China sees new world order with oil benchmark backed by gold | Hacker News Reader

China sees new world order with oil benchmark backed by gold

asia.nikkei.com

54 pointsmbgaxyz58 comments

A gold backed currency, rather than a fiat currency, gives control to a physical resource. The ones who control the physical resource and mining dictate the market. It is a very bad idea but probably good for the biggest gold producers in the world, they happen to be China, Russia and Australia (US is #4) [1].

A non-fiat currency is a single point of failure and since it is locked to a physical resource, it will cause many economic downturns with no lever to adjust. If a gold backed petro currency or oil is backed by gold, crypto currencies will explode exponentially.

[1] https://en.wikipedia.org/wiki/List_of_countries_by_gold_prod...

"China's move will allow exporters such as Russia and Iran to circumvent U.S. sanctions by trading in yuan. To further entice trade, China says the yuan will be fully convertible into gold on exchanges in Shanghai and Hong Kong."

It is not clear if the gold conversion can be into physical gold and shipped out of China. I would tend to doubt it, but would be a big deal if true.

Nationally they have > 1,800 tonnes[0] of the stuff as of 2017 – fifth in the world behind the US, Germany, Italy, France. Is that enough? Probably it would be simpler to do the transaction electronically in yuan but I would understand if people wanted something a bit more tangible. So the question is then, are there precedents to this flavo(u)r of trading setup/arrangement?

[0] https://www.statista.com/statistics/267998/countries-with-th...

Gold should just be an instrument of accounting. These exchanges are not the central bank and the central bank's holding is not very relevant. This should be meant to alleviate traders' concerns with capital control and RMB convertibility.

While this scheme may facilitate trading in Shanghai as domestic speculators no longer need to deal with forex risk, the countries with large petrol surpluses still need to decide what currencies to ultimately hold.

Note, the whole purpose is to game sanctions the US has on Russian trade and other hostile regimes. But how profitable will this be?

"...Russia's 2013 nominal GDP was $2.1 trillion, and Italy's was $2.07 trillion, according to the World Bank. ... Italy's 2013 GDP per capita (per person) was $34,619, and Russia's was $14,612.Jul 27, 2014..."

http://www.politifact.com/truth-o-meter/statements/2014/jul/...

Sounds like China is backing the wrong horse[s]

'game', or sovereign states exercising their sovereignty?

What does Italy have that China cannot produce itself? Brand name products, basic machines and chemicals which Italy exports are not important to their development.

Russia has oil, minerals and iron which China needs to grow.

Last one to try to circumvent the petrodollar was Ghadaffi. It seems China now takes the opportunity of the current political climate to try it themselves.

(Petrodollar principle is explained well by Adam Curtis' documentary "Bitter Lake")

Qaddafi's mistake was in giving up WMDs not trying to price oil in something other than dollars. Saddam is gone, Qaddafi is gone, Kim, Assad and Iran are still there. Never, ever give up WMDs.

that is an amazing point. the lesson to future authoritarians is clear, isn't it.

The American Empire had a nice run. Continuously rising inequality at home and anti-hegemonic strategies (like this one) abroad signal that the end is nigh. What remains to be seen is how ugly things get during the transition.

Meanwhile, back in reality, the US median income is among thh highest on earth, US disposable income is among the highest on earth, US economic productivity is among the highest on earth, US technology advancement is among the best on earth, US unemployment is low, US wages have been typically climbing twice as fast as in the EU, American companies dominate the planet (outside of China), and in the last ten years that Europe has been mostly treading water economically the US added an economy the size of Germany.

This is all true. I don't disagree with you.

But. (There's always a but.) I'm not disputing that the US isn't a great economic powerhouse. What I'm getting at is, at what cost.

If the middle-class gets gutted and relative and absolute poverty keeps increasing then we're not really creating a just society, are we? In one of the wealthiest, if not the wealthiest nation ever if we still haven't figured out how to protect the most vulnerable among us then we've a bit of a problem. As some have suggested, maybe basic income is a solution? But to others you may as well have suggested that that dude Stalin may have made a nice omelette even though he broke a few eggs.

And outside the US, what the untenable situation where two countries (neither of which are the US) have to trade oil in dollars. For just how long do you think that arrangement will last? It could be, and has been, argued that some part of the might of the US comes from having its currency as the world currency and part of that is dollar-denominated trade. Cease that and the landscape alters. China knows that. Others know that.

China also knows that you get bombed/hacked/etc to oblivion for trying it.

Iran hasn't been bombed or hacked to oblivion for trying it[1]. Russia hasn't been bombed or hacked for trying to kill it[2]

[1] https://en.wikipedia.org/wiki/Iranian_oil_bourse

[2] http://www.nytimes.com/2008/02/25/business/worldbusiness/25i...

