Trump and the petrodollar

[sculptor]

Trump, it seems, wants a weaker(lower value) dollar
by raising rates, the fed seems to be moving in the opposite direction

Does Trump have the petrodollar in his toolkit?
alternately
If Trump can and will kill the petrodollar then the dollar should weaken. Can he do this? Will he do this?

..............................
If he does this
Picture a mad stampede to walmart with folks loading up on the last of the cheap imports?

 

[joepistole]

Trump, it seems, wants a weaker(lower value) dollar
by raising rates, the fed seems to be moving in the opposite direction

Indeed, Trump and the Fed are at odds. If Trump gets his huge multi-trillion dollar fiscal stimulus package, they will be even more at odds, and interest rates will soar. But at this point, Trump's legislative agenda appears to be dead on arrival.

Does Trump have the petrodollar in his toolkit?
alternately. If Trump can and will kill the petrodollar then the dollar should weaken. Can he do this? Will he do this?

Trump has limited monetary powers. His monetary power ends with the appointment of Fed governors.

That said, he can do things to cheapen the dollar, but none of them are good. He can begin a trade war with a major trading partner. He could cause a debt default. Next year he can appoint a new Federal Reserve chairman in an attempt to influence monetary policy. Will he do any of those things? God only knows. Trump is a wild and crazy kind of guy.

 

[exchemist]

Trump, it seems, wants a weaker(lower value) dollar
by raising rates, the fed seems to be moving in the opposite direction

Does Trump have the petrodollar in his toolkit?
alternately
If Trump can and will kill the petrodollar then the dollar should weaken. Can he do this? Will he do this?

..............................
If he does this
Picture a mad stampede to walmart with folks loading up on the last of the cheap imports?

I don't understand what you mean by "kill the petrodollar". Petrodollars are the dollars earned by petroleum-exporting nations, seeing as oil on the international oil market is priced in dollars. There is no distinct entity called the "petrodollar", surely? There are just dollars.

Personally, I don't see how any of this is in Trump's control, in any way at all. He can't influence the international oil market, nor can he decide by presidential diktat that international oil sales can't be priced in dollars any more.

 

[joepistole]

I don't understand what you mean by "kill the petrodollar". Petrodollars are the dollars earned by petroleum-exporting nations, seeing as oil on the international oil market is priced in dollars. There is no distinct entity called the "petrodollar", surely? There are just dollars.

Personally, I don't see how any of this is in Trump's control, in any way at all. He can't influence the international oil market, nor can he decide by presidential diktat that international oil sales can't be priced in dollars any more.

It's an antiquated term especially given oil is increasingly traded in varying currencies. But it's a popular term in American right wing circles. There is a belief in American right wing circles that the petrodollar is a sword of Damocles hanging over the American economy. The truth is there just isn't enough of them to threaten the US economy.

The US POTUS cannot dictate to others. But he can do things which will weaken the dollar but none of them are good for the US.

 

[exchemist]

It's an antiquated term especially given oil is increasingly traded in varying currencies. But it's a popular term in American right wing circles. There is a belief in American right wing circles that the petrodollar is a sword of Damocles hanging over the American economy. The truth is there just isn't enough of them to threaten the US economy.

The US POTUS cannot dictate to others. But he can do things which will weaken the dollar but none of them are good for the US.

Ah OK, that makes sense.

But how would petrodollars pose a threat anyway? Surely all they do is allow Saudis and others to invest in the US economy? Is that a bad thing? Why?

 

[joepistole]

Ah OK, that makes sense.

But how would petrodollars pose a threat anyway? Surely all they do is allow Saudis and others to invest in the US economy? Is that a bad thing? Why?

True, petrodollars do benefit the US economy. But American right-wingers fear that the petrodollar enslaves the US to oil producing states. They fear that if, for whatever reason, oil producers stop using US dollars it will massively devalue the US dollar and result in economic chaos and disorder. It wouldn't, but that's the fear.

The biggest threat to the US economy is the Republican Party. Playing political games with the full faith and credit of the US as they have done isn't good for anyone. That's the biggest threat to the US economy.

 

[iceaura]

Trump, it seems, wants a weaker(lower value) dollar
by raising rates, the fed seems to be moving in the opposite direction

Does Trump have the petrodollar in his toolkit?
alternately
If Trump can and will kill the petrodollar then the dollar should weaken. Can he do this? Will he do this?

We have no evidence that Trump has put any thought into the matter, or has any consistent policy one way or the other, or possesses any interest in developing such a policy.

 

[iceaura]

Personally, I don't see how any of this is in Trump's control, in any way at all. He can't influence the international oil market, nor can he decide by presidential diktat that international oil sales can't be priced in dollars any more.

