In today’s world of DOLLAR domination it is easy for the U.S. Treasury — under the guidance of the president — to place sanctions on many different global actors as they strive to use the conduit of SWIFT and other banking facilities to move money around the globe. The U.S. likes to beat its chest and proclaim that it is operating in a rules-based system and therefore sanctions are an appropriate tool in response to the malevolent actions of autocratic-oriented nationalistic actors. But whose rules? And the invocation of sanctions leads to those subject to the whims of U.S. policy to find ways to operate in international grey areas of commerce.
Cuba has been sanctioned for 60 years and to what avail? More importantly, the U.S. has attempted to sanction Russia (read: Putin and his cronies) for its autocratic actions against some of its citizens who have demonstrated against Putin and his repressive tendencies — as well as military actions in the Crimea and Eastern Ukraine.
The same impulse exists as the Biden administration threatens sanctions on Chinese communist party officials for Hong Kong, Taiwan and of course the Muslim minority in Xinjiang. But as Deng Xiaoping warned in 1989 after the West imposed sanctions on China for the horrendous response in the Tiananmen Square Massacre, sanctions by the western powers elevated nationalism and helped the Communist Party rise above its supreme act of political repression.
In November 1990 the sanctions were relaxed as the Bush administration (directed by James Baker and Brent Scowcroft needed a bargaining chip to garner China’s support for the removal of Iraq from Kuwait. Remember, Russia and China both have veto power in the U.N. Security Council so how are sanctions bargaining chips? Either the U.S. is a sanctimonious hypocrite or the U.N. is an atavistic remnant of the golden age of U.S. hegemonic power.
In an effort to circumvent the sanctioning impulse of the global hegemon the Chinese are pursuing a central bank digital currency (CBDC) in an effort to undermine the influence of the U.S. dollar’s exorbitant privilege. This is no easy task as the U.S. military might, innovative capitalist economy, academic powerhouses and most importantly a rock solid bastion of the rule of law have maintained the credibility of the dollar. It can be argued that the last decade has called into question the economic policies of each administration to sustain the DOLLAR as a store of value.
The perpetual use of NEGATIVE REAL YIELDS to continually support DEMAND has forced the global financial system to seek alternatives to the DOLLARS, such as precious metals, art, stocks, real estate and most recently BITCOIN. The Chinese have made noise about a currency to replace dollar dominance but the Chinese political and judicial systems are too capricious to attract buyers of YUAN commensurate to percentages of its global trade. If the Chinese are going to have credibility it will need to back its digital currency with a certain percentage of precious metals. A return to SILVER-backed digital currency would be judicial as it would roll back the sordid effects of the Opium Wars and the debasenment of Chinese currency.
As was discussed in detail in the Atlantic Council’s “The LONGER TELEGRAM” published anonymously six weeks ago China is going from a status quo power to a revisionist power. Pay attention to the value of the YUAN as it is the linchpin to an attack of the sanctimonious nature of U.S. power and influence. I have opined for three months that it was the strengthening YUAN that was leading the rally in global commodity prices.
***Janet Yellen was on MEET THE PRESS this morning and her appearance was once again a reminder that her and FED CHAIR JEROME POWELL are connected at the “hip.” She said, “I don’t believe that inflation will be an issue. But if it becomes an issue ,we have the tools to address it.”
There’s no follow-up question as to what those tools are and in her role as Treasury Secretary does that imply wage and price control. Unlike when Yellen was FED chair she has no power to enforce monetary policy.
Also, the White House economic team has been noting that inflation is transitory and all price rises reflect bottlenecks, which will prove short-lived. Warren Buffet has joined the chorus of those concerned about inflation. Watch the bonds, currencies and precious metals to see how the market is reacting to Yellen and Buffet. A drop in BOND futures will have the ALGOS selling myriad asset classes initially. Will it be able to sustain the effect of rising long term yields for we know that short rates are subject to the FED and the Treasury on Thursday sold four-week bills at 0%. Be patient as the markets unfold.
