Challenges for the reserve currency

[00:00:00] If you look at China and Japan, I used to fight like hell with them because they always wanted to devalue their yen. Do you know that? The yen and the yuan. And they'd always want to devalue it. They devalue, devalue, devalue. And I said, not fair that you devalue because it's hard to compete when they devalue. But they always thought, no, our dollar is very good. This is the Debunking Economics podcast with Steve Keen and Phil Dobbie.

[00:00:26] Donald Trump earlier this year complaining about the weakness in other currencies and the strength of the US dollar. Well, the reason why the dollar is strong, and even if it goes down, he really doesn't stay there for long, is because it's the reserve currency. But could that all change? Could Donald Trump get his way? Could the dollar be losing its shine? Is the role of the reserve currency becoming less significant? And if so, what happens next? That's this week.

[00:01:03] Well, the US continues to dominate the world in terms of money because it is the world reserve currency. But could that gradually change? And perhaps there are several ways in which that could happen. And what are the consequences if it does? It's not going to change overnight. That's for sure.

[00:01:21] But maybe this is a good place to start, Steve. We talked about the travesty that John Maynard Keynes lost the argument at Bretton Woods in 1944, his idea for the bank or the idea of that was to try and minimise trade differences, trade deficits and trade surpluses. In either case, you'd either be charged interest on a loan if you had a trade deficit or you would be hit with a tariff if you had a trade surplus.

[00:01:48] Not quite. But, you know, basically there were penalties for both surplus nations and deficit nations. Yeah. And those kind of... Would it have worked, do you think? It would have worked because it was a very clever idea that the basic problem that Trump saw... Sorry, Trump, pardon me. Apologies to John Maynard. The basic problems that John Maynard saw were that trade surpluses, in his opinion, boosted the economy of countries running the trade surpluses,

[00:02:15] whereas trade deficits reduced the level of economic activity. So, in the aftermath of the Great Depression, a lot of countries put up tariffs to try to boost their exports over their imports. And he saw this as destructive, not as dangerous as the private debt bubble that caused the Great Depression in the first instance, but it meant the recovery was going to be harder. And countries were using the fact that the sum of all trade deficits is zero to boost the ones were running a trade surplus and the ones were running a trade deficit were penalised.

[00:02:45] And I know that's the exact opposite of MMT, and I'm stating it straight away because MMT is wrong on this front, and Keynes was right. A trade surplus boosts the economy running a trade surplus. So, he said in the past... I mean, that just makes perfect sense, doesn't it? Yeah, I know. I know. But MMT says exactly the opposite, and I'm sick and tired of pretending. I think it deserves respect. I'm going to be abusing it all the way through until I prove it wrong, which I'll be doing after I finish the book I'm currently working on, on how other economists have stopped up the economy by not understanding climate change.

[00:03:15] But anyway, back to the... I feel like we've got you on a bad day today, Steve. I've got a bad... I'm on the warpath and all over the bloody planet, and one of them is MMT's attitude to trade. But let's start with Keynes. But anyway, yes, I mean, it was... Okay, but the question is, I mean, I understand that, you know, if you've got a trade surplus, then you're going to do better than if you've got a trade deficit, and Keynes was just trying to even it out. And it is a zero-sum game, of course. Exactly. And that's the point Keynes appreciated, which again, MMT hasn't made.

[00:03:44] And does it mean if you do level it out in that way, so you don't have some countries getting more extreme growth than others, that globally GDP stays the same, or does it slow down because you don't get the growth potential? Keynes actually came with... One of Keynes' objectives was to bring up a system which promoted economic growth as much as possible. Of course, Keynes is writing in the 1930s, 1930s, so he had no awareness of global warming.