There is a so-called "conspiracy theory" that a major motivation for removing Saddam from control over Iraq's oil fields was his undermining of the petrodollar and consequent threat to US economic power and stability.

The evidence for it is fairly persuasive, especially in the vacuum of alternative explanations.

But how would petrodollars pose a threat anyway? Surely all they do is allow Saudis and others to invest in the US economy?

The dominance of the dollar in the oil trade for many years effectively required oil importing countries to obtain large amounts of dollars. That has been a significant source of economic and other power for the US, and an advantage for many US based multinational corporations. That dominance is eroding, thank you W&Cheney, and the risks involved in transition are of course opportunities for others - such as Russia.

 

[sculptor]

a brief primer on the petrodollar:
The petrodollar system originated in the early 1970s in the wake of the Bretton Woods collapse.(end of us gold standard)

President Richard M. Nixon and his globalist sidekick, Secretary of State, Henry Kissinger, knew that their destruction of the international gold standard under the Bretton Woods arrangement would cause a decline in the artificial global demand for the U.S. dollar. Maintaining this "artificial dollar demand" was vital if the United States were to continue expanding its "welfare and warfare" spending.

In a series of meetings, the United States — represented by then U.S. Secretary of State Henry Kissinger — and the Saudi royal family made a powerful agreement. (Several authors have worked to compile data on the origins of the petrodollar system, some exhaustively, including Richard Duncan, William R. Clark, David E. Spiro, Charles Goyette and F. William Engdahl).

According to the agreement, the United States would offer military protection for Saudi Arabia’s oil fields. The U.S. also agreed to provide the Saudis with weapons, and perhaps most importantly, guaranteed protection from Israel.

The Saudi royal family knew a good deal when they saw one. They were more than happy to accept American weapons and a U.S. guarantee to restrain attacks from neighboring Israel.

Naturally, the Saudis wondered how much all of this U.S. military muscle was going to cost…

What exactly did the United States want in exchange for their weapons and military protection?

The Americans laid out their terms. They were simple and two-fold.

1) The Saudis must agree to price all of their oil sales in U.S. dollars only. (In other words, the Saudis were to refuse all other currencies except the U.S. dollar as payment for their oil exports.)

2) The Saudis would be open to investing their surplus oil proceeds in U.S. debt securities.
...
The Primary Benefits of the Petrodollar System
The petrodollar system has proven tremendously beneficial to the U.S. economy. In addition to creating a marketplace for affordable imported goods from countries who need U.S. dollars, there are more specific benefits.

In essence, America receives a double loan out of every global oil transaction.

First, oil consumers are required to purchase oil in U.S. dollars.

Second, the excess profits of the oil-producing nations are then placed into U.S. government debt securities held in Western banks.

The petrodollar system provides at least three immediate benefits to the United States.

• It increases global demand for U.S. dollars
• It increases global demand for U.S. debt securities
• It gives the United States the ability to buy oil with a currency it can print at will

for more see:
http://ftmdaily.com/preparing-for-the-collapse-of-the-petrodollar-part-2/

 

[exchemist]

a brief primer on the petrodollar:
The petrodollar system originated in the early 1970s in the wake of the Bretton Woods collapse.(end of us gold standard)
President Richard M. Nixon and his globalist sidekick, Secretary of State, Henry Kissinger, knew that their destruction of the international gold standard under the Bretton Woods arrangement would cause a decline in the artificial global demand for the U.S. dollar. Maintaining this "artificial dollar demand" was vital if the United States were to continue expanding its "welfare and warfare" spending.

In a series of meetings, the United States — represented by then U.S. Secretary of State Henry Kissinger — and the Saudi royal family made a powerful agreement. (Several authors have worked to compile data on the origins of the petrodollar system, some exhaustively, including Richard Duncan, William R. Clark, David E. Spiro, Charles Goyette and F. William Engdahl).

According to the agreement, the United States would offer military protection for Saudi Arabia’s oil fields. The U.S. also agreed to provide the Saudis with weapons, and perhaps most importantly, guaranteed protection from Israel.

The Saudi royal family knew a good deal when they saw one. They were more than happy to accept American weapons and a U.S. guarantee to restrain attacks from neighboring Israel.

Naturally, the Saudis wondered how much all of this U.S. military muscle was going to cost…

What exactly did the United States want in exchange for their weapons and military protection?

The Americans laid out their terms. They were simple and two-fold.

1) The Saudis must agree to price all of their oil sales in U.S. dollars only. (In other words, the Saudis were to refuse all other currencies except the U.S. dollar as payment for their oil exports.)

2) The Saudis would be open to investing their surplus oil proceeds in U.S. debt securities.
...

Do you have any other reference for the existence of this agreement? Does the agreement have a name? I cannot seem to find any independent references to it.

