World reserve currency status follows the leader in manufacturing and trade. Maintaining dollar hegemony was never going to be feasible after de-industrialization, but short-sighted decisions like weaponizing SWIFT have accelerated its decline. As the dollar is gradually shunted out of world trade, the US will be less able to export its inflation abroad. The implications won’t be pretty.
For all of its current very high profile issues of uncertainty in the US, who would actually trust China in any way shape or form as an alternative?
It’s a totalitarian state who has been jailing its wealthiest businesspeople on a whim, causing many to flee, and it’s about to embark on an invasion of its peaceful neighbor.
Which part of any of that screams “that currency will be a stable place to store my money?”
> who would actually trust China in any way shape or form as an alternative?
Most of the Asian countries (except South Korea, Japan and Taiwan) and African countries. They’re already getting tons of investments and loans from China.
As opposed to China, who will probably invade pretty much every Asian country, and the only big unknown is the order. Western China is annexed. Nepal is Annexed. Hong Kong is annexed. Mongolia is 100% under Chinese control. Northwest Pakistan is 95% under Chinese control. Parts of Russia, Afghanistan, Tajikistan and other countries are under Chinese control to a greater or lesser extent, and all those countries have zero hopes of defending against China, and sure as hell can't count on anyone's support. Certainly not their neighbors, or the gulf states, and not the US. The South China sea (including Phillippine, Japanese, Taiwanese territory) is under Chinese control. And the countries' only hope for maintaining independence is the US.
China is an empire. It cannot survive except through expansion so betting it will expand is like betting a person will breathe tomorrow.
Accepting Chinese currency is like France buying Nazi bonds in 1939 (which France and most European countries did, btw). It seems like, in fact it is, the height of stupidity, but it's amazing what a little bit of promised money can make people do.
This is figuratively, and potentially literally, paying for the bullets that will end up lodged in your skull, because the shooter promises 10% return. Which of course, these states will gladly do.
Like Philippines that are almost at war with China? Or India that have regular skirmishes with them? Who exactly in Asia? Is Shri Lanka important for world economy?
"It’s a totalitarian state who has been jailing its wealthiest businesspeople on a whim, causing many to flee, and it’s about to embark on an invasion of its peaceful neighbor."
To be fair and very frank: the USA does the same things
Peaceful neighbor: greenland or mexico (sure the cartel related violence but it isn't per se state.)
Jack MA is the famous chinesse example, but it was close enough for bill gates, howard hughes and mark zuckerberg.
Totalitarian state: It depends, as someone born in the USA, I've felt much freeer in China then USA. USA states and cities have been pushing things such as teens/kids can't be alone - yes it isn't federal.
More recent, just look at the turning point usa assination - don't want to get to political since that's a black hole of political theater there but - that isn't common outside the USA.
Credit system: USA's credit system is much more abusive then china's social credit system.
While most of the issues are just present in the current administration, and should go away with the next administration - China has acted more responsibile and more consistent with it's policies while the USA is going all over the place lately.
But for terms of currency, both are not great as of now - the rmb pegged to dollar will change soon, usd reserve currency is eroding everywhere.
"Former President Donald Trump writes in a new book set to be published next week that Mark Zuckerberg plotted against him during the 2020 election and said the Meta chief executive would “spend the rest of his life in prison” if he did it again."
I hear you on China loud and clear, however the balance of focus must be on us, the US, not shooting ourself in the face anymore. Debt, current account deficit, and interest payments have got to get in order. Our house needs to get in order by us for us.
> For all of its current very high profile issues of uncertainty in the US, who would actually trust China in any way shape or form as an alternative?
People would trust China for the same reason people still trust the US after it invaded 2 countries in the middle east for no reason whatsoever and decided to imprison 2 million of it's citizens at any given time.
If tomorrow there are better prospects of making money in China, then people will go to China and use the yuan to store their wealth. It's that simple. Morals have nothing to do in this equation.
I don't necessarily disagree, but can you explain why you think it is, that people keep trusting powerful states which keep giving plenty of reasons to not be trusted?
Because money is the priority for those people. If they can make more money by operating in a different regime then they will, the moral or political stance of that regime isn’t really relevant
I feel like you're maybe dismissing "moral or political stance" as something almost aesthetic here, some like this, some like that.
