Relative to each other, they can’t. But relative to something else, they easily can.
A reader asked me to comment on a video by Brent Johnson, CEO of Santiago Capital.
Chinese Yuan Devaluation – What you Need to Know
My reader thought Brent and I were in disagreement. But I agree with nearly all of it.
Brent did say that he thought most people thought Trump would lose the trade war.
My position is Trump has midterm election concerns that China doesn’t have, but no one will win the trade war because no one ever does.
But the focus of his video is more on the yuan than the trade war and my previous posts for years have been in agreement with what he is saying.
At 41 minutes, the video is too long (something I am often guilty of myself), and that the key ideas could have been covered in 10-15 minutes easily.
Nonetheless, please take the time to play the video, Brent covers many key ideas on which most get wrong.
Five Key Agreements
- China is worse off than most think
- China may find it hard to defend a peg to the yuan
- Talk of China selling Treasuries to hurt the US is nonsense
- China needs reserves to stop capital flight
- China has significant US dollar liabilities for which it needs reserves
Agreement Discussion
Point 4 and 5 are significant.
We have heard massive amounts of nonsense over the years about “China dumping US treasuries.”
I have pointed out numerous times that bouts of China selling US treasuries were to strengthen the yuan or to stop capital flight, the exact opposite of what most pundits think.
Santiago spent a lot of time on that topic as well.
Points 1 and 2 are related and it is starting to matter big time. China has a massive property bubble that has bust.
Demographics make that bubble impossible to revive.
Santiago places more faith in China’s official holding of US treasuries and dollar denominated liabilities than I do. China masks its US treasury and US agency securities via State Owned Enterprises (SOE) through exchanges in Europe.
I suspect China has a lot more reserves than Santiago thinks, but hey, I could be wrong. The reverse could be true if China’s US dollar liabilities are bigger than China admits or Santiago thinks.
Neither of us really knows, and that is a comment he made as well.
Recent alleged “dumping of US treasuries” is more likely to be of European nature than Chinese in nature, IMO.
Devaluation by Who, When and How?
Curiously, outside of Santiago, the only devaluation comments I have heard recently pertain to a US dollar devaluation, not a yuan devaluation.
I find the idea of a strict US dollar devaluation laughable although a plunge in the dollar might easily be a given.
US dollar devaluation discussion is silly because the dollar floats and that is not about to change.
There will not be another Plaza Accord agreement to devalue the dollar.
The Plaza Accord was a joint agreement signed on September 22, 1985, at the Plaza Hotel in New York City, between France, West Germany, Japan, the United Kingdom, and the United States, to depreciate the U.S. dollar in relation to the French franc, the German Deutsche Mark, the Japanese yen and the British pound sterling by intervening in currency markets.
For starters, the Plaza Accord didn’t even work. The dollar had already started to weaken by the time the agreement was made. The trend merely continued.
And Now?
Why would Europe, Japan, and Canada agree to cooperate with Trump to weaken the dollar when that would make exporting to the US more difficult?
Yet, the dollar is likely to skink on its own accord given Trump’s downright horrific budget proposals nearly guaranteed to increase the deficit while adding trillions of dollars to the national debt.
US Dollar Index vs Euro and Yuan
The Euro, Yen, British Pound, and Canadian dollar all float. Japan has intervened in the Yen (never successfully), but essentially the Yen mostly floats.
The yuan is currently pegged to whatever level China wants.
Yuan Devaluation How?
- By Peg
- By abandoning the Peg
Santiago discussed a peg devaluation. But what would happen if China just let the yuan float?
There is a lot of irony in my question because Trump accuses China of suppressing the yuan.
That accusation was certainly true from 1994 to 2012. Since then, I have commented many times (contrary to popular opinion) that the Yuan could easily sink if China let it float.
And now the yuan could easily crash (not just sink) if China abandoned the peg with no controls.
Dollar and Yuan Pressure
Santiago had some great charts in his video on China’s US dollar liabilities.
If he is low on US dollar liabilities and I am high on actual reserves, China is in more trouble than either of us has stated.
But even if things are as stated by China, pressure is on the dollar and yuan for both to go lower.
Who Does a Yuan Devaluation Hit the Hardest?
That’s a key question Santiago did not address.
The answer is Europe, especially Germany. A rising Euro and a falling Yuan means Europe will be flooded with exports from China and Germany will struggle exporting to China and the US.
Heck, we are starting to see this already.
Chinese Exports to the US Drop 21 Percent but Total Exports Rise
On May 8, I commented Chinese Exports to the US Drop 21 Percent but Total Exports Rise
For now, China is still doing fine on exports and US shelves are not empty, yet.
China’s export growth rose even as shipments to the US slumped sharply in the first month after President Donald Trump hit its goods with tariffs above 100%.
