Several readers asked me to discuss the petrodollar. Here are two pertinent theories.
Theory #1 – War Is a Boon for the Petrodollar
Wall Street Journal writer Diana Choyleva claims The Iran War Is a Boon for the Petrodollar
America strikes back against China’s patient challenge to the U.S. currency’s supremacy.
A Deutsche Bank report making the rounds argues the Iran war represents a “perfect storm” for the petrodollar, the primary currency in which oil is bought and sold. The report says that U.S. military entanglement in the Gulf, the weaponization of the Strait of Hormuz, and reports that Tehran is granting passage in exchange for yuan-denominated payments add up to a historic blow to dollar dominance. The argument is superficially compelling. It is also exactly backward.
Start with the threat to the petrodollar before this conflict began. China had spent years methodically building the infrastructure to supplant dollar dominance in oil trade: yuan settlement corridors; the mBridge platform, which allows financial institutions to bypass dollar rails and move digital currencies across borders; and deepening financial and technological ties with Gulf producers. Beijing’s ambition wasn’t a dramatic overnight coup. It was patient structural erosion. Shift enough oil settlement into yuan, recycle enough petrodollar surpluses into Chinese assets, and the architecture of dollar dominance quietly hollows out.
The petrodollar system, born from the 1974 security-for-oil-pricing bargain between the U.S. and Saudi Arabia, rests on three pillars: oil priced in dollars, transactions settled in dollars, and oil revenue recycled into dollar-denominated assets. Because oil is so central to global manufacturing and transport, paying for it in dollars creates a gravitational pull that dollarizes trade, saving and reserves across the global economy. Undermine that dollar-based oil trade, and the whole edifice begins to shift.
Washington has noticed. Gulf states, led by Saudi Arabia, supported the U.S. campaign against Iran and have so far viewed American military performance favorably for the most part. Whatever one thinks of the conduct of the war, one thing is clear: When the security commitment was tested, it held.
The petrodollar has two legs: the “petro” and the “dollar.” China was making progress on both. For now the U.S. is pushing back hard in the Gulf, in Caracas, and at the Strait of Hormuz. The dollar’s long-term fate will ultimately depend on whether Washington sustains this strategy and on whether the global energy transition eventually makes the contest moot. Neither outcome is certain. But those who conclude that the petrodollar is already in its death throes are reading the map upside down. The storm is real. The dollar is fighting back.
Ms. Choyleva is founder and chief economist at Enodo Economics and the author of “Petrodollar to Digital Yuan: China, the Gulf and the 21st Century Path to De-Dollarization.”
Three Pillar Petrodollar Theory
- Oil priced in dollars
- Transactions settled in dollars
- Oil revenue recycled into dollar-denominated assets
Pillar number one is nonsense. The pricing unit, outside of something totally illiquid like Yap Island stones, is irrelevant.
Yet, masses of economic illiterates still believe the Iraq war started because Hussein was going to price oil in euros.
Here’s the theory: Hussein made a threat to price oil in euros. War started. So the war was over the pricing unit.
Here’s the reality: Major currencies are fungible and can be traded at will. It does not take dollar reserves to buy oil anymore than it takes dollars to buy gold (which is not at all).
Even settlement is not that important. The reason is the same. Currencies are fungible. Something immediately settled in dollars does not have to remain in dollars.
What Really Matters
What does matter is where a nation holds its reserves. But that is largely forced by trade surpluses, not conscious decisions.
Q: Why did the Gulf states hold US dollars?
A: Mainly because they accumulated them. For a long time the US had major trade deficits with the Gulf states. Those nations accumulated US dollars as a direct result. Then they recycled the dollars into weapons, planes, or other purchases.
Oil priced in euros would not have changed that picture.
US Independence
Direct Gulf state accumulation of dollars from the US has declined because the US is now largely (but not totally) oil independent. The US buys more from Canada for our needs than the Mideast.
Thus, the Gulf states are now dependent on Europe and Asia (especially China and India) for oil sales instead of the US.
Theory #2 – The Demise of the Dollar
Bloomberg writer Aaron Brown says The Iran War Just Broke the Petrodollar
The virtuous loop that has seen America underwrite stability in the Middle East in exchange for Gulf states recycling their dollar revenues into US Treasuries has been broken.
The understanding traces back to 1974, when Henry Kissinger struck one of the most consequential financial deals in modern history. Saudi Arabia would price its oil in dollars and park the surpluses in US assets — Treasuries above all. Other Gulf states followed. In exchange, America provided security guarantees and a stable global order.
The arrangement was elegant in its circularity: Oil consumers paid dollars for energy, those dollars flowed to Riyadh and Abu Dhabi, and from there back into Washington’s debt. For 50 years, this petrodollar loop quietly subsidized American borrowing costs and cemented the greenback’s role as the world’s reserve currency.
The US-Israeli war with Iran has fractured this arrangement — at both ends.
Start with the importing side. Since the strike on Iran on Feb. 28, foreign central banks have been net sellers of Treasuries for five consecutive weeks. Holdings at the Federal Reserve Bank of New York have dropped by roughly $82 billion to $2.7 trillion, the lowest level since 2012.
The mechanism is straightforward. Turkey, India, Thailand and other oil-importing nations are caught in a brutal arithmetic: Oil priced in dollars has surged past $100 a barrel while their currencies weaken against the greenback. To limit depreciation — which would push domestic oil prices even higher, forcing either fiscal subsidies or household pain — central banks intervene in currency markets. That requires dollars. The most liquid dollar asset any central bank holds is Treasuries. So they sell.
The petrodollar loop requires two moving parts: dollars earned and dollars invested. Both have stopped.
There is a longer structural story that the war is accelerating rather than creating. The share of Treasuries held by foreign investors had already fallen to around 32%, down from half in the early 2010s. Central banks became net sellers in early 2025. For the first time since 1996, global central banks now hold more gold in aggregate than US government bonds. These were slow-moving trends, easy to dismiss as noise. The Iran war is making them look like signal.
For starters, gold reserves are primarily up because the dollar value of gold is up, not because of a sudden major shift to buying gold.
Second, Brown’s discussion of US treasuries is simply wrong.
The official reserve numbers are errant because they do not include China’s State Owned Enterprises (SOEs) or its holdings of US Agencies. Nor do they include China’s US dollar assets held in Europe.
Brad Setser Chimes In
Setser: The “fit” with global dollar reserves is actually much better if total purchases of Treasuries and agencies are counted v dollar reserves during this period (this captures Agencies managed by private fund managers, non US custodied Treasuries, etc).
Shadow Reserves
Setser: The FT’s Big Read is on the China sock 2.0 (one of my favorite phrases) and the pink paper endorsed the concept of “shadow reserves”!
Articles preaching mass selling of US treasuries miss all of Setser’s accurate observations.
Simple Trade Math
- The US constantly runs a trade deficit.
- Those dollars (no longer for oil) get accumulated as US dollar denominated reserves somewhere.
Q: But what does that mean for petrodollars?
A: The decline of petrodollars originating from the US is actually a US success story.
The US is mostly free of Mideast imports. As a direct result, the gulf states accumulate less petrodollars that originate here.
Oil in Euros
Those posts typify the conspiratorial nonsense about something totally irrelevant.
Few understand how markets work. Those who understand the least, tend to scream the loudest.
Here’s someone who understands.
It’s Happening
A Curious Thing
Allegedly, the war will be a boon to, as well as the demise of the Petrodollar.
Aaron Brown (Bloomberg) and Diana Choyleva (WSJ) both make the same error regarding the pricing unit.
