It’s that time again.
And of course it never happens (and never will) says Michael Pettis in a Tweet Thread.
Every 2-3 years we hear the same foolish talk about a major Chinese sell-off USD reserves and of course it never happens (and never will). There are at least two problems. First and most obvious is the idea that Beijing’s “reducing its US…
https://t.co/L9LyOs38aM via @scmpnews— Michael Pettis (@michaelxpettis) May 6, 2020
- …government debt holdings” would somehow “spell trouble for the US government bond market at a time when Washington is significantly ramping up new issuance”. The idea that the US needs foreign buyers of its bonds is based on a misunderstanding of both the balance of payments.
- …dynamics and the role of the Fed. The US economy would actually benefit if foreigners reduced their holdings of US assets.
Second, and more importantly, the claim that the PBoC will reduce its holdings of USG bonds begs the question in exchange for what? No other developed… - …country will accept the current account impact of massive PBoC purchases, and while there are many developing countries that would be eager to receive the inflows, China’s experience of developing-country lending has been so bad that it will probably try to reduce flows to…
- …the developing world as fast as it can without undermining the BRI story.
Alternatively China could stockpile commodities in exchange for a small portion of its USD reserves, and it is probably doing that anyway, but given China’s impact on the price of these commodities… - ..this would result in an even more inverted balance sheet. The only other option is for China to accept a sharp reversal of its current account surplus into a large current account deficit – or, as one person cited in the article suggests, to “sell its US Treasury holdings…
- …for yuan, seeking to engineer a collapse in the US dollar to end its status as the ruling currency” – but you only have to state the option to realize how painful it would be for the Chinese economy (and of course, contrary to what that person claims, it would do absolutely…
- …nothing to end the USD status as the ruling currency).
So what else could Beijing do to protect itself if they are worried (about what is anyway just foolish electioneering talk)? The most likely is to exchange direct holdings into indirect holdings through disguised… - ..street accounts, but that would have to be done slowly and carefully if they don’t want to incur large trading losses.
As I see it Pettis only has two things wrong, both minor.
- The stories don’t circulate every two years, it’s more like once or twice a year, with slight variations.
- I would not use the word “Never”.
The stories all have these things in common.
- Higher US interest rates
- End of the US dollar as the world’s reserve currency
- Death of the dollar.
The rationale varies but this is the first time it has been Pandemic-related.
Recirculating Ideas
- Petro Yuan
- Gold-Backed Yuan
- Crypto-Backed Yuan
- US Deficit
- US Debt
- SDR Scheme of Some Sort
- War
- Pandemic (new to this list)
With all these ideas in play, there is no way to hold the stories to once every two to three years.
SDR stands for “Special Drawing Rights” which is the way the IMF lends money.
SDRs are not even a currency. They cannot be used in transactions and there is not even a market for them or a way to trade them. Rather, SDRs are valued as a basket of currencies that can potentially be converted to any major currency.
SDRs are IMF loans that total 0% of transactions. But that does not stop nonsensical hyperinflation articles.
Get Ready Get Ready for World Money
Get Ready for World Money said Jim Rickards in his latest nonsensical hyperinflation rant regarding SDRs on March 25.
The task of re-liquefying the world will fall to the IMF because the IMF will have the only clean balance sheet left among official institutions. The IMF will rise to the occasion with a towering issuance of special drawing rights (SDRs), and this monetary operation will effectively end the dollar’s role as the leading reserve currency.
“The replacement of the dollar could happen almost overnight,” says Rickards.
Yeah right. In what century?
Rickards is Full of Laughs
Please recall my September 2017 article: Rickards: “Next Financial Crisis 6-8 Months Away” Got Popcorn? Gold?
“Got popcorn?” was my sarcastic comment.
That urgent “please buy my book” financial crisis idea was based on nuclear war with North Korea within 8 months.
Today the insurmountable threats are the Pandemic and SDRs.
Next it will be oil, the Euro, sunspots, or Martians. Who knows? But I guarantee you it will be sooner than two years,
Petroyuan’s Crash at Birth
Anyone recall how the petroyuan was supposed to crash the dollar?
To refresh your memory, please see Petroyuan’s Crash at Birth April 21, 2018.
Meanwhile, in the real world, let’s discuss what it takes to to be the world’s global reserve currency.
