The forces at play in de-dollarisation
reuters.com
reuters.com
Has it really though? This entire article reads more like a propaganda position than anything. Plenty of anti-US countries have much to gain from continuing to foment this narrative.
I'd argue the actual negative would be that you have nobody in Washington arguing over debt ceilings and budgets (i.e. not caring at all about where money is going). In fact, it's quite positive that people are in conflict over the right way to handle money and if anything should increase confidence in its status as the reserve currency. All this political chicken is how the game has always been played.
Bottom line is that as far as trust and confidence go, the United States could certainly improve, but it's still by far the best. Who is honestly going to trust China's government with their terrible track record, especially after all their COVID lies, lockdown nonsense, quietly taking over HK and a growing threat towards Taiwan's freedom. And Russia? Give me a break.
Personally it seems there's a recent uptick in "armchair doomerism" articles around the idea of de-dollarisation.
I don't see why. It just needs to be making enough stuff that the rest of the world needs to justify holding their currency in reserve.
He repeats the thing about them running a deficit which I've heard a lot but doesn't make any sense. When the US became the reserve currency it didn't run a deficit. It's a benefit of being a reserve currency that you can do that, not a prerequisite.
If you're holding a currency in reserve, you're explicitly not using it to purchase goods and services. I don't remember if it was in this video, or the "Weaponization of the Dollar" video that he discusses this.
> When the US became the reserve currency it didn't run a deficit. It's a benefit of being a reserve currency that you can do that, not a prerequisite.
The non-deficit was under Bretton Woods, where gold was the ultimate reserve underlying the dollar. Is it coincidental that the US started running a trade deficit in the decade it abandoned Bretton Woods?
https://research.stlouisfed.org/publications/economic-synops...
"Starting in about 1970, the United States began to run trade deficits again, which have continued to this day. These shifts in the long-term U.S. trade balance appear to correspond well with U.S. industrialization in a global setting."
If your currency becomes a reserve currency it tends to appreciate in value, which makes your own products more expensive (especially as exports). You can call being able to import things cheaply a benefit, but it's a detriment to those in the reserve currency country who make their living as producers. For instance, the US farm system is, in part, propped up by subsidies. And even those didn't save the small farms.
https://usafacts.org/articles/federal-farm-subsidies-what-da...
"Government payments (excluding crop insurance payments) to farms have fluctuated since 1933, from a low of $1.5 billion in 1949 to $32.1 billion in 2000. In 1949, government payments made up 1.4% of total net farm income — a measure of profit — while in 2000 government payments made up 45.8% of such profits.
In 2019, farms received $22.6 billion in government payments, representing 20.4% of $111.1 billion in profits."
Right. The point is you need confidence that it will be possible to use it for that in the future for a large portion of your (or somebody else's) basic needs.
The US gained reserve currency status when it became the world's factory in the aftermath of WW2 while the rest of the world's factories had been destroyed.
>Is it coincidental that the US started running a trade deficit in the decade it abandoned Bretton Woods?
After it became the world's reserve currency? No, it's not coincidental. As I said before it's a perk of being a reserve currency. How could they resist?
Well, they couldn't.
>If your currency becomes a reserve currency it tends to appreciate in value, which makes your own products more expensive (especially as exports). You can call being able to import things cheaply a benefit, but it's a detriment to those in the reserve currency country who make their living as producers.
I never said that being the world's reserve currency was good for America. It went from the world's industrial powerhouse (a title now claimed by China) to a having its entire industrial ecosystem hollowed out for profit.
It did take a long time though. That could be the case for China also. This is the kind of shift that can take up to 2-3 generations though, whereas a run on a currency takes a day.
Exactly.
For years the cranks and conspiracy theorists have been whingeing about rumors of oil being traded in currencies other than dollars, as if that would somehow wipe out US global power.
This argument never made sense to me since forex trading is extraordinarily liquid and cheap.
If the seller of oil wants to receive euros or yen instead of dollars, and the buyer of oil wants to pay in francs or pounds, the cost of the forex conversion is measured in hundredths of a percentage point.
If treasury debt repayment is ocassionally late, it becomes a much more complex asset to manage. A dollar tomorrow isn't the same as a dollar today, and sometimes a dollar today is what's needed.
I don't think there's much danger of the debt not being paid at all, or paid at less than agreed face value and coupons. That would be a whole different thing, the 14th amendment says all public debts of the United States are valid, and to do otherwise would be a huge change, with major consequences. People don't buy long term Treasury securities because they think it's a good credit risk, they do it because they think there's no credit risk. If that changes, the whole game changes.
