Petrodollar Exiting Through the Back Door?

“When the dollar collapse comes, it will happen two ways – gradually then suddenly. That formula, famously used by Hemingway to describe how one goes bankrupt, is an apt description of critical state dynamics in complex systems.

The gradual part is a snowflake disturbing a small patch of snow, while the sudden part is the avalanche. The snowflake is random yet the avalanche is inevitable. Both ideas are easy to grasp. What is difficult to grasp is the critical state of the system in which the random event occurs.” Jim Rickards, Currency Wars

As already published in the previous Oil and Gold Reports, the US dollar hegemony has been subject to increasing bouts of criticism. China, Russia, and India, but also Japan, are the countries that have gradually been switching the settlement of their bilateral trade in their own currencies or in commodities in order to circumvent the US dollar. This is a clear sign of a paradigm shift, especially since more than two thirds of the US currency is held abroad.

Last year, the Chinese rating agency Dagong Global Credit raised eyebrows when it downgraded the rating of the US to A and reduced the outlook to “negative”. According to Dagong, the QE scheme has sustainably eroded the legitimacy of the US dollar as global reserve currency. The rating agency regards the lack in willingness to pay off the government debt as ignorance vis-à-vis the creditors. In 2011 S&P downgraded the US rating to AA+. Since then, according to S&P, reckless budget policy continues, and a further downgrade is possible. Since Barack Obama took office, the US government debt has increased by 50%. Read More