Reserve Currency Status Requirements
- Floating Currency – China Fails
- No Capital Controls – China Fails
- Large Liquid Bond Market – China Fails
- Property Rights – China Fails
- Willingness to Run Trade Deficits Sacrificing an Export-Based Economy – China Fails
- Global Trust – China Fails
China fails in six out of six requirements.
Perhaps some day China will meet all of those requirements but until then, do yourself a favor and go back to sleep.
For those keeping score, SDRs fail 1, 2, 3, 4, 5, and 6 as well.
Heck, SDRs are not even a currency.
Necessary Conditions
A reader just asked “Mish, instead of the demise of the dollar, I’d like to hear your thoughts on the demise of the $USD’s reserve currency status, that is, what sorts of conditions and trends that would require?”
I listed 6 conditions that any country would have to undertake, or have forced on it.
Who wants them? Consider the EU – would it run deficits? Who else is big enough?
Those are points 3 and 5.
Inflation or Deflation?
If you believe all this printing will soon result in a huge outbreak of inflation, you are mistaken.
For discussion, please see Inflation or Deflation? Collapse in Demand Trumps Supply Shocks
Amusingly, Hyperinflationists Come Out of the Woodwork Again.
Understanding the Problem
The Fed’s seriously misguided efforts to force inflation into a system begging for deflation is the problem.
The Problem is Not Deflation, It’s Attempts to Prevent It
Mish
if the US $ is such a great currency why would you recommend gold ?
Before too long, all fiat currencies are going to crash. You can only kick debt down the road so long. QE (aka counterfeiting) doesn’t fix anything,it just papers over the problem with more debt letting things fester a little longer. Thus, when it comes, it is going to be really nasty.
The question is how non confiscatory currencies will gain foothold. China is at least as dead set on preventing this, as The US is.
The CCP may be less in-your-face flat out incompetent at everything they attempt, than the Trump-Pompeo gang. But they are no less determined to prevent their designated slaves from obtaining the means to revolt.
I personally believe anonymous cryptos will first gain meaningful traction in developing countries. People in those places, end to labor under fever delusions that their local juntas are something other than just a theft gang. While both Americans and Chinese, despite all evidence to the contrary, seem to fantasize that their particular government is somehow different. Just not everyone elses government…..
Upside is, though, that no global power like China nor the US, can completely isolate themselves from the third world. Which leaves the door cracked open enough to allow cryptos, if properly anonymous, to slowly at first, then all at once, become more and more accepted there as well.
China can hold a basket of currencies, commodities and gold instead of the dollar (not totally but significantly).
Could their coming Digital Yuan wreck sanctions across the globe? If the dollar is used for 60% of trade, what happens to its value if China/Russia knock that down into say 40%?
Could the dollar crash if (after deflation passes) it becomes a hot potato no nation wants to hold in fear of its dropping value?
Point 2 is wrong. “The US economy would actually benefit if foreigners reduced their holdings of US assets.” I can see that Fed printed funds being handed out in exchange for real goods from say the Chinese, is a big win, but when those printed funds become exchanged for US production sent abroad..not so much. Two sets of goods flowed, but the printed funds remain in the US. Foreigners reducing their holdings is inflationary for the US.
China Inc. now faces another disruption: a global shortage of dollars.
Chinese companies are looking at $120 billion of debt repayments this year on their U.S. dollar denominated debt.
…with respect to China…well they either have to obtain dollars…or imo fwiw declare default/war….
sooner or later it always comes down to force…
“…with respect to China…well they either have to obtain dollars…or imo fwiw declare default/war….”
Or, and don’t bet against them pursuing this, increasingly demand creditors denominate debt in Yuan. Enough non-Chinese entities are increasingly dependent on China now, that they have less and less choice but to comply.
The Trumplings may specifically seek to only narrowly decouple the US from China proper. But the end result is to accelerate decoupling from China’s closest trading partners as well. Which are increasingly the whole darned world. The world can’t do without China anymore. Just like it couldn’t do without The US post WW2, when Bretton Woods came into being.
China is the indispensable nation now. While The US is just some strange freakshow of helpless, broke, unemployed and unemployable wannabe Fat Elvises, who sit in their decaying ghetto yelling obscenities at their betters, as those are going to work and paying less and less attention to the fatsos for every year that passes.
Yes certainly going forward they can demand that. Still have to reconcile the historical dollar denominated debt.
