Store of Value: Oil to Commodities = Dollar to Yuan

Money is a Medium of Exchange (交易媒介), a Unit of Account (赊账标准), and a Store of Value (价值储存). The USD has been doing an excellent job as a medium of exchange (dollars are without a doubt the most widely accepted currency on the planet). The liquidity (流动性) of the dollar is absolutely unmatched by ANYTHING else on earth today. Not by gold. Not by silver.

Liquidity of the USD is guaranteed because of OPEC agreement in 1971 that all oil sold must be sold in USD. Every economy requires oil to survive. Even if you wanted to store all of your assets in Euros, Yen or CYN, you’d have to trade them for dollars every time you another oil tanker shows up at the port. During some periods, currencies have been pegged to gold or silver. Since 1971, the USD has been backed in oil. Prior to American occupation, Iraq started selling oil in Euros. In Dec 2007, Iran stopped selling oil in USD. The only strong ally of the US in Iraq was the UK, who is not a member of the Euro.

Unfortunately, the USD as a Store of Value (保值) is becoming more of a problem. More nations aren’t terribly concerned because their dollar holdings are just held in the treasury and not actively managed to maximize return.

The People’s Bank of China (中国人民银行 AKA 中行 AKA PBC) is more active in asett management and is the single largest holder of USD. When the Financial Crisis hit last year, the PBC increased it’s speed in using some of those dollars to acquire mineral reserves and other basic commodities around the world. Most notable deals have been in Australia, Africa and South America.

Short term, nothing will change. China has raised Export Rebates 7 times in 2007 attempting to re-ignite export growth with the US.

The Euro had a shot to become the global reserve currency, but the American showdown against Euro oil trading in Iraq helped prevent it, and now the Euro is showing signs of weakness. The needs of the member countries are diverging and it won’t get the boost anticipated boost belonging to the world reserve currency. The Yen doesn’t have a shot because Japan’s already got it’s own problems. However, the CYN is positioned to become the next global reserve currency.

Eventually, central banks will choose between using an oil backed currency backed a deeply indebted economy, or a commodity backed currency backed by a economy with large currency reserves.

If you owe the bank $1MM the bank owns you, but if you owe the bank $100T, you own the bank. This is also true of the US/China relationship. Short term movement away from the status quo would destroy both China and the US’s economies.

Short term, China will continue to be the land of tax avoidance, fake bookkeeping, and financial lies that may even make the USA look good by the time that they come to the surface. Short term, you’d have to be crazy to invest your central banks assets into the Black Box of China – which can only favorably compare with places like Russia – because we have no idea how good or bad the real numbers are. At the same time, you’ve have to be crazy to invest your central banks assets in dollars, because we do know how bad the numbers are.

Medium term, since China is working to re-ignite export led growth, and the US is printing dollars like they are going out of style, so nothing will change.

But one morning a few years from now Central Bankers are going to wake up in the morning and say, do I really want to store my money in rapidly devaluing oil backed paper, or in relatively stable commodity backed paper?

4 thoughts on “Store of Value: Oil to Commodities = Dollar to Yuan”

  1. An outstanding share! I’ve just forwarded this onto a coworker who had been conducting a little research on this. And he in fact ordered me dinner because I found it for him… lol. So let me reword this…. Thank YOU for the meal!! But yeah, thanks for spending time to talk about this topic here on your web page.

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