[00:04:11] That's the thing that it makes me now say we've got to attenuate growth or we've got to go for... We've got to reduce the size of the economy. But if you wanted to simply increase it, then Keynes' idea was to eliminate the beggar-thy-neighbour policies which were undertaken by countries in response to the Great Depression, so stop countries trying to boost their exports and reduce their imports by tariffs and so on. So tariffs were not quite ruled out by his proposal, but it's definitely very limited. You certainly couldn't do what Trump is doing right now

[00:04:39] if Keynes' idea had been adopted. And he also said that if you minimise trade deficits and surpluses, then you basically enable... In the case of government money creation, that stays inside the country where it's created. You get... And you've got a higher rate of economic growth because, first of all, you didn't have countries suffering from huge trade deficits who, therefore, couldn't build their manufacturing sector properly. And secondly, the penalties that Keynes imposed were paid to developing economies.

[00:05:09] And the idea was that the Bancor, as he called it, I would call it the terror these days to emphasise, you know, that we're all on the same planet. The idea was that a country running a surplus would have a positive balance at the International Clearing Union. A country running a deficit would have a negative balance and passed a fairly limited range. Once you started having a sustained deficit or a sustained surplus, you had to pay interest on that gap.

[00:05:38] And that interest was then sent to third world countries. And all the third world countries could do with those bankors is buy goods from other countries. So it actually was a way of promoting more economic activity and it replaced foreign aid with the benefit of a penalty against countries running sustained trade deficits or surpluses. And presumably it would also influence exchange rates a great deal. If you had a big deficit, no one's going to want to invest in – sorry, a big surplus, I should say.

[00:06:07] No one's going to want to invest money into your economy if they see you've got a big surplus. So presumably it would devalue your currency, wouldn't it? Well, in fact, now a surplus would boost your economy because you're – But if you're getting – if your surplus is then going to get curtailed by – Yeah, it would limit the – it would limit the globalization. And like one of the many things that Keynes was conscious of was that globalization was dangerous. He thought you – he wasn't in favor of autarky

[00:06:35] but he basically was in favor of relative self-sufficiency and realized that if you have too globalized an economy then you end up with a system where the financial systems becomes internationalized as well. And one of my great Norwegian systems dynamics friends, Trona Andresen, found a quote where at one point Keynes said, and above all else, let finance be national.

[00:06:59] So heavily export – a planet dominated by trade deficits and surpluses, and that's the planet we're on right now, ends up empowering the financial system because you need to be borrowing money all the time and transferring it from one country to another. When you have a balanced trade platform, and that's what Keynes wanted, predominantly countries would have relatively balanced exports and imports. So they would have much, much smaller trade deficits and surpluses.

[00:07:29] You wouldn't have the same need for finance either. Finance would be predominantly national as Keynes wanted. Yeah, which is very different to where we are today, which is where – Oh, God, yeah. – which is very much international finance. And, of course, it didn't pass in those days because the US didn't want it because the US at the time had a huge trade surplus. Surplus. And basically thought it would have a surplus forever, and it set itself up by becoming the reserve currency to destroy its trade surplus, which is what's happened over time.

[00:07:58] And now it has this massive deficit. But it doesn't want to get rid of it because it's got a massive deficit, and it quite likes being the reserve currency. And we'll talk about what the consequences were if that stopped happening. And China doesn't want it, of course, for the same reason that the US didn't want it. I mean, they wouldn't want it now because they are the one with a huge trade surplus. So they get penalized as well. So a large part of the world doesn't want this. Clearly, it's never going to happen. So when the horse is bolted, we're stuck with what we've got. Yeah.

[00:08:28] Yeah. But in terms of – I mean, the Americans, because everything the Americans get, they turn into a weapon, okay? This just seems to be part of the American psyche. So they've turned – having become the dominant currency on the planet, and therefore you need the American dollar for international trade. If you wanted to buy – if an Australian wants to buy goods from Bulgaria, it needed American dollars, okay? So that meant you had a demand for American dollars over and above the demand to buy American goods.

