The US dollar’s hegemony is looking fragile
theguardian.com
theguardian.com
These two things can be simultaneous true:
- The USD and it’s position in the world has never been as fragile as it is now
- The Renminbi / Digital Chinese Yuan has no viable path to supplanting the USD as things stand today.
Until there are no more capital controls on the mainland, a free floating exchange rate (that is not controlled by the central govt.), and a trust that the central government won’t step in and devalue (or possibly weaponize in some way) the RMB, I would put my money that it will never become THE reserve currency of the world, digital or not.
Digital RMB news has generally felt like lots of hype machine and PR. While it would be beneficial to the CCP, Chinese economy and Chinese businesses - I still would bet it would be mostly relegated to the utility as a medium of exchange, not as a store of value (why do $$ mainlanders want to immediately turn their RMB to pretty much anything else that’s offshore?).
Unless I am missing something major and obvious here..
Step in and devalue their currency or weaponize it?
What makes the US different? Because it's trustworthy?
Obviously there is nothing the US couldn’t do to the dollar. Any law or policy can be passed or changed; the constitution can be amended.
The US is "different" here, because they have to be proven wrong after many years in this position. Any other country/currency instead needs to be proven better than USD and trustworthy in a long run.
How does China's transparency-averse system effect confidence-building though?
... and the US receives hard goods in exchange for that paper/credit.
We have had a free ride since the end of WW II, and I think we should appreciate that while playing the game on the board that is in front of us, with a clear eyed view of reality. I think that Rogoff’s view of reality is accurate.
Every time this argument is raised it’s now ‘Yes, but now is really the time.’ But why not after the Cold War, when a multipolar world was widely predicted? Or after Iraq, or the Arab Spring, or the financial crisis?
If COVID really is the trigger, I’d argue that people have had a good taste of China-style authoritarian restrictions on freedom and movement over the last year, and I’d say they didn’t like it very much.
It’s got to the point where in the absence of any new and compelling evidence, such claims have to be treated with a little scepticism.
It would be completely natural for there to be a transition to more balance between the major trading bloc currencies, namely USD, EUR and RMB, but it won't be as severe or cataclysmic as claimed, mainly because that doesn't serve anyone's interest (who is holding USD and can bring it about) and because the markets will smooth the way.
The most likely outcome is that everyone will be better off and The US will lose some soft power, which is a process that has already been underway.
USG owes $28 trillion, borrowing at an increasing volume. If switching to 3 reserve currencies happens as you say, rates will go up. How exactly do you service $28 trillion and beyond debt with higher rates? So no, it won't be as joyous for everyone as you suggest.
The only way that the dollars international status would meaningfully affect USG’s ability to borrow is if it was relegated to emerging markets status. All developed market currencies can borrow at sub-2% rates. That doesn’t require you to have reserve currency status.
Yes, there's a Federal Reserve too, and they can bid up the price of bonds and buy as many as they want, but it's functionally equivalent to printing money, so it becomes a question of how badly they overshoot their inflation target, and that influences demand as well.
Foreign central banks may hold a sizable proportion of short bonds, particularly 3-month T-Bills. But there’s essentially an infinite wall of demand for short bonds at the near zero bound. So maybe loss of reserve status increases borrowing costs from 0.02% to 0.15%. Not exactly a catastrophe for the budget deficit.
This is why reserve status is essentially irrelevant to borrowing costs. All developed market governments, regardless of their currency’s reserve status, can borrow cheap in today’s regime.
The average Treasury bond duration is about 60 months, and falling, so that's still half the bonds we're talking about (and rising).
You've got to keep in mind that the people who are buying or holding these bonds are the ones who will get burned, so they're not going to suddenly dump their USD holdings at great expense. The Chinese I'm sure would love to strike at the USD but they're holding trillions of it, so they would mostly be hurting themselves.
So if it happens it will be relatively gradual and the Fed and the market will do its thing.
Those are the same thing. The Fed shrinks the money supply by inducing someone to surrender dollars in exchange for debt. This means there is increased supply, and the price of the debt goes down (i.e. the rate goes up).
