Monday, November 25, 2013

China Setting the Table for Saudi Petrodollar Change

The weekend, the US took a first step in an agreement with Iran with regards to their nuclear program. It is a bit confusing as the two sides did not even react the same about what was it in (right to enrich). There are a lot of good gimmies for the Iranians and not much beef for the West. The Iranians are even allowed wiggle room on enforcing changes due to constraints of their political system. It has also angered big partners in the Middle East Israel and the Kingdom of Saudi Arabia (KSA). Following the Wisconsin Project's information, I lean towards the side that thinks the Iranians can assemble a few nukes now if they want and this six month window gives them more time. The Saudis have recently let it leak that they have nukes on demand in Pakistan (Sunni connection), and this agreement may force them to move in the next six months to flex their muscles. China is aware of this as well and is setting the table for the Saudis to end the petrodollar.

China announced they do not see a benefit to increasing foreign currency reserves any longer. They only said foreign currency reserves, not total reserves. China also announced moving to add oil contracts to the Shanghai Exchange. As I wrote previously, the Saudis just have to accept yuan only from China for their oil, and this would hurt the petrodollar enormously. The beauty of the Shanghai Exchange's gold market is that it is a physical market with a high percentage of contracts ending with physical delivery. The Comex has become a paper market, and the very strength of the West's market (liquidity) has been abused by the New York banks to become a game rigged for their benefit. The Western banking center has lost the other strengths they used to have relative to other financial centers, financial transparency and the strict enforcement of law. China wants to see Shanghai become a major international financial center, and the Saudis using the Shanghai Exchange would cement a quasi-petroyuan and give the exchange more liquidity and credibility.

This entire Iranian temporary agreement may end in six months with nothing else. It might be a giant blunder. It might also be a White House admitting that Iran technically has nuclear capability, and we must accept it. Another reading of this might be that this temporary agreement is really cover for the Israelis and Saudis to feign anger, publicly announce a shift away from the US, orchestrate a bombing run on Iranian facilities and the US quietly helps them out. The US could plausibly deny any involvement and denounce said run while applauding it. The US did sell fifty five bunker busting bombs to Israel in 2011. That could be the master plan.

The final phase of the petrodollar system has been in play since the American financial crisis of 2008 that was followed with no criminal proceedings. A system will work if the laws are enforced, and with no enforcement, it made the gaming of the system acceptable, wounding the integrity of it for voluntary players. The KSA voluntarily participates in the petrodollar system. A change does not happen quickly when security agreements are in play, but even the slight suggestion that a change may come will spark a reaction. The warming up to Iran may be a rouse or a quick blunder by an administration that only cares about politics at home, but it might be a new shift in the Middle East.

It might also be a sign of a new status for America. We have interests not allies, and nations aligned with us may start aligning elsewhere as our interests have changed. If America's power projection and status has changed, we will see more upheaval and a realignment of many nations. This will not happen overnight but no global reordering has happened quickly.

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