Home » Dollar » China, Russia, and the End of the Petrodollar

China, Russia, and the End of the Petrodollar

by John Rubino on October 9, 2012 · 65 comments

Say you’re an up-and-coming superpower wannabe with dreams of dominating your neighbors and intimidating everyone else. Your ambition is understandable; rising nations always join the “great game”, both for their own enrichment and in defense against other big players.

But if you’re Russia or China, there’s something in your way: The old superpower, the US, has the world’s reserve currency, which allows it to run an untouchable military empire basically for free, simply by creating otherwise-worthless pieces of paper and/or their electronic equivalent. Russia and China can’t do that, and would see their currencies and by extension their economies collapse if they tried.

So before they can boot the US military out of Asia and Eastern Europe, they have to strip the dollar of its dominant role in world trade, especially of Middle Eastern oil. And that’s exactly what they’re trying to do. See this excerpt from an excellent longer piece by Economic Collapse Blog’s Michael Snyder:

China And Russia Are Ruthlessly Cutting The Legs Out From Under The U.S. Dollar

China and Russia are not the “buddies” of the United States.  The truth is that they are both ruthless competitors of the United States and leaders from both nations have been calling for a new global currency for years.

They don’t like that the United States has a built-in advantage of having the reserve currency of the world, and over the past several years both countries have been busy making international agreements that seek to chip away at that advantage.

Just the other day, China and Germany agreed to start conducting an increasing amount of trade with each other in their own currencies.

You would think that a major currency agreement between the 2nd and 4th largest economies on the face of the planet would make headlines all over the United States.

Instead, the silence in the U.S. media was deafening.

However, the truth is that both Russia and China have been making deals like this all over the globe in recent years.  I detailed 11 more major agreements like the one that China and Germany just made in this article: “11 International Agreements That Are Nails In The Coffin Of The Petrodollar”.

A few of the things that will likely happen when the petrodollar dies….

-Oil will cost a lot more.

-Everything will cost a lot more.

-There will be a lot less foreign demand for U.S. government debt.

-Interest rates on U.S. government debt will rise.

-Interest rates on just about everything in the U.S. economy will rise.

So enjoy going to “the dollar store” while you can.

It will turn into the “five and ten dollar store” soon enough.

Some thoughts
Snyder goes on to note that both China and Russia are accumulating gold, which will protect them from the coming currency crisis and give the ruble and yuan greater legitimacy in global trade. In Jim Rickards’ book Currency Wars, he tells the story of financial war games conducted by the US military, in which one of the scenarios was a Russian gold backed currency that challenged the dollar. We’re apparently not far from that plan becoming feasible.

The US spends a big chunk of its $700 billion a year defense budget on dominating the Middle East in order to force the trading of oil in dollars. Let that trade be diversified into several currencies and the demand for petrodollars goes way down. Central banks and global corporations will sell part of their dollar holdings, sending the dollar’s exchange rate into a tailspin. This in turn will make it harder for the US to finance its military empire/welfare state.

The net result: America becomes Spain, no longer able to simply whip out the monetary credit card to cover its overspending. We’ll have to live within our means, cutting maybe $3 trillion a year in government largesse (including the growth in unfunded entitlements liabilities).

Cuts on this scale can’t be accomplished smoothly, as Europe is discovering. So in this scenario the coming decade will be even messier than the last one, with “Occupy” movements shutting down cities and every election producing incumbent massacres. A combination of higher prices for necessities and lower wages will demote much of the middle class to “working poor.”

Meanwhile, China and Russia will reap the rewards of stronger currencies, and will divide (or share) control over their part of the world. It’s hard to know who to feel sorrier for, Americans who thought they could depend on government programs for a middle class lifestyle, or the neighbors of China and Russia who will see the relatively light hand of the American empire replaced with something far more atavistic.

  • grochef

    Hi John,

    I’m sure you’ve read it, but James Rickard’s book. “Currency Wars” really goes into depth about the currency battles that have been going on for decades.

  • http://www.facebook.com/people/Dan-Buckles/100000913763806 Dan Buckles

    Romney wants to increase military spending to a trillion dollars, while Obama wants to lower the spending to levels previous the wars. Looks like it will be cut down considerably more if this happens and the corporate empire will have to come home.

    • http://twitter.com/EvilLiberal666 Michelle Black

      They will just use someone Else’s money.

  • http://profile.yahoo.com/CSKPDC7WJNSP7LJKARPZ7RJD7Q Mohamed Alibabwa

    Gold Bitchez!

