The Petroyuan And ApeCoin: Fables Of The Dollar Deconstruction

The Petroyuan And ApeCoin: Fables Of The Dollar Deconstruction

A few days ago, market participants were treated to a new version of an old story.

“Saudi Arabia is in active talks with Beijing to price some of its oil sales to China in yuan,” The Wall Street Journal wrote, citing the ubiquitous people familiar with the matter, before suggesting such a development “would dent the US dollar’s dominance of the global petroleum market,” a dubious claim.

To be fair, Summer Said and Stephen Kalin were quick to make the only two points that matter for the vast majority of the Journal‘s audience. Such talks around yuan-priced crude have been going on for at least a half-dozen years, and to the extent they’ve taken on a new sense of urgency, it’s primarily due to frustration in Riyadh with “decades-old US security commitments to defend the Kingdom.”

The Biden administration isn’t as friendly with Mohammed Bin Salman as the Trump administration was, nor is this White House as hawkish on Iran as the last. Notwithstanding “secret” diplomatic talks in Baghdad, Riyadh and Tehran haven’t restored diplomatic ties since the Kingdom’s decision to execute a prominent Shiite cleric in 2016 pushed the regional rivals to brink of war. Ongoing attacks by the IRGC-backed Houthis against Saudi infrastructure are a constant reminder of simmering tensions, and while the US assassination of Qassem Soleimani likely degraded Iran’s willingness and capacity to orchestrate spectacular strikes against high profile targets à la Abqaiq and Khurais in September 2019, the Kingdom’s security demands of Washington aren’t always commensurate with the perceived scope of sundry threats. In short: There’s no such thing as “too much” when it comes to security guarantees. If the US wants more oil, the Kingdom wants more security.

Ideally, Mohammed Bin Salman would also like carte blanche to perpetrate the war in Yemen, not just unbothered by allegations of war crimes, but in fact abetted by US complicity. He’d also rather not be lectured by anyone in Washington when he presides over extraterritorial executions (i.e., Jamal Khashoggi’s demise in the Kingdom’s Istanbul consulate).

So, that’s the price of the petrodollar, but what I’d note immediately is that this a classic case where one side’s leverage disappears entirely in the most extreme scenarios. As long as the world is generally stable and ties between Washington and Riyadh are even a semblance of friendly, the Saudis have leverage. But in the (highly unlikely) event the relationship breaks down entirely, the US doesn’t actually need Saudi Arabia. Washington could cut the Kingdom loose tomorrow, and the vast majority of the global commodities trade would still be conducted in dollars and Americans would still have energy. The Saudis, on the other hand, would be compelled to reckon with a number of existential problems virtually overnight, including, but not limited to, a currency crisis, social unrest tied to inevitable economic upheaval and something much closer to even odds (militarily) against the IRGC.

When you consider the petroyuan discussion, you need to take account of everything said above. Note that Beijing and Tehran are strategic allies. The Saudis can’t depend on China to protect them from Iranian aggression. No amount of oil sales are sufficient to flip that equation, especially not when Iran sells oil too.

With all of that out of the way, there are myriad other reasons why the petroyuan story is just that — a story. It’s a canard, and a tired one at that. If you want to know how tired, consider that many of you have almost surely read something I’ve written on it before, and not in my current incarnation. That is: Some of my petroyuan musings were available to the public prior to the advent of this site. True, six years isn’t a long time in the grand scheme of things, but the fact that some readers have unknowingly perused my opinion on this when Barack Obama was still in the Oval Office speaks to the “here we go again” nature of the headline. As Bloomberg’s Cameron Crise wrote, “The headline that Saudi Arabia might accept yuan for its oil exports to China is a nice story that fits the current geopolitical narrative about the dismemberment of the current global financial order — such a nice story, in fact, that various iterations have floated around in 2017, 2018, 2019, 2020 and last year.”

So, it’s old news. But why can’t it work? Well, let me count the reasons. Most obviously, the riyal is pegged to the dollar, which means, among other things, that embarking down a policy path aimed at undermining the greenback is tantamount to pulling out a pistol, waving it around wildly and then shooting yourself in the foot. Additionally, just about the last thing you want to do when you preside over an isolated, one-dimensional economy where the currency is pegged to the dollar is start selling your most important export for something other than dollars. If it became obvious that the monarchy was bent on pursuing such a financial suicide mission, the market would start to doubt the durability of the peg. That’s trouble.

