Dear Jim and Family,
I wanted to comment on the alleged threat of the Saudis to decouple the US Dollar from Oil sales. They’ve been saying that for a decade. The Iraqis promised to do it, one of the primary reasons for the invasion. The Iranians did it, but nobody cares because they’re an oil importing nation so they don’t actually matter much. The Venezuelans have been trying to get the rest of OPEC to do it since we nearly got Chavez ousted in a coup backed by the US. Pity that failed, but there will be a next time for him. With 16% annual inflation and 18% unemployment, talk is VERY cheap in Iran. Money is measured in Oil, and with the US Dollar as the reserve currency for Oil, we are in an unprecedented position.
This currency change threat has been going around for years, more and more often since 2006 when we were close to peak oil production. It is nearly inevitable except for one important fact: all the OPEC nations are loaded in US Dollars right now, and the USA is a stable country they like to invest in, both in Bonds and in real estate, the commercial variety in particular. Our stock market is where most of the Oil Sheiks put their investments so they really can’t afford to dump dollars without taking a savage hit to their fortunes. While that may seem bearable for ideologues, the fact that their fortunes stave off violent revolution and pay their secret police and informants means they literally can’t afford to dump the dollar. It would mean their lives would be forfeit in the resulting coups and revolutions.
Things are slightly less dire in China, where most of the nation’s wealth is in US bonds. Dumping the dollar there has been requested since 2006 there, as well, but they don’t dare for fear of abruptly ending the economic prosperity that’s lifting the standard of living there for the first time in 50 years. They now have a middle class. Revolution is started by the Middle Class. They really can’t afford a civil war in a nation of 1.3 billion people and counting. They can’t dump the dollar.
And the Japanese, the other big holder of Dollars? We feed Japan with our rice, our Kobe beef (a special breed of cattle raised here in California and shipped across the ocean), and they buy our bonds because the national bank system of Japan is less than effective. Japan is also occupied by US bases since Japan is unable, legally, to more than defend itself within its own borders. Threats by North Korea means we, as their allies, are their defense abroad from a real and determined foe. A hundred million Japanese can’t afford to dump the Dollar.
This means the rumor is probably just that: yet another rumor. Markets move on rumors, but they don’t stay moved for long. Expect renewed stability rather than actual dollar collapse. Our current Post-Oil transition is [occurring in]slow motion. It will likely continue that way for the foreseeable future too. Sincerely, – InyoKern