  • QEternity
  • Tom

    Good article, John. Of course, this could play out over a long time. However, when you look at gold’s high correlation with oil where high grade is in declining supply and at America’s huge debt, it looks to me that gold is probably in for a 10%+ annual return for the next decade. Our great leaders in D.C. will keep playing the empire game till the bitter end without regard to rising prices at home.

  • Observer

    A good article. I can see all this happening, if we can get past some lunatic attacking Iran or some other underrated country and provoking a nuclear war which renders all-null and void.

    • Frank

      You mean Obomba? The guy who bombed Libya?

  • Cat

    “who will see the relatively light hand of the American empire replaced with something far more atavistic.” — I do not quite see the truth in this. Is it possible that the person who wrote this does not speak either Chinese or Russian, and/or hasn’t studied and understood their respective histories, and/or just plainly never been in these civilized countries? I guess so. Otherwise s/he would know that neither Russia nor China ever forced their value systems onto other nations. So… I think it will be a rather good news if this ugly, hegemonistic and uncivilized “American empire” would finally give place to something more civilized… :-)

    • Ezra Pound

      There’s nothing “American” about the “American Empire” you refer to. The amoral “American” empire is in fact a Jewish empire, built on the rubble of the Judeo-British Empire. America did not embark on its course toward Empire until we were culturally colonized by Judaicism.

      • robertsgt40

        Good to see a student of Pound and his protege Mullins.

      • http://profile.yahoo.com/SCZLCJTOARTR7CNH3S5223DJVI Sam

        i totally agree, but americans will have to pay the price for their complacency and ignorance. Life is not meant to only live, get fat, watch porn, watch helpless palestinians getting killed and robbed of their land while sending money to the illegal vile stinking settlers. Life is meant that you become responsible for what you country is doing. so pay a dear price ugly fat americans.

        • Agent P

          What is a ‘Palestinian’ – a Jordanian Arab…?

          • SheikhYerbouti

            A Palestinian is a formerly peaceful agrarian citizen of the land between the Mediterranean and Jordan. This land is currently occupied by obnoxious arrogant European colonials who possess an unbelievable sense of entitlement, and have become the fascist genocidists of whom they were once victims. I hope that clears it up for you, Agent P.

    • http://www.facebook.com/sidharth.sankar.33 Sidharth Sankar

      “Otherwise s/he would know that neither Russia nor China ever forced their value systems onto other nations …”

      Hmm …whatever happened to Eastern Europe, Central Asia, and Tibet? Haven’t the Russsians and Chinese imposed their communist values in these nations?

      I’m in India and I’m quite happy with American forces in Afghanistan, Middle East and Indian Ocean. The American Navy let’s us spend the little cash that we have on infrastructure rather than nukes.

      While I’m not happy with the way the Dollar is managed, I’d never trust a reserve currency controlled by either Russia or China. It’s either the Dollar (backed by Gold) or Gold.

      • Lester

        AYE to that! Both China and russia are also imperialists, so our (little people) best hope is an uneasy balance between those three. If Saddam had had the nukes he was accused of, Washington would’ve stayed the hell out of there! So it’s now obvious that Iran must get nukes to keep itself and its oil safe!

    • John Doe

      Have you ever looked at the history of communist Russia? They simply took control of half of Europe after World War 2 and killed millions in their gulags who didn’t agree with their communist policies….WOW…Really??? and Communist China doesn’t even allow more than one child per family. They kill any more that are conceived without the parents consent. That should speak volumes about that. You are so wrong on this issue it is frightening…

  • http://www.facebook.com/profile.php?id=601776379 Henry James Garner

    WHAT GOES ROUND…………

  • http://www.facebook.com/profile.php?id=601776379 Henry James Garner

    My first chartered accountant, told me something that I’ve never forgotten. He tore up the insurance policies that I’d just bought and told me that thru the ages, a fullgrown ox and an ounce of gold, have been of similar value. Forget currency and paper.

    • robertsgt40

      You got that right. All fiat paper returns to its original value. ZERO Now lets watch dancing with the stars. A nation asleep doesn’t want to WTFU

  • Chris T.

    This article points out the proper mechanism of what will happen, and what is going on, but the tone makes it look as though THEY are the bad guys. Can you blame them for trying to get out of the shackles we impose?
    Sad to say, but this un-American imperialism, meaning our government, is the bad guy, not them.
    It is even a stretch to say, at least with resp. to China, that their trying to escape our clutches is a drive to become the new hegemon. maybe true, but not necessarily. China certainly didn’t attempt this when she was clearly able, 100s of years ago.