Total exports expanded 8.1% last month, above the 2% increase forecast by economists. Imports fell 0.2%, leaving a trade surplus of $96 billion, according to data from the customs administration Friday.
Everybody Loses
Because of Trump’s tariffs and a rising Euro, the EU will have a difficult time exporting to the US.
A sinking yuan relative to everything but especially the Euro will make the EU very vulnerable to Chinese imports.
A rising Euro will make German exports difficult, especially to China.
The EU will no doubt react to this, but not as fast as Trump did. But the US acting faster did little but ensure less trade and higher prices for the US.
The US loses in slower growth, retaliations, and higher prices. Small businesses get clobbered.
For discussion, please see Small Businesses Will Get Hit the Hardest by Trump’s Tariffs
Small businesses were already struggling. Tariffs will end the viability of many.
The Lead Question
To answer the lead question: “Under What Circumstances Might the US Dollar and the Yuan Both Crash?” the answer is current conditions, with ramifications noted above.
Relative to each other, the yuan and dollar cannot both sink. But relative to a basket of currencies, or gold, they both can.
There are no winners in these beggar-thy-neighbor strategies. Instead, we are discussing who loses the most and in what ways.
Gold Soars to Another New High, What’s the Message?
On May 6, I asked Gold Soars to Another New High, What’s the Message?
There are three messages. Do you see them?
If you think we are headed for a currency crisis, then you are thinking correctly.
Don’t ask me when, because no one knows. But the message is unmistakable.
Treasury Bonds expire. Unlike the Fed, that repurchases their balance sheet to keep rates from rising, China lets their U.S. Treasuries expire. Likely, China purchased long-term U.S. Treasuries before the mortgage meltdown, where Bernanke lowered rates to historic minimums. China’s 20-year U.S. Treasuries expire currently. With actual inflation rising, and long-term rates at the low end of historic norms, there is little incentive for China, or anyone except SVB, to purchase additional long Treasuries.
In 2012, China’s government had their university students protest Bernanke’s continued low-rate policies. Bernanke’s low rates devalued the dollar, which created positive U.S. trade imbalance with China. Bernanke visited China, and the protests stopped. Likely, Bernanke explained to Chinese officials about the policies of secular stagnation. The failed economic concept Larry Summers would present to the IMF a year later.
China took to the bogus policies of secular stagnation almost emphatically. They lowered rates, and used cheap money to build out infrastructure, which created problems they now encounter. Development of new technological innovations was also part of the low rate guidelines. China’s race to the bottom of currency devaluation, brought about the tariff war during Trump’s first presidency. There was little reason for China to purchase U.S. long Treasuries after the mortgage meltdown.
Currencies are like religion, all based on belief…
If you believe in the dollar? It has value.
If you believe in gold? It has value.
Productive farm land?
A wind farm?
Yankee reserve dollar is what keeps the US$ as the cleanest shirt in the laundry. But it is still a dirty shirt.
When the US loses its reserve status and there isn’t a replacement is the question that Santiago Capital and Mish should address. In other words, what are the alternatives to Yankee$ after its collapse.
The US will lose a trade war to China if Trump is in charge because Trump doesn’t know WTF he is doing. This is witnessed everyday between tariffs, immigration, budget deficits, foreign policy, domestic policy, the Emoluments clause, etc..
Possibly the best solution is what Steven Keen has argued and what John Maynard Keynes was the first to proffer at Brenton Woods, namely Bancor.
This would require the world or at least a big majority of the top 20 economies in the world to agree upon it so good luck politically agreeing on it today but technically it is the best solution for a world reserve currency without one country having reserve status.
Once Yankee$ is no longer the reserve currency, then a medium of exchange choice has to be made or the monetary, financial and balance of trade world remains in Great Depression II. Bancor or a derivative of it will then most likely result in its circulation assuming WW III hasn’t started.
I have addressed reserve currency at least 40 times in the last 4 years.
There is no suitable replacement for the dollar.
At this time TINA. I’ve also reiterated time and time again TINA on Mishtalk.com re the USD as the reserve currency.
My latest rant discusses when the Yankee$ loses its reserve status, which all reserve currencies do eventually.
Hey guys, the answer is there is no suitable repacement…… YET.
Basing our plans on believing it can’t happen is one of the things that will allow it to happen.
What happens if goods for international trade were priced in grams of gold, and exchange was made using digital/crypto units backed by gold (with physical transfers between treasuries/banks as required) and paid out in local currencies?
Asking for King Midas.
And what happens when those jets or ships don’t arrive for payment in gold because the buyer doesn’t have it due to a shortage, or his buyer(s) can’t pay?
Secondly, gold can be speculated causing distortions,disruption, etc. If a digital currency has a backing perhaps as Keynes also suggested a commodity laden basket of hard and soft commodities might be best.
But again if the seller demands payment what happens when the commodities don’t arrive? There would be less chance of speculation, shortages, etc., but famines and shortages for commodities do occur.
