Apologies in advance for this very long thread, but as regular readers know, I worry greatly about common misunderstandings of the role of reserve currencies. The author seems to assume that what makes a currency a dominant reserve currency is...
its low frictional trading costs, which is why, he believes, digital currencies, with China in the lead, will dominate international trade.
But while a low frictional trading cost is a necessary condition, it is not nearly sufficient. A quick glance at the role of the...
3/19
US dollar over the past 100 years, the period during which it achieved dominant status, makes this clear: when the world was short of savings relative to its investment needs, during the first fifty years of that period (a period characterized by the global need to...
4/19
rebuild economically from 2 world wars) the US was a permanent net provider of savings to the world.
In the next five decades, however, when the global economy was substantially rebuilt and needed to export excess savings, the US automatically became a permanent net...
5/19
absorber of foreign savings. Of course during this time the US shifted from permanent trade surpluses, when the world needed the US to supply it with food, capital goods and consumer goods, to permanent trade deficits, when the world urgently some place in which to dump...
6/19
excess production of consumer goods.
This was no mere coincidence. To me it suggests three things. First, that reserve currency status is a function of a lot more than low-cost trading. In fact given that the cost is already so low, and seems to be in permanent decline...
7/19
decline anyway, I suspect it doesn't even matter much any more.
What seems to matter a lot more is the willingness of the reserve-currency country to run large imbalances in response not to its own needs but rather to the needs of the rest of the world. As an excellent...
8/19
CFR resource shows, the US typically absorbs 40-50% of global imbalances, and the Anglophone economies — with similar financial markets all of whom, like the US, punch way above their weights as international reserve currencies — collectively...
Given that China's currency (and that of other surplus countries, like Japan) punches so far below it's weight, it is surprising that anyone would argue that there is no relationship between the international status of a currency...
10/19
and its willingness and ability to absorb global imbalances.
Second, the reason these countries are "willing" to accept major reserve-currency status has more to do with ideology than with economic rationality, driven by, and reinforcing, the disproportionate power of...
11/19
the financial sector on domestic decision-making. Like the UK in the 1920s, they are perhaps too willing to sacrifice the needs of the producer side of their economies in order to maintain the overwhelming power of the financial side. The result, as Matthew Klein and I...
12/19
show in our book, is that these reserve-currency countries have constantly to choose between allowing unemployment to rise or allowing debt to rise. They have mostly chosen the latter.
And third, while China has been promising for nearly two decades that its currency will achieve dominant reserve status within five years or so, in fact the RMB is probably the least important of the top ten currencies given China's status as the second largest economy...
14/19
and largest trader in the world, and by relevant standards its role has barely improved in the past decade and may even have declined.
Why? Because for all over-excited talk about achieving major international status, Beijing has always refused to take the economic...
15/19
steps needed to increase its role in absorbing global imbalances.
On the contrary, when Covid-19 created a demand shock in a world already suffering from excess savings and insufficient demand, Beijing had an incredible opportunity to boost the role of the RMB by...
16/19
boosting net domestic demand. Instead it implemented a muscular supply-side response that actually worsened its contribution to global demand imbalances.
In the end I do expect the international status of the US dollar eventually to decline, but not because of the...
17/19
rise of the yen (which, we were told in the 1980s and 1990s, was virtually assured) or of the RMB. Either it will decline because the US decides that it is no longer willing to absorb the huge and rising economic cost of dominant reserve-currency status to its producing...
18/19
sectors and its balance sheet in exchange for the declining geopolitical benefits and to maintain the status and dominance of of its financial sector (which may be the same thing), or it will decline when the cost of maintaining the power of the dollar helps...
19/19
sufficiently undermine the US economy, which has always been the real source of American power. The experience of the UK in the 1920s provides an accelerated vision of how that can happen.
1/2 I did a quick back-of-the-envelope calculation of currency-share to GDP-share of the top ten currencies:
NZD 9.4
HKD 8.9
SFR 6.2
GPB 4.2
Aus dollar 4.4
USD 3.6
Yen 2.9
Can. dollar 2.7
Euro 2.2
RMB 0.3
2/2
There are a lot of problems with this table, not least because it reflects a single point in time, and obviously the smaller the economy, the more likely it is to be an outlier, but it is still interesting.