    And even if that was their motivation:
    GOOD!
    Because our access to the reserve currency was NO benefit to us, because it has been bought at the greatest cost: debasing our own currency, which you euphemistically call whipping out the c-card.
    The sooner it ends the better, and as we are incapable of doing it on our own, having it imposed is not terrible.
    Painful, of course:
    withdrawal from an addiction is painful, but if not attempted, the only outcome is death!
    And just like drug-addicts, very rarely does withdrawl happen without outside imposition.

    We have only ourselves to blame.

    The commentor who lumps Russia in with China about : “not imposing”:
    that is not correct.
    Even excluding the USSR’s will towards system imperialism, Russia did it too!
    Just look at their pan-slavism that ultimately led to WWI.
    Today, that has prob. changed, other than perhaps to impose a local monroe doctrine. And why not? we did it 200 years ago too.

  • come-and-take-it

    The US will not go quietly into that good night! Faced with loss of hegemony due to currency devaluation the political hacks will provoke a conflagration to prevent that eventuality. One wouldn’t think that a country so bent upon control of its and the rest of the worlds’ masses would allow something as simple as a currency to slow it down. You have to remember, we spend more than the next 25 countries on the planet for “defense” and those 25 are on our side in a confrontation with communist tyranny. Militaristic blackmail lurks in the halls of Foggy Bottom. Hilary will be in her element.

  • Caribpac

    Can´t wait for that to happen …..

  • http://profile.yahoo.com/J75TJPBXVQSCH4NABQB2KNHZ5E Rich

    I fear the moment when the masses on welfare find out that their EBT cards have become worthless. Whom are they going to turn to? And more importantly whom are they going to turn against?

  • Rogoraeck

    Boy, oh Boy! Are we in shit now!

  • http://www.facebook.com/Dave.Phillips.Qld Dave Phillips

    The Wall St and Bond St banks, Zionist and industrialist puppet masters will not let this happen. They and the patsys they are installing all over the world would rather go another round of global conflict with nukes than lose the plot they have set in motion. The fact the end of the world or a genocidal extinction will ensue with catastrophic environmental damage means nothing to this cabal, it is their way or no way! We are fucked, it is just a matter of time. Enjoy your time that is left, spend all your “dollars” and stock up on food, water, ammo, and medicines, if you are not killed in the conflict you will die in the fallout, make peace with your loved ones and choose to try and survive in a wasteland, or die.

    • We are fooked

      Lately, I have been thinking the exact same thing. The banksters (banker ganster thugs) who control the brand of toilet paper that we call the dollar will control the world with their false toilet paper money, or else!!! If the lose that control, they will, out of insanity, cause World War 3. They cannot fathom a free world with free markets. It’s their way, or the highway. It’s their way, or WW3.

      • http://www.facebook.com/profile.php?id=742104313 Adam Goodwin

        You’re gonna think I’m crazy for posting this, but there are reports of UFOs interfering with the operations of nuclear weapons. Take this for example: http://www.telegraph.co.uk/news/newstopics/howaboutthat/ufo/8026971/Aliens-have-deactivated-British-and-US-nuclear-missiles-say-US-military-pilots.html
        And this video of a Larry King show: http://www.youtube.com/watch?v=gTos4RTPpmc
        These people don’t strike me as alien cult nutters, so I give them the benefit of the doubt. But when I approach this topic, I think what are the disadvantages versus the advantages of believing something like this: if it’s not true, I have no control over the outcome of a nuclear war, so fuck it. If it is true, then I am spared from suicidal/homicidal elites pushing the button. Either way, the outcome of this issue is completely out of my control, so why not put stock in the truth behind this. That way, at least, I can have a more positive psychology as I prepare my family and farm for the collapse of the dollar.
        So there is a chance that these fears of nuclear war are unfounded; but, either way, they’re unnecessary, no?

        • http://www.facebook.com/Dave.Phillips.Qld Dave Phillips

          Being prepared for the worst case scenario in any situation is good sense, if the worst does not happen, you are blessed and can continue to live happy in the knowledge you are as prepared as anyone can be who isn’t an elite or military higher up. If the worst does happen, then at least you have a buffer against the very worst of the conflict where it affects you directly (a bomb within say 500 miles), or indirectly when social law and order collapses and the natural urge to get the best of resources that are available kicks in. All you need is warm clothes, space (rural is best), a defendable construction for shelter and food and water stocks to a) get you over the first few months, and the b) stocks of seeds to cultivate food. That and ammo, and water filters/purifiers. If you can have solar and diesel generation on your land, then get it, Diesel stores well and will see you through again while you build your solar grid up and become totally energy free from old sources. Medicine and medical supplies are also important, always have some end of life drugs handy for the very very worst because if the conflict is truly a life ending event you are then able to live in some comfort and die on your terms before you and your loved ones fall ill to the terrible thing radiation can do to a human body, it is also a peaceful end, you take the drugs (phenobarbital or similar) and just go to sleep.