The big systematic problem the US is facing is that much of what you describe is heavily funded by the ability to print dollars to sustain the trade deficit - because the World needs dollars. In other words, the US is living above its means because the World is ready to give goods for paper (money).

That move from China is aimed at undermining this ability. I'm completely not rooting for the Chinese, but the risk is real. If they succeed, the US will need to cut internal consumption by 2.6%, which will hit heavily an already struggling middle class. Not a good prospect.

This too shall pass.

The us has been coasting on good will and trump is squandering it. Now that he world doesn't see the us as a reliable partner, we're going to see the rug pulled out from under us rather quickly. China right now looks like a safer bet if you're looking for an ally.

As soon as I posted the above comment I started getting down votes so let me go into detail to hopefully stave off any negativity in what I think is a very important topic. Sorry, I know its not the done thing to talk about down-voting here :)

(1) Note that this article is _explicitly_ about changing the dollar-backed oil trading arrangements we have had up until now and even has the phrase “new world order” in the title.

(2) Another article[0] on the front page at the moment discusses the economic implications of the current rising inequality with “How do those who have less than nothing keep giving to the rich? Simple: they go deeper into debt, deeper into negative wealth. But how can that be sustained over a long time? Debts don’t need to be paid off, but they do need to be serviced.” The answer is historically speaking is with revolution.

Put (1) and (2) together and you do have a bit of a situation you must admit, no? Is it the phrase 'American Empire' that is being objected to? Fair enough, that's a bit of rhetoric on my part but American Imperialism[1] has got its own (rather long) Wikipedia page.

Disagree all you want but tell me why you disagree rather than thumbing that down button :)

[0] https://ergodicityeconomics.com/2017/08/14/wealth-redistribu...

[1] https://en.wikipedia.org/wiki/American_imperialism

edit: explaining the motivation for posting a follow-up

What kind of imperialists do what we did for Japan, Europe, Vietnam etc. without, oh, I don't know, getting territory or reimbursements out of the deal? Please, igravious, feel free to conquer me and play those same devious imperial tricks on me!

The US did get a bunch out of those deals: military bases across the globe and the related political influence.

For example, several European states house US nuclear weapons. [1] Japan serves as an outpost against China and North Korea. [2] "Currently South Korean forces would fall under United States control should the war resume. This war time control is planned to revert to South Korea in 2020." [3]

And Vietnam? The south was lead by a series of military governments during the war, which the US was apparently willing to accept. Sure, they pressured for elections, but in the meantime, fighting Communism was more important. [4]

I wouldn't call the US an empire, but they're not exactly a selfless force of protection either.

[1] https://en.wikipedia.org/wiki/Nuclear_sharing

[2] https://en.wikipedia.org/wiki/Japan%E2%80%93United_States_re...

[3] https://en.wikipedia.org/wiki/South_Korea%E2%80%93United_Sta...

[4] https://en.wikipedia.org/wiki/South_Vietnam#1963.E2.80.9373

Where did I use the term selfless?

What kind of imperialists do what we did for Japan, Europe, Vietnam etc. without, oh, I don't know, getting territory or reimbursements out of the deal?

"According to an annual report titled Allied Contributions to the Common Defense published by the U.S. Department of Defense in 2004, Japan provided direct support of $3.2 billion (about ¥366 billion) and indirect support worth $1.18 billion, offsetting as much as 74.5 percent of the total cost.... [in 2017] It said Japan will pay ¥192 billion in the current fiscal year in direct support. U.S."

https://www.japantimes.co.jp/news/2017/01/31/national/much-j...

What empire? Who is the Viceroy of Okinawa or Stuttgart? When did we start collecting taxes from Djibouti or Kuwait?

The petrodollar is how the US collects their tributes.

A voluntary exchange of goods or services for money is not a tax or tribute.

When we invade countries and depose leaders who threaten to trade oil on something other than the dollar, it's not exactly voluntary.

While I disagree with the comment you are replying to, your comment isn't correct either.

There is a non-trivial amount of oil traded in the euro, and also see [1], [2]

[1] https://en.wikipedia.org/wiki/Iranian_oil_bourse

[2] http://www.nytimes.com/2008/02/25/business/worldbusiness/25i...

I already explained _hours_ ago that I was using the term American Empire semi-rhetorically. It does not matter if you show that the way the US has employed and distributed its power historically do not meet your strict definition of how an empire operates because I'm not cutting my cloth to suit the tailoring of your definition. By many accounts the neo-colonial way in which the US has conducted and continues to conduct itself is imperial.