 

[exchemist]

There is a so-called "conspiracy theory" that a major motivation for removing Saddam from control over Iraq's oil fields was his undermining of the petrodollar and consequent threat to US economic power and stability.

The evidence for it is fairly persuasive, especially in the vacuum of alternative explanations.

The dominance of the dollar in the oil trade for many years effectively required oil importing countries to obtain large amounts of dollars. That has been a significant source of economic and other power for the US, and an advantage for many US based multinational corporations. That dominance is eroding, thank you W&Cheney, and the risks involved in transition are of course opportunities for others - such as Russia.

Thanks. So, according to your explanation,

1) there is, indeed, no mechanism by which Trump could "kill the petrodollar".

2) petrodollars are a source of strength for the US economy, rather than weakness.

In fact, it seems from what I have read that are a lot of reasons why the dollar is the principal reserve currency of the world. But I have also read that a lot of Americans are starting to worry that its pre-eminence could be under threat, which could affect the rate at which the US government can borrow money. I suppose the rise of China and the appearance of the Eurozone (if they ever stabilise it!) might create rival reserve currencies. (In fact I read that the Euro already is one, but has only about 20% of the size of reserve holdings that the dollar has.)

Maybe that is the concern behind what Sculptor is saying. But I still can't see how Trump can do much to alter the dynamics of that.

 

[exchemist]

I may have found a somewhat more credible source for some of this stuff, here: https://www.bloomberg.com/news/feat...behind-saudi-arabia-s-41-year-u-s-debt-secret

According to this article, which makes no mention of any agreement by the Saudis to use exclusively dollars to sell oil, there was a very sensitive agreement- now confirmed to have existed - for the Saudis to buy US Treasury bonds in exchange for the US guaranteeing to buy oil from them (in dollars of course) and providing military assistance. This was sensitive because of the support the USA was giving to Israel, the sworn enemy at that time of KSA and the GCC countries. The Saudis were especially concerned that money they lent the US did no appear to be recycled into warplanes for Israel, for example. (This makes perfect sense to me. I recall the sensitivity of purchases I had to make when I worked in the oil industry in the Gulf in the 80s. GCC rules were quite strict about not buying from countries that dealt with Israel - though of course there were provisions for exceptions.)

So my take on all this is that the US bought a lot of oil KSA with dollars, and this effectively led to the oil price being, de facto, a dollar price. But the real secret deal was the investment of Saudi oil wealth in the USA, given the hostilities in the Middle East.

 

[iceaura]

1) there is, indeed, no mechanism by which Trump could "kill the petrodollar".

There are several things he could do that would undermine to the the point of ruin the dominance of the dollar in the oil trade, thereby hollowing out the demand for dollars globally (recall that the US is not a dominant source of manufactured goods other than weaponry - that and possibly food would be the remaining demand for dollars, if nations don't need them for trade with each other).

The risk is he may do them by accident, or via Russian influence - Russia would benefit from the collapse of the petrodollar - and thus do greater harm than an actual policy would do.

) petrodollars are a source of strength for the US economy, rather than weakness.

That is not clear. They are a major pillar of support, true, but that seems unwise and increasingly high risk.

From some viewpoints, the petrodollar has corrupted the US economy, weakened it intrinsically in several ways - a kind of a resource curse corollary (https://en.wikipedia.org/wiki/Resource_curse).

 

[exchemist]

There are several things he could do that would undermine to the the point of ruin the dominance of the dollar in the oil trade, thereby hollowing out the demand for dollars globally (recall that the US is not a dominant source of manufactured goods other than weaponry - that and possibly food would be the remaining demand for dollars, if nations don't need them for trade with each other).

The risk is he may do them by accident, or via Russian influence - Russia would benefit from the collapse of the petrodollar - and thus do greater harm than an actual policy would do.

That is not clear. They are a major pillar of support, true, but that seems unwise and increasingly high risk.

From some viewpoints, the petrodollar has corrupted the US economy, weakened it intrinsically in several ways - a kind of a resource curse corollary (https://en.wikipedia.org/wiki/Resource_curse).

OK but I remain sceptical. What would he do that would make countries prefer to buy and sell oil in Euros, say, or Renminbi? And what about all the other commodities that are traded in dollars? Why would they want to change?

 

[sculptor]

Do you have any other reference for the existence of this agreement? Does the agreement have a name? I cannot seem to find any independent references to it.

Yes, dozens

Context: 1973
Yom Kippur war
Nixon asks congress for another 2.2 billion in military aid for Israel
Saudi Arabia's King Faisal responds with the "Arab oil embargo"

Nixon has 2 problems on his plate--------keep the artificial dollar strength after the fall of bretton woods, and keep the supply of oil steady.

