I was asked to comment on US dollar swap lines to Mideast oil producers.
Statement from Treasury Secretary Scott Bessent and Two Replies
Q: Wonder if Mish Shedlock would like to take a peek at this?
A: Sure!
Secretary Bessent
Discussions with countries, including our Gulf and Asian allies, about U.S. dollar swap lines are part of ongoing, routine conversations that
@USTreasury has been having with our partners over a number of years. They are a testament to the U.S. dollar’s primacy and the strength of America’s economic shield.
Additional swap lines can benefit our nation by reinforcing dollar usage and liquidity internationally, maintaining smooth functioning in dollar funding markets, promoting trade and investment with the United States, and, in hypothetical stress scenarios, preventing disorderly sales of U.S. assets as well as disruptions to U.S. markets, businesses, and households.
Many of these countries have pristine sovereign balance sheets and large dollar holdings – larger than many major economies with whom we maintain permanent swap facilities. I applaud our allies’ foresight and watchful risk management by exploring additional financial buffers during periods of market quiescence.
Extending permanent swap lines can be a major first step in creating new U.S. dollar funding centers in the Gulf and Asia.
Dollar dominance and reserve currency status are strengthened by constant long-term initiatives, including countering the growth of problematic, alternative payment systems.
Under @POTUS, this is American Economic Leadership at work.
Comments on Bessent
Bessent and Mideast Oil Producers are in semi-panic mode.
There is a run on various countries who need dollars because none is coming in from oil.
Bessent presents this as routine. The mechanism may be. But the extent isn’t.
Here’s the key statement: … in
hypotheticalstress scenarios, preventing disorderly sales of U.S. assets. That is not hypothetical. It is the fear.A big lie (discussed below): Extending permanent swap lines can be a major first step in creating new U.S. dollar funding centers in the Gulf and Asia.
Dollar Milkshake Reply
Goodbye, dollar milkshake theory.
In the movie Minority Report, Tom Cruise is part of a team which prevents crime before it can happen.
Fed swap lines being expanded to cover all US allies (non-allied countries have already de-dollarized their economies) prevents funding stresses before they become funding stresses.
Ergo, there will never be any “sucking” of liquidity from the global financial system into the US dollar even in a severe crisis, which means the dollar will lose its safe haven bid in times of stress.
If the world is short dollars, and the Fed supplies them, there is no consequence to being short dollars. You are actually encouraged to use dollars for carry trades, much like Abenomics did to the Japanese Yen.
The eventual outcome is the dollar becoming more of a transactional currency and less of a store of value.
This is great news for Asians. It means the end of permanent currency depreciation, making local equities more attractive relative to US assets. Pair high growth rates and favorable demographics with currency stability, and you have the perfect setup for an EM resurgence.
The Treasury Secretary does not understand the long-term implications of this Empire ending move.
Comments on the Milkshake Theory
Mostly nonsense.
The Mideast has not de-dollarized or it would not need swap lines would it?
In general, it’s not that the Fed is supplying dollars per se. Rather the US runs trade deficits and the world accumulates dollars as a result. Period.
As long as the US runs huge trade deficits, the world will continue to accumulate dollars.
The specific problem here is that the oil producers have dollar funding needs but no dollar income from oil sales due to blockage of the strait.
The War Impact
Iran’s closure of the Strait (through which ~20% of global oil normally flows) has stranded tanker traffic for most Gulf exporters. Alternative pipelines help Saudi Arabia somewhat, but not enough for everyone.
Production cutbacks, damaged infrastructure (from strikes), and shipping/insurance issues have slashed export volumes.
Result: Big drop in dollar revenue inflows, even with higher per-barrel prices for whatever still moves.
This creates temporary dollar liquidity mismatches:
Governments and banks still have ongoing USD obligations (imports, debt payments, investor payouts, funding for diversification projects).
Without steady oil dollar inflows, the Mideast oil producers might need to sell US assets (Treasuries) in a disorderly way — which Bessent explicitly wants to avoid, as it could hurt US markets and interest rates.
Prolonged shutdown worsens this: reserves get drawn down, pressure builds on currency pegs, investor confidence dips (hurting hubs like Dubai), and non-oil sectors (aviation, tourism, ports) suffer from strikes and disruptions. responsiblestatecraft.org
This is not an Immediate Crisis but we could get there with messy political ramifications even if there is little risk in the swaps.
The requests are largely precautionary and political:
The US and the Mideast prepare for a longer war, in different ways.
Oil producers are absorbing hits from a conflict they didn’t start.
In addition to oil-related inflation, allies puts additional pressure on Trump to make a deal.
This is not just a US-Iran-China thing as widely debated on X. The idea the US is gaining something on China is preposterous.
There is no dollar upside from this.
Trump’s ridiculous bluff is Iran is desperate for peace talks, but he doesn’t care.
Brilliant or Routine?
Bessent’s Two Lies
Extending permanent swap lines can be a major first step in creating new U.S. dollar funding centers in the Gulf and Asia.
Dollar dominance and reserve currency status are strengthened by constant long-term initiatives, including countering the growth of problematic, alternative payment systems.
The idea that the Mideast will become a dollar funding center is a joke.
Alternative payment systems are actually little threat now. However, the idea that that the US has constant long-term initiatives to strengthen the dollar is also a joke.
The fact is, the world is desperate to get off dollars. But the second fact is that is extremely difficult to do so given massive and persistent trade deficits and fiscal deficits.
That combination is what’s flooding the world with dollars. This is why I proposed a slow drip theory.
