Personal Finance Topics / Macroeconomic Trends and Risks
No. of Recommendations: 6
The article is at the site of European Business Magazine. It looks at Iran's use of the yuan as the basis of what oil it allows through the Strait of Hormuz may be a more damaging weapon against the US than all its missiles.
https://europeanbusinessmagazine.com/business/iran...
Iran is considering allowing a limited number of oil tankers to pass through the Strait of Hormuz on the condition that the cargo is traded in Chinese yuan, a senior Iranian official told CNN. Yenisafak The official described the potential move as part of Tehran’s plan to manage the controlled reopening of the strategic waterway, which has been effectively closed since March 1 following US-Israeli attacks on Iran. Yenisafak
The financial implications deserve more attention than they have so far received.
The Architecture of American Financial Power
To understand why the yuan condition matters, it is necessary to understand what the petrodollar system actually is. Born from the Nixon shock of 1971 and formalised in 1974, the arrangement under which Saudi Arabia and the broader Gulf agreed to denominate all oil sales in US dollars created a self-reinforcing loop that has governed global finance ever since. Because oil — the world’s most traded commodity — must be purchased in dollars, every nation that imports energy must first acquire dollars. Every central bank holds dollar reserves for precisely this reason. The dollar’s status as the world’s primary reserve currency is not an abstract achievement; it flows directly and mechanically from oil.
Global oil is predominantly traded in US dollars, except for sanctioned Russian oil, which is priced in roubles or yuan. Yenisafak Iran’s proposal would extend that exception to the world’s single most critical maritime chokepoint.
As the reserve currency for international trade the US receives huge benefits. Because other countries need dollars, it effectively props up the value of the US dollar. Here's the question:
What would the costs to US business and consumers be if the dollar lost its reserve status?
No. of Recommendations: 9
What would the costs to US business and consumers be if the dollar lost its reserve status?
The effects would be real, but not cataclysmic. After all, the world reserve currency used to be the Pound and Britain still has an economy. And before that Spain, and they’re still around too.
Are there advantages? Sure; borrowing costs are lower for business, individuals, and government. It gives us an advantage that foreigners hold dollars, because they are often recycled back to the US in the form of investments - in business or in Treasuries which keeps demand up and lets the government run deficits to keep money in motion.
But I wouldn’t worry about it too much. First, what’s gonna happen is what’s gonna happen. (Small comfort, I know.) But at the moment the US has about 60% of the world currency market, and the next closest is something like 15%. That doesn’t mean the world can’t change - obviously it already has a couple of times, just that it doesn’t seem imminent.
No. of Recommendations: 0
So a slow decline over 50 - 100 years.
But we live in a much faster world now. I don't think it will take that long. What is your time frame?
No. of Recommendations: 10
So a slow decline over 50 - 100 years.
But we live in a much faster world now. I don't think it will take that long. What is your time frame?
I have no time frame. In fact I don’t even have a prediction. The US could continue to be the reserve currency for another 100 years, or it could end by 2030, there’s no way to know. It’s “the future” which only makes itself understood as it arrives.
There isn’t a formal “Board of Reserve Currency” or anything, it’s a determination made by the millions of transactions in the market by millions of individual actors, all looking to make their life easier (consonant with safety, trust, etc.)
I have wondered if that attribute could ever be “transferred” to a sovereign like China, given the opaqueness of their internal financial machinations - but then they are becoming a monster industrial powerhouse and it would make sense for some, at least, to begin trading directly in their currency rather than gyrate through currency exchange into dollars, then in yuan, or whatever the particular sequence might be for that actor.
Now I’m not so sure that the insularity of China and its command structure is such a big deal. After all, Spain was the reserve currency and they had a Monarch at the time, which could be just a capricious. And the US is whipsawing on issues of financial stability (tariffs, penalties, closing borders, penalizing foreign investment, etc) so we’re not exactly the paragon of rectitude one might want.
Spain lost its status in the 18th century due to fiscal mismanagement, inflation, and lack of trust which the rest of the world demonstrated by moving to the gold standard for a time. Then came England and the Industrial Revolution, and its industrial might so huge that it was easier to trade in Pound Sterling than gold; they lost the “reserve” title when World War II bankrupted them and the US became the predominant producer of finished goods as well as commodities. Everybody wanted to trade with US, Britain was left in the (literal) dust.
Surely that will happen to the US at some point, whether Trump can manage to damage the US economy and trust in just a couple years remains to be seen, whether China earns enough “trust” so investors are comfortable parking their financial assets in that currency likewise is unknown.
I have no timeline. I don’t even predict that it will be China next, although that seems a good bet. I just don’t know. Nobody does, really.
No. of Recommendations: 3
I would point out that if Iran lets too much oil flow through the Strait, they lose their bargaining position. That said, if the US dollar lose its primacy, it will be a trauma far more potent than Britain's slide because of our debt position.
Jeff
No. of Recommendations: 2
That said, if the US dollar lose its primacy, it will be a trauma far more potent than Britain's slide because of our debt position.
I'm skeptical it would be much of a problem. We owe most of the debt to ourselves. Countries without a reserve currency like say, Australia or Japan don't seem to have any problem borrowing.
