Overview
The low, low value of the volatility index
The overflowing list of flashpoints in the world
A look at the Triad of benefits the US currently has - Fiat based, World Reserve Currency, Petrodollar
💀An observation of how previous challengers to the Petrodollar system have ended
Well, well, well.
I haven’t checked the Volatility Index (VIX) for quite some time. I didn’t expect it to be… so low. The VIX is referred to as the fear index it is calculated using Chicago Board Options Exchange (CBOE) pricing data.
Options are a derivative that take volatility into account. Or said another way, the pricing includes human consensus around what the future holds.
Quickly eyeballing the chart below, today (far right of chart) looks to be close to the bottom of the last 5 years.
Quite surprising considering:
USA is allowing their weapons to be fired directly at Russia
NATO was and is refusing to sign any de-escalation from Russia
Russia firing missiles perilously close to the edge of NATO countries
Russian Nuclear Submarines are running test drills off the edge of Florida
Israel teetering towards war with Hezbollah
China running mock attacks around Taiwan
Putin in North Korea for the first time in 27 years and setting up the means to receive latest technology armaments
Time for a quick thought exercise. Thought exercises are my favorite thing as a thinker. They are a mental sandbox where you can re-frame context and analyze the result.
Imagine if Russia was arming 250,000 Mexicans by sending billions of dollars of weapons to Mexico to facilitate the re-taking of Texas.
Feel that reaction.
Know I am not for or against Russia. I just observe.
Lowest Common Denominator
What is the commonality amongst modern day risk? I would argue its the United State of America. Ray Dalio’s excellent observations of patterns in economics culminate in his teachings around the Changing World Order.
🎞️ The Changing World Order Refresher
🎞️ How the Economic Machine Works
Dalio argues that after the peak and subsequent fall of the reigning dominant force (United States) is always challenged by the competition.
The United States managed, somehow, to set itself up to have staggering advantage over other countries. They managed to set it up so that they are Fiat based, are the world’s reserve currency AND use the Petrodollar System. This triad is an infinite power cheat code - just like when you were 10 years old and were the bank and a player at the same time in Monopoly. Logically it stands that they would use this infinite power to their advantage, whilst they can, to suppress the possibility of losing it.
How do these things combined give USA infinite power? Money can be used to buy anything, food, shelter, weapons. The more money you have the more power you have. Being that the United States is the world’s reserve currency and most trade is carried out in USD, there is a perpetual demand for the currency. It makes total sense for the US to import as much stuff as possible in exchange for a piece of paper. The US can print the paper - so effectively, they get free products and goods from countries around the world. A massive win for America. Those countries that have to import goods priced in dollars, such as Japan who buys most of their oil from overseas get heavily impacted by the US printing money. This can be known as the US exporting their inflation to other countries. For example, if a country imports oil priced in USD, and the USD depreciates, the cost of oil in the local currency increases.
The Petrodollar also meant that Oil would be traded internationally in US dollars. Anyone wanting to buy oil would do so only in US dollars. Additionally the Saudis would use the dollars they received from the sale of their oil to plow back into US Treasuries with the agreement! The US get to effectively to have their cake and eat it - crazy!
For a quick refresher on the Petrodollar see this video.
A threat to the Petrodollar system is a threat to the dominance of the United States.
Lets look at challenges to the Petrodollar and how they went.
Saddam Hussein attempted moving Iraq from trading Oil in USD to Euros. Iraq was subsequently invaded and Saddam executed.
Muammar Gaddafi attempted to disconnect trading Oil in USD to an African Currency - the Gold Dinar. The same fate happened to Gaddafi as Hussein.
Other notable attempts of moving away from the Petrodollar include Iran, Russia, China and Venezuela. It’s pretty obvious when you look at these countries and how the US treats these countries as to the US’s future motives.
Of note, the Saudis in the last few weeks have declined to re-sign the recently expired 50 year agreement of the Petrodollar.
My closing thoughts that the motivation for the United States to keep their unique grip on power going, the upcoming presidential elections in November and a general decline in global GDP are a catalyst for future volatility. Reversion to the mean is a natural phenomenon and the low level of VIX and long running advantage of the United States feel that they are due for a course correction.
Risk is upon us, unless a new financial tailwind comes about; to which AI seems to be the only candidate. Time is ticking.
War is likely the fallback when GDP drops