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11 International Agreements That Are Nails In The Coffin Of The Petrodollar

Is the petrodollar dead?  Well, not yet, but the nails are being hammered into the coffin even as you read this.  For decades, most of the nations of the world have used the U.S. dollar to buy oil and to trade with each other.  In essence, the U.S. dollar has been acting as a true global currency.  Virtually every country on the face of the earth has needed big piles of U.S. dollars for international trade.  This has ensured a huge demand for U.S. dollars and U.S. government debt.  This demand for dollars has kept prices and interest rates low, and it has given the U.S. government an incredible amount of power and leverage around the globe.  Right now, U.S. dollars make up more than 60 percent of all foreign currency reserves in the world.  But times are changing.  Over the past couple of years there has been a whole bunch of international agreements that have made the U.S. dollar less important in international trade.  The mainstream media in the United States has been strangely quiet about all of these agreements, but the truth is that they are setting the stage for a fundamental shift in the way that trade is conducted around the globe.  When the petrodollar dies, it is going to have an absolutely devastating impact on the U.S. economy.  Sadly, most Americans are totally clueless regarding what is about to happen to the dollar.

One of the reasons the Federal Reserve has been able to get away with flooding the financial system with U.S. dollars is because the rest of the world has been soaking a lot of those dollars up.  The rest of the world has needed giant piles of dollars to trade with, but what is going to happen when they don’t need dollars anymore?

Could we see a tsunami of inflation as demand for the dollar plummets like a rock?

The power of the U.S. dollar has been one of the few things holding up our economy.  Once that leg gets kicked out from under us we are going to be in a whole lot of trouble.

The following are 11 international agreements that are nails in the coffin of the petrodollar….

#1 China And Russia

China and Russia have decided to start using their own currencies when trading with each other.  The following is from a China Daily article about this important agreement….

China and Russia have decided to renounce the US dollar and resort to using their own currencies for bilateral trade, Premier Wen Jiabao and his Russian counterpart Vladimir Putin announced late on Tuesday.

Chinese experts said the move reflected closer relations between Beijing and Moscow and is not aimed at challenging the dollar, but to protect their domestic economies.

“About trade settlement, we have decided to use our own currencies,” Putin said at a joint news conference with Wen in St. Petersburg.

The two countries were accustomed to using other currencies, especially the dollar, for bilateral trade. Since the financial crisis, however, high-ranking officials on both sides began to explore other possibilities.

#2 China And Brazil

Did you know that Brazil conducts more trade with China than with anyone else?

The largest economy in South America has just agreed to a huge currency swap deal with the largest economy in Asia.  The following is from a recent BBC article….

China and Brazil have agreed a currency swap deal in a bid to safeguard against any global financial crisis and strengthen their trade ties.

It will allow their respective central banks to exchange local currencies worth up to 60bn reais or 190bn yuan ($30bn; £19bn).

The amount can be used to shore up reserves in times of crisis or put towards boosting bilateral trade.

#3 China And Australia

Did you know that Australia conducts more trade with China than with anyone else?

Australia also recently agreed to a huge currency swap deal with China.  The following is from a recent Financial Express article….

The central banks of China and Australia signed a A$30 billion ($31.2 billion) currency-swap agreement to ensure the availability of capital between the trading partners, the Reserve Bank of Australia said.

“The main purposes of the swap agreement are to support trade and investment between Australia and China, particularly in local-currency terms, and to strengthen bilateral financial cooperation,” the RBA said in a statement on its website. “The agreement reflects the increasing opportunities available to settle trade between the two countries in Chinese renminbi and to make RMB-denominated investments.”

China has been expanding currency-swap accords as it promotes the international use of the yuan, and the accord with Australia follows similar deals with nations including South Korea, Turkey and Kazakhstan. China is Australia’s biggest trading partner and accounts for about a quarter of the nation’s merchandise sales abroad.

#4 China And Japan

The second and third largest economies on the entire planet have decided that they should start moving toward using their own currencies when trading with each other.  This agreement was incredibly important but it was almost totally ignored by the U.S. media.

