How China quietly amassed the world's biggest oil hoard, built a replacement for the petrodollar, and used the Hormuz crisis to usher in the multipolar world.
this is an essay about why nations should never use their currency as a weapon, as the USA has since Brenton Woods, as it establishes counter-trends which are hard to predict. In the 1970's, Saudi had a resource that attracted reserve dollars; since 1990, China has a resource that has attracted reserve dollars. The only thing those nations could buy with that shitty paper was Treasuries, which only encourage profligate spending in swamp D.C. Anyone buying cheap oil with yuan is natural. The oil selling nation needs yuan to buy manufactured goods from China.
The petrodollar only works when America has something to sell. Back in the 1970's, America made stuff. Now? Only so many Teslas to sell. Weapon systems? Perhaps.
This all leads me back to a foundational reserve asset that America may lead the way if it can get its regulatory framework corrected - cheap energy, unconstrained by daily pumping of oil or gas. Uranium for modular nuclear reactors that get refueled every 18 months to 10 years. Such long-ish timeframes provide natural stability far better than an SPR.
As for "fascinating rabbit hole. I might write a whole essay on it one day." - perhaps a whole book would be appropriate. An Austrian perspective of what happens when you try to weaponize a fiat currency to secure dominance in a real reserve asset. It's going to generate unintended (bad) consequences, guaranteed.
That's called the Triffin Dilemna. A country issuing a global reserve currency need to run a trade deficit to provide enough money to the rest of the world. At the cost of eroding long term confidence in its currency.
That might also explain why China is not in such a hurry to crash the Western economy and have to replace the dollar with its yuan...
Thanks, Tris. I think you're onto something with the last part. China doesn't really want the yuan doing the dollar's job (since taking the reserve role means inheriting exactly the dilemma you describe). Of course, then there's the capital controls. With those still in place, the yuan couldn't take that role even if the CCP wanted it to. And I don't see them making the trade of giving up control of their currency and their banking system in exchange for reserve status. They seem perfectly happy with the yuan as a transaction currency instead... especially if it even partly replaces the petrodollar.
I already wrote, but wanted to add that I almost always just write my comments spontaneously on finishing the articles. Ive always been interested in comments by folks who have similar interests and backgrounds enabling them to take pleasure in those substack posting I also appreciate, most of which are fairly esoteric. But generally I barely get the original reading done, because it's important to me to continue to expand my understanding, and then blast on to the next project. Recently I've started checking out comments more often and, as just now, I learn even more or am reassured that we're similarly stimulated. Makes sense, of course. I'm thankful for Lau's work in analyzing relavant material and for the community that responds with meaningful comments.
Thanks, Jay. I couldn't agree more about the comments. That's actually why I started featuring reader comments in my Monday pieces (see below). Most of my subscribers read by email only and never open the comment section, so they'd otherwise miss all of it.
Lau's analysis is so clear and comprehensive and, for me, often quite original, that I'm amazed and appreciative -- here about the bigger picture China strategy to replace the petrodollar and how the US/Israel onslaught against IRAN played perfectly into that and what the stress test proved. I wish I weren't so busy with lots of other projects. Tomorrow, for sure, I'll finish the earlier article about SNAFU re Uranium. Recommend the same to any of you who haven't followed up yet as well.
I’m new to this but I have a (maybe naive) question: How will the impact of a yuan based oil trade manifest in terms of the dollar and the US deficit? I ask because having read this article it feels as if this could be much worse than I had thought
Great question, Jon (and not naive at all). The more oil trade moves outside the dollar, the less structural demand there is for dollars and U.S. Treasuries. That doesn't mean an overnight collapse, but it does make financing America's deficits more expensive and weakens one of Washington's biggest geopolitical advantages. It's one of the reasons I think this story matters so much. And that's before you even add the Japan factor.
That’s really helpful, thanks. It does suggest to me that China’s current moves have a longer term aim than creating a multipolar world - maybe weakening America’s economy long term? I wonder where the tipping point is in terms of yuan oil payments and the weakening of the follar?
