Thread by @michaelxpettis

1/12
I fully agree with Jim O'Neill that "the dollar plays far too dominant a role in global finance", and that it would be better (for the US above all) if the BRICS were able to manage to cut back its role dramatically.

ft.com/content/f8f3b2…

2/12
That's because a less dollarized world would mean that the US would not have to run such large deficits in order to balance the world's demand for dollar assets, which itself is a consequence of very weak domestic demand in the surplus countries.

3/12
But it is not clear to me that O'Neill understands why USD is the dominant currency, which is also why, aside from some huffing and puffing over currency indexing, the BRICS will never do anything that seriously undermines the USD system.

4/12
Imagine for a moment that BRICS decided not just to index some trade in one of their currencies but to balance trade surpluses, perhaps with RMB. This means that foreign countries must be allowed to buy and sell RMB at will to match their current trade and capital needs.

5/12
By definition China would have to give up control of its capital account, which ultimately means reversing its excess of savings over investment, something it hasn't been able to do for decades. It also means, of course, giving up control of its trade account.

6/12
As I explain in my ROKE piece, for China to reverse its structural excess of savings over investment ultimately means choosing between surging unemployment and even more debt as it completely transforms the structure of its economy.

elgaronline.com/view/journals/…

7/12
Is China eager to do either? No. On the contrary, during a period of (still very small) net financial inflows in 2020-22, the PBoC warned many times about the potential risks these posed for China. And yet some analysts say that the PBoC wants to remove all restrictions.

8/12
It is surprising to me that so many analysts think that changing the dominant global currency is like changing the color of your shirt: aside from looking a little prettier, nothing fundamental in your life will have changed.

9/12
I think it is because they believe shifting from structural surpluses to structural deficits is a minor thing, a matter of importing a little more. That shows how little they understand the relationship between a country's internal account and its external account.

10/12
A shift away from USD requires a major shift in the patterns of global trade and global imbalances. I can see why the US would benefit from such a shift, but why would the BRICS undermine the very system that accommodate their mercantilist growth polices?

11/12
If the structure of global trade and capital hadn't been so profoundly determined by the role of USD, it couldn't have become so entrenched and so difficult to dislodge. But if it is, then how can anyone talk of dislodging USD as if it were just a matter of preference?

12/12
Because I believe that USD dominance is bad for the world, and especially bad for the US, I am all in favor of the US taking aggressive steps to reduce the global role of USD, but I am not so foolish as to think that this wouldn't be very painful for surplus countries.