World Rushes to De-Dollarize Oil Trade Before US Economy Crashes and Burns

[jhungary]

@jhungary @Spectre

1) In the short term, I see a trend where countries are engaged in not only currency swap agreements but also in barter projects so that there would close to net zero transfer

2) One of the corner stones of the current setup is formation of OPEC and denomination of all oil trade is Dollars. What if OPEC gets divided and the Russia and it's allies (Kazakhstan, Iran etc) start denominating Oil in a separate reserve currency like Bancor? This is where foundational institutions like SCO, AIIB, BRICS Bank and alternative payment systems come in handy

Bancor - Wikipedia, the free encyclopedia

Russia to issue 30mn national payment cards in 2016 – CBR head — RT Business

Russian national payment system and Japan’s JCB to issue co-badged cards — RT Business

http://www.ft.com/cms/s/0/84241292-66a1-11e5-a155-02b6f8af6a62.html#axzz3xJeViN54

China launches global yuan payment system — RT Business

You cannot replace the current Currency system with anything, not the gold system, not the barter system.

Why gold system is not an answer?

While gold system were dominated during 1800s to early 1900s, gold system have an inherit flaw and that is its abundance.

While there are a fixed amount of gold in this world. The extraction rate is also depending on the technology level, meaning you can only extract a certain amount of gold on a given day, month and year.

So what would be the problem? The problem would not be much if you can match your gold production rate to keep up with the demand without depreciating it price. But what if your demand of currency spike? Say for example, you need to major overhaul your country by rapidly approving development project? If the demand of currency spike, it will spike the demand of gold under gold standard. And since you cannot extract anymore than you can limited by technology, at some point, you would not have enough gold to go around.

Now, that would leads to two possible solution, either you pay using gold certificate (A form of IOU) and using the certificate to accumulate gold debt. Or you appreciate the value of gold so you can pay more with less gold.

Which the first one is what actually happened after WW1 when the spiked domestic production for material used in war lead to too many IOU around the world and most country are facing bankruptcy rather than actually able to pay off the gold debt.

The second solution will totally destroy the creditability of gold system if their value can be appreciated and depreciated by given demand. And that is why the gold system failed in 1920.

Another problem is that to have gold as a standard currency system, it have to have a stable amount of reserve, but look at today gold distribution, you will see 40% of all the world gold is in private ownership, and you can own a piece of gold and you don't know it, like mobile phone, speaker to computer, there is a demand of gold OUTSIDE currency reserve, thus effectively putting Gold outside the possible replacement of USD.

Why Barter system will fail?

Barter system is the same as gold system, instead, you use gold to barter, you use other trading item, for example, apples and oranges, coal and iron ore.

The problem associate with barter system is that since no fixed rate can be established, you can literally have a free market (by free, I am not talking about free trading, but floating price)

While there are no way you can determine how many apple can be trade for how many oranges. Another issue with barter system again is the rate of production. Say for example, One man have a corn farm, and another man have a cotton. While normally, the cotton farm use 2 bale for 1 basket of corn, what if the cotton farm did not have a good harvest this year? Then effectively they will be poorer as you can only trade with what you had, not what you should have. The reverse is also true, what if the corn guy have a good year and he have instead of 100 basket of corn, he have 200? So either the rate keep the same and the corn guy become super-rich, then everybody will go farm corn and you can then only barter corn with corn or the exchange rate have to be alter, which again, destroy the integrity of the currency.

Using barter system would be like playing a game of lucky wheel. Sometime you will get lucky, sometime you don't, hence it would not be able to replace world trade...

As far as US Dollar is concern, the only way USD is out of the picture is either WB or IMF issue some sort of Global Currency Certificate. But even then, it would not be able to replace US Dollar dominance, as you still need some backing of this GCC type currency, and given the model of today financial world, who would you think will back up majority of this currency? Well, it would be the United States Dollars

 

[Providence]

You cannot replace the current Currency system with anything, not the gold system, not the barter system.

Why gold system is not an answer?


While gold system were dominated during 1800s to early 1900s, gold system have an inherit flaw and that is its abundance.


While there are a fixed amount of gold in this world. The extraction rate is also depending on the technology level, meaning you can only extract a certain amount of gold on a given day, month and year.


So what would be the problem? The problem would not be much if you can match your gold production rate to keep up with the demand without depreciating it price. But what if your demand of currency spike? Say for example, you need to major overhaul your country by rapidly approving development project? If the demand of currency spike, it will spike the demand of gold under gold standard. And since you cannot extract anymore than you can limited by technology, at some point, you would not have enough gold to go around.