Age may be an issue but I don’t think his experience should be in question.
Basically we're past the point of finding extremely qualified individuals as leaders, now it's much more of a popularity contest
Also, I’m not sure that this country has ever really selected leaders based on innate leadership potential (whatever that may be). Sometimes it selects for celebrity (I think GWB and Obama were arguably both in this bucket, despite traditional-ish political backgrounds), sometimes generals, sometimes Republican senators from Ohio.
But even for the presidents who turned out to be tremendously powerful leaders (Lincoln, FDR, LBJ), I’m not sure that was a deliberate choice by the voters ex ante (and obviously not in the case of LBJ).
As long as the elections keep on happening in a timely manner it's a "flaw" that can fix itself.
I’d argue that it shows the opposite. That when it matters most, the US Congress can muster up a compromise and do so year after year.
This is like the least significant thing they could work together on. There are SO many more issues they could tackle together but won't.
[1] - https://www.youtube.com/watch?v=xTwwNoh0E6Q [video][6 mins]
[2] - https://www.youtube.com/watch?v=4V2s5-lOKAA [video][5 mins]
This dude is the absolute most entertaining geopolitical analyst, perhaps because no one else is filling this niche?
Is anyone else filling it? Any reason they aren't blowing up right now?
The thing is, Zeihan seems to be wrong a lot or most of the time about the particularities of his claims, yet his delivery is in a tone that is almost confident to the point of parody. Why doesn't he ever show any self doubt? I guess because that's a big part of his entertainment value, the showmanship. It doesn't stand up to scrutiny though if you watch for a couple years and then go back and look at the old videos.
We've yet to hear him really explain in a coherent way why piracy will suddenly plague the global oceans just because the US Navy won't patrol as consistently.
Ostensibly, because it's profitable to do so. Probably more profitable than before the US got tough on pirates.
That entity might not like the idea of freedom of speech and expression as much as Good Ol' Uncle Sam does. Then they can start dictating terms and sanctions since they control trade.
Still makes no sense to me.
Everybody just ignores that he's had far more wrong predictions than correct ones.
For instance, he's been predicting the collapse of China within a decade for almost 20 years now.
[0]: https://www.youtube.com/watch?v=JrMiSQAGOS4
[1]: https://www.mearsheimer.com/wp-content/uploads/2019/06/Why-t...
Just beyond parody. Such expertise.
> We've yet to hear him really explain in a coherent way
It's hard to explain geopolitics in a coherent way in a five minute video...
I listened to one of his videos on China, and as a long-time China-watcher, I was not impressed. In fact, I closed the tab and wrote him off. He identified most of the factors influencing China's political situation, which he confidently extrapolated as actual fact. Much of what he said was not unreasonable as a working hypothesis of what might be going on specific to that area, but it was certainly highly unlikely to be accurate. The whole picture was definitely not accurate.
Compared to the clarity of thought of, say, John Mearsheimer or Ian Shapiro, who are scholars, I found Zeihan to be a waste of time.
This is my first exposure to Peter Zeihan (and geopolitical youtubers in general), so I can't really say. From a purely financial point of view Patrick Boyle covers stuff like this (with understated humor), and he's got 100k more subscribers.
Relevant recent videos:
Would a BRICS common currency work? 22 minutes - https://www.youtube.com/watch?v=JHZnVdBZJfA
The Weaponization Of The Dollar 20 minutes - https://www.youtube.com/watch?v=y9HoPF0_a6A
Brazil and Argentina - A Common Currency? 18 minutes - https://www.youtube.com/watch?v=e4H5X4fjq90
The Death of Globalization! 23 minutes - https://www.youtube.com/watch?v=H5ejv-dTAaU&t=185s
China's Overseas Bailouts! 18 minutes - https://www.youtube.com/watch?v=wfeDXy0bJb8
He always explains it in very coherent terms that no other country has a navy capable of overpowering pirates on the deep sea. The fact that it's plain obvious bullshit doesn't make it incoherent.
Personally, I think it's very valuable that he puts it on every video of his. It has a very effective impact on audience selection.
For the Malacca Strait, the most important navies are Indonesia, Malaysia, and Singapore. They could all police it together now, and with the some cooperation and improvement could each do it separately.
Not even the slightest bit self-doubt when he says China won't exist in 10 years lol.