The US will service the debt the way it always has, by growing its economy. Somewhat higher inflation will actually reduce the debt load in real terms.
The "joy" is that the US will be forced to be more disciplined.
Depends on the country. Majority of U.K. want vaccine passports to go to places like pubs and ball games
https://www.reuters.com/article/us-global-forex-reserves/u-s...
> The greenback’s share slid to 59% in the fourth quarter, from 60.5% in the third, declining for three straight quarters. Its share in 1995 was 58%.
Besides, the situation did change recently. Wikipedia now recognises China as effectively the worlds largest economy.
https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)
These things are more guesswork and storytelling than anything.
At some point the world economy is so much bigger than the USA's (even if no one stuffs up), the the US government simply CANNOT product enough dollars* for the demand.
Exactly the same reason why the Swiss franc can never be the global reserve currency.
* Although the current USG is certainly giving it a good go ;).
The parent's point (about US' share of world GDP) is quite different to the one you're making here.
The reason why our subjective probability of a building collapse goes up with the passage of time is because we know already that structural engineers are reliable. The passage of time tells us more about the structural integrity of the building than about the reliability of the engineering advice.
Macro-economists and geopolitical pundits on the other hand have little credibility when it comes to forecasting. The passage of time should only increase scepticism, especially when the reasons for the forecasted collapse keep changing.
If a psychic keeps giving you either incorrect predictions or predictions that remain unrealized, does your belief in them go up or down?
The article seems to be more about this: "Just as the US eclipsed Britain at the end of the nineteenth century as the world’s largest trading country, China long ago surpassed America by the same measure."
that seems to be the author's new compelling evidence.
Side note, I don't see how most of the events you listed: winning the Cold War, Iraq or the Arab Spring could even remotely challenge the US dominance, just the opposite, if anything.
But there is constantly new and compelling evidence.
In my opinion there are two factors. 1. Domestic economic and fiscal health; and 2. Foreign aid.
US debt, consumer debt, student loan debt, and corporate debt are all at historic highs. Across the board there are defaults at historic highs and a general inability to service these debts at every level. In that period of 30 years you mention we have seen for the first time ever US cities and governments declare bankruptcy.
But maybe even more important to maintaining global hegemony is foreign aid. That it’s paying foreign governments to make it worth their while to support the US dollar as the global reserve. Consider from 2001-2011 foreign aid exploded from $10B to $50B where it peaked and has plateaued and even slightly declined for the next 10 years (and in reality numbers aren’t even available for the last 2 years). It should come as no surprise the explosion in spending kept the US ahead of China, but since the US peaked China now outspends the US in foreign aid. It’s “keeping up with the Jones’” on a global scale.
Because the former USSR is/was far weaker than anticipated.
For USA and Europe COVID-19 has been really expensive whereas China in particular has grown through it. The US relies on Asia - in particular China and Japan to cover that cost by buying US treasuries in an slowly inflating currency. At the same time the relationship between China and the west is increasingly antagonistic. This creates a different dynamic from 2008 - how different - time will tell.
https://www.fiscal.treasury.gov/files/reports-statements/tre...
As of the end of 2020, there are 27.7 trillion dollars in outstanding public debt. 10.8 trillion is held by the Federal Reserve and the US government. About 7 trillion (no data since September) is held by foreign countries. Of those, China owns 1.07 trillion and Japan owns 1.29 trillion. I don't think it's reasonable to characterize the US as relying on China and Japan to cover those costs.
The other major (all holding > 100 billion) holders of US debt overseas, in order, are the UK, Ireland, Luxembourg, Brazil, Switzerland, Belgium, Taiwan, Hong Kong, the Caiman Islands, India, Singapore, Saudi Arabia, Korea, Canada, and France. This seems like a pretty good mix.
NB: Real yields on treasuries are all negative. People are buying treasuries despite knowing they will lose money in real terms. I don't think people giving the US free money just so they can hold t-bills is a sign of the weakness of the US dollar.
https://www.treasury.gov/resource-center/data-chart-center/i....
The numbers sound big but then in different perspective not so big. The internal debt of the US, in some sense, at least when we are thinking about the viability of the US dollar in international trade, cancels itself out. And debt and swaps with Europe or the UK? Perhaps it matters less than debt to other countries.