According to Bloomberg, it is anticipated that this agreement will strengthen ties between these two Asian giants….

Japan and China will promote direct trading of the yen and yuan without using dollars and will encourage the development of a market for companies involved in the exchanges, the Japanese government said.

Japan will also apply to buy Chinese bonds next year, allowing the investment of renminbi that leaves China during the transactions, the Japanese government said in a statement after a meeting between Prime Minister Yoshihiko Noda and Chinese Premier Wen Jiabao in Beijing yesterday. Encouraging direct yen- yuan settlement should reduce currency risks and trading costs, the Japanese and Chinese governments said.

China is Japan’s biggest trading partner with 26.5 trillion yen ($340 billion) in two-way transactions last year, from 9.2 trillion yen a decade earlier.

#5 India And Japan

It is not just China making these kinds of currency agreements.  According to Reuters, India and Japan have also agreed to a very large currency swap deal….

India and Japan have agreed to a $15 billion currency swap line, Japan’s Prime Minister Yoshihiko Noda said on Wednesday, in a positive move for the troubled Indian rupee, Asia’s worst-performing currency this year.

#6 “Junk For Oil”: How India And China Are Buying Oil From Iran

Iran is still selling lots of oil.  They just aren’t exchanging that oil for U.S. dollars as much these days.

So how is Iran selling their oil without using dollars?

A Bloomberg article recently detailed what countries such as China and India are exchanging for Iranian oil….

Iran and its leading oil buyers, China and India, are finding ways to skirt U.S. and European Union financial sanctions on the Islamic republic by agreeing to trade oil for local currencies and goods including wheat, soybean meal and consumer products.

India, the second-biggest importer of Iran’s oil, has set up a rupee account at a state-owned bank to settle as much as much as 45 percent of its bill, according to Indian officials. China, Iran’s largest oil customer, already settles some of its oil debts through barter, Mahmoud Bahmani, Iran’s central bank governor, said Feb. 28. Iran also has sought to trade oil for wheat from Pakistan and Russia, according to media reports from the two countries.

#7 Iran And Russia

According to Bloomberg, Iran and Russia have decided to discard the U.S. dollar and use their own currencies when trading with each other….

Iran and Russia replaced the U.S. dollar with their national currencies in bilateral trade, Iran’s state-run Fars news agency reported, citing Seyed Reza Sajjadi, the Iranian ambassador in Moscow.

The proposal to switch to the ruble and the rial was raised by Russian President Dmitry Medvedev at a meeting with his Iranian counterpart, Mahmoud Ahmadinejad, in Astana, Kazakhstan, of the Shanghai Cooperation Organization, the ambassador said.

#8 China And Chile

China and Chile recently signed a new agreement that will dramatically expand trade between the two nations and that is also likely to lead to significant currency swaps between the two countries….

The following is from a recent report that described this new agreement between China and Chile….

Wen called on the two nations to expand trade in goods, promote trade in services and mutual investment, and double bilateral trade in three years.

The Chinese leader also said the two countries should enhance cooperation in mining, expand farm product trade, and promote cooperation in farm product production and processing and agricultural technology.

China would like to be actively engaged in Chile’s infrastructure construction and work with Chile to promote the development of transportation networks in Latin America, said Wen.

Meanwhile, Wen suggested that the two sides launch currency swaps and expand settlement in China’s renminbi.

#9 China And The United Arab Emirates

According to CNN, China and the United Arab Emirates recently agreed to a very large currency swap deal….

In January, Chinese Premier Wen Jiabao visited the United Arab Emirates and signed a $5.5 billion currency swap deal to boost trade and investments between the two countries.

#10 China And Africa

Did you know that China is now Africa’s biggest trading partner?

For many years the U.S. dollar was dominant in Africa, but now that is changing.  A report from Africa’s largest bank, Standard Bank, says the following….

“We expect at least $100 billion (about R768 billion) in Sino-African trade – more than the total bilateral trade between China and Africa in 2010 – to be settled in the renminbi by 2015.”

#11 Brazil, Russia, India, China And South Africa

The BRICS (Brazil, Russia, India, China and South Africa) continue to become a larger factor in the global economy.