About $115 billion in Asian emerging-market debt is set to mature this year and $200 billion next year, according to data from Dealogic. The dollar’s 7% climb this month against a basket of currencies and a 243-basis-point blowout in Asia ex-Japan credit spreads could complicate the task of refinancing, and analysts are predicting that some stretched companies will have to seek restructurings with bond holders.
Certainly agree with your other points on China issues. Its like the auto companies in US demanding part companies in Mexico open back up and keep the supply chain going….because they are dead in the water without them.
Only one weapons plant left in US…and they aren’t geared for it. Our military would go naked without clothes from China. Certainly preposterous and either show or complete stupidity to suggest decoupling from China. While smart in the long term…something done quietly and not pretentiously.
Another supporting link..
As long as there is a dollar denominated debt…there will be a demand for a dollar…until default or jubilee. Of the latter it will likely be a transfer of ownership of assets until food/guns push folks into jubilee…
See that now with the Fed’s expanding balance sheet as they provide 1’s & 0’s in US dollar denominated computer bits to folks in return for assets (ranging from junk to gold) such that folks can be made whole and service their dollar denominated debt.
Question is…how long before the food/guns equation takes hold??? Or perhaps their is the indentured slavery aspect…
Economic recessions are like an IQ test that the majority fail miserably, and lose their backsides as a result.
The dollar is not going anywhere, and will rise in value as the economic depression continues.
If you do not understand or agree with that statement, you are destined to loose a lot of money and have a very hard time for the next few years…..
The same non-sense about USD goes around every 10 years. It cannot happen because our consumption is the world’s growth. The world cannot afford for the major currencies to become worth less much less worthless. China gamed the WHO and that didn’t work out too well for the world. They are trying to do the same with WorldBank and IMF. They even kidnapped the head of the WorldBank a few years ago. They simply don’t understand transparency, how money and capital work and the concept of personal liberty. How could they ? They are a communist country.
I am waiting August the Great and Ted
Show me some articles “every 2 or three weeks” where I said China would crash.
You have 2 hours in which to do so.
I do not tolerate blatant lies about what I have said or not said.
Petroyuan’s Crash at Birth
That is the last reference to China Crash that I can see and curiously it was in reference to the death of the dollar stupidity.
When the F have I called for China to crash every 2 or 3 weeks
Show me one
I expect an apology for such stupidity. If not Goodbye
You should apologize for the dumb essay about Hillary Clinton’s brain disease while we’re passing around apologies. You certainly have said some dumb stuff over the years. The self-driving cars prediction looks like another silly call, but you can blame it on Covid19. I first started reading the blog here in 2008 when you made a lot of prescient calls about what would happen, and explained what was happening really clearly- but it hasn’t been so accurate in the intervening years. At least you belatedly realized what a mistake Trump was, and also correctly recognize the scale of the Covid19 disaster.
I have no history wrong – I listed the requirements now.
Very aware of Nixon – sheesh – Wrote about it at least 2 dozen times
The economy is in free fall. So why isn’t the stock market?
Everything is bad, and yet somehow the stock market is good.
Where do you think all that “printed” money is going?
When everything is in free fall, this “everything” necessarily includes the wealth of The Fed’s favored welfare recipients.
In order for The Fed to do its job, which is, after all, to ensure those leeches never suffer, and hence that “The System” which exists to keep them flush at productive people’s expense, stays intact; The Fed has no choice but to up the intensity with which is robs everyone else. That way, productive people can be forced to bear the cost of not only their own share of the free fall, but also of the favored leeches’ share.
Now, the mechanism by which productive people are robbed in financialized dystopias, is by pumping up and hence increasing asset prices. That’s how increased costs are heaped upon the productive, in order to ensure the talentless, idle leeching classes which it is The Fed’s job to look out for, get to stay fashionably talentless, wealthy, useless, stupid, powerful, in charge and singing The Fed’s praise..
Hence why the stock market is up. “The stock market” is just a redistribution scheme, after all. No different from any other welfare system. It takes money from productive people and businesses, and hands it to the rank idiots The Fed and Government favors.
Procrastination and faith keeps the dollar afloat. The more you have, the more you hold on to it. After all, what else is there beside other assets whose price depends on dollar, again?
Smart, sophisticated people can be like scared sheep when it comes to basic instincts.
