Discover more from Contemplations on the Tree of Woe
Predictions and Prophecies for 2023
The End (of the Petrodollar) is Nigh...
In a few days we’ll be ushing in the 2,023rd Year of the Lord. At times such as these, it is customary for armchair generals, pajama-clad pundits, and demoralized doomsayers to offer up their predictions for the year(s) to come. I am a man of custom, or, at least, a man who follows Twitter trends. Here, then, is my prediction for 2023 AD. I have just one, though it has many spillover effects.
The Petrodollar System Will End!
As I explained in my series Running on Empty, the petrodollar is the centerpiece of American hegemony. I predict that in 2023, at the latest 2024, that system will end. Its demise may be disguised by the mainstream and financial press, but it will be self-evident in the transactions themselves, and its aftershocks will be mighty.
Contemplations on the Tree of Woe is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.
Now, the end of the petrodollar system has been a long time coming, of course. It’s been a major goal of America’s strategic competitors for years. In 2017, China and Russia created the petroyuan so that its partners could trade for oil without using dollars. However, the petroyuan did not unseat the petrodollar in the six intervening years. 80% of oil transactions remained in USD. Why?
Saudi Arabia, the linchpin of the petrodollar system, continued to insist on using dollars in its transactions.
The Chinese continued to be reliant on trade with the US to fuel their economy, and thus could not risk destroying the system that made the US dollar valuable.
The US has a proven track record of using military force to support the petrodollar, and with Donald Trump in charge — known to Chinese citizens as “Emperor Trump” for his vigorous policies — the Chinese were reluctant to “fuck around and find out.”
Now those conditions have changed.
Let’s start with Saudi Arabia. Relations between the US and the Saudis have deteriorated substantially since Biden became president. Riyadh is unhappy with US efforts to keep Iran from becoming a nuclear power, with its criticisms of the regime over dissident journalist Jamal Khashoggi, and with its failure to support Saudi efforts in Yemen.
In March 2022, Saudi Arabia signaled its displeasure by announcing it was considering accepting yuan for oil. In October 2022, it signaled further displeasure by expressing interest in joining the BRIC (Brazil-Russia-India-China) trading bloc. Most recently, in early December, Riyadh warmly welcomed Chinese President Xi, with Crown Prince Mohammed bin Salman hosting a summit with Beijing to its strong relationship with China. The main topic? Chinese’s call for oil trade to be priced in yuan. This does not look like bluster by either nation. Just a few months prior, the Chinese had inked a deal with the Russians to trade natural gas in yuan and rubles.
With Saudi Arabia in play, two questions remain. Can the Chinese afford to disrupt the petrodollar, and can the US do anything about it?
I believe the Chinese can now afford to disrupt the petrodollar. While America used to rely on its economic ties with China to avert the threat of petrodollar disruption, those ties are fraying rapidly. Faced with IP theft, unfair trade practices, rising labor costs, and supply chain risk, US companies are rapidly (and wisely) moving their manufacturing out of China. Gartner reports that a third of supply chain partners plan to exit the Middle Kingdom. At the same time, China has been building its own commercial empire in Europe, Asia, and Africa and doubling down on its efforts to keep American manufacturing out. The result can only be called a trade war. Indeed, that’s exactly how the Peterson Institute for International Economics describes it:
US average tariffs [on China] have increased from 3.8 percent to 12.0 percent, and China's average tariffs [on the US] have increased from 7.2 percent to 18.3 percent… During this same period, China has lowered the tariffs it applies on imports from the rest of the world. China's average tariffs toward those exporters have declined from 8.0 percent in early 2018 to 6.5 percent by early 2022. The United States increased its average tariffs on imports from the rest of the world from 2.2 percent to 3.0 percent over this same period.
So US tariffs on Chinese goods are now 315% greater than in 2017, and 400% higher than on other trading partners. Chinese tariffs on US goods are now 254% greater than in 2017, and 285% higher than other trading partners. The days of “Chimerica” are over.
What can the US do about this? In the past, the US has used military force and economic sanctions to prevent countries from abandoning the petrodollar. It did so in Iraq, in Libya, in Iran. It cannot do so in China. As I discussed in World War Next, it is very unlikely that the US can win a war with China. It probably cannot even stop China from taking Taiwan anymore.
So the chess pieces are in place for China’s final move. Ink the deal with Saudi Arabia in 2023 and the petrodollar comes crumbling down. Perhaps superb diplomacy on the part of President Biden can avert this… but it seems unlikely.
Some US experts, like foxes in an Aesop fable who can’t eat the grapes, have argued that the petrodollar would have gone away anyway. After all, the global economy is moving to abandon polluting and expensive fossil fuels in favor of cheap, clean renewable power. This is, to be blunt, utter nonsense. The energy return on energy invested is not high enough to sustain an industrial civilization, the rare earth minerals are not sufficiently abundant for the batteries to go electric, and the technologies themselves are unreliable when they’re needed most. Renewable power will not replace fossil fuels this year, next year, or ten years from now. Nuclear power could have, and still might, if we’re smart, but that will not help us in the new term.
