Every 12 to 18 months, the collapse of the US Dollar and the end of its hegemony in global trade is pronounced. Social media goes into overdrive debating how the Chinese Yuan is going to replace the Dollar, how China will sell its US Treasury holdings, sending the Dollar into a tailspin or how Democrats will turn the US into a socialist country impoverishing millions since nobody wants to hold the greenback anymore. Ok, I made the last one up, but you get my point.
I obviously agree with everything that is written. A couple of months ago, I wrote on the topic from another perspective that supports the statement and implies that the Chinese currency is unlikely to replace the dollar’s dominance even in a possible future decline. Here it is:
"The challenges of the BRICS cooperation, which was intended to balance the West and support the Global South, reflect the complex reality. BRICS ended to be a facade and a tool for China’s ambitions and interests. This is in contrast with the admirable goals of the New Development Bank (NDB) treaty and The Contingent Reserve Arrangement (CRA) treaty, signed in 2014, which aimed to provide mutual financial assistance and liquidity protection to the BRICS members in case of financial difficulties or short-term liquidity pressures.
Recent events reveal the truth clearly.
April 26, Argentina’s Economy Minister Sergio Massa said his country would use the yuan to pay for imports from China. This could seem like another sign of how the world is abandoning the dollar because of the American bullying, and echoes Brazil’s president Lula’s call for a new “international medium of exchange” during his first state visit to China in April. [...]
He proposed that the Brics countries create their own alternative currency for trade and suggested that gold could be a standard for their currencies. Argentina has been stuck in a severe currency crisis for a long time, with inflation soaring to 100%, making it hard to restructure its debt with the International Monetary Fund, and on top of that, the worst drought ever has ruined the country’s farm exports. Bad economic policies drain the country of foreign exchange reserves, which are essential to buy imports.
And this is where the Chinese approach comes into play:
It opens swap lines, which give liquidity to countries that are in need and lack dollars in their reserves.
This is indeed the tweet by Sergio Massa (as translated from spanish):
“We activated the swap with China together with the ambassador Zou Xiaoli, businessmen and chambers of the sector, which allows us to pay in yuan the imports with that country and replace 1.040 billion dollars in April and 790 million from May.”
The swap line is a contract where two parties agree to swap periodic payments in two different currencies, related to the capital and interest payments, based on specific contract terms. In this case, China transfers its yuan to Argentina, which boosts the South American country’s reserve stock. After that, the yuan is used to settle imports and exports between the two countries. In practice, it is a supply credit.
Argentina’s formal part of the swap is unclear. A swap is an OTC contract that depends on the parties, so it could result in tighter economic ties (i.e. a Chinese stranglehold) in the absence of available liquidity.
Beijing has funded many emerging countries within the Belt & Road framework with the same strategy, but now they are in trouble. The rise in interest rates on the dollar makes them try to restructure their foreign debt with multilateral institutions and international private lenders. China and the International Monetary Fund are in a power struggle, because China does not want to cut its loans’ nominal value and only offers payment extensions. China also wants Western multilateral lenders to reduce their exposures, which have always been “super senior”, to join in debt restructuring. If the IMF agrees to reduce its loans, it would soon vanish, and China would be the only global provider of emergency finance and a regular creditor.
What becomes clear is that China does not want its currency to replace the dollar as the reference reserve currency. China simply wants to become the only country that can offer financial assistance to other countries in need, such as loans, swaps, or grants, lending money on a regular basis, and expecting to be repaid with interest, pledging the debtor’s assets.
Here is the reason why I believe that this approach wouldn't be successful:
[...] The current world order resulted not only from power but also from decisions taken by the United States and its allies to collaborate closely in the economic and security domains, first to counter the Soviet Union and then to promote a worldwide order that facilitated trade and cooperation.
The truth is that the alliances that matter are determined by cultural proximity, integration, mutual respect and willingness to support the enormous and costly effort to maintain them. The United States is the fulcrum of the current order, certainly for its economic and military weight, but above all because it represents a cultural point of reference. Television series, movies, modern literature, music and culture in a broad sense have had a huge impact on my education and all my generation, not for some superiority of America as a Nation but for the melting pot from which that culture derives. Integration is the real key to the future society... and to sustain integration, mutual respect and the huge and expensive effort to maintain them, a solid institutional system that can balance and correct its own flaws is essential (cf. Douglas North). This also explains why America could withstand a Trump presidency while Putin is damaging Russia.
I believe that when defining financial Cassandras, we primarily refer to the syndrome identified by the French philosopher Gaston Bachelard. This syndrome describes a pathology in which individuals systematically formulate adverse prophecies about their own future or that of others. Over time, those afflicted with this complex are not taken seriously, leading to a loss of self-confidence. In the case of financial gurus, there is a tendency to constantly exaggerate and, ironically, they are believed precisely for this reason, that's saying a lot about the contrasting dynamics between the real world and the world of finance.
