Dollar Are Getting Larger
30, 2017 "Information
- Many readers are familiar with the original
petrodollar deal the U.S made with Saudi Arabia.
It was set
up by Henry Kissinger and Saudi princes in 1974 to
prop up the U.S. dollar. At the time, confidence in
the dollar was on shaky ground because President
Nixon had ended gold convertibility of dollars in
Arabia was receiving dollars for their oil
shipments, but they could no longer convert the
dollars to gold at a guaranteed price directly with
the U.S. Treasury. The Saudis were secretly dumping
dollars and buying gold on the London market. This
was putting pressure on the bullion banks receiving
in the dollar began to crack. Henry Kissinger and
Treasury Secretary William Simon worked out a plan.
If the Saudis would price oil in dollars, U.S. banks
would hold the dollar deposits for the Saudis.
dollars would be ďrecycledĒ to developing economy
borrowers, who in turn would buy manufactured goods
from the U.S. and Europe. This would help the global
economy and help the U.S. maintain price stability.
The Saudis would get more customers and a stable
dollar, and the U.S. would force the world to accept
dollars because everyone would need the dollars to
ďdealĒ was a not so subtle threat to invade Saudi
Arabia and take the oil by force. I personally
discussed these invasion plans in the White House
with Kissingerís deputy, Helmut Sonnenfeldt, at the
time. The petrodollar plan worked brilliantly and
the invasion never happened.
years later, the wheels are coming off. The world is
losing confidence in the dollar again. China just
announced that any oil-exporter that accepts yuan
for oil can convert the oil to gold on the Shanghai
Gold Exchange and hedge the hard currency value of
the gold on the Shanghai Futures Exchange.
has several parts, which together spell dollar doom.
The first part is that China will buy oil from
Russia and Iran in exchange for yuan.
The yuan is
not a major reserve currency, so itís not an
especially attractive asset for Russia or Iran to
hold. China solves that problem by offering to
convert yuan into gold on a spot basis on the
Shanghai Gold Exchange.
straight-through processing of oil-to-yuan-to-gold
eliminates the role of the dollar.
the first country to agree to accept yuan. The rest
of the BRICS nations (Brazil, India and South
Africa) endorsed Chinaís plan at the BRICS summit in
China earlier this month.
Venezuela has also now signed on to the plan. Russia
is #2 and Venezuela is #7 on the list of the ten
largest oil exporters in the world. Others will
follow quickly. What can we take away from this?
the beginning of the end of the petrodollar system
that Henry Kissinger worked out with Saudi Arabia in
1974, after Nixon abandoned gold.
leading reserve currencies do die ó but not
necessarily overnight. The process can persist over
example, the U.S. dollar replaced the UK pound
sterling as the leading reserve currency in the 20th
century. That process was completed at the Bretton
Woods conference in 1944, but it began thirty years
earlier in 1914 at the outbreak of World War I.
gold began to flow from the UK to New York to pay
for badly needed war materials and agricultural
The UK also
took massive loans from New York bankers organized
by Jack Morgan, head of the Morgan bank at the time.
The 1920s and 1930s witnessed a long, slow decline
in sterling as it devalued against gold in 1931, and
devalued again against the dollar in 1936.
is losing its leading reserve currency status now,
but thereís no single announcement or crucial event,
just a long, slow process of marginalization. I
mentioned that Russia and Venezuela are now pricing
oil in yuan instead of dollars. But Russia has taken
its ďde-dollarizationĒ plans one step further.
now banned dollar payments at its seaports. Although
these seaport facilities are mostly state-owned,
many payments, like those for fuel and tariffs, were
still conducted in dollars. Not anymore.
just one of many stories from around the world
showing how the dollar is being pushed out of
international trade and payments to be replaced by
yuan, rubles, euros or gold in this case.
gold is ultimately heading to $10,000 an ounce, or
often ask me, ďHow can you say gold prices will rise
to $10,000 without knowing developments in the world
economy, or even what actions will be taken by the
made up. I donít throw it out there to get
headlines, et cetera.
implied non-deflationary price of gold. Everyone
says you canít have a gold standard, because thereís
not enough gold. Thereís always enough gold, you
just have to get the price right.
saying that we will have a gold standard. Iím saying
if you have anything like a gold standard, it will
be critical to get the price right.
analytical question is, you can have a gold standard
if you get the price right; what is the
non-deflationary price? What price would gold have
to be in order to support global trade and commerce,
and bank balance sheets, without reducing the money
is, $10,000 an ounce.
I use a 40%
backing of the M1 money supply. Some people argue
for 100% backing. Historically, itís been as low as
20%, so 40% is my number. If you take the global M1
of the major economies, times 40%, and divide that
by the amount of official gold in the world, the
answer is approximately $10,000 an ounce.
mystery here. Itís not a made-up number. The math is
eighth grade math, itís not calculus.
where I get the $10,000 figure. It is also worth
noting that you donít have to have a gold standard,
but if you do, this will be the price.
impending question is, are we going to have a gold
function of collapse of confidence in central bank
money, which is already being seen. Itís happened
three times before, in 1914, 1939 and 1971. Let us
not forget that in 1977, the United States issued
treasury bonds denominated in Swiss francs, because
no other country wanted dollars.
States treasury then borrowed in Swiss francs,
because people didnít want dollars, at least at an
interest rate that the treasury was willing to pay.
bad things were, and this type of crisis happens
every 30 or 40 years. Again, we can look to history
and see what happened in 1998. Wall Street bailed
out a hedge fund to save the world. What happened in
2008? The central banks bailed out Wall Street to
save the world.
going to happen in 2018?
know for sure.
eventually a tipping point will be reached where the
dollar collapse suddenly accelerates as happened to
sterling in 1931. Investors should acquire gold and
other hard assets before that happens.
James G. Rickards is the editor of
the latest newsletter from Agora Financial. He is an
American lawyer, economist, and investment banker
with 35 years of experience working in capital
markets on Wall Street.
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