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Comment by gullyfur | Hacker News Reader

> This is the petrodollar hypothesis, a debunked theory of global trade.

Who debunked this? Because I've seen this posited in dozens of places, so I'd love to see the rebuttal

I’m not sure where there’s a structured rebuttal, but the main reason why commodities are generally priced in dollars is due to currency liquidity and the forex markets. There are only a handful of currency pairs that don’t involve USD. If I have Japanese Yen and I want to buy Saudi Riyals, that trade needs to settled twice, JPY -> USD and then USD -> SAR adding both currency risk and settlement overhead. Pricing in USD cuts all of that out, along with the inertia of everybody being comfortable with dollars and the extremely liquid and large market for both dollars and dollar denominated debt. It’s just easier.

Why geopolitical is not involved here?

The US dollar isn’t the largest and most liquid market on earth because the US is mean to people, if anything that would make it less useful for third parties. It’s used because it makes the most sense. Look at the USD as a gift card. If Starbucks only accepted star-bux, requiring me to buy starbux to buy Starbucks, we’d still be valuing drinks in dollars regardless of the exchange rate. Even if I could use those starbux at Target, I wouldn’t start caring about my starbux currency risk as long as I could convert to dollars. It’s the same for other countries. Japan doesn’t care about its exchange rate to the riyal because both float reasonably stably to the dollar. Saudi doesn’t want yen and japan doesn’t want to buy riyals so they split the difference and transact in dollars.

Your explanation involved a bit of mind-reading here to deduce that the Japanese don't want riyals and that people wouldn't value things in star-bux.

Going by actual evidence, if the Japanese are trading with the Saudis it is pretty clearly they don't want riyales, yen or dollars; they want goods and services that they are trading for. They would be ambivalent about what they traded for that oil in as long as they ended up with the most product out for the least yen in.

There is evidence that the Japanese want dollars (their foreign reserves are jumping), but there is no particular evidence that they want to trade in dollars. If anything it is more likely that they are trading in dollars because SWIFT is the cheapest way of moving money around internationally and it has some sort of favouritism for US dollars.

Parent is making an accounting point. Unless you have perfectly balanced trade, your balance sheet will continuously expand in either your currency, the foreign currency, or both. The Saudi government either isn’t inclined or can’t find counterparties to run enough of a trade deficit to provide the rest of the world enough riyals to satisfy their demand for Saudi oil. The USA on the other hand is willing to run such a trade deficit, it's pretty much the only game in town.

Meanwhile, the USA is able to find counterparties for its massive trade deficit because the USA itself has a huge and incredibly diversified economy and demands dollars in payment. You can buy oil from the USA in dollars for the same price you can get it from the Saudis. You can also buy all kinds of other things you can't buy from the Saudis. The dollar has massively superior optionality compared to the riyal (and most or even all other currencies) and that increases demand for it.

Well no, they’re trading in dollars because that’s what the people they’re buying from want in exchange.

Another way of putting it is: dollars have a network effect going for them, and it’s stronger than Facebook’s network effect in social media. This network effect was intentionally built during the Cold War. And with the USSR’s collapse, it became that much stronger.

The Saudi Riyal has been pegged to the US Dollar since 1986, as are most Gulf countries: UAE, Qatar, Bahrain, Oman. Kuwait was the only one to break it under pressures from the 2008 GFC. This is the historical backbone of the Petrodollar and has survived decades of political and financial strain.

Also, >It's just easier< strikes me as very fragile logic, because it is only True until it isn't.

Is anyone pricing oil with Bitcoin? It seems that crypto would be the ideal type of currency for international trading. Is that not a thing because government wouldn't want to give up control to a decentralized system that they don't run?

Because, to use a technical term, the fuck is Saudi Arabia going to do with $400bn worth of bitcoin? After 1 year, assuming Saudi Arabia was able to procure every bitcoin that can ever be mined, past present and future, they would be worth $20,000 each. And then they have all the bitcoin that nobody wants.

Whatever anyone would do with $400bn worth of an asset?