A recent agreement between those nations sets the stage for them to increasingly use their own national currencies when trading with each other rather than the U.S. dollar.  The following is from a news source in India….

The five major emerging economies of BRICS — Brazil, Russia, India, China and South Africa — are set to inject greater economic momentum into their grouping by signing two pacts for promoting intra-BRICS trade at the fourth summit of their leaders here Thursday.

The two agreements that will enable credit facility in local currency for businesses of BRICS countries will be signed in the presence of the leaders of the five countries, Sudhir Vyas, secretary (economic relations) in the external affairs ministry, told reporters here.

The pacts are expected to scale up intra-BRICS trade which has been growing at the rate of 28 percent over the last few years, but at $230 billion, remains much below the potential of the five economic powerhouses.

So what does all of this mean?

It means that the days of the U.S. dollar being the de facto reserve currency of the world are numbered.

So why is this important?

In a previous article, I quoted an outstanding article by Marin Katusa that detailed many of the important benefits that the petrodollar system has had for the U.S. economy….

The “petrodollar” system was a brilliant political and economic move. It forced the world’s oil money to flow through the US Federal Reserve, creating ever-growing international demand for both US dollars and US debt, while essentially letting the US pretty much own the world’s oil for free, since oil’s value is denominated in a currency that America controls and prints. The petrodollar system spread beyond oil: the majority of international trade is done in US dollars. That means that from Russia to China, Brazil to South Korea, every country aims to maximize the US-dollar surplus garnered from its export trade to buy oil.

The US has reaped many rewards. As oil usage increased in the 1980s, demand for the US dollar rose with it, lifting the US economy to new heights. But even without economic success at home the US dollar would have soared, because the petrodollar system created consistent international demand for US dollars, which in turn gained in value. A strong US dollar allowed Americans to buy imported goods at a massive discount – the petrodollar system essentially creating a subsidy for US consumers at the expense of the rest of the world. Here, finally, the US hit on a downside: The availability of cheap imports hit the US manufacturing industry hard, and the disappearance of manufacturing jobs remains one of the biggest challenges in resurrecting the US economy today.

So what happens when the petrodollar dies?

The following are some of the things we are likely to see….

-Oil will cost a lot more.

-Everything will cost a lot more.

-There will be a lot less foreign demand for U.S. government debt.

-Interest rates on U.S. government debt will rise.

-Interest rates on just about everything in the U.S. economy will rise.

And that is just for starters.

As I wrote about earlier today, the Federal Reserve is not going to save us.  Ben Bernanke is not somehow going to pull a rabbit out of a hat that will magically make everything okay.  Fundamental changes to the global financial system are happening right now that are impossible for Bernanke to stop.

We should have never gone into so much debt.  Up until now we have gotten away with it, but when demand for U.S. dollars and U.S. debt dries up we are going to experience a massive amount of pain.

Keep your eyes and ears open for more news stories like the ones referenced above.  The end of the petrodollar is going to be a very significant landmark on the road toward the total collapse of the U.S. economy.

So what do you think the fate of the U.S. dollar is going to be in the years ahead?

Please feel free to post a comment with your thoughts below….

10 Reasons Why The Reign Of The Dollar As The World Reserve Currency Is About To Come To An End

The U.S. dollar has probably been the closest thing to a true global currency that the world has ever seen.  For decades, the use of the U.S. dollar has been absolutely dominant in international trade.  This has had tremendous benefits for the U.S. financial system and for U.S. consumers, and it has given the U.S. government tremendous power and influence around the globe.  Today, more than 60 percent of all foreign currency reserves in the world are in U.S. dollars.  But there are big changes on the horizon.  The mainstream media in the United States has been strangely silent about this, but some of the biggest economies on earth have been making agreements with each other to move away from using the U.S. dollar in international trade.  There are also some oil producing nations which have begun selling oil in currencies other than the U.S. dollar, which is a major threat to the petrodollar system which has been in place for nearly four decades.  And big international institutions such as the UN and the IMF have even been issuing official reports about the need to move away form the U.S. dollar and toward a new global reserve currency.  So the reign of the U.S. dollar as the world reserve currency is definitely being threatened, and the coming shift in international trade is going to have massive implications for the U.S. economy.

