Daniel Lacalle vs Peter Schiff
The winner by a mile is Lacalle. There is no victory for China.
Here are some reasons Lacalle did not mention, but I have mentioned on numerous occasions.
- As long as China runs a trade surplus with the US, it will accumulate US assets, primarily US treasuries. The recent instances in which China allegedly “dumped” treasures was in fact a move to stop capital flight.
- China does not even float the yuan. It is sheer idiocy to promote the yuan as a reserve currency or even a major global currency until it does.
- To hold the status of the world’s reserve currency, China would have to be willing to run trade deficits instead of seeking trade surpluses via subsidized exports.
- The US has the largest and most liquid bond market in the world. China has next to nothing.This is another requirement to having a currency widely held and used in trade.
- The US has property rights and human rights that are nonexistent in China. Even if yuan-based bonds existed, who wants to hold them with that backdrop?
Petroyuan Silliness
The twin sister of “Victory Plan” silliness is Petroyuan silliness.
I discussed many of the above ideas in Gold-Backed Petro-Yuan Silliness: Reserve Currency Curse?
also consider Petroyuan’s Crash at Birth.
China is not remotely capable of what Schiff claims and I highly doubt it will be any closer 10 years from now. Chinese banks and SOE are in horrendous shape and the yuan would likely crash if China floated it now.
Mike ‘Mish” Shedlock
Yuan rocketing upward would destroy China’s economy which is dependent on huge exports to US and Europe (since the tie up to dollar and Euro through a currency basket where dollar has the highest weighing and Euro the 2nd highest).
Schiff is a loony.
China also can not lower the yuan much because food that China imports a lot becomes too expensive to peasants leading to Chinese spring where communists are overthrown if yuan drops too much.
Arab spring started because of large food price increases worldwide and especially in the Arab world and the catalyst was a market seller who set himself on fire after authorities had fined him and confiscated his products.
The thing I don’t understand is everyone acts like China must hold US Treasuries but why is this necessary? Russia unloaded all its Treasuries so why can’t China do the same and accumulate precious metals in the future instead of US paper? Why does anyone buy Treasuries? It’s toilet paper!
China does not have to hold treasuries. They can invest their dollar holdings in anything they want. The value of US treasuries is that they bear interest (unlike dollars), cannot lose their nominal value (unlike precious metals), are completely liquid within the international banking system, and have almost no cost to trade to other countries.
Imagine buying gold instead. As soon as everyone realizes China is buying gold, everyone will hold out for the best price. The price of gold would quickly skyrocket. Over the years, China would realize it is putting out a lot of dollars for not much gold. When it decided to stop doing that, the price of gold would collapse and its investments would see a massive loss. Not to mention the losses in settling transactions for gold and transporting it to China. That can’t happen with treasuries.
China buys US treasuries to keep dollar higher vs Yuan so that Chinese products continue to be exported in large quantities to USA so it is in China’s interest that dollar is high.
Russia on the other hand mainly exports oil and gas and mainly to EU so it is not as interested to prop up the value of the dollar because although oil and gas are priced in dollars usually when dollar drops oil and gas prices rise so it does not matter.
Russia buys gold because treasuries could be subject to sanctions and be confiscated but gold in Russian vaults will not be confiscated since it is projected by Putin’s new penis boosters like the several kinds of unstoppable and trajectory changing and superfast missiles that can be fitted with several nuclear warheads.
In the long run, there are more downsides to being a reserve currency than upsides.
As long as the size of China’s trade footprint with other countries keep growing, there will, slowly, be as shift towards Yuan as a trading currency. If your Indonesian company is almost entirely a supplier to a Chinese multinational building products for sale in Asia, and your employees use their salaries to buy Chinese products, Dollars aren’t all that important anymore.