[00:08:58] And that meant that – that increased the relative exchange rate value of the American dollar to other currencies. And what that means is, of course, America gets a penalty in terms of its manufacturing sector. Because it might be – if it's – if the – if you started off from a level playing field where, say, China had the same industrial capability as America, of course it wasn't a level playing field in the first instance. But if you started there and then American dollar became the international currency,

[00:09:27] then that increases the value of the American currency by – you can't say how much, but let's say 30%. That means America's manufacturing sector has a 30% price penalty against the Chinese, and it will gradually decline over time. And I think that's exactly what's happened. I think it's a huge mistake for a country's currency to be used as the national currency. But it almost always happens that way because when you become politically dominant on the planet,

[00:09:54] you're also – you're militarily dominant as well. That's how you get to be politically dominant. Your currency gets used. That means your currency increases the power of your financial sector but diminishes your production system, and over time you decline again. And this has been a pattern of empires for the last 300 years. Well, the most dominant currencies are the ones who you think are going to win wars because they'll still be worth something when the war's over.

[00:10:21] Well, in fact, you get to become the dominant currency because you build weapons the other countries don't have. So the initial dominance of becoming an empire involves producing arms that mean you can defeat your rivals. Nobody has won a war by using imported weapons. You make your own weapons. It's something – some innovation in your own system that gives you a great advantage over the rest of the world. Then your currency gets used for international trade, and then you start undermining your manufacturing sector.

[00:10:49] So the biggest exporter in the world obviously is China. They're buying – they're selling a lot of stuff to the United States. The United States is buying that stuff, the US dollars for those purchases are going back to China, and then China transfers that into US Treasuries. All that – the part that the MMT misses, and this is extremely important,

[00:11:14] is that in the end of the day, it's a Chinese firm exporting to an American firm. The American firm pays in dollars. The Chinese firm receives those dollars. They can hang on to the dollars and use those for buying American-denominated assets, or they can send to the central bank and say convert 80% of this into a minbi. And what it means is it actually boosts the domestic money supply, and it boosts it in the hands of firms, which will use that to invest.

[00:11:41] Yes, because that transfer at the central bank is actually creating new in MB to transfer that US dollar. And so, yes, you have an increase in the money. Absolutely right. You've got an increase in the money supply. And they've got these – and the central bank is holding these reserves of US dollars, which amounts to about $650 billion at the moment, which, I mean, it's small, for I, compared to the total debt held by the public.

[00:12:10] In other words, the real debt for the United States, which is about $36 trillion. That's the amount of money that's been paid out over time. So they're a very small slice of that. But why do they hang on to it? Why do they hang on? Because they can buy American assets with them. And it's also – I mean, the portfolio – because we live in a totally financialized world, a huge focus of the behavior of governments as well as the behavior of private individuals and corporations is portfolio management.

[00:12:40] So they want to have a range of different currencies, particularly if you're involved in international trade. The central banks are almost always involved in what are called dirty floats. They will have targets for their own exchange rate. If the currency is going the wrong way, they'll use the buying power of the central bank to buy the currency to drive its own currency up. All these sorts of manipulations are part of how governments in general behave.

[00:13:06] But the big thing is if you're running a trade deficit, then you end up – the country running the surplus ends up with funds that it can use to buy assets from the country running the deficit. And you've seen that massively in Australia, of course. I mean, this is probably one reason I've got a different perspective on MMT, on trade to the generally Americans who dominate MMT thinking. I've seen Australia deindustrialized over the last 40 or 50 years.

[00:13:35] And a huge part of it is because globalization has undercut the capacity of the Australian manufacturing sector to produce goods and services. So I'm very conscious of how – and then what it's meant is Australian inventions like, for example, Vegemite get owned by American companies like Kraft. So you end up selling your assets. And what happens ultimately is you end up being a nation of workers where the capitalists are overseas.

[00:14:01] So you're working for American capitalists and the profit being made from Australian firms goes to American corporations. It's Americans have got more money and the dollar is stronger. So that whole process in China where they get the money in American dollars goes to an American company. The Chinese company says, well, this is no good American dollars. We don't want that. We want it in yuan or an imbi. So they pass it on to the central bank.