However, they expect completely different results from their errors.
Pricing Fact Check
Q: Would oil priced in yuan or euros change the oil price in dollars?
A: No
Q: Would pricing oil in something other than dollars force countries to hold receipts in something other than dollars?
A: No.
Q: Then why would it matter?
A: It wouldn’t. End of story
How Significant Is Oil in Global Trade?
I have no doubt some of you are unconvinced by the above irrefutable logic, so let’s for a second assume I am wrong.
For the purpose of this experiment, let’s assume the “petrodollar” immediately dies. Every “petrodollar” becomes a petroeuro, petroyuan, or a petro-whatever.
How would that impact global trade in dollars?
Oil ranks among the top traded commodities by value, but it represents a modest slice of total global trade (goods + services).
- Global Trade Total: Roughly $35 trillion (2025 UNCTAD estimate).
- Oil’s Share: Roughly $1.31 trillion for crude (OEC data for 2024) That’s about 3.7 percent of total trade.
- Mideast Assignment: Let’s generously assign 60 percent of that $1.31 trillion to Mideast petroyuan. The Mideast petroyuan would then be 2.2 percent of total global transactions that was a previously mix of dollars and euros.
The dollar share of global transactions as measured by payments is 50 to 60 percent. That would make the dollar-related transaction hit 3 to 4 percent.
Q: That’s it?
A: Yes. Even if 100 percent of all Mideast oil transactions were priced in yuan, settled in yuan, and reserves held in yuan, global US dollar transactions would only decline by 3 to 4 percent.
In contrast to the theories of Brown and Choyleva, I see a continued slow drip abandonment of dollars.
Slow Drip Abandonment
- Trump’s actions have increasingly alienated US allies. Countries are genuinely sick of Trump, for the right reasons.
- The US has weaponized the US dollar (both Trump and Biden did this). Countries are fearful of getting caught in the crossfire.
- Tariffs and tariff avoidance.
- Trump has turned the US into an unreliable trading partner with his repeat threats, contradictions, and constant position shifts.
- America First has become a “My way or no way” set of demands, not negotiation tactics.
- Trade with the US is down and heading further down as a direct result of points 1 through 5.
- Importantly, it’s not just petrodollars. There is pressure on all dollar-denominated transactions.
- There’s a global incentive to shift away from dollars, when and where possible.
When and where possible is the key component of the slow drip abandoment idea. Dollar avoidance is not that easy or it would have happened in a major way already.
“When and Where Possible” Canadian Style
Carney says the days of sending 70 cents of every dollar in military spending to the United States are over and gets a standing ovation
Realistically, how fast will that happen? But it will happen, eventually.
Carney is leading the global charge with his anti-US speeches. Actions will follow.
Consider Spain
Trump has turned the US into an unreliable trading partner.
There are long-term consequences to Trumps threats. One of those consequences is US dollar avoidance.
My next example directly pertains to petrodollars.
Gulf Allies Turn Away From U.S. for Fresh Ammo
The Wall Street Journal reports Gulf Allies Turn Away From U.S. for Fresh Ammo
Six weeks of relentless air bombardment sapped air defense stocks in the Middle East. Now begins the scramble to rearm.
With a fragile cease-fire in place between the U.S. and Iran, America’s closest allies in the region—and some of the best customers for U.S. weapons systems—are scanning the world for alternative missile defenses, getting creative about ways to bolster defenses quickly.
Saudi Arabia, Qatar and the United Arab Emirates are turning to South Korean missile-defense systems, Ukrainian drones that smash into targets midair and traditional American Gatling guns.
They are also looking to tap new kit from startups, including Britain’s Cambridge Aerospace, which the U.K. said on Friday will be supplying Gulf states with small, low-cost missiles designed to take out drones and other munitions.
It also exposes the arms industry’s lack of capacity despite a surge in demand since Russia invaded Ukraine four years ago. The U.S. arms industry, in particular, could lose out potential orders.
Saudi Arabia has reached out to Japan, which makes Patriot interceptors, and it has asked South Korea’s Hanwha and LIG Nex1 about bringing forward an order for their M-SAM system, according to people familiar with the matter.
The M-SAM, a midrange surface-to-air system that can intercept drones, missiles and planes, has been used by the U.A.E. to down Iranian munitions, a South Korean lawmaker said.
The Gulf states have figured out the US can no longer protect them. So now, they are turning to South Korea, Japan, the UK, and amusingly Ukraine.
If the Mideast states start holding yuan reserves, guess what it will be for.
Yet, petro-whatever is at most 2.2 percent of total transactions, or 4 percent of US denominated transactions.
I don’t want to downplay this too much, but it’s not the death of anything. It’s a long-term slow drip trend.
TINA Déjà Vu
For now, where are Saudi Arabia, Canada, and Europe going to get military jets?
Unless China is willing to part with its top fighters, (hint, it won’t) there is no current alternative (TINA) to the F-35.
More importantly (much more), the US remains the the global consumer of last resort.
The desire to shift away from dollars is strong, and easy to see. Spain, China, and Canada provide the evidence. But desire and doing are two different things.
Reserve Currency, Petroyuan, Death of the Dollar Nonsense
China and Germany have export driven models. Export mercantilism and huge shifts away from the dollar are incompatible.
I have been discussing reserve currency, petroyuan, death of the dollar, gold-backed yuan, bitcoin reserves, and related nonsense since at least 2011.
Here’s an interesting one from April 21, 2018: Petroyuan’s Crash at Birth
Economist and book author Daniel Lacalle pretty much sees things the way I do regarding the petroyuan hype.
Lacalle compiled some amusing stats in his post on the Petroyuan’s Lacklustre Birth.
The biggest mistake made by China in its launch of the yuan oil contract has been to think that a currency with capital controls and an expensive market that trades for barely a few hours a day would be a fantastic incentive for global oil transactions.
Death of Dollar Silliness
The idea that the yuan will soon replace the dollar as the world’s reserve currency was then, and still is ridiculous for currency reasons, political reasons, and economic reasons.
Consider my October 25, 2017 take called Gold-Backed Petro-Yuan Silliness.
A massive amount of hype is spreading regarding China’s alleged ambitions to dethrone the dollar. The story this time involves China’s plan is to price oil in yuan using a gold-backed futures contract. Even if that were true, the impact would be zero. CNBC is now in on the hype: China has grand ambitions to dethrone the dollar. It may make a powerful move this year.
Repeat after me: It’s meaningless what currency oil is quoted in. Once you understand the inherent truth in that statement, you immediately laugh at headlines like that presented on CNBC.
Nothing has fundamentally changed regarding the yuan replacing the dollar as a major reserve currency.
China Flunks Five of Five Reserve Currency Tests
- Currency Requirement: If China wants to assume the role of having the world’s reserve currency, something I highly doubt actually, it will need to have a free-floating currency.
- Bond Market Requirement: If China wants to assume the role of having the world’s reserve currency, it will need to have a very large, if not largest, freely trading global bond market.
- Balance of Trade Requirement: China would have to be willing to run trade deficits instead of seeking trade surpluses via subsidized exports.
- Reserve Currency Curse Requirement: Having the world’s reserve currency is a curse because it necessitates a willingness to have endless trade deficits . Mathematically, as long as China runs surpluses, foreign holding of yuan will not match foreign holding of dollars. A mathematical corollary to having massive trade deficits year in and year is the need to have a very large, freely trading bond market. Adding gold into the yuan-futures mix does not alter the picture other than to add costs.