Tags: Chinese Yuan, inflation, Janet Yellen, negative real yields, sanctions, U.S. Dollar
May 2, 2021 at 6:45 pm |
[…] LINK HERE to the Blog Post […]
May 2, 2021 at 8:15 pm |
Why do the Chinese have to back their digital currency with precious metals? What backs Bitcoin? While the CME guarantees the ‘other side of the trade’ in the official Bitcoin contract – what happens with all the other sudo-exchanges representing ‘whatever’ digital coin they have on hand? Do they have a clearing house? Fees are charged at three or four levels – the real business is fees. Block chain means nothing and is responsible to no one – who sees what they do? What better way to undermine the traditional currencies? Are we headed toward a boom, created by pent up demand or an economic bust, created by someone on a keyboard somewhere? Yes, patience is indeed a gift. I have tulip bulbs for sale is anyone is interested.
May 3, 2021 at 3:09 am |
Please remove my comments. I defer to Mr. Munger.
May 3, 2021 at 5:00 am |
Barbara–thank you for the post and good to hear from you—Blockchain I believe and agree with you will be very transformative for the financial industry.The Chinese I believe will have to “offer” more in order to establish global credibility for the control shown by the Communist Party in the initial digital coin experiment has revealed concerns to Chinese and non-Chinese alike.The GREAT TRANSFORMATION[Polanyi] is that blockchain will DISRUPT the FEE driven machine of wall street—see the website of 9th gear for a taste of the world to come
May 3, 2021 at 5:48 am |
Both the USD reserve status and SWIFT dominance are in their end days IMO, but those are lengthy topics (but for example, regarding the end of the USD reserve status and why US policymakers actually want/need that now, see some of my comments in Yra’s immediately preceding post on The Arrogance of Janet Yellen).
Regardless, three related questions to ponder.
1) Why are US SWIFT sanctions against Iranian banks about to be removed and JCPOA about to be reinstated without any major changes to it nor any real significant concessions from Iran compared to before? IMO, the reason is similar as why the sanctions against China were previously removed with no changes in China, as described in this article. Sanctions are indeed sanctimonious.
2) In view of #1, what will come of INSTEX and why?
3) If SWIFT is still so dominant and secure in its position, why was SWIFT so quick and keen to get on board with China’s DCEP? (Hint: look at the global trade map I linked in Yra’s previous post)
SWIFT is just a messaging system that’s slow, expensive, error-prone, easily replaceable today technologically, very insecure compared to newer technology, suffers losses/theft and lacks financial privacy (monitored by NSA).
But SWIFT is entrenched. It does not move any funds but rather just sends payment instructions to correspondent banks to settle accounts. Thus SWIFT’s strength and the ability for the US to enforce sanctions rests in its network of participating correspondent banks. But the effect of this is waning due to the receding status of the dollar and particularly the rapidly waning need for the traditional banking system in an increasingly digital world. Fintech digital payments are the future everywhere (and already dominant in China and much of East Asia); so bye-bye SWIFT and bye-bye SWIFT sanctions.
May 3, 2021 at 7:35 am |
Yra –
Enjoy reading your work and podcasts when they happen. My question, more than comment, concerns gold. Before going further let me state I am not a gold bug nor have any strong feelings about gold.
China recently put in a significant order for gold, $8.15b. They continue a march of gold buying that begun under Xi. Interestingly, China’s land mass is considered one of the most ideal locations for gold mining in the world. However, their reported gold production is also one of the lowest for this land mass potential.
Why? They know the value of gold. And they continue to buy it in the open market aggressively.
Is it not possible that China is stockpiling gold to a tune hard for others to get their arms around. Thus giving them the ability to play the gold = currency card in the future? Actually mining the gold but not reporting it?
By having a gold reserve beyond any other country, they could immediately change the playing field by saying, “China is now going to use the gold standard for the Yuan.” It would be immediate, make other currencies and debt highly toxic and change the world order. All without firing a shot, having a conflict and they could potentially do it in a way that allows them to make it “universally acceptable” going through the right institutions rather than unilateral when announced or implemented.
China is doing all they can to build up an internal consumption economy that does not need, or needs in a limited way, goods and services from others.
I don’t want to make this a “conspiracy” comment but more a question as you did state a while back that China was taking delivery of commodities from future purchases rather than closing out the contracts.
