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Mats Kaarbø

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What will China's decision to bypass the American dollar when trading oil mean?

It all starts with this article: http://www.examiner.com/article/dollar-no-longer-primary-oil-currency-as-china-begins-to-sell-oil-using-yuan

"For the first time since the 1970's, when Henry Kissenger forged a trade agreement with the Royal house of Saud to sell oil using only U.S. dollars, China announced its intention to bypass the dollar for global oil customers and began selling the commodity using their own currency."

What does this action by China mean? How will it affect people across the world and especially people in America? Will this escalate the tension between America and China? How will this affect the current world currency or the whole global economy for that matter? [Researched and sourced answers are preferable.]

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    Sep 14 2012: Many things are occuring at once. Yesterday the US Fed announced yet another stimulus and the price of oil jumped to over $100 per barrel. The US dollar is in decline. The US foreign policies and current economic problems have a impact on the dollars value throughout the world.

    The ratio of the US dollar to the Chinese Yuan Renminbi is 0.158300 even though the US is in decline the Chinese wish to enter world level politics and economics. As Hugo has expressed the problem is not the economics of China it is their leadership. Their focus and desire to achieve a leadership position in the world has blinded their need to invest and develop internally.

    I would think on a world level that for the present the dollar will stand. There is much at stake in the next election. The esclation of the US debit and even more stimulas packages and by the white houses own estimate an additional 3 trillion will be added to the US debit in next year alone. Lack of foreign policy is currently in the forefront of the news both here and abroad. The fight between the President and Secretary of state Clinton have added to the problem. Obama's announcement that he accepts Jersulum as the Capital of Isreal not Tel Aviv has irritated one of our long standing allies.

    The world is seeing shifting ideas, policies, and philosophies from the US administration that leaves a unclear picture of what the US supports or not. Many of our closest allies went to the conference in Iran, what does that signal.

    If the US "falls off" the "fiscial cliff" that is in our near future our world position is a thing of history. That is change you can believe in. The US rating is currently Aaa and set to fall yet again.

    China does not have to pursue world leadership the US is handing it to them.

    I am proud to be American but am deeply troubled with probems that were of our own making. The sad part is that we refuse to learn from our own errors. We continue to throw money at the problem.

    Bob.
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    Sep 14 2012: On China's side, China is actually doing this to ease off some adversities it's facing in economic field. Granted, China's economy has been skyrocketing, closely following America's and trying to find the right time to sneak ahead, but as we all know its economy is largely depending on the construction of infrastructure, which means the economy growth will go stagnant if the government doesn't implement some policies to promote innovation and creativity in industrial field. And unfortunately, that's exactly where China is right now. China is aiming to increase the value of its currency to at least preserve its monetary bases, namely by bypassing the dollar for oil customers.

    I'm not sure about the tension between America and China since China has most of exchange reserve in dollars and America owes a big debt to China, but surely the action will only provide China with a reprieve until its economy growth just halts, unless China starts thinking about tackling the real problem in ways of education and many other things.
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    Sep 14 2012: It means that the dollar will no longer be the only currency de facto backed by oil. Which means that the U.S. inflation and stability will be less accepted. But China has it's own set of problems and is not ready to be the go to world currency. At this point it is still going to be the U.S.

    Of course I could be wrong but that is the way I see it.
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    Sep 17 2012: It might actually be a good thing for the US in the long run as the exchange rates will rely more on domestic issues rather than being artificially supported by use as a world standard. US companies might be able to move manufacturing back home, and exports might flourish if your lucky.
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    Sep 16 2012: Great! we're in a good position to offload our sixty million sheep.
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    Sep 16 2012: This is a smart move for China. Oil is the new gold standard. This is why China is sending anti-Japanese propaganda through their media. Japan is on the verge of making oil obsolete. China will destroy Japan before this happens. It's not at all about some small islands. Call me crazy but this is what I read between the lines.
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    Sep 15 2012: Important Question and no doubt distarous for the U.S.

    http://www.zerohedge.com/news/china-and-iran-bypass-dollar-plan-oil-barter-system-and-deeper-dive-iranian-oil-bourse

    "China has decided to commence an barter system in which Iranian oil is exchanged directly for Chinese exports. The net result: not only a slap for the US Dollar, but implicitly for all fiat intermediaries, as Iran and China are about to prove that when it comes to exchanging hard resources for critical Chinese goods and services, the world's so called reserve currency is completely irrelevant. The implications of this are momentous, especially for US debt, whose indomitability is only predicated upon the continued acceptance of the currency it backs as a global reserve. If China is now openly admitting to the world that it does not need US monetary intermediation, and by implication, the "debt" backing said intermediation, what then? And who will follow China next?"

    the $US as settlement currency for all oil transactions is one of the factors that has kept the $us artifically viable

    Libya and Iraq's plans to settle oil exports in its own gold back currency some say was a factor in our intervention in those two countries I( and of of course their moves toward nationalization of all their oil and other resources)

    Chinas unsustainable 7% growth rate makes its consumption of any goods services and resources a driver oof prices, availability and terms.across the board.

