The pen is mightier than the sword, goes the old saying.
The Ministry of Foreign Affairs of the People’s Republic of China (‘MFA’) took that sentiment to heart when on Monday, the 20th of February, it issued a communication entitled ‘US Hegemony and its Perils.’
This was, most would argue, President Xi’s scathing rebuttal to what Dr Ankit Shah, a well-known financial, economic and international security analyst called USA’s,
…imposition of a unipolar dollar world.
The document lays out the official state perspective of the United States’ role in the establishment of the modern monetary era, the frictions behind the perpetuation of dollar supremacy and reflects the growing appetite for an alternative medium of exchange.
Chinese authorities perceive American ‘abuse’ of their dollar hegemony through five tightly interwoven realms – Political, Military, Economic, Technological and Cultural.
Shah notes that party figures who opposed President Xi’s de-dollarization vision were downgraded during the November 2022 CCP congress, paving the way for a monumental economic shift.
Value and the role of currencies
Value is a notoriously difficult concept to identify, pin down and distil into its explanatory components. Most of all, it is at least partly intangible.
Currencies are a remarkable innovation in human history because they tackle just such intangibilities.
They label and attempt to quantify value, and transform a previously abstract, highly individual idea into a shareable, tradable one.
The individual characteristics of goods and services give way to a single encapsulating numerical unit which can describe the entity of interest.
Not all currencies are equal though.
The currencies that retain their purchasing power under economic duress and act as a lasting store of value are known as reserve currencies.
The dollar is just such a rare reserve currency that is internationally accepted, not only as a credible store of value but utilized in invoicing and settlements across the globe.
However, with great power comes great responsibility, and how effectively the chosen issuer shepherds their exorbitant privilege is a major component of determining the longevity and success of a reserve currency.
In today’s unbacked, fiat currency world, the dollar manifests value through an act of pure will.
The universal consensus that allowed this arrangement to flourish is beginning to show signs of fragility.
China’s perspective
The violent and tumultuous period from 1939 – 45 proved to be a major turning point for the United States in its emergence as the key superpower on the global stage.
Crucially, the Bretton Woods agreement gave rise to the global dollar standard in 1944.
The International Monetary Fund, the World Bank and the Marshall Plan were central to successfully birthing the dollar-centric global monetary system and operationalizing the greenback as the unrivalled global reserve currency.
Key factors that supported the rise of the dollar included the well-established international legitimacy of the Federal Reserve, the liquidity and depth of American bond markets, and the lack of any credible alternative at the time.
Any country that may have hoped to go toe-to-toe with the United States was already in severe decline, suffering from high inflation or deep economic destruction on account of the war.
The imperialist powers of yesteryear saw their demise as well, while Japan and Germany were left militarily toothless and their industries constrained.
Thus, over nearly eight decades, every country in the world has conducted their respective economic policy within the rubric of the dollar as the universal standard of value.
China’s remarkable story towards becoming the engine of the global economy and lifting millions out of poverty was largely attributed to market reforms, global capital flows and an export-oriented development model.
However, this narrative appears to be changing with the understanding that within the US-based framework, most of the benefits did not accrue to the Chinese state or people.
Specifically, the document points to the issue of US seigniorage.
Seigniorage
It argues that to produce a $100 bill costs roughly 17 cents. While countries all over the world had to produce goods or provide services worth $100 to earn this revenue, the USA was able to freely generate this sum for less than a one-five hundredth of the market price.
The MFA claims that the USA,
…used worthless paper notes to plunder the resources and factories of other nations.
Shah adds,
What China got was just peanuts…$3 trillion of reserves after 4 decades of hard work, while the US printed and distributed $13 trillion…in just the last 3 years during covid.
Broader instability
The Chinese paper also notes that US policy is the source of much economic instability in global financial markets.
For instance, following the Fed’s prolonged ultra-loose policies, asset valuations ballooned unsustainably.
The sudden and drastic U-turn to hyper-aggressive policies has driven vast capital outflows from emerging markets, resulting in financial volatility, economic turmoil, deprecating currencies and high import inflation.
The Chinese government also elected to cite the case of the downfall of Japan in the 1980s.