- Capital Controls Requirement: The currency must move freely without capital controls.
No fundamental requirements have changed. Yet, here we go with “Déjà Vu all over again” on the petroyuan discussion.
The one thing that has changed is the desire to avoid dollars has grown stronger. There is a definite leak in the US dollar desirability boat.
But it’s a slow leak. And the petroyuan has little, if anything, to do with it.
Rather, persistent fiscal deficits and Trump’s treatment of allies have everything to do with it. The US has weaponized the dollar with sanctions on Russia and China.
Trump and Biden are both guilty of excess sanctions and weaponizing the dollar, but the origin of this mess starts well before either of them.
The Dollar Exodus Beginning
The dollar exodus had its beginnings way back in February 1965 when French President Charles de Gaulle announced his intention to exchange its U.S. dollar reserves for gold at the official exchange rate of $35 per ounce.
Lyndon Baines Johnson was then president. The War in Vietnam and Johnson’s “War on Poverty” accelerated the US deficit and inflation.
On a campaign that promised to restore law and order to the nation’s cities and provide new leadership in the Vietnam War, Richard Nixon won the election in 1968.
Arthur Burns was Fed chair.
In 1971 President Nixon appointed the then Democrat John Connally as Treasury Secretary. That’s when things started rolling.
Our Currency But Your Problem
Shortly after taking the Treasury post, Connally famously told a group of European finance ministers worried about the export of American inflation that the dollar “is our currency, but your problem.”
By 1971, US money supply had increased by 10%. In May 1971, West Germany left the Bretton Woods system, unwilling to revalue the Deutsche Mark. Switzerland also started redeeming dollars for gold.
On August 5, 1971, the United States Congress released a report recommending devaluation of the dollar to protect the dollar against “foreign price-gougers“.
On August 9, 1971, as the dollar dropped in value against European currencies, Switzerland left the Bretton Woods system.
On August 15, 1971 Nixon directed Connally to suspend, with certain exceptions, the convertibility of the dollar into gold or other reserve assets, ordering the gold window to be closed such that foreign governments could no longer exchange their dollars for gold. He also issued Executive Order 11615, imposing a 90-day freeze on wages and prices in order to counter inflation. This was the first time the U.S. government had enacted wage and price controls since World War II.
So Much for Temporary
The move was not temporary. Abandonment of the gold standard removed all constraints on deficit spending.
There have not been any restraints on deficit spending since. Wars became easy to finance. Deficits? No problem. Congressional spending is out of control.
Paul Volcker, who replaced William Miller as Fed Chair, expressed regret over the abandonment of Bretton Woods.
China Joined the World Trade Organization (WTO)
China officially joined the World Trade Organization (WTO) on December 11, 2001
China’s inclusion into the WTO exacerbated global trade problems but did not cause them.
China did take advantage of WTO rules, accelerating the “Reserve Currency Curse” problems.
What to Do About It?
Gold provided an enforcement mechanism that would have ended these imbalances.
No one wants to go back to gold because every nation and central bank wants to inflate at will.
China (and the world) would greatly benefit if China voluntarily stopped its export mercantilism. But China won’t.
Until this setup blows up in a global currency crisis, expect continual small leaks (mostly unrelated to oil) in global dollar-denominated transactions.
When? I don’t know. Nor does anyone else.
Meanwhile, expect relentless Déjà Vu hype over meaningless “oil priced in whatever” nonsense.
Finally, China is becoming more dependent on Europe for exports, adding to those drips. This is poised to become a major problem for Europe.
“No word about transaction fees. Trading dollars for yuan is not free.”
Transaction fees unavoidable, thus irrelevant.
To hold dollars instead of local currency requited a transaction fee did it not?
So when do you pay it? Sooner or later?
There is also a holding cost and currency risk to holding dollars.
“There is also a holding cost and currency risk to holding dollars.”
Therein lies the reasoning for not holding dollar denominated debt paying a mere 4.5%. The war mongering spend is eroding credibility and creditworthiness.
Another downgrade of US debt is likely.
Perhaps we can discuss the new QE that is becoming apparent if following the Fed’s balance sheet?
Thanks again for all of the thought provoking articles and alternative perspectives.
😉
QE has already begun in earnest. The Fed’s Balance sheet has started expanding again. Back over 6.6 trillion already. As the saying goes “Full FAITH and credit”. Do less than 400 million people really think that they will continue to impose their will on 7.8 billion people? LOL!
Excellent article. Probably one of the best in a recent series of very good articles.
I fully agree that there is a lot of garbage being written about the demise of the Dollar, based on very superficial analyses, and possibly a lot of anti US bias.
As one of the readers asking for this article a few days ago, thank you Mish. You hit the ball out of the park, again, with caveats regarding Trump and Biden’s currency abuse, banking system abuse, relentless warmongering and disparagement of global neighbors.
Why do oil-importing countries keep dollar reserves? Because oil is priced in dollars. Yes, that price may fluctuate but the dollar-to-local-currency exchange ratio is another thing that can fluctuate.
Countries can avoid this second level of fluctuation by holding the dollar instead of their local currency. If oil is not priced in dollars, they don’t need to hold dollar reserves to the extent that they do now.
But you have to stick to your nonsensical theory because it is way too late for you to admit that you were wrong!
Countries don’t use central bank dollar reserves for commerce. It is prudential. When global companies want to buy oil – and most other things – they call their bank and arrange payment in eurodollars – the $14 trillion in dollar credit created by offshore banks.
Q: Do countries use central bank dollar reserves for oil
A: Yes, countries extensively use central bank U.S. dollar reserves to purchase oil, as the dollar remains the primary currency for global oil trade. This practice is a cornerstone of the global financial system, often referred to as the petrodollar system.
There is no petrodollar system and companies never use central bank reserves. Companies use eurodollar credit. They go in and out of the dollar short term through commercial banks.
“Countries” rarely buy oil directly, instead using state-owned companies which, again, use eurodollar credit. Central bank dollar reserves are used for banks and large, longer term borrowers of dollars to prevent squeezes and cushion excess volatility.
“Petrodollars” – about $300-450 billion – do get recycled into the cash and cash-like assets underlying the $14 trillion in eurodollars.
You can see the scale of excess dollars from oil purchases is just not that big. Chinese companies process far, far more dollar purchases, again in eurodollar credit and yet nobody talks about a “Chinadollar” system.
That’s because it’s all eurodollars – THE medium of international exchange.
So once again for us fools, since hard currencies are all fungible, why did we ever need FX swap lines between the Fed and eg SNB? Why would the hard fx countries ever be “short” of usd? Couldn’t they just declare “we are so fungible”!
Why don’t you look at the dollar volumes for oil (I posted them) with relatively constant demand over time, and compared to huge, sudden spike highs.
You are comparing two different things. And one of them is to address spike volatility not normal demand.
That is certainly a much better post than your stuff about Trump. What is noticeable also is that the comments are at so much more mature a standard, even though some of them are over the same aliases.
I think you’re wrong in dismissing old books, by the way. You can see things from a different angle by reading an old book. If it is an old book that has stood the test of time by being remembered by somebody today, there is almost certainly something to be gained from reading it.
When I was appointed to the “library committee” of my boarding school in year 1965, I looked in the back of a cupboard and discovered some pamphlets entitled “Germany’s New Order” and “Living With National Socialism.” Apparently they had been lying there since before World War Two. I should have pinched copies: they would have provided interesting insights into how the Establishment in the 1930s were trying to reconcile themselves to the rise of the Nazi Party government in Germany. The teacher in charge made them disappear quickly, and made a joke about how I had found some pamphlets that were “so old they said the world was flat.”
