“The glory days of the petrodollar are over,” says Brad Setser CFR fellow. 
Petrodollars. Myths and Reality
Please consider Petrodollars. Myths and Reality by Brad Setser, emphasis mine.
The foundation of the dollar’s global role, it is sometimes argued, rests on the willingness of the Gulf countries (but not Russia) to price their oil in dollars.
But it was never quite clear why oil pricing mattered quite as much as some claim.
To be sure, there are network effects around dollar pricing. But it isn’t hard to pay for oil in a global currency like the euro, even if the underlying contract is priced in dollars. There is a deep and liquid market for converting euros into dollars, and a firm aiming to lock in the euro price of oil 3 months forward can buy oil forward in dollars and dollars forward with euros, thereby locking in a euro price.
Dollar settlement is a problem for countries that are sanctioned by the U.S. and the EU and for frontier economies that cannot settle their oil bill in local currency, but it hasn’t required most European oil importers to build up big stocks of dollar reserves just to pay for oil.
What has mattered at times is how the big oil exporters manage their surplus funds when there is a surge in the global price of oil.
Yet the myths around petrodollars persisted long after they had lost most of their substance: the 1970s deal between Saudi Arabia and the United States to price oil in dollars never dictated the accumulation of dollar reserves in East Asia, and it should be clear by now that the U.S. commitment to defend the Saudis is based on much more than dollar pricing of oil.
While transparent economic data has never been a forte of the GCC countries, over time some of the oil exporters started reporting quarterly balance of payments data that makes it possible to track a decent portion of the core flow out of the GCC into global markets.
As a result, we more or less knew three things going into the current oil shock:
First, the Saudis, along with most other oil exporting economies, weren’t running current account surpluses going into the latest oil shock. The Saudis actually have run deficits in 2024 and 2025.
The Saudis were thus a net drain on the liquidity of the global banking system; Aramco, the Public Investment Fund (PIF) and the Kingdom itself have been significant issuers of international bonds.
Second, the remaining oil surplus was concentrated in a small set of countries with tiny populations relative to their oil and gas endowments and wasn’t being accumulated in the form of central bank reserves—in that sense, the world of classic “petrodollars” had come to an end.**
The GCC countries and Norway do still have a significant surplus, but that oil surplus had fallen to around $200 billion dollars or so in 2025 ($35 billion in Kuwait and the UAE, $25 billion in Qatar, and around $50 in Norway; the Saudi deficit $33 billion.
That is tiny relative to the $1.5 trillion surplus of “manufacturing Asia”—the buildup of dollars in the Chinese state banks and the buildup of offshore dollars in Hong Kong and Singapore from Chinese exporters drove the Eurodollar market.
Third, there are notable differences in how the remaining oil surplus is invested.
It isn’t going into classic reserves and traditional reserve assets.***
Tracking these flows isn’t easy—and the Emirates remains a black box.
But there is enough real data for me to refute the modern financial fairy tale that there is a big float of petrodollars sustains the dollar system.* This is fun to believe, but not really based in reality.
There is too much talk about Kissinger’s 1974 deal with the Saudis, and perhaps Treasury Secretary Simon’s deal. That deal wasn’t for all time.
The Saudi surplus from ‘73 and ‘79 had disappeared by the late 80s and early 90s, but at the time, few talked about the end of the petrodollar system.
It is time to update a lot of priors. The U.S. is now a net oil exporter, not an importer, and has no direct need for Saudi supply. The Saudis today are borrowers rather than lenders, big issuers of dollar-denominated bonds not buyers of Treasuries. The Gulf monarchies are more equity investors than “bankers” to the world.
The Saudis aren’t going to generate a big surplus to reinforce the postulated petrodollar system with oil at around $100—not when their balance of payments breakeven (on around 7 million barrels a day of exports) is over $90 a barrel.
And even with oil above $100, the big sources of offshore dollar liquidity (dollars in banks, available to be lent out) are the Asian manufacturing exporters, not the Gulf monarchies.
* The UAE’s reserves are up, but that stemmed from pre-Iran “excursion” financial flows; the CBUAE is the federal central bank and it doesn’t manage the budget reserves of any individual emirate to my knowledge.