It really boils down to the exorbitant privelige. How big is it really? Who exactly bears the cost and who encurs the benefits? Not exactly clear in the details.
However were Japan and China to give up their "mercantalistic" practices of buying US treasuries and instead letting their own currencies appreciate and start trade and investing without using the USD.
Then that probably would be quite a thing.
Pessimists persists in humanity because sometimes they are right. It’s valuable to let that fear be voiced, explored, determined, and planned for.
Now it exports totalitarian morality, while China is telling boys to be more masculine and mocks the western 白左.
It is fairly easy to lose a country's reputation.
You might be shocked by how they look like.
I think few in the West realize how fast China is moving.
Looks like insomnia. China does move impressively fast, but what does this show? Everyone needs to sleep.
People need places to feel part of society, and it's fun to visit, but living in a mall/amusement park/sports bar/Tron has negative health impacts with all the over stimulation.
By now, high density, ecologically sensitive, mixed use cities that have a focus on overall quality of life, rather than dazzling, are more impressive. Chinese development can pull ahead there with a focus on transportation systems.
But your point may have been largely about scale in which case I agree. They’ve moved very fast n
Now imagine if they turned this focus to something else.
Why is that? I think it says more about us in the west.
This said, we won't have a real tipping point until China can rival Hollywood for quality and quantity of cultural output, and their language makes that quite difficult. This is one of the reasons the USSR never "won" even at the time when it was arguably more powerful and efficient than the US.
Amazing how fast attitudes change. Just a few decades back, Japanese goods and Made in Japan had the same cheap, low quality reputation as Made in China goods today. I even distinctly remembered the same "Japanese people as a culture don't care about quality" comments which is the same as some people nowadays complaining that Chinese people have "chabuduo"(just enough) attitudes. Or the same accusations of no creativity.
Funny how drastically these "deep-rooted" cultural attitudes in Japanese people have changed. Or maybe its not the culture of Japan that has changed but the perceptions others have of it. I reckon the same is for China.
Maybe part of it is economic risk. Localization and distribution would have some costs, and maybe nobody's willing to take a risk on "let's bring China's #1 movie to the US". Things like anime in the west got bootstrapped in obscure fandoms on an informal, low-budget, and sometimes downright bootleg way, which I'm not sure they want to do if they're trying to consciously develop soft power.
I am somewhat surprised about how limited China's attempts at soft power seem to be. They don't have a prominent global media presence like, say, the BBC/DW/NHK. They don't seem to be tooting their horn well about their engineering advances. They don't even seem to have effective tourism marketing-- I can't think of the last time I saw an advertisement encouraging travel to China (even before the pandemic) while there are loads of travel documentaries on TV all conveniently sponsored by "(random state or European country) Tourism Office"
I do think a missing piece is having a few more world-beating brands. Yeah, we have a few, (Lenovo, for example), but we're definitely at the point where people will say "I'm not going to buy a Chinese car/washing machine!" -- which feels about where Korea was in 1980 or Japan in 1955.
* Centralized governing system
* Production excess, we continued to produce even if we didn't have any buyers and the quality was pretty bad (today you have Wish or Aliexpress through which you can sell literally anything, even people from my family are ordering crazy stuff from China that has no use at all, so China has the upper hand, we just didn't have that technology back then)
* Lack of political diversity
* No indicators of survivability, China is yet to go through a major crisis (Black Swan) to see how it handles it, the pandemic is not a Black Swan
* Impedance mismatch between communism, atheism promoted by Marxism vs. Christianity that promotes individual thinking, Eatern cultures generally are more collectivistic, so again, China has the upper hand
* Socialist countries are ticking time bombs, they implode when you don't expect them to happen, usually the trigger is local. Nobody thought that Soviet Union would collapse out of nowhere, I still remember reading articles coming from socialists in German and American newspapers lauding the policies adoped by Soviets and how they will get ahead of them. On 15th December 1989 nobody in Romania would have thought that the next day a bloody revolution will start out of a small Hungarian minority in the city of Timisoara. Localism! Everything from China comes from the top level, filtered and censored, we may never know what happens locally and it will be a surprise for us when that happens.
