China has been providing low cost goods to America for more than three decades, it has enriched many, and impoverished others. These low prices however have allowed America to largely avoid the realities of inflation resulting from the prolific money printing of successive administrations since the Nixon presidency. The American government appears to work on the assumption that as long as you don’t run out of paper and ink you can solve all your economic problems. All thinking people know that to be ridiculous.
The $US has enjoyed the privilege of being the worlds reserve currency since the end of WW2. This has ensured the continued demand for $US as a medium of exchange in international trade. It has endured as such largely because of the absence of any alternative currency. The 1973 accord with O.P.E.C. required all oil was sold exclusively in the dollar. When alternatives were tried, Saddam Hussein selling Iraqi oil in Euros, or Gaddafi and the gold backed Dinar, bad things happened to them. But alternatives do now exist, China’s enormous trade flows with Russia and many of it’s other partners are now conducted in reciprocal currencies. The 140 participant countries signed on to China’s Belt and Road initiative will also avoid trade in dollars as the project develops further. America’s continued weaponisation of the dollar against any country who doesn’t bow to it’s will has undermined any remaining confidence the dollar enjoyed. Low oil prices and the decreasing demand has also hit the dollar hard. It is a simple fact, when demand drops, so does the dollar, and the demand that sustained the $ is no longer there.
This conversation is not new, Economists have been predicting the collapse of the $ for 50 years since the Nixon removed the $ from the gold standard. Hence there is an element here of “The Boy who cried Wolf”. But things have changed. China owns 1.2 Trillion in U.S treasuries, Japan is the largest debtor with 1.3 Trillion owed, Saudi Arabia also has huge holdings but exactly how much is not known. In common with all countries holding American debt they are seeing the unrestrained money printing rapidly erode the value of their holdings. Understandably no one is very happy with the situation and alternatives are being used where ever possible. Japan and Saudi are effectively American “client “states” and as such are unlikely to rock the boat, but China isn’t. Should it wish, China could dump it’s dollar holdings and plunge the dollar into a hyperinfaltionary spiral overnight.
The weaponised dollar, is now pointed back at America.
It is worth acknowledging here that the relationship between the U.S. and China is at it’s lowest point in recent memory. We would have to go back 70 years to the Korean war to find a time of comparable tension. The relationship has never been good, ( a spectacular understatement ) but despite that, diplomacy and reciprocal trade continued. However recently several major red lines have been crossed, most notably the U.S. abandonment of the “One China Policy”. China and it’s people know they are under attack from America, and they have had enough. They have reluctantly accepted that there is no future in trade with America. De-coupling is already happening in Technology, Media, Banking, and the supply chain. And in all those sectors, and more, it is happening very quickly.
Can China do this?, yes it can. While America has been tearing itself apart these last few months China has signed the two largest trade deals in history, one with the E.U. and one with the A.S.E.A.N group of countries. America is now only China’s 3rd largest trading partner. The Belt and Road Initive is aimed at developing new markets with 140 countries who historically lacked the infrastructure required to develop their economies.These will all be new markets for Chinese goods and technologies. It is investing in future long term growth, developing new economies and markets. America produces nothing China needs that it can’t get elsewhere. The sanctions placed on computer chips caused a disruption to certain sectors but those disruptions proved only a very short term problem that it has moved quickly to address. But America does need China, it needs the rare earths required for military production, automotive and high tech manufacturing. All would come to a standstill without the rare earths which China has essentially monopolised. Additionally, 85% of all pharmaceuticals used in the U.S. and their precursors come from China. Imagine what America would look like if supplies of Pharmaceuticals were stopped. The truth, however unpalatable is that America needs China, China no longer needs America.
What is now happening in China should alarm all Americans business’s. China no longer wants the dollar, China has too many dollars it doesn’t need anymore of what it regards as increasingly worthless currency for tangible products. Where trade is still being conducted many Chinese companies are no longer pricing their goods in Dollars, they are pricing in RMB and want to paid in such. For the last 40 years, dollars came in and where exchanged into local currency, now, if you want Chinese goods, first buy RMB with your dollars.
And China is not alone, widely unreported is the fact that many countries who are considered allies of America, The U.K, France, Germany, India and Mexico are also moving rapidly away from the $ and the institutions that sustain it. The swift payment system, the I.M.F. the World Bank and the Bank for International Settlements are all now being replaced by more equitable alternatives.
Trump’s tariffs have not affected China or hurt it any way, the Tariffs have been paid by the American consumer. It has just added further inflationary pressure on the economy. But that is the tip of the iceberg. Biden’s new $1.9 Trillion stimulus( actually a bailout ) will plunge the $US to new lows. If that is not alarming enough, consider this, 40% of all the $US currently in circulation globally have been created in the last year. The $ has plunged in value some 15 % over the last few months, and it continues to decline. We can only hope that as inflation inevitably increases it will be gradual, the consequences of a more rapid decline are unthinkable, yet most certainly possible.
Denial appears to be a U.S. Government policy, but denial is not a useful strategy for the private sector. Companies must deal with the fact that global supply chains may soon to be a thing of the past for American companies. As the $ continues to decline it’s reduced purchasing power is making foreign products uneconomical. The one positive is that the companies who have recognised these facts are bringing their supply chains home. Re-shoring makes good economic sense, because it is possible that in the near future, the only people who will accept the dollar are likely to be other American companies….