** A fairy tale that is also widely believed in the national security community, which has convinced itself that dollar “dominance” is critical to U.S. global power without carefully defining what is meant by dollar “dominance.” As an example, does the impact of the dollar’s reserve currency status hinge on the actual flow of dollar reserves, or the dollar’s share of a static stock of reserves?
*** To be clear, unless the U.S. walls itself off, stops exporting, allows efficient internal transport of Gulf Coast and Texan oil to the West and East Coast, and changes its stock of refiners to use light rather than heavy oil, the U.S. does rely on Saudi and GCC oil to keep the global price of oil and thus the domestic price of oil stable. And of course, the U.S. public remains incredibly sensitive to swings in the price of oil.
I have been fighting petrodollar nonsense for two decades.
I last discussed petrodollars on April 14, 2026.
Please consider The Petrodollar Theory Is Dead. It Never Made Sense to Begin With
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
Theory #2 – The Demise of the Dollar
Bloomberg writer Aaron Brown says The Iran War Just Broke the Petrodollar
My position is both theories are silly, that the petrodollar idea never made much sense, but if it ever did, it sure doesn’t now.
Here are the three pillars of the Petrodollar idea.
Three Pillars of the Petrodollar Theory
- Oil priced in dollars
- Transactions settled in dollars
- Oil revenue recycled into dollar-denominated assets
Mish vs Setser – Total Agreement
Mish – Pricing Unit
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).
Q: Would oil priced in yuan or euros change the oil price in dollars?
A: NoQ: 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 storySetser – Pricing Unit
It was never quite clear why oil pricing mattered quite as much as some claim.
It isn’t hard to pay for oil in a global currency like the euro, even if the underlying contract is priced in dollars.
There is a deep and liquid market for converting euros [Mish: or Yen etc.] into dollars, and a firm aiming to lock in the euro price of oil 3 months forward can buy oil forward in dollars and dollars forward with euros, thereby locking in a euro [Mish: or yen] price.Mish – Settlement
Currencies are fungible. Something immediately settled in dollars does not have to remain in dollars.
What does matter is where a nation holds its reserves. But that is largely forced by trade surpluses, not conscious decisions.
Setser – Settlement
Dollar settlement is a problem for countries that are sanctioned by the U.S. and the EU and for frontier economies that cannot settle their oil bill in local currency, but it hasn’t required most European oil importers to build up big stocks of dollar reserves just to pay for oil.
What has mattered at times is how the big oil exporters manage their surplus funds when there is a surge in the global price of oil.
Yet the myths around petrodollars persisted long after they had lost most of their substance: the 1970s deal between Saudi Arabia and the United States to price oil in dollars never dictated the accumulation of dollar reserves in East Asia, and it should be clear by now that the U.S. commitment to defend the Saudis is based on much more than dollar pricing of oil.
Mish – 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.
Setser – US Independence
The U.S. is now a net oil exporter, not an importer, and has no direct need for Saudi supply.
The Saudis today are borrowers rather than lenders, big issuers of dollar-denominated bonds not buyers of Treasuries.The Gulf monarchies are more equity investors than “bankers” to the world.
Mish – Oil Transactions
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.
Setser – Oil Transactions
The Saudis aren’t going to generate a big surplus to reinforce the postulated petrodollar system with oil at around $100—not when their balance of payments breakeven (on around 7 million barrels a day of exports) is over $90 a barrel.The GCC countries and Norway do still have a significant surplus, but that oil surplus had fallen to around $200 billion dollars or so in 2025 ($35 billion in Kuwait and the UAE, $25 billion in Qatar, and around $50 in Norway; the Saudi deficit $33 billion.
That is tiny relative to the $1.5 trillion surplus of “manufacturing Asia”—the buildup of dollars in the Chinese state banks and the buildup of offshore dollars in Hong Kong and Singapore from Chinese exporters drove the Eurodollar market.
“The glory days of the petrodollar are over,” says Brad Setser. That’s assuming there ever were glory days, something that Setser definitely hints at in his post.
Setser and I see things very much alike.