A lot of this is being fueled by China.  China has the second largest economy on the face of the earth, and the size of the Chinese economy is projected to pass the size of the U.S. economy by 2016.  In fact, one economist is even projecting that the Chinese economy will be three times larger than the U.S. economy by the year 2040.

So China is sitting there and wondering why the U.S. dollar should continue to be so preeminent if the Chinese economy is about to become the number one economy on the planet.

Over the past few years, China and other emerging powers such as Russia have been been quietly making agreements to move away from the U.S. dollar in international trade.  The supremacy of the U.S. dollar is not nearly as solid as most Americans believe that it is.

As the U.S. economy continues to fade, it is going to be really hard to argue that the U.S. dollar should continue to function as the primary reserve currency of the world.  Things are rapidly changing, and most Americans have no idea where these trends are taking us.

The following are 10 reasons why the reign of the dollar as the world reserve currency is about to come to an end….

#1 China And Japan Are Dumping the U.S. Dollar In Bilateral Trade

A few months ago, the second largest economy on earth (China) and the third largest economy on earth (Japan) struck a deal which will promote the use of their own currencies (rather than the U.S. dollar) when trading with each other.  This was an incredibly important agreement that was virtually totally ignored by the U.S. media.  The following is from a BBC report about that agreement….

China and Japan have unveiled plans to promote direct exchange of their currencies in a bid to cut costs for companies and boost bilateral trade.

The deal will allow firms to convert the Chinese and Japanese currencies directly into each other.

Currently businesses in both countries need to buy US dollars before converting them into the desired currency, adding extra costs.

#2 The BRICS (Brazil, Russia, India, China, South Africa) Plan To Start Using Their Own Currencies When Trading With Each Other

The BRICS continue to flex their muscles.  A new agreement will promote the use of their own national currencies when trading with each other rather than the U.S. dollar.  The following is from a news source in India….

The five major emerging economies of BRICS — Brazil, Russia, India, China and South Africa — are set to inject greater economic momentum into their grouping by signing two pacts for promoting intra-BRICS trade at the fourth summit of their leaders here Thursday.

The two agreements that will enable credit facility in local currency for businesses of BRICS countries will be signed in the presence of the leaders of the five countries, Sudhir Vyas, secretary (economic relations) in the external affairs ministry, told reporters here.

The pacts are expected to scale up intra-BRICS trade which has been growing at the rate of 28 percent over the last few years, but at $230 billion, remains much below the potential of the five economic powerhouses.

#3 The Russia/China Currency Agreement

Russia and China have been using their own national currencies when trading with each other for more than a year now.  Leaders from both Russia and China have been strongly advocating for a new global reserve currency for several years, and both nations seem determined to break the power that the U.S. dollar has over international trade.

#4 The Growing Use Of Chinese Currency In Africa

Who do you think is Africa’s biggest trading partner?

It isn’t the United States.

In 2009, China became Africa’s biggest trading partner, and China is now aggressively seeking to expand the use of Chinese currency on that continent.

A report from Africa’s largest bank, Standard Bank, recently stated the following….

“We expect at least $100 billion (about R768 billion) in Sino-African trade – more than the total bilateral trade between China and Africa in 2010 – to be settled in the renminbi by 2015.”

China seems absolutely determined to change the way that international trade is done.  At this point, approximately 70,000 Chinese companies are using Chinese currency in cross-border transactions.

#5 The China/United Arab Emirates Deal

China and the United Arab Emirates have agreed to ditch the U.S. dollar and use their own currencies in oil transactions with each other.

The UAE is a fairly small player, but this is definitely a threat to the petrodollar system.  What will happen to the petrodollar if other oil producing countries in the Middle East follow suit?

#6 Iran

Iran has been one of the most aggressive nations when it comes to moving away from the U.S. dollar in international trade.  For example, it has been reported that India will begin to use gold to buy oil from Iran.

