Blog | Personal Finance

The Axis of Assets

The changing landscape of the oil industry

meet your own rich dad - start your quiz now

Thousands of years ago, Rome was the biggest empire in the world. At the time, it stretched from Europe through the Middle East and into North Africa. It was so large that they coined a term, imperium sine fine, which meant “empire without end.”

To the Roman citizen, it seemed as if their empire would last forever. Nothing could stop it. But like all empires, it did stop. The average Roman citizen never saw it coming, however, because they were living in such extravagance and ignorance to what was happening in the world around them.

This ignorance was famously satirized by the Roman poet, Juvenal, who coined the phrase, panem et circenses, which meant “bread and circuses.” Juvenal was speaking to the political reality that if a government provided cheap food and ample entertainment, its citizens would not pay attention to reality and revolt. His contention was that the average Roman citizen had traded in his birthright to freedom in exchange for panem et circenses.

Eventually, the Roman Empire did fall. And while there were many reasons why this happened, you can bet that the Roman citizens didn’t fully realize them until it was much too late.

Repeating histories

Another common phrase is, “Those who do not learn from history are doomed to repeat it.” And today, we may be seeing this come to reality in the US.

Americans have plenty of bread and circuses to enjoy. Currently our country and our media are obsessed with President Trump’s administration and Russian ties. And when we’re not obsessing over that story, we’re binge-watching “Stranger Things” or watching the NFL. These things dominate our national conversation, but rarely is there mention of the global realities—the economic forces—that can threaten our prosperity and the very ways in which we live.

This is why I recently wrote on Twitter, “Create your own reality. Don’t live in someone else’s.”

I’m convinced that the powers that be in the US definitely want you living in the reality of bread and circuses, not the reality of what is happening in the global economy.

This is why I wouldn’t be surprised if you haven’t read this article, “China sees new world order with oil benchmark backed by gold.” And if you have read it, I wouldn’t be surprised if you didn’t fully comprehend the importance of it. This is not a knock on anyone’s intelligence. It’s just a commentary on how hard it is to learn about important things that are happening in the world. This is why I’ve made it my mission to educate people on what is happening in the economy and to help spread financial knowledge and grow financial intelligence.

How oil works

In order to understand why this article is so important, we must first understand how the global oil markets work.

Currently the global oil markets are dominated by what is called the petrodollar. In simple terms, the petrodollar system means that the majority of oil sold in the world is pegged to a fixed US dollar price. This means that when any country sells oil, they receive payment in US dollars.

This system, build by Nixon with the Saudi Arabians in 1974 after the collapse of the Bretton Woods system—i.e., the gold-backed dollar—ensured that the US dollar would be the reserve currency of the world, since oil is the world’s biggest commodity.

What is more, many countries often receive much more petrodollars than they need when they sell oil. So they “recycle” them. As Investopedia writes, “These surplus dollars are spent on domestic consumption, lent abroad to meet the balance of payments of developing nations, or invested in U.S. dollar denominated assets. This last point, is the most beneficial for the U.S. dollar; as the petrodollars make their way back to the U.S., these recycled dollars are used to purchase U.S. securities (such as Treasury bills), which creates liquidity in the financial markets, keeps interest rates low and promotes non-inflationary growth. Moreover, the OPEC states are able to avoid currency risks of conversion and invest in secure American investments.”

Obviously, a system like this is very advantageous for the US—despised by growing super powers. So, enter China, and the article in question.

China and oil

As author Damon Evans writes, “China is expected shortly to launch a crude oil futures contract priced in yuan and convertible into gold in what analysts say could be a game-changer for the industry.”

In short, China is seeking to create an alternative to petrodollars with their own currency, the yuan by issuing oil contracts in yuan backed by gold futures.

Why is this important?

As Sri Jegarajah writes for CNBC, “The yuan is not yet fully convertible, it’s fixed daily, prone to intervention and subject to capital controls. Given that regime of tight control over the currency, many global players are likely to assume a yuan-denominated oil benchmark would be firmly under Beijing’s thumb.” Backing the contracts by gold futures allows for some transparency into this system, as well as stability.

But perhaps more concerning is that while US investors obviously won’t flock to yuan-based oil contracts, a good portion of the world might, especially those countries under US sanctions, such as Russia and Iran.

Shifting global powers

If China is successful in setting up an alternative to the petrodollar, it could mean devastation for the US economy as the “recycling” of petrodollars dries up and liquidity in the US capital systems slows to a trickle. They’re all linked.

China, who is a major oil importer and who also has one of the largest reserves of gold in the world, knows this. They are looking to take control of the price of both commodities, and by extension become the dominant world power.

In his famous speech after 9/11, President George W. Bush spoke about the Axis of Evil, countries that endorse and support global terrorism.

Today, we should be talking about the Axis of Assets, global coalitions lining up to change the global economy and the way in which money flows across the world.

What about you?

Whether China is successful or not, is not my point in this article. Rather, my point is that this is a major story that the majority of Americans would never have heard about, not understand.

Yet, hopefully, you can see how it would have a major impact on you, your family, and your finances. Should China win in the oil wars, many people will lose their wealth.

However, those who are financially intelligent, and who focus less on bread and circuses and more on what is truly happening in the world, can prepare for such circumstances—and even thrive in them.

Whatever may happen in the future, I urge you to be vigilant and pay attention. Your financial future depends on it.

Original publish date: November 14, 2017

Recent Posts

Three Investment Values
Personal Finance

The Rich Dad Guide to Investing Values: Defining Your Path to Financial Success

It’s important to know which core values are most important to you, especially when it comes to the subject of money and financial planning.

Read the full post
Risky vs. Safe Investments
Paper Assets

Smart Investing: Understanding the Difference Between Risky and Safe Options

What you may think is a “safe” investment, I may see as risky. For example, many financial planners advise their clients to get into so-called “safe” investments — such as savings plans, mutual funds and 401(k)s.

Read the full post
Mastering Money
Paper Assets, Personal Finance

Mastering Money: The Key to Achieving Financial Freedom

Begin the path to making money work for you today, not the other way around.

Read the full post