May 3, 2021 at 9:28 am |
Kevin, I’m not Yra but I think you make numerous perceptive observations. But I also think nobody wants to be the reserve currency anymore. Not China and not the US (see why in my comments in Yra’s previous post). So a gold-backed yuan isn’t in the cards. Unless maybe for offshore use only in order to faciliate settling international accounts, beyond the reach of US control or sanctions. As gold seems to perhaps be primed to resume its old role of balancing international accounts, as all fiat declines and gradually becomes shunned. Already, most CB’s are drawing down their fiat reservies, trend set to accelerate.
IMO the Chinese have been buying all the gold and commodities they could get their hands for some time just because they were astute traders anticipating price increases, shortages or blockages. As the PBOC is mostly staffed with experienced traders rather than left-leaning theoretical academics like the Fed.
No doubt China wants an internal consumption economy but that’s difficult to achieve and it might not happen. A stronger currency facilitates internal consumption but makes it more difficult to export (thus the US is throwing the diving dollar to the wolves without even pretending to care about the buck anymore). Without strong internal consumption, China can’t be thrilled to see the yuan keep rising – never mind backing the yuan with (its hugely understated reserves of) gold.
I see evidence that China wishes to be part of the world order while the US is doing all it can to force China out of that, so indeed China might become forced to try to change the world order how you explained rather than be isolated and poor again as during the “century of humiliation”. However, from what I’ve read, China probably won’t try to forcibly change the world order, but rather will wait for the West to blow itself up like Weimar and become so desperate that they’ll need China with its gold savings & productive capacity to help restore stability (not unlike the 2008-09 US financial collapse but more so), and then seek China’s favor who will then enjoy the advantageous position of strength in coming to the table. As that’s more their kinda game and they’re very patient, historically.
May 3, 2021 at 10:22 am
Dave and all—keep this conversation going–Kevin dead right on target with your view as I have discussed this possibility.As David Richards has themed for several years,China is the ultimate disruptor and it does not necessarily have to be by military means–that is why I raise the sanctions issue for as to quote the village idiot—that is so 19th century.There are now many analysts noting that China supports corrupt autocrats and they should therefore be shunned evermore and thrust out of the rules based system but I would advise for the wall street pundits and Washington policymakers to read the Structural Theory of Imperialism by Johann Galtung— when nations wish to exert their influence nothing like sustaining the center of the peripheries to raise your level of influence
May 3, 2021 at 8:00 am |
A Bitcoin futures contract, hmmm? A futures contract is a performance bond. Clearing houses guarantee the other side of the trade, but who guarantees the perfomance bond? Is there an insurance company somewhere in this? A performance bond is like a surety bond for a construction project, so who’s backing the clearing houses? The FED?
The blockchain lives in cyberspace, it is not a country, no citizenship, no tax regime, no elected representatives, it has no courts or legal system. Bitcoin is a ledger system, not a physical commodity, it depends on the stability of electrical communications and computer power, what happens when it fails? Technology always fails sooner or later. What happens when someone loses their secret code for their crypto wallet, which court to call to make a claim? What about beneficiaries to a crypto wallet, is it valid in a will? All we are doing is transferring “trust” from an analog “human” system to digital “cyberspace” where no one has your back, not even the great Bill Gates. He has not figured out how to stop viruses from infecting Windows, so he changed careers and became a global spokesman for biological viruses. Sure hope he doesn’t fail at fighting the corona virus like he did with computer viruses. Counterparty risk plays a part in two ways, there are pros and cons. The counterparty risk to the blockchain IS THE INTERNET ITSELF. “Distributed ledger” means every node acknowledes a transaction, not private IMO. Sometimes you want a counterpary, whether it’s your broker, banker or a lawyer. Digital Currency is just the latest “catch phrase,” it all depends on trust and who backs a currency and the laws of a nation. Trust in fiat currency lies in the system of goverment itself and the law and order of a nation, no matter if it’s paper or not. This brings us to GOLD, it lives in the human realm, it cannot live in cyberspace. It is the perfect unit of account because of its atomic stucture and has over 5,000 years of “trust” to validate gold as such. However, a legal system can be good and bad for gold also. Just ask the victims of 1971 after Nixon closed the gold window. Gold might not be the perfect currency either, but at least it lives on earth. Trust in a digital currency still depends on the system of government in a nation, not just because it’s a “crypto” currency. Why would anyone trust a sytem of government with no property “rights” or civil rights? All things considered, I’d rather live on earth than cybespace anyway, it just tastes better.