But we're talking about what you can trust a government to do here. It matters even if you're indifferent to morality or politics. It's very much relevant to making money, too.
People trust powerful states who might occasional do shitty things because they tend to assert their dominance when necessary.
You can see that clearly now with how the EU completely messed up their negotiations with Trump regarding the tariffs.
If you are an investor and you are given the chance to invest in two companies, one of them located in a country that is not afraid of throwing it's weight around to get things done or defend it's interests and the other who might have a better record in terms of human rights but doesn't want to appear too aggressive, which one do you pick?
If the only thing you care about is ROI then the answer is easy. Is it right? Probably not but that is just the world we live in and the system that we are all part of.
Obviously this is a simplified example but you get the gist.
Personally I think that the problem with the USD is that it can be used as a weapon against other countries. Why would China risk being cut off from the global banking system like Russia was? It simply makes no sense.
Cutting Russia from SWIFT was major mistake.
It only reinforced what China and other countries already knew, that is, that it can be weaponized in an instant. That in turns means that we should see a decrease in the USD dominance and a shift away from the traditional big players like SWIFT in favor of other home grown systems like CIPS.
Would you care to elaborate? Why does it have to follow the leader in manufacturing? shouldnt the world reserve currency also be the most available? If it’s not dollar then what’s the alternative? Yuan isn’t an open currency, impossible for it to replace dollars as the world reserve currency.
Yes, letting the Ukraine related sanctions chronically fester is a tremendous strategic error.
The benefits of leverage are dramatically maximized and reinforced by using them as little as possible, on the fewest targets as possible, for the shortest intervals possible, to obtain the most decisive results as possible.
Helping an ally interminably not lose on the battlefield (instead of supporting a win), is also a leverage destroying strategic error. There goes significant deterrence.
And to triple down, the US has expanded its sanctions (er, tariffs) to all its enemies (uh, trading partners), giving everyone strong signals that no relief is coming, other than to back away from the US.
Leverage that took a couple centuries to achieve is hemorrhaging.
You're so defeatist. The US could turn things around and in fact, is. The problem with China is that you can't trust anything there--their bonds are garbage, their equities, same.
The issue is, the current administration seems to be hell bent on speed running the course to a similar destination. The overt attempts to politicize the Fed and key govt institutions has sown the seeds to distrust in US govt data and monetary policy.
Whether we water and fertilize the seeds, or let them dry and wither will decide the level of credibility we get in the future.
Strong institutions are absolutely critical for long term economic success. Enforcement of the rule of law, accurate data and credible monetary policy are the bedrock on which long term economic prosperity is built. Right now, we seem to be taking a jackhammer to that foundation.
Leader in tech (by existential margin) -> manufacturing -> trade. US got reserve currency because they had (more or less monopolized) peak tech stack, and also happen to be only manufacturing superpower post war. Only way to develop to modern standards is to have what US had (hence existential), and only US can make it at scale. Over time the tech gap (well MIC gap) = US can leverage for petro dollar, i.e. like saying you can only buy water in USD. Then virtuous cycle of overwhelming accumulated liquidity for dominant reserve currency + FED policy functionally guaranteeing US will eat Triffin shit if investors kept propping up USD with favourable ROI. And IMO investors will continue to until US realize Triffin not worth it.
Meanwhile PRC not entertaining being reserve because eating Triffin shit / be global lender of last resort retarded. What PRC does offer is selling entire tech stack to get 90% modern at 30% cost. At least PRC fine for short/medium term if investors run to US to watch line go up (at the expense of US debt -> domestic drama), while industry runs to PRC to for material goods that keep their country running. It's a degree first/second order leverage (indispensable tech/industry to supply indispensable tech) that builds reserve currencies, having goods no one else has, in PRC case, having goods at affordable prices no one else can match, and in many ways bypass downsides of Triffin, as long as PRC can convince enough countries to settle in RMB for transactions relevant to PRC interest.
So is China going to finally let the Yuan fully float and get rid of exchange controls? That's when you know the yuan has really come of age...when you don't need special documentation to convert your yuan into dollars or euros.
