Comment by pas
2 years ago
Okay, so it's an especially hard topic, because the soundbites seem simple and dangerous (dedollarization, end of the dollar hegemony, BRICS will move off the dollar, the first signs of the beginning of the inevitable and long predicted extremely overdue fall of the West, etc.), but the prosaic technicality-dense details are simply long and turn out to be extremely anticlimatic.
Payment systems are already here that avoid the dollar. (From the extremely simple blockchainish digital-synthetic currencies like Ripple XRP to the classic SWIFT-like China's CIPS[1].) And these are already in use. After Russia got thrown out of SWIFT they are now basically using CIPS. (Of course they also have their own version, SPFS. "Coincidentally" its development started in 2014.)
However, on the CIPS wikipedia page you can notice that the important things needed for the actual settlement is a boring list of stuff about each member institution (account numbers, settlement procedure description, credit rating). And each member institution has its own rules about what transfers to accept. And of course in hard times trust is in low-supply, transfers start to get manually reviewed, tolerances start to decrease, everyone starts to hoard good money, thus only bad money remains.
All in all, the important thing is that there's no magic system that can handle payments without the usual institutional-societal framework. (Well, of course there are blockchainish things. For example Visa is doing something on Solana. And Solana is pretty fast and cheap. And a horror show to develop smart contracts on, but that's not really relevant now, and not important for Visa or Russia/China/banks, because they don't care much about the ethos of decentralization, they just want to have something quasi-trustless, fast, and cheap.)
> If that trillion is halved to $500B, what happens?
It depends, but, well ... nothing really. Most of money is already at rest. It represents exactly that stuff you got for it. It represents all the wealth created. It was printed to keep inflation around 1-2%. If it disappears in some computer system people will start to scratch their heads, but the ratios will remain mostly the same, so purchasing power and wages/salaries will not change.
That said if some bank decides to flood the market with cheap US Treasury bonds nothing happens. That's already in USD, the bank loses on the transaction a lot. And a lot of these reserves are in bonds.
Okay, what happens if that bank asks for the cheap bonds not USD, but let's say rubels? Okay, they will end up with a shitton of rubels. The exchange rate shifted, but nothing actually happened, sure the ratio of flow of goods and services will adjust as the overpriced rubels will be exchanged for a bit more goods and services than without this huge transaction. But what does this lead to? More exports from the typical exporters. It's not particularly good for anything that's hard to scale up, it will just result in price inflation. And then eventually the exchange rate will go back to reflect the actual flow of goods and services.
[1] https://en.wikipedia.org/wiki/Cross-Border_Interbank_Payment...
Thank you for the thought out explanation to a complex topic important for us to understand.
You recognize impact to exchange rates when one currency is in more demand than another. If this causes an increase in exports sold in the devalued currency, rates could eventually stabilize, but that depends on many things. Those exports could be gold in our treasury, US land, and factories. Those assets that are fixed in place are only valuable to a foreigner if they can be assured they will not be confiscated.
I know this is simplistic, but let's walk through this flow. I print up a $100 bill and give it to China for a washing machine. China will take it because they need it to buy a barrel of oil from Saudi Arabia. That $100 floats around in the world perhaps never returning as long as others accept and use it. If Saudis start accepting Yuan in payment for oil, China does not need that $100 bill as much. They start reducing their dollar reserves and US bonds. They use those dollars to buy the gold, US land, and factories. The US then has a lot of dollars but not as many assets. The dollars become less valuable because we have so many of them but not as much demand for them. If they are afraid of US sanctions, China will be less inclined to buy assets that could be seized and so the currency is less useful to them.
Admittedly there are many other factors. We will need to see how it plays out.
So let's do it realistically. You take out a loan for 100 USD, it gets printed by some bank, let's say Chase. You buy a washing machine from China, they put it in their central bank. (And they don't but bonds, let's assume.)
What if they want to buy oil, which happens to be sold by the Saudis, who want 100 USD for it. They can do it, or they can print more yuan, and use that to buy more USD on some exchange. (And they did it a lot, to keep the yuan artificially low. That's basically half of how they ended up with this huge reserve.)
And since their inflation was around 2 percent since 2010, and currently even negative unfortunately, they can print a lot.
And this is how economic development and exchange rates connect. One man's trade deficit is another's reserve basically. As long as there's some slack in economies (mostly some unemployment metric is used as a proxy for this) it makes sense to spend. (Otherwise it'll just push up prices more, ie. lead to inflation. Hence the very technical sounding name of NAIRU, Non-Accelerating Inflation Rate of Unemployment, I think hands down the worst name for any concept over many fields.)
If China starts using its reserves to buy US assets, that leads to a lot of USD getting back into the US economy, it's like a stimulus. It would push up prices of course, the Fed would increase interest rates, maybe it would even start fiddling with some other knobs (it could increase the fractional reserve ratio, it could increase interest paid on reserves, or interest paid on excess reserves).
> If they are afraid of US sanctions, China will be less inclined to buy assets that could be seized and so the currency is less useful to them.
Yes, and one read of the belt and road initiative is basically this, instead of giving it to citizens to spend, they tried to use it for geopolitical/colonialist/mercantilist projects.
All in all, my understanding is that using their huge reserve to cause some crisis would be a zero-trick pony (because after 2008 and the recent bank crisis, and the Russian sanctions implementations the West seems capable of handling speedbumps), and a slow decoupling would be good anyway. (As it would help the non-finance sectors of the US.)