Fallout from the war in Ukraine—what I call the New Iron Curtain—seems to be accelerating the shift away from pricing all commodities in US dollars. China and Russia have been working on this for a long time, but that’s now shifting into a higher gear with Russia demanding that “unfriendly” countries pay for oil in rubles.
India is reported to be working on rupee-ruble transactions for raw materials. And—this is huge—there are reports Saudi Arabia is talking to the Chinese about selling oil in yuan. There are reports India wants in on that deal as well.
But even before the New Iron Curtain, the petrodollar system’s end was coming in view over the horizon.
Whether we like government intervention in the energy sector or not, burning fossil fuels to power vehicles and electric grids is being banned and penalized. Even the war has not (yet) changed this agenda. That aside, consumers want electric cars and non-carbon-emitting energy sources.
Petroleum products may still be used to make plastics, fertilizers, and other industrial applications for a long time, but burning it in motors is going the way of the dodo.
That will take decades, I know. The 2050 target for many green energy goals is a long way off. But the smaller the oil piece of the energy pie becomes over the years, the less need other countries have for US dollars to pay for oil.
Long before all the war or the COVID-19 lockdowns, the world was moving away from oil (and coal) for energy. That’s not news, I understand.
My point is this:
Even before we stop burning gasoline and diesel entirely, they will become marginal energy commodities—that ends the main use case for the US dollar outside the US.
It may still have “rule of law” and the “good faith and credit of the United States government” behind it, but I don’t think these things are as important to other countries. The main reason they hoard dollars is that Saudi Arabia only takes dollars for oil. For now.
Now, what happens if the need for dollars is greatly reduced at a time when high inflation is rapidly eating away at the dollar’s “cleanest shirt in the dirty-clothes basket” status?
Reserve-currency regime change would be anything but a surprise.
That would be as big a game-changer for the global economy as almost any I can think of—and not just for resource speculators.
Granted, I don’t see this happening tomorrow.
But don’t kid yourself that it won’t be until 2050. It could come as soon as 2030, which is a nearer-term goal for many Green agenda items. The New Iron Curtain could bring it on even faster.
Bear in mind that this change won’t be like a light switch that suddenly flips… and the process has already started.
Imagine, for example, that in light of the London Metal Exchange (LME) breaking the nickel market this month, traders start quoting Shanghai metals prices more often? What if they do it in yuan? This may not happen now, but I think it will in due course.
I’m not saying I like it, by the way. As I’ve written before, a world in which the gold-dollar exchange ratio is north of $10,000 would be a very scary place.
But whether I like it or not, I see the scales tipping more and more away from the US dollar. At some point, there may be some big headline event that marks the end of the US dollar’s hegemony as reserve currency of the world. That would simply be the culmination of what we already see starting to happen around us now.
I can’t give you a precise prediction of when the US dollar loses its top-dog status, but I can say that I don’t want to be caught on the wrong side of history when it happens.
And while a timeframe like 2030 may seem to be a long way off, it takes time to prepare for historic changes like this. That makes it important to start thinking ahead now.
What to do?
My friend Doug Casey’s old “Crisis Investing” formula still makes sense: Liquidate, Consolidate, Speculate, and Internationalize.
The last is the one that gives the most people the most trouble. But if we’re talking about potential monetary regime change, I think internationalization may be the most important part of the formula. Just remember that it doesn’t mean one has to move to a hut in Fiji or some such. Even partial internationalization can be a big help.
For more on this, see my article on the topic.
As for the “speculate” part of the formula, that’s what we’re here for.
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