Sorry if that’s not relevant. I may be showing my age. This happened in Australia, by the way.
> “gold reserves are primarily up because the dollar value of gold is up, not because of a sudden major shift to buying gold.”
Not exactly. Below is the link to the chart showing the world CB’s gold balance *in tonnes*. You can see that 2008 was major reversal of gold trade – selling before 2008 because ‘nobody needs pet rock’, buying after admitting their ignorance. At the same time mining and scrap sales are flat for the last 10 years.
https://www.icloud.com/iclouddrive/072qWfxzwmNTKSWZDzNRGrLTQ#cb%5Fgold
It seems to me that simple monetarism explains what’s going on. The US can do whatever as long as there are foreigners willing to buy its debt. Buy a Treasury and pull some money out of circulation, in effect – holding back inflation. If the Fed just “printed” money (just computer entries mostly) then real trouble starts – because the US then goes on the path to become Argentina/Iran/Turkey etc.
I think they could “print” 2-3% indefinitely, as long as that rate of inflation is acceptable – but that might not be politically possible as many 3rd world nations have found out. In addition, I think there are real productivity problems building up – that lead to inflation by tariffs and domestic products costing more
Mish, two of the “pillars” you described for a currency to become reserve currency are open capital flows and running a trade deficit. I would argue that post WWII the US had a trade surplus (up the the early 1970s) and capital flow were restricted and this did not prevent the US dollar to be the reserve currency and the US government made dollars available overseas (loans, grants, overseas investment, etc…) care to comment? Thank You!
Total novice here. Might the huge swath of offshore US dollars place some level of de facto constraint on the US’s own potential meddling with (the world’s already-issued) dollars? It seems a different picture from the great currency walls around the yuan, behind which the PRC government could pull massive manipulative moves overnight. Trump puts up all kinds of other “walls,” and some impoverish us, behind them. (I note his and Biden’s protectionism on cars, which bars us from good prices on cheap efficient cars.) Maybe China has similar issues with currency. A wall protects, but also confines and constricts. Does this make any sense?
Also, I wonder, does Trump overestimate his ability to manipulate the cost of credit inside the USA? His attacks on Powell the Fed suggest this to me.
“Paul Volcker, who replaced William Miller as Fed Chair, expressed regret over the abandonment of Bretton Woods.”
Cycles all have their up phase and their down phase, as the constant is change over time. Bretton Woods was abandoned due to change that led up to it. Same with Glass-Steagall, which was created to prevent what happened in the 1930’s from happening again. In 1999, it was in the way, so it was removed.
Here’s a hilarious Chinese meme video that was referring to the US abandoning Japan, but you could swap out the Japanese flag for any Gulf State flag & the meme works just as well.
https://x.com/zmx8067/status/2042927322731569635
– The petrodollar has two legs: the “petro” and the “dollar.” > Can we add a third leg of “Trust”
>> China is making noise, and have been working this for awhile now. Do they have the trust and faith in the Yuan, to do so, is the ultimate question. The U.S. Currency is very open, and easy to see where and why it may be going and even when at times. Does China have that same level of trans parity into its standing. When it goes down, will we know, and why as well? Same as when it goes up. Can they claim so, even if it doesn’t, if not open with the books so to speak. Maybe this is simply a part of being the reserve, but I would like to know and understand all of those things before I would decide to change over.
I’ll make a small exception with Mish on this thread though he is absolutely correct about the petrodollar. Being the world’s reserve currency does not require running massive trade deficits, it can also be provisioned by flooding the world with currency through massive loans to foreign trading partners, though that may have capacity limits.
Secondly, the dollar is the world’s reserve currency for a couple of reasons. First of all, the world needs a standard trade currency. The idea is the same as any currency. The value of currency in the first place is that it allows to traders to make unequal trades but still retain all the value. If I value my spear more than your necklace, I must either discount my spear or not make the trade. A common currency fixes that problem. So the US dollar is that common currency world-wide. Secondly, why the US dollar? Simply because of history. After WWII the US was a massive manufacturer relative to the rest of the world, and it flooded Europe and Japan with dollars through loans to rebuild. The dollar became the common trade currency to the entire heavy manufacturing (and trading) world afterwards because those loans had to be paid back in dollars. It remains that way because it is “good enough” due to our massive budget and trade deficits.
What Trump has done is made much of the world dislike the United States. Having the reserve currency gives Americans an advantage in income and wealth creation. Much of the world now wants to punish the US for being so craven in using that advantage. But settling on a new world trading currency is very, very difficult.
The contraction of the E-$ has supported the exchange value of the U.S. $. Powell administered the coup de grâce of the E-$ by eliminating reserve requirements against domestic deposit liabilities. An interest rate differential will not prevent the dollar’s decline.
From one moment to the next, we cannot even tell what is reality or not when it comes to any stages of this skirmish. The big one in my mind are fertilizer/Natgas shortages which would push anyone to the brink of fears of a total systemic collapse.
BUT, right before that: we will see a RIP TO ALL TIME HIGHS in the SPX, suckering in late buyers.
Hi, Mish, central to all things US dollar is Brent Johnson, with his “Dollar Milkshake Theory.”
Here is Gemini’s Take:
To understand its relationship with the Petrodollar, we have to look at the global demand for liquidity and debt.
1. What is the Dollar Milkshake Theory?The theory uses a “milkshake” metaphor to describe global capital. Imagine the world’s various currencies and assets as the ingredients of a milkshake sitting in a glass.
The Mechanics of the “Squeeze”
2. Does it matter to the Petrodollar?The Petrodollar system refers to the global practice of pricing and trading oil exclusively in US Dollars. This system has been a primary pillar of USD demand since the 1970s.
Why it DOES matter:
Why it might NOT matter (or why the theory is evolving):
The Bottom LineBrent Johnson argues that the structural plumbing of the global financial system (debts and derivatives) is so heavily tilted toward the USD that it is almost impossible for the world to “quit” the dollar quickly. Even if the Petrodollar begins to fade, the sheer volume of USD-denominated debt ensures that the “straw” will keep sucking up liquidity for the foreseeable future.
“ This system has been a primary pillar of USD demand since the 1970s.”
I refuted that nonsense.
End of story
The transaction currency is not as important as the store of value currency. Theoretically one US dollar could supply all of the world’s trading needs if the velocity was high enough. What is important is which currency countries (and their people) want to park their assets in. Right now it is still US dollars via Treasuries and US equities. That can change. China has a freely traded currency in the Hong Kong dollar. They probably will use that more in the future.
Yes, at the end of the day the world has had a global economy forever. People/corporations/countries that produce things of real value are the world’s creditors. The standard of living improves for the producers. Unfortunately, at the heart of all modern monetary systems are useless fucking bankers. Think about it. This class of people simply bring currency into existence with the click of a mouse. They can then buy things of real value (i.e. gold, politicians etc.). How hard do you have to actually work for your currency? See the problem yet? You have no representation, wake the fuck up.
The banking industry does produce something.
It produces debt.
Meaning it produces money.
FAIL. Banks create currency, not money. BIG difference.
And what’s the difference? They seem to spend the same.
It will get even more interesting when Trump and Bessent start openly threatening foreign T-Bill and T-Bond holders with US default. Hey, if you stop trading in dollars we will default and you’ll get 30 cents on a dollar. Your dollar assets are not our problem.
Hidden threat was already published by Miran in his famous November 2024 document. At that time it was framed as cash for protection – we will protect you and you buy long-dated T-Bonds with very low yield.