Thanks for reading, litoralis, and welcome aboard! As for uranium, you may be referring to the uranium report, which is for paid subscribers. But I've also written plenty on uranium that's free for everyone. Here's a good place to start:
Thanks, dr. b! I'm glad you enjoyed it. As for your question, mostly public breadcrumbs, honestly. I've been following things like the petrodollar, China's de-dollarization efforts, and gold flowing from West to East for years now. The pieces are all out there in the open. It's just that few people seem to bother putting them together.
Nicely explained... I admire China's engineering approach, stress test the system before you announce the product. Very much the opposite of the U.S. approach, launch the marketing hype and hope the product floats later. Can't help but wonder what's next?
Thanks, Barlow! As for what's next, you might want to keep an eye on two things: 1) whether China's oil imports ever return to their old normal, and 2) whether any Gulf producer starts openly pricing crude in yuan (instead of quietly settling in it).
I think you've missed one piece of the puzzle Lau and all the 8 comments I've read so far. I think one or two (Yeng & Tris) have questioned this with asking about the US (wall street & the eLites) and how it's used it's control of the World Currency.
They are right, but the answer isn't what most people think, President Trump (I like to call him AGENT ORANGE, due to the fact how he exposes everything, especially in the dc, wall & k Street, magic media, academentia, etc etc Swamps).
What President Trump is doing (and his backers/group) is destroying the real enemy, the global eLites, run by the city of london and now with wall street (since WWll). I'd even go as far to say that Xi, Putin, Modi and Trump have been working together to do just that. All have in the last 500 years or so been manipulated and abused, by this global Elite group(s) in some way, to take control of, or influence each of these 4 countries 9and others), through the control of their resources, people and ideology.
This has been going on for thousands of years, but the Venetians seemed to have taken it to another level and then worked with the Dutch, which in turn worked with the British, who once again took it to a whole new level and finally joined with the US eLites.
Everything President Trump has done and is trying to do, is destroy this old world system and bring to the forefront, Independent Nations that want the best for their Citizens, through; legitimate, fair and equal respect, for each nations goals and aspirations.
What if Trump's attacks on Iran is actually an attack on this Chinese attack on the petrodollar regime?
What if the Hormuz blockade is not a bug, but a feature in terms of blocking not only the Iran-to-China trade, but also a signal to Saudi and other gulf countries to not strsy from the petrodollar regime?
At some point Trump actually seemed almost disappointed that $200 oil didn't happen... and there was also his comment on MBS needing to "kiss his ass"... was this to be read as "and not kiss Xi's ass"?
So, ultimately, with a year and half of oil in reserve, the question is whether China can remaim in business longer than the US can afford the Iranians to keep Hormuz closed…
That's very interesting. Especially because it contradicts (or somehow complements ?) the thesis I think I read recently around here. But I can't find it anymore.
The idea was for the US to take advantage of the fact that China has two monetary systems, one domestic and one international, that can only diverge to some extend. But, having expanded the latter too much in favor of Iran and Russia and created billions of petro-yuan, zt one point, China central bank would be forced to step in for both financial and strategic reasons. This would create an imbalance with the domestic system that would be fatal to its economy. It is just a matter of letting the wars in the Gulf and in Ukraine going on as long as needed.
This was quite convincing too. If, of course, we agree that the US do have a master plan (and Trump is not just acting on impulses like the MSM keep saying…)
Maybe this will ring a bell for someone?
Nevertheless, with millions of barrels in reserve, whatever the plan, if any, this might indeed make it possible to thwart it during a long time...
If one or both chinese currencies were backed by gold (even partially) would it be necessary to align them closely?
Didnt Bessant years ago as a hedge fund guy try to sink the hong kong dollar using some sort of financial shinanigans that required a hefty chinese response at the time?
Honestly, I don't know... I just remember it made some sense the way it was explained.
But I reckon both protagonist try to stress their adversary's monetary and economic system to the point it breaks. Both have their strengths and weaknesses. One of them may play better than the other.
But for now, even though the consequences of the closure of the Strait of Hormuz could be tragic for Europe and Asia, the U.S. economy is doing quite well...
this is an essay about why nations should never use their currency as a weapon, as the USA has since Brenton Woods, as it establishes counter-trends which are hard to predict. In the 1970's, Saudi had a resource that attracted reserve dollars; since 1990, China has a resource that has attracted reserve dollars. The only thing those nations could buy with that shitty paper was Treasuries, which only encourage profligate spending in swamp D.C. Anyone buying cheap oil with yuan is natural. The oil selling nation needs yuan to buy manufactured goods from China.
