Quick history quiz: in all of recorded history, how many superpowers pegged their currency to the currency of a rival superpower? Put another way: how many superpowers have made their own currency dependent on another superpower’s currency?
Only one: China. China pegs its currency, the yuan (RMB) to the U.S. dollar. It adjusts the peg a bit here and there, but the yuan’s value is set by the Chinese state, not by the market of buyers and sellers.
(Yes, various nations have used gold coins minted by rival powers (Spanish pieces of eight were money everywhere, for example) but we’re talking about fiat currencies, backed by nothing but supply and demand, not intrinsically valuable gold coins.)
Second question: is pegging your currency to a rival power’s currency a sign of strength? The obvious answer is no. It’s a sign of weakness. A real financial power issues its own currency and let’s the global FX (foreign exchange) market discover the relative price / value of the currency. The financial power trusts the market to discover the value / price of its currency, and it responds by raising or lowering the yields on its government bonds and other pricing inputs.
If the issuing nation won’t allow users and owners of its currency price discovery, few will want the currency because they can’t trust the state’s arbitrary, non-market price. This reality is reflected in the chart below of global currencies’ relative share in global payments, loans and reserves. China’s currency, the yuan (RMB) is basically signal noise: its global role in payments, loans and reserves is near-zero.
Tagged with: china
The conventional narrative holds that China’s Belt & Road Initiative is cementing China’s global superpower status. There’s an alternative narrative, however: it’s a decade too late. From this perspective, global trade has reached the top of the S-Curve and is in the stagnation phase, which will be followed by decline or collapse.
Global trade growth loses momentum as trade tensions persist (WTO)
Why could global trade decline as a secular trend? The answer of the moment–trade wars– is more a symptom than the disease itself, which is the benefits of globalization have declined and the negative consequences are becoming unavoidable.
Trade is never “free;” there are always losers to any trade, and if the benefits accrue to the few at the expense of the many, the gains no longer offset the losses. Resistance to globalization is rising, and national interests are gaining political ground.
Then there are the strategic considerations of trade. Do you really want your nation overly dependent on other nations for energy, food, semiconductors and capital?Food security makes little sense by itself; the spectrum of autarchy / self-sufficiency must also include energy, critical technologies and capital–human, institutional and financial.
Going forward, the last thing nations will want is increasing dependence on China–or any other hegemon.
Imagine the reaction in the global Muslim community if a western nation imprisoned hundreds of thousands of Muslims solely for being Muslim and subjected them to torture, “re-education” that amounts to treating their religious faith as a pathological mental illness, forcefully separating parents and children, incarcerating the children in state-run orphanages, and on and on in a ruthlessly efficient Nazi-like systemic oppression.
The Muslim “street” would erupt in mass protests, burning flags and calling for the downfall of The Great Satan, and the Muslim nations would cancel energy and trade contracts and lodge diplomatic protests.
But the global Muslim community, and indeed, the entire global community, is strangely silent as China pursues a high-tech suppression of its ethnic Muslims. This silence might be the one thing Tehran, Moscow and Washington have in common: a complete and utter disregard for China’s Muslim-only gulags.
While America’s ruling elite greedily rubs its hands over the wealth that will flow from a “trade deal” with China, where is America’s vaunted concern with human rights? Nowhere to be found. Where are the canceled energy and trade contracts between China and Iran, Turkey, Pakistan, Egypt, Indonesia, Malaysia, Iraq, Syria, Saudi Arabia, the Persian Gulf States and other Muslim-majority nations?
China’s enormous successes–raising hundreds of millions out of poverty, landing a rover on the dark side of the moon, etc.–are well known. Less appreciated is China’s increasing vulnerability to financial instability arising from asymmetries that cannot be resolved by tweaking trade policies.
As this article explains, The China Story That Is Far Bigger Than Apple, China’s trade balance–trade surpluses for decades– is close to slipping into trade deficits.
At the same time, China’s once-mighty pool of savings has diminished as consumption has risen. As a result, China now needs foreign investment more than it did in the previous era.
Chinese businesses have borrowed around $2 trillion in US dollar-denominated debt in the past few years, requiring the acquisition of dollars to service the debt.
So far this sounds like a typical case of a fast-growth economy maturing into a trade-deficit, debt-dependent consumption economy.
What the article misses the staggering rise in the cost of living in China over the past two decades.
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The signs are everywhere: credit exhaustion is global, and that means the global growth story is over: revenues and profits are all sliding as lending dries up and defaults pile up.
What is credit exhaustion? Qualified buyers don’t want to borrow more, leaving only the unqualified or speculators seeking to save a marginal bet gone bad with one more loan (which will soon be in default).
Lenders are faced with a lose-lose choice: either stop lending to unqualified borrowers and speculators, and lose the loan-origination fees, or issue the loans and take the immense losses when the punters and gamblers default.
Europe is awash in credit exhaustion, and so is China. China’s situation is unique, as credit expansion has been propping up the entire economy, from household wealth to corporate speculation to the export sector.
As this article explains, The China Story That Is Far Bigger Than Apple, China’s trade balance–trade surpluses for decades–is close to slipping into trade deficits.
Natural and human systems tend to go through stages of expansion, stagnation and decline that follow what’s known as the S-Curve. The dynamic isn’t difficult to understand: an unfilled ecological niche is suddenly open due to a new adaptation; a bacteria evolves to exploit a new host, etc. Expansion is rapid until the niche is fully occupied, and then growth matures and stagnates; the low-hanging fruit has all been picked, and it’s much more costly to reach what little is left.
Human economies starved of capital, credit, access to markets and freedom are akin to unexploited ecological niches. Lacking capital, credit and the freedom to innovate, experiment and advance, economies wallow in a self-reinforcing stagnation.
Should capital, credit, access to markets and freedom become available, the economic expansion can be breath-taking. This is the basic script of postwar Japan and the Asian Tiger economies: economies with either minimal or war-damaged infrastructure, limited capital/credit and stifling status quo power structures that limited the freedom of the populace to access markets and innovations were suddenly open to credit, markets and innovation.
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The first point (and a half) is a counter to this statement which everybody accepts as doctrine:
Anybody can buy gold with dollars at any time – no gold backed oil contract needed.
I won’t name names. We’re all on the same side here, but for some reason this topic is more polarizing than it should be.
Let’s think about “anybody can buy gold with dollars now” for a moment.
Dollars come from the United States. The benchmark global gold price in dollars comes from the United States.
It makes sense that if a company/country is selling a crap-ton of barrels of oil for dollars, said company/country would be most efficient in purchasing their physical gold on the COMEX with those dollars.
It’s not like a company or country can walk into some local coin shop with $350,000,000 in U.S. dollars and scoop up a 259,259 Chinese Gold Pandas.
They need the COMEX.
Here’s the problem: