Re:The Global Dollar Short Squeeze
by LatteLazy on Friday April 10, 2020 @05:37PM
(#22837605)
So I am no expert and I am not the commentor you replied to but...
I thought the idea behind PetroDollar was that countries sold their oil, that gave them big trade surpluses, then they used that to buy US Government Bonds. They chose US government bonds because they are secure, inflation proof, liquid and it gives them geopolitical clout.
The fact that many oil transactions are priced in USD isn't really relevant because if you get paid in Euro\Yuan\Rubble and immediately turn them into USD, then USD is where the demand will actually be. As OPEC members all wanted dollars because that's what you use to by US Govt Securities, that makes the USD the "petrodollar", even if they all insisted on being paid in say Euros and then sold those euros to buy USD it would make no difference.
So that answers why it doesn't really matter what currency oil transactions happen in.
But it represents another problem for the PetroDollar hypothesis: Who is buying US government debt and how much are they buying (net). Because that is where the real strength is, people want US bonds, not US Dollars.
When all this started, there were few countries with long term surpluses, just Opec really. But since then Japan and China (Japan apparently holds more than China as of 2020 I think, but the link says the reverse as of 2017) has eclipsed them. Saudi are minor holders actually, other Opec holders not even making the top 20.
Also, oil prices for the last 20+ years have been very unstable. At times (Iraq wars, the 2008 crash etc) the oil price has been high and that means Opec have a lot of cash to purchase bonds. But at other times (like now) the oil price has been low. Right now, Saudi has a trade deficit. So they are SELLING their US securities to fund that. Also, the slow erosion of market share of Opec has meant that even high prices are no longer as big a revenue boon for them.
Similarly, China has become a much bigger purchaser of bonds. That sort of works in favour of the "petrodollar" (should it be petro\sino\japan dollar now?) hypothesis as it makes it easier for the US to run a government deficit. But right now, China is coming out of quarantine so their economic numbers are about to stall right?
So if the Saudis (and Opec) can't afford US bonds and the Chinese and Japanese are not buying them (as their economies stall), just how interest rate resistant is the US deficit? I suspect people know that the treasury will print dollars to maintain the deficit as they have been since 2008. But that only happens without inflation when everyone else (Brits, Eurozone etc) are doing it too. But if they manage Covid-19 better than the US (and respectfully that doesn't seem hard), they wont need the same deficit funding. And similarly EU social structures mean they can deal with disasters like this without the use of central government funds.
So really is this a case of Who Knows what will happen?
Sorry if I am missing something here or it's all armchair economics :)
I thought the idea behind PetroDollar was that countries sold their oil, that gave them big trade surpluses, then they used that to buy US Government Bonds. They chose US government bonds because they are secure, inflation proof, liquid and it gives them geopolitical clout.
The fact that many oil transactions are priced in USD isn't really relevant because if you get paid in Euro\Yuan\Rubble and immediately turn them into USD, then USD is where the demand will actually be. As OPEC members all wanted dollars because that's what you use to by US Govt Securities, that makes the USD the "petrodollar", even if they all insisted on being paid in say Euros and then sold those euros to buy USD it would make no difference.
So that answers why it doesn't really matter what currency oil transactions happen in.
But it represents another problem for the PetroDollar hypothesis: Who is buying US government debt and how much are they buying (net). Because that is where the real strength is, people want US bonds, not US Dollars.
When all this started, there were few countries with long term surpluses, just Opec really. But since then Japan and China (Japan apparently holds more than China as of 2020 I think, but the link says the reverse as of 2017) has eclipsed them. Saudi are minor holders actually, other Opec holders not even making the top 20.
https://en.wikipedia.org/wiki/United_States_Treasury_securit...
Also, oil prices for the last 20+ years have been very unstable. At times (Iraq wars, the 2008 crash etc) the oil price has been high and that means Opec have a lot of cash to purchase bonds. But at other times (like now) the oil price has been low. Right now, Saudi has a trade deficit. So they are SELLING their US securities to fund that. Also, the slow erosion of market share of Opec has meant that even high prices are no longer as big a revenue boon for them.
Similarly, China has become a much bigger purchaser of bonds. That sort of works in favour of the "petrodollar" (should it be petro\sino\japan dollar now?) hypothesis as it makes it easier for the US to run a government deficit. But right now, China is coming out of quarantine so their economic numbers are about to stall right?
So if the Saudis (and Opec) can't afford US bonds and the Chinese and Japanese are not buying them (as their economies stall), just how interest rate resistant is the US deficit? I suspect people know that the treasury will print dollars to maintain the deficit as they have been since 2008. But that only happens without inflation when everyone else (Brits, Eurozone etc) are doing it too. But if they manage Covid-19 better than the US (and respectfully that doesn't seem hard), they wont need the same deficit funding. And similarly EU social structures mean they can deal with disasters like this without the use of central government funds.
So really is this a case of Who Knows what will happen?
Sorry if I am missing something here or it's all armchair economics :)