These days no one is enthusiastic to get protected by USA because it means buying overpriced weapons built for 20th century wars and risking that White House turns your country into another Ukraine or Kuwait.
Petrodollar stands on US bayonets. US bayonets stand on US defence industry and its wide and loong supply chain spread across many allied nations. When Trump turns allies into indifferent countries he will put US weapons production in danger and US bayonets too.
Pakistan moving in Saudi Arabia to protect it could be also interpeted as hidden Chinese protection of Saudis as Pakistan depends a lot on Chinese weapons and systems. And yuan will follow Pakistani bayonets.
Regarding T-bills and bonds etc. The Fed will, and does, buy whatever they need to in order to make interest rates whatever they want them to be. Every single central bank on the planet does this. Wake the fuck up. The fed’s balance sheet has already begun expanding again. The WORLD is heading back to feudalism, this time with nuclear weapons. Hedge accordingly.
The Fed doesn’t set rates, they follow the market…they are a lagging indicator, the market will price in rates changes long before the Fed reacts
There are no facts to back your statement. The Fed’s balance sheet has begun expanding already. If there is so much demand then there is no need for The Fed at all. You are indeed a good american sheep.
This is what used to happen.
The market sets long term bond rates, however short term rates are set by the Fed – and if the market does not comply then they intervene in the market.
If I were the US, I’d be more worried about demand for US debt than I would be US currency.
Demand for U.S. debt (Treasuries)
→ Directly determines yields (interest rates)
→ Higher demand = higher bond prices = lower borrowing costs
Demand for U.S. currency (the dollar)
→ Influences financial conditions more broadly
→ Often leads to demand for Treasuries, but not always
What actually sets borrowing costs? — it’s demand for debt.
LMFAO! The fed buys whatever debt that they need to in order to make the interest rates whatever the fuck they want them to be. This isn’t hyperbole, its MATH. FYI – The Fed has begun expanding it’s balance sheet again (but the economy is great right?) LOL! back over 6.6 trillion already.
Fed doesn’t set rates, if you believe that nonsense you need to do more research
https://www.nationalreview.com/2021/01/the-federal-reserve-doesnt-set-interest-rates/
The Fed mostly buys Treasuries to help adjust the cash in the system.
At the margins, the Fed buys and sells Treasuries to adjust interest rates and help the “plumbing” of the banking system.
It does not use its balance sheet to cushion total debt or interest on the debt. It should, in my views and a lot more. I am an MMT adherent.
If there is so much demand why is the Fed buying U.S. debt again? Good luck with that cognitive dissonance!
Nobody needs to increase demand for U.S. Treasuries. They are far and away the most valuable financial collateral in the world and are always in short supply.
LOL! Then why does the Fed need to buy at all? Again, you cannot have it both ways. Typically useful idiot. LOL!
So you think you think there isn’t adequate demand for Treasuries and the Fed has to buy them to fund the deficit?
That story is as old as the hills. People always wring hands about a “weak” Treasury auction as if it means the U.S. is having trouble selling it’s debt.
It always turns out to be nonsense.
If you buy the dollar, where do you put it?
Yes you could buy farmland or real estate (though Americans keep trying to punish Japan or China when they do so), but that isn’t liquid or readily available.
People put it in treasuries because it’s liquid. Demand for the dollar is not generated by foreigners who need American manufactures.
Your distinction between currency and debt does not hold up.
You don’t “buy the dollar”, except in forex. You buy Treasuries or money market funds or whatever. Mostly you leave it for your banker to manage. It just is leveraged to produce credit/money.
The petrodollar debate misses the point. The dollar isn’t dominant because of oil — it’s dominant because the US provides the world with a single, massive, liquid safe asset.
That’s why euro “takeover” never happened. The euro has ~20% of reserves but no unified bond market, so diversification away from USD goes to “others,” not euros.
The real risk isn’t oil pricing — it’s whether a second safe asset emerges.
Ironically, that may depend more on US policy than Europe. Push allies hard enough (security, sanctions), and you might force the EU into a true Eurobond market.
The EU is too disjointed/incompetent to do this itself – but Trump is definitely pushing them that way.
The petrodollar debate misses the point. The dollar isn’t dominant because of oil — it’s dominant because the US provides the world with a single, massive, liquid safe asset.”
That was indeed one of my six key requirements and why the Euro, yuan, etc., fail.
But weaponizing the dollar ended the “safe” part. That’s why the dollar avoidance scramble. I see you are thinking!
It’s not so much the dollar that got weaponized as the Swift payment system.
That’s what countries are desperate to get out of. Or at least be able to move their assets out of Swift and into another system (this is in theory the promise of Crypto) that the US could not lock you out of.
No. Swift is just one of many ways the US can monitor transactions.
But the main tool is the threat to sanction any bank that doesn’t enforce sanctions, threatening their viability as a business. The banks themselves do most of the Treasury’s work.
Yep – but “safe” is relative. You don’t need to be perfectly safe, just safer than the alternatives — like not needing to outrun the bear, just the other runners.
Just wish the EU could get its act together. If it can’t then we will slip into fragmentation with yuan and crypto at the margins – not a great outcome.
From AsiaTimes via Godfree Roberts “Here comes China” substack:
China’s PPP GDP is only 25% larger than that of the US? Come on people… who are we kidding? Last year, China generated twice as much electricity as the US, produced 12.6 times as much steel and 22 times as much cement. China’s shipyards accounted for over 50% of the world’s output while US production was negligible. In 2023, China produced 30.2 million vehicles, almost three times more than the 10.6 million made in the US.
On the demand side, 26 million vehicles were sold in China last year, 68% more than the 15.5 million sold in the US. Chinese consumers bought 434 million smartphones, three times the 144 million sold in the US. As a country, China consumes twice as much meat and eight times as much seafood as the US. Chinese shoppers spent twice as much on luxury goods as American shoppers.
Ford CEO out yesterday yapping and “painican” about Chinese imports….need to keep that 100% tariff or it’s over, he says. US consumer be damned. I’d love the try one of those Chinese EV micro or mini truck/SUV….well, until I get plowed into by a soccer mom playing with her Iphone driving a Suburban.
They sell plenty of full-size EVs too, AFAICT.
Exactly.
Remember when the US and Europe were going to defeat Russia with their GDP?
And Russia came back producing more weapons and ordinance than all of NATO from Tallinn to San Diego combined?
See how well you can defend yourself at the front line by firing dollars back while being pummeled by shells and bombs.
When I moved abroad, I obviously had to pay living expenses in another currency. To hedge against potential dollar devaluation, I like keeping at least one year of living expenses in the local currency.
To generalize: Knowing you must make purchases using a currency tends to increase your holding of that currency.
I’m guessing when you moved abroad it was for retirement purposes.
But if you moved abroad for work reasons and were paid in the local currency then you’d have no need to worry about a dollar devaluation. This is my case when I moved from Canada to the US for work more than 30 years ago. I don’t care at all about what the Canadian dollar does since I get paid in US dollars and my expenses are in US dollars.
Yes, good inference.
As far as analogies go, if you need oil to live and it’s priced in a currency you dont earn, then it’s more like my situation than yours.
It’s worth noting that Petrodollars support the offshore credit creation machine (Eurodollar) that allows the US to run deficits that would bankrupt any other nation.
Foreign held dollars are a RESULT of US trade deficits. That is the offshore credit machine, not petrodollars.