If Saudi Arabia started buying Bitcoin in bulk, then the price of Bitcoin would go up. This would create demand for the asset that is increasing in value and other people would start buying and holding. Saudi Arabia would not be able to acquire all the Bitcoin, but it doesn't really matter anymore, because now everybody wants it, because it has increased in value.

The fact that cryptocurrency is prone to such fluctuations is a significant part of the reason it's a bad currency. Nobody wants to have a bank account that can halve or double in a few months.

I think most people view Bitcoin as digital gold nowadays. (with the added benefit that the supply is known) I would not use it for short term cash needs, but from a long term store of value it has provided real benefit over a 10 year period. If the monetary supply is going to be dramatically expanded by the Fed, then it is a great way to hedge against the dollar. Couple that with the recession and the likelihood that the effects of the global pandemic is seemingly going to be here for a while, I can't think of a better place to put my money right now.

I doubt "most people" think anything of the kind. Digital pyrite, perhaps. Considering that btc has tanked along with the market (only more so) why would it make a good hedge? BTC is for gambling, and everyone knows it, so when the world gets scary the bottom falls out of cryptocurrency first.

There is no reason to believe BTC will not crash that's more solid than people smiling knowingly and saying "it can't, it's the future". It's not, though.

A global pandemic is a pretty extraordinary event. All markets are going to react poorly. BTC is by its nature more volatile, so it has a tendency to experience more dramatic corrections

It acts as a hedge, because the dollar gets devalued every time the Fed expands its balance sheet. If nothing else happens, then the value of Bitcoin will increase relative to the dollar. This is the same reason why people buy gold. Only with Bitcoin the amount of the commodity that can exist is well known and finite. (i.e. there are not new discoveries of Bitcoin repositories that will suddenly increase the global supply)

Bitcoin is unlike most other cryptocurrency assets (except for maybe Ethereum?), because it has been around for more than 10 years and has become well integrated into the traditional economy. BTC crashing is pretty unlikely at this point. Maybe it gets replaced over the long term by some other asset, but that will take time and not be a sudden event.

BTC is absolutely not well integrated into the traditional economy. Getting it is difficult compared with any real currency, spending is difficult compared with any real currency.

> BTC crashing is pretty unlikely at this point.

BTC just crashed in the last month. It's extremely likely to happen, which you can observe easily because it keeps happening. It's value is not stable. It never has been.

You can buy BTC using USD via exchanges, you can buy BTC futures, you can buy funds that contain BTC along with a mix of other assets. This is what I mean by the traditional economy, NOT you can go down to your neighborhood grocery store and pay for your groceries. The point is that major financial firms have integrated fiat economies and the Bitcoin ecosystem, which makes Bitcoin much more valuable compared to other cryptocurrencies.

When I talk of BTC crashing I'm speaking of the price of BTC going to 0 and never recovering. What you are observing is the volatility of Bitcoin. Bitcoin is a highly volatile asset, but that doesn't mean it still can't provide good long term value. Plotting a linear regression on the price of BTC will show an upward trend and that's over a 10 year period even with all of its ups and downs.

Keep in mind that basically nobody else uses the word "crash" to mean "goes to zero and stays there". Traditional economy is generally a reference to the act of exchanging money for goods and services.

You can use words however you want, but if you want to be understood it's helpful to use the common definition.

I was trying to stay in context with how you originally phrased your response of..

   "There is no reason to believe BTC will not crash that's more solid than people smiling knowingly and saying "it can't, it's the future". It's not, though."

This quote implies that BTC lacks long term value, which again I argue that BTC does have long term value for reasons previously stated. Certainly, I understand that sharp declines in value are often described as crashes.

In regards to the term "traditional economy", I actually meant to insert the words "integrated with", so the start of the sentence should have read "This is what I mean by integrated with the traditional economy..."; just an error on my part. The point I'm making is that the integration with the traditional economy is occurring on the backend finance side and adds legitimate value and use to Bitcoin over many other cryptocurrencies.

And voila! You’ve created an enormous speculative bubble. That hasn’t ever gone wrong.

Bitcoin has had several big moons/busts now, but the software and network has persisted and grown dramatically in size. The long term trend is up. I think it is really hard at this point to make the case that this is a bubble.

