What happens if US becomes insolvent? Is USD going to be inflated? hyperinflated? Will other currencies appreciate or just devalue their own currency by the same percentage to keep up the exports and continue to earn USD for oil?
No one serious is worried about American solvency. The paper says 50% over the next 10 years, but even most economists misunderstand how the monetary system works.
There are so many other issues to worry about at the moment more immediate than solvency.
Not that I believe the folks at the top at the GOP really cared about it, ever, going back to (at least) Reagan; it was mostly an excuse to cut taxes on the wealth and cut social programs:
CATO has been quite good of late at dismantling many of the worst of the Trump GOP's initiatives with real research. They're immigration research is a great resource to rebut the nativist MAGA nonsense.
How long will the petrodollar remain a thing with the current diversification of energy sources proceeding apace internationally?
Listening to Americans talk about energy and vehicles feels like going back in time, they’re stuck in the past and things that worked then and the world is rapidly routing around them. Quite sad to see.
The petrodollar thing always seemed overhyped by people who don't understand economics that well. It was just a term for the dollars received by oil producing countries like Saudi Arabia.
People used dollars rather than yen or pounds because it the US was the largest and a rather free and stable economy. That still mostly applies.
The argument in the linked article:
>Since the 1970s, global oil transactions have been priced and conducted almost exclusively in U.S. dollars. That arrangement has given America an unparalleled advantage, effectively creating an economic blackmail chip.
I think is bunk. A country pricing in Euros would make no difference apart from traders needing to check the dollar euro rate.
Abit glib to call it hyped when the US has started multiple wars to protect the petrodollar.
Trying to do business any other way puts targets on whole countries, much less the speaker and their family. Many attempts were made in the middle east and Africa to make that change, and those people and governments were wiped out.
While the argument can be made for it's economic effect and power today vs 20 years ago, I don't think it was overhyped then.
I'm a Brit and we've done business other ways for centuries without issues. At least not issues due to using pounds rather than dollars. Who got wiped out?
> A country pricing in Euros would make no difference apart from traders needing to check the dollar euro rate.
You can't clear nation-scale oil purchases by looking at the exchange rate, which is predicated on there being sufficient liquidity at that price for the transaction you're looking to make.
The petrodollar is both a demand and supply solution, and you're looking at this in micro rather than international macro terms.
The demand explanation is simplest -- the largest producers of a limited-source, universally-required commodity demand that purchases be made in US dollars.
As a result, all countries need access to dollars in order to make those purchases at scale.
Enter the supply side, where dollars both aren't and kinda-are physical. They aren't, in that international transactions are obviously executed with digital balances. They are, in that arbitrary countries can't just "create" dollars as needed: they must get those dollars from someone who has them.
Ultimately... the US Federal Reserve, who is empowered to create new dollars.
Putting all of this together, you have an aggregate demand for dollars of {US federal budget, similar to other countries' monetary demand} plus {international float for transacting dollar-denominated commodities}.
It's that second piece that people are really referring to when they say things like 'the petrodollar allows the US to run deficits that would negatively impact other countries' currencies'.
Because as Doctor Strangelove quipped, it is not only necessary but essential for this system's smooth functioning that the US produces large enough numbers of excess dollars to meet international demand.
The fly in the ointment, so to speak, has been the 00s+, initially War on Terror, now War on Et Al., US weaponization of the dollar against countries doing things it doesn't like.
Hence Russia/China's dream of breaking the petrodollar.
One piece of evidence - around 2020 the US went from being an oil importer to an oil exporter and people hardly noticed.
I also think if Saudi asked to be paid in Euros rather than USD it wouldn't make much difference. People just change currencies into what they need. They are just tokens to facilitate the trade of goods and services like oil for Ferraris in Euro or oil for Boeings in USD. The forex markets are huge.
Ironically, the US being an oil import / exporter is the least important country to this system, given it's the only one able to arbitrarily inflate the US dollar supply.
The forex vs oil scale is valid point, and it'd be curious to compare it across the decades.
Per some preliminary numbers, Brenton Woods being abandoned in 1971 led to market forex volume substantially growing every year.
Oil:forex looks like ~1:150 in 1980, scaling to 1:500 in 2010.
So indeed an increasingly smaller portion of the forex pie.
The markets generally respond to US concerns by buying more US treasuries. That’s counter-intuitive but reflects the situation that if things hit the fan they feel loaning the US money is still the safest place for their money.
For better or worse there’s unlikely to be a scenario where the US becomes insolvent but it’s not far worse for those outside the US.