It's kind of like duck-typing I figure. If it looks like an empire and behaves like an empire it's probably an empire.

The four behavioral characteristics that clinch it for me are: [1] the continued unilateral interference in the sovereignty of other nations either covertly or overtly; [2] the non-participation in international norms; [3] the continued garrisoning of territories in other nations; [4] the historic and current role of the dollar and the US-backed financial systems and institutions globally.

[1] https://en.wikipedia.org/wiki/United_States_involvement_in_r...

[2] https://en.wikipedia.org/wiki/List_of_treaties_unsigned_or_u...

[3] https://en.wikipedia.org/wiki/List_of_United_States_military...

[4] https://en.wikipedia.org/wiki/Reserve_currency#United_States...

I'm not sure about Djibouti.

Kuwait paid about $16B after the first Gulf War and continues to pay for US troops based there. It's unclear how much that is, but Japan (for example) pays $2B a year to keep US troops in Japan.

That's independent of things like international trade being executed in US dollars, which is why the US can control World trade: at some point everything needs US dollars. That's why US sanctions are so effective and why people who are very rich and powerful still hate being sanctioned.

I was asking about taxes. That is what empires require of their subjects.

Taxes come in many forms. And paying taxes is hardly the only distinguishing feature of an empire. For example, many colonies of the British Empire remained part of the Emprie long after they stopped paying taxes (eg, Canada, Australia). In some case I don't believe they ever paid taxes at all. Yet they immediately sent troops in war, and provided favorable trading conditions.

Even outside that, paying for troops to stay was often known as tribute.

Edit: in any case I wouldn't actually argue that the US is an empire in the traditional sense. It has been the the unchallenged hegemon for nearly 30 years and before that the leader of half the world for another 40. I think speaking of the American Empire is a reasonable shorthand, even if it misses many subtleties.

Taxes do not come in many forms. They are involuntary payments made with jail as the punishment for noncompliance.

So.. an empire has to threaten to put a whole country in jail before it can be an empire? Does it dig up the land and physically put it in prison? Only the leaders? Every single person?

That meets no definition of empire I've ever heard of, and I'm not sure what you are even arguing anymore. Are you just trying to find something to be right about?

Come on!

Look outside your idealogical bubble for a couple of minutes, and think about what your point is.

If your point is that the US isn't an empire, then sure - I think everyone will agree it was never the same as the Roman empire or the British Empire.

But the post cold-war US was something, which involved it obtaining a lot of power in many forms. Some of this power was financial and was based on the US dollar being the reserve currency, and even the US's enemies had little choice but to concede to that power.

When the OP said that this is the end of the US's empire, that is what they meant. Think about that - if you disagree, then fine. There are reasons to think they could be wrong (this has been tried before and didn't work then).

But claiming the US is not an empire because it didn't collect taxes (!) as though that somehow invalidates the argument is just wrong.

I think this is the reason China and Russia have been hoarding gold and backing cryptocurrencies. They are waging an economic war against US hegemony by attacking their currency.

It is strategically timed too considering the US just spent the last 10 years printing money and expanding the balance sheet by 350%.

China and Russia are also big producers of gold. But if gold truly comes back, it will give a huge boost to Africa, which has most of the reserves.

That's true only of the well governed African states with inclusive rather than extractive institutions. Gabon's oil hasn't done much to boost the standard of living of anyone outside the Presidential circle though GDP has gone up a lot.

Yes. The money is likely not to be spent well.

That doesn't check out. Why would China try to push down the US dollar when the US is their largest export market? That would also damage all the effort they put in trying to devalue the yuan.

Good point.

Perhaps the Chinese feel secure their transition into a consumer economy is on good footing. I've noticed my China stocks go up 50% in the last month or two. Confidence is way up.

Five banks of the BRICS Interbank Cooperation Mechanism (ICM) have agreed to establish local currency credit lines and develop cooperation on credit ratings in the run-up to the forthcoming BRICS summit in China.

So the entire East part of the world will trade with China

They are building the New Silk Road [1]. This is part of the reason South China Sea is so hot, 2/3rd of world trade goes through there. Also the reason we haphazardly threw together the TPP which was not as generous to trading partners as China's deal which includes tons of investment to partner countries.

We in the US have to get better at remembering how we helped re-build countries after WWII, we need to understand that economics wins all wars again. We need to get the authoritarians out of power that don't believe that. China gets it all too well. Extremism is rooted out when people have comfort from a good economy.

[1] http://www.npr.org/sections/parallels/2017/05/16/528611924/f...