Instead, please note that slow drip abandonment of the dollar is what’s really happening. From my article …
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.
- China’s direct 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.
- The US no longer imports much from the Mideast. So, the Mideast accumulates less dollars directly from the US. This is actually a US success story.
- There is no replacement in sight for the US dollar losing reserve currency status.
- There is a global incentive to shift away from dollars, when and where possible.
When and where possible is the key component of the slow drip abandonment idea. Dollar avoidance is not that easy or it would have happened in a major way already.
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.
Death of Dollar Silliness
Despite the above, 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.
Dollar Debasement
Dollar debasement accelerated 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” increased 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, adding to the “Reserve Currency Curse” set of 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 (unrelated to oil) in global dollar-denominated transactions.
When? I don’t know. Nor does anyone else.
Expect More Oil Priced in Whatever Silliness
Meanwhile, relentless Déjà Vu hype over meaningless “oil priced in whatever” nonsense will continue for many reasons.
- Hype sells
- Death of the dollar theories and conspiracy theories are sexy
- Petrodollar theories are like religion, not easily abandoned.
- Authors promote nonsense to sell books
- People hear something interesting and think they are geniuses for passing it on.
Addendum.
I added points 8 and 9 to the Slow Drip setup on April 25, 2026.
Suppose that outside US, there are only oil producers (Eg Kuwait) and manufacturers (eg Korea). Suppose also that Kuwait has shown clear desire to build and maintain Treasury positions with its surpluses but that Korea is not keen to hold Treasuries/dollars. Now suppose oil prices move down sharply and Kuwait surpluses “ move” to Korea surpluses. Can we guess that this will be unsupportive of Treasuries and USD since Korea will be recycling its trade surpluses to other stuff eg gold? The fact that transactions were settled everywhere in USD is irrelevant to “ propping up” the USD?
Let’s suppose I have wings and can fly to the moon and don’t need oxygen.
Would I fly to the moon?
So we ARE in the middle east because of Israel. When Trump told a bunch of christian zionists that we are in the middle east because of Israel and NOT oil he was correct. The media did not cover it or put it on page 9 not because it was a gaffe but because it was an inconvenient truth.
Very good post, Mish.
I had a similar conversation with Mr Binion many years ago in Vegas. He said this: You have an advantage when they are using your chips. I think it could be applied here.
June Brent $99.17. 99 tankers on the wall, 99 tankers, you take one down, pass it around and you still have 99 tankers in the Straits of Hormuz….
Uh oh. bond yields rising again. We’re a few basis points from 5% disaster on 20 and 30 year. Be on the lookout for an announcement of an amazing deal tomorrow which will be 100% lie. The Schrödinger’s Straits of Hormuz (open or closed depending on who is speaking) will be at the center of it.
https://www.cnbc.com/markets/bonds/
US 10-YR
4.309 +0.059
US 20-YR
4.899 +0.05
US 30-YR
4.916 +0.035
It’s hard for anyone who lived through Volcker to see 5% as a “disaster”. It’s a pretty reasonable rate.
5% + US debt to GDP of 123% = disaster
Eh.
If you believe, as I do, that MMT is inevitable and good, you’d be less worried.
We weren’t $40 trillion in debt during Volker’s time. Why do I need to explain that to you if you were around during Volkers time?
Can you do math, what is 5% of $40 trillion?
Guilty of point 5
Mish, I posted this comment on the other post days ago about the same subject (the Petrodollar) but probably you did not read it (the post was already few days old) so i repost it here: 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!
End of Gold Standard
Enter China and the WTO
Those two things are the difference.
I’m sorry but I don’t think it’s right at all to say that the dollar was “debased”. To me, if there’s anything that’s more mythological than the petrodollar, it the mother of all myths, the gold standard.
The gold standard did not “back” the dollar. Gold was the standard for “good collateral”. The gold standard meant you knew how much currency you were going to get if you had to sell your collateral.
Obviously gold was a terrible form for collateral to take as the world economy became larger and more integrated. Obviously the better alternative was government bonds – essentially currency that earns interest. Government bonds have a predictable cash value, are more fungible and can be created at will.