But something really needs to replace the petro dollar, especially as chinese EV and clean energy tech production reduces or eliminates the need for having a petro dollar at all in most of the world.
Trump’s sledgehammer orgy has only just begun and it’s already hard to imagine anything but a catastrophic outcome. He and his gang have still more than 3 years left (at the minimum) to continue their work of destruction. Everyone with an ounce of self-preservation instinct will distance themselves as far as possible.
I stopped reading the Economist a few years ago for this exact reason. It looks like it is still the case. Any article mentioning reserve currency without mentioning Triffin dilemma is not serious. Any article mentioning how US dollar will lose its reserve status without mentioning how the Euro (a large liquid currency with no capital controls and 3 decades of existence ) did not takeover is even less serious. Any reporter claiming RMB is the next world currency never tried to wire a dividend payment out of China.
Illuminating article. And if the yuan bonds information is real, it won't even take 4 years for a lot of global finance to move away from the dollar.
It might be tough for the US to accept the higher cost of global resources (and thus become a poorer country) but maybe this gradual decline in dollars status is what the administration hopes is the best case.
Maybe like the UK but the problem with the US is that the US is a violent country. Lower standard of living is likely to cause violence. UK literally just lost all the colonial wealth but came together to build itself again.
In many ways, the US is a spiral descent culture while the UK lost is all and ascended again but to lower levels.
It's nonsense to claim that the USA is a particularly violent country. Since 1776, the per capita rate of violent deaths has been lower than Europe or China.
People wank about "stability and convertibility" for reserve currency, but the real story is USD strong because USD profitable. US can internationalize domestic crisis, blow up countries, stir foreign instability "paradoxically" global investors pile into the dollar safe haven. The foundation of that is investors trust FED will ensure USD more profitable on stabilized basis than alternatives, regardless of problems, foreign or domestic, and overtime this accumulates into uncontestably deep liquidity that sustains reserve currency. But that's also mechanism of baseline Triffin bind: the U.S. runs deficits to supply dollars abroad to maintain reserve status, if Trump (because that's what he's signalling) deliberately abandons USD ROI credibility and sustains it, like weak-dollar policy (for muh exports, how how investors lose 30c on the dollar), reserve demand unravels or debt servicing increases even more. AKA USD can survive almost any external crises, but internal sabotage i.e. sustained deliberate devaluation will erode profitability (safety) / liquidity premium -> feedback loop of weaker demand, higher yields, both bad. Reserve demand only works when the FED isn't captured for policy that undermines USD premium / mercantilist FX gaming and US eats Triffin that may or may not be good for Americans.
At end of the day PRC doesn't want RMB as reserve - they don't want Triffin either. They just want insulation from USD weaponization while the U.S. is sanction-happy and forced into erratic policy trying to "solve" its structural bind by making foreigners eat the cost. The real Chinese play is to build RMB strength at home while the U.S. either burns the dollar to dig out of the debt hole, imposing losses on global investors, or keeps digging until debt service alone paralyzes U.S. policy capacity, already visible in constraints on defense procurement, i.e. airforce / naval capitalization. That paralysis is the bigger strategic win than simply ending USD reserve status.
World reserve currency status follows the leader in manufacturing and trade. Maintaining dollar hegemony was never going to be feasible after de-industrialization, but short-sighted decisions like weaponizing SWIFT have accelerated its decline. As the dollar is gradually shunted out of world trade, the US will be less able to export its inflation abroad. The implications won’t be pretty.
For all of its current very high profile issues of uncertainty in the US, who would actually trust China in any way shape or form as an alternative?
It’s a totalitarian state who has been jailing its wealthiest businesspeople on a whim, causing many to flee, and it’s about to embark on an invasion of its peaceful neighbor.
Which part of any of that screams “that currency will be a stable place to store my money?”
> who would actually trust China in any way shape or form as an alternative?
Most of the Asian countries (except South Korea, Japan and Taiwan) and African countries. They’re already getting tons of investments and loans from China.
Getting investments isn’t the same as adopting a currency as a reserve for its stability.
The US dollar lost ~10% of its value this year. It is expected to lose another 10%. Which stability are we talking about?
Also, here you can see the change in the foreign exchange reserves by currency: https://en.macromicro.me/charts/116488/global-official-forei...