Many Asian companies already feel every move in the Yuan exchange rate at least as much as they feel moves in the Dollar one. Even in Germany, more and more companies are increasingly exposed to the Yuan, as this is where their customers are. Which isn’t likely to change anytime soon, as at least the Chinese pays with something. Not just empty promises of Central Bank bailouts.
Yuan is a fiat currency just like dollar is a fiat currency.
Yuan also has currency controls, is not freely floating (so the price is not real and can crash) and is backed by a country where chinese desperately want to get their money out of China.
Yuan will NEVER replace dollar.
I’m certain that Chinese leaders are not stupid enough to take Schiff’s bait.
Under the current economic paradigm, nobody supplants the US for the foreseeable future. The US wins this fight for multiple reasons, ranging from fundamentals to military to corrupt forces that want the existing system of graft to continue.
When people talk about countries like China or Russia “winning”, what they should mean is in the event of global social and economic upheaval. Even then, it’s not like they would be taking the reins of power as we know them, but rather suffering less than other societies. It would no longer be about winning the most, but losing the least.
One nice thing about China is that despite their huge population, they do have a basic trust in leadership and in each other. They aren’t divided to anywhere near the extent we are in the US. A country that operates in relative harmony is much better for weathering the storm, but not necessarily for buying a McMansion, building up a killer retirement, taking lavish vacations, etc. As long as that game continues, the US remains king. If the system blows up, though, look out below.
How do you know they have a “basic trust in leadership”? Answer: they have no other choice. It is a Communist dictatorship, run by and managed by the power and control of the gun. There is no “one nice thing about China”. Not one.
If they had trust in each other, as you say, they would have basic democracy and human rights. There is zero trust; only survival under massive government control. Now, it may be that they have lived so long under Communist rule that they know of no other way. Thanks to the censorship of their news media and internet, they have no way to get information on the suppression in their own country. In China, you cannot do an internet search for the words Tiananmen Square, or Democracy, or Civil Rights. They are banned words. And now Google has acquiesced to China’s demands on censorship in order to be able to do business there after having pulled out several years ago for the same reason.
In another example of how much “trust” and confidence the Chicoms have in their wonderful system, they recently demanded that all airlines cease referring to Taiwan as a destination on their websites. Now they have to refer to cities in Taiwan as cities in China. If they don’t (and all of them did) they would be banned from flying into China.
Everyone knows that China is a problem for the world. And it’s getting worse when you see the inroads they are making in Africa and South/Central America. Always heavy-handed demands and corruption.
And, it is just a matter of time before their attempt to control the SCS blows up in their faces.
You didn’t refute anything I said. Sure, the PRC government is autocratic, nobody claimed otherwise. People can still trust it, whether any of us think they should or not. From everything I’ve seen, regular Chinese people do believe the government is at least trying to lead the country forward and they have some confidence in it.
You’re really going to claim that there is not one nice thing about China? Dial back the hyperbole, it makes you seem unhinged.
Maybe it’s time for Peter Schiff to write another book…
Schiff is a gold bug / dollar hater, who has been wrong for over five years, and like a politician that can never admit a mistake, he continues to double-down and remain bitter.
China’s 10-yr plan calls for financial reforms that includes developing the domestic economy and allowing market forces to increase the yuan. They also understand they need an unbiased rule of law. Since their leaders actually care about their economy more than being reelected, I have no reason to doubt that China will eventually overtake the US for one primary reason – capital is waiting to flee the corruption of the west. Armstrong’s model forecast that China will take over the reigns of economic capital of the world sometime after 2032.
If China would lift capital controls they have then capital would fly out of China quicker than Weimar Germany’s value of currency dropped.
Chinese have caused most of the crypto currency bubble, caused Macau to become number 1 gambling destination (it used to have unlimited withdrawals from ATM’s so perfect place to get money out and send it abroad and claim to have lost it at the casino.)
Chinese have also re-inflated the California property bubble and caused the Canadian property bubble since one could transfer money out of China to buy Real Estate and the more expensive it was the more money one could get out of China.