The petrodollar only works when America has something to sell. Back in the 1970's, America made stuff. Now? Only so many Teslas to sell. Weapon systems? Perhaps.
This all leads me back to a foundational reserve asset that America may lead the way if it can get its regulatory framework corrected - cheap energy, unconstrained by daily pumping of oil or gas. Uranium for modular nuclear reactors that get refueled every 18 months to 10 years. Such long-ish timeframes provide natural stability far better than an SPR.
As for "fascinating rabbit hole. I might write a whole essay on it one day." - perhaps a whole book would be appropriate. An Austrian perspective of what happens when you try to weaponize a fiat currency to secure dominance in a real reserve asset. It's going to generate unintended (bad) consequences, guaranteed.
That's called the Triffin Dilemna. A country issuing a global reserve currency need to run a trade deficit to provide enough money to the rest of the world. At the cost of eroding long term confidence in its currency.
That might also explain why China is not in such a hurry to crash the Western economy and have to replace the dollar with its yuan...
Thanks, Tris. I think you're onto something with the last part. China doesn't really want the yuan doing the dollar's job (since taking the reserve role means inheriting exactly the dilemma you describe). Of course, then there's the capital controls. With those still in place, the yuan couldn't take that role even if the CCP wanted it to. And I don't see them making the trade of giving up control of their currency and their banking system in exchange for reserve status. They seem perfectly happy with the yuan as a transaction currency instead... especially if it even partly replaces the petrodollar.
Thanks, Thomas. Great contribution. And yes... that rabbit hole, explored properly, is probably book-length rather than essay-length.
I already wrote, but wanted to add that I almost always just write my comments spontaneously on finishing the articles. Ive always been interested in comments by folks who have similar interests and backgrounds enabling them to take pleasure in those substack posting I also appreciate, most of which are fairly esoteric. But generally I barely get the original reading done, because it's important to me to continue to expand my understanding, and then blast on to the next project. Recently I've started checking out comments more often and, as just now, I learn even more or am reassured that we're similarly stimulated. Makes sense, of course. I'm thankful for Lau's work in analyzing relavant material and for the community that responds with meaningful comments.
Thanks, Jay. I couldn't agree more about the comments. That's actually why I started featuring reader comments in my Monday pieces (see below). Most of my subscribers read by email only and never open the comment section, so they'd otherwise miss all of it.
https://www.snafuinvesting.com/p/spain-is-the-new-california
Lau's analysis is so clear and comprehensive and, for me, often quite original, that I'm amazed and appreciative -- here about the bigger picture China strategy to replace the petrodollar and how the US/Israel onslaught against IRAN played perfectly into that and what the stress test proved. I wish I weren't so busy with lots of other projects. Tomorrow, for sure, I'll finish the earlier article about SNAFU re Uranium. Recommend the same to any of you who haven't followed up yet as well.
What an extraordinary contribution. You have fundamentally changed my thinking.
I’m new to this but I have a (maybe naive) question: How will the impact of a yuan based oil trade manifest in terms of the dollar and the US deficit? I ask because having read this article it feels as if this could be much worse than I had thought
Great question, Jon (and not naive at all). The more oil trade moves outside the dollar, the less structural demand there is for dollars and U.S. Treasuries. That doesn't mean an overnight collapse, but it does make financing America's deficits more expensive and weakens one of Washington's biggest geopolitical advantages. It's one of the reasons I think this story matters so much. And that's before you even add the Japan factor.
https://www.snafuinvesting.com/p/japan-just-called-its-money-home
That’s really helpful, thanks. It does suggest to me that China’s current moves have a longer term aim than creating a multipolar world - maybe weakening America’s economy long term? I wonder where the tipping point is in terms of yuan oil payments and the weakening of the follar?
Thanks for this intriguing and very original viewpoint. Much appreciated.
Im new to this substack and will look for the article on uranium too!
Thanks for reading, litoralis, and welcome aboard! As for uranium, you may be referring to the uranium report, which is for paid subscribers. But I've also written plenty on uranium that's free for everyone. Here's a good place to start:
https://www.snafuinvesting.com/p/the-best-uranium-setup-ive-seen-in
Very insightful, thanks!