  • Mike Gleeson

    I have to agree with Mr. Phillips below. I am buying a standby generator. As America goes broke and the people desperately broke, the grid will become unreliable. I am buying new appliances before the dollar loses 75%. Get positioned now. The fools in D.C. that think they run the world will take us to ruin. John Rubino wrote some years ago about the collapse of the dollar and admits he couldn’t predict when it would happen. But, look around folks. Our economic system is collapsing and poverty is spreading sea to shining sea. I wish you all only the best but we all need to realize that one morning we’ll wake up and the world will have changed. Nuclear war? I wouldn’t put it past John McCain and Hillary. These people may not be insane but they truly believe in the myth of American hegemony and we’ll all suffer for their delusions. Stock up, prep up and hunker down. The dollar collapse isn’t far away.

  • Jason Carter

    The best thing that could happen to America is the collapse of the welfare/warfare state. At least my children will have a chance for a better future. The immediate future, however, will be ugly indeed. Just as a baseline, the U.S. government needs to be cut by 50%. Total default needs to occur so we can reset. However, I fear the banks will not want to take that kind of loss and, instead, impose severe austerity.

    We will have to bring our troops home and shrink the military budget. This will not make the world safer, however. Israel will be chastised by most of the world once it sends missiles into Iran to destroy nuclear facilities. Russia and China will side with Iran.

    • Sue

      I hope your kids know how to shoot.

    • kmackenz

      The biggest welfare receipients are the corporations that pay no taxes and get huge subsidies. Exxon made $50 billion in profits and paid $0 in taxes. It actually got a refund of millions because of federal subsidies. This makes the old $122 weekly welfare check look like a joke.

      • Jimothy Jones

        Dont go telling that to any ole glenn beck audience member.

  • Agent P

    This is why it is so important (for the monetary authorities in the $U.S.), to force Iran into submission. Very little to do with ‘nukes’, and a Whole Lot more to do with the dominoes of $petrodollar hegemony beginning to fall.

    • http://www.facebook.com/tony.rossini.35 Tony Rossini

      US can’t afford any more wars. Iran will not succumb.

      The last 12 years in Iraq and Afghanistan will end up costing the US Govt somewhere near $6 trillion dollars…..or $20,000 to each American.

  • identalias

    Bring it on.

  • http://www.facebook.com/profile.php?id=100000639121324 Otton Bexaron

    Brazil’s President Dilma Rousseff, herself an experienced economist, has called the lastest “quantitative easing” by the U.S. Fed, a “financial tsunami” crashing over the developing nations, because they can’t devalue their own national currency and lower their interest rates in order to discourage the flood of cheap dollar into their financial systems. The BRICS (Brazil-Russia-Indian-China-South Africa – have already switched to use their own currencies in their mutual trade relations.

  • Suzanne Majo De Kuyper

    Control over the world’s currencies by Russia and or China will not be worse than US control at all.Fighting back right now the US is doing everything it can to make the dollar worthless by Helicopter Ben Bernanke’s printing of dollars with no end and no backing of any kind. US brutality militarised knows no bounds, it’s relish in inflicting punishment has no equal. Genocidal would name it aptly.

  • mijj

    > “the relatively light hand of the American empire ”

    lol .. you have to be kidding .. hahahaha

  • lewis

    “relatively light hand of the American empire?” Come on John, maybe you should ask the people in Iraq about that, or Vietnam, or anywhere else in South America, the Middle or Far East.. However. as always, superb article!

    • John Doe

      He is referring at that point to the “light hand” that we will be forced to have because our economy will be shredded and we will have no military left…

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  • Eatyourvegetables

    Can somebody explain to me how it is in China’s interest to see the dollar go down the drain? They have a huge amount invested in the dollar and need the US consumer for the health of their own economy. The US and China are joined at the hip…no?

    • Lester

      By the time China converts its dollars to gold, there will be no US consumption of imports. Too poor for that. We shall see how long Saudi will sell oil for US dollars and at what price if they can get gold from others. I’m sure there is a plan, we just don’t know it!

    • JustMe

      China has been converting their dollar investments into commodities and resources by buying up everything they can in Africa and South America… mines, oil fields, gold, raw materials, everything they can get their hands on. When the dollar falls, they will have lots of valuable raw materials and production capability. I’m afraid we won’t.

