No, Virginia, Trading Oil in Other Currencies Won't Kill the Dollar

America doesn’t care what color electrons you use

Sat, Feb 13, 2016
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3,673Comments
This is the only way to really "kill the dollar." Don't try this at home

There are good reasons for doing certain cross-border trade in your own currency, or that of your trade partner.

Consider that all digital dollar transactions across borders, anywhere on this planet, have to go through one or more U.S. banks.

And if Uncle Sam doesn't like you, well, he can just cut you off from that.

No more foreign trade for you!

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It happened to Iran in 2012, forcing the country to survive on a bizarre gas-for-gold scheme with Turkey, complete with a "gold express" on passenger flights from Dubai to Tehran.

Russia was also threatened with something roughly along these lines in 2014.

Thus, the main benefit of using non-dollar currencies in your foreign trade:  You're not as vulnerable to the whims of Uncle Sam.

And for countries on the outs with the Uncle, that's very important.

But that's it.

Folks who claim that “de-dollarization” in the oil trade—or any other trade—will “kill the dollar” (or something like that), don't ever explain how.

Sure, it sounds good, but what is the mechanism of action?

Answer:  There is none.

Because, today, demand for the dollar isn’t based simply on the convenience of using it to settle accounts across borders.

Or more precisely, that’s part of it, but by no means the root of it.

The dollar is convenient because every country and major bank has some.

In other words, demand for the dollar is based on its status as the global reserve currency.

And its status as the global reserve currency is due to the massive, highly-liquid market for U.S. Treasury bonds.

And the massive, highly-liquid market for U.S. Treasury bonds owes its existence to:

(1)  The USA's unique position of running perpetual, large, unrestrained budget deficits, while

(2)  maintaining its ability to pay off the debt issued to cover those deficits by issuing more debt perpetually, while

(3)  the world needs somewhere to stuff its trillions in cash (to include trillions of dollars earned by running large, perpetual trade surpluses with the USA.)  Because, after all, a foreign central bank holding cash dollars wouldn't be able to pay itself a return, and as for potential large depositors, your national deposit insurance scheme only guarantees accounts up to some trivial amount.  Whereas the USA can print dollars and thus, guarantees all of its bonds.

Does this sound like a confidence scheme?

Hell yeah!

But what are you going to do about it?

That is, if (hypothetically) everyone suddenly lost confidence in the USA's ability to pay its debts without inordinately debasing its currency...

...Where else could they put their money?

You can't dump those trillions and trillions in your local non-U.S. bank.

No one would guarantee it!

Beyond some token amount, no state can guarantee deposits in a currency that it can't print itself.

Nor is anyone yet prepared to guarantee the hypothetical equivalent of those dollars in local currency terms.

Not to mention, the nature of double-entry accounting means banks would have to immediately loan that money out or put it on deposit with their Central Bank—which creates its own set of problems.

So all those folks who chant “there will be a run from the dollar” should think about what they're saying.

Moreover, they should ask themselves:  A "run" into what, exactly?

What would the nations and banks of the world convert their dollar reserves into?

It can't be “rubles” or “yuan”, because that available volume of rubles or yuan (not debt instruments, but actual bank money to play around with) doesn't exist.

The authorities would have to print mountains more rubles or yuan on the spot, crashing their value (and thus, paradoxically, supporting the dollar.)

But more to the point in our debt-money system, that volume of ruble or yuan sovereign debt does not exist.

Hence, saying “there will be a run from the dollar into (blank)”, ignores the fact that there's not enough (blank.)

Not by a long shot.  Not even if the dollar crashed 50 percent overnight against every other currency.

But even if there was enough, your money-changer or bond dealer would have to take those dollars you're handing him, and put them somewhere!

After all, he won't just throw them away.  He has to eat, too.

So where would they go?

Into U.S. bonds!

Thus reinforcing the dollar's status as the global reserve currency!

So as you can see, a cataclysmic “run on the dollar” is impossible under the current system.

Uncle Sam has this one locked down tight.

As I explained here, it would take a total collapse of global finance to even begin to get the ball rolling away from dollar hegemony.

And as I also explained here, the pain of such a collapse would be borne primarily by emerging markets like Russia, China, etc.

And that's the last thing those countries want.

So as long as the dollar remains the world's reserve currency, “de-dollarization” of the oil trade means nothing to the dollar.

It's certainly a good idea for the countries involved.

But America could care less.

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