Bitcoin is an “asset”, not an intermediary. Saudi doesn’t just sit on their dollars, they buy stuff with it, either actual goods and services or fixed incomes. Since nobody wants bitcoin for their labor and it’s a highly speculative asset that isn’t a particularly good store of value, it doesn’t accomplish either of the key things that are needed.

Bitcoin is both an asset and an intermediary. I don't think it is a good intermediary due to its volatility and tax treatment, but it certainly has and can be used as such.

If you had bought a hundred dollars worth of Bitcoin back in April of 2011 and sold it at it's most recent all time low on December 16th 2018 you would have $320,000. If you sold it today you would have $681,800. Volatile? yes. Good long term store of value? All available data indicates yes.

It's speculative in so far as the software and the network are speculative. The speculative risk of both of these attributes has reduced over time. (i.e. The more time that goes by the more likely that bugs in the protocol will be discovered and the network size and volume has dramatically increased)

The real danger to Bitcoin is probably another cryptocurrency that comes along and does it's job better. This will be very hard though as Bitcoin is essentially the Facebook of the cryptocurrency world. I think that it is possible that this will happen, but it will likely be a process more than an event. Offering holders of Bitcoin to diversify overtime should other cryptocurrencies come into being.

Whether Saudi Arabia should buy it or not is an entirely different matter. IMHO if they have some reserves that they don't think they will likely need to touch for a 5 to 10 year period then I would invest some in it. It would be akin to trading in some of their dollars for Gold. (https://tradingeconomics.com/saudi-arabia/gold-reserves)

Dollars are similarly useless in Saudi Arabia. They use the riyal there. Outside of the US, dollars are really just government bonds that people hold as a store of savings. They have to be sold before you can do local transactions or pay local taxes.

Saudi needs dollars to buy everything else since they make nothing and import everything. Everybody else will take their dollars, so it’s a worthwhile thing to have around for them. Sure, you can’t buy a kebab on the streets of Jeddah with them, but the chicken that kebab was made with was almost certainly bought in some way using those aforementioned petrodollars.

How does the seller selling the kebabs in riyal get the chicken given they only earn riyal?

You need somebody who wants riyal for dollars. Why would the chicken seller not take the riyal since that helps his customers and do the FX magic themselves? "Local currency sales" is what marketing men recommend. It's just the latest form of vendor financing.

Who wants riyal for dollars. People who buy kebabs in Saudi. Those who live and work there.

As I said the dollars are useless in Saudi, because that's not the local currency stuff you need day to day is priced in.

The point again is that in aggregate you can buy things in the currency you have and you can sell things for the currency you want. The financial system smooths the path to that deal - for a price.

As anybody with a Paypal account and who trades internationally understands.

>How does the seller selling the kebabs in riyal get the chicken given they only earn riyal?

They buy the dollars they need to buy the chicken off the Saudi national bank for Riyal. That’s their job. Controlling that rate is a primary way the SA government manages their domestic economy.

> Dollars are similarly useless in Saudi Arabia.

This is simply outright wrong.

According to Wikipedia, the last arms deal that Saudi Arabia struck with the US was, that alone, around $350 billion.

That's more than most of the nation's GDPs.

Trying to put a Ponzi scheme such as Bitcoin on par with the US dollar is either an entirely clueless assertion or a disingenuous claim made in line with all the other pump-and-dump schemes that plague the so called crypto currencies.

Currency is slightly more fungible than this. Not enough to invalidate your point, but worth noting that I've purchased food, transportation, lodging, and knickknacks in Saudi/Bahrain/UAE and Oman using USD. All of the above items, in each country. It's certainly not a universal currency though, I'd say the vast majority of vendors were not interested in taking USD. Even then though, generally you could find a private citizen/local expats from many other continents that would be willing to perform currency exchange to/from popular currencies at a rate profitable for them.

Vendors/citizens of some other countries - Jamaica, many parts of Mexico, many parts of Canada, also are happy to deal in USD as a customary business practice, at least in my experience.

Sure. It's the same here. I can buy stuff with Euros in York rather than the usual GBP. But generally people want the local currency because they have fixed liabilities in the local currency - taxes and debts. Chances are they'll take your money and then swap it out for the local version rather than hold it.