I am sure this is a nice article, but I'm always surprised when something with a hard paywall makes it this high up on HN. Does everybody but me have a Financial Times subscription?
There is less and less demand for US treasuries, and Trump’s tariff war has only accelerated it.
The GENIUS act gets US a set of entitites that are forced by law to buy US treasuries - stablecoin issuers. It helps the digital dollar be used around the world, and treasuries to still have some demand. That is probably why it is called “genius”. This is the last step before the demand shock.
The US will have to stop borrowing and eventually print money to service its sovereign debt.
And when they do, they could either send it to banks, corporations, fatcats and pork projects — or they can send it to every American equally. The latter would be a UBI that would trickle up into the economy, with people spending it on their actual needs. It would increase most health outcomes, emotional health as well, raise average effective IQ by 13 points. And then they could tax the corporations and robots, and pay down the debt.
As it is, there are literally not enough dollars in existence to pay down that debt. The US will have to print them, or default.
The US emits two types of scrapes of paper, one of which (bonds) promises the other (the us dollar) and the "experts" somehow think america can actually go bankrupt. That's hilarious.
Interesting part is the gap between beliefs and prices => if the investors expect a US debt crisis we expect it to show up somewhere in the term premium real yields dollar or inflation expectations ; those signals can remain muted for a long time
Here are the numbers for the US, as a percentage of GDP:
- Government Debt: 123.0%
- Tax Receipts: 17.2%
- Spending: 23.1%
- Deficit: 5.9%
- Interest on Debt: 4.2%
So yeah, 1/4 of taxes go to paying interest. To allay the debt concern crowd a bit: gdp numbers are real numbers, so inflation of 3% and growth of 1% = 4% nominal, so that deficit number actually means that next years govt debt as percent of gdp won’t be materially higher.
This is the government playbook: create actual inflation of 6% per year, with reported statistic inflation of 3% per year. This means real growth looks like +3% before you need to talk about contractions/recession.
All this means that the sovereign crisis is not near and the government steals your savings at 6% per year.
If the United States tried to make various geopolitical moves to sabotage its reserve currency and ultimately become insolvent as a result of a self inflicted debt crisis then I don't see how the current agent orange situation could be topped.
There are so many plumbing issues with the financial system happening at once that people really do not have a clear picture of what is happening in totality.
Start with Japan... Still the largest foreign creditor. However they are facing a situation where the yen carry trade that began after the plaza accords in the 1980s is unwinding. The recent Treasury intervention and the associated expansion of the repo market so they do not sell treasuries directly reveals a hidden structural weakness. This leads to the AI boom because cheap Japanese debt was recycled into larger yields in the U.S. And it's different this time because companies like Microsoft have what is rated as safer debt than the US Treasury itself. The yield on financing part of the AI boom has been much better than yields back home in Japan. So even Japanese institutional investors may start seeing domestic debt as more attractive as the carry trade unwinds and domestic Japanese debt starts paying more. This ties back into the recent treasury intervention and offering a way to unload U.S. debt without impacting the markets directly.
Which brings us to an ongoing structural change that will remove the largest foreign investor in U.S. debt. Which as we all know, is approaching $40 trillion with over $30 trillion of that being held as public debt. Meanwhile, the budget deficit is continuing to rise causing even more issuance of debt. After the 2008 crash, and over the next decade, the U.S. was able to issue debt basically for free and it issued a ton of it. But that debt matures and when it matures, it has to largely be reissued at current rates. There was no free lunch. With the Japanese largely pulling back and at best not selling the debt they have now to defend their currency or to chase domestic yields in Japan, that goes to the UK as the second largest foreign investor. And the UK clearly can't absorb what the US has to issue and refinance. China has been reducing its holdings because as the BRICS bank, etc, replace their need for dollars, they will begin using it in more creative ways.
Some speculation is that the U.S. intervention into the yen carry trade is being challenged by foreign actors, which did not happen during past interventions. Monitoring the daily spread, and if the yen continues climbing over 160 then this will be the first time the U.S. intervention failed to work. To prevent selling existing Treasuries to defend the currency, the Japanese investors will unload it in the repo market.
But this brings us to a new structural problem in response to the insane amount of debt being issued and refinanced and this is called the weighted average maturity. Recently, the U.S. Treasury implied that they are going to begin moving more issuance to shorter term debt because those markets are currently still much more liquid than the longer term markets that had issues revealed by the failure of Silicon Valley Bank. When SVB needed to cover deposits, they found the 20 and 30 year Treasury market was not as liquid as they had hoped. This same fact likely pushed the Treasury to have Japanese investors move towards the repo market instead.
