Mr. X Interviews
After the gold peg to the dollar was abandoned and the petrodollar system adopted, the US was expected to keep oil prices stable by managing their inflation with interest rates, which is partly what inspired Volcker to raise rates so dramatically—keep the dollar as good as gold for oil. But eventually deficits left the US unable to manage oil inflation with interest rates.
The baby boomers and the entitlements that follow from them aging and retiring are going to be a major driver of inflation. Between the social security payments and growing burden on the healthcare system, the US could expect to pay up to $100T they don’t have—forcing massive deficit spending (printing). Even worse, much of that $100T is in health services the US can’t print, meaning that value can increase considerably in dollar terms.
The inflating dollar and likely strong future inflation given the demographic changes in the US has moved countries toward de-dollarizing. The concerns motivating this move are largely over the oil inflation that follows from US money printing and QE. QE isn’t necessarily inflationary in the US, but that inflation is usually exported to the global oil market (so long as oil is priced in dollars).
China wants to use gold to create a floating exchange with CNY to encourage energy exporters to hold it as a reserve and sell oil (oil futures) in CNY. This would allow China to progressively decrease its reserve holdings and print for critical imports. Lowering its FX reserves could also lead to a balance of payments issue with the US as demand for dollars (USTs) from China dies. This would leave the US struggling to support its deficit spending while also giving China the ability to print money for oil, a privilege only the US currently has.
The United States’ biggest export over the past 15 years by far has been USD and USTs. Most of that is in the form of debt and has gone to fund entitlements and defense spending.
With giant countries de-dollarizing and essentially shorting the USD, they are either going to cover their shorts much lower after a the dollar is massively devalued, or the system will continue to squeeze USD higher until these giants are forced to implement a new system that will allow them to cover their shorts (i.e. a new global currency standard with something other than the dollar as the primary reserve currency).
From within the United States’ own military, high ranking officials have eyed the writing on the wall and suggested the government take steps to redirect military funds to more productive uses domestically. In other words, buying goods from China to fund the military to defend against China is not a sustainable practice and we need to focus on remaining economically competitive. A huge part of regaining competitiveness is brining back the US’s manufacturing base it has slowly arbitraged away through the trade imbalances perpetrated by the petrodollar system.
The US exports USDs to the world to support the petrodollar system and then the world lends those USDs back to the US by buying USTs. In other words, we sell UDSs, The US can either force the rest of the world to continue buying USTs through its military might or it can rescind its deal to offshore jobs and its manufacturing base in exchange for those countries to fund its deficit spending by devaluing the USD and letting the U.S. regain a competitive edge in the world market. Devaluing the USD has historically been avoided to keep oil prices reasonable, evidenced by Volcker’s room to nearly kill the US economy with untenable interest rates to reign in USD inflation. This signaled the US was willing to do whatever it needed to to protect the value of the USD and its role in oil pricing, but the strength of the dollar is preventing the US from ever balancing its trade deficits.our jobs, and factories to other countries who lend us money to buy more of their goods.