* An educated population is hard to control, the only thing that communism does great is offering education for the masses and opportunities, the moment it will hit a certain threshold, people will just want more and everything will end violently. As Wikipedia puts it:
"The events that demolished the Iron Curtain started with peaceful opposition in Poland, and continued into Hungary, East Germany, Bulgaria, and Czechoslovakia. Romania became the only communist state in Europe to overthrow its government with violence." [1]
> Why is that? I think it says more about us in the west.
I can agree with you. Because of our experience, it is easy for us to swap China with "Western Communism" and think that it will have the same faith without taking other factors into consideration. The West has problems and the pandemic revealed them, blaming China for the Corona problems is stupid, we should blame our overlyoptimized, overlyindividualistic nature. When Italy was "burning" at the beginning of the pandemic, all European states were reluctant to aid and all the press in Europe was finger pointing them in a disgraced way, typically European. I remember states that I've believed to be "team-players" like Sweden notifying all other European memebers that they will do it their own way. The same happened with my country, they were so late to react to the advice of WHO and EU, so late that the local municipalities started to take the matter into their own hands they practically blocked the access to the cities.
I have listened to this viewpoint (and at some point I have held it myself) for the past 20 years. And year after year it is clearly proven wrong.
Today Chinese companies such as Huawei, TikTok, DJI, Xiaomi are absolutely world class technology companies. Ten years ago Chinese companies of this stature were unthinkable. Yet somehow we question whether Chinese companies will be capable of producing a highend microchip, now that we via our sanctions have create a halfway sputnik moment for them? Whether they can create an international blockbuster movie?
Could it be that we in the west are speaking out of prejudice? That we think we know what modern Chinese communism and Chinese culture is? And we just assume it is going to degenerate into some Soviet style bureaucratic, corrupt, degenerate mess.
In fact, a lot of western designed stuff made in China is only possible thanks to the Chinese innovation in production. If you start digging the OEMs of western brand products, you find that the manufacturers of the parts like cameras, sensors, motors, controllers, antennas, speakers etc. are all standalone Chinese companies with their own products that are not simply produced in sweatshop but supplied to the western brands as a original designs. Surely it goes beyond electronics, the same is valid for the more traditional stuff like textiles or plastics etc.
What China lacks on is culture. Surely they have very deep culture with traditions dating back thousands of years but on the global scale the Chinese culture is a curiosity at most. Arts and lifestyle is dominated by the west in a sense that everyone on the earth has some part of it in addition to their local culture and that culture dictates the mental models of all the people, including the Chinese people. When you have a hegemony over the culture, you say how to live, who to like, who to hate, how to use technology and what to consume.
When I moved to the UK from Turkey, I noticed that all the stuff regarding the functioning of the society that we blindly follow made sense in the UK and a lot of restrictions and rules that we had in Turkey were designed to force the Turkish society to function like a western one. That's why you can innovate in culture changing stuff in the UK but it's very hard in Turkey: because UK is on the cutting edge and Turkey merely follows some cargo-cult-like culture.
Let me give you an example. In Turkey banks are very good at tech and design, we used to do chip&pin forever, contactless payments and alternative channel payments existed since ever and our ATMs can do almost everything that a bank can do and their mobile apps were always very well made and powerful. Why wouldn't Turkish banks dominate fintech then? We hear all the time about some UK or US bank making something easy to use and getting huge rounds of funding, making them more valuable than the Turkish banks that did these things since years? It's definitely not the lack of talent or entrepreneurship as these are found im ample amount in Turkey. Turks that travel to UK/USA/EU are shocked by the primitiveness of the everyday banking.
I think the reason is this: In the Turkish mental models we don't know why we do the thing we do it comes of utilising Western institutional models. We usually have rigid rules and structures that are designed to force behaviour which dictates a mental model about how something has to be and that cannot be questioned.