Slow Drip Abandonment
Trump’s actions have increasingly alienated US allies. Countries are genuinely sick of Trump, for the right reasons.
The US has weaponized the US dollar (both Trump and Biden did this). Countries are fearful of getting caught in the crossfire.
Tariffs and tariff avoidance.
Trump has turned the US into an unreliable trading partner with his repeat threats, contradictions, and constant position shifts.
America First has become a “My way or no way” set of demands, not negotiation tactics.
China’s direct trade with the US is down and heading further down as a direct result of points 1 through 5.
Importantly, it’s not just petrodollars. There is pressure on all dollar-denominated transactions.
The US no longer imports much from the Mideast. So, the Mideast accumulates less dollars directly from the US. This is actually a US success story.
There is no replacement in sight for the US dollar losing reserve currency status.
There is a global incentive to shift away from dollars, when and where possible.
When and where possible is the key component of the slow drip abandonment idea. Dollar avoidance is not that easy or it would have happened in a major way already.
Trump has turned the US into an unreliable trading partner.
There are long-term consequences to Trumps threats. One of those consequences is US dollar avoidance.
Death of Dollar Silliness
Despite the above, the idea that the yuan will soon replace the dollar as the world’s reserve currency was then, and still is ridiculous for currency reasons, political reasons, and economic reasons.
I discussed the yuan, reserve currencies, and petrodollars recently. It’s worth a quick look.
Petrodollar Myth and Reality
Please consider What Does CFR’s Brad Setser Say About Petrodollar Myth and Reality?
In the post I compare comments made by Brad Setser to comments I made in a previous post.
“The glory days of the petrodollar are over,” says Brad Setser CFR fellow.
Myths around petrodollars persisted long after they had lost most of their substance: the 1970s deal between Saudi Arabia and the United States to price oil in dollars never dictated the accumulation of dollar reserves in East Asia, and it should be clear by now that the U.S. commitment to defend the Saudis is based on much more than dollar pricing of oil.
Mish – US Independence
Direct Gulf state accumulation of dollars from the US has declined because the US is now largely (but not totally) oil independent. The US buys more from Canada for our needs than the Mideast.
Thus, the Gulf states are now dependent on Europe and Asia (especially China and India) for oil sales instead of the US.
Setser – US Independence
The U.S. is now a net oil exporter, not an importer, and has no direct need for Saudi supply.
The Saudis today are borrowers rather than lenders, big issuers of dollar-denominated bonds not buyers of Treasuries.The Gulf monarchies are more equity investors than “bankers” to the world.
Mish – Oil Transactions
Oil ranks among the top traded commodities by value, but it represents a modest slice of total global trade (goods + services).
Global Trade Total: Roughly $35 trillion (2025 UNCTAD estimate).
Oil’s Share: Roughly $1.31 trillion for crude (OEC data for 2024) That’s about 3.7 percent of total trade.
Mideast Assignment: Let’s generously assign 60 percent of that $1.31 trillion to Mideast petroyuan. The Mideast petroyuan would then be 2.2 percent of total global transactions that was a previously mix of dollars and euros.
The dollar share of global transactions as measured by payments is 50 to 60 percent. That would make the dollar-related transaction hit 3 to 4 percent.
Q: That’s it?
A: Yes. Even if 100 percent of all Mideast oil transactions were priced in yuan, settled in yuan, and reserves held in yuan, global US dollar transactions would only decline by 3 to 4 percent.In contrast to the theories of Brown and Choyleva, I see a continued slow drip abandonment of dollars.
Setser: The Saudis today are borrowers rather than lenders. The Gulf monarchies are more equity investors than “bankers” to the world.
That directly contradicts nonsense from Bessent.
“Déjà Vu all over again”
No fundamental requirements have changed. Yet, here we go with “Déjà Vu all over again” on the petroyuan discussion.
The one thing that has changed is the desire to avoid dollars has grown stronger. There is a definite leak in the US dollar desirability boat.
But it’s a slow leak. And the petroyuan has little, if anything, to do with it.
Rather, persistent fiscal deficits and Trump’s treatment of allies have everything to do with it. The US has weaponized the dollar with sanctions on Russia and China.
Trump and Biden are both guilty of excess sanctions and weaponizing the dollar, but the origin of this mess starts well before either of them.
What to Do About It?
Gold provided an enforcement mechanism that would have ended trade imbalances.
No one wants to go back to gold because every nation and central bank wants to inflate at will.
China (and the world) would greatly benefit if China voluntarily stopped its export mercantilism. But China won’t.
Until this setup blows up in a global currency crisis, expect continual small leaks (unrelated to oil) in global dollar-denominated transactions.
When? I don’t know. Nor does anyone else.
Expect More Oil Priced in Whatever Silliness
Meanwhile, relentless Déjà Vu hype over meaningless “oil priced in whatever” nonsense will continue for many reasons.
Hype sells
Death of the dollar theories and conspiracy theories are sexy
Petrodollar theories are like religion, not easily abandoned.
Authors promote nonsense to sell books
People hear something interesting and think they are geniuses for passing it on.
Who’s Really Desperate for a Deal?
As for Trump’s obvious bluff that Iran is desperate for a deal, please see Is There Any Point to the Latest Peace Negotiations With Iran?
Trump wants Iran to say what’s on the table. The opposite is true as well.
Both sides think they have an advantage here. But only one side has elections to worry about.
Regardless, as long as both sides think they have an advantage, we are essentially arguing over the shape of the negotiation table.
Comments
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