Far be it from me to question the wisdom of Zoltan Pozsar, but consider me skeptical of the idea that, as he wrote earlier this month, the PBoC could print yuan, buy Russian commodities and thereby establish a “Eurorenminbi,” which Pozsar suggested would mark “China’s first real step to break the hegemony of the Eurodollar market.” For one thing, nobody sane wants to see the demise of the Eurodollar market, because that would mean the demise of… well, everything, really. Global commerce and finance as we know it would cease to exist. The world would stop spinning. Almost literally, if you conceptualize of international finance and trade as goods and services circling the globe.

Beyond that, though, who, other than a desperate autocrat in Moscow, would willingly cede control of their financial future to Beijing? If you get into the yuan in size, it’s not so easy to get out. What happens to Riyadh’s CNY assets if, for example, Iran decides to start a war with the Saudis? If you think the White House is capricious, wait until you see what happens to a nation’s CNY assets in the event that nation ends up in a hot war with one of Beijing’s staunchest international allies.

And there’s more. So much more. Given the realities of the dollar peg, any oil sales the Saudis made in yuan would probably just end up being converted back into dollars, in which case the entire endeavor would amount to little more than a ridiculously circuitous charade. If the Saudis were to keep their CNY proceeds, what exactly are they going to do with them? Buy Chinese government bonds? Maybe. But that’s not straightforward either. Consider the following from Bloomberg’s Crise:

Looking at Saudi Arabia’s trade balance with China, we see that it was a surplus of roughly 20 billion yuan per month towards the end of last year. It seems reasonable to think that the total should exceed 200 billion yuan pretty easily given trends in oil prices. There are approximately 27 trillion yuan of central government bonds, so net Saudi yuan proceeds would amount to a little less than 1% of that per year. That sounds feasible, right? It seems like it, until you consider that according to Bloomberg data, the 50 largest institutional holders of government bonds — which include a lot of domestic asset managers — hold a total of just over 700 billion yuan of bonds. The Saudis could conceivably match that in less than four years. Having lots of demand for your bonds seems like a nice problem to have, but a problem it will be if there isn’t enough paper for domestic banks and investors. So the question remains: Would China be prepared to ramp up government debt and conceivably see the economy shift to a current account deficit if that’s the price required for an internationally-accepted petroyuan?

Good question. And one that speaks directly to the notion that fanciful headlines usually aren’t compatible with reality. The petroyuan story is no exception.

In a March 16 note which carried the hilarious title “Lost Rents of Arabia,” Rabobank’s Michael Every further underscored how absurd this probably is from a logistical perspective. “We’re talking $56 billion in oil and related petrochemical exports, and $27 billion in Saudi imports, taking 2019 as a base,” he wrote, on the way to noting that “$56 billion is hardly the entire $2.6 trillion global oil market, even if this is Saudi Arabia, and even if we assume all Saudi-China trade switches to CNY, that’s $320 million per working day versus the $6.6 trillion global daily FX market, and note I’m using dollars not CNY for easy comprehension here, which makes my point for me.”

That latter quip speaks to a point I’m compelled to reiterate virtually every, single day. Anytime anyone starts talking about the demise of dollar hegemony, virtually every argument that involves numbers is couched in dollar terms, an irony that’s perpetually lost on the people making the argument.

Rabo’s Every went further. “The oil market needs a base currency that’s liquid, which CNY is not, freely tradable, which CNY is not, and stable, which CNY only is because it doesn’t meet the other two criteria, and because it’s on/off soft-pegged to the US dollar,” he wrote, citing an incisive critique from Anas Alhajji, on the way to noting that,

Even a move to oil priced in a basket of currencies is hugely complex to maintain across OPEC partners, which is why it hasn’t happened yet. Saudi Arabia’s own currency is pegged to the US dollar, so it would be exchanging complete shielding from FX volatility for FX volatility, unless CNY also remains pegged to the US dollar. Saudi Arabia would end up accumulating lots of CNY, which is of no use unless everyone else makes the same shift, and CNY does not meet the criteria to expand from its current base. Indeed, with China being accused of perhaps helping Russia militarily in Ukraine, there won’t be any Western adoption of CNY. Perhaps emerging markets will do so, but that bloc would then gradually, or rapidly, detach from the US and the West. Good luck with that. Saudi Arabia would probably still price oil in dollars given its own balance sheet, and just allow (some) Chinese oil payment in CNY and the Saudis would then sell those CNY back to China for dollars immediately.

Note how all of this ends up being self-referential at every, single turn. The entire world is priced in dollars. Love it, hate it or apathetic to it, you can’t escape it.

This week, Yuga Labs decided to capitalize on the runaway success of its blue-chip, Bored Ape Yacht Club PFP project by launching its own cryptocurrency, ApeCoin. 15% of the available supply was airdropped (i.e., given away) to holders of Bored Ape Yacht Club NFTs. Many of those holders were already rich thanks to the mind-bending appreciation of the NFTs themselves, which currently list for a minimum of 100 Ethereum or, more to the point, around $300,000 at the current exchange rate.