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1/9 The FT's Tej Parikh makes a very important point here. China's industrial policies have involved among the greatest support and subsidies for technology in history, and we've clearly seen the benefits when it comes to advanced technology. ft.com/content/b44458…
2/9 But in the roughly two decades of their implementation, not only have we not seen a corresponding rise in productivity, but in fact China's fall in productivity has been extremely steep, and has occurred at a much, much lower level of development than it had occurred...
3/9 in other economies that followed similar strategies, e.g. Japan, South Korea, Taiwan, Singapore and Hong Kong.
The point is not that China doesn't have great technology. It is that Chinese technology doesn't seem to make Chinese workers more productive.
1/9 China's GDP growth for the third quarter came in at an expected 4.8% year on year, with the first three quarters growing 5.2%. It seems China is very much in line to report GDP growth for 2025 at – or just under – the GDP growth target of 5%. english.news.cn/20251020/f556e…
2/9 This shouldn't surprise. As I wrote earlier this year, we all know that China's GDP growth target is not a prediction. It is politically determined, and by the end of the year China will have achieved it by directing however much credit is needed. carnegieendowment.org/posts/2025/05/…
3/9 The fact that analysts are constantly changing their China GDP growth targets over the year – and sometimes by large amounts – only shows just how different the meaning of GDP is in an economy that mostly doesn't operate under hard budget constraints versus ones that do.
1/9 Bloomberg's Chris Anstey notes that "the consumer — not the producer — has been the main focus of officials in Washington. By contrast, China’s leadership, drawing on Marxist tradition, of course focused on production."
@AnsteyEco bloomberg.com/news/newslette…
2/9 There is nothing wrong, of course, with maximizing consumption. The whole point of economic development, after all, should be to improve total welfare. This was one of Adam Smith's main points.
3/9 What academic economists have real problems understanding, however, is that to be sustainable, the rise in consumption has to be supported by a rise in production, not by a rise in debt and certainly not, most foolishly of all, by minimizing the price of imports when these...
1/9 China Daily says that the next Five-Year Plan might see a change in the way local governments collect taxes, shifting collection from the site of production to the site of consumption. chinadaily.com.cn/a/202510/17/WS…
2/9 This will presumably change local-government incentives from encouraging more production to encouraging more consumption. According to China Daily, "Local governments, eager for economic growth and...
3/9 tax revenue, aggressively court the same favored industries with favorable policies. The result is a dangerous cycle of redundant construction, vicious internal competition, and ultimately, some oversupply situations."
1/5 Chinese debt continues to rise quickly, with total social financing rising by 8.7% year on year in September (more than twice GDP growth) to RMB 437.08 trillion. This is equal to nearly 312% of 2025's expected GDP (versus 303% at the end of 2024). caixinglobal.com/2025-10-16/chi…
2/5 In the first nine months of the year, TSF rose RMB 30.09 trillion. If you assume interest on the stock of debt at an average of 2.5%, this implies that it required an increase in debt in the past year equal to 17% of GDP in order to boost nominal GDP by around 4%.
3/5 Bank lending grew by less than expected, or 6.6%, a record low and down from 6.8% in August, and while many analysts have focused on the implications for credit growth, what it really shows is that in recent months there has been a shift in the locus of debt creation.
1/9 WSJ: "According to the people close to Beijing’s decision-making process, Xi’s hard-line strategy is based on the belief that Trump will ultimately fold and offer concessions rather than deploy Washington’s own significant leverage."
via @WSJwsj.com/world/china/ch…
2/9 If true, this could be a very high-risk strategy. According to the WSJ, "With hiring slowing, manufacturing contracting and prices rising, many economists say the U.S. isn’t positioned to absorb another major trade fight with China."
3/9 But if you were to rewrite the sentence as: "With hiring slowing, domestic demand stagnant and prices declining, many economists say China isn’t positioned to absorb another major trade fight with US", it would no less true.