Eastern energy pivot threatens the US dollar
Patrick
L Young is expert in global financial markets working in multiple disciplines,
ranging from trading independently to running exchanges.
The
“Power of Siberia” is much more than a 30 year Sino-Russian gas/pipeline deal.
Paying for the process accelerates the vogue to reduce dollar pricing. That, not
the energy supply, will become the most acute threat to US economic
hegemony.
The
superlatives have flowed as effortlessly as one day the gas will. At a stroke
Russia has hugely diversified its energy sales with a $400 billion pivot. A fascinating by-product of the energy factor is the
money element. The singular superpower era has been fuelled by an American
economy benefitting from“dollarization”.
Global reserve currency status has hugely fuelled America’s ongoing experiment
in "government
by irrational exuberance." Washington has grown addicted to
borrowing cheaply, exploiting its reserve currency to spend liberally on all
vestiges of government. Thus the powerhouse private economy of the United States
runs parallel to a massively inefficient government spending machine. Being a
reserve currency has multiple benefits - other nations habitually trade in
dollars thanks to global benchmarks. Hence, oil, gas and indeed illicit
narcotics are all traditionally priced in the dear old greenback. Surplus
dollars often find their way back to the USA and end up holding US Treasury
Bonds - the debt which feeds big government.
Recent
moves to break dollar hegemony in energy pricing have been led by various Gulf
states. Now, China and Russia have a perfect opportunity to circumvent dollars
entirely with their bilateral deals creating a $77 billion pipeline (the world’s
largest construction project) as well as the $400 billion gas transfer
agreement. Thus the “Power
of Siberia” is not merely an
apt name for the pipeline stretching from Eastern Siberia to China’s populous
north-eastern regions; it is also a maxim for the rise of alternative
currencies.
While
the US dollar epitaph has been written many times, it still isn’t imminent.
However, a dollar centric era is clearly coming to an end. Despite the ongoing
failure of the political euro to be recognised as a valid reserve currency, US
dollar threats are emerging rapidly - free floating bitcoin, rubles and yuan can
all become significant competitors to the greenback.
Even
reduced reserve status has major implications for the USA. The more central
banks, corporations, and indeed savers, prefer other currencies, the more
difficult it is for the US to seamlessly borrow to feed its inherent
overspending. Here the US is an agent in its own demise. Tax laws like FATCA and
a misguided neocon ‘sanctionmania’ are driving alternative stores of
value, even before we factor in the destructive impact on savers of the Fed’s
quantitative easing.
QE
is akin to another reserve currency trait, known in the economics fraternity
as“exorbitant
privilege.” For the US to pay
bills, it can just print more cash and satisfy any debt denominated in dollars.
The increasingly integrated global economy has enabled Washington to abuse
exorbitant privilege at a scale unknown to previous reserve currency nations
such as Imperial Britain.
While
the US dollar has been the established pricing unit for global energy, the
petrocurrency play has helped maintain US reserve currency hegemony. However,
America has overplayed its cards, borrowing too heavily, ignoring fiscal
discipline and then endeavouring to bully the rest of the world to maintain its
erratic standards. Ironically even the ‘good news’ of US shale further weakens
the dollar’s reserve status. With less import demand from an increasingly
self-sufficient US, why will exporters want to price in US dollars? After all,
the world’s biggest oil importer China already has grave misgivings about the US
dollars it holds. Indeed its existing energy deals with Brazil bypass the
dollar.
The
Eastern trade pivot will take a remarkable edge off America’s ability to simply
kick the can down the road fiscally. Meanwhile the US government needs to borrow
(conservatively) $2.7 billion per day. “The
Power of Siberia” will likely
be financed in construction and operation through expansion of the existing
Sino-Russian swap facilities established between Beijing and Moscow i.e. without
recourse to US dollars. Thus removing the dollar from the energy price is
becoming more feasible by the day. Any expansion may not be very apparent by
2018 when the pipeline is due to open. Nevertheless ongoing US dollar hegemony
is being endangered by each and every eastern trade deal.
In Washington DC, the pork barrel politicians of “Kickcanistan” must adjust their thinking, and particularly their spending, to take account of the eastern pivot.
In Washington DC, the pork barrel politicians of “Kickcanistan” must adjust their thinking, and particularly their spending, to take account of the eastern pivot.
The statements, views and opinions expressed in this column
are solely those of the author and do not necessarily represent those of RT.
No comments:
Post a Comment