China’s Quest to Upend U.S. Dollar as Global Reserve Currency

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When the U.S. commercialized the oil and gas industry it also fought to ensure that its position as the leading provider of oil and gas remained unfettered.

During the industrial revolution Standard Oil Company, a U.S. based oil and gas conglomerate, initially operated as a Trust Company and later as a Holding Company. It was the preeminent supplier of oil and gas in the U.S.

Standard Oil Company also had a virtual monopoly on the oil and gas industry, which led the U.S. Government to sue it under the Sherman Anti-Trust Act. In 1911, U.S. Supreme Court ruled in favor of the U.S. Government and ordered the break up of that company.

As a result of that Court’s decision, 33 of the companies held by Standard Oil Company were divested from its portfolio. https://www.britannica.com/topic/Standard-Oil-Company-and-Trust.

Two decades later when oil was discovered in Saudi Arabia Standard Oil Company sent its engineers to that region to explore the commercial viability of Saudi Arabia’s discovery. When that was determined, the Saudi Kingdom and Standard Oil Company formed the Arabian American Oil Company (Aramco).

That deal restored Standard Oil Company’s position as the leading oil and gas provider and also enriched both entities’ financial coffers via a profit-sharing agreement, which lasted until 1980. That year, the Saudi Kingdom gained full control over Aramco, which is now called Saudi Aramco. http://www.history.com/this-day-in-history/standard-oil-geologists-arrive-in-saudi-arabia

In 1945, Saudi Arabia’s King Abdul Aziz and U.S. President Franklin D. Roosevelt met to discuss oil and politics. https://en.wikipedia.org/wiki/History_of_Saudi_Arabia. The meeting resulted in King Aziz agreeing to sell Saudi Arabia’s oil to the U.S. in exchange for U.S. protection from his enemies.

Between 1942-1945, the U.S. was in what is often referred to as a war economy, which meant that the U.S. government was stockpiling precious, but limited resources for use in industries that would further its military and economic objectives. That included oil and gas, which most likely led to the meeting between King Aziz and President Roosevelt in 1945. Cecil Bohanon’s Economic Recovery: Lessons from the Post-World War II Period (August 2012)

After World War II the U.S. economy flourished, which resulted in immeasurable and surprisingly growth. https://www.mercatus.org/publication/economic-recovery-lessons-post-world.

After the glory days of growth had dissipated, the U.S. found itself in a recession that was fueled by an oil embargo begun by the Organization of Petroleum Exporting Countries (OPEC). In 1974, during that embargo the U.S. sent its Secretary of Treasury, William Simon, to Saudi Arabia to negotiate an end to OPEC’s economic punch. One of OPEC’s founding members is Saudi Arabia, who at that time was upset with the U.S. for supporting Israel during the Yom Kippur War. https://www.bloomberg.com/news/features/2016-05-30/the-untold-story-behind-saudi-arabia-s-41-year-u-s-debt-secret.

That meeting led to an agreement whereby the U.S. would provide military support to the Saudi Kingdom in exchange for the Saudi Kingdom agreeing to purchase U.S. Treasury Bonds and selling its oil to other Nation States in U.S. dollars. That deal also helped the U.S. finance its struggling economy and solidified the U.S. dollar as the world’s reserve currency. Simon’s Deputy, Gerry Parsky, stated that Simon’s other task during that visit was to “neutralize crude oil as an economic weapon,” which proved to be quite effective as evidenced by the oil embargo. https://www.bloomberg.com/news/features/2016-05-30/the-untold-story-behind-saudi-arabia-s-41-year-u-s-debt-secret and https://www.cnbc.com/2017/10/11/china-will-compel-saudi-arabia-to-trade-oil-in-yuan–and-thats-going-to-affect-the-us-dollar.html.

It has been reported that the Saudi Kingdom holds approximately $750 billion in U.S. debt (bonds) and that China holds approximately $1.15 trillion. http://money.cnn.com/2017/08/16/investing/china-us-debt-treasuries/index.html. There are huge concerns that Saudi Arabia and China may now be in a position to use their substantial holdings of U.S. debt as a weapon against the U.S. https://www.bloomberg.com/news/features/2016-05-30/the-untold-story-behind-saudi-arabia-s-41-year-u-s-debt-secret, and http://money.cnn.com/2017/08/16/investing/china-us-debt-treasuries/index.html, something that the Saudi Kingdom threatened to do when the U.S. granted its citizens the right to sue the Kingdom for alleged involvement in the September 11, 2001 attack on the U.S.

The U.S. effort to neutralize oil as a weapon proved to be quite effective, but the result of that effort may prove to work against it. If the Saudi Kingdom decides to sell off its vast holding of U.S. Treasuries it would put the U.S. in a peculiar situation forcing the U.S. to go into its coffers to make good on $750 billion owed to the Kingdom. Such an action would throw the U.S. economy into a tailspin and force it to raise taxes in an effort to replenish that coffer.

Marc Chandler, head of currency strategy at Brown Brothers Harriman, was quoted saying that “we don’t do ourselves justice if we underestimate our liabilities to big holders” of U.S. debt. https://www.bloomberg.com/news/features/2016-05-30/the-untold-story-behind-saudi-arabia-s-41-year-u-s-debt-secret.

