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Michael Pettis

Michael Pettis

Jan 20
16 tweets

1/15 Since the 1960s few arguments in international finance have been as exciting as "the coming demise of the dollar", but these arguments seem always to founder on the same set of mistakes.…

2/15 That is why it is hard to find anyone who specializes in international financial flows, and who is fully familiar with the mechanisms and history of the global balance of payments, making this argument.…
3/15 Pozsar argues, for example, that countries like China are running their biggest surpluses ever (true) but are recycling less and less of these surpluses into dollars (not true) and more into geopolitical investments such as funding the BRI and other developing countries.
4/15 In fact for all the over-excited talk of China's debt-trap diplomacy, China's developing countries lending peaked in 2015-16 when it learned, thanks in large part to Venezuela, just how risky this kind of lending can be, and has since then reduced flows substantially.
5/15 He also discusses the PBoC's digital currency as a major indicator of this change, but here too he is very mistaken. Anyone who lives in China knows that for all practical purposes money was digitalized years ago. No one except the very elderly carries cash.
6/15 And yet no one uses China's digital payment system abroad simply because Beijing refuses to give up control of its capital account (and with it, inevitably, its trade account). Digital currency won't change that.
7/15 The irony is that while Pozsar correctly notes that China's trade surplus is bigger than ever, he doesn't realize that this makes China even more dependent, and not less dependent, on the willingness of China and the rest of the world to hold dollars.
8/15 The key to global currency "domination" is not how excited the political elite say they are about having their currency dominate. It is how willing they are to allow clear and transparent foreign ownership of domestic assets and, even more importantly, how...
9/15 ...willing and able they are to give up control of their capital and trade accounts. Beijing has made it clear it wants none of those things, and while I think they are right to reject these, it also means that the RMB cannot really act as a major international currency.
10/15 So can we at least agree that China is reducing the dollar component of its reserves? Even that is questionable. China's reserve accumulation since 2017 has occurred indirectly, through state-bank purchases of dollars. Without knowing the precise currency composition ...
11/15 ...of these assets, we have no idea whether or not the amount of dollars China is holding has increased or decreased, but simple B-o-P arithmetic tells us that China's rising accumulation of foreign assets was mostly matched by rising foreign accumulation of US assets.
12/15 Poszar argues that the US is about to lose its "exorbitant privilege" to countries like China. He is wrong on two counts. First, the US does not benefit from the dollar's global role. Wall Street, owners of movable capital and the foreign affairs establishment do benefit.
13/15 But their exorbitant privilege comes at an exorbitant burden for American farmers, workers and producers. The dollar's global role is simply the obverse of its role of absorber of last resort of excess savings, mainly through soaring debt.…
14/15 Second, and related, is that this why conditions won't change until Washington itself takes much-needed steps to reduce the global role of the dollar. Pozsar argues countries like China, Russia and Saudi Arabia want to lead the way to a world less dependent on the dollar.
14/15 In fact those countries really want a world in which they can maintain the very high trade surpluses that boost domestic growth and especially benefit the exporting elites within their domestic economies.…
15/15 That means that what they require above all is someone to run the correspondent deficits. As long as the US, and only the US, is willing and able to play this role (not for much longer, I hope), the dollar will dominate the world of international trade and capital.
Michael Pettis

Michael Pettis

Senior Fellow, Carnegie Endowment. For speaking engagements, please contact me at
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