exclusively.  They were sitting on the worlds greatest oil reserves that had barely just been tapped, and their voice was the only one that mattered.  The global oil for dollars trade became “law” almost instantly.  But, we didn’t send paper currency overseas.  We sent Treasury bonds there.  Those are our “overseas currency” everyone holds in reserve.  Foreigners buy our debt, because they use those as currency for oil.  That was how we imported inflation all these decades.  That was how we controlled the oil trade ( forget the influence private oil companies used to have ).  That was how our economy continued to function.  The Saudi’s pumped a barrel of oil, we covered that with creating a Treasury bond, other countries had to give us some kind of commodity to get the bond to give to Saudi Arabia to get that oil ( in simplistic terms ).  We didn’t send paper money, so there wasn’t inflation.  Just more debt.  Foreign countries didn’t buy Bonds to earn interest ( they don’t hold them long enough ), they bought bonds to buy oil.  Well, then that wonderful bargain turned sour.  We’ve gone from foreign countries “savings” of half the global total to now only a third ( close enough to losing half ).  And honestly, do you really believe we have another thirteen years until that 33% falls to 15%?  I sure don’t.  There are so many things working against us.

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China and Russia are already over the dollar as far as trading goes.  As China is the worlds second largest user of oil, and Russia the #1 or #2 producer ( sorry, brain fart.  I’m not recalling the Saudi and Russian production numbers right now ), you can kind of see how this neatly shoves aside their need for the US and its dollar.  The national debt is so out of control, having doubled on Obummer’s first term, that we can pay the military and the interest payment and that is about it.  Every other payment is new debt ( we are borrowing around half of the yearly budget ).  Which, no, China is not buying.  We buy it ourselves.  An IOU.  And that $18 trillion?  That is just the admitted debt.  We lent another equal amount to bail out most banks globally in 2008/2009.  So, we keep doubling down on the derivatives market to keep that “creation” from devouring its creator.  Then there is Peak Oil itself, which we can blame for this mess, mostly.  Lack of growth in oil supply ( a plateau is nice, keeps things from imploding, but it isn’t growth which we need to feed the interest payments ) seems to be as deadly as supply contraction ( you need a healthy financial sector to loan to the fracking industry to pump, for instance ).  So here is the thing.  The PetroDollar is already dead.  It is a zombie, dead but still animated.  Just like our economic system.  Really, what is keeping all the other powers on the system?  Just rabid fear of what our rabid dog country with nuclear weapons will do if they move to fast away from it.  That is it.  The system doesn’t even benefit the Saudi’s anymore, as their former protector is now incapable of keeping her neighbors under control.  The Chinese would both give her a better deal and clamp down effectively post haste ( the biggest budget no longer gives us much military effectiveness-just compare our control of Iran or Iraq or Afghanistan or even puny Libya with Chinese control of Tibet or other western provinces ). 

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All of this scares me, because how long can this game continue in our favor?  One opening on this chessboard and others race in to dispose our control.  We can’t predict the timing, and we know when it happens our country crashes and crashes hard ( although, HOW hard is a critical question ).  It should come out of the blue, and even knowing it is coming allows us little direct preparation.  We’ll have some fun with that, I’m sure.

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