At first, the Turks find the Banking in western countries extremely primitive and they simply cannot think about institutions doing financial services without being a bank. In fact, fintech in the UK is fine but you need to look beyond HSBC or Lloyds, you can have Azimo for sending money abroad or Monzo for simple banking. Now Turkish banks and regulators are copying the west again and the mental model of fintech is being expanded to include non-bank payment processors etc. despite that they had the tech much earlier and these things were simply features of the existing banks.
When you are not at the cutting edge in a culture(financial culture, for example), you cannot innovate. Those who dare will be quickly put down for not following the rules or even making something hard to categorise according to the current rules. To question why and how you do something and innovate on the core platforms you need to have total understanding and you cannot have that with non-naturalized imported culture. It's like innovating on top of Apple/Facebook/Google platforms.
I think culture is the actual moat of the US and the west in general.
Regarding innovation, I wonder how much role social friction plays. I'm not turkish, but my understanding is that there is a lot of interpersonal negotiations in turkish dealings, who knows who, who owns a favour to whom. Which is related to corruption. You don't have that as much in the West, when you deal with someone it doesn't matter as much who you are and who you know.
This is one of the most insightful comments I've read on HN today. I experience this a lot, especially in the arts, in my own country. That constant reference to "the rules" and "the way it's supposed to be done" reflects the kind of "follower-culture" that, I think, impedes innovation.
That is not to say innovation does not (or cannot) happen within such a limiting framework; the framework is limiting and works against an innovative spirit.
I'm sure that people in the dominant culture are facing the same resistance but since they don't have a reference to follow(they are at the cutting edge, the top, the front trenches) they can brand their work as innovation much easily. If you are in a "follower-culture", people will not accept your work as good unless it is recognised by the upper culture. It happens a lot in Turkey, where the local artists doing unusual things won't be accepted by the local critics or academia until they make a name for themselves in the USA, UK or EU.
It's not limited to artist. Game developers, app developers, inventors will be initially branded as "scammers" or a "joke" if they do something in a way that's not usually done up until they receive recognition from abroad.
China has built at an even more aggressive pace and scale. It has built an unprecedented amount of infrastructure in an unbelievably short amount of time. That infrastructure will reach end-of-life all around the same time. It's likely going to end up as an infrastructure crisis at a level beyond what the US is suffering from now.
*I am not claiming that all Chinese construction is shoddy, but adherence to code in building is clearly a significant issue and the only way it won't have multiplying effects to cost are if the only goal was the economic activity of the construction process and not at all the constructed result of the process.
Most Americans don’t much travel abroad, don’t see how nice life can be in Europe, how beautiful and energetic the people are in Africa (but a lot of violence in some places), the calm energy and generally very good vibes in India, the vibrancy of Asia. I love my country but I also believe in having a realistic view of the world.
Closing the economy because of fear of a virus first found next to a Chinese lab, triggering a shift in currency dominance to China?
https://www.nytimes.com/interactive/2019/01/17/world/asia/ch...
Or alternatively it'll go away when people in the US decide they'd be happier with Yuan or Euros in their pocket then stuff in their house.
I have no clue when either of those situations will arise though.
Which is why Airbus is such a big deal — and COMAC on the horizon.
But will Metcalfe’s Law kick in with the Digital Yuan over time?
The Yuan has a long way to go from its current 2.5% share.
But if Chinese digital superplatforms ever gain traction in the developing world, it would be relatively easy to swap the means of exchange on the platforms, especially if it offers superior purchasing power retention.
Pushing Digital Yuan as part of both physical and digital One Belt, One Road efforts make sense.
Perhaps the future is a battle between relative value propositions but with far lower switching costs than the Cold War.
Apple versus Android, Dollar versus Yuan.
Ultimately, it is the US’s game to lose far more than it is China’s game to win.
But complacency kills.
Especially when it falls beneath the velocity threshold of general population detection.
What?
This is my interpretation of what was said.
This kind of sentence should never leave someone's keyboard.
What about "Especially if the process is slow enough that people don't notice any abrupt change?"
"[..] the sustainability of its debt might be called into question"
and this:
"[..] backed by the Fed, which has unlimited capacity to issue currency in a crisis"
in the same article and don't feel any cognitive dissonance.
