For quite some time, we have been predicting that the Russians and Chinese will, at some point, bring an end to the petrodollar system that has virtually guaranteed the US the position of having its currency be the world's default currency. This position has allowed the US, in recent decades, to go on a borrowing and currency-printing spree, the likes of which the world has never seen.
First, a Little History
It's important that we back up a bit here to have a look at how this came about in the first instance.
In 1971, the US government, under Richard Nixon, took the US off the gold standard. This meant that, from that point on, the dollar was backed by nothing. However, as long as the dollar was accepted as legitimate currency (even though it was now mere paper), not only could the game continue as before, but the US would then be free to print as much “currency” as it wished. It would also be free to borrow as much as it wished, thereby building as large an economic house of cards as it wished.
Of course, the foolhardiness of this decision would not be immediately clear to all and sundry. It would take some time before the chickens would come home to roost.
Enter the Petrodollar
Back in 1971, it was necessary to assure that the dollar would retain its position in world trade as the world's premiere currency, in spite of the fact that it was no longer backed by anything. The US reached an agreement with Saudi Arabia that, in trade for arms and protection, the Saudis would denominate all future oil sales, worldwide, in dollars. The other OPEC countries fell into line, and the “petrodollar” was assured.
Returning to the present, we have stated for some time that the methods by which the US, the Russians, and the Chinese have been playing the game have been very different. The Chinese, for over 4000 years, have played the game of wéiqí, and the wéiqí philosophy is a primary part of Chinese philosophy. The idea is to distract your opponent whilst you subtly surround him. Once he is enclosed, with no support from outside, it's game over.
By contrast, the Russians are perennial chess players. Chess, played correctly, involves the concept of imagining each move that your opponent may possibly make. For each possible move, you imagine each possible move you could make and how your opponent might retaliate. You then select your best move. A good chess player is one who has learned to imagine several moves in advance. Therefore, once your opponent makes his move, you are never taken off-guard. You are prepared for anything he does.
Mister Putin is a consummate chess player, and since he has returned to office, each time the US has made a move, he has been ready. Each of his moves has not only countered the US, but trumped them. At every step that the US gets tough on Russia, Russia immediately says, in effect, “Okay, remember, you brought this on yourselves.” Russia then makes a move that puts the US in a far worse position than it was before.
The amazing fact here is that the US method recognises neither wéiqí nor chess. They appear to be playing checkers. The US has, since World War II, used the approach of “The Yanks are Comin'.” The US has been the biggest boy in the schoolyard and has, through a combination of bluster and bullying, been able to intimidate the world and, as a result, get virtually everything it wanted for a very long time. Conventional diplomacy has taken a back seat with the US, and, particularly since the administration of George Bush, the US has very much ramped up its “biggest boy in the schoolyard” approach, much to the irritation of the rest of world.
Here Come Those Chickens
But now, the US is broke, and its stature as the biggest boy has begun to wane. The other kids in the schoolyard are playing smart, whilst the US is still playing tough…and it's no longer working.
Claiming that Russia was overstepping its power in the Ukraine (when, in fact, it was the US that was guilty of this move), the US applied economic sanctions to Russia. The US media treated this as a major blow to Russia, from which the Russkies had better back off if they knew what was good for them.
But, in fact, this served as an open invitation for Russia to retaliate. Since the very first thrust by the US, each parry and thrust by the Russians has been both effective and well planned. (It should be borne in mind that the latest announcement that Russia would not accept US dollars in payment for gas could only be enforced if Russia could get its international gas customers to agree. At the time of announcement, nine out of ten customers had, in fact agreed. These decisions were, unquestionably, not reached overnight. This chess move was planned well in advance.)
When Russia announced that Gazprom, the largest gas supplier in the world, would no longer be accepting US dollars from its clients, the West was shaken by the news.
End of the Petrodollar
So, does this spell the end for the petrodollar? Not just yet. But it does add a nail to the petrodollar coffin, and a rather large nail, at that. It most certainly announces to the world that, if the US continues its schoolyard bully approach, both the Russians and the Chinese are more than ready. They have greater power than the US gave them credit for and, as we are witnessing, are more adept at the game itself.
Time after time, the US announces a flimsy new policy that is half-baked at best, and the US media announce, in effect, “This'll show 'em!” And yet, at every turn, the Sino-Russian tag-team deals blow after blow to US hegemony in the world.
The US is at war with China and Russia. It's an undeclared war, and it's monetary warfare, not military warfare. Yes, there are the military distractions, such as in the Ukraine and the Middle East, but the primary war is being fought monetarily.
If we observe the Asian responses to the US attacks in this war, and assess them objectively, we see that the Asians do not seek to kill off the US. In each battle, they, like skilled bullfighters, deflect the charging bull, then thrust the sword forward, wounding him again and again with every charge.
As this approach is becoming a pattern, it would indicate that the Russians and Chinese, much like a bullfighter, are wearing out the bull and provoking him to lose enough blood that, soon, he will no longer be able to continue the fight.
There will be no H-bomb moment here. No point at which the US, to the entire world's surprise, suddenly self-destructs. Just as Rome wound down 2000 years ago, we shall observe a similar winding down of the US. (Although there will be many sudden crashes along the way, the entire process will stretch out for years.)
And I believe the US will be kept alive by the victors. It will remain in business as a country and will serve the East, particularly as a consumer of Eastern-produced goods.
But it will cease to be the world's empire. Much as the British Empire wound down as a result of the world wars, the US will be greatly diminished in power.
More and more, US residents are coming to realise that the “recovery” that is forever being heralded as “just around the corner” will not arrive. No “green shoots,” no “shovel-ready jobs” will materialise. The US are attempting to win a chess game by playing checkers, and they will not succeed. The US's place in the world will be a casualty of that error, as will be the US economy.
Editor’s Note: Unfortunately there’s little any individual can practically do to change the trajectory of this trend in motion. The best you can and should do is to stay informed so that you can protect yourself in the best way possible, and even profit from the situation.
This is what Doug Casey’s International Man is all about: helping you cut through the smoke and mirrors while making the most of your personal freedom and financial opportunities around the world. The free IM Communiqué is a great place to start.