Twitter was alive with screenshots posted by bewildered NFT holders who woke up Thursday morning to as many as 10,950 free ApeCoins for each NFT they owned. A coordinated listing of ApeCoin by nearly every major centralized cryptocurrency exchange (an unprecedented event that raised serious questions which go well beyond the scope of this article) created instantaneous demand and liquidity for the coins, which immediately traded for around $20, based on the price I was able to see for an on-chain swap just before things got going on the big exchanges. They subsequently fell to around $6 and then stabilized near $13.

Don’t lose the plot. Let this sink in: Some holders owned dozens of eligible NFTs, and were thus handed tens upon tens of thousands of free coins, redeemable in the open market for USD-pegged stable coins at an average price of around $10 each. It’s a story too ridiculous to be true, but for our purposes here, the point is just that nearly every, single screenshot I saw posted on Twitter had one thing in common: Holders were keen to show the dollar amount of their overnight riches. Why? Well, for bragging rights, obviously, but more critically, because you can’t be “rich” in ApeCoin. Nor can you be “rich” in Ethereum until the vast majority of goods and services are available to be purchased with ETH. You can only be rich in currencies which can be exchanged for things you actually need or which can be used to do things you have to do, like pay taxes.

I’m reminded of one netizen’s ill-fated attempt to score social media points by replying to Stephanie Kelton with a picture of a menu from a restaurant that had started accepting cryptocurrency for meals. “Looks like a great place!”, Kelton replied, referencing the menu items. Then, she delivered the punchline: “Why are all the dishes priced in dollars?”


23 thoughts on “The Petroyuan And ApeCoin: Fables Of The Dollar Deconstruction

  1. Really good deep dive into the entanglements within the world’s currency system. Many people seem to be a bit deluded about the importance of the dollar. No substitute for the dollar is priced other than in dollars. The book I never got around to writing was a treatise on value and all the ways we define it and manage it. I have to say Dr. Kelton’s response to the menu is spot on. I wonder when MBS will become arrogant enough to really piss of the US and test our response.

  2. As usual, the stubborn realities of volatility, stability, interconnectedness, pirates, risk, costs, etc., enter into functionality.

    In terms of a Petro yuan, there can be little treehouse boys clubs that secretly design special purpose entities where a handful of billionaire thugs exchange marbles in a game. I assume that game is already being played with arms and drugs, so expanding the financial framework of criminal money laundering into a Petro yuan crypto connection is unremarkable.

    The thing that will make the exciting world of crypto magic less exciting is instability and that moment in time when your fun money is illiquid and failing as collateral or failing to buy something like groceries.

    As a speculative toy, the shiny allure of crypto as a get rich quick mechanism seems appealing as a modern digital ponzi opportunity, primarily because so many cool people are chasing its hipster legacy. Why invest in the reality of grandpa’s antique mutual funds when NFT stuff is so hot?

    Anyway, here’s more trash talk from some idiot at Bank of England:

    “The stablecoins in circulation today are typically backed by a mix of commercial paper, short dated securities and cashfootnote[14]. This backing model is not appropriate for use in systemic payments. If holders were to run from these stablecoins, the assets would not support all redemptions. First, there is a liquidity mismatch between these backing assets and the redemption profile needed to serve as a payment instrument and second stablecoin operators may face difficulties in selling the backing assets, particularly in stressed conditions.”

  3. An additional thought related to Petro Juan crypto dynamics is the geopolitics of trade in general.

    At the core of trade sanctions is the hope that when terrorist nations or individuals rear there ugly heads, there are international laws and mechanisms that can be initiated to penalize bad actors.

    The current sanctions in Ukraine are a great example of this economic policing power and many international corporations have respectfully cooperated in a United effort to cut off Russian liquidity. However, there are holdouts, like Nestle who like India want to pretend that there are grey lines associated with mass murderers.

    In this topic of digital currency, there is a camel’s nose in the tent, where these neutral players cross ethical lines in their support of terrorist activities. The defi theory behind crypto provides the curtain to hide accountability for global interactivity.

    Apparently, people that love crypto and NFT money laundering are willing to connect themselves to global criminals, in a United effort to destabilizing the dollar and embracing a wild west 1860’s-like currency disaster.

    The Schrodinger Kitty Litter Box of anonymous crypto allows the simultaneous states of morality to intertwine with criminal lust. It’s not stability.