US Dollars: 71% -> 58% Chinese Yuan: 0 -> 2%
As opposed to China, who will probably invade pretty much every Asian country, and the only big unknown is the order. Western China is annexed. Nepal is Annexed. Hong Kong is annexed. Mongolia is 100% under Chinese control. Northwest Pakistan is 95% under Chinese control. Parts of Russia, Afghanistan, Tajikistan and other countries are under Chinese control to a greater or lesser extent, and all those countries have zero hopes of defending against China, and sure as hell can't count on anyone's support. Certainly not their neighbors, or the gulf states, and not the US. The South China sea (including Phillippine, Japanese, Taiwanese territory) is under Chinese control. And the countries' only hope for maintaining independence is the US.
China is an empire. It cannot survive except through expansion so betting it will expand is like betting a person will breathe tomorrow.
Accepting Chinese currency is like France buying Nazi bonds in 1939 (which France and most European countries did, btw). It seems like, in fact it is, the height of stupidity, but it's amazing what a little bit of promised money can make people do.
This is figuratively, and potentially literally, paying for the bullets that will end up lodged in your skull, because the shooter promises 10% return. Which of course, these states will gladly do.
Where did you get info about losing another 10%?
"Morgan Stanley Research estimates the U.S. currency could lose another 10% by the end of 2026.": https://www.morganstanley.com/insights/articles/us-dollar-de...
Like Philippines that are almost at war with China? Or India that have regular skirmishes with them? Who exactly in Asia? Is Shri Lanka important for world economy?
"It’s a totalitarian state who has been jailing its wealthiest businesspeople on a whim, causing many to flee, and it’s about to embark on an invasion of its peaceful neighbor."
To be fair and very frank: the USA does the same things
Peaceful neighbor: greenland or mexico (sure the cartel related violence but it isn't per se state.)
Jack MA is the famous chinesse example, but it was close enough for bill gates, howard hughes and mark zuckerberg.
Totalitarian state: It depends, as someone born in the USA, I've felt much freeer in China then USA. USA states and cities have been pushing things such as teens/kids can't be alone - yes it isn't federal.
More recent, just look at the turning point usa assination - don't want to get to political since that's a black hole of political theater there but - that isn't common outside the USA.
Credit system: USA's credit system is much more abusive then china's social credit system.
While most of the issues are just present in the current administration, and should go away with the next administration - China has acted more responsibile and more consistent with it's policies while the USA is going all over the place lately.
But for terms of currency, both are not great as of now - the rmb pegged to dollar will change soon, usd reserve currency is eroding everywhere.
tl;dr buy gold I guess
How was Zuckerberg close to being in jail or abducted by the state please explain
Summoned to congress a few times most recently wasn't in line with Trump:
https://www.politico.com/news/2024/08/28/trump-zuckerberg-el...
"Former President Donald Trump writes in a new book set to be published next week that Mark Zuckerberg plotted against him during the 2020 election and said the Meta chief executive would “spend the rest of his life in prison” if he did it again."
I hear you on China loud and clear, however the balance of focus must be on us, the US, not shooting ourself in the face anymore. Debt, current account deficit, and interest payments have got to get in order. Our house needs to get in order by us for us.
Totally agree. I just took issue with the idea that China’s currency would somehow be more stable.
> For all of its current very high profile issues of uncertainty in the US, who would actually trust China in any way shape or form as an alternative?
People would trust China for the same reason people still trust the US after it invaded 2 countries in the middle east for no reason whatsoever and decided to imprison 2 million of it's citizens at any given time.
If tomorrow there are better prospects of making money in China, then people will go to China and use the yuan to store their wealth. It's that simple. Morals have nothing to do in this equation.
> People would trust China for the same reason
I don't necessarily disagree, but can you explain why you think it is, that people keep trusting powerful states which keep giving plenty of reasons to not be trusted?
Because money is the priority for those people. If they can make more money by operating in a different regime then they will, the moral or political stance of that regime isn’t really relevant
I feel like you're maybe dismissing "moral or political stance" as something almost aesthetic here, some like this, some like that.
