Last week we talked about the growing risk to the "petrodollar," as China has taken advantage of global instability to strengthen influence and ties with oil-rich countries, with the prospect of trading oil in yuan.
As we discussed, the "petrodollar" has been the cornerstone of the dollar's role as the "world's reserve currency." And the world reserve currency status has been key in building and sustaining the United State's position as the economic superpower.
This posturing by China on a "petroyuan" is, of course, an explicit challenge to dollar hegemony, and therefore to U.S. global leadership.
Even mainstreet media (CNN and Fox) ran tutorial-like stories on this over the weekend.
And this challenge by China comes at a moment when the U.S. is in a position of weakness, trying to restore confidence in the banking system, while infighting over another debt ceiling raise — which is the product of record debt, record deficit spending and record high debt service.
That said, as we've also discussed in recent days, the interest rate market is now pricing in significant rate cuts by year end, driven by the recent confidence shock in the banking system, and expectations of subsequently tighter credit.
This is all a powerful formula for a weaker dollar, which should be a powerful formula for another leg higher in commodities prices (particularly oil prices).
Of course, a weak dollar would underpin inflation. But that could be a good thing, if it's orderly.
As we've discussed in my daily notes often, we need inflation. We need an inflationary boom (high nominal growth, hotter than average inflation), where the unsustainable government debt-load can be inflated away by growth.