>We in the US have to get better at remembering how we helped re-build countries after WWII

In the interest of the US

I read someplace that political power is constant. If you withdraw, then the power doesn't go away - it remains for others to seize. Perhaps it's the law of conservation of political power.

For example, it happened in Iraq when the U.S. eliminated the people holding power, Hussein and the Baathists, and didn't have realistic plans for anyone to seize it. Iran, Shiite religious authorities, and Sunni insurgents all jumped for it. The mess still hasn't been resolved.

It's happening on a much larger, more significant scale globally as the U.S. withdraws. Others aren't sitting still; they are coming in and seizing the power for themselves. It is very hard won and the most valuable thing in the world; who would walk away from it?

The US is not withdrawing. The US did have a plan for Iraq and executed it. The plan was to take out the regime and establish a military presence and prevent a strong regime from taking the old one's place. A mess accomplishes that. The US is still surrounding Iran with operations in Afghanistan and Iraq. The US still operates (indirectly?) in Syria against Russia. When Gaddafi tried to circumvent the petrodollar his country was wiped out. The sanctions against North Korea continue.

The big problem for me is that all of these things have been predicted well in advance and explained in detail by the 'crazy conspiracy theorists'. One of the predictions is that North Korea is a strong candidate for initiating World War III.

The main thing I worry about now is if China really considers North Korea an ally when it comes down to it, if there is some missile launch at Japan, a US retaliation, and then China gets involved. It seems absolutely crazy but so are all of the other wars. News about China circumventing the US dollar is much more frightening for me than hearing about all of the latest North Korea threats. Because this gives China a reason to back North Korea if the US effectively blocks China's oil benchmark plans.

I'm just curious: could you give me an example where a 'crazy conspiracy theorists' explain and predict the war against Afghanistan, Iraq etc..? I mean articles which predate the situations.

I believe it was Cheney and possibly Rumsfeld whose organization, in the late 1990s, published a paper advocating invasion of Iraq.

I agree with many of those points, but they describe the U.S.'s actions before Trump took office. Since then the U.S.'s behavior has been exceptionally isolationist; for example, the U.S. withdrew from the Paris climate agreement, is trying to withdraw or renegotiate multiple trade agreements, wavered on NATO commitments, has openly stated they embracing 'America First' policy, etc. etc. etc.

So far, between 1971 and now, any country attempting to get past the petro dollar has been stopped by revolution, war, etc.

What pressure or leverage can the USA put on China? My view is: more pressure is wanted , than is available...

The only pressure unfortunately that I know of is the most massive, deadly, and technologically advanced military the world has ever seen. I worry that since supposedly North Korea is nominally an ally of China, all of these North Korea nuclear/atomic weapon headlines are aimed towards an eventual trigger for World War III. They will say its about an evil dictator and a bomb or something, but really it will be about the petro dollar and global power.

China's shifting to domestic consumption and strong Yuan is better than weak Yuan. Strong currency will also reduce capital flight from the country and increase its financial powers to buy world resources such as mining rights and companies abroad.

They understand how the dollar status as reserve currency helps strengthen American power. Many Chinese leaders understand the power of finance. They have used it to develop export-oriented economy and they are now using it to expand their power abroad.

China is now confident it is strong enough and has resources and relationships to counter US pressure.

This is a non-story. There won't be any physical gold actually backing the Yuan or any fixed gold exchange rate. The same limitation applies to the oil contacts. The only change they're making is to allow gold trading denominated in Yuan in a couple of Chinese exchanges. You can already freely trade gold in every other major fiat currency so nothing new here. And if you buy a large quantity of gold with Yuan, good luck on taking delivery of physical metal and getting it out of the country.

Won't cryptocurrency allow them to circumvent the dollar ?

I don't understand why US-embargoed countries can't simply get paid in gold. Transporting a billion dollars worth of gold costs nothing compared to transporting a billion dollars worth of oil. And no third country can intervene in transaction between two governments, which is exactly what the two governments should want.

The embargoed countries are mostly poor and don't have much gold reserves. And the US might be able to seize or destroy gold shipments in transit. Moving physical gold is far more risky than a wire transfer.

But China is rich and has tons of gold reserves to pay Iran with.

Moving gold is risky for individuals, but manageable for governments, certainly big powerful ones like China or India. The question is not whether it's more risky than a wire transfer but whether, when a wire transfer isn't possible, gold is workable.

I don't think the US would try to sieze shipments being made by another country, say by shooting down a Chinese or Indian air force plane. That will have major consequences, and be treated an act of war.

Why would this be a bad thing?

Meanwhile Wall Street is building its own block chain.

Should be an interesting transition off Brenton Woods.

Bretton Woods was over in 1971...

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