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The Rise of the 'Petro-yuan' and the Slow Erosion of Dollar Hegemony

Yuan Dollar

For seventy years, one of the critical foundations of American power has been the dollar’s standing as the world’s most important currency. For the last forty years, a pillar of dollar primacy has been the greenback’s dominant role in international energy markets. Today, China is leveraging its rise as an economic power, and as the most important incremental market for hydrocarbon exporters in the Persian Gulf and the former Soviet Union to circumscribe dollar dominance in global energy—with potentially profound ramifications for America’s strategic position.       

Since World War II, America’s geopolitical supremacy has rested not only on military might, but also on the dollar’s standing as the world’s leading transactional and reserve currency. Economically, dollar primacy extracts “seignorage”—the difference between the cost of printing money and its value—from other countries, and minimises US firms’ exchange rate risk. Its real importance, though, is strategic: dollar primacy lets America cover its chronic current account and fiscal deficits by issuing more of its own currency—precisely how Washington has funded its hard power projection for over half a century.  

Since the 1970s, a pillar of dollar primacy has been the greenback’s role as the dominant currency in which oil and gas are priced, and in which international hydrocarbon sales are invoiced and settled. This helps keep worldwide dollar demand high. It also feeds energy producers’ accumulation of dollar surpluses that reinforce the dollar’s standing as the world’s premier reserve asset, and that can be “recycled” into the US economy to cover American deficits.
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The Great Western Gas Fiasco

Putin Chin

Russia’s leader Vladimir Putin usually wears a perfect poker face. But last week in Shangahi, the icy-cold Russian president came awfully close to bursting into a big grin.

And why not? Putin had just stolen a march on his western rivals. The US-British attempt to wound Russia’s economy and punish Putin for disobedience had just blown up in their red faces.

After 20 years of difficult talks, Russia and China had just signed a huge deal that called for Russia to export 38 billion cubic meters of gas worth some $400 billion to China. The agreement begins in 2018 and will involve one of the globe’s largest engineering projects that links Russia’s remote gas fields to China’s pipeline system.

In addition, China will invest at least $20 billion in Russian industry and boost imports of Russian products, notably military systems. China will become Russia’s largest trade partner.

This was not the much ballyhooed “pivot to Asia” that President Barack Obama expected. It is, however, the long-dreaded embrace between the Chinese dragon and Russian bear that has given western strategists the willies.
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The Sino-Russian Hydrocarbon Axis Grows Up

Eight years ago, in the pages of The National Interest, Flynt Leverett and Pierre Noël identified a “new axis of oil”—a “shifting coalition of both energy exporting and energy importing states centered in ongoing Sino-Russian collaboration”—that was emerging as an increasingly important counterweight to the United States on a widening range of international issues.  While, at the time, Russian oil and gas exports to China were negligible, Leverett and Noël projected that Russian hydrocarbons would become “a major factor buttressing closer Sino-Russian strategic collaboration” in the future.

Western analysts have long been skeptical of the prospects for sustained Sino-Russian cooperation—but over the last eight years, the new axis of oil has become undeniable market and geopolitical reality.  Russia is now one of China’s top three oil suppliers (with Saudi Arabia and Angola) and is set to grow its oil exports to China significantly in coming years.
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The Chicoms Are Coming! Reflections On The Folly Of The War On Vietnam And Its Progeny

China Vietnam

Back in the spring of 1968 I also got an invitation to evacuate. It was from Secretary of Defense, Robert McNamara, suggesting I evacuate my cushy life as a student in East Lansing, Michigan to join his crusade to stop the “chicoms” from annexing Vietnam.

According to McNamara, Chairman Mao and Uncle Ho were joined at the hip in a crusade to turn all of Southeast Asia “red”.  Unless forcefully deterred with American guns and blood, the chicoms would come pouring across the Vietnamese border any day; it would be the Yalu river crossing all over again.

As it turns out,  right about then 40 million people were starving in the villages of China due to the massive crop failures brought on by Mao’s earlier “Great Leap Forward”.  During that ingenuous project,  hundreds of millions of Chinese peasants had been instructed to become overnight industrialists by building tiny steel furnaces in their backyards. Unfortunately,  the peasants had gotten so enthused by the Great Helmsman’s vision of turning the Yellow River Valley into the Ruhr overnight that they had melted their hoes and rakes for scrap!
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Why We’re No Longer Number One

Last week World Bank economists predicted that China would soon displace the United States as the world’s largest economy. The fact that this one-time economic basket case is now positioned to surpass the US is one more sign of the damage done to American prosperity by welfare, warfare, corporatism, and fiat money.  

Some commentators have predicted that China’s reign as the world’s largest economy would not last long. This may be true. While China has made great strides since adopting free-market reforms in the 1970s, China is still run by an authoritarian government whose economic policies distort the market in order to benefit state-favored industries. These state-favored businesses are often controlled by politically-powerful individuals.
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The National-Security State’s Dangerous China Taunt


It didn’t take long for the U.S. national-security state’s “pivot” toward Asia, after its disastrous 12-year foray into the Middle East, to produce a new crisis for Americans. In response to China’s decision to implement a new air zone involving a long territorial dispute with Japan over a group of islands, the U.S. military sent two B-52 bombers flying over the zone to test China’s resolve, proving that China is just a “paper tiger” given that it didn’t shoot the planes out of the sky.

It was a childishly dangerous taunt. What would have happened if China had shot down the planes? Then what? Would the U.S. national-security state have stood idly by, thereby exposing itself to being accused of being a paper tiger? I don’t think so. To show its resolve, the U.S. government would have had to retaliate with some sort of bombing campaign against China.

Don’t forget, after all, that under our system of government the president can now send the entire nation into war without a congressional declaration of war.
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The Dragon Enters NATO's Orchard

FD 2000 Air Defense

What a tumultuous week it has been. It began with United States president Barack Obama’s speech in the UN General Assembly last Monday signaling that the era of American dominance of the Middle East is ending. But the signal is already being acted upon before the week ended.

That is what the stunning announcement in Ankara on Thursday signifies – over the decision by the Turkish government led by Prime Minister Recep Tayyip Erdogan to select a Chinese defence firm, China Precision Machinery Import and Export Corp [CPMIEC], for a $3 billion contract to co-produce a long-range air and missile defence system for the country… 

From a long term perspective it is a close call to decide which is going to be more fateful – the American-Iranian thaw that Obama visualized in his UN speech and kick-started immediately thereafter, or the appearance of a Chinese company that is allied to the People’s Liberation Army to undertake the highly sensitive task of building a missile defence ensemble for a country on Europe’s doorstep that also happens to be a key member country of the North Atlantic Treaty Organization [NATO].
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