Financial commentator Andrei Jikh discusses the impending transformation of the international economy with the upcoming dissolution of the longstanding petrodollar arrangement between Saudi Arabia and the United States, set to expire on June 9, 2024. This agreement, which has been the cornerstone of the global financial system for 75 years, positioned the US dollar as the primary reserve currency, thereby ensuring economic stability and facilitating the appreciation of asset values. The pact between the US and Saudi Arabia has been a key element in upholding the US dollar’s supremacy in global commerce.
On a recent Sunday, the Saudi Arabian prince announced the decision not to extend the contract, indicating a pivotal shift in the global financial scene. Established in the aftermath of World War II, the petrodollar system has been instrumental in allowing the US to commandeer global energy markets, profoundly affecting the American standard of living. The move away from the gold standard to a valuation based on the US dollar has been crucial in maintaining the country’s grip on international trade. The rationale behind Saudi Arabia’s choice, as well as the full ramifications for current and succeeding generations, are yet to be completely grasped.
Jikh points out the emerging trend of nations moving to divest from the US dollar in their international commerce and oil dealings, with Saudi Arabia being the most recent nation to make headlines. This shift may herald the decline of the US’s financial hegemony. He poses the question of what America is known for exporting that garners global demand, suggesting that the export of US dollars is the country’s main commodity. He outlines how the US economy gains from the ability to distribute its currency and accrue debt through treasury bonds, which results in a robust economy, reduced interest rates, and enhanced liquidity in financial markets.
The potential repercussions of Saudi Arabia’s departure from dollar-denominated oil transactions could be far-reaching. Jikh warns of possible increases in interest rates that could make mortgages, rents, auto loans, student loans, and credit card debt more costly. This could also exert pressure on the banking sector, the national deficit, and the federal budget, possibly leading to elevated tax rates. Furthermore, the dollar’s value might be impacted, raising the cost of international travel and imported goods.
He also delves into the motives behind Saudi Arabia’s decision, such as its commitment to the BRICS alliance and a general trend toward reducing dollar reliance. Jikh argues that the US has limited strategies to counter this movement, and notes that the dollar still holds a substantial share of the world’s foreign exchange reserves and is commonly used in international transactions. He closes by sharing personal insights on the situation and suggesting investment strategies.