May 7, 2021 at 1:52 pm |
Good points. Some more points by Macrovoices’ Erik Townsend, the network architect/entrepreneur engineer who sold his software company in 1999 for $160M, then became a fulltime investor in Hong Kong, so he’s uniquely qualified to comment on digital currency, finance and the technology unlike me…
1) New distributed ledger technology is making blockchain obsolete (too slow and inefficient);
2) Digital currency will be as revolutionary as the PC and the internet;
3) Blockchain-based cryptocurrencies will not play a major role in the DC revolution.
https://www.macrovoices.com/video-main/macrovoices-videos/610-digital-currency-revolution-outlook-and-update (Part 1 of 2)
May 4, 2021 at 3:11 am |
The yuan accounts for just 2% of international payments today, about the same as the Australian and Canadian dollars.
May 7, 2021 at 1:42 pm |
Yeah, I’ve heard that same thing for many years. What’s that number based on? I’m guessing it’s the percentages in SWIFT transactions? As intuitively it makes no sense anymore given how much global trade and economies have changed from years ago, even tho the dollar still surely dominates in intl pymt transactions for now.
But I’ll bet that 2% excludes transactions on newer int’l pymt exchanges like INSTEX (Europe), CIPS (China), Riipple, SPFS (Russia) as I just read Russia claims it sells 75% in Euro and 25% in Yuan now, probably outside SWIFT. Likewise, China has been claiming that it pays for most of its oil imports from Saudi and Iran in yuan (likely outside Swift) despite US rules against that.
And for sure the percentages must exclude shadow banking payments becoming common across East Asia for example, because nobody really knows the shadow banking data except that it’s expected to become as big or bigger than traditional banking payments, eventually everywhere.
May 4, 2021 at 3:51 am |
This is a great little blog, so much insight and information to process. The chessman are always in motion.
From my perspective, the IMF and BIS seem to be mostly concerned about re-balancing the trade deficits between surplus and deficit countries. A much weaker USD and stronger Yuan and Euro would accomplish this in their minds.
Collateral damage being mitigated along the way, student loans still in forbearance, rent evictions and foreclosure moratorium still in effect, more stimulus checks coming?
Always a student, never a master.
May 4, 2021 at 4:34 am |
Anyone know how much of the USD recorded on SWIFT is actually bank to bank transfers within China? Does China even need to be a reserve currency to become the largest economy? They have made quite incredible progress so far by taking advantage of the USD reserve currency status. It’s the classic Chinese strategy, use other countries ingenuity against them, sounds like Art of War.
May 4, 2021 at 4:39 am |
https://www.economist.com/finance-and-economics/2021/05/03/will-going-digital-transform-the-yuans-status-at-home-and-abroad
May 7, 2021 at 2:00 pm
Well, in fact for 2020, China took first place for FDI (foreign direct investment) and their bonds remain popular this year among global investors given the higher real yields and relatively strong currency.
$16-trillion of deposits moving from USD to e-Yuan per the link below… and Jamie Dimon, JPM and Morgan Stanley “get it” about the transformation of the global payments & financial/banking system by the likes of shadow banking and DCEP. What’s also happening is that DCEP and new distributed ledger tech eliminate all aspects of the need for any intermediaries such as banks, SWIFT and USD, with big gains in efficiency and costs that’s driving the trend. Which BTW will also be the death knell of US financial sanctions.
Per the article below, “Exporters won’t have to write contracts in foreign currency for payments due months ahead, and buy expensive hedges against currency market fluctuations. They will just receive payment in their own CBDC. China’s dominance in digital currency will follow naturally from its position as the world’s top exporter.” All parties are paid immediately on a digital system without any need for costly & slow international bank transfers, credit lines, banks and implicit or explicit FX hedging (expensive).