Those dollars often buy oil, but they are mathematically guaranteed to buy some US asset. Oil from Saudi is NOT a US asset. Buying oil from the Mideast simply transfers the dollar elsewhere. Someone MUST hold every dollar 100% of the time. Buying foreign oil does not count.
Also, Countries that have debt denominated in their own currency never go bankrupt. But they can have massive inflation.
Did you ever read William Engdahl’s book about the 1973 oil crisis? Just curious.
LMFAO! This is NOT 1973. Not by a long shot.
Correct. A 1973 book is irrelevant, and probably wrong anyway.
Your dismissive remark is a letdown.
Wasn’t my point. It could help you and Mish understand the oil crisis, the petrodollar, and efonomics from a different perspective.
Heh…”efonomics” was a typo. But I think it might have its uses… 😉
That’s just not true. Dollars paid to companies offshore get saved in the bank or whatever and become collateral for lending. The dollars don’t persist. When dollars are paid back the money disappears.
I don’t understand what you mean by “Someone MUST hold every dollar 100% of the time”. The supply of dollars (domestic and eurodollars) goes up and down all the time as banks expand or collapse their balance sheets.
Even otherwise $ will be adversely affected by less Global Trade due to destruction of Industries , as $ shortage will occur. Many economies will be shattered.
“For now, where are Saudi Arabia, Canada, and Europe going to get military jets?”
Multiple recent reports describe Canada reassessing its 2023 decision to buy 88 F‑35A jets. However, the only serious alternative being pitched is Sweden’s Saab Gripen E/F.
Pd if i recall the part for the f35 are not only produced in the is. Something like 2.3 million dollars in parts per jet are produced by 100 companies in canada. If i recall parts are produced across nato including turkey.
Maybe China and Russia can sell them some jets?
North Korea can probably sell them some artillery shells too.
The Gripen is crap and the F35 walks all over it in all the tests that were done.
If Canada switches to the Gripen they are going to regret it big time. If they want to avoid the F35 they should just get out of the military jet business altogether (other than keeping the CF18s they have) since drone warfare is going to be the future in the next 10 years or sooner.
Most US planes and military wherewithal have no actual combat record.
Moreover, they always forget that the production, maintenance, and use of weapons is actually part of the whole weapons system when it comes to an actual war.
US dollars are like Cheezies and cocaine, you know they’re no good for you but you can’t stop consuming them.
Most national currencies are a bad joke, illiquid, restricted like CNY or useless like EUR. When crap hole basket case countries like Argentina and Turkeyieee get their fiscal panties in a bunch it’s always due to a lack of US dollars and the band aid put on is always US dollars, not gold bars or meme coins.
Long may the money printer go Brrrrrr!
Oceania currency is restricted. Not truly convertible.
Why/how? Financial controls, tax code, criminal law.
No word about transaction fees. Trading dollars for yuan is not free. There is a certain percentage for the brokers. If the majority of commodities is priced in dollars, then its the other nations that must pay the trading fee, not the Americans. That’s where the benefit comes in.
“No word about transaction fees. Trading dollars for yuan is not free.”
Transaction fees unavoidable, thus irrelevant.
To hold dollars instead of local currency requited a transaction fee did it not?
So when do you pay it? Sooner or later?
There is also a holding cost and currency risk to holding dollars.
After America and Europe seized over $300 Billion USD of Russian assets through the SWIFT banking system it caused many Foreign Banks to buy more Gold and hold less US dollars. Many Countries now Despise the USD but realize it will probably have a slow Demise— So they constantly work at finding workarounds..Many Countries now know the Devil they are dealing with.
That which can not be sustained, will not be sustained.
The Swift payment system is different than pricing oil (or other goods) in US dollars.
I suspect a whole lot of the world would like to exit the Swift payment system (this was one of the things crypto promised) due to the US and it’s allies freezing assets. Countries now know they need to get their assets out of Swift.
One thing I think that confuses people, especially older people (say 50+) about oil being priced in US dollars is that they still believe countries need to purchase US dollars in order to buy oil.
This comes from the 1980s and earlier when you DID need to do that. For example I remember well traveling to the US and other countries as a kid in the 70s and 80s with my parents and they were always getting US travelers checks (remember those) and US cash for the trip. You pretty much had to get US dollars in order to buy things in the US or other countries that used the US dollar.
Today everything is digital and mostly works off credit/debit cards. You can easily come to the US from Canada and just pay for everything on your Canadian credit card and US prices get auto-converted to Canadian dollars. No need to deal with US dollars at all.
That’s what happens now with oil. Country X buys oil from the Middle East priced in US dollars but the transaction is now all digital. Country X never has to buy US dollars at all.
Don’t these countries borrow from banks in what are called Euro-dollars, that is to say, loans priced as dollars to be spent as dollars?
100%…I remember this vividly on our trips to Europe. I think I remember some places not accepting them, but pretty rare. Plus my old man would always be worrying about someone at the hotel sneaking into the room and stealing the ones we would leave in the hotel…I think he might have asked to use the Hotel safe in some situations.
But in the end it does not matter whether you buy stuff with lira or pounds directly or whether you have to exchange it first. It’s the same, just a little fx-fee.
What currency do you think credit card debt trades in?
It’s dollars all the way down.
Avoiding the dollar will perhaps hit the Usonian banks, which take a cut in processing a lot of dollar trade settlements, first.
Speaking of petrol and dollars, it seems no amount of dollars will buy petrol in Australia these days.
https://www.telegraph.co.uk/business/2026/04/14/australias-diesel-guzzling-economy-suffers-fuel-pumps-dry/
I phone some friends in Australia and they confirmed petrol running dry in rural areas but cities still have fuel. Good tip for everyone living in rural areas here in US if disruptions get really bad, the first to hurt will be the rural folks. Something I pointed out during the whole EV – ICE debate a while back.
Mish would oil priced in yuan raise its value against the dollar. Therefore making chinese exports more expensive.
It would do no such thing unless the oil seller demanded yuan as the holding unit.
The pricing unit has nothing to do with the holding unit.
I went over that in detail.
Thanks i will have to reread. Been a long day.
Think i could have asked the question better also.
As oil is traded in dollar countries need to accumulate dollar. So each country that want to buy oil form Saudi needs to obtain dollar. So total demand for dollar is quite high, even if transaction between those 2 countries is not involving USA at all. Same later Saudis have dollar and they need to do something with it. Even if they convert those dollar somewhere else (like buy gold from South Africa) those dollars still are in system, just different place.This can go on but eventually someone holds those dollars and needs to do something with it. So either US bonds or US stocks (or buying US goods).
If dollar is removed from international trade, demand for dollar will drop. Nobody needs to acquire dollars or worry later what to do with it.
So switching transactions away form dollar remove quite big demand to keep it.
If trade will start happening in say Yuan then similar mechanism will happen, someone eventually will have Yuan and only place to use would be to either buy something from China or invest in bonds/stocks there.
That is slow process but with recent development this trend is speeding up.
At some point if indeed world is moving away from dollar whoever hold that dollar will try to sell it to someone else. So when times come and dollar will stop being international trade currency it will collapse due to amount of dollar in circulation.
“As oil is traded in dollar countries need to accumulate dollar.”
An ignorant statement as I explained.
well, just simple check in chatGPT tells you that international trace in 2025 was around 35T $ and dollar denomination was like 90% of it, or 33T. Now in 2025 total US trade deficit (record) was 900b only.
So tell me how those countries got those dollars to trade? Some might get it from trade with USA but majority is via forex transactions and FED feeding global system with whatever supply of dollars is needed (via different type of mechanism or intermediary banks).