    • http://www.facebook.com/tony.rossini.35 Tony Rossini

      China have been diluting their exports to US …down to 17%
      It’s strategy is to develop a sizeable Middle Class in China thus boosting home consumer demand. Their factories instead of being geared mainly for products to exports…can instead focus on production for home markets. Therefore it has less emphasis of trade with the U.S…in case of any future conflict.

      JustMe below provided the other half of the equation….spreading out worldwide investing in commodities & resources.

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  • bastiat

    “light hand of the American empire” this made me LoL.

  • jessica

    pres, Chavez of Venezuela start it, el comenzo a exigir en china compartir las monedas sin el dollar, mientras nos distraen con bombear un deficiente y pobre pais como Iran, los paises tercermundistas estan buscando afianzar su moneda,sucede que paises en desarrollo han sufrido las calamidades en su economia cuando paises del primer mundo sangraron y usaron las riquezas de paises del tercer mundo para solventar sus economias, pero ya no pueden hacerlo y ahora se encuentran en situaciones dificiles donde tienen que encontrar soluciones que ya paises pobres han superado, paises desarrollados ahora estan colapsando,ahora los adinerados estan comenzando una nueva burbuja inmobiliaria para atraer tercermundista y sangrar de una manera disfrazada a paises en vias de crecimiento, usan burbujas inmoviliarias y atentados de guerra para seguir aumentado su capital , su avaricia ,haciendose los economistas salvadores, la burbuja de que aceptemos guerras Falsas para ser complices de los apoderados y adinerados y que sean aceptados y aplaudidos por enminentes estudiosos de estadisticas y economistas, me hace pensar que la educacion en este pais esta entredicha,nuestra educacion esta fallando y las masas estan siendo llevadas al abismo.

    • Sue

      The U.S. will be Venezuela’s (and anyone else) graveyard.

      Come get some.

  • Elly

    I appreciated your article but I lol’ed at the “atavistic” remark. Looks like you can’t deal with being a loser and try to say something demeaning to safe face and go down with dignity. At least if Russia will dominate the world, lobotomy won’t exist because Russia was the first country to outlaw it back in stalinist time, while America hasn’t completely banned it even today. and the lobotomies that were performed before that were done much more carefully and humanely than American style of sticking an unsterilized icepick into an unanesthetized person’s eye cavity and haphazardly stirring the brain because the person is deemed to be “better off with less brain tissue”. Now ponder on that for a while ;-)

  • Tom

    Maybe they can do it the old fashion way. Get off those butts and work for it that is one thing that has broke this nation. Not SS Medicare SS is not an entitlement. The workers paid for it with blood sweat and tears.Myself 45 years I’m sick of sorry ass politions including. Obombo giving everything away. He is a Traitor and a whole. Lot of dumbass’s are giving him. another 4 years I’m feed up

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  • John Scrivener

    “relatively light hand of the American empire” … relative to what? Genghis Khan?

    I can’t think of any nation more belligerent than the US.

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  • robert scott

    Somebody is getting upset with the dollar. When more and more countries join the crowd and gradually start refusing it, the times when America was buying up the world’s production with suitcases of freshly printed greenbacks will be over. And stuff will become expensive. What this may cause on the Main Street, is the topic of a (hyperbole) video called “The Day the Dollar Died” now circulating on youtube (I am in no way associated with nor do I know the makers, the “National Inflation Association”). Ironically, the video came out virtually at the same hour when the news about the China-Russia deal surfaced. What a timing.

  • Steve L. Webb

    The American people has trust their government, but do the U.S.
    Government trust the American people? For a short while after 911 they
    did, what happen to that trust? The ruthless elite of this world wants
    to reduce global population. They feel there are too many people on
    planet earth! “Some of you have to go”! How are they doing this? By the
    food we eat, by the water we drink, and by the air we breathe. Whatever
    means that gives results!
    On 07/02/ 2013 T.V. (FRONTLINE)
    documentary, it covers “America’s crumbling infrastructure”. A two hour
    program is a must see! “Deplorable” AND “Shocking” ! This nation doesn’t
    have funding or the commitment to address this dire need. Many are
    being affected by, “is our drinking water really safe”? Are the bridges
    really safe we drive over daily? Some of you have to cross your fingers
    just to make it to the other side safely. Think about that, emergency
    vehicles and school buses use those same daily bridges? Outdated, sewer
    drain pipes are emitting toxic gases we don’t need to transmit into our
    atmosphere. Please people, after seeing this documentary we need to
    reevaluate our nation’s proprieties!

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