So there was no debasement at all, if anything, dollars obviously became more valuable. The demand was so high that the City had to create trillions more.
Now Treasuries are, by far, the most valuable collateral in the world because they can be converted to the most valuable currency in the world with ease and certainty.
The Gold Standard ended in 1933, what we had between the end of WWII and 1971 was not a Gold Standard but rather a “Gold exchange stardard” for balance of payments purposes, the promise for the US government to redeem overseas dollar balances in gold if other nation authorities asked for and when enough countries doubted the US could actually do that, the system imploded.
Ok – Accepted.
Mentally change my statement about gold standard and replace it with gold exchange standard. Nothing else in my post changes.
I was aware of it and did not want to do into more explanations. But your terminology is correct.
The People who made dollars available overseas are the City of London When they invented the eurodollar. That is dollar credit created by Banks outside the FED system. Totally bypasses the American system except for some settlement concerns.
Ridiculous. Totally ridiculous.
No one “invented” eurodollars.
It’s a definition: Eurodollars are U.S. dollar-denominated deposits held in banks or bank branches located outside the United States. They are not restricted to Europe; they are held in financial centers worldwide—such as the Bahamas, Cayman Islands, and Singapore—and are not subject to U.S. Federal Reserve regulations.
The question is where those dollar deposits come from. The innovation is that they come from dollars *created* through credit. You don’t think lending trillions of dollars outside the Fed system was pretty innovative. That much lending without a central bank? Seems like an invention to me and it was developed in the City of London, as far as I know.
Yes, that $14 trillion is everywhere now, but that fact in and of itself is important. It is THE international credit product.
I haven’t checked this, but as I understand it, the U.S.A. did in fact run a trade surplus up until the early 1970s, but it ran a balance-of-payments deficit because of the cost of keeping occupation troops in Germany, Japan, and Korea.
Don Caligula made the US an unreliable treaty party. Then, the Muppet made the US dollar and Treasuries risky assets. Finally, Don Epstein made the US an unreliable trade partner. Good riddance!
could someone explain this? ty
Retail sales post biggest jump in more than 3 years on record spike in gas prices
Do retail sales include gas purchases? Lol. That would explain it but if not, it’s mind boggling. I’m not even sure who is buying anything. As population ages, you consume less stuff except medical care.
I have all the furniture, TVs, and other stuff I could ever need and I suspect most people across America have houses full of stuff so I don’t get it.
If inflation is high the reported price of goods purchased also goes up. But the quantity & quality does not.
Higher reported sales for the same basket of goods & services.
It takes fuel to get goods to factor6, warefouse, store, home.
I fully agree with the overall thesis of Setser’s and your post about the petrodollar. The bolded comment “The U.S. is now a net oil exporter, not an importer, and has no direct need for Saudi supply” caught my eye though because it is not precisely true. A better statement might have been that “The U.S. is now a net total petroleum exporter, not an importer, and has no direct need for Saudi oil supply.” Total petroleum is the sum of “oil” and “liquid petroleum products”. The US is still a net importer of oil, albeit only about 2 million bpd, but is an exporter of liquid petroleum prodcuts, about 6.5 million bpd. Hence the net total petroleum exporter. A large portion of these liquid petroleum products are propane and butane, about 2.3 million bpd. Not what you would consider as transportation fuels. The second part of the sentence is precise though, with Saudia Arabia directly providing only about 5% of US oil imports. Canada provides 60% of our imports.
Yes not precisely true. Setser made the mistake, not me.
But close enough for him. By that I mean no huge US dollar flows to the mideast
That statement about petrodollar is old wives tales, reserve currency is another matter, the reserve currency is about acceptance of a vehicle for trade can be coconuts marbles as long all parties agree the problem we have is the abuses of such currency.but the agreement is the only item available at this point, because trade is boss and all ledger agree the dollar is it,but not petro or or….
I don’t think “reserve currency” is actually that meaningful at all. Central bank reserves matter in forex, they matter when central banks have to back up local dollar BORROWERS. They mean nothing for trade as far as I know.
Central banks use dollar swap lines – again, borrowing, not accumulation. Accumulated dollars matter in sovereign wealth funds and their availability matters for eurodollar-creating commercial banks.
