No Minister

Money

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I’ve occasionally written before about the status of the US dollar as the global reserve currency, usually in comments in response to claims that the US dollar is finished as such, because the mighty, mighty Chinese economy is powering into the 21st century and America falls and yada, yada, yada.

These claims have been amped up by the invasion of Ukraine by Russia, not least because of the sanctions levied against Russia:

Blocs of nations have long been chasing dollar alternatives. These latest sanctions have merely forced the pace.

The world will no longer consider the dollar a dependable monetary bedrock. If the United States can kick Russia from the international payments system, it can kick other miscreants from the international payments system.

There’s also this from that same article, which actually focuses more on the realpolitik of the Ukraine invasion and US-Russian relations, than on economics but which has another interesting side-note on the latter:

The Western press was full of gloating stories about how Mastercard and Visa stopped handling transactions when Biden announced the sanctions. That’ll show ’em. But those companies had done the same thing back in 2014 when, with Barack Obama at the helm in the United States, Putin gobbled up Crimea. This time, Putin was ready. He had already implemented his own card payment system. Mastercard and Visa piggybacked on it. One irony of the situation, as the web site Daily Reckoning observes, is that:
“instead of Visa and Mastercard getting the fees, Russia’s central bank collected 8.2 billion rubles in net profit, or about $94 million at current exchange rates. Russia actually profited from Visa and Mastercard sanctions.”

The Rouble (or Ruble if you like) has also bounced back to pre-invasion levels against other currencies.

However, for a whole variety of reasons – and the fundamental, structural problems with the Chinese economy will not get even a look-in here – the US dollar is going to stick around as the reserve global currency and this article explains why, specifically in comparison to the Chinese Yuan:

The Federal Reserve calculates, for instance, that the dollar is a part of some 85 percent of all the world’s currency exchanges. The next most significant is the euro at 35 percent, which includes euro-dollar transactions. For all Beijing’s pushing, the yuan at most constitutes 5 percent of these exchanges. About 80 percent of all trade contracts globally are denominated in dollars, whether an American is involved or not. The yuan barely exceeds 5 percent. According to the International Monetary Fund (IMF) some 60 percent of all central bank currency reserves are held in dollars, down from 70 percent at the turn of the century but still an overwhelming proportion. The next highest is the euro at 20 percent. China’s yuan amounts to a mere 2 percent.

The article also goes into the same arguments I’ve made about the problems with having China holding the global reserve currency; there are a quite a number of issues but they boil down to the Chinese Communist Party’s hold on China, if you think America is capricious the world of Xi Jinping is one hundred times more so.

The article also notes that we’ve heard all this before:

  • During the fallout over Nixon’s collapse of Bretton Woods and the dollar-gold link in the early 1970’s.
  • The great inflation of the 1970’s and early 1980’s would doom the US dollar, not to mention all that “crazy” military spending by “Raygun Ronnie” (see Paul Kennedy’s The Rise and Fall of The Great Powers in the late 1980’s for the then fashionable academic wank on the end of the USA).
  • The rise of Japan in the late 1980’s when places like the Emperor’s Palace grounds were worth more than all the land in California and Japanese companies were taking over the world – paradoxically these claims came just as Japan peaked, after which two decades of low growth and periodic recessions became the new normal for her.
  • The rise of the Euro in the 2000’s produced a lot of chest thumping – right up until problems emerged with Greece, Italy, and a few other EU members.

So it goes. In the case of China, here are just some of the problems the world would face:

China, which pursues mercantilism and cronyism, can make no claim to operating a system under the impartial rule of law. Not only has the country violated patents and copyrights on every continent, but it has blatantly stolen technology and trade secrets from all its trading partners. It regularly alters rules with no recourse offered to either domestic or foreign interests, and Beijing threatens to expropriate assets from any who do not bow to its political demands.

Nobody will trust such a nation, and in any case, like Japan, China has not yet shown how it’s moving from being an export economy, and having to back the Yuan as a reserve currency would make that transition even tougher.

Written by Tom Hunter

April 5, 2022 at 1:00 pm

One Response

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  1. What you have hit upon here Tom is the central question of our time and is now
    being decided in part on the European Steppe

    The thing is would you deposit your money with a Bank that could withhold it from you if you didn’t do what you wanted, which is effectively what happens when the US Sanctions another nation

    The USA itself can do and does as it wishes without being sanctioned and neither it nor its citizens are subject to the War Crimes Tribunal in the Hague

    It has thus been a law unto itself

    So what is happening is the Nations of the East, Russia, China and India in particular are building alternative banking systems for settling international transactions

    And the reason why I think this will work out is that these nations actually contain about a third of the worlds total population, are resource rich and/or highly productive

    This war has been building for years, that the USA would attack Russia using proxies has been obvious to all for a long time and everybody has been preparing

    Russia sell gas to Europe covered by contracts and Russia will honour those contracts, but if the payments for the supplied gas made to banks from which it cannot be retrieved then that gas has been stolen

    That is the whole point of the Ruble payments, they cant be stolen

    One of the messages this debacle has sent is that sovereign nations cannot trust the Western banking system – you haven’t heard it obviously but it resonates in the Global South

    I also suspect you don’t appreciate how appalled most nations are over the wanton destruction of Libya

    The tectonic plates a shifting in human affairs – how messy it gets remains to be seen

    Andrei

    April 5, 2022 at 2:02 pm


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