The point of the article is that around the world very large amounts of loans have been denominated in US dollars, even in countries that don't use USD. That means there is always a constant and large demand for USD to repay those loans.

So outside of the US, no USD is not just a store of savings, it's a means of repaying debt. Hence why people want it and will accept it as a first preference over most other currencies when international transactions need to be made.

Repaying debt is the same as an increase in the store of savings.

Your personal balance sheet moves in the same direction from a lower value to a higher one.

Not in USD it doesn't. You got your loan in USD, spent it to buy whatever you needed, you have assets, not USD. You need USD to repay the loan, where do you get them from?

He's talking about Saudi Arabia, not random people in Saudi Arabia...

Saudi is random people in Saudi. Countries aren't sentient on their own.

What is countries? I mean it's just atoms, man... This is all so trivial!

Well no, in this particular case it’s the house of saud.

Can always buy US weapons and politicians with dollars

The price of bitcoin would probably grow way way way way higher than 20k if Saudi Arabia decided they were only going to sell only for bitcoin, as in “add a large number of zeros” higher.

Not yet, but maybe they will when the dollar squeeze causes their economies to crash.

I'd say that is a good enough reason to buy. As they say, buy the rumour, sell the news.

Can you use Bitcoin to buy a few billion dollars in really safe and liquid treasuries when you need to park a trade surplus somewhere? If not, it isn't really useful in the oil trade.

No. Because Bitcoin has no use in legal industries.

Wrong. It's a great intermediary to buy and sell international assets cheaper and faster than with SWIFT. Also it effectively bypasses local bureaucracy.

It’s too volatile for this, sorry. If it’s so great, why isn’t everyone doing it?

I as an individual prefer to be paid by US dollars over Indian Rupees. Trust me, the Saudis would prefer the same

That's an outcome/result of decades of policy, not the source of the policy (which I'm trying to understand)

the user "JumpCrisscross" just debunked it just now, his evidence was saying "it was debunked". What other evidence do you need?

Just because something is priced in dollars doesn’t mean it is paid for in dollars.

Fundamentally in every real transaction in the world the seller gets the currency they want to hold and the buyer gets to use the currency they earn in. Because otherwise there is no deal.

The whole purpose of the global financial system is to sort out those mismatches so deals get done - and make a turn while doing so.

There are at least 96 oil producing countries in the world ([1]). It makes sense to trade oil with USD across the board instead of fragmenting the oil market into 96 different sub-markets (oil to each country's local currency).

Now, the buyer and seller can of course convert USD from/to their desired currency on FX markets. Oil trades tend to be big, so that would cause demand for USD liquidity. That demand, and the fact that these dollars are effectively "locked" inside the FX markets (reducing supply), would make the dollar price go up (everything else being equal), hence strengthening the dollar.

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

You can't convert currency. You can only exchange it (outside of those currencies that are fixed to the dollar or whatever). That means that somebody has to want the dollars for you to get the local currency you need to pay staff and pay local taxes. In aggregate that's a wash.

Which is the point I'm making - expand your view beyond just buying and selling the oil, and think how you get into the position in the first place. From the ground to where it is used.

Whatever currency you hold those selling oil will take for their oil - because there is a big financial system whose job it is to make that happen and to shuffle the currency holdings around until everybody holds what they want to hold.

The FX system is part of the oil market. It lubricates the parts oil can't reach.

> and make a turn while doing so.

This is called settlement overhead, and is the reason you're incorrect. Every time you change one currency for another on any meaningful scale, it eats into your profit margin..

Tl;Dr - there's no such thing as "no foreign transaction fee!!!1!" in oil baron sized transactions.

Think a little bit wider than that. How do you pay your staff in the local area you work in? How do you pay taxes to the local government? How do you sell your oil to people who don't have, or don't want to, hold dollars. Are you really going to turn them down just because they hold GBP?

That's the whole point though, those people don't really exist. Basically everyone who does business internationally is, well, doing business internationally. You can either restrict your market to only people who hold your non-dollar currency, hold every currency in the world, or hold dollars. And keep in mind, everyone else holds dollars...

This is sometimes referred to as the network effect.

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