M_M, I think inertia is a better word than procrastination. But fear does rule.
… in the financial land of the blind, one eye is king …
If China gets more confident in letting the Yuan move independently of the dollar, some share of current dollar demand will indeed shift towards the Chinese currency.
The PBOC is very much helping underwrite the dollar’s outsized relevance, by helping reduce the currency risk of those involved in trade with China, both foreign and domestic, from staying overweight in dollars.
Once China finally internalizes the US truly is a dead end economically, and starts treating the Yuan/Dollar exchange rate with benign neglect; and this results in increased USD/CNY exchange rate volatility; central banks in countries heavily exposed to trade with China, will also come under pressure to mind their own currency’s volatility vs CNY. Instead of reflexively falling back on soft targeting USD, confident that since “everyone” else does the same, things won’t get too far out of balance.
“The Fed’s seriously misguided efforts to force inflation into a system begging for deflation is the problem.”
The immovable object fighting the irresistible force.
The Fed can force enough money into the system to keep stock prices high, but not enough to keep primary demand high. It should be interesting to see what happens to PEs in the months ahead.
Mish, instead of the demise of the dollar, I’d like to hear your thoughts on the demise of the $USD’s reserve currency status, that is, what sorts of conditions and trends that would require.
I listed 6 conditions that any country would have to undertake, or have forced on it.
Who wants them?
Consider the EU – would it run deficits?
Who else is big enough?
Those are points 3 and 5.
Throughout history reserve currencies have come and gone.
Fiat money is debt and its obligations, nothing more. That US debt is being used as a reserve by various nations. That is an odd form of currency based on post war US trade and geopolitical dominance , to the victors the spoils, in this case subservience to a US financial system based on the “debt of gratitude” of other countries.
The US global enforcement of obligation, and its relatively transparent monetary system, and associated legal safeguards, its dynamic involvement worldwide, maintain the authority of that currency. It is not so much to do with trade balance or monetary escapades, though eventually those could signal a profound loss of structure in the previous.
If I had a dollar bill, or a euro, or yuan, would I call any of them a reserve ? They are only worth what others will recognise them for, and so fiat is no more than a form of recognition by others. It therefore seems strange to hold something as reserve that only someone else recognises, that depends on whatever their recognition later will be, especially because that recognition is essentially illusory.
So at a broader level in a new environment, recognition beyond the more superficial level of US domestic economy and valuations, will depend on the level of association subscribed by other countries to the credibility of US management of trade and finance worldwide, of the methods of verification that bring a level of certainty to the use of the dollar.
This is not a given. The pandemic, or rather the reaction to it, is in my opinion having a leveling effect which strips away much of the image of US exceptionalism. The last twenty or more years of perpetual war are more of an impasse than any form definition beyond the unpredictable use of force by the US and its allies. So that is also a loss of potency in certain ways. Add to this that the international financial world is definitely not nationalistic, and therefore has little opinion on whether a reserve belongs to one nation or another, instead viewing the whole as amalgam, it generates a loss of position to the US eventually. After all, to an accountant the sum eventually nets zero, the only question being how long a certain form of calculation is used. You can be sure that greater or more representative forms of calculation are being sought.
So is the dollar really reserve currency now even ? Not really, it’s just a medium that is widely understood and works where it does, there is not really a number one place in this in the totality of transactions and currency, because a vast majority are not in dollars, and even many that are are only token out of convenience, and not of any great sense of dedication beyond immediate facility. If the US manages its position well, there is no reason it cannot stay ahead in many ways for a long time to come, but maintaining a position is often harder than first achieving it, because circumstance and opportunity often change beyond those that initially offered success. An example of this is right here, of being focused on currency reserve status, which is already a past measure that cannot be used to predict future reality, and I should think from outside looks like no more than a form of self adulation.
Well, I’m playing the role of polemicist I guess .
Mish, you need to go into the octagon with Jim Rickards.
If Jim Rickards genuinely wakes up in the morning, and seriously believes, after decades upon decades of of limit-lock “liquidity” injections by every halfwitted hack with a money printer; that “The task of re-liquefying the world” is any sort of task at all; he has exactly zero business being in any Octagon. And should stay in daycare. Until he, on the offchance he’s a lucky guy, one day he may grow up. And perhaps develop, at least some bare minimum, comprehension of something, anything whatsoever.
