Hey There Income Hunter,
The East vs. West battle is heating up.
I have said in the past that when the Saudi’s flip over to the East alliance, it is over for the dollar.
The reason why I feel that way is when the US defaulted on our promise to redeem dollars for gold, our financial system was on the verge of collapse.
It was Henry Kissinger who came to the rescue for the US by meeting with the Saudi’s and striking an incredible deal to back oil to the dollar.
Kissinger offered Saudis:
– US military protection for Saudi Arabia’s oil fields
– Provide them with weapons, plus guaranteed protection from neighboring Israel.
In return for:
– The Saudis would price all of their oil sales in U.S. dollars only.
– The Saudis would invest their surplus oil proceeds in U.S. debt securities.
This was a tactical move by the US and it worked in the short-term by giving the dollar a quasi-backing of oil.
However, the deal was only as good as the Saudi’s promise to only take dollars for oil. The freezing of Russia FX reserves has changed everything.
The world will now move briskly towards creating a new monetary system that will be great for the world and great for the US.
Today, I will lay out what that system will look like and the impact on the markets.
Oil – the Most Important Commodity in the World
The US jumped to stardom on the global stage in 1944. We were so dominant at the time because we held most of the world’s gold and we were a manufacturing machine.
We launched the dollar reserve currency system that was backed by gold and all other currencies were pegged to the dollar.
Even though the dollar was backed by gold, the world’s demand for dollars was to purchase oil.
You see, Oil IS the economy because just about everything manufactured demands oil in some shape or form.
This demand for dollars created some problems for the US including:
– Being forced to run massive trade deficits to supply dollars to the world.
– Which meant we had to offshore all the manufacturing and all the manufacturing jobs.
– We had to run massive deficits at the government level.
Being the reserve currency did ignite economic growth in the short term, but in the long run, printing currency for the world will bankrupt you.
As the US printed money to distribute around the world, that diluted the amount of gold that backed it so redemptions for gold skyrocketed and Nixon was forced to close the gold window in 1971.
That is when Henry Kissinger went to Saudi Arabia and struck the oil/dollar link for military backing. This became the “petrodollar” system.
The printing, however, only grew as our debt burden grew. Then, in 2008 when we had to print trillions more to bail out the banking system, the writing was on the wall for a dollar-only monetary system.
US Drops the Financial Nuclear Bomb on Russia
Now fast forward to Feb. 26 of this year when the US met with their allies (UK, Canada, Europe, and Japan) and agreed to freeze $300 billion of the Russian central bank reserves. This kept Russia from being able to defend the collapse of the Russian Ruble.
It was a shot across the bow to every global trading partner that, in effect, the US will no longer support a unilateral dollar based monetary system.
The message the US announced to the world on Feb-26 was that they are ready to transition to a new global monetary system.
The Saudi announcement yesterday to consider selling oil for Chinese Yuan will expedite this shift.
The New Monetary System
I believe the new system will include the US, China, Europe, UK and Japan. The solution will be:
A neutral reserve currency basket backed by gold.
– Gold could be revalued to much higher prices to increase the size of the market in order to satisfy the demand to purchase oil. For example, they could price 100 barrels for an oz, which would increase gold’s price above $7,500.
– Treasury bonds will be negatively impacted because there are still $12 trillion parked in FX reserves (mostly held in bonds) that will need to be liquidated with much of the proceeds put into gold to strengthen each country’s currency.
– Lastly, the new system will be incredible for the US because we will be able to reindustrialize our economy and finally be able to allow the dollar to devalue, which will make us much more competitive around the world.
Bring It Home
There is a pot of gold at the end of the rainbow! The new monetary system will give the US a new start, although we will have to go through a very rough patch during transition.
Hopefully, this helps you see why we are faced with this East vs. West battle today. Deglobalization has pitted countries against each other, so scrambling for power will be rampant until we get the final rules of the new system in place.
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Live and Trade With Passion My Friend,
Griff