Welcome to our Friday mailbag edition!
Every week, we receive some great questions from your fellow readers on our recently published essays. And every Friday, I answer as many as I can.
Today, we’re kicking it off with an ongoing debate among readers in the mailbag…
I’ve written several times about my belief that the U.S. dollar’s position as world reserve currency is safe, for now.
This is despite China’s ongoing campaign to establish its currency, the yuan, on the world stage.
My essays on this topic have sparked lots of comments from readers, and not everyone agrees with me. Here’s China’s plan for world domination, as reader Jon G. sees it…
I respectfully disagree that the predominant position of the U.S. dollar is secure in my lifetime.
China’s strategy starts with taking Hong Kong and folding its GDP into theirs. Add the belt-and-road initiative, which is designed to be a win-win as they build infrastructure and future China economic dependence.
They then take Taiwan and absorb its $1.48 trillion GDP into theirs.
China agreed to support Russia’s “Special Operation” in Ukraine, hoping it succumbs to Russia and becomes a future trading partner, also legitimizing its takeover of Taiwan.
Russia, being the third-largest producer of oil, then agrees to exchange oil for petroyuan, as does Saudi Arabia.
Along comes Venezuela and Nigeria… and others, as well. Iran’s oil production neutralizes and becomes a non-factor, as it remains a political rival to the West and its regional politics excludes it from geopolitical inclusion.
European countries like Germany (who isn’t fully committed to the Ukraine conflict for the following reason), Hungary, and some others remain dependent on Russian oil and subsequently agree to pay in yuan, which tips the outcome.
As the U.S. economy continues to deteriorate, requiring ever more dependency on Chinese production, the conversion to the yuan becomes almost automatic. It won’t be disruptive to the world… just us. The final win for China in the win-win equation.
My point: China is desperate to establish the yuan as the world’s reserve currency. It resolves all issues, economic as well as political, for them going forward.
As world economic domination is the goal, the ultimate dispute will be China versus Russia, as the U.S. takes an also-ran position. The future looks ugly.
– Jon G.
After we printed Jon’s comments in one of our daily mailbags, reader John H. responded with his thoughts…
Mr. Jon G.’s comments strike me as either the product of a vivid imagination or conclusions from facts quite different from those known to me.
Putin has done such a lousy job of running the country that the population of Russia is in decline. (Source: a U.S. cabinet secretary in the last few years.)
This decline is being accelerated and exacerbated by the incursion into Ukraine. An untold percentage of the Russian death toll is comprised of 18-year-old and similarly young-aged recruits.
The current state of the Russian economy is that it is in shambles. And that was the state of affairs before the adding of sanctions.
Their only hope in a military contest with China would be to use nuclear weapons. And I am not convinced that would be enough to achieve victory. (China has relatively few atomic weapons.)
China may be able to take control of Taiwan by military action, but that will mean defeating the United States. The security agreement concerning Taiwan is much stronger than the one covering Ukraine.
China is more of a long-term threat to the United States, but it has significant long-term, internal political problems. The economic and political structures in a given country must be aligned.
South Africa said they were a free-market country. Under apartheid, what they practiced was slavery. In the long haul, those two policies were in conflict and only one could prevail.
China is in the same boat at the present time. They cannot operate the free-market model they currently use and continue the tight, central political control, as it now exists. Only one of those policies will prevail.
That does not mean the dichotomy cannot go on for a long time and enable them to cause plenty of trouble.
– John H.
Hi Jon, thanks for your observations. And thanks, John, for considering Jon’s perspective.
There are certainly two very distinct views out there about China’s ability to continue to rise as a superpower, despite its own weaknesses… or because of its strengths.
In the end, time will be the ultimate arbiter of that.
However, to address your points…
First, it is certainly true that Russia’s economy is in dire straits. It was before it invaded Ukraine. And it is more the case now.
With regards to a potential nuclear war with China, I don’t think Russia would risk that sort of confrontation, or vice versa.
Both countries are involved in a symbiotic economic and energy relationship that neither would want to jeopardize.
Second, China also has internal domestic problems. Its younger population is declining, which means less economic support for the ageing population.
There’s also the constant power paranoia on the part of President Xi Jinping. When I was there researching my book, Collusion, many people spoke to me on what’s called “background.”
This meant they would provide me information and context, but only on condition that I didn’t reveal their names. They were afraid of government repercussions.
Of course, I take journalistic integrity very seriously. I would never compromise my sources. But I was also saddened by that state of affairs. And from what I’m hearing, it has gotten worse since the pandemic.
