The past week was packed with news of all sorts. We had news out of the Ukraine where a couple of cease fires ended before they started. The British scrambled fighter jets against Russian aircraft. ISIL marched through Iraq slaughtering 1,000’s including the judge who sentenced Saddam Hussein to death. There was a Fed meeting along with “end the Fed” riots in Germany of all places. Shanghai announced that their physical gold exchange would go live in the 4th quarter (do you wonder at all about the timing of this?) and the “missing collateral” situation for base metals has begun to spread. Lots and lots of big news but one “little” piece of news caught my attention more than anything else.
TASS announced on Friday that Russian foreign minister Sergei Lavrov would meet with Saud al Faisel, the Saudi’s foreign minister. It was reported that the two would speak about the situation in Syria, Iraq and also “energy.” Why did this piece of news stick out at me like a sore thumb? For several reasons, first, Russia and Saudi Arabia have had opposing views on Syria. Saudi Arabia would like to see the Assad government fall so that a pipeline could be constructed and the Russians if you recall supported Mr. Assad back in the Fall when President Obama was about to unilaterally bomb them. I believe that Russia and Saudi Arabia are also on separate sides when it comes to what is happening in Iraq. Mr. Putin has publicly pledged support of Iraq’s leader Mr. Maliki while ISIS is Sunnis with the support of the Saudis. This part we know about, the talks on “energy” in my opinion are the most interesting part and I’ll explain why.
I have no information whatsoever to prove what I am about to write, it is strictly my opinion but I think that it makes sense. We do know that China and Saudi Arabia have been busy doing energy deals. We also know this of China and Russia together. As Russia and Saudi Arabia have “differing views,” it would not surprise me if China was the one who set up this “date” between the two “to make nice” with each other.
China knows that Saudi Arabia’s stance of only accepting dollars for oil is THE ONLY thing left holding up the dollar. If you look at what China has done and of course what Russia is doing, they are preparing for (actively promoting in the case of Russia) a “de” dollarized world. I believe that China knows that the dollar will lose reserve status one way or another, with or without Saudi Arabia being the one who pulls the plug. I think that the Chinese want this to happen cleanly and without bickering between two of their partners, Russia and the Saudis. It is important to understand the Eastern mentality here. Getting the job done is most important; however, how it looks publicly is also important. If the Russians and Saudis can somehow bend their views and come to agreement (or just agree to disagree because they were told to) then the stage is almost 100% set.
I have said many times that when Saudi Arabia announces that they will accept currencies (or gold?) other than dollars, the Western financial system will probably fall within a two week time frame. If Saudi Arabia were to announce that they would no longer accept any dollars from the U.S. or anyone else, this time frame tightens up to “overnight” in my opinion.
If you look at this from a distance, China has done everything they needed to do to make ready for the dollar being abandoned. They became the largest creditor to the U.S., our “banker” in other words. They have built out infrastructure, plant and equipment and done so “on credit” in many cases. They have scoured the globe and made deals where they have tied up the future supply of many commodities and done so by promising to pay dollars in many cases. This way they can “spend” some of their hoard and get something real in return. They have the ability to make our interest rates rise by selling their treasuries and it appears that they have already imported much of our exported gold. Yes, they have had talks and done supply deals with Saudi Arabia but there is one thing missing.
The missing “player” to the team is Saudi Arabia. Yes Saudi Arabia trades with China but they are still as of now on “America’s team.” If I had to guess, Mr. Lavrov is probably pledging Russian military “protection” if the Saudis changed teams. In my opinion the Saudis already know exactly what Mr. Lavrov will (or has already) propose because it is what the Chinese desire. The Chinese need Saudi Arabia for their energy supply. Yes, but more importantly they need them to torpedo the dollar. “Publicly” if the Saudis make an announcement of accepting other currencies then the Chinese cannot be blamed for blowing up the West’s financial system. In fact, the Chinese can say, “Hey, we took a beating on our treasuries, we are the ones who got stiffed!” Publicly, the Saudis can say something like “we already have too many dollars, we wish to diversify.” In this manner, it will look to the rest of the world as logical. Do you see what I am saying here? The Chinese know the end game but they do not want to arrive there “ugly.” They are dignified people and appearance is very important to them. Don’t get me wrong, they are fierce business people willing to fight it out but the appearance of “how” they do business is very important to them.
Again, as I said above, this is my opinion. I have no fly on the wall or inside information at all but this does make sense to me now that a top level meeting between Russia and Saudi Arabia has occurred. It is my opinion that on any given day the Saudis will announce that they are “changing teams.” I would suspect that they will do this in a very dignified manner just as Mr. Putin has handled the Russian foreign affairs. I don’t think that there is any chance that the Saudis will initially “shun” or refuse dollars. They won’t need to; they will wait to see what happens. “What happens” as in how badly the dollar falls from this news. They may only need to wait a very short time before others begin to refuse the dollar, in this manner they can simply exit the dollar with the rest of the crowd…rather than being the ones screaming fire in an over populated dollar crowd.
I continue to lap up the remarkable amount of work you produce, free of charge and I appreciate it. God bless you may man.
Quick question: if the Chinese have secured many deals with dollars as the promised pmt, and subsequently the de-dollarization goes full tilt, will that receiving entity not ‘be screwed’ by having to accept payment in a then-known dead currency, and be “retaliatorily (my made-up word) upset” by it?
(I cannot afford too much gold, but I could certainly afford silver at current basement prices. Does MF cater to smaller buyers like myself?)
Thanks Bill! The MFr blog has now replaced ZH as my first required reading of the day…..