The amount of salt I take him with would be deadly for anyone with high blood pressure but he is so much fun.
I think a big part of his act is telling Americans what we hope will happen while not believing it will. Also plays on the idea "everything you know is wrong" .
I would recommend Niall Ferguson and especially the Good Fellas show/podcast/youtube show from Stanford Hoover Institution.
To contrast Niall with Zeihan on China, we are in Cold War 2 that will last multiple generations. When debt payments surpass military spending it tends to be the beginning of the end for an empire. The problem with Niall is I think he is actually talking about reality.
The immediate trend is towards trade denominated in various national currencies, but the ultimate trend is towards bootstrapping a new commodity-backed reserve currency via an international organization such as BRICS.
Arguing that USD won’t be displaced because it’s entrenched in various systems and used a lot completely misses the point that the underlying factors which created that state of affairs in the first place have collapsed.
but as the world de-dollarizes, there's the idea that the we are going go the so-called "multipolar world" which I think means that there won't be a global reserve currency anymore; but many of them... but isn't this how the world worked in the 19th century?
However, as China catches up, and begins to overtake USA as the world's most powerful nation, doesn't this suggest that we are going to a world in which chinese renminbi (not yuan) is the new world's reserve currency?
curiously, renminbi is only mentioned once in this article, in the description of a graph.
also, I have very little access to quality information about renminbi, so I wonder how much is it a digital central bank currency? how much blockchain technology has been incorporated into its foundation?
I don't think it is as necessarily as clear as "whoever is the most powerful nation gets to be in charge of the reserve currency." Nor do I think you were necessarily making that assumption.
There are pros and cons to having one's national currency be the world's reserve currency. For one, it provides more liquidity and easier access for US firms to capital markets. On the other hand, it can be argued that the US's trade deficit can be in part attributed to the need for more US dollars to exist(so that other nations can hold them in reserve) than goods it produces. This is called the Triffin Dilemma[1].
Additionally, the trade deficit has an interesting effect, namely the goods traded tend to be commodities which over time because easier and cheaper to produce ie: productivity increases naturally compound over time to lower their manufacturing cost. The CPI changes over the last 20 years[2] clearly indicate that TVs, computers, phones have benefited from productivity increases, while healthcare, education, and childcare have not. The latter group, is both resistant to outsourcing via international trade and (importantly) is resistant to scaling by increased productivity measure. This last component is known as the Baumol Effect[3].
With these in mind, you have a rough guide on what could happen if the Renminbi because the world's reserve currency - China would issue more Renminbi so that others could hold them in reserve, this could impact the US trade deficit, capital could be more difficult to find for US firms(bad for the economy), but US manufacturing could make a comeback(for better or worse), and this could mean fewer US dollars chasing services which could impact the Baumol Effect and shift the trajectory of cost disease. Mirror this for China.
The US, keeping these in mind, would have to make a calculation: is this a net positive or negative? There are, however, other strategies they could pursue. One of the ideas floated around by Keynes (in order to address the factors leading to the Triffin Dilemma) is the creation of the Bancor[4], a supernational unit of account structured to incentivize small trade deficits, or in more recent times the idea of a Carbon coin[5] structured to avoid civilization collapse from climate change.
The issue with the Bancor and Carbon coin is always one of was that a new international clearing union would necessarily need to be created to facilitate Bancor accounting. And the issue with a Carbon coin is fundamentally a coordination problem among central banks and national policy. They simply don't work if you're the only one doing it. And frankly, nations like the US have a difficult time when it comes to accepting a world where they aren't in charge. When faced with the question of a Renminbi-dominated future through inaction, or having to overcome the coordination problem of a supernational unit of accounting, the US finds itself between two seemingly impossible choices.
1. https://www.bis.org/publ/work684.pdf
2. https://i.pinimg.com/originals/88/7f/f0/887ff07f61b1b635ffac...
3. https://en.wikipedia.org/wiki/Baumol_effect
I guess we live in these distant countries and speak different languages, how could we possibly agree on anything if we can't even understand each other.
Maybe some day they will invent a type of communication that spans continents. Perhaps even nearly instantaneous communications across the other side of the world! Imagine if something that incredible were real? And then we might even have software what can translate between any major language automatically.
If only such a science-fiction world were possible. Maybe someday in the far future we will have the tools for some level of civilized geopolitical resolution.
But who am I kidding..computers will probably write poetry, songs, and computer programs before we get all of that stuff. Or maybe never. Maybe some day.