I think the problem is that people are stuck in an ancient, irrelevant, gold standard mentality. People just can’t seem to stop imagining dollars as an analog to gold coins that can pile up like a dragon’s treasure or something. Dollars (and all money, really) is a probabilistic number. It’s a quantum, not a thing.
Yet Russia decreed a gold standard briefly in 2022 to fortify a slumping ruble. It also uses gold sales to improve liquidity.
Right, and that was evidence of abject failure.
I don’t understand this fascination and endless talk of the petrodollar. I asked perplexity two questions: How much oil (in dollar terms) does the world buy from the middle east.
The world bought about US$1.322 trillion of imported crude oil in 2024 overall, but a clean “Middle East share” in dollar terms isn’t directly given in the available source. The best verified proxy here is that the Middle East produces about a third of the world’s oil, and it accounts for roughly 25% of seaborne oil trade.
I then asked how much junk China exported to the world.
China exported about $3.58 trillion in goods in 2024, based on trade data reported for total exports to the world. A closely related source puts the figure at about $3.75 trillion for 2024, so a practical answer is that China exports roughly $3.6 trillion to $3.8 trillion in goods annually.
Why does no one ever worry about the Junk-Yuan but we get hysterics over the petrodollar? Heck China’s “junk” exports are literally TRIPLE the amount of oil that gets exported but not ever a single peep about it. Why?
No one says, “Trump’s policies are going to be the end of the Junk-Yuan”
I hope this is the last post on the petrodollar, it adds nothing to the discussion of economics.
This is an excellent post, Bravo Mish!
I’m an economic illiterate who believes the petrodollar is important. The systems maintains dollar value while providing a channel for debt financing vis treasury sales. That aside, the Iranian war has shown that the US can not defend the gulf states.and that is a pillar of the petrodollar agreement. We will find out if economic consequences develop but the blow to US prestige is real and immediate. I look for those multibillion dollar investments from the gulf states Trump promised to never happen. I’m not always right, we will see.
Believe in the tooth fairy if you want.
The petrodollar was a thing in the last century. Now it’s just window dressing for Zionism.
Trump admitted as such to a bunch of christian zionists during his first term. There was a reason why the media did not jump on this “gaffe”.
Sorry, I rearrange my first post earlier.
There are many different points of view of people, institutions, countries, central banks, etc view Chinese Yuan replacement of USD as reserve currency.
Here is the Deep Seek view according to Five Stages of Grief:
That’s an amusing and clever framing. If we imagine “USD losing reserve currency status to CNY” as a loss that markets and policymakers might grieve, here’s where the idea likely stands on the Kübler-Ross five stages of grief:
Current stage overall: Early Stage 2 (Anger) moving into early Stage 3 (Bargaining) — but still far from Acceptance. CNY’s share of global reserves is ~2-3% vs USD’s ~58%, so talk of “replacing” is premature.
If you ask Chap GPT or others there will be some difference.
I’d agree Yuan won’t fully replace USD but Yuan will be used and stored more than before. Only percentage change.
Remember – this is many years long process.
The Iranians are charging yuan for passage.
The Chinese Yuan can’t substitute for the dollar by design. The Chinese insist on a dual currency system, one internal one external. They alsi refuse to open their bond markets for fear of capital flight and instability.
Petrodollar got replaced by Asiadollar long time ago, Brad Setser is right.
That’s why military pivot to Asia is so important for the US – to make sure that Asia pays for its imported energy in dollars. That’s why physical control of oil reserves is important for Trump – Asia imports energy. And that’s why Trump wants to burry NATO – to free his hands and move to Asia.
Trump’s principal competitors are Russia (oil&gas, coal supplier) and China (electric production solutions supplier). Freezing Ukraine war was supposed to free hands of NATO to deal with Iran. Putin outsmarted Trump (Putin always ready to “negotiate” with Trump’s two clowns dressed like envoys) and forced Trump into war on two fronts.
War with Iran was supposed to produce next Venezuela for the US and solve all Israeli problems in Middle East. Instead it has led to energy crisis and Russia and China becoming solutions for many countries.
