You may first want to read the Zero Hedge article here:
US Threatens Russia Over Petrodollar-Busting Deal
In the early 70s the US began to incur trade deficits. Prior to that time, gold was pegged to the dollar at $35. But when the US began running trade deficits, other countries began exchanging the dollar proceeds for gold. Nixon's solution was to take the dollar off of the gold standard and currencies would float freely. The dollar was no longer pegged to gold.
The US created a deal with the OPEC nations that oil must be traded in US dollars, no matter who the buyer was. In general, virtually all trade between nations were transacted in US dollars. This created a strong demand for the dollar as nations with trade surpluses built up large dollar reserves. Making use of growing dollar reserves presented problems for countries who needed to figure out what to do with the dollars. Basically, the only way to get rid of them was to buy US debt (Treasuries), or invest in other US assets such as Fannie and Freddie.
Up till now, this arrangement has made it possible for the US to continue running large deficits in order to continue entitlement programs and military spending, without incurring a high rate of interest on the debt, as creditor nations purchase US debt, thus keeping the yields on treasuries down.
The largest holders of US Debt have been Japan and China. But Japan no longer runs trade surpluses, and China has begun making arrangements to bypass the dollar in trading arrangements with many nations.
Whereas China and Japan had been the largest holders of US debt (slightly over $1trillion each), the Federal Reserve now holds that title as it approaches the $4 trillion mark, as a direct result of its QE monetization. The Fed has begun to slow down its purchase of US debt (tapering), and thus far there has been no adverse effects on the interest rate. But as more and more trade is conducted outside of the US dollar, the demand for US debt has to be able to meet the supply. Where will that demand come from if less and less trade is conducted without the dollar?
Assuming the demand is not met, either the Fed would have to ramp up QE, Congress would have to pass some kind of mandatory provision that retirement funds purchase US Treasuries, or interest rates would rise. If interest rates were allowed to rise, real estate values and stock market values would crash, thus making pension funds insolvent. Also, the interest on the national debt would skyrocket, forcing Congress to make large cuts to entitlements and military spending. In short, there would be a severe depression with possible side effects being civil unrest and possibly movements demanding to secede.
In retaliation to sanctions, Russia is now making moves to untie itself to the dollar. Russia is negotiating large energy deals with China and Iran that would total billions worth of dollars, but would not be transacted in dollars. When you think about it, two countries should have the right to negotiate trade deals between them in any manner they like. But obviously this is a big deal for the US, as it sets a precedent that other nations may follow.
Here's the dilemma. If the US does nothing, eventually the dollar gets phased out as reserve currency and the scenario described above (depression, weakened dollar, bankrupt pension funds, etc.) appears likely; perhaps within a few years. On the other hand, if the US escalates, and the Russians are not intimidated (I don't think they will be), the risk of war and possible nuclear Armageddon becomes a possibility.
There are an infinite number of twists and turns that may happen, but based on how things are going, the future doesn't look that bright. I don't see a solution, but I'd rather take my chances with depression that nuclear war.
US Threatens Russia Over Petrodollar-Busting Deal
In the early 70s the US began to incur trade deficits. Prior to that time, gold was pegged to the dollar at $35. But when the US began running trade deficits, other countries began exchanging the dollar proceeds for gold. Nixon's solution was to take the dollar off of the gold standard and currencies would float freely. The dollar was no longer pegged to gold.
The US created a deal with the OPEC nations that oil must be traded in US dollars, no matter who the buyer was. In general, virtually all trade between nations were transacted in US dollars. This created a strong demand for the dollar as nations with trade surpluses built up large dollar reserves. Making use of growing dollar reserves presented problems for countries who needed to figure out what to do with the dollars. Basically, the only way to get rid of them was to buy US debt (Treasuries), or invest in other US assets such as Fannie and Freddie.
Up till now, this arrangement has made it possible for the US to continue running large deficits in order to continue entitlement programs and military spending, without incurring a high rate of interest on the debt, as creditor nations purchase US debt, thus keeping the yields on treasuries down.
The largest holders of US Debt have been Japan and China. But Japan no longer runs trade surpluses, and China has begun making arrangements to bypass the dollar in trading arrangements with many nations.
Whereas China and Japan had been the largest holders of US debt (slightly over $1trillion each), the Federal Reserve now holds that title as it approaches the $4 trillion mark, as a direct result of its QE monetization. The Fed has begun to slow down its purchase of US debt (tapering), and thus far there has been no adverse effects on the interest rate. But as more and more trade is conducted outside of the US dollar, the demand for US debt has to be able to meet the supply. Where will that demand come from if less and less trade is conducted without the dollar?
Assuming the demand is not met, either the Fed would have to ramp up QE, Congress would have to pass some kind of mandatory provision that retirement funds purchase US Treasuries, or interest rates would rise. If interest rates were allowed to rise, real estate values and stock market values would crash, thus making pension funds insolvent. Also, the interest on the national debt would skyrocket, forcing Congress to make large cuts to entitlements and military spending. In short, there would be a severe depression with possible side effects being civil unrest and possibly movements demanding to secede.
In retaliation to sanctions, Russia is now making moves to untie itself to the dollar. Russia is negotiating large energy deals with China and Iran that would total billions worth of dollars, but would not be transacted in dollars. When you think about it, two countries should have the right to negotiate trade deals between them in any manner they like. But obviously this is a big deal for the US, as it sets a precedent that other nations may follow.
Here's the dilemma. If the US does nothing, eventually the dollar gets phased out as reserve currency and the scenario described above (depression, weakened dollar, bankrupt pension funds, etc.) appears likely; perhaps within a few years. On the other hand, if the US escalates, and the Russians are not intimidated (I don't think they will be), the risk of war and possible nuclear Armageddon becomes a possibility.
There are an infinite number of twists and turns that may happen, but based on how things are going, the future doesn't look that bright. I don't see a solution, but I'd rather take my chances with depression that nuclear war.