What the chinese need to do is to control parts of this new digital currency infrastructure, which the world’s trade and finance will inevitably use. They’re already achieving this in China but also across Asia including Singapore as I’ve explained in detail in a previous comment about my personal experience transacting here. Then as the role of traditional banking & fiat (USD, EUR, JPY) gradually declines in use and is replaced by using a digital infrastructure, largely controlled by Chinese interests, they will be in the catbird seat.
See, this isn’t about China replacing the dollar with the yuan in the financial system, which they’re not trying nor need to do. Rather, they’re trying to leverage their world-leading trade and fintech & payments system technologies (years ahead of everyone) to firmly implant themselves in the plumbing of the new, digital transactions infrastructure of all Asia, whose economy alone is now more than the rest of the world’s economies combined per the Financial Times.
https://asiatimes.com/2021/04/chinas-digital-yuan-displaces-the-dollar/
May 7, 2021 at 1:48 pm |
As Trump knew, actually both China and Western Europe have taken advantage of USD reserve currency status. But on the bright side, any Americans fortunate enough to have had reasonably good jobs have long enjoyed a nice ride on the reserve currency status because no country without the reserve currency status could have so cheaply obtained such huge quantities of goods globally in exchange for pieces of printed paper for so long. As Sam Zell said last month, if the US loses its reserve currency status, then the US standard of living will fall in half or more. With civil unrest in the streets as average people won’t understand what really happened to them.
You know what else makes average people take to the streets to smash & loot? High inflation. Perhaps more so if the gov’t lies about it. Someone just showed how US pork prices have tripled since last year, as have hogs on the chart. Not nearly as much as lumber and semis but still, I don’t remember food & housing inflation being this high even during the worst of the 1970’s when BLS acknowledged 20% inflation instead of 2%. The punchline? As both are “white meat”, they’re gonna substitute possum for pork in the inflation calculations.
And in response to your question, IMO China doesn’t need to be the reserve currency to be the largest economy. Pretty sure that China doesn’t want the yuan to be the reserve currency, if they see how it has hollowed & financialized the US economy. And besides, China is already the world’s largest real economy by several trillion dollars in terms of real GDP PPP and almost twice the second-place US in terms of total global trade. Per the IMF as of April 2021 (“China” figure excludes the five special autonomous regions such as HK or else it’d be an additional $3T more).
https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)#Lists
May 5, 2021 at 3:35 am |
Just another comment from the Peanut Gallery. Don’t mind me.
Yellen coming out and saying rates may have to rise.
https://www.reuters.com/world/us/treasurys-yellen-interest-rates-may-need-rise-modestly-2021-05-04/
Does it have anything to do with the increased trade deficit?
https://www.cnbc.com/2021/05/04/us-trade-deficit-surges-to-new-record-shortfall-with-china-rises.html
So instead of the American public going out and spending money on services, restaurants and the like, we just bought more “stuff” from China. lol.
Janet Yellens’ new book will be titled “Unintended Consequences”
First Chapter: “Whoops, my bad” or “Rethinking Stimulus”.
May 7, 2021 at 1:39 pm |
Re your article about Yellen saying interest rates might have to rise sometime, she walked that back mere hours later as US stocks dropped an intolerable 1% afterwards, oh the horror!
US policymakers are going to keep real US interest rates negative for years by hook or crook, full stop. US nominal yields may rise as US inflation soars but real rates will stay negative and likely get more negative. Financial repression squared.
If Yellen was truthful, she’d instead talk about the tumbling value of the people’s currency, especially because the dollar is her purview, not really interest rates nor social justice issues which she loves to talk about even whilst she and Powell go about destroying the people’s purchasing power and thus their standard of living. What a clown show those two are.
I don’t understand how being so uber-dovish helps the average joe.
May 9, 2021 at 4:21 pm |
Yra thanks for sharing your thoughts.
Is there a link to a story on China creating a silver backed CBDC?
May 9, 2021 at 10:41 pm |
Kapil—no for it is my conjecture based on historical analysis coupled with China’s desire to disrupt the status quo–as it is written in the Longer Telegram from the Atlantic Council—China is moving from a status quo power to a revisionist power—so when it is time to test the Dollar I don’t know how else they could gain the credibility—it is my thesis and it is also coupled with the massive warehouse being built in Singapore to hold 15,000 tons of silver