Now, that would leads to two possible solution, either you pay using gold certificate (A form of IOU) and using the certificate to accumulate gold debt. Or you appreciate the value of gold so you can pay more with less gold.


Which the first one is what actually happened after WW1 when the spiked domestic production for material used in war lead to too many IOU around the world and most country are facing bankruptcy rather than actually able to pay off the gold debt.


The second solution will totally destroy the creditability of gold system if their value can be appreciated and depreciated by given demand. And that is why the gold system failed in 1920.


Another problem is that to have gold as a standard currency system, it have to have a stable amount of research, but look at today gold distribution, you will see 40% of all the world gold is in private ownership, and you can own a piece of gold and you don't know it, like mobile phone, speaker to computer, there is a demand of gold OUTSIDE currency reserve, thus effectively putting Gold outside the possible replacement of USD.


Why Barter system will fail?


Barter system is the same as gold system, instead, you use gold to barter, you use other trading item, for example, apples and oranges, coal and iron ore.


The problem associate with barter system is that since no fixed rate can be established, you can literally have a free market (by free, I am not talking about free trading, but floating price)


While there are no way you can determine how many apple can be trade for how many oranges. Another issue with barter system again is the rate of production. Say for example, One man have a corn farm, and another man have a cotton. While normally, the cotton farm use 2 bale for 1 basket of corn, what if the cotton farm did not have a good harvest this year? Then effectively they will be poorer as you can only trade with what you had, not what you should have. The reverse is also true, what if the corn guy have a good year and he have instead of 100 basket of corn, he have 200? So either the rate keep the same and the corn guy become super-rich, then everybody will go farm corn and you can then only barter corn with corn or the exchange rate have to be alter, which again, destroy the integrity of the currency.


Using barter system would be like playing a game of lucky wheel. Sometime you will get luck, sometime you don't, hence it would not be able to replace world trade...


As far as US Dollar is concern, the only way USD is out of the picture is either WB or IMF issue some sort of Global Currency Certificate. But even then, it would not be able to replace US Dollar dominance, as you still need some backing of this GCC type currency, and given the model of today financial world, who would you think will back up majority of this currency? Well, it would be the United States Dollars

Thanks for that comprehensive answer. I wish I had the patience to type such a huge answer

 

[jhungary]

Thanks for that comprehensive answer. I wish I had the patience to type such a huge answer

lol, it took me 15 minutes or so to write this...I wrote my research thesis on Gold System so almost all the information simply just pop into my head.

 

[Viper0011.]

World Rushes to De-Dollarize Oil Trade Before US Economy Crashes and Burns

Russia, China, India and other emerging powers are pushing for a multipolar world; meanwhile the United States, a former hegemon, is unable to stop them as it is losing its political power and is “de-facto bankrupt,” William Engdahl, a political observer for New Eastern Outlook, told Radio Sputnik.

I REALLY wanted to see the source of this news and no surprise, it was the Spit-on-neck news!!!! The world should be "De-Yuanize" the globe as the current crises comes from the Chinese. Not the US. In fact, the US economy on its own is doing pretty well. The system is being damaged the second time since July of 2015 due to Yuan's second devaluation. Which obviously will impact the globe.

Add Oil below $ 30 a barrel, and here's your magic recipe for stock markets around the world to go down!!!!

 

[jhungary]

I REALLY wanted to see the source of this news and no surprise, it was the Spit-on-neck news!!!! The world should be "De-Yuanize" the globe as the current crises comes from the Chinese. Not the US. In fact, the US economy on its own is doing pretty well. The system is being damaged the second time since July of 2015 due to Yuan's second devaluation. Which obviously will impact the globe.

Add Oil below $ 30 a barrel, and here's your magic recipe for stock markets around the world to go down!!!!

Sputnik used to wrote article with a sense of humour, Now it's just rubbish after rubbish like a losing dog barking afar... It's just sad.

US dollar are not without problem, like overstretching the dollar due to its international currency status, but then saying De-Dollarize (Which is not a term to begin with) is just sad, I think the writer did not have a slight clue on how currency works. In fact, I really want Russia and China to de-Dollarize, that a win-win for US economy, I mean, you should lose your money with your own currency, Stop dragging USD when you devalue your own stock market....

 

[Viper0011.]

Sputnik used to wrote article with a sense of humour, Now it's just rubbish after rubbish like a losing dog barking afar... It's just sad.

US dollar are not without problem, like overstretching the dollar due to its international currency status, but then saying De-Dollarize (Which is not a term to begin with) is just sad, I think the writer did not have a slight clue on how currency works. In fact, I really want Russia and China to de-Dollarize, that a win-win for US economy, I mean, you should lose your money with your own currency, Stop dragging USD when you devalue your own stock market....