But we're talking about what you can trust a government to do here. It matters even if you're indifferent to morality or politics. It's very much relevant to making money, too.
People trust powerful states who might occasional do shitty things because they tend to assert their dominance when necessary.
You can see that clearly now with how the EU completely messed up their negotiations with Trump regarding the tariffs.
If you are an investor and you are given the chance to invest in two companies, one of them located in a country that is not afraid of throwing it's weight around to get things done or defend it's interests and the other who might have a better record in terms of human rights but doesn't want to appear too aggressive, which one do you pick?
If the only thing you care about is ROI then the answer is easy. Is it right? Probably not but that is just the world we live in and the system that we are all part of.
Obviously this is a simplified example but you get the gist.
Personally I think that the problem with the USD is that it can be used as a weapon against other countries. Why would China risk being cut off from the global banking system like Russia was? It simply makes no sense.
Cutting Russia from SWIFT was major mistake.
It only reinforced what China and other countries already knew, that is, that it can be weaponized in an instant. That in turns means that we should see a decrease in the USD dominance and a shift away from the traditional big players like SWIFT in favor of other home grown systems like CIPS.
World reserve currency is backed by massively outsized military spending and forever wars againdt anyone treathening the hegemony.
The only way out is to actually start creating and exporting something else besides war, weapons or weapon backed 'IP', or 'credentials' (degrees).
The credibility of the credentials has gone down the toilet.
To get the world to actually buy real stuff from you, you have to produce goods they actually want.
Not sure the US is actually ready to re-uptake 'manufacturing' of products at a quality and price point the rest of the world sees as good value.
Would you care to elaborate? Why does it have to follow the leader in manufacturing? shouldnt the world reserve currency also be the most available? If it’s not dollar then what’s the alternative? Yuan isn’t an open currency, impossible for it to replace dollars as the world reserve currency.
This can be replaced by the most dominant in AI maybe
Yes, letting the Ukraine related sanctions chronically fester is a tremendous strategic error.
The benefits of leverage are dramatically maximized and reinforced by using them as little as possible, on the fewest targets as possible, for the shortest intervals possible, to obtain the most decisive results as possible.
Helping an ally interminably not lose on the battlefield (instead of supporting a win), is also a leverage destroying strategic error. There goes significant deterrence.
And to triple down, the US has expanded its sanctions (er, tariffs) to all its enemies (uh, trading partners), giving everyone strong signals that no relief is coming, other than to back away from the US.
Leverage that took a couple centuries to achieve is hemorrhaging.
And we are living in a Kurt Vonnegut novel.
You're so defeatist. The US could turn things around and in fact, is. The problem with China is that you can't trust anything there--their bonds are garbage, their equities, same.
The issue is, the current administration seems to be hell bent on speed running the course to a similar destination. The overt attempts to politicize the Fed and key govt institutions has sown the seeds to distrust in US govt data and monetary policy.
Whether we water and fertilize the seeds, or let them dry and wither will decide the level of credibility we get in the future.
Strong institutions are absolutely critical for long term economic success. Enforcement of the rule of law, accurate data and credible monetary policy are the bedrock on which long term economic prosperity is built. Right now, we seem to be taking a jackhammer to that foundation.
Leader in tech (by existential margin) -> manufacturing -> trade. US got reserve currency because they had (more or less monopolized) peak tech stack, and also happen to be only manufacturing superpower post war. Only way to develop to modern standards is to have what US had (hence existential), and only US can make it at scale. Over time the tech gap (well MIC gap) = US can leverage for petro dollar, i.e. like saying you can only buy water in USD. Then virtuous cycle of overwhelming accumulated liquidity for dominant reserve currency + FED policy functionally guaranteeing US will eat Triffin shit if investors kept propping up USD with favourable ROI. And IMO investors will continue to until US realize Triffin not worth it.
Meanwhile PRC not entertaining being reserve because eating Triffin shit / be global lender of last resort retarded. What PRC does offer is selling entire tech stack to get 90% modern at 30% cost. At least PRC fine for short/medium term if investors run to US to watch line go up (at the expense of US debt -> domestic drama), while industry runs to PRC to for material goods that keep their country running. It's a degree first/second order leverage (indispensable tech/industry to supply indispensable tech) that builds reserve currencies, having goods no one else has, in PRC case, having goods at affordable prices no one else can match, and in many ways bypass downsides of Triffin, as long as PRC can convince enough countries to settle in RMB for transactions relevant to PRC interest.