Spot on, could not agree more. Well-written. Here's my two cents on the same topic: https://www.emorningcoffee.com/post/will-the-us-dollar-remain-the-global-reserve-currency
I obviously agree with everything that is written. A couple of months ago, I wrote on the topic from another perspective that supports the statement and implies that the Chinese currency is unlikely to replace the dollar’s dominance even in a possible future decline. Here it is:
"The challenges of the BRICS cooperation, which was intended to balance the West and support the Global South, reflect the complex reality. BRICS ended to be a facade and a tool for China’s ambitions and interests. This is in contrast with the admirable goals of the New Development Bank (NDB) treaty and The Contingent Reserve Arrangement (CRA) treaty, signed in 2014, which aimed to provide mutual financial assistance and liquidity protection to the BRICS members in case of financial difficulties or short-term liquidity pressures.
Recent events reveal the truth clearly.
April 26, Argentina’s Economy Minister Sergio Massa said his country would use the yuan to pay for imports from China. This could seem like another sign of how the world is abandoning the dollar because of the American bullying, and echoes Brazil’s president Lula’s call for a new “international medium of exchange” during his first state visit to China in April. [...]
He proposed that the Brics countries create their own alternative currency for trade and suggested that gold could be a standard for their currencies. Argentina has been stuck in a severe currency crisis for a long time, with inflation soaring to 100%, making it hard to restructure its debt with the International Monetary Fund, and on top of that, the worst drought ever has ruined the country’s farm exports. Bad economic policies drain the country of foreign exchange reserves, which are essential to buy imports.
And this is where the Chinese approach comes into play:
It opens swap lines, which give liquidity to countries that are in need and lack dollars in their reserves.
This is indeed the tweet by Sergio Massa (as translated from spanish):
“We activated the swap with China together with the ambassador Zou Xiaoli, businessmen and chambers of the sector, which allows us to pay in yuan the imports with that country and replace 1.040 billion dollars in April and 790 million from May.”
The swap line is a contract where two parties agree to swap periodic payments in two different currencies, related to the capital and interest payments, based on specific contract terms. In this case, China transfers its yuan to Argentina, which boosts the South American country’s reserve stock. After that, the yuan is used to settle imports and exports between the two countries. In practice, it is a supply credit.
Argentina’s formal part of the swap is unclear. A swap is an OTC contract that depends on the parties, so it could result in tighter economic ties (i.e. a Chinese stranglehold) in the absence of available liquidity.
Beijing has funded many emerging countries within the Belt & Road framework with the same strategy, but now they are in trouble. The rise in interest rates on the dollar makes them try to restructure their foreign debt with multilateral institutions and international private lenders. China and the International Monetary Fund are in a power struggle, because China does not want to cut its loans’ nominal value and only offers payment extensions. China also wants Western multilateral lenders to reduce their exposures, which have always been “super senior”, to join in debt restructuring. If the IMF agrees to reduce its loans, it would soon vanish, and China would be the only global provider of emergency finance and a regular creditor.
What becomes clear is that China does not want its currency to replace the dollar as the reference reserve currency. China simply wants to become the only country that can offer financial assistance to other countries in need, such as loans, swaps, or grants, lending money on a regular basis, and expecting to be repaid with interest, pledging the debtor’s assets.
Here is the reason why I believe that this approach wouldn't be successful:
[...] The current world order resulted not only from power but also from decisions taken by the United States and its allies to collaborate closely in the economic and security domains, first to counter the Soviet Union and then to promote a worldwide order that facilitated trade and cooperation.
The truth is that the alliances that matter are determined by cultural proximity, integration, mutual respect and willingness to support the enormous and costly effort to maintain them. The United States is the fulcrum of the current order, certainly for its economic and military weight, but above all because it represents a cultural point of reference. Television series, movies, modern literature, music and culture in a broad sense have had a huge impact on my education and all my generation, not for some superiority of America as a Nation but for the melting pot from which that culture derives. Integration is the real key to the future society... and to sustain integration, mutual respect and the huge and expensive effort to maintain them, a solid institutional system that can balance and correct its own flaws is essential (cf. Douglas North). This also explains why America could withstand a Trump presidency while Putin is damaging Russia.
Sorry to be pedantic, but Cassandra’s prophecies were always accurate; it’s just that no one would listen to her, so the nation fell into ruin.
I believe that when defining financial Cassandras, we primarily refer to the syndrome identified by the French philosopher Gaston Bachelard. This syndrome describes a pathology in which individuals systematically formulate adverse prophecies about their own future or that of others. Over time, those afflicted with this complex are not taken seriously, leading to a loss of self-confidence. In the case of financial gurus, there is a tendency to constantly exaggerate and, ironically, they are believed precisely for this reason, that's saying a lot about the contrasting dynamics between the real world and the world of finance.
Wow, that is about the best explanation I have ever seen. Bravo.