The weaponization of the dollar
As the foreign affairs arm of the Chinese government, the MFA stated,
America’s economic and financial hegemony has become a geopolitical weapon.
As per the MFA, US sanctions have become much more frequent, rising an incredible 933% between 2000 and 2021.
Andy Schectman, President of Miles Franklin Precious Metals, believes that the ferocity of the Russia sanctions in the wake of the Ukraine war has had a detrimental effect on global trust in the dollar.
A new era
Fiat currencies are theoretically limitless but have been historically time-bound.
Their rise and fall are dictated by prevailing economic realities, political imperatives and societal attitudes towards the issuer.
Invariably, fiat currencies have been ultimately inflated out of existence as short-term political demands tend to take precedence over longer term economic sustainability.
As a result, sellers demand higher quantities of the fiat currency, eroding purchasing power.
The economic agents who once made the currency viable, would then look upon the same pieces of paper with anxious suspicion.
Every reserve currency in history, such as the Florentine Florin, Venetian Ducat, Spanish Real, and British Sterling, has seen a glorious heyday followed by its eventual demise as the accepted foundation stone of economic value.
China’s administration is betting that the dollar would not be any different.
With the country now throwing its full weight behind de-dollarization, this has the potential to galvanize the global search for new challenger currencies and a departure from the indiscipline of the dollar-led (or any fiat) regime.
With an alternative monetary framework being one of the points up for discussion, the BRICS Summit in August 2023 could offer a potential roadmap.
Eager to break away from dollar dependence, Schectman expects that these countries are likely to negotiate a shift towards commodity money, or fixed currency creation pegged to a unit of the chosen commodity.
If such a shift materializes, the dollar would undoubtedly lose a significant portion of its appeal in the global markets.
This would pose a new challenge for the BRICS governments as well, with reduced access to the deeply liquid American bond markets that today are a ready source of capital.
Thus, Shah believes that any fresh currency endeavour will demand consensus upon a capital raising model and a robust framework that offers the protection of commodity money mechanisms.
Is the USA in a bind?
Countries that hold sizable reserves of commodities to which a new monetary system could be pegged may now be in the ascendency.
Further, due to the asymmetric relationship with the dollar, Shah believes that China’s total manufacturing capacity was always overextended and undervalued (alternatively, the dollar was overvalued), indicating tough times ahead for domestic workers and empty shelves for international buyers.
Without comfortable access to globally cheap labour and manufactured imports, much more production would be forced to gravitate towards domestic hubs in the USA.
However, Shah expects that reorienting domestic production will be a painful process for the US since,
(American) salaries are artificially inflated. You know in an economy where 180 plus countries have parked their savings, automatically all their sectors will rise in value…All the sectors are inflated.…
He estimates that salary levels would have to be cut back by a whopping 60% to make domestic production viable.
This upheaval will drive down living standards across the board and usher in a collapse in financial valuations, especially of derivative products which are now deeply enmeshed even in supposedly safe pension fund investments.
On the other hand, Schectman warns that the decision by international dollar holders to turn away from the greenback would fuel runaway inflation in the States, necessitating the shift to higher rates and leading to an asset price collapse.
In such an environment, how reliably rates can be lifted will have to be seen.
Since national interest payments alone stand at over $850 billion this year; the colossal US debt burden; rising poverty levels and the prospect of eroding dollar demand, Shah expects that the US government may itself try to support the search for monetary alternatives.
Source: FRED Database
Schectman concurs that there is a seeming lack of American resolve to maintain the hegemony of the greenback given that one of its key partners, Saudi Arabia stated that it would look to trade oil in alternative currencies, which could precipitate a sharp decline in existing dollar demand.
It would appear that several central banks have been preparing for just such an eventuality, with the flurry of demand for, and repatriation of physical gold over the last few years.
Source: World Gold Council
Gold, because it has maintained a strong connection with accepted monetary value over thousands of years. Interested readers can learn more about this here.
Schectman believes that authorities may also try to usher in Central Banking Digital Currencies (CBDCs) to fill the vacuum that may be left by the dollar.
Note: Dr Shah’s interview was conducted in both English and Hindi. Although I have tried to quote statements made in English, any translation in inserted quotes is my own.
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