Michael Pettis Profile picture
Apr 14, 2021 21 tweets 4 min read Read on X
1/19

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...

ft.com/content/3fe905…
2/19

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...

cfr.org/report/global-…
9/19

absorb 65-75% of global imbalances.

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.

yalebooks.yale.edu/book/978030024…
13/19

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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More from @michaelxpettis

May 30
1/8
In a piece for Caixin, Wu Ge, chief economist at Changjiang Securities, writes: "The economic fallout from the real estate slump has been masked in part by strong overseas demand for Chinese goods."

caixinglobal.com/2025-05-29/com…
2/8
"If foreign demand takes a turn for the worse," he continues, "it will become clear just how important real estate is to stabilizing China’s economy."

He's right, and he makes a very important point.
3/8
In 2021-22 China's property sector, after reaching some of the highest levels in history, began such an extended collapse that in any other economy it would have set off much lower growth and even recession. But there was no associated slowdown in China's GDP growth rate.
Read 8 tweets
May 28
1/7
Very good FT article on how China achieved its dominance in manufacturing, along with the cost both to China and to its trading partners: "Using a unique combination of industrial policy, subsidies and other state-support coupled with private sector...
ft.com/content/724431…
2/7
entrepreneurialism and ferocious competition in China’s vast market, the country was able to sharply increase the share of Chinese producers domestically and internationally in many of the sectors, in some cases matching or exceeding foreign competitors’ technology."
3/7
Because the subsidies and other state support mostly came in the form of direct and indirect transfers from the household sector, the huge expansion in China's manufacturing sector was also the flip side of the huge contraction in the consumption share of GDP.
Read 7 tweets
May 27
1/4
SCMP: "China has become the leading debt collector of developing countries, shifting from a net capital provider, “as bills coming due from its belt and road lending surge in the 2010s now far outstrip new loan disbursements”."

via @scmpnewssc.mp/gtrfe?utm_sour…
2/4
It may not seem so at first, but this has trade implications. Some analysts have argued that if the US is successful in reducing its trade deficit, China can manage the process by redirecting its exports to developing countries.
3/4
But if developing countries are going to replace any part of the US accommodation of global trade surpluses, they can only do this with rising deficits, which in turn must be financed with rising net capital inflows.
Read 4 tweets
May 26
1/7
SCMP: "Xu Lin, who helped draft Beijing’s five-year plan for decades while an official at the National Development and Reform Commission, has called...
scmp.com/economy/china-…
2/7
for China’s annual growth target to be lowered for the next five years to 4%, factoring in the likelihood of a protracted rivalry with the United States and the need to solve deep-rooted structural problems in China."
3/7
The country's GDP growth target is not the best estimate of what the economy can deliver in any given period but rather a target designed to achieve a growth rate that satisfies political needs.
Read 7 tweets
May 22
1/12
This Liberty Street account of trade makes the same mistakes most mainstream American economists make when it comes to explaining the US trade deficit.

libertystreeteconomics.newyorkfed.org/2025/05/why-do…
2/12
Thomas Klitgaard notes, correctly, that by definition the US current account is equal to the excess of US investment over US savings.

But then he insists that causality can only run in one direction: from the internal account to the external account.
3/12
In other words, he claims that US savings and US investment are both determined by domestic factors (mainly low US savings), and because the former is less than the latter, the US must turn to foreigners to fill the gap.
Read 12 tweets
May 21
1/9
Martin Wolf says the world has three options in considering the future of the hegemonic role of the dollar. One is "continued domination by the dollar". Another is that some other currency, perhaps the euro or even the renminbi, replace it as hegemon.

ft.com/content/d96568…
2/9
And the third is "a world with two or three competing currencies, each dominant in different regions."

The first option means maintaining the existing system, with all it problems, but I suspect that this may be much easier said than done.
3/9
Since the GFC, there has been a transformation of the way in which we think about the global trade and capital regime, along with a growing bipartisan consensus in the US that the costs to the US economy, and especially to its manufacturing sector, have become unsustainable.
Read 9 tweets

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