Right on, Stuki. I unintentionally inferred that Rickards and Mish were equals. I should have said ‘drag Rickards into the octagon.’ My bad.
Also Mish got some of the history wrong. There was no large liquid bond market and it’s certainly not because of “trust” that the USD became a reserve currency. The USD used to be backed by Gold remember? Until Nixon suspended it. Also I am not sure it’s anything to brag about nowadays. Would you rather have a reserve currency or the ability to produce PPE? Not to mention the dollar has lost quite a ton of its value.
Very good post.
I have no history wrong – I listed the requirements now.
Very aware of Nixon – sheesh – Wrote about it at least 2 dozen times
“Death of the Dollar Theories Circulate Endlessly”
…
Yeah, $US so bad no wants to use / touch … oh, wait … (BIS):
“Emerging market corporate bond issuance denominated in US dollars surged after the global financial crisis and has kept up its rapid pace. The total stock of US dollar-denominated debt of non-banks outside the United States stood at $11.4 trillion according to the latest BIS estimate (BIS, 2018), of which non-banks from emerging market economies (EMEs) accounted for $3.7 trillion. This total of $3.7 trillion is more than double the level in 2010.”
Money borrowed by foreign business is often that which is offerred cheapest, it could even be said dollars are buying foreign debt. That is not really dollar reserve currency, maybe the opposite as borrowers of dollars might borrow thinking the dollar will decline in value, hence lose status.
Foreign dollar currency (debt really because the US has not that base currency in circulation) reserves are around 5tr dollars ? Global debt is around 200tr dollars according to
..so therefore are but a fraction of global debt, one that is held by foreign governments. No mean feat and a buffer that brings stability in international transactions and fx, but to me not “Dollar is reserve currency” all in capitals either. It tells me that trading on the dollar platform just makes more sense for these countries, and taking on US debt is means of access to that platform.
Apart from that, for the 100tr or so worth of global gdp, dollar is not that present… not that much a choice of reserve, is not the money changing hands that is, outside US ?
Just trying to get a perspective of what dollar reserve status means outside of the financial system and national accounts , if it really exists much except in countries whose own currencies are very unstable.
“Money borrowed by foreign business is often that which is offerred cheapest, it could even be said dollars are buying foreign debt.”
…
You can’t go by cheapest only. As a borrower you want stability + desirability in currency. Stability allows borrow to hedge cheap. Desirability means attracting investors. Pricing in $US will attract more investors (in general) than in any other currency.
$US has plenty of warts, but other options wartier.
“SDR stands for “Special Drawing Rights” which is the way the IMF lends money.”
…
I always laugh when SDRs mentioned. A 30 second search reveals only $US 281 billion in total allocated. Not even enough to count as change under the seat cushion re global trade.
Not to mention US is a major source of funds (and consequently “pull”) for IMF … surely, US won’t mind IMF destroying its currency.
How is this different from mish’s call of “China Crashing” every 2 or 3 weeks?
ROFL. To be fair, a lot of “observers” of China have gotten it wrong for YEARS.
Same with people who have been calling for the crash of the Japanese Yen.
Good question. LOL
Hyperbole much?
When the F have I called for China to crash every 2 or 3 weeks
I expect an apology for such stupidity.
You should have a general banning policy for people who make grossly exaggerated claims about your positions but won’t back them up with evidence.
Does anyone view cryptocurrencies as a capital flight risk? I posited that to a business journalist and received the standard dollar primacy response. But if rates go negative in the reserve currency…
Under certain situations yes. It could be.
Here is something to ponder. As long as the drug cartels continue to accept U.S. dollars as payment than the dollar will be fine. When the cartels, the richest people on the planet, stop taking dollars you will know you have trouble.
Fair enough.
I don’t view cryptocurrency, specifically Bitcoin, as a flight risk, I view as the only legitimate alternative. Certainly things like negative interest rates could accelerate this adoption but my opinion is that we will see a growing trend of Bitcoin as the currency of choice in 2nd and 3rd world countries, and many accumulating Bitcoin in their reserves. Bitcoin’s controlled inflation and inability to be influenced by political forces makes it a better, unbiased and fair currency and money metric. To be clear, I am not forecasting the complete downfall of the USD, but overtime I believe it will lose its place as the preferred/defacto world reserve currency.