Discover more from Learning by Proxy with Vivek Srinivasan
End of Currency Hegemony
The world is changing and way people see themselves is changing. This will certainly show itself in how the world is ordered.
The last time I wrote about currency hegemony, I was told that China cannot “dump” bonds by one of the readers. I gave up on the email chain because I do not like writing long emails (ironic because this blog arrives by email!) and it would have taken a lot to disabuse them of their belief.
Nevertheless, things are happening, they keep happening and setting the context would help.
Every country has its own currency. The fact that government accepts tax in that currency is what makes the currency powerful. Living in India, I need to pay the government tax in Indian rupees, hence I want my earning to be in Indian rupees. Not to mention, all of the products and services that I buy have to be bought in Indian rupees; since they need to pay their taxes in Indian Rupees. Therefore even if I am providing services to someone overseas, I want them to pay me in Indian rupees.
Zooming out a little, if the people of one country buy a lot of stuff from another country, they need to hold enough of the other currency or balance it out by selling other things.
Balance of Trade
Let us take China and US to understand this.
America produces weapons, pharmaceuticals and banking disasters. All of them deliver huge returns to the executives running the companies.
China makes most other things. The Chinese manufacturers want to be paid in Chinese Yuan but the Americans can print only dollars.
If China bought $100 worth of stuff from the US and vice versa, we would have a balance of trade. But if the US is buying $100 worth from China but China only buys $50 worth from the US - China has a trade surplus and the US has a trade deficit.
In this case, the US will have to buy more Chinese Yuan to pay for the imports and as it goes on doing this because the Chinese have no use for the dollar, beyond a point, the value of the dollar will begin to decline. It will become weaker and the cost of importing would increase.
This will make it harder for Americans to afford Chinese products and America will become poor.
This does not happen. Why?
Welcome to Currency Hegemony
Today when the US imports, China does not convert the dollar directly to Yuan. Instead, it leaves the extra dollars with the Federal Bank. Since the Federal Bank pays no interest, China invests this money into US Treasury Bonds.
Over the past 20 years, China has ended up parking over a Trillion dollars in US treasury bonds.
Monies like this help the American government finance the Trillion-dollar Afghan war that it lost.
Why hold on to the dollar at all? OIL
The way in which US currency hegemony works is by having made the USD the default currency for oil trade across the world. Every country needs energy. A large portion of it comes from Oil today. Every country needs to buy oil and therefore they require USD. This ensures that countries across the globe hold their trade deficit with the US in the form of USD instead of insisting on being paid in their currency.
National debt and the bond market are two sides of the same coin. In the case of the US, the Bond market is also an elaborate Ponzi scheme. They raise money through bonds and then raise the debt ceiling and issue more bonds to pay the interests of past bonds.
The GDP to debt ratio for Greece at the peak of its crisis was 170%. The US has a GDP-to-debt ratio of 140%. In a world where their currency hegemony did not exist, they should be facing an unprecedented crisis. Instead, they just offered another $30 billion for bank bailouts and $100 billion
to keep the Ukraine war alive to make the military-industrial complex richer.
This is because they can go on printing more and more US dollars. In the current state, it does not hurt them to increase the supply of money. When bondholders have to be paid, they just create more money to pay them off.
Now in this context
The bonds are not really an asset. They are merely a means of earning interest on the USD being held at the Federal Bank.
If existing bondholders start selling, the price of the bond dips below the coupon rate (what you are paid when the bond matures) so that it is more attractive for the buyers. But if the belief that this Ponzi scheme could continue did not exist, who is going to want to buy?
Could a $100 coupon bond sell for $1? How will the country raise more debt?
The USA spent a Trillion dollars to kill ONE man who was sitting in ally territory.
If China has to write off $1 Trillion to permanently and completely decimate the American currency hegemony, do you think they will flinch? Is it really too big a price to pay?
It is a pawn sitting there to be sacrificed if it can deliver the goods!
Money is imaginary. It is our imagination that gives it value! There is nothing real about it. It is not like the resources that we dig out of the ground or the food that we grow and eat.
If a country was to face 10,000% inflation the money would not be worth the paper it is printed on.
America has been great at creating this perception of the unassailability of the US Dollar. But nothing is. Silicon Valley Bank went down in a matter of hours. If the dominoes fall, anything financial can go down pretty quickly.
Last time I mentioned that one of the large oil producers - Russia - was considering moving to the Yuan trade for oil.
The US feds have been in a constant war against the workers. Raising interest rates till it becomes impossible to find a job and unemployment rises.
Rising unemployment will imply lower consumption. Anticipating this…
Saudi Arabia and other OPEC+ oil producers on Sunday announced further oil output cuts of around 1.16 million barrels per day, in a surprise move that analysts said would cause an immediate rise in prices and the United States called inadvisable.
The pledges bring the total volume of cuts by OPEC+, which groups the Organization of the Petroleum Exporting Countries with Russia and other allies, to 3.66 million bpd according to Reuters calculations, equal to 3.7% of global demand.
America does not like this one bit. Primarily because this will increase prices and therefore inflation. OPEC is a cartel and has complete control over determining the oil prices across the world by controlling supply. Some American lawmakers think that they will be able to force the hands of OPEC by passing legislation in the US.
A group of bipartisan U.S. senators on Wednesday said they have reintroduced legislation to pressure the OPEC oil production group to stop making output cuts.
The so-called No Oil Producing and Exporting Cartels, or NOPEC, bill was reintroduced by senators Chuck Grassley, a Republican, and Amy Klobuchar, a Democrat, and others on the Judiciary Committee.
If passed by the committee, both chambers of Congress and signed by President Joe Biden, NOPEC would change U.S. antitrust law to revoke the sovereign immunity that has protected OPEC+ members and their national oil companies from lawsuits over price collusion.
This will make it possible for the US to take OPEC countries to court for colluding and for anti-competitive behaviour. Their hope is that since many of these countries have assets in the US, they could be frozen in retaliation.
The last time the Americans pissed the Saudis off during the 1970s they had no fuel to put in their cars and Henry Kissinger had to be rushed to the Middle East.
This time, they might simply switch away from the USD. If this were to happen, the US will be left with no other choice but to freeze assets. Their dollars will lose value precipitously.
It increasingly looks like the tipping point of the war of currency supremacy is just around the corner.
In the words of Master Oogway - One often meets their destiny on the road they take to avoid it.