It has nothing (or very little) to do with trade deficit with USA.
Again whoever ends up having those dollars will need to do something with it what is most likely invest in US bonds/stocks.
When this mechanism stop/slows we will see reverse.
Agree, they do not need to accumulate dollars – however they often do.
If someone is buying something priced in a foreign currency, they typically hold an inventory of funds in that currency.
For example, if you temporarily move to a different country then you often keep a slush fund in the local currency. People planning expensive foreign vacations often start to accumulate funds in the local currency long before the trip.
A currency, an object, virtually anything at all, only has value or buying power IF it is perceived to have value. Currency, gold, wooden nickels, all like religion, Belief.
It helps to own the banking system, quoting system, and the credit rating system…
BTW, gr 8 r tickle
And ~ the dollar stays the reserve currency until the Rothschilds shift their allegiance… Again…
They have value if you need them to pay for taxes or other stuff.
Nobody ever marshals any evidence for this, because there is none.
A little akin to the notion that China wants to take over global hegemony from the US or that Russia is just pining to own Europe — there is no evidence. It’s all projection.
Here’s some more completely nonsensical but ‘self-evident’ common phrases:
They all follow Trump logic about a benevolent America being ripped off by the world.
How exactly did China, or Hong Kong, or Taiwan, or Japan, or European nations become prosperous by giving away goods subsidized by their own population at less than production cost? If you think this is a good economic model, please start a store/shop where you sell product for less than it costs.
They subsidize until they kill the competition and then they jack up the prices. There are so many examples of that it is not even worth listing them. I’m currently in Taiwan and I was surprised big time that all the electronics made here is more expensive here compared to how much we pay in US. On average 15-20%. It is to such extent so even the people of Taiwan buy from US when they visit us – laptops, phones, etc. When I asked them why – their answer was that this is the government policy and this is how they maintain employment. Now TSMC can charge whatever they want for the chips. China can charge whatever they want for what they have monopoly for. It may not make any sense to us but this is how it is and it’s killed a lot of industries in the other countries.
Taiwan became prosperous before TSMC became a thing.
Japan, Hong Kong, Taiwan, China — all were belittled for producing cheap plastic toys before they climbed up the value chain.
Here’s some more examples.
It has nothing to do with government policy.
It’s marketing power and scale.
Correct!
Very good post Mish, thank you very much for the time and effort you put in.
To the extent that transactions do not take place in US dollars, demand for the dollar is reduced which should reduce its value relative to other currencies.
However, Valuing something in US dollars is different than paying for it in US dollars.
The transition from US denominated transactions to other currencies is going to be very gradual as much of the global system is already set up to the benefit of the dollar. But over time it may become significant. The thin edge of the wedge. If fewer transactions are done in US dollars then the need for large US reserves in other countries becomes less and countries may reduce their US debt holdings accordingly. The US has to find lenders for over $30T in US debt currently on an ongoing basis. This requirement is increasing at a rate of about $1.5T per year. Anything that reduces the demand for US treasuries is a very real danger to the US economy. Based on the current trajectory, at some point the number of lenders won’t be sufficient to take up the treasuries on offer and house of cards will fall. At what point that happens is anyone’s guess. Hence the flight to gold. Through out that process in theory the value of the dollar relative to other currencies will fall and inflation will result.
I believe the US dollar is already defying gravity but perhaps it is just because the US dollar is the prettiest pig in the pen (ie. other countries are borrowing just as much or more) or more likely because my theories are flawed in some way.
Carney is really saying that Canada is no longer automatically going to buy US when it comes to military equipment. Now that US is basically telling Canada you can’t count on us if someone attacks you and perhaps we are the ones who may invade you there is no benefit to Canada in keeping the US happy by buying US stuff.. This plus the fact that Canada is looking at joining the EU makes the EU a more favourable trading partner for military apparatus than the US.
If Russia invaded Canada I wonder if Trump would step in? At this point I think it is more likely that he would support Putin crazy as that sounds and Carney looks like he thinks so too.
Canadians don’t need any military gear.
To fend off the Poles or the Dutch?
Indians? They are welcomed with open arms.
No. The only party Canada has to worry about is the US, who have invaded 3× before (historically speaking) and offered and threatened in addition.
But defending against the US is a foolhardy mission.
We placate them instead.
The main thing to placate them is to patronize the Military Industrial Complex and pretend that we support their wars to spread “freedom”.
It would be preplanned. Russia invades northern Canada and US uses this as an excuse to occupy southern Canada. This would be a repeat of Poland in WW2.
What would happen next who knows.
However Russia showed it has no interest to invade Canada. It already sold it’s North American holdings (aka Alaska) as it was not a strategic asset.
Would selling oil in a currency other than the dollar force the oil selling countries to hold their reserves in that currency? No, but it would encourage them to. At least that’s how it seems to me. If the oil-selling countries got payment in yuan, I would think they would be more inclined to buy weapons – and other stuff – from China. And probably to invest in Chinese financial markets. Admittedly, a bigger factor would be which currency is at lower risk of debasement and which country’s markets are more liquid and less subject to seizure. The dollar and dollar-based (and Euro) investments already took a trustworthiness hit when Russian assets were frozen.
They are going to buy weapons from whomever they think makes the best weapons for a reasonable cost. For a VERY long time that was the USA (we are the worlds foremost warmonger after all). But drone warfare starting in the Russia/Ukraine war has exposed a lot of US weapon systems as out dated or too expensive for what they do (ie cost 1 million to shoot down a 30K drone).
It’s also very hard to hold Yuan because there isn’t much available since China is a net export nation.
Correct TT.
I have said for decades ‘what is our obsession with having to make incredibly expensive bombers that can cost more than the entire countries we send them to blow up. MISSLES, AND RELATED RENDERED BOMBERS COST INEFFECTIVE DECADES AGO. Give up that stupid costly Military vanity!
The beef I have is GDP.
We produce bombs that add to GDP.
When we blow up the desert (or buildings or whatever) all that remains is the debt.
Where’s the product? It’s used up. And we gained nothing for it.
The expense is we need to kill thousands of people on the other side of the globe with no risk to ourselves.
The brave war fighters as they are now called need to have impunity.
Impunity is expensive, otherwise the sandal-shod commies we need to bomb would get the same gear.
Not really.
The FX markets are the biggest and most liquid markets in the world.
Everyday the currency that changes hands is greater than the sum of annual international trade.
Calling the dollars traded with the Middle East countries Petro Dollars would be akin to calling dollars traded with Central American countries Pedro dollars. It doesn’t make any sense and it is just not true. Countries that run a trade surplus with the United States are always going to have dollars no matter what you call them.
Hi Mish, longtime reader.
From what I understand if a company in, say Thailand wants to buy crude oil from Saudi they do the same thing as if they want to buy factory equipment from Germany or rice from Korea: they call their banker and the banker pays for it with eurodollar credit.
It’s not, as far as I understand, that oil is priced in dollars it’s that the vast majority of international trade is done in eurodollars – of which there are $14 trillion in deposits.
The “petrodollar” is a small part of the eurodollar system and mainly different only because it involved people putting dollars in to the bank rather than borrowing them.
I think that petrodollars are only about $300 billion per year, not really much compared to $14 trillion in dollar credit.
What matters is what currency the oil seller wants or will take.
If is dollars, one trades local currency for whatever that is. It could be euros, yen, dollars whatever.
The pricing unit is irrelevant. What currency the seller wants (or will accept) is all that matters.
I am quite certain oil trades in euros as well as dollars. It may trade in Yen too. Thailand baht, no.
