Trump's Bullying and His War in Iran Will Make You Poorer

Oil Purchased with Chinese Yuan

Trump's war in Iran is speeding up the decline of the American dollar, and that will make you poorer. Iran recently offered to allow oil tankers to pass through the Strait of Hormuz, but only if the oil in the tanker was priced and purchased using Chinese yuan instead of dollars. Why should you care about that? You should care about it because it will affect your life very directly.

In order to understand why this is so, you first need to know that for decades, most international trade in oil has been conducted in U.S. dollars. In 1973, Pres. Nixon made an agreement with Saudi Arabia that the United States would protect the Saudi oil fields militarily, and in return the Saudis would price and sell their oil only in U.S. dollars. Since then, oil from OPEC countries has been priced and sold in dollars. The effect of this agreement has been that countries that buy oil need to have dollars to pay for it. That has created a high worldwide demand for dollars and that demand has kept the dollar strong and the prices of imported goods low in the United States. 

In addition, the Saudis agreed that the dollars they received for their oil would be recycled into investments in United States treasury bonds. That has allowed our government to borrow at artificially low interest rates, and that in turn has kept interest rates low for everyone in the United States. The interest rate that banks charge for mortgages, for example, is tied to the interest rate on treasury bonds. In effect, you were able to buy a house with an affordable monthly mortgage payment because Saudi Arabia was buying treasury bonds. If they stop doing that, interest rates in the United States will rise, and that means that mortgages and other loans will become more expensive. The rise in interest rates along with the rise in the prices of imported goods will affect you directly because it will become more costly to borrow money to buy a house or any other consumer goods.

Imported Goods Are Cheap Because the Dollar is Strong

Many of the things that you buy are imported or contain imported parts. For example, every automobile factory in the United States has a supply chain that includes at least some parts made in other countries, and those parts are cheap because the dollar is strong.  If a car has parts made in – say – Mexico, those parts must be purchased with Mexican pesos. So, the American company buying the parts uses its American dollars to buy pesos to pay for the parts, and their prices in dollars depend on the number of pesos that a dollar will buy. A strong dollar buys more pesos than a weak dollar. Therefore, the cost in dollars of making the car depends on the strength of the dollar. The stronger the dollar is, the cheaper will be he cost in dollars of making the car and the lower will be the price that you will have to pay to buy it.

The requirement that oil must be paid for in dollars has kept the dollar strong, and the dollar’s strength has kept the prices of imported goods low. That has meant that the cars, clothes, furniture and imported fruit that you buy have been affordable for you. In addition, low interest rates have made it affordable for you to buy such things on credit.

Trump's Bullying of Other Nations is Weakening the Dollar and Increasing Interest Rates

That situation is now changing. Countries all over the world are looking for ways to reduce their need for dollars. Some countries started doing that before Trump was elected, but his bullying has lent urgency to their search.  Countries are looking for ways to reduce their dependence on the United States, and they want to do it quickly. Countries that were our allies now see us as dangerous and unpredictable. They are working to reduce their dependence on the United States and on the American dollar, and specifically, they are moving to other currencies to pay for their oil. China already pays for its oil with Chinese yuan. The BRICS countries are paying for oil with their own currencies. The EU is talking about paying for its oil with euros. All of that means that the dollar will weaken further and that interest rates in the United States will rise.

A Weak Dollar Together with Higher Interest Rates Will Make You Poorer

The effect of this will be that your purchasing power will continue to decline. Because of Trump’s bullying of other countries, many of the things you buy will become more expensive very soon. In addition, the value of your life’s savings (which you hold in dollars) will decline. Because of Trump's bullying and his war, you will need to adjust quickly to the new economic reality, and you can thank our president for that.