Thank you Ric. Yes, this would mean that China would be paying in a zeroed out currency which would mean new negotiations, who would have the advantage at the table under this circumstance? We will handle any size order that you have and be glad to do the business. Call us at 800-822-8080 and ask for one of the brokers.
thats a very solid thesis.considering that the saudis’ and the u.s. have been joined at the hip for many decades,there main concern,(as you say) like the chinese is,how do you “break-up” the relationship without a fight by the one who will get hurt the most. and maybe the timing of the break-off will be when the shanghai gold exchange comes online in the 4th Q. i can see your thesis being how it will go down. no wonder the pm gurus are all saying that pm’s will go down again,and by the end of the summer they will do the moon shot. thanks for a wonderful piece you wrote. chris
thank you Chris. The Shanghai exchange since it will be physical will take the pricing mechanism up and away from the COMEX and LBMA…part of the plan as I see it.
Why couldn’t the Russians just coerce Assad into letting the pipeline go through for the Saudis? He could keep his kingdom, have all of the international scrutiny lifted from him, and the ‘rebels’ he are fighting would fall apart with no more money flowing in from the Saudis/Americans? Surely they (Russia/China/Saudi) could find something else to sweeten the pot too, or is the Sunni/Shiite conflict too much to overcome in this manner? New to the site, but like what I am seeing so far! Thanks!
welcome and hope you come back. The Russian do not want the pipeline because this gas will compete with theirs and is cheaper.
Very good article, but the Saudi’s know switching one unbacked fiat paper for anthor also carries serious risk! I’m going to throw a wild card out here. A more plausable fracture point is the lack of (Public) confidence on where’s my Germany, Saudi, etc. sovereign GOLD? Does England really hold Saudi’s Gold? To keep the big players & especially the Saudi’s not looking like the bad guys all they have to do publically is say “where’s my Gold” OH, “You don’t have it!” “We’re now going to conduct/transact “Gold for OIL until we get back what we legally own”. This would be the beginning of the end of most fiat paper… Just thinking out loud.
This is the most plausible, connect-the-dots presentation of precisely how the dollar may lose its reserve currency status that I’ve read. I agree the change is coming…this may well be the road map for how it will happen and perhaps even when.
Your analysis offers a possible “bloodless,” non-confrontational way for the world to transition away from the USD as the reserve currency. Almost a best-case playbook for those on the other side of the issue.
So frustrating that the US’s monetary and foreign policy have set us up for this dollar crash and the re-importation of (hyer)inflation.
No rational free-market thinker could object to the steps being taken by Russia, China, Iran, Saudi Arabia or other world economies in order to protect their economic best interests.
I would love to hear your thoughts on what life in the US may look like in the weeks and months after the USD reserve status is lost. Can you see a best case scenario with a gradual readjustment to the new normal, or are we looking at true chaos and economic collapse?
Thank you Ken. Hopefully it does go this route and blood is not shed. As for life in the States, sad to say I cannot see any scenario where chaos and violence is not a part of it because of “who we have become” as a nation. Truly sad.
My concerns as well. Think about Southern California, specifically LA, yikes. 20 million people in a frying pan desert. The only thing they really “produce” is TV and movies, and maybe financial services. They support their consumptive lifestyles by using the reserve status of the dollar to buy things manufactured overseas. The only way I see that place maintaining any order is if the military sends in truckloads of food. Pretty scary stuff, you only need to follow the logical dots to envision what will happen. I have a friend there who I’m trying to convince to get out, he suspects something is up but is in disbelief / denial that it could get that bad. They have plans to buy a nice house in Palos Verdes in a few years… Well if he can get up here he will have a place to stay if needed.
Maybe I’m wrong though and somehow LA will manage to pull through somehow, but I can’t see how. I think TBTB elites know this and are terrified of it, which is one reason they have been stalling for so long and dishoarding all the gold, as they have no other option, or else face immediate social collapse in the US.
LA and Hollywood is propped up by Israel based money… and Silicon valley has a lot of (manufacturing) fingers in China’s pie…
Very logical reasoning. It’s so easy to see to anybody that has been paying attention for the last several years. The world is changing and it is only to the betterment of all if it is done without any more shooting wars. In my opinion if our agency’s (CIA, NSA, FBI, HLS, IRS, Executive, Legislative, Judicial and on and on) that are suppose to protect us had been doing their jobs we would not be in this situation now. When I was a small boy I heard from an elected judge on how the system could be saved and he said it was by NOT ever voting for an incumbent.
my first thought was that he was an “appointed” judge but then re read this. A wise man.
Deep thinker you are, Bill. Maybe you’re right. Occam’s razor is always a good shot.
Thank you Andrew, maybe not an exact roadmap but I’m guessing close to it.
Bill your logic is impeccable, your theory sound.
Jim Willie has been predicting China as diplomatic peacemaker between Russia and the Middle East for the past two years. I believe time will prove both your theories correct as the Saudi’s kick out the final leg propping up the petro dollar and USDollar hegemony.
Your statement that China will determine when the Yuan becomes the next world reserve currency is spot on. As the world’s largest debtor nation, the US no longer controls it financial destiny. If China and Russia dump the USDollar, or sell all shares of stocks in US companies, or dump all USTreasuries held as reserves in their respective central banks, the sun will almost immediately set on the Anglo American Empire, and the US will become an economic pariah along with all of the US Banks which have been victimizing the world since 1971 when the US abandoned Bretton Woods.
Thanks for you insights into all things financial. Your work is greatly appreciated.