Dollars, yen, and euros are highly liquid.
So someone trades Baht for dollars then buys oil. Conversion from Baht to dollars likely has a much higher fee than euros or yen to dollars.
Euros may be traded straight up for oil.
Eurodollars are nothing but foreign held dollars. It’s a strange name. Eurodollars are also an interest rate product having nothing at all to do with euros. The name is confusing. But yes, as I explained, oil is only a tiny percent of dollar transactions.
Eurodollars can better be referred to as virtual dollars.
For instance, Germany and Vietnam can use dollar prices and keep accounts in dollars, while having no actual dollars. If they have balanced trade, it all evens out to zero. If not, their bank systems will have to settle accounts sooner or later, but they could even do that by trading dollar liabilities held by some other party, much as a collection agency purchases bills you owe the dentist.
The only difference between a virtual dollar and a real dollar (which exists only as binary digits in a computer) is that they are not liabilities of the US government.
Well, that’s almost right. Eurodollars are dollar credit **created** by banks outside the Fed system. Dollars, foreign or domestic, aren’t liabilities of the US government. They are credit created by banks. Domestic banks have their accounts at the Fed but the Fed doesn’t control or back their balance sheets.
First, I need to point out that eurodollars are not dollars held but dollars lent. They’re not part of the Fed system and they don’t come for m domestic deposits. They are dollar credit created by fractional reserve lending against bank-held assets, mostly in Treasuries and mostly in the City of London.
I’m not saying that to be didactic. It’s central to the petrodollar myth. Petrodollars just don’t matter except to a very small group of energy-related companies and bankers.
The vast majority of international trade is done in dollars and the vast majority of that is done with short term eurodollar credit. Companies use eurodollars like an international credit card.
De-dollarization is therefore also a myth. Just ask the BIS. Central bank dollar reserves are not for trade, they are for safety and cushioning forex volatility.
The Chinese could create a “euroyuan”. They kind of try. But they are too cowardly to open up their financial system.
“Trump has turned the US into an unreliable trading partner.” Yes, absolutely. However, Trump will be shortly gone ( well 3 years max ), and his successor will,
hopefully schooled in the failure of his tenure, drop the tariff and sanction nonsense. The reputational healing induced by both foreign dollar reserves held and a return to free trade will work wonders for the US currency. Congress should endeavor to accelerate the fix, but they are, I fear, collectively morons.
Your conclusion is why your premise is erroneous: the US produced the Donald and the Congress critters. The Donald has an expiration date, but his successor will come from the same pipeline that he did.
Reputational healing ???? Really. Unlike Governor Trump people have long memories are are not in a forgiving mood. Sorry but you reap what you sow.
Why don’t you debate Lyn Alden on the subject. Please don’t call her an economic imbecil, or any of your other pejoratives you use to descibe people regularly. She knows more about economics than you, me and a million other people combined. You might also take a lesson from her on how to analyze and comment on other peoples perspectives. You do yourself a real disservice when you comment the way you have above. There is probably a reason why you are rarely invited to interviews. I’m not saying Lyn is right and you are wrong on this subject. What I am saying is you are the idiot in the room for commenting the way you do on other peoples ideas.
Lyn Alden views the petrodollar system as a foundational, yet fraying, pillar of the modern global monetary system, which has provided structural demand for the U.S. dollar, supported massive Treasury liquidity, and provided the U.S. with geopolitical leverage since the 1970s. She believes this system is in a gradual, long-term decline (de-dollarization), shifting towards a more fragmented, multipolar currency landscape. Lyn Alden – Investment Strategy
+4
Key insights on her view of the petrodollar include:
Alden emphasizes that this transition is a rare, slow-moving shift comparable to historical changes like the 1971 abandonment of the gold standard, noting it will take considerable time for the petrodollar’s influence to be fully replaced. Lyn Alden – Investment Strategy
Lyn Alden seems to understand the eurodollar which makes me wonder why she thinks the petrodollar is important. It’s a simple question of scale. The petrodollar is just not that much money.
You didn’t get it.
The USD is the global reserve currency because [the word ‘Reserve’ is a clue] other parties park reserves there.
Although the transaction function of money is not completely separate from the store of value function, for thousands of years people have stored wealth in gold, but hardly anybody used it for day to day transactions. In fact, they tend to use credit in almost all cultures for day to day transactions. There are trillions of Euro-dollars out there (virtual dollars) to transact with, which are not liabilities of the US Fed or Treasury.
As soon as there is a more reliable, liquid, and practical alternative to parking wealth than converting it into USD reserves, people will shift their habits.
The dollar is the world’s reserve currency because it meets 6 requirements the yuan and Euro don’t.
That is the long and short of it.
And that will not change as long as the US keeps running trade deficits
.
Those trade deficits mathematically require foreign purchases of US assets. It is a mathematical entity. US Trade Deficits == US assets bought overseas. Those assets could be treasuries, agencies, US stocks or even farmland. This is not avoidable. It is a mathematical entity. 1=1
However, it does not force the oil producers into demanding dollars for oil. Nothing forces that.
No, sorry Mish. U.S. trade deficits are funded by dollar credit. Banks leverage the (mostly) Treasuries they hold by at least 10-1. At least. These are not banks with reserve requirements.
There is $14 trillion of eurodollar credit out there. It’s not a dollar-in-dollar-out system
Central bank dollar reserves don’t fund trade. They are for the safety of local credit systems. Globally there is a lot of dollar credit and central banks provide a safety and volatility cushion.
I think Lyn Alden is one of the most brilliant economic writers on the planet.
We don’t have to agree on everything.
But nothing forces settlement in dollars. Period.
But there are so many dollars floating around globally because the US has had huge trade deficits forever.
Lyn has the cart before the horse.
Because of what I said (and it will persist because of US trade deficits), dollars accumulate overseas.
What impetus is there to change? None because Saudi buys US products. That is NOT forced. It’s desire.
I would argue that the US somehow may force the Saudis to buy US products providing protection for the fragile and corrupt Saudi monarchy.
“Ms. Choyleva is founder and chief economist at Enodo Economics and the author of “Petrodollar to Digital Yuan: China, the Gulf and the 21st Century Path to De-Dollarization.”
She is literally talking her book.
Mish, the world would be a smarter place if you reached a broader audience. [I’ve learned a ton from you since I found GETA in 2001].
Perhaps you could author a treatise on economics and get on the lecture circuit?
Those that need learning most can’t be taught
Great read Mish! Thanks
Excellent post Mish! Thanks!
Great post.
I can’t believe how often it is repeated that the pricing of something, eg oil, in a currency somehow is hugely beneficial to that country.
Eg I who do not reside in the US might buy something from an ebay seller in China where the item is priced in $USD.
If I pay in the local currency $AUD. And the seller receives Yuan. Where do does the demand for $US come into thing? Sure there is a transaction partner in-between and currency traders that assist in determining the exchange rate. But even so $US are no in the picture apart from on the sticker.
What matters is people using a currency as a STORE of value not as a transaction sticker price. The US does benefit from its currency being used as a store of value by countries across the globe. And the fact that items are priced in $US is more of a by product of this rather than a cause of this.
A large stable economy with stable prices, and trustworthy financial sector is the attribute to favour a currency been a good store of value and a reserve currency.
This is what the US should care about, not what the stick price of an oil barrel is.
A+ Post!
Thanks
I think I spent 15 hours on this one.
Several readers requested a write-up
The Iran War Just Broke the Petrodollar
https://archive.is/UpE2M
I linked to that nonsense