Tensions between the U.S. and Iran are not likely to go away any time soon, and Iran is likely to continue to do what it can to inflict pain on the United States in the financial world.

#7 The China/Saudi Arabia Relationship

Who imports the most oil from Saudi Arabia?

It is not the United States.

Rather, it is China.

As I wrote about the other day, China imported 1.39 million barrels of oil per day from Saudi Arabia in February, which was a 39 percent increase from one year earlier.

Saudi Arabia and China have teamed up to construct a massive new oil refinery in Saudi Arabia, and leaders from both nations have been working to aggressively expand trade between the two nations.

So how long is Saudi Arabia going to stick with the petrodollar if China is their most important customer?

That is a very important question.

#8 The United Nations Has Been Pushing For A New World Reserve Currency

The United Nations has been issuing reports that openly call for an alternative to the U.S. dollar as the reserve currency of the world.

In particular, one UN report envisions “a new global reserve system” in which the U.S. no longer has dominance….

“A new global reserve system could be created, one that no longer relies on the United States dollar as the single major reserve currency.”

#9 The IMF Has Been Pushing For A New World Reserve Currency

The International Monetary Fund has also published a series of reports calling for the U.S. dollar to be replaced as the reserve currency of the world.

In particular, one IMF paper entitled “Reserve Accumulation and International Monetary Stability” that was published a while back actually proposed that a future global currency be named the “Bancor” and that a future global central bank could be put in charge of issuing it….

“A global currency, bancor, issued by a global central bank (see Supplement 1, section V) would be designed as a stable store of value that is not tied exclusively to the conditions of any particular economy. As trade and finance continue to grow rapidly and global integration increases, the importance of this broader perspective is expected to continue growing.”

#10 Most Of The Rest Of The World Hates The United States

Global sentiment toward the United States has dramatically shifted, and this should not be underestimated.

Decades ago, we were one of the most loved nations on earth.

Now we are one of the most hated.

If you doubt this, just do some international traveling.

Even in Europe (where we are supposed to have friends), Americans are treated like dirt.  Many American travelers have resorted to wearing Canadian pins so that they will not be treated like garbage while traveling over there.

If the rest of the world still loved us, they would probably be glad to continue using the U.S. dollar.  But because we are now so unpopular, that gives other nations even more incentive to dump the dollar in international trade.

So what will happen if the reign of the U.S. dollar as the world reserve currency comes to an end?

Well, some of the potential effects were described in a recent article by Michael Payne….

“The demise of the dollar will also bring radical changes to the American lifestyle. When this economic tsunami hits America, it will make the 2008 recession and its aftermath look like no more than a slight bump in the road. It will bring very undesirable changes to the American lifestyle through massive inflation, high interest rates on mortgages and cars, and substantial increases in the cost of food, clothing and gasoline; it will have a detrimental effect on every aspect of our lives.”

Most Americans don’t realize how low the price of gasoline in the United States is compared to much of the rest of the world.

There are areas in Europe where they pay about twice what we do for gasoline.  Yes, taxes have a lot to do with that, but the fact that the U.S. dollar is used for almost all oil transactions also plays a significant role.

Today, America consumes nearly a quarter of the world’s oil.  Our entire economy is based upon our ability to cheaply transport goods and services over vast distances.

So what happens if the price of gasoline doubles or triples from where it is at now?

In addition, if the reign of the U.S. dollar as global reserve currency ends, the U.S. government is going to have a much harder time financing its debt.

Right now, there is a huge demand for U.S. dollars and for U.S. government debt since countries around the world have to keep huge reserves of U.S. currency lying around for the sake of international trade.

But what if that all changed?

What if the appetite for U.S. dollars and U.S. debt dried up dramatically?

That is something to think about.

At the moment, the global financial system is centered on the United States.

But that will not always be the case.

The things talked about in this article will not happen overnight, but it is important to note that these changes are picking up steam.

Under the right conditions, a shift in momentum can become a landslide or an avalanche.

Clearly, the conditions are right for a significant move away from the U.S. dollar in international trade.

So when will this major shift occur?

Only time will tell.

Finca Bayano

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