Will Commodities Be The New Reserve Currency As The Death Knell Of The Dollar Sounds?

 

Many respected economists and market analysts who favour the free markets approach concur that the world is heading into a new monetary order – what Zoltan Poszar of Credit Susse has called Bretton Woods III. Ignoring the bollocks being spouted by Klaus Schwab with his Great Reset and Joe (Dementiaman) Biden and his Build Back Better, we are heading towards a new economic reality that will see the collapse of the US$ as the default reserve currency, to be replaced not by any other fiat currency such as the Euro or the Renminbi, but by a system in which  commodities are the primary denominator of value. Should this turn out to be the case we can expect an acceleration of the shift in geopolitical power from west to East.

“When this crisis (and war) is over, the U.S. dollar should be much weaker and, on the flipside, the renminbi much stronger, backed by a basket of commodities,” said Pozsar in his dispatch on March 7.

For politicians and business leaders this will cause huge and complicated problems as the follies of their virtue signalling green agendas and net zero energy policies are exposed. For us ordinary punters it will mean a rough ride ahead:

• inflation will stay high, destroying the value of savings and pension funds.
• interest rates on our borrowings will be higher, rates on our savings will stay low
  
• Costs of food and consumer goods as well as energy products will be higher putting luxury goods beyond the reach of many people
  
• Unemployment may fall as manufacturing industry is repatriated.
  
• Virtue signalling policies such as the EU's paying farmers to let agricultural land return to nature (rewilding) will be abandoned as importing basic foods becomes too expensive
  

Due to the effects of  rising commodity prices and the political instability resulting from the Russia-Ukraine war is starting to change  our relationship with money from how we know it.

Currently the values of  all major currencies are defined by nominal values in relation to the US$, agreed and regulated by institutions such as the Central Banks. In future the real values of the commodities must be a factor in determining values. Commenting on the Biden Administration's bid to freeze Russia out of world markets by expelling Russian banks from the SWIFT international payments system, Vyacheslav Volodin, the speaker of the lower house of the Russian parliament, as reported by the BBC this week, told the world: “If you want gas, find roubles.”

 The Kremlin followed up with a bombshell that has hardly been mentioned by mainstream media:

The Kremlin also said Russia could start demanding payment in roubles for other commodities such as fertiliser, grain, metals and timber.

This means that Russia isn’t merely demanding rubles for gas and oil exports; it’s also going to demand rubles for commodities.

The ruble requirement begins today (1 April,) and will be rolled out across existing contracts over the next several weeks and months, according to the Russian finance ministry. Many European nations, notably Germany, depend on Russian gas to power their cities, nomes, offices and factories. The day that the gas tap is turned off is the day that Germany’s economy collapses and the nation is pluncged into chaos, suffering irreversible economic damage due to mass bankruptcies of German-based businesses.

European leaders have insisted they will refuse to pay for Russian energy exports with rubles. Such threats will be exposed as empty bluster the moment the lights go out and the machines stop working because the gas that fuels the power stations has stopped flowing.  The exclusion of of Russia from financial systems means Russia is largely unable to use dollars or euros. So there’s no point in Russia trading gas for fiat currencies that it can’t use and doesn’t want. So long as the West’s sanctions remain in place, if Russia were to sell gas for dollars or euros, that would be the equivalent of giving away its natural resources for free.

It is worth noting that the rouble has already fullly recovered from its plunge in currency markets immediately following the imposition of economic sanctions by the West. While the corporate media was initially claiming Russia’s currency would collapse within days, as this blog predicted the opposite has happened. Russia’s currency is actually climbing steadily in value while the dollar, the euro and the yen are all losing value at a shocking rate.

So why should The Kremlin not simply order pipeline operators to turn off taps on the pipelines to Europe and sell to China, India, Pakistan, Bangla Desh, Indonesia, Viet Nam and Philippines (about half the world's population between them.)

It is already happening “Germany and Austria have taken the first steps towards gas rationing,” the BBC reported this week. Austria relies on Russia for 80% of its natural gas. Germany simply has to find Roubles.

And no country is going to give away energy for free. Especially not to a group of “unfriendly” nations that unleashed economic warfare against you in the first place.

 

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Currency Wars

Rouble recovrs and gains as western leadsers shoot their own currencies in the foot

 

Watch the ruble climb as it is backed by energy, commodities and gold

The ruble has already achieved a full recovery from its initial plunge following the economic sanctions put in place by the West. While the corporate media was initially claiming Russia’s currency would collapse within days, quite the opposite has happened. Russia’s currency is actually climbing steadily in value while the dollar, the euro and the yen are all losing value at a shocking rate.

