If you’ve ever seen the movie The Perfect Storm, you might recall that the namesake storm was a rare combination of two storms synching up over the North Atlantic to wreak havoc on the region. Well, two emails landed in my inbox last week that portend a perfect storm on the horizon.
I will share the headlines:
- What if the U.S. starts paying Saudi for oil in riyal?
- BRICS nations dump dollar in oil trades.
If you’ve been reading my dispatches for longer than a hot minute, you’ll already know where this dispatch is going.
And it’s going no place good.
If you’re new to Field Notes… well, first, “Welcome!” Truly glad you’re here. And second, this dispatch is going no place good.
Those two headlines are running up against each other at the same moment de-dollarization is taking hold in the world, and they promise to foment a hurricane-force wind of trouble here in the U.S. of A.
The mainstream media—and by that, I mean the Western media… and by that, I mean the U.S. media—insist that all this talk about de-dollarization and the potential (let’s call it “certitude”) for pricing oil in currencies other than the dollar, is just a bunch of prattle-and-blather.
That it’s all so much claptrap from dour ne’er-do-wells trying to sell end-of-times newsletters or get you to build a bomb shelter stocked with Mylar-packaged freeze-dried ice cream or whatever.
Never ever gonna happen in our lifetimes, the media say, based on thoughtful and sober interviews with Wall Street and K Street types who are, supposedly, thoughtful and sober.
Now, if you know me, you know I’m going to completely disagree with the mainstream. And I’m going to snicker and shake my head as I do so.
Assuming the dollar remains king of the hill—and the only currency in which oil will be priced from now until forever—is the height of homefield arrogance. I understand why the U.S. media push this narrative. They’re cheerleaders rooting for the home team, even if that means lying about our chances of winning the game.
Don’t get me wrong: I’m rooting for the home team, too. I don’t want America to stumble.
But I’m also a realist who takes this dot and that dot, and the dot way over there behind that crepe myrtle tree, and I put them on a piece of paper, and I think and I ruminate and I cogitate… and I begin to see how these dots interconnect, and where they’re logically likely to lead.
Maybe not today. Maybe not tomorrow.
But at some point in the foreseeable future.
Step back and assess those two headlines dispassionately. Assess them in light of all that’s happening with the anti-dollar movement and America’s enormous debts, and a different possibility, probability, certitude emerges: The world simply is moving on.
The dollar had its day in the sun. It served the globe generally admirably for the last century.
But all good things come to an end.
No empire has ever lasted.
No global reserve currency has ever lasted.
Like, never ever.
Not a single one.
And it only makes sense.
Empires—as well as the politicians/mandarins who manage a nation’s currency—grow fat, dumb, and lazy. They forget their history (assuming they knew their history in the first place).
They become so accustomed to the status quo that they become sclerotic. And they think that no matter what they do, what’s normal today will always be normal across every tomorrow to come.
And when the U.S. media come calling with questions for a story on de-dollarization and the Saudis pricing oil in riyal or even Chinese yuan, these sclerotic thinkers spew their sclerotic thinking and the media print it as thoughtful and sober analysis.
But here we are—Saudi Arabia considering the possibility of settling oil trades by way of local currencies. For nearly 50 years, the Saudis have settled oil trades in dollars—hence the term “petrodollar.” This would be a shift of historic and monumental proportions.
It could hurt much worse than de-dollarization.
But, of course, why shouldn’t the Saudis not want to trade in the local riyal? It’s their oil. They should get paid in their currency.
Why shouldn’t India pay the U.A.E for oil in rupees or Emirati dhiram? (And India did that just recently.)
I mean, more broadly, why should the world pay for oil in dollars when dollars aren’t the local lucre?
Why should the Saudis or the Emiratis or the Indians… or the Chinese, the Indonesians, the Brazilians… why should any of them face the added cost of converting their currency into dollars to go buy oil, or selling oil in dollars to then face the added cost of converting them back into the home currency?
That’s two currency-conversation costs—one on each side of the trade—that factor into the transaction. Lose the dollar, and only one currency conversion happens, and buyer and seller can split the cost. Each side saves money. Win-win.
Moreover, each side creates demand for their own currency, instead of creating artificial demand for a currency they don’t really care about—the dollar—but have been forced to care about only because of a meeting in Bretton Woods, New Hampshire in the dying days of World War II, when Allied powers decided the dollar would rule the post-war world.
Logically and financially, it only makes sense to boost trade in your local currency if you’re a Saudi or Emirati or Indian official. You’re doing right by your own country and currency. Why should you give two shits about the impacts of de-dollarization?
Of course, what’s logical for the goose serves up the gander as Sunday night dinner.
Meaning, the dollar will face severe consequences as this new way of thinking about oil trading takes root, even as the idea of de-dollarization spreads.
Right now, trading oil in dollars creates demand for dollars, since countries need dollars to go buy oil. When that’s no longer the case, countries will have no need to go buy dollars. They’ll just trade in riyal or rupees or pesos or yuan or whatever.
Supply and demand make a market. Demand falls relative to supply, so prices must fall. Ninth-grade econ, really.
In currency terms, that means the value of the dollar falls relative to other major world currencies.
That’s not a guess. Just simple facts based on those ninth-grade economics lessons.
And that will have a whole host of horrible, terrible, no good, very bad impacts on Americans and their pocketbooks.
But that’s a perfect storm I’ll tell you about another day.
For now… just make sure you have some financial flood insurance in place: Swiss francs, gold, and bitcoin.
More to come…