Thanks! Glad it resonated.
Fascinating Lau. I’ve not seen this anywhere. How did you put this together?
Thanks, dr. b! I'm glad you enjoyed it. As for your question, mostly public breadcrumbs, honestly. I've been following things like the petrodollar, China's de-dollarization efforts, and gold flowing from West to East for years now. The pieces are all out there in the open. It's just that few people seem to bother putting them together.
Well done. I think it’s brilliant and important.
Nicely explained... I admire China's engineering approach, stress test the system before you announce the product. Very much the opposite of the U.S. approach, launch the marketing hype and hope the product floats later. Can't help but wonder what's next?
Thanks, Barlow! As for what's next, you might want to keep an eye on two things: 1) whether China's oil imports ever return to their old normal, and 2) whether any Gulf producer starts openly pricing crude in yuan (instead of quietly settling in it).
I think you've missed one piece of the puzzle Lau and all the 8 comments I've read so far. I think one or two (Yeng & Tris) have questioned this with asking about the US (wall street & the eLites) and how it's used it's control of the World Currency.
They are right, but the answer isn't what most people think, President Trump (I like to call him AGENT ORANGE, due to the fact how he exposes everything, especially in the dc, wall & k Street, magic media, academentia, etc etc Swamps).
What President Trump is doing (and his backers/group) is destroying the real enemy, the global eLites, run by the city of london and now with wall street (since WWll). I'd even go as far to say that Xi, Putin, Modi and Trump have been working together to do just that. All have in the last 500 years or so been manipulated and abused, by this global Elite group(s) in some way, to take control of, or influence each of these 4 countries 9and others), through the control of their resources, people and ideology.
This has been going on for thousands of years, but the Venetians seemed to have taken it to another level and then worked with the Dutch, which in turn worked with the British, who once again took it to a whole new level and finally joined with the US eLites.
Everything President Trump has done and is trying to do, is destroy this old world system and bring to the forefront, Independent Nations that want the best for their Citizens, through; legitimate, fair and equal respect, for each nations goals and aspirations.
What if Trump's attacks on Iran is actually an attack on this Chinese attack on the petrodollar regime?
What if the Hormuz blockade is not a bug, but a feature in terms of blocking not only the Iran-to-China trade, but also a signal to Saudi and other gulf countries to not strsy from the petrodollar regime?
At some point Trump actually seemed almost disappointed that $200 oil didn't happen... and there was also his comment on MBS needing to "kiss his ass"... was this to be read as "and not kiss Xi's ass"?
If China just burnt its reserve oil all through then who was trading oil under the Chinese system?
Very interesting. Just wonding how much of the recent decline in China's treasuries is due to valuation declines vs active reduction?
So, ultimately, with a year and half of oil in reserve, the question is whether China can remaim in business longer than the US can afford the Iranians to keep Hormuz closed…
That's very interesting. Especially because it contradicts (or somehow complements ?) the thesis I think I read recently around here. But I can't find it anymore.
The idea was for the US to take advantage of the fact that China has two monetary systems, one domestic and one international, that can only diverge to some extend. But, having expanded the latter too much in favor of Iran and Russia and created billions of petro-yuan, zt one point, China central bank would be forced to step in for both financial and strategic reasons. This would create an imbalance with the domestic system that would be fatal to its economy. It is just a matter of letting the wars in the Gulf and in Ukraine going on as long as needed.
This was quite convincing too. If, of course, we agree that the US do have a master plan (and Trump is not just acting on impulses like the MSM keep saying…)
Maybe this will ring a bell for someone?
Nevertheless, with millions of barrels in reserve, whatever the plan, if any, this might indeed make it possible to thwart it during a long time...
If one or both chinese currencies were backed by gold (even partially) would it be necessary to align them closely?
Didnt Bessant years ago as a hedge fund guy try to sink the hong kong dollar using some sort of financial shinanigans that required a hefty chinese response at the time?
Honestly, I don't know... I just remember it made some sense the way it was explained.
But I reckon both protagonist try to stress their adversary's monetary and economic system to the point it breaks. Both have their strengths and weaknesses. One of them may play better than the other.
But for now, even though the consequences of the closure of the Strait of Hormuz could be tragic for Europe and Asia, the U.S. economy is doing quite well...