Keynes’ Bancor for a medium of exchange in world trade remains IMHO and Steven Keen’s the best option.
trump gives all clear. buy stocks. What a great leader.
In the US monkey-see-monkey-do world, Trump’s buy-stocks will likely have short term success. However short-term approaches seldom solve long-term issues.
In prior posts here, I’ve mentioned competitive advantage. When the US had the advantage (after WW2), it was squandered to create the dependent society and engage in regional conflict to preserve the ’empire’ in the hive-minds of politicians and pundits, left and right.
Add to a dependent society under mass media control, over-regulation, high labor costs, diminished nationalism, poor leadership, and marginalized education–the slow-motion-train wreck should be obvious.
The US now lives largely on credit with zero competitive advantage, except for its military.
I’d visit Washington D.C. if there was an LBJ Memorial Latrine available.
tarrifs, to quote frederic bastiat
that which is seen and that which is not seen
Good points, Mish. In Europe businesses freak out because of cheap yuan compared to euro. It is no coincidence that ECB decreases rates so fast regardless of Taylor or whatever rule. To devalue dollar and keep it there the US would have to force ECB, Japan, UK, Canada, ASEAN, RoK to dramatically increase interest rates. It is not going to happen because the US has no leverage anymore. Story of tariffs on China shows that. Liberation day was just announcement of sort of Import tax to plug the worst holes in US federal budget and to enable prolongation of 2017 tax cut deal which will include what Trump promised dureing campaign (tips, overtime, etc.).
Mish says–If you think we are headed for a currency crisis, then you are thinking correctly. To better handle a currency crisis some choose to follow the many Global Central Banks who have been buying tons of Gold. There might be a better strategy then buying Gold but 10% or more of someones investments in Gold is at least a partial hedge to these Global currency devaluations?
Why are central banks buying gold? More monkey-see-monkey-do behavior, or do they realize implosion is nearing.
Notice how the Fort Knox gold talk has all but vanished.
Good for you, Mish for sharing your thoughts on the US Dollar and Brent.
I have been having a “pen pal” exchange with Brent for a year (Emails). He is spot on. It also amazes me that he is on a lonely island on the Dollar. He just released another Video yesterday. I have not viewed it yet.
I’m heading to PR soon to meet with him.
China is vulnerable to aggressive financial tactics because they are dependent on exports. Like all they do is exports. The Premier thought he could run the tables on Trump and watch the US stock market crash for a win but instead Chinese factories and banking system were experiencing extreme duress. The Premier need a calm population and he cannot mow down a billion angry unemployed Chinese. I am sure there is going to be extreme introspection in the CCP to make sure they are more resilient. They play the long game. But for now they lose
I’d be careful judging the Chinese mentality with a Western mentality. The Opium Wars created a long memory.
Please help Im confused the tariff deal means a lower tariff amount on Chinese stuff right? But that still means higher prices; just not as much ? And this will be revisited in ANOTHER 90 days? What about the 90 days that started back in April? But I know who cares the stock market is booming.
Currency crisis is just the flip side of sovereign debt crisis
The currencies of the world have already crashed. Gold is right this moment $3239.70 basis June CME futures.
Let that sink in. Three thousand two hundred and forty dollars.
That is about 4 TIMES what it reached in the inflation crisis of the late 1970s
The great refinancing crisis is happening now where the US needs to roll over what, 7, 8, 9 TRILLION dollars of debt in the next 6 months?
Never mind the corporate rollovers of their zero interest rate debt from the COVID planned disaster which is now just approaching 5 years old
And to top that all off as Mish said, the Trump deficit is going to be WORSE than Bidens. RUFKM. 1 TRILLION in military spending?
Insanity. At least they are dismantling the censorship framework, which they will just rebuild when they take back control. And it looks like he will fail in dismanlting the unelected shadow government and the CIA. The Trump Presidency will likely be a mere hiatus in the destruction of civilization and mankind. We will be entering dictatorships as started under Biden, well really under GW Bush, after the CIA took over just before i was born they really ramped it up under Bush, which was a mere CIA puppet presidency. Dictatorships and dark ages headed in. Or is it merely a 4th turning and Spring lies ahead some years from now?
Skipping the political bias, IMO you are basically right.
The easy answer to currency crashes is war. India v Pakistan, Israel v Iran, Russia v Europe, etc. Anyone of those can spiral out of control quickly especially if WMD’s are used in any of them.
I’d say that’s the highest probability vector to a currency crisis at this time. A close second is another pandemic. Fungal infections (which have no known cure) are starting to rapidly spread across America and the world. Watch the TV show “The Last of US’ to understand the potential.
Got exit strategy?
For the ultimate conflict, either exit the planet or you’ll need to be way south in the southern hemisphere, which leaves three ‘places’ for exit strategies.
