Slowly, Then All At Once
The US used to fight wars to prevent the world from trading oil in currencies other than the US$. Now it seems like it has become in the strategic interest of the US to encourage the world to trade energy in currencies other than the US$.
The reason for this is that more expensive oil in US$ terms forces foreign UST holders to have to sell down their UST holdings in order to procure the US$ necessary to buy the more expensive oil. This UST selling by foreign holders, commensurate with a Treasury that has to finance 6%+ deficits with over $500bn in net duration securities every quarter, creates an awful lot of supply pressure on USTs like we saw in the August-October period last year.
Since the US/Europe decided strategically to expropriate Russian overseas reserves (in addition to the reserves of other enemies of the US), it must know now that no country is going to trust the US government enough to continue to build UST reserves over time. As a result, the US must now figure out a plan to slow down the selling of these USTs to buy time before it can transition back to USTs being forced back on to bank balance sheets via regulation or ultimately to be bought the Fed.
Enter non-US$ energy transactions to the mix.
If the US allows holders of USTs to purchase oil/natural gas in currencies other than the US$ (in their local currency), these countries will not be forced to sell USTs aggressively like we saw in the August-October period last year when oil prices were rising quickly. They can simply price oil in local currency, trade with oil exporters for goods in local currency, and settle excess trade balances in gold.
This system seems like it was accelerated last fall post the BRICS meeting in August, which exacerbated the US bond selloff. I believe this is what scared the Treasury and the Fed to pivot in October/November in an attempt to buy time to weaken the US$ and lower interest rates to help the US government’s deficit situation which continues to explode higher. We know that China and India are already doing this buying of oil in their local currency. I am starting to think that Japan is doing this as well and over time, Europe is likely to begin too (otherwise they really will be screwed from a global competitive perspective.
Gold has been re-inserted into the game again and will continue to grow its share as a global neutral reserve asset over time. Fed Chair Powell’s performance at the press conference last week, where he spoke dovish in the face of accelerating growth and inflation data, suggests his primary role of ensuring smooth UST market functioning is taking center stage. The US government needs a weaker dollar and lower interest rates to survive and the Fed will help accommodate that over time since a dysfunctional political environment in Washington DC has proven incapable of doing anything on either raising taxes or cutting spending to rectify the deficit situation.
I expect more commodity transactions to be done away from US$ over time now that the US government is aware that it is in its strategic interest to support non-US$ commodity trading in order to prevent accelerating UST sales going forward.
Although we went to war in Iraq and spent trillions of dollars fighting the battle to prevent oil from being priced in dollars, it seems as though we finally understand the error in that thinking and that allowing for multi-lateral energy pricing which weakens the US$ over time, improving our competitive positioning to rebuild domestic supply chains, is in our best interest.
Important Disclaimer: This blog is for educational purposes only. I am not a financial advisor and nothing I post is investment advice. The securities I discuss are considered highly risky so do your own due diligence.