That’s why China can’t fully participate in the global free market model. Its government would need to reduce restrictions and support for the areas of the economy it deems critical. I just don’t think it would be comfortable with that.
Years ago, when I used to visit China, it seemed that the idea of more liberal capitalism was taking hold. But it’s a much longer road now.
And just to reiterate, I don’t think we need to be concerned about the U.S. dollar losing its reserve currency status… not in the next 10 years, or in my lifetime.
As I wrote earlier this week, the dollar continues to strengthen relative to other currencies. Especially since the pandemic and the war in Ukraine.
Also, the fact that over 90% of global oil sales is priced in U.S. dollars provides crucial support for the dollar’s reserve currency status.
Even if countries like Venezuela, Russia, and Nigeria agree to yuan-based oil contracts, where would they then invest those yuan?
The yuan is not a freely convertible currency. So you can’t easily use or invest them anywhere outside China.
And finally, I firmly believe the dollar’s strength and safe-haven status will keep it in pole position for many years to come. Even in the face of challenges from other currencies, notably the Chinese yuan.
Up next on the great yuan debate, reader Jerry K. doesn’t think it would be such a bad thing if China supplanted the U.S…
You have written that you see the dollar remaining as the currency of choice for the immediate future.
What would be the consequences if it was replaced by the yuan or some other currency? Would the United States become a second-tier country, like Italy or France?
It might not be the worst thing to happen if the dollar was replaced by maybe the yuan.
Would that mean that every country in the world would then look to China for a free handout every time they needed something, as they do now with the U.S.?
Would China be the power that countries would look to for military aid or to have their army settle a civil war or religious uprising?
It might not be such a bad thing to sit back and watch some other country take center stage for a while.
– Jerry K.
Hi Jerry, thank you for writing in, and for your comments. I believe the U.S. dollar will remain the currency of choice for many years to come, for all the reasons I outlined above.
But let’s imagine that the yuan did take over the mantle. (The Euro tried for a minute, but that’s just never going to happen.)
China’s been engaged in a debt-for-relationships exercise since the financial crisis of 2008.
Countries in that region, especially poorer ones like Sri Lanka and Thailand, have borrowed from China. In return, China got access to their nation’s economy.
If the yuan were king, yes, it would mean that more countries would amass more debt denominated in yuan rather than in dollars.
It would mean more central banks around the world would stockpile bonds backed by the People’s Bank of China, too, instead of U.S. treasuries.
And yes, I think more countries would look to China for military aid, weapons, and other forms of backing.
We are starting to see some of that with Russia and China, now.
But I don’t believe China (or Russia, for that matter) will ever assume the geopolitical role the U.S. currently plays.
That said, it’s also true that the U.S. government seems to be without a concrete plan to counter China’s efforts.
While we will need to maintain trade relations with China, America urgently needs to consolidate its global trade position. And it needs to shore up the domestic economy, from a manufacturing and production standpoint.
Finally, it’s not China’s currency taking over that worries reader Steven C. He’s more concerned about central banks’ plans for digital currencies…
What is happening with the large banks, the world central banks, and the launch of a digital worldwide currency? I am concerned, as I do not want the government having the ability to control or see what I spend my money on. Any thoughts?
– Steven C.
Hi Steven, thanks so much for sharing your concern with me, and with other readers. I’m sure it’s on a lot of people’s minds. I get the question a lot – in various forums.
I don’t want the government to see what I do with my money, either. This is why I like the idea of Bitcoin. And blockchain technology as it’s utilized by Bitcoin.
The thing is global central banks, particularly the big ones, would benefit from a central bank digital currency (CBDC).
The main reason is the very control you mention. It’s even easier to fabricate a CBDC out of thin air than a fiat currency.
And by definition, a CBDC enables the central bank to follow its path from creation to usage by individuals and companies. A traceable currency would be the ultimate goal for a government or central bank.
That said, I think we’re several years away from this transition. But it will happen. That’s why I just recorded an urgent video presentation to help you end up on the right side of this shift.
In it, I go into more detail on what a digital dollar could mean for our financial system, for regular Americans, and for our money. To watch it – for free – just click here.
And that’s it for this week’s mailbag. Thanks again to everyone who wrote in.
If I didn’t get to your question this week, look out for my response in a future Friday mailbag edition.
I do my best to respond to as many of your questions and comments as I can. Just remember, I can’t give personal investment advice.
And if there are any other topics you’d like me to write about, I’d love to hear from you. You can write me at [email protected].
In the meantime, happy investing… and have a fantastic weekend!
Editor, Inside Wall Street with Nomi Prins