But this brings a new problem, because there is only so much appetite for increasingly taking long term debt and reissuance and moving it towards the front of the weighted average. Currently around 6 years, and the goal is to move it between 2 and 4. Imagine the liquidity impact on moving large amounts of new debt issued and refinanced debt from the 30yr to more short term funding.
Next up, there is a need to have the Federal Reserve unwind its balance sheet even more quickly at the same time all of the above is happening. But it is the Feds balance sheet and forms of QE that have propped up the repo market itself under times of stress. So after Japa...
26 comments
[ 0.95 ms ] story [ 43.5 ms ] threadThere are so many other issues to worry about at the moment more immediate than solvency.
* https://www.cato.org/commentary/sadly-fiscal-restraint-no-lo...
When you've lost the Cato Institute…
More recently in 2025, "The petrodollar, not GOP fiscal restraint, is what sustains our unsustainable debt":
* https://thehill.com/opinion/finance/5465671-republican-fisca...
Not that I believe the folks at the top at the GOP really cared about it, ever, going back to (at least) Reagan; it was mostly an excuse to cut taxes on the wealth and cut social programs:
* https://archive.is/https://www.nytimes.com/2003/09/14/magazi...
Listening to Americans talk about energy and vehicles feels like going back in time, they’re stuck in the past and things that worked then and the world is rapidly routing around them. Quite sad to see.
Oman!
It’s not possible to make any predictions about the petrodollar in this context.
We know what should happen. But it is like trying to predict earthquakes.
People used dollars rather than yen or pounds because it the US was the largest and a rather free and stable economy. That still mostly applies.
The argument in the linked article:
>Since the 1970s, global oil transactions have been priced and conducted almost exclusively in U.S. dollars. That arrangement has given America an unparalleled advantage, effectively creating an economic blackmail chip.
I think is bunk. A country pricing in Euros would make no difference apart from traders needing to check the dollar euro rate.
While the argument can be made for it's economic effect and power today vs 20 years ago, I don't think it was overhyped then.
You can't clear nation-scale oil purchases by looking at the exchange rate, which is predicated on there being sufficient liquidity at that price for the transaction you're looking to make.
The petrodollar is both a demand and supply solution, and you're looking at this in micro rather than international macro terms.
The demand explanation is simplest -- the largest producers of a limited-source, universally-required commodity demand that purchases be made in US dollars.
As a result, all countries need access to dollars in order to make those purchases at scale.
Enter the supply side, where dollars both aren't and kinda-are physical. They aren't, in that international transactions are obviously executed with digital balances. They are, in that arbitrary countries can't just "create" dollars as needed: they must get those dollars from someone who has them.
Ultimately... the US Federal Reserve, who is empowered to create new dollars.
Putting all of this together, you have an aggregate demand for dollars of {US federal budget, similar to other countries' monetary demand} plus {international float for transacting dollar-denominated commodities}.
It's that second piece that people are really referring to when they say things like 'the petrodollar allows the US to run deficits that would negatively impact other countries' currencies'.
Because as Doctor Strangelove quipped, it is not only necessary but essential for this system's smooth functioning that the US produces large enough numbers of excess dollars to meet international demand.
The fly in the ointment, so to speak, has been the 00s+, initially War on Terror, now War on Et Al., US weaponization of the dollar against countries doing things it doesn't like.
Hence Russia/China's dream of breaking the petrodollar.
One piece of evidence - around 2020 the US went from being an oil importer to an oil exporter and people hardly noticed.
I also think if Saudi asked to be paid in Euros rather than USD it wouldn't make much difference. People just change currencies into what they need. They are just tokens to facilitate the trade of goods and services like oil for Ferraris in Euro or oil for Boeings in USD. The forex markets are huge.
The forex vs oil scale is valid point, and it'd be curious to compare it across the decades.
Per some preliminary numbers, Brenton Woods being abandoned in 1971 led to market forex volume substantially growing every year.
Oil:forex looks like ~1:150 in 1980, scaling to 1:500 in 2010.
So indeed an increasingly smaller portion of the forex pie.
nothing is being done in the national interest
(not saying every GOP congressman is personally like this, but they're actively aiding and abetting)
The markets generally respond to US concerns by buying more US treasuries. That’s counter-intuitive but reflects the situation that if things hit the fan they feel loaning the US money is still the safest place for their money.
For better or worse there’s unlikely to be a scenario where the US becomes insolvent but it’s not far worse for those outside the US.