Thank you for writing a balanced post. I agree, if you must devalue something, it should be a country's own currency not linked to a "Reserve" status. That way, anyone else who has it, won't cry when the numbers drop like crazy!!

 

[WaLeEdK2]

US dollar Collapses=US economy collapses=end of paper money. Electronic money will be the new thing.

 

[Providence]

US dollar Collapses=US economy collapses=end of paper money. Electronic money will be the new thing.

If you are referring to crypto currency like bitcoins then you are sadly mistaken. Only drug mafias use that vehicle which makes it susceptible to a ban anytime..

 

[WaLeEdK2]

If you are referring to crypto currency like bitcoins then you are sadly mistaken. Only drug mafias use that vehicle which makes it susceptible to a ban anytime..

No not that.

 

[Indika]

Trust me .. the world is fucked up not because of one currency system but the east asian countries which runs huge trade surplus with US and prefers to park their reserves in USD only.

You're referring esp to China?
Biggest USD reserves and biggest sovereign creditor to the US?

Agreed,

While there are no way you can determine how many apple can be trade for how many oranges. Another issue with barter system again is the rate of production. Say for example, One man have a corn farm, and another man have a cotton. While normally, the cotton farm use 2 bale for 1 basket of corn, what if the cotton farm did not have a good harvest this year? Then effectively they will be poorer as you can only trade with what you had, not what you should have. The reverse is also true, what if the corn guy have a good year and he have instead of 100 basket of corn, he have 200? So either the rate keep the same and the corn guy become super-rich, then everybody will go farm corn and you can then only barter corn with corn or the exchange rate have to be alter, which again, destroy the integrity of the currency.

simply put supply & demand.

Using barter system would be like playing a game of lucky wheel. Sometime you will get lucky, sometime you don't, hence it would not be able to replace world trade...

Dollar gains prominence due to world trade. Stop importing goods, then dollar loses much significance.
What if next decade economic growth is driven by self consumption instead of exports/imports? Currently western countries have the technology edge wrt to goods produced hence charge more. Tmmrw if China decides to drive demand by investing/spending inside the country by cashing the foreign reserves then dollar demand should fall.

Dollar as a base currency has brought stability to the western world at the most. World is in a transition state as countries become more developed & self sufficient then we will see a better playing field.

 

[jhungary]

Agreed,

simply put supply & demand.

The problem with supply and demand in bartering is that bartering is not in real time, the trade, in fact is in real time, but have you thought about what before the actual trade happened?

Say today, my country wanted 200 bale of cotton, and we have a production of 100 ton of banana to exchange it. Hence the exchange rate is 200 bale of cotton to 100 ton of banana. However, I cannot Increase my tonnage of banana, because it was grew a year before, so, unless the exchange rate changed I cannot get more than 200 bale of cotton. It would be a problem if I have an expected need of cotton (Like the winter is colder this year and hence the demand of cotton spiked)

You have to also consider the exchange rate does not have any effect of goods sale as good are prepared before sale. But people will go where they can make the maximum trade, hence one particular problem will appear with the barter system, and that is dilution of market due to the demand, say if this year apple trade is better than oranges, then if I am an orange farmer, I would consider changing my farm land to grow apple, but the problem is, while you have this idea, anyone else can also have this idea, so next year come, you get basically everyone selling apple. Which will pull down the sale of apple.

Barter trade cannot regulate the supply and demand, hence it would not work as any form of standard, it would work if you are talking about a one time transaction, but for frequent trade, it simply won't work as that would mean you need to predict what you need next year, and do it this year, and unless someone can see into the future, this, again, won't work.

Dollar gains prominence due to world trade. Stop importing goods, then dollar loses much significance.
What if next decade economic growth is driven by self consumption instead of exports/imports? Currently western countries have the technology edge wrt to goods produced hence charge more. Tmmrw if China decides to drive demand by investing/spending inside the country by cashing the foreign reserves then dollar demand should fall.

Dollar as a base currency has brought stability to the western world at the most. World is in a transition state as countries become more developed & self sufficient then we will see a better playing field.

Trade balance depend on currency swapping, which basically determine the value of any given currency. If tomorrow China decided to stop importing everything (Let for the argument sake, say they can) Problem with this, is that Chinese Yuan would start to spike domestically, which mean the need of actual money rise, and China would have no choice but to either buy back Yuan in foreign country as part of Foreign exchange, or starting to print more money to make the demand.

