Thursday, May 22, 2014
This Story Could Affect You More Than Anything You'll Read Today
The most important and far reaching story out there today is naturally the one you're not hearing about. And it has the potential to affect you personally a great deal more than 90% of what's in the headlines.
Russian President Vladimir Putin has scored a major win.He has finally succeeded in making a large deal with China to supply the Chinese with natural gas and oil - in a non-dollar contract.
As part of the agreement, the Bank of China (BOC) just signed a non-dollar agreement with VTB, one of Russia’s largest commercial bank to allow VTB and BOC to pay each in their domestic currency, removing the need for energy trading to be conducted in US dollars and a big step towards undermining the dollar's status as the world's reserve currency, something that's been true since the post WWII Bretton-Woods Agreement.
Putin's deal with China was held up for a long time simply because of price haggling.Gazprom, Russia's nationally owned energy company is anticipating that its average export price on gas this year will be around $10.62 per million Btu. The Chinese will be getting it at a substantial discount, around $10 per million Btu. Since the gas China now imports from Myanmar and Central Asia costs the Chinese about $10.15 per million Btu,the deal makes sense for them. In fact, it makes so much sense for them that they're willing to invest an estimated $25 billion to finance infrastructure costs to take in the estimated 38 billion cubic meters per year the Chinese have contracted to import from Russia, 20% of Russia's total output.The pipelines involved are scheduled to be completed by 2018.
And they'll be dealing in rubles and renminbi, not dollars...which makes the deal sanctions-proof, gives Russia a badly needed dose of hard currency, and allows Putin to thumb his nose at any EU threats of finding other sources of energy as a result of the Situation in Ukraine. And when it goes through, it accomplishes something Putin has been working to accomplish for years, bypassing the U.S. dollar as the medium for energy trades.
How does this effect you? Let's look at what that last sentence really means.
Because the U.S. dollar is the medium in which energy trades are calculated, the price of these commodities is linked to the value of the dollar, and the oil producing countries in essence import our inflation...they simply raise their prices to cover it, which also affects the prices of other commodities they import, like foodstuffs and western manufactured goods. The secret behind our relationship with the Saudis and the Gulf Emirates is that for years, they have successfully fended off efforts by Russia, Venezuela and the Iranians to ditch this arrangement.
While it's not entirely ditched yet, this is a major breach, and a lot of other OPEC members and customers will probably gleefully walk through it, depending on the strength of their currency and their need to import energy.
Since the value of anything depends on demand, how much people want or need to own it, the potential loss of the dollar's status as the world's reserve currency weakens the dollar. As this trend continues, the inflation we've been importing will now start to come home to roost as foreign manufactured items like the cheap goods we've learned to love made in China are going to cost more. So will food, and interest rates.
Your paycheck and your retirement dollars will not stretch as far either, your savings and 401Ks will be negatively impacted and travel will be likely more expensive than it already is.
This was probably inevitable, given the ridiculous policy of 'quantitative easing' and the huge amount of the $18 trillion debt and climbing President Obama and his team have run up. There's a part of me that thinks this might have been deliberate on the Obama Regime's part, seeking to weaken our currency deliberately to pay back these funds in cheaper dollar. No nation in history has ever managed it, and the ones that have tried did damage to their economy and their standard of living it took decades to recover from,if they were able to recover at all. Ask the Argentinians some time about how well that worked out for them.
Finally, if more countries abandon the dollar as a reserve currency, the U.S. will have lost a huge weapon, one we used successfully on al-Qaeda during the Bush Administration. No longer will we be able to say to foreign countries that if they do business with terrorist groups or a country we wish to impose sanctions on that U.S. banks will be barred from doing business with them,honoring letters of credit or handing their transactions.
That will still mean something because of the size of the American market, but nowhere near as much as it does with the dollar as the world's reserve currency. And losing that strategic weapon could affect Americans in a negative way in the future as well.