Considering the US has one of the lower overall tax rates of developed economies, I’m not sure we’ve reached any sort of crisis level
There is less and less demand for US treasuries, and Trump’s tariff war has only accelerated it.
The GENIUS act gets US a set of entitites that are forced by law to buy US treasuries - stablecoin issuers. It helps the digital dollar be used around the world, and treasuries to still have some demand. That is probably why it is called “genius”. This is the last step before the demand shock.
The US will have to stop borrowing and eventually print money to service its sovereign debt.
And when they do, they could either send it to banks, corporations, fatcats and pork projects — or they can send it to every American equally. The latter would be a UBI that would trickle up into the economy, with people spending it on their actual needs. It would increase most health outcomes, emotional health as well, raise average effective IQ by 13 points. And then they could tax the corporations and robots, and pay down the debt.
As it is, there are literally not enough dollars in existence to pay down that debt. The US will have to print them, or default.
- Government Debt: 123.0%
- Tax Receipts: 17.2%
- Spending: 23.1%
- Deficit: 5.9%
- Interest on Debt: 4.2%
So yeah, 1/4 of taxes go to paying interest. To allay the debt concern crowd a bit: gdp numbers are real numbers, so inflation of 3% and growth of 1% = 4% nominal, so that deficit number actually means that next years govt debt as percent of gdp won’t be materially higher.
This is the government playbook: create actual inflation of 6% per year, with reported statistic inflation of 3% per year. This means real growth looks like +3% before you need to talk about contractions/recession.
All this means that the sovereign crisis is not near and the government steals your savings at 6% per year.
There are so many plumbing issues with the financial system happening at once that people really do not have a clear picture of what is happening in totality.
Start with Japan... Still the largest foreign creditor. However they are facing a situation where the yen carry trade that began after the plaza accords in the 1980s is unwinding. The recent Treasury intervention and the associated expansion of the repo market so they do not sell treasuries directly reveals a hidden structural weakness. This leads to the AI boom because cheap Japanese debt was recycled into larger yields in the U.S. And it's different this time because companies like Microsoft have what is rated as safer debt than the US Treasury itself. The yield on financing part of the AI boom has been much better than yields back home in Japan. So even Japanese institutional investors may start seeing domestic debt as more attractive as the carry trade unwinds and domestic Japanese debt starts paying more. This ties back into the recent treasury intervention and offering a way to unload U.S. debt without impacting the markets directly.
Which brings us to an ongoing structural change that will remove the largest foreign investor in U.S. debt. Which as we all know, is approaching $40 trillion with over $30 trillion of that being held as public debt. Meanwhile, the budget deficit is continuing to rise causing even more issuance of debt. After the 2008 crash, and over the next decade, the U.S. was able to issue debt basically for free and it issued a ton of it. But that debt matures and when it matures, it has to largely be reissued at current rates. There was no free lunch. With the Japanese largely pulling back and at best not selling the debt they have now to defend their currency or to chase domestic yields in Japan, that goes to the UK as the second largest foreign investor. And the UK clearly can't absorb what the US has to issue and refinance. China has been reducing its holdings because as the BRICS bank, etc, replace their need for dollars, they will begin using it in more creative ways.
Some speculation is that the U.S. intervention into the yen carry trade is being challenged by foreign actors, which did not happen during past interventions. Monitoring the daily spread, and if the yen continues climbing over 160 then this will be the first time the U.S. intervention failed to work. To prevent selling existing Treasuries to defend the currency, the Japanese investors will unload it in the repo market.
But this brings us to a new structural problem in response to the insane amount of debt being issued and refinanced and this is called the weighted average maturity. Recently, the U.S. Treasury implied that they are going to begin moving more issuance to shorter term debt because those markets are currently still much more liquid than the longer term markets that had issues revealed by the failure of Silicon Valley Bank. When SVB needed to cover deposits, they found the 20 and 30 year Treasury market was not as liquid as they had hoped. This same fact likely pushed the Treasury to have Japanese investors move towards the repo market instead.
But this brings a new problem, because there is only so much appetite for increasingly taking long term debt and reissuance and moving it towards the front of the weighted average. Currently around 6 years, and the goal is to move it between 2 and 4. Imagine the liquidity impact on moving large amounts of new debt issued and refinanced debt from the 30yr to more short term funding.
Next up, there is a need to have the Federal Reserve unwind its balance sheet even more quickly at the same time all of the above is happening. But it is the Feds balance sheet and forms of QE that have propped up the repo market itself under times of stress. So after Japa...