It would be a mistake to think of this story as esoteric or insignificant. Let me explain.
At present, Saudi Arabia accepts only U.S. dollars in trade for oil (this is by agreement between the kingdom and the Nixon administration back in the 1970s). This means that any buyer of Saudi oil must obtain U.S. dollars to pay for it. Buyers can do this in two main ways:
- They can sell products (exports) into the U.S. marketplace, accepting dollars in payment.
- They can buy U.S. federal debt by purchasing Treasury notes.
Either way, the buyer is forced to participate in the U.S. economy, presumably in ways that are, on net, beneficial to the U.S. (whether or not they are beneficial to the buyer).
The purchase of federal debt, however, is problematical. Our federal government has been running deficits for years, which is another way of saying we have been using other countries’ wealth to finance our profligate spending.
HERE IS THE POINT: To the extent that Saudi Arabia begins accepting yuans for oil sales, the U.S. will be forced to reduce deficit spending. That is — for us — deficits will begin to matter.
But Saudi Arabia is not the only country that wishes to abandon the U.S. dollar as the currency standard for trade. India, for example, also would benefit from greater independence from the dollar. And, of course, should China’s yuan become the international currency standard, China will enjoy the benefits the U.S. has exploited for the last 50 years (then lost).