What will China do with its enormous dollar reserves? It will use them to import raw materials from third world to manufacture more solar panels, EVs, charging stations, transformers, etc. This equipment will be sold to third world, invoiced in yuan, backed by yuan denominated long-term export loans and repaid in yuan.
Those countries exporting raw materials to China may partially repay their dollar loans to Western creditors.
Stealth dedolarization speeded-up by Hormuz crisis.
All good points. Setser does mention dollar based sanctions – which I recall was a threat to Russia having dollar debts but no way to pay them – such that the US wanted to create an artificial default. That sort of nonsense will go away but you might call it slow drip.
Mish this is one of the posts that should go in the Mish’s greatest hits. It covers so much in a single post and is clarifying yet comprehensive..
Thanks. I would agree with you. This is by far the best post on this subject I have done. Plus I have agreement from an actual expert on such matters.
I think that the competition between the yuan and the dollar will increase in short order, causing a readjustment in the world order. As soon as China sells its US bond holdings, things will change in a major way.
In the hard minerals industry, the US is lagging far behind in international productivity, mainly due to permit delays (not concerns over environmental deregulation, but due lack of public knowledge of mining efficiency with respect to reclamation). I maintain there is no more valuable land mass on earth than that which can produce minerals for mankind; not the land are of Washington D.C., nor that of any physical place on earth. Society can agree to move a church or a capital of a state (or a country) from one place to another, but the entire population of the earth cannot move a mineral deposit from one place to anther!
One must remember that communicative humanoids have only been around for a few ten thousand years… that is a snap in geological time. Where will we be only 500 to 1000 years from now…
I believe you need to re-read mt article and think about slow drip and reserve currencies
You should read my post above, the world is stuck on the petrodollar mindset when China already exports triple the cash volume of oil, we already have a replacement for the petrodollar if you want to think in that terms it’s the Junk-Yuan.
I think U.S. dollar dominance has something to do with the U.S. being the largest consumer market on the planet. Your thoughts?
Correct. The US consumer has been the importer of last resort. However Trump’s tariffs are crimping that particular item.
As long as US consumer continues to hold this crown the US$ is ‘safe’.
The U.S. consumer is important, clearly, but the far, far more important thing is the absolute dominance of the dollar and Treasuries in the global financial system.
This guy is sort of a nut but this is a good video:
https://www.youtube.com/live/EUfDYJ2WYRI?si=UaJal1q93QNnnJf9
There are many different points of view of people, institutions, countries, central banks, etc view Chinese Yuan replacement of USD as reserve currency.
Here is the Deep Seek view according to Five Stages of Grief:
That’s an amusing and clever framing. If we imagine “USD losing reserve currency status to CNY” as a loss that markets and policymakers might grieve, here’s where the idea likely stands on the Kübler-Ross five stages of grief:
Denial – “USD’s dominance isn’t seriously threatened. The dollar is irreplaceable.” Many still here, especially in US policy circles.Anger – “China manipulates currency, doesn’t play fair, has capital controls — CNY can’t be a reserve currency.” Present among some critics and Western media.Bargaining – “Maybe a multipolar system with USD, EUR, CNY, and digital currencies is fine.” Growing in central banks diversifying reserves (e.g., gold, small CNY holdings).Depression – “The dollar’s share is slowly declining, and there’s nothing we can do to stop long-term trends.” Emerging among some economists and ex-officials, but not widespread.Acceptance – “CNY will eventually rival USD, but it will take decades and require full convertibility, rule of law, and deep capital markets.” Very few here — most analysts agree CNY is not yet a true reserve currency.Current stage overall: Early Stage 2 (Anger) moving into early Stage 3 (Bargaining) — but still far from Acceptance. CNY’s share of global reserves is ~2-3% vs USD’s ~58%, so talk of “replacing” is premature.
If you ask Chap GPT or others there will be some difference.
I’d agree Yuan won’t fully replace USD but Yuan will be used and stored more than before. Only percentage change.
Remember – this is many years long process.
–
The yuan can’t be a global force until there is far, far more yuan-based financial collateral. The Chinese bond market is a walled garden that keeps international flies outside the domestic system .