Carl Weinberg, chief economist and managing director at High Frequency Economics, is also quoted saying that “the world’s transaction currency would suffer [resulting in] lesser demand for U.S. securities across the board.” He also believes “moving oil trade out of dollars into yuan will take . . . between $600 billion and $800 billion worth of transactions out of the dollar… [resulting in] a stronger demand for things in China, whether it’s securities or whether it’s goods and services.” https://www.cnbc.com/2017/10/11/china-will-compel-saudi-arabia-to-trade-oil-in-yuan–and-thats-going-to-affect-the-us-dollar.html.

It appears that the U.S. did in fact underestimate its liabilities to the biggest holders of its debt, something that former U.S. President Barack Obama tried to keep from happening when he vetoed the bill that gave U.S. citizens the right to sue the Saudi Kingdom over its alleged involvement in the September 11, 2001 attack on the U.S. Former President Obama’s veto was subsequently overwritten by the U.S. Congress and became law.

Recently, other oil producing Nation States such as Venezuela have begun selling its oil in currencies other than the U.S. dollar. http://www.arabnews.com/node/1158311/business-economy. Interesting enough, in 2007 it was reported, “if Gulf Cooperation members really do want to divorce from the dollar, then selling oil for euros or another currency would be the next logical step. If that were to occur, America would be in big trouble.” https://www.thetrumpet.com/4281-will-the-saudis-start-a-stampede-away-from-the-dollar. What was incorrectly predicted in 2007 was that the Euro would be the world’s reserve currency and not the Yuan.

The U.S. may indeed be in big trouble if the Yuan does replace the dollar as the world’s reserve currency. One example of China’s push to make the Yuan the world’s reserve currency is China’s interest in purchasing an interest in Aramco. http://www.marketwatch.com/story/saudi-arabia-thinks-about-shelving-international-ipo-for-saudi-aramco-reports-2017-10-14. The only condition of the purchase is that the Kingdom sells its oil in Yuan as opposed to the U.S. dollar. As evidenced by past dealings of this kind, the result of such an agreement is the Yuan replacing the U.S. dollar as the world’s reserve currency. https://www.cnbc.com/2017/10/11/china-will-compel-saudi-arabia-to-trade-oil-in-yuan–and-thats-going-to-affect-the-us-dollar.html.

A prolong agreement of that kind would throw the U.S. economy into a tailspin as most Nation States main purpose for purchasing U.S. debt is to have a secure and safe financial instrument to trade for oil. If oil is subsequently sold or traded via the Yuan then there would no longer be a need for other Nation States to have the U.S. dollar as a reserve currency.

Also worth noting, Brazil, Russia, India, China and South Africa (BRICS) have been meeting annually since 2009 to discuss a new world order.

The BRICS have a lot going for them. These countries encompass over 25% of the world’s land coverage and 40% of the world’s population and hold a combined gross domestic product or GDP of 18.5 trillion dollars. https://www.cnbc.com/id/44006382.

In fact, the BRICS created two financial mechanisms in an effort to bolster its economic futures. The first is called the New Development Bank, which is to finance infrastructure and sustainable development projects and the other is called the Contingent Reserve Arrangement (CRA). The CRA was created to aid member States that face financially difficult times to avoid the stringent approval criteria and conditions that may be imposed upon them by the International Monetary Fund and the World Bank for similar assistance. https://justdmarkets.com/chinas-development-bank/. Those institutions are headquarters in China, which in my opinion is no coincidence.

Also worth noting, China signed foreign currency agreements with the United Kingdom, Hong Kong, Taiwan, Singapore, France, Korea, Germany and Australia, which allowed those States to clear trades using the Yuan. https://justdmarkets.com/chinas-development-bank/. Prior to those agreements, China did not allow the Yuan to be traded globally.

Last month Egypt began negotiations to join the BRICS. Coincidentally, https://english.mubasher.info/news/3156417/Egypt-starts-negotiations-to-join-BRICS-association-PM a huge natural gas field was discovered in Egypt in 2015 that is estimated to be worth approximately $100 billion in today’s prices. https://www.nytimes.com/2015/10/29/business/energy-environment/a-gas-discovery-in-egypt-threatens-to-upend-mideast-energy-diplomacy.html and https://oilprice.com/Latest-Energy-News/World-News/Eni-and-BP-Make-Significant-Gas-Discovery-in-Egypt.html. It should come as no surprise why Egypt is being courted by the BRICS; Egypt has the potential to negatively affect the U.S. economy by selling its natural gas in currencies other than the U.S. dollar. A devalued currency has no chance of competing with a reserve currency when it comes to the trading any goods or services on the world market.

The potential threat to the U.S. economy by China’s Yuan becoming the world’s reserve currency is very real. This threat seems to be ignored by its policy makers who are more concerned with satisfying their respective political bases as opposed to working together for the good of its citizenry. Based upon what you have just read do you think that Americans should be learning Chinese, probably not; but in the near future if Americans want to do business with China they better hope that China doesn’t have a Chinese only language policy!

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Allen Thomas