The Effects of the Petrodollar Collapse
The probable effects of a petrodollar collapse are many, and in the short term, they’re all very bad. Consider:
Demand for US dollars is kept artificially high because all nations need dollars to buy oil. When the petrodollar collapses, the demand for dollars will plummet. Since the supply of dollars is greater than ever, the effect will be that the dollar’s value goes down — way down.
The decline in the value of the dollar will be immediately apparent in higher prices for oil and higher prices on imported consumer goods. Shortly thereafter, the higher fuel prices will also increase the prices for domestic goods which rely on foreign fuel to be manufactured, as well as trigger layoffs in many industries that cannot afford the higher prices.
Demand for US stocks, bonds, and real estate is kept artificially high because petrol-producing nations need to recycle the dollars they receive into investment. As the petroyuan eats into the petrodollar, this “recycling” will be diverted from the United States to China. This will cause asset prices to increase in the People’s Republic and decline in the United States. Expect a bear market in all three asset classes.
The decline in the value of the dollar will increase the value of foreign currency, gold, silver, and crypto relative to the dollar. However, the asset price increase in these will be moderated by the loss of recycling above.
The decline in demand for US bonds will force the US to increase the interest rates it offers, which will cascade through the rest of the bond market, increasing interest rates across the board. That, in turn, will cause an economic recession and many potential bankruptcies as firms are unable to maintain spending in the face of higher debt obligations.
The most likely US response to these circumstances will be to have the Federal Reserve reduce interest rates and purchase its own bond issuance, inflating the money supply with more cheap dollars:
The price of oil and consumer goods will increase even more. This will be exceptionally bad for working-class consumers.
The price of stocks, bonds, and real estate will be temporarily kept more-or-less stable, to the benefit of the investor class and detriment of first-time home buyers and renters.
The price of gold, silver, and crypto will increase relative to the dollar.
The US national debt and deficit will continue to expand to unsustainable levels.
The US will risk entering a hyperinflationary crisis.
This “best case” economic situation will thus be similar to the stagflation that preceded the petrodollar, but worse, because America is much less industrialized and self-sufficient than it was in 1970, with much more debt. And it’s at best a short-term “solution” for the investment class. In the absence of the petrodollar, the US cannot endlessly print money.
If, on the other hand, the US responds with an austerity program, allowing interest rates to rise, asset prices to drop, and the money supply to decrease, following the Reagan-Volcker model, then:
The price of oil and consumer goods will eventually stabilize at a new, higher level.
The price of stocks, bonds, and real estate will brutally collapse, with the investor class taking huge losses. Major firms will go bankrupt and shutter.
The price of gold, silver, and crypto will decrease relative to the dollar.
The US will risk entering a deflationary debt crisis, but will be unable to inflate out of it without risking hyperinflation.
It is a fact that Reagan-Volcker only succeeded because Nixon had put the petrodollar system in place. Massive US government spending on national defense, combined with petrodollar recycling inflows into our markets, and the opening up of China to US trade, made their fix possible. None of those circumstances exist now.
It’s impossible to predict the second-order economic effects because we don’t know which of the two choices the US policymakers will adopt - the Scylla of stagflation or the Charybdis of austerity.
We can, however, predict what the foreign policy implications will be. In a word: war. It will be something like this:
The US will enter into armed conflict with a foreign power. It might be Iran, in order to regain hegemony in the Middle East. It might be with China, over Taiwan. it might be with Russia, over Ukraine. It could be something unexpected, such as a South American adventure against Venezuela, or an expedition into Africa under the pretext of human rights designed to disrupt the Belt and Road and secure valuable mineral resources.
The entry into the war will justify a ramp-up in government spending on arms, which will have the benefit of increasing US industrialization, creating jobs, and using surplus labor. However, the shift to war footing will not be cost-free. It will impose real hardship domestically, with shortages, rationing, and high prices. The government will conclude that “we’re suffering for victory!” is a better talking point than “we’re suffering due to decades of abusing our position as hegemon and failing to build sustainable economics".” Thus the US will find itself, not enjoying the happy outcome of America in World War II, but the sad situation of Britain in World War II, from which it emerged poorer in every way.
The risk of world war will be very, very high, with all of the pernicious consequences I have previously described.
To give you a sense of what the consequences of all of the above might look like in terms of the American way of life, consider the following facts about Great Britain in World War II:
National debt rose to 200% of GDP.
Household food consumption declined by 11%.
Household coal use dropped by 25%.
Household electrical appliance use dropped by 82%.
Household private automobile use declined by 95%.
In order to get out of this trap, Great Britain had to increase its exports, which meant sustaining war-time rationing of domestic consumption. The 1940s and 1950s were a terrible age of austerity in Great Britain. Rationing didn’t end until 1954! And that’s with the benefit of having an economically devastated Europe to sell into, and billions of dollars in Marshall funds from the US. Our plight could well be worse.
Let us contemplate this on the Tree of Woe.
Contemplations on the Tree of Woe is a reader-supported publication. As the only substack publication solely devoted to delivering woefulness, we are uniquely situated to explain what is coming for our doomed and hopeless nation. To receive depressing insights which will keep you up at night, consider becoming a free or paid subscriber.