    Disaster for theUS and long time coming//no surprise

    And maybe no answer form the $us that will make a differece.t
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        Sep 16 2012: Hello Ed,

        So nice to see you here and of course as a wise man and an oil industry insider..what you say carries a great deal of weight with me.

        I agree with your every point.

        I think you are rightthat with Chnai holding so much of our debt as its investment it does't want to upset the apple cart for us in a way that would comprose their holdings..perhaps that's why they did this deal as abter deal insteda of a currency deal?

        I don't think they will be buying a lot more of our debt though or looking for any kind of greater co entanglement with the future of the $us.

        I know what ou are saying of hte Canad/China good relations is true and a further warning to the US. If Canada isn't with us in blocking trade with Chia on things like meat and grains..we are not in good shape.

        Do you see our problem as amonetray policy problem mainly or a political leadership problem?
  • Sep 15 2012: Researched and sourced answers......Greed and power prohibits as usual any answer.
    • Sep 16 2012: They are preferable, but not a requirement.
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    Sep 15 2012: Corporate are merely hidden personal taxes. Corporations are pass-through entities. If they are taxed, they add those taxes to the cost of goods and services and send them on to the next link in the chain, ending up in the hands of the consumer. Imagine the hidden taxes built into your car. The ore miner, the plastics maker, the truckers, the smelter, the machinists, the parts makers, the manufacturers, the dealerships, etc - each adding its own taxes to

    re: economy unsustainable: No, I meant that the economic model is a ponzi sheme that cannot be sustained in the absence of consumers.

    re: automation: Humans have been on this planet for tens of thousands of years. Automation for little over 100. It has transformed our lives, but it will eventually put all people out of work. Thus, I suggest that we begin educating ourselves about alternative social models that will better serve us. This is our only chance of a controlled crash vs. an uncontrolled crasy.

    Yes, there are mnay companies who are making huge profits - the biggest of them all - Goldman Sachs, that is replacing analyists with computers who are far more efficient and less expensive. Trading stocks at near the speed of light, nano-minute by nano-minute, is not building anything meaningful. I'
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    Sep 14 2012: I remember a preacher going on about this a decade ago. The idea is to emasculate the American people in readiness for the new world order. Sent a shiver up my spine !
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    Sep 14 2012: What we will see first, as is occurring in Spain today, a run on the banks as wealthy people attempt to move their money either offshore or into Chinese banks while they can get a fair rate of exchange. They are doing this now. this lowers the value of the dollar and those caught with cash will find it's exchange rate is very low. Of course this will create local inflation as products are increased in price to reflect the new currency exchange rates and decline dollar value.
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      Sep 15 2012: I know I'm just being controversial for the sake of controversy here... but I hope this is true. I hope all the rich people move their money to China, where the state owns everything.

      What perfect just desserts that would be. They sold the western world on socialism, moved all their money to China... and then, during it's economic "turmoil"... China seizes their assets, and we all get to start all over again, in a capitalist society, without rich people : p

      It's fun to dream.
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        Sep 15 2012: First come first serve. I think the Chinese will leave the wealthy very much in charge of their assets in the US. They have all the population troubles they need in their own country. Nothing much would change except the the dollar would be nil and the Yuan would be the new money. Those caught when the Yuan declines in value will be the ones hurt.

        You could always move your money to Holland. It's always hard for me to figure out how the money exchange thing works for some reason. Take programming for instance. I can write a program in any programing language you want, understand programming logic to a very complex level but I can't use a cellphone without deleting the call or something else. :)

        I guess I should add that you don't leave your money in the Chinese banks, you just want to exchange your dollars for their Yuan. Once you get the Yuan, you could use an Iranian bank :)
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        Sep 15 2012: I think this guy thinks similarly to you David. You might read this:

        http://seekingalpha.com/article/315952-why-investments-in-china-will-eventually-be-worthless
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    Sep 14 2012: By joining with Russia to undermine the U. S. Dollar in this way, it will cause the US dollar, that is already seriously devalued by excessive dollar creation, to be devalued even more.

    but do understand that our economy is currently unsustainable. Take population growth and combine it with automation (not just in manufacturing, but in so many jobs where the computer itself has put people out of work), and you have a growing economy (which is really just devaluation of currency) combined with an absence of consumers who are no longer earning $ to buy goods, and the value of money is quickly coming to naught.

    this is something that we should all be preparing for. No one will be there to save us when our $$$ has zero perceived value. The value of our money has decreased by 97% since the inception of the fed. It survives by faith alone - a faith that is being eroded.
    • Sep 14 2012: "but do understand that our economy is currently unsustainable. Take population growth and combine it with automation (not just in manufacturing, but in so many jobs where the computer itself has put people out of work), and you have a growing economy (which is really just devaluation of currency) combined with an absence of consumers who are no longer earning $ to buy goods, and the value of money is quickly coming to naught."