So he sends Kissinger(dept. of state) and Simon(dept of treasury) over to work out a deal.
see:
"Saudi-U.S. Joint Commission on Economic Cooperation". Wherein excess oil revenues are invested in US treasuries.
.........................................................

What would he do that would make countries prefer to buy and sell oil in Euros, say, or Renminbi?

The deal worked out by state has Saudi, then most of opec agreeing to trade oil only in us dollars in exchange for our military protection(from Israel) of their oil fields.
Simple: cease the mutual defense agreements, and stop fueling Saudi Arabia's war machine.
If we break the "deal' from our end, would they then not then break the deal from their end?

If so, then the dollar falls--------the tricky part is how fast and how far?
.........................
as/re:

But I still can't see how Trump can do much to alter the dynamics of that.

These are not treaties ratified by congress, they are letters of agreement between state and treasury and a foreign government.
State and Treasury are under the executive. Trump is the current executive.
So, My question was: Can Trump negate decades old state and treasury dpts' letters of agreement?

 

[exchemist]

Yes, dozens

Context: 1973
Yom Kippur war
Nixon asks congress for another 2.2 billion in military aid for Israel
Saudi Arabia's King Faisal responds with the "Arab oil embargo"

Nixon has 2 problems on his plate--------keep the artificial dollar strength after the fall of bretton woods, and keep the supply of oil steady.

So he sends Kissinger(dept. of state) and Simon(dept of treasury) over to work out a deal.
see:
"Saudi-U.S. Joint Commission on Economic Cooperation". Wherein excess oil revenues are invested in US treasuries.
.........................................................

The deal worked out by state has Saudi, then most of opec agreeing to trade oil only in us dollars in exchange for our military protection(from Israel) of their oil fields.
Simple: cease the mutual defense agreements, and stop fueling Saudi Arabia's war machine.
If we break the "deal' from our end, would they then not then break the deal from their end?

If so, then the dollar falls--------the tricky part is how fast and how far?
.........................
as/re:

These are not treaties ratified by congress, they are letters of agreement between state and treasury and a foreign government.
State and Treasury are under the executive. Trump is the current executive.
So, My question was: Can Trump negate decades old state and treasury dpts' letters of agreement?

First, I am not yet wholly persuaded such an agreement exists. You have not provided more evidence of it.

My Bloomberg reference (in another post on this thread) is evidence that there was a Nixon-era secret agreement for the Saudis to buy US govt bonds (or otherwise invest in the USA) the dollars they got from selling oil to the US, in exchange for having the US as a customer and for military support. But that's a bit different from an agreement to price oil in dollars only. My reading of why Middle East oil is mostly priced in dollars is that it was a natural outcome of the dollar having been the reserve currency for so long anyway, and the importance of the US as a buyer at that time. But if you have real evidence for a currency deal then I'd be happy to accept it.

If Trump were to stop supporting KSA militarily, I suppose the Saudis might threaten to sell off some of their US bonds and investments. The US side of the bargain on oil sales seems to be broken anyway, now that the US produces so much shale oil. So maybe the Saudis no longer consider themselves bound by this understanding in any case - it was 40 years ago and both markets and sources of supply have diversified a lot since then.

I actually think the US ought to dump KSA and embrace Iran. It is KSA that has exported its horrible Wahhabi version of islam all over the word and given us all these suicidal terrorists, not Iran. I don't think it matters much what currency oil from KSA is priced in any more. There are so many sources of supply and the role of oil in the world economy in future will not be as dominant as it once was.

But why do you think Trump would change his policy on KSA? Hasn't he just been on a trip to reinforce it?

 

[iceaura]

But why do you think Trump would change his policy on KSA? Hasn't he just been on a trip to reinforce it?

It is possible that Trump has no actual policy in any of these matters.

 

[exchemist]

It is possible that Trump has no actual policy in any of these matters.

Oh definitely. But some of his people may have a policy. I expect Tillerson does, for instance. And "Mad Dog" Mattis. Obama was I think engaged on a gradual, and in my view intelligent, rehabilitation of Iran and a concomitant distancing from KSA. But that is on ice for now of course.

I don't myself think the sky would fall in for the dollar, if KSA starting offering barrels in Euros. For a start, the whole system is geared to the dollar and it would take years for any other currency to command a serious share of oil pricing. Secondly KSA is just one source these days. The dollar would still be the favoured currency for most countries I think, with the Euro and possibly the Renminbi taking a small share. But people would need to learn to trust both of these, as both have their exposures to domestic economic uncertainties. The US has its economic faults but it has huge economic mass and inertia and a very well established and stable rule of law and trading environment, which has to make its currency a reasonable choice to trade in.

You may be right that it would do the US economy some long-term good to feel the bracing draught of not being the world's only reserve currency.