  4. MBS is not America’s friend. He showed early signs of having a sociopathic personality disorder early in his nascent ascent to Saudi Arabian power after jailing all his family competitors and then ordering the murder of a critical Wapo journalist in the Saudi embassy in Istanbul.

    The U.S. sales of military hardware to the Saudi’s doesn’t justify continued ‘coddling’ of MBS and Saudi Arabia and support of his genocidal war in Yemen. Now that America is functionally energy independent, the. U.S. should start to send a tougher message to MBS that he risks America’s ire at his peril.

    If America is prepared to sanction China if the aid Putin in his illegal and genocidal war with Ukraine, we can do things far more punitive to MBS and his entourage.

  5. I agree that CNY replacing the USD as the reserve currency is plain silly and not something to lose sleep about.

    What I do worry about however is the fallout from nuking Russia’s CB. Foreign CBs at the time of the GFC held about a third of all UST. That percentage has been falling ever since and is now about half of that. I don’t know how to quantify the effects of this trend, but at the margin it bodes poorly for both future inflation levels and the ease with which we can service our debt down the road.

    1. The US will never “have trouble” servicing debt. America issues the currency the interest payments are denominated in. The reason Russia is in trouble is because the have hard currency debt with dollar coupons that have no local currency payment clause.

      1. True, but what Barry is suggesting is that we may have to offer higher rates to issue bonds. Unless we go full MMT.

        The holdings numbers be cites may well undercount the actual foreign holdings. Unless things have changed the rather lagging TIC data often obfuscates true ownership. Thus holdings by many US hedge funds were listed as foreign because the registered owners were in the Cayman Islands or Netherlands Antilles.

        It’s said (a fine Trumpism) that many Chinese holdings are also parked in nominee names rather than as official foreign holdings at the NY Fed.

        I imagine that will become more common now that we have prevented the Russian CB from tapping their savings. You modern ones think or hope they will diversify into cryptos. But us old dinosaurs figure physical gold held in vaults in friendly venues such as Switzerland and Singapore or even at home may prove to be a wiser hedge. There’s always a non-trackable bid out there.

  6. 275 or 300 bps in rapid succession with this kind of leverage in the economy is going to create a severe downturn, yes a depression- that is my view. I did not say a 1930s depression. Nor did I say the Fed should keep rates at zero. Saying it has been done before does not cut it. The economy was far different in 2004-5 than it is now. It has become obvious that they should raise fund rates. Just not like a Bull(ard) in a China shop. My view is maybe 3 or 4 raises – depends on the economy of course and how much they intend to shrink the balance sheet (bad idea in my view- but that is another story). Could my number be wrong? Sure- nobody knows what the right number is. It could be 6 or 2, but I am pretty confident it is not 11 or 12 in rapid fire succession. Looking at the shape of the yield curve, the value of the $ and the direction of corporate bond spreads will give one a clue that I may be onto something. Powell’s approach makes far more sense. Could he be wrong? Sure- but Bullard’s approach has too much risk. And for good measure what makes anyone think monetary policy is going to impact inflation that much? We are opening up after a pandemic shut down and a now a war that have caused supply shocks and in particular an energy shock. The central bank surely has to react and cut back stimulus, but slam on the brakes? Foolish.

  7. I don’t know why but this topic area is fascinating for me.

    An interesting area related to the pandemic is what’s called convergent mutation, basically COVID hanging out with people that have suppressed immune systems, everywhere.

    That condition can be used as an awkward metaphor for crypto, NFT and Petro Juan.

    I view NFT as a cancer like state that exists as a binary reality. It’s out there and it’s growing and spreading, but it’s not really a critical issue, it’s a derivative mutation of crypto that infects a small subset of speculative participants.

    Nonetheless, as that underlying activity spreads, adoption of NFT madness is more like the equivalent of zoot suits from around 1940ish.

    In that analogy, social unrest and inequality is somewhat behind generational NFT acceptance, but I doubt we’ll see generational adoption.

    The Ukraine crisis adds a new layer to global instability and thus people are looking for a new stability, thinking crypto has magical accountability as a better way forward, when in fact, it’s pretty obvious that crypto is highly chaotic.

    I imagine crypto mutation stuff will spread in hybrid financial instruments and worm it’s way into corporate balance sheets, and not unlike COVID it’ll linger unnoticed as it mutates. For some reason that reminds me of Chinese securities interlaced into Americans pension funds, with the full blessings of SEC and various oversight authorities who look the other way and pretend that was not risky.

    This whole intermingling issue is all about the Camel Nose finding it’s way inside the tent, creeping in as it studies new ways to evade detection. This also fits nicely with polarized politics and people everywhere who’ll not understand anything while they become passionate experts with fever pitch opinions that stake out territory in Schrodinger’s Kitty Litter Box.