So is China going to finally let the Yuan fully float and get rid of exchange controls? That's when you know the yuan has really come of age...when you don't need special documentation to convert your yuan into dollars or euros.
But something really needs to replace the petro dollar, especially as chinese EV and clean energy tech production reduces or eliminates the need for having a petro dollar at all in most of the world.
This.
All the talk about about trade or industrial might is pointless if the Yuan isn’t fully convertible and the exchange rate floats.
And China isn’t going to do that any time soon because of capital flight out of China and the artificially low Yuan pumps exports.
https://archive.ph/7Zeti
This article is more like anti-trump rather than promoting yuan, just look at swift proportion
Trump’s sledgehammer orgy has only just begun and it’s already hard to imagine anything but a catastrophic outcome. He and his gang have still more than 3 years left (at the minimum) to continue their work of destruction. Everyone with an ounce of self-preservation instinct will distance themselves as far as possible.
Whenever the economist writes a thesis, bet the other way
I stopped reading the Economist a few years ago for this exact reason. It looks like it is still the case. Any article mentioning reserve currency without mentioning Triffin dilemma is not serious. Any article mentioning how US dollar will lose its reserve status without mentioning how the Euro (a large liquid currency with no capital controls and 3 decades of existence ) did not takeover is even less serious. Any reporter claiming RMB is the next world currency never tried to wire a dividend payment out of China.
Illuminating article. And if the yuan bonds information is real, it won't even take 4 years for a lot of global finance to move away from the dollar.
It might be tough for the US to accept the higher cost of global resources (and thus become a poorer country) but maybe this gradual decline in dollars status is what the administration hopes is the best case.
Move to what exactly?
Kinda like the UK.
Lots of similarities, almost like you could predict it by reading history
Maybe like the UK but the problem with the US is that the US is a violent country. Lower standard of living is likely to cause violence. UK literally just lost all the colonial wealth but came together to build itself again.
In many ways, the US is a spiral descent culture while the UK lost is all and ascended again but to lower levels.
It's nonsense to claim that the USA is a particularly violent country. Since 1776, the per capita rate of violent deaths has been lower than Europe or China.
What happens with those figures if war is removed from the data? US Euro compare 2000 to 2000: https://ourworldindata.org/data-insights/since-2000-homicide...
Oh, the joys of isolationism.
People wank about "stability and convertibility" for reserve currency, but the real story is USD strong because USD profitable. US can internationalize domestic crisis, blow up countries, stir foreign instability "paradoxically" global investors pile into the dollar safe haven. The foundation of that is investors trust FED will ensure USD more profitable on stabilized basis than alternatives, regardless of problems, foreign or domestic, and overtime this accumulates into uncontestably deep liquidity that sustains reserve currency. But that's also mechanism of baseline Triffin bind: the U.S. runs deficits to supply dollars abroad to maintain reserve status, if Trump (because that's what he's signalling) deliberately abandons USD ROI credibility and sustains it, like weak-dollar policy (for muh exports, how how investors lose 30c on the dollar), reserve demand unravels or debt servicing increases even more. AKA USD can survive almost any external crises, but internal sabotage i.e. sustained deliberate devaluation will erode profitability (safety) / liquidity premium -> feedback loop of weaker demand, higher yields, both bad. Reserve demand only works when the FED isn't captured for policy that undermines USD premium / mercantilist FX gaming and US eats Triffin that may or may not be good for Americans.
At end of the day PRC doesn't want RMB as reserve - they don't want Triffin either. They just want insulation from USD weaponization while the U.S. is sanction-happy and forced into erratic policy trying to "solve" its structural bind by making foreigners eat the cost. The real Chinese play is to build RMB strength at home while the U.S. either burns the dollar to dig out of the debt hole, imposing losses on global investors, or keeps digging until debt service alone paralyzes U.S. policy capacity, already visible in constraints on defense procurement, i.e. airforce / naval capitalization. That paralysis is the bigger strategic win than simply ending USD reserve status.
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