      US economy is unsustainable? Are you rather referring to US debt and spending?

      Automation is a good thing and it was around for over a century. What has to happen however is that people continue to learn new skills and acquire knowledge as we continue to move toward knowledge based economy.

      There are many people and companies in the US that are making enormous profits so we need to ensure companies and wealthy individuals get taxed fairly.
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        Sep 15 2012: Corporate taxes are merely hidden personal taxes. Corporations are pass-through entities. If they are taxed, they add those taxes to the cost of goods and services and send them on to the next link in the chain, ending up in the hands of the consumer. Imagine the hidden taxes built into your car. The ore miner, the plastics maker, the truckers, the smelter, the machinists, the parts makers, the manufacturers, the dealerships, etc - each adding its own taxes to

        re: economy unsustainable: No, I meant that the economic model is a ponzi sheme that cannot be sustained in the absence of consumers.

        re: automation: Humans have been on this planet for tens of thousands of years. Automation for little over 100. It has transformed our lives, but it will eventually put all people out of work. Thus, I suggest that we begin educating ourselves about alternative social models that will better serve us. This is our only chance of a controlled crash vs. an uncontrolled crasH.

        Yes, there are many companies who are making huge profits - the biggest of them all - Goldman Sachs, that is replacing analysts with computers who are far more efficient and less expensive. Trading stocks at near the speed of light, nano-minute by nano-minute, is not building anything meaningful into a GDP that is being artificially sustained by such practices.

        Better to cap top incomes than to add more hidden taxes to the products & services that you already can't really afford.
        • Sep 15 2012: "Corporate taxes are merely hidden personal taxes. Corporations are pass-through entities. If they are taxed, they add those taxes to the cost of goods and services "

          That is not necessary the case. For example, large corporations like Google, Apple and Amazon are using tax loopholes to pay low tax rates. At the same time they accumulate billions of dollars in their cash reserves. They can pay their fair share of taxes instead of accumulating so much?

          In addition due to competition companies usually can't just pass the taxes to the consumer but rather look at how to make things more cost effective. Or they can stop paying excessive salaries for their CEOs.

          "Automation for little over 100. It has transformed our lives, but it will eventually put all people out of work. "

          I think this will not be the case for the next few decades. Automation is currently happening in manufacturing and low level jobs. That does not mean we don't have large number of jobs in service sector, research and development, IT etc. Because machines still can't think people that are willing to upgrade their skills can always find a job. I agree that people that do not want to upgrade will have harder time to find work.

          Another trend I see is that there are fewer people that are working. Many people start to retire early or work PT instead of full time in order to have better life-work balance.

          "Goldman Sachs.... is not building anything meaningful"

          I agree on this point =)

          Cheers
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        Sep 15 2012: I don't know how old you are, but a few decades goes by very quickly. Those who have children might disagree with your unspoken suggestion that we not start preparing for the inevitable right now. Then again, they haven't so far. LOL

        You know, if we were to cap top incomes, and better regulate how much $$$ a corporation or a person can hold in reserves (don't know the number any more or even if there is one, but when I owned a business 10 years ago, it was a quarter of a million for corporations), we could go a long way to fixing the problems.

        If a company is tax-free, and if caps are installed, then the price of goods and services goes down - where it can be properly taxed to you directly - through a national sales tax.

        The USA had a revolution because King George wanted the colonies to pay the equivalent of 1.7% in exchange for military security from the Indians.

        I think that if ALL taxes were out in the open, that there wouldn't be nearly so much complacency as we see our futures being flushed down the toilet.
        • Sep 16 2012: "I think that if ALL taxes were out in the open, that there wouldn't be nearly so much complacency as we see our futures being flushed down the toilet."

          Yes I completely agree. I think this would solve most problems and make the system fair. Adding artificial limits might be counter-productive but more transparency would allow anyone to question why certain individuals or corporations don't pay their shares?

          cheers
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        Sep 16 2012: Perhaps then the banking system is the problem. What if we penalized corporations for accumulating weath through interest income. We should install a clause that a certain percentage of revenue be spent in research, innovation, and employee re-education.
        • Sep 16 2012: Yes I also think the banking system is broken.

          I would not place any artificial limits on how much corporations can accumulate but at the same time they need to contribute back to the society in terms of taxes, payment of damage made to the environment through their actions etc.

          Transparency might be the answer where employees can then ask for company's investment in their re-education and government can ensure it receives fair tax revenues in order to support research and innovation?
  • Sep 14 2012: Not surprising at all. However, aren't the exchange rates between currencies pretty easy to look up?
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    Sep 13 2012: Featuring this Conversation.