Brent has been way off for a long time now.
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1 & 2 are debatable. 3 is true to a degree, but US sanctions are a risk China cannot reasonably ignore, though the move if it happens will likely be gradual. 4 is self evident for any nation with a peg. 5 is overstated – China’s declared $3 trillion in declared reserves are more than sufficient to cover this.
Don’t buy these arguments? Just look at the movements of the CNY & DXY during the worst of the trade war. It’s the DXY and treasuries that got sold not CNY, while Chinese bonds rallied.
they have to buy and sell treasuries to hold the peg according to the dollar slide. If the dollar slides, which it did, the Chinese have to dump Yuan and buy dollars or treasuries. The internal and external Chinese currencies have their own dynamic as the Chinese have to prevent capital flight…again
You are standing on your head thinking in opposites and backwards as well. You have not properly assessed what he is saying. Go back to bed.
“…Yet, the dollar is likely to skink on its own accord” I am guessing skink is a typo – but since Im not a currency expert I ask “Is there such a thing as a currency skinking?” Perhaps such a concept should exist – perhaps it even does.
well at least this is one use of this thing Unlimited gold! Scientists Witness Lead Literally Turn Into Gold in The Large Hadron Collider
https://www.sciencealert.com/scientists-witness-lead-literally-turn-into-gold-in-the-large-hadron-collider
I watched that video some time ago. Yes, China is worse off than most people think but it isn’t as bad off as the United States. China could just pull in its horns and supply its own needs except for energy and it will soon be relatively self sufficient due to investments in solar and nuclear power. And in a world where money is very common, I think actual produced goods may become more valuable.
China does have significant liabilities but so does the United States, especially unfunded social liabilities. China has capital controls so China could bring home a lot of funds while restricting funds from leaving. If the US dollar doesn’t devalue on its own, I predict capital controls in the United States such as forced purchases of Treasuries for banks, insurance companies, etc.
There are lots of reasons for the problems in the United States but tariffs really don’t address them at all. The trade war is illogical. We need to get our own house in order first. I don’t see that happening from either Republicans or Democrats.
Are you sure that China can make enough food for their citizens?
China would have to fall back to eating much less meat if they were going to supply their own needs without imports. They would still import some rice.
China import food because it s adultered. With Chineese Food, you can get rice blended with rice grain made from plastic.
Looks like the cone-headed haters of Trump just got punked, again, on a Sunday night by The Donald doing a deal with China. Of course, the fat, cone heads will say it’s not really a deal because it’s not long-term…. They just don’t get Trump’s style and his unorthodox way to negotiate a better deal for Americans.
The dollar will cease to exist one day, but that probably happens after WW3 and all currency becomes moot.
It must be so nice to believe in one’s leader so devoutly that every bit of evidence that that leader has no clue ( imposing tariffs that won’t work to bring manufacturing home but will destroy small businesses, take actions to make the world hate us (seizing Iceland, calling Canada a “state”, imposing illegal and unnecessarily harsh measures on immigrants – including many who have been here for years, have paid taxes and served in the miliary)… so when the slightest success (reducing/altering) tariffs with Britain and at least talking to the Chinese – weeks after this was all supposed to have happened, we can pronounce that our leader (T) is simply playing on ‘another level’ using unorthodox methods that will bring about wonderful things for our country. ARE YOU SERIOUS?
And the tone of preadolescent arrogance with these kinds of expressions of uncritical excuses and fealty, at every random, quirky turn by Great Leader, make it all the more silly. I mean, Trump just blinked so hard, I’m surprised his eyes stayed in his head, and if it holds (as so little does with him), historically so. Biggest trade blink ever. Like, he capitulated on the grand global reordering with the big opponent, the backbone of the big picture program. He backed down. Now we get (slightly less) cheap Chinese stuff again? That wasn’t the rhetoric 72 hours ago! I guarantee you will hear no retraction or apology from the minions or the Great Leader when it finally collapses of its own incoherence.
His unorthodox style is to create the problem then claim he fixed the problem.
And yet Obama was the first president to start gutting the WTO by not reappointing appellate judges.
The confrontation with China was arriving, gradually. I’m recalling the proposed TPP to isolate China and strengthen US-Pacific rim ties. Trump helped bump up China grievance in wide awareness. So how does that explain this weeks rout? Are we waving a white flag? Are back to the financial markets wagging the Trump tail? It’s not as if he has shown patience in even the faintest degree.
Why do tariffs exist in the first place? Understand that and you realize tariffs are merely indicators of much larger problems. They don’t fix the problem–in the long term. They make it worse by subsidizing non-competitive businesses.
Tariffs significantly funded the USG before the income tax. The USG even ran surpluses without the income tax.
… in a world before things like global wars, when military budgets and the welfare state were vastly smaller, most Americans were farmers, etc., etc.