Because the dollar is used, for instance, to pay for oil, there is a strong demand for dollars outside the USA that has the effect of making USA imports cheaper. So, if the dollar lost international importance, that would put the USA in the same situation that the other nations. But going from there to the idea that the USA will have problems to pay a debt in dollars makes not sense.
You can see it all around the world, in the current crisis, what decide the interest rate and the interest of the public debt is not "the markets" is the central banks. Otherwise you will not find demand for assets that, in some cases, have negative return.
So, it's not the supply and demand in the markets what decide the price, but the policy of the monetary authorities (1).
(1) - This only apply for countries that have its own floating currency.
If someone lends the US enough dollars to buy a sandwich and gets back enough dollars for 2 pieces of bread - they don't smile ruefully and say "well, they fulfilled the letter of the contract so their debt must have been sustainable". They're going to say "the US basically defaulted! I should have seen this coming, their debt as of 2021 was totally unsustainable".
Why the Chinese (for instance, now that they are fashionable) buy USA debt? Because they have a lot of dollars from selling things to the USA, so, instead of having those dollars in a checking account, they buy bonds that give them interest.
Recommended talk:
Not that that means he's wrong, but his credibility as an expert isn't good.
1) in terms of economic growth, China is expected to surpass the US as the biggest economy by the end of this decade. Some of these predictions have been moved forward by economists factoring in e.g. Covid and the policies of recent administrations (i.e. they had that effect apparently). So, the closer that get, the less evident it gets that we should trade using dollars. After all once that happens most trade effectively is not in dollars anymore.
2) Demographics this century are going to be interesting. China is the largest nation right now. But its population is actually shrinking and projected to dip below 1 billion by the end of this century where other countries (e.g. India and Nigeria) might end up becoming larger. The US looks like it would shrink except it is able to keep up through immigration. The same is happening in the EU. So relatively speaking, China will become smaller in the next decades even as the world population continues to grow.
3) In the past hundred years, oil has been the major driver for our economies and we've historically traded in it using dollars. However, with clean energy coming up and China not having a lot of domestic oil production as well as a massive clean energy industry, this is not likely to continue to be the case. Large parts of our transport sector are transitioning to EVs right now. So, the less important oil becomes, the less important the dollar becomes. This will also transform economies very dependent on oil right now (like the middle east).
IMHO, it's not a given that the US loses its dominance. But it does need to adapt to prevent that from happening. A pan North American/European/South American block would still be an enormous portion of land and the world population. And it's culturally very homogeneous. I've not been to either but I think I'd feel a lot less of an alien in e.g. most of South America than in most of Asia where language and culture are much more different (not better or worse, just different) than what I grew up in. Unite those economies, and you have a block of countries that is mostly already maintaining friendly relations, shares a lot of values, and doing a brisk trade with each other and the rest of the world. Australia, Micronesia, and much of Africa also fit in that picture quite easily. The world is a big place.
But isolationism as practiced currently is not putting us (Europeans and North Americans)on a positive path. It didn't work out that great a century ago either. The US needs to look at its past to see what worked and didn't work last century. Winning WW II and landing on the moon was not an accident. That was the US transforming itself from the failing colonial economy it used to be to a world power in about forty years and changing isolationist policy to a policy of being the world's leading economy. That had its own problems of course (and several wars) but it wasn't all that bad. If the US declines into irrelevance, it will be its own fault.
Hyperinflation, seizure of citizen assets, stagnant/declining business growth, or cryptocurrency
The recent money creation has given them a lot of flexibility going forward. They now have a huge reserve that can be used to fight inflation without having to raise interest rates sharply.
QE was very much inflationary and cancelled out the deflationary environment. QT will do the same thing in the other direction.
Fiscal policy is the level that you want to use for increasing/decreasing inflation. Somebody have to spend more in the economy if you want to see inflation.
Just try bartering for something with cocaine to see what I mean.
What if the person you sell cocaine to for dollars to spend on Amazon reports you?
What if you get an IRS audit, how do you justify the funds used to buy the house?
Yes, you'll be able to use crypto on black markets, but that is hardly covering all your needs.
A drug dealer certainly could.