The most surprising thing this week to me has been the legacy media ignoring the report that Saudi Arabia is talking to China about accepting the yuan for payments of oil. The signal this sends is not good. You might be wondering why this is such a big deal.
Well, the U.S. has printing a significant amount of USD over the past 15 years. This isn’t a Democrat or Republican thing. Both parties have signed on to the large deficits we have incurred since 2008. COVID only exacerbated the issue given the multiple stimulus bills passed by congress. This has led to an expansion of the M2 money supply (something you never hear about).
You might ask why pricing oil in yuan is such a big deal. Well, most oil trades in USD. This creates a significant demand for USD given the volume of trading the happens everyday. This demand for USD allows us to import many things from consumer goods to raw materials. Without this demand, the value of the USD will fall increasing the inflation pressures we feel. The result may be
Over the past 30 years, the management philosophy has been to offshore the labor intensive work. Between the environmentalist pushing businesses to go green and move away from fossil fuels as well as Americans not wanting to do the hard/dirty work, we have become consumers of materials and goods mine, manufactured, etc. from second and third world countries. The COVID pandemic showed what folly this was as global supply chains cracked and U.S. manufacturers had to delay production, reduce staff and take other actions to deal with these delays. Now, with the war in Ukraine hitting us just as supply chains were beginning to heal, you now face accelerating inflation, additional shortages and further delays in manufacturing. Couple this with a tight labor force and accelerating inflation, and you have the making of the stagflation era of the ‘70s returning.
Now, enter the conversation about the yuan replacing the USD for some oil sales. Should that occur and the USD is no longer the sole reserve currency, what would the impact be? I believe you would have a reduction in the value of the USD pushing the price of the goods we import up. To combat this, the reaction would likely be in increase in interest rates to attract investments in USD. This would put pressure on the federal spending available for social programs as a larger percentage of the budget would have to go to interest. The higher interest rates required to offset the increase in M2 money supply we have seen over the past 15 years would certainly drive us into a recession. Without the flexibility to ”stimulate the economy” with “free money” due to the increased rates and a reduction in taxes associated with the recession, the government will likely have to cut domestic spending programs. Given today’s environment, this will lead to civil unrest like never seen in the U.S.