In terms of real purchasing power in America, the dollar is actually losing an astonishing 2% per month. If you have dollars in a bank account, you are effectively earning negative 2% interest every month in terms of the loss of its actual value. To make matters even worse, Biden has proposed a $5.8 trillion federal spending spree for 2023, meaning the government will be spending nearly $1 trillion every other month. And that doesn’t count the bailout money that’s coming in 2023, which will likely reach several trillion dollars all on its own. We aren’t far from the US central bank printing a trillion dollars a month.

Putin, on the other hand, made a tactically brilliant move in demanding payment in rubles because that will drive demand for rubles for years to come. The petro dollar is now giving way to the hydrocarbon ruble. Since Russia sits on about 30% of all known natural resources in the world, tying the ruble to those natural resources instantly makes the ruble a store of value, especially given that every nation in the world needs energy, grains, minerals, timber and other resources that will be linked to the ruble.

Nobody needs dollars, really, since dollars are a failing fiat currency that’s being devalued by the day. It’s sort of like investing in an athlete who just jumped out of an airplane without a parachute. What people need are things like food, heating fuel, electricity, oil and so on. This is what Russia’s exports provide. This is what’s backing Russia’s new vision for the ruble.

 

“Central banks have it easy when it comes to policing the prices of money in the nominal domain, but not when it comes to policing prices in the real domain of commodities, especially when pressures come not from demand, but supply,” he added.

In a case where commodities will pretty much dictate the new world monetary order, factors like the geopolitical standing of the commodities supplier in the international community, the real added cost on foreign cargo given the shift in trade partners, and the protection of the safety of shipping these commodities must be considered.

“The point we make is that for price stability, we need structural stability in both the nominal and in the real domains–deflation (structural) happens when demand cannot be funded, and, contrarily, inflation (structural) happens when supply is disrupted by war and other events.”

Foreign cargo

On foreign cargo, the world is suddenly seeing commodity-supplying nations making demands on paying for the exports in their respective currencies: Russia demands its exports are paid in rubles and Saudi Arabia has expressed openness to paying for Chinese exports in renminbi.

“It used to be as simple as ‘our currency, your problem’. Now it’s ‘our commodity, your problem’,” as Pozsar puts it.

And in a situation like this, supplier nations get to supersede the monetary world order. “According to estimates by the US Department of Agriculture, China holds half of the world’s wheat reserves and 70% of its corn. In contrast, the U.S. controls only 6% and 12% of the global wheat and corn reserves,” said Pozsar.

He also added that “energy and commodities are needed for virtually everything,” and as the leading energy exporter, Russia virtually “exports everything.”

Shipping

While Europe and other energy-importing nations are working on cutting off their dependency on Russia, the country is bound to look for customers in the East–primarily China–through less-efficient routes. This leads to a domino effect where China would import fewer resources from a much closer Middle East, and Europe looking into sourcing its energy imports from other producers with no established efficient routes. Essentially, this is why Pozsar believes the added cost of shipping would factor in the price of money.

“Consider that as cheap Russian oil gets diverted to China, China will buy less oil from the Middle East and then Middle Eastern oil will now have to be shipped to Europe with the same loss of efficiency as the shipment of Baltic oil to China,” he said.

Pozsar painted a picture of the possible scenarios coming off from these new trade routes, essentially concluding that shipments might take four months instead of around a week. He also laid out how the current trade routes and shipping vessel capacities would provide for a much harder import-export synergy in the new geopolitical realliances–which again, would cost more.

“Russia exports every major commodity imaginable, and the same problems will show up in other products and also with ships that move dry, as opposed to wet cargo. It will be a big mess,” explained Pozsar.

Protection

With the price of money heavily tied to commodities, its protection and security are expected to influence the new world monetary order.

Pozsar explained that while “currency, deposits, and money fund shares are interchangeable always at par,” the value of commodities is at the mercy of its security and consistency of shipment. Factors that might affect this include power shift (and price control) in favor of route regulators and bottlenecks in sea routes caused by external factors.

“More expensive ships. More expensive cargo. More expensive transit fees. Much longer transit routes. More risks of piracy. More to pay for insurance. More price-volatile cargo. More margin calls. More need for term bank credit,” he relayed.

The triangle of a new world order

Citing Ray Dalio’s stagflation view, Pozsar said that “the price signals from the four pillars of commodity trading will dominate the signals coming from the four prices of money.”

Arising from the ashes of the current geopolitical conflict, commodities-driven monetary world order would replace the current one, as Pozsar puts it.

“Commodity reserves will be an essential part of Bretton Woods III, and historically wars are won by those who have more food and energy supplies,” he added. In the new world order, banks would create eurorenminbi mainly to accumulate for buying Chinese Treasuries, outside money like gold (instead of G7 inside money), and commodity reserves instead of foreign currency reserves.

With the new approach to understanding the monetary order, financial and price stability may be achieved over time–but not without taking hits on inflation and interest rates.

“The new trinity of Bretton Woods III will be about ‘our commodity, your problem’– the EU’s inflation problem for sure, if not the inflation problem of the entire G7,” Pozsar ended.