  8. I apologize for my enthusiasm on this topic, but…

    I hope to be the first to suggest this, but the Petro Juan is nothing less than an NFT.

    The transactions that China, Russia and India are toying with are nothing less than private transactions between desperate criminals. The oil trading contracts are agreements that virtually are as valueless as an NFT pixel. There’s a very strong relationship between NFT auctions where someone is posting massive amounts of fake bids to inflate a worthless trade.

    China may be willing provide backing to facilitate exchanges with Russia or India, but how much real world exchange value will be in the supply chain? Will the captain of an oil tanker pay for insurance with China oil tokens that have no exchange value? Thus, at what point do these fake exchange experiments break down and explode, and when does reality kick in? Some sucker in the pipeline will eventually want a currency pegged to something other than the capricious fantasy value of a red pixel.

    From a recent paper from India on crypto:

    “In contrast, despite China being the world’s largest trading partner, its currency still makes up less than 2 percent of the world’s reserve currency.8 Due to this discrepancy between China’s share in trade and its currency’s share in the global economy, the country remains beholden to a financial system that undermines its importance”

    I found that last sentence really funny! China’s currency experimenting is slightly ahead of American efforts, but nothing amazing. They’ve made progress to a point where subway tokens are digital, but those tokens are pretty useless in Moscow or New Delhi….bahawha, but maybe those are priceless in oil deals?

  9. I’m almost running out of ideas on this topic, but if this were my closing argument to put the Petrojuan on death row, it’s the case to be made about a race to the bottom.

    There’s a reason that China has such a tiny fraction of global reserves. They play a trade war game that depends on a relationship based on currency manipulation and devaluation. That’s the secret sauce for the Petrojuan and their new flavors of NFT digital currency will be based on the same recipe they’ve been serving for many decades.

    China, Russia and India and a dozen other mini me dictatorships may want to exchange NFT dog crap but those tokens will never have the liquidity of the dollar.

    In a race to the bottom, cheap Russian oil and a devalued Petrojuan are nothing but an enhanced lubricant that will add to the decline of those criminal based societies.

    Economic 101 stuff:

    “As long as a currency peg keeps the yuan low relative to other currencies, consumers using foreign currencies can buy more of China’s exports than they would if the yuan was more expensive”

    1. @oldbird you had me stumped with “put the Petrojuan on death row” for a bit. I thought maybe it was slang for Petrobras oil-rig roustabouts, which confused me because I thought everyone knows their called Petrobros, am I right? And why would we do all oil-rig roustabouts like that, after all, this isn’t Saudi Arabia? Then the lightbulb went off! First-strike on Putin’s main ally in ‘our backyard’, the Venezuelan dictator, Maduro! But, that would mean the US envoy just sent to talk with Maduro was a smokescreen! Very Putinesque. You ex-CIA? Never mind don’t tell me. Lets run this by Doody Giuliani and Kidney Powell to fabricate legal cover for Flynn’s crackedpot team of ex-Silvercorp commandos. We’ll call it Operation Gideon II in honor of the first monumental cluster-fork Operation Gideon. If that doesn’t work, or even if it does, I’ll call OAN (or is it NaN?) and Fox News and get them to cite the Moron Doctrine of ~1823 for 3 or 4 news cycles and it’ll be perfectly legal in the minds of 70+ US million voters. Don’t worry, I got this. Will finish reading your comment tomorrow.

      P.S. Eric and Don Jr. said whatever we do just don’t mention Donald Trump’s name ever! They were empathic about never mentioning Donald Trump or Trump Towers LLC or #TheRealDonaldTrump ever!

  10. This is a great article, thank you. If the Fed was forced to pivot and resume QE to save the economy from a recession, the US$ should weaken dramatically, and if at the same time China introduced a currency convertible to gold, do you you think such a currency could replace the US$ as a reserve currency? If trading partners didn’t want yuan, they could always take gold.

      1. @H: Just echoing @hookandgo to say you have written sage words, yet again, this weekend. Excellent event interpretations across a range of financial, geo-political, etc. subjects that might reverberate equity indices most liberal democrazy smaii investors risk money in. Feels like I got my money’s worth of dots connected. If something is germane to a point you deem important, then it bears repeating/hyperlinking. No need to mention it, or apologize, for me. Besides, reiterating matters of import really helps the intermittent reader checking back in. Thanks.

    1. Dude! Think Nixon! Not exactly the Gold Standard for American presidents from our rule of law standpoint, but is any POTUS’s policies more likely to have been scrutinized, thus deeply understood and appreciated, by the Chinese than Tricky Dick’s?

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