Currency Matters

If you control food, you control people.
If you control oil, you control nations.
If you control currency, you control the world.
– Henry Kissinger

Guarding The Old Order
The above is a famous quotation that some believe underlies Kissinger’s geopolitical realism, from the standpoint of the oligarchs of financial capitalism whom he serves.

Ownership does not necessarily mean control, and those who control do not necessarily have to possess or own the asset. Take oil, for example, the means of control by the world’s financial oligarchs have been refined to tying oil transactions in the world exclusively to a single currency, the US dollar. Of course, that tie-in has to be backed, and rigorously enforced, by military might and other maneuvers, clandestine and/or diplomatic. Major players in the USD-denominated oil futures market, operating in tandem with those in the financial funding markets, can practically determine the pricing of, and who reaps what benefits from, the world’s oil and natural gas resources. This is often irrespective of the real supply-demand relationships. Hence, this period of World Order is often referred to as the Petro-Dollar World.

Today, as a result of multiple factors, energy supply of oil and natural gas is in over-abundance. That will change the overall formula of power dominance. (Some are suggesting that the strategic resources have evolved from oil and gas in the last half a century, to data and cyber resources in the future, the control of which has yet to be sorted out.) In any case, what is critical still is the status of currency, namely, on whose IOU credits the world conducts its economic transactions. The New Order may not be a monopoly as far as the balance of power of currency is concerned. But whatever it may evolve into, currency matters.

Two weeks ago, China launched the RMB-denominated oil futures contracts in Shanghai. A unique feature of these contracts is the option to settle into gold. These financial instruments are designed to facilitate the purchase of oil and natural gas by China, using the RMB as the payment currency. RMB is increasingly useful to the exporting countries because they can use it to buy goods from China in return. The gold option in the futures contracts enable the sellers to protect the value of the RMB they receive.

A year ago, I alerted you to the significance of China’s launching of the RMB-denominated futures contracts on gold. I pointed out that it provided a “plank” upon which the USD and the RMB can potentially see-saw on relative neutral terms. That would constitute one of the prerequisites and useful mechanisms to the design of a prospective currency cooperative framework between the two major countries in the world. The introduction now of the RMB oil futures contracts is another mechanism in the process.

China will be the world’s largest importer of energy for some time to come. The US has dramatically changed from the largest importer to being self-sufficient domestically. In fact, it is priming to become a major exporter, eyeing up China as a big customer. For national security reasons, China buys from all over the world, with no more than 20% from any single country. Qatar, Russia, Iran and recently Saudi Arabia and Venezuela, are all willing to accept RMB as payment under the appropriate conditions. The RMB futures contracts help meet some of these conditions. They go a long way toward making the RMB a potential major Petro-currency.

When buying from the US, China can use USD. It has plenty of that, and needs to find good use for it. Presumably, the US will insist on USD. But wait a second, not if we enter into a currency cooperation framework in which there is a substantial commitment to swap for each other’s currencies, allowing both more flexibility to manage their balance of payments. [That is a part of my idea, but there is yet a lot of technical details to be worked out and tough negotiations ahead.] In any case, a New Order may be emerging.

Energy Matters
Early this year James Woolsey, one of the more clear-headed ex-directors of the CIA, advised the Chinese that the immediate key to US-China relations is energy cooperation.

Everything went onto a good start with China agreeing, in the first instalment of the 100-day pledge on economic cooperation, to buy natural gas from the US on a best-term basis. For reasons yet to be confirmed, no more progress was made in the senior-level Economic and Financial Meeting in late July that marked the end of the first 100 days. With no joint statement and no press conference after the meeting, things could not have gone very well.

The only thing I heard is that the US side was not prepared for the meeting. Out of almost 300 items under discussions between trade and investment representatives, with many that had progressed to a stage where agreement could have been signed, the Trump team was not ready (or was not prepped) on anything. Instead, they pressed for things which were not sufficiently discussed in advance. There was a total disconnect.

It was not unexpected to the Chinese, who know well in advance that Donald Trump would ask for the sky and have a hidden play book. Graciously, the Chinese issued a positive statement, publicly praising the commitment on both sides to make constructive progress. Donald Trump was less subtle, and quickly initiated the first steps to a potential trade war by launching an across-the board section 301 investigation directed at China.

The Chinese have time on their side. They have plenty of US dollars, 3 trillion in their reserves. They have been diversifying their FX holdings by (1)purchasing gold and (2)building up their oil and gas reserves, during the last two-year period of (a)a strong dollar and(b)low energy prices. My guess is that the US would like to conclude a major natural gas deal with China, to preempt the worsening of terms as China’s options keep improving. Now, the USD has sharply depreciated, and the RMB appreciated. A trade war always hurt both sides. It is the opposite of win-win. So eventually, the two sides will come to agreement. China will make room, but Trump and Wilbur Ross had better be reasonable. Time is not on their side.

It would make sense for China to pursue a balancing act among its suppliers, weighing geopolitical and other strategic factors (I will try to update you in a piece on “Why Afghanistan?”). An unstable US domestic political reality, however, makes doing business difficult and risky. The sooner we come to establishing a currency cooperation framework, the better the chance we have for peace and development in the world. In the big scheme of things, it is abundantly clear with China’s latest moves that indeed, energy matters, as does currency.


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