FATCA and the Petrodollar
Last week I spent time watching some videos in a new YouTube channel that I subscribed to, called FATCAForum and reading thru a website called RepealFATCA.com. It was moving seeing first-hand accounts of how this law is impacting regular people. There is this one clip in which a man is actually crying as he describes how it has ripped his family apart. Of course FATCA is used as a catch all term to describe other related US compliance rules which include FBAR and PFIC reporting, together with similar efforts being promoted by the UK (son of FATCA) and other OECD nations. One thing commentators are failing to do in my opinion, is to explain what exactly is driving this.
Previously, I wrote about the 2007 to 2010 period where rich countries saw the ratio of their gross sovereign debt to GDP spike from 74% to 101% on average. British public debt jumped from just 44% of GDP to 79%, while US debt leapt from 66% of GDP to 98%. Furthermore, thanks to weak profits and higher unemployment, the biggest drag on public finances has come from lower tax receipts. FATCAand similar laws therefore unfairly target individuals when everyone knows that the real targets are corporations – particularly stateless ones.
But even this may be a red herring as the real Achilles heel of the US economy remains the petrodollar system. This is what allows the US to continue running deficits and printing currency to stimulate its economy. But for a while now, observers have noted that this cornerstone of US economic prosperity is in danger. CNBC published a story on February 14th this year entitled ‘Is the Dollar Dying? Why US Currency Is in Danger’. In it, CNBC points out that according to the International Monetary Fund, the dollar has drifted to a 15-year low and is shrinking as a percentage of the world's currency supply, raising concerns that the greenback is about to see its long run as the world's premier denomination come to an end. It is this phenomenon that China refers to when it speaks about the de-Americanized world. We all know it.
Last week I also had a great talk with a Certified Financial Planner. I suggested to him that the buoyancy in western equity markets is a product of QE-driven liquidity and not underlying asset values. On my mind was Ambrose Evans-Pritchard’s recent article in the UK Telegraph in which he quotes a JP Morgan report - "The current episode of excess liquidity, which began in May 2012, appears to have been the most extreme ever in terms of its magnitude." It went on to say that the latest surge is far beyond anything seen in the last three episodes of excess liquidity: 1993-1995, 2001-2006, and during the Lehman emergency response from October 2008 to September 2010, all of which set off a blistering rise in asset prices.
I keep thinking that all we need is some black swan event to tip an already fragile global economy over the edge and this time, we wouldn’t be able to leverage the same monetary tools to pull ourselves out of it again. Some speculate that Obamacare may be that black swan but I don’t buy it. Obamacare in the US, is like household energy bills in the UK. It’s a political game being played by politicians on both sides of the aisle. As a news reporter on Revolution (one of my favourite tv series these days) said last week, the mainstream media is not about truth but about creating heroes and villains.
The real concern is obviously the unravelling of the petrodollar system which the lamestream media conveniently plays down or just ignores. Consider what’s been happening in Saudi Arabia recently. The country inexplicably rejected a seat on the powerful UN Security Council then the nation's intelligence chief publicly announced a reduction in cooperation with the U.S. The writing is on the wall. Obviously they are upset with the Whitehouse’s failure to attack Syria and Iran.
Add to this America’s growing energy independence thanks to shale gas. This is forcing the Saudi Royals into the willing embrace of the Chinese. China has just become the world's largest oil importer, surpassing America's 6.24 million barrels per day with 6.3 million barrels per day. This is a sustainable increase in imports according to Wood Mackenzie which predicts that Chinese oil imports will be 70% of world demand, by 2020.
So the question is really when would China start paying for oil imports with RMB? Fortunately it wouldn’t be too soon because of two reasons. Firstly, the RMB is not fully convertible and tradable like dollars and Euros are. Secondly, it seems as if China prefers the title of world reserve currency be shared by a basket of currencies as opposed to just one. So China would want their RMB to be ‘a’ reserve currency and not ‘the’ reserve currency.
And so the currency wars continue…
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