Problem with that is, without the influx and outflow of your own cash, the currency will simply "Not Balanced" and their value will simply go up and up.

One example is in the virtual reality world, a MMORPG game that have its own currency which allow player to buy in game item, say a dragon slayer sword, now player can make a lot of its own money by slaying monster with said sword, hence the game keep generate game-money and without the net flow of currency outside or inside the game to curb this trend, the game will simply keep generating game money and everything will lose its value, simply because player now amass a lot more money as they play the game, and if they were not exchanged or recovered by any mean to the game administrator, the money will start depreciating. Say today I can get a dragon slayer sword for 1 million game currency, come next year, it will cost a lot more maybe 2 million, or 3 million, depending on how much game money generated during the past year.

The only way a country can survive is by resort to bartering, and I have already show you why it does not work.

Set aside no country can be self sufficient to begin with..

 

[Spectre]

@jhungary Interesting example of MMO Mechanics. I have some experience studying the economics of virtual market places in Eve Online, GW2 and Archeage.

Different games employ different mechanics to control inflation and currency depreciation effects. In essence all employ money sinks using probability matrix. There is a chance based mechanism where you have an exceedingly large chance to destroy your weapons in process of up-gradation and since almost all MMO players are into min-maxing they invariably end up destroying lot of available currency in form of weapons through these mechanisms.

EVE which is the closest stimulator to an open market place works differently though where in money sink is large battles and billions of in-game currency is lost irrevocably in form ship destruction.

Real World - is a lot more complex but has similar money sinks in form of consumer goods. Every-year Billions of Dolllars are sunk into latest gadgets and cars and by the end of their life-cycle which is getting exceedingly shorter these goods are junked. Cars are scrapped, Cell-phones are recycled at fraction of their original value.

Some of this is planned by way of technological obsolescence where-in product manufactures either through clever marketing gimmicks or through shoddy manufacturing ensure that the consumer is compelled to continuously buy new stuff and junk the old one.

Regards

The problem with supply and demand in bartering is that bartering is not in real time, the trade, in fact is in real time, but have you thought about what before the actual trade happened?

Say today, my country wanted 200 bale of cotton, and we have a production of 100 ton of banana to exchange it. Hence the exchange rate is 200 bale of cotton to 100 ton of banana. However, I cannot Increase my tonnage of banana, because it was grew a year before, so, unless the exchange rate changed I cannot get more than 200 bale of cotton. It would be a problem if I have an expected need of cotton (Like the winter is colder this year and hence the demand of cotton spiked)

You have to also consider the exchange rate does not have any effect of goods sale as good are prepared before sale. But people will go where they can make the maximum trade, hence one particular problem will appear with the barter system, and that is dilution of market due to the demand, say if this year apple trade is better than oranges, then if I am an orange farmer, I would consider changing my farm land to grow apple, but the problem is, while you have this idea, anyone else can also have this idea, so next year come, you get basically everyone selling apple. Which will pull down the sale of apple.

Barter trade cannot regulate the supply and demand, hence it would not work as any form of standard, it would work if you are talking about a one time transaction, but for frequent trade, it simply won't work as that would mean you need to predict what you need next year, and do it this year, and unless someone can see into the future, this, again, won't work.

 

[VCheng]

De-dollarize to what exactly ?

You know it's easy to sit in your garage and type horse-crap all day but you words gotta make sense to the outside world.

Yuan has severe capital restrictions to make it a viable transaction tool and less said about rouble is better.

I was thinking the same things as I filled up my SUV with cheap gasoline and paid for it in worthless dollars.

 

[Lonely Hermit]

@Spectre @jhungary @Providence
I am afraid the whole world is heading towards Japan style stagnation.
When Japanese real estate bubble popped Japan's central bank reduced the interest rate to 0 and since then they have been using loose monetary policy with no result.
Graph Japanese interest rate BoJ - long-term graph

This has lead to stagnation in their economy since

The FED, ECB, PBOC have followed the same loose monetary policy that is print money to escape deflation
In 2008 when we where hit with crisis Ideally what should have happened was fed would have allowed the market to collapse. This would have popped the inflated bubble just like it happened during great depression in 1929. But instead all the central banks in the world followed loose monetary policy.
Graph American interest rate FED - long-term graph

Graph European interest rate ECB - long-term graph

Graph Swedish interest rate Riksbank - long-term graph

Swedish interest rate are negative such a loose monetary policy has inflated a bigger bubble.
This level of quantitative easing and loose monetary will lead to Weimar republic or Zimbabwe style HyperInflation .

 

[Tiger Genie]

the bozos that write these made up articles I bet are paid in rouble rolls.