[00:14:28] The central bank transfers it into yuan with currency that they've created. That process of creating more currency obviously weakens the value of the yuan because there's more yuan in circulation. And the fact that they're not passing any money back to the United States, actually taking it from the United States, obviously boosts the value of the U.S. dollar. So the exchange – so China continues to create cheap goods by that process.

[00:14:57] It's part of the mechanism that enables them to do that, yeah. And this, again, when you do the accounting using Ravel – and I've done that with the European Union. I'm using the example not of America versus China but of Germany versus Italy. And one of the obvious features of the euro was abolishing exchange rate adjustments. But it also means that each country in the euro creates exactly the same currency. They're all creating the euro.

[00:15:23] When the government runs a deficit in Italy, it creates euro in Italy. When the government in Germany runs a deficit, it creates euro in Germany. And then Italy and Germany have always had differential inflation rates. Italian inflation rates, except for the Weimar Republic period obviously, have always been higher than German. So what that means is if you don't have exchange rate adjustments, and that's abolished by instituting the euro in the first instance,

[00:15:50] then over time the price of Italian goods, which are rivals for German goods, rise. And if you're looking at it – let's take fancy sports cars. For a while, the Lamborghini is going to be cheaper than a Mercedes and obviously more fun. But over time, the Lamborghini gets more expensive because of the higher inflation rate in Italy. And it means ultimately Italian buyers say, I can't afford the Ferrari or the Lamborghini.

[00:16:20] I'll buy the Mercedes or the BMW or the Audi. And what you get out of that is that that boosts the rate of growth of the German economy and reduces the rate of growth of the Italian economy. And I've modeled that. I've shown it's real. And, of course, in the case of intra-European union international trade, all of the money is converted into the domestic currency because it starts that way. They're all euro. So you don't have that effect of a fraction being held on in a foreign currency.

[00:16:49] But it shows that, again, this is one reason I'm attacking MMT. It shows the exact opposite rather than benefiting from a trade deficit, which is the argument they make that Italy would be better because of a trade deficit because it gets the goods. In fact, Italian industry develops less rapidly. If our Italian economy industry starts to collapse, German industry rises. So that's the danger.

[00:17:11] If you allow trade deficits and trade services to get extreme, the countries running trade services get more investable funds and grow more rapidly. And then you get the deficit countries end up being deindustrialized. So let's ignore MMT for the rest of this conversation. That's a good idea. Yeah.

[00:17:31] But when we come back after the break, you make that point about the disadvantage of different levels of inflation within one trading block, within one currency, two countries, one currency. Because I wanted to lead on to why don't Asian countries, if they are sick of dealing with the US dollar, why don't they start trading with their own currency?

[00:17:55] And there have been ways of looking at that, you know, whether there should be an Asian trading currency, a bit like the ECU used to be in Europe. So it's not in general circulation, but it is in circulation between businesses. It's a way of trading between businesses. Does that make sense? So you might just have answered that with that example. So we'll look at that when we come back on the Debunking Economics podcast. This is the Debunking Economics podcast with Steve Keane and Phil Dobby.

[00:18:31] So what about it, Steve? A lot of trade happens involving the US dollar simply because the US dollar is safe. So if Japan wanted to buy something from China, they might not trade through the US dollar because commercial banks will hold money in their respective currencies.

[00:18:55] Similarly, between Europe and maybe Australia even, perhaps you don't need to buy through the US dollar. But if you do, if you're a small country, then you would. Or if you were buying petrol because Saudi Arabia only trades in US dollars. And the reason for that is, well, in the case of Saudi Arabia, it's because it's the only currency they'll accept and they've pegged their own currency to the US dollar.

[00:19:23] But for those smaller countries trading that can't do that direct relationship between two banks, they're going to go through the US dollar. And that's a significant portion of all the trade that goes on in the world. And they're doing that because it's seen as safe. Oh, the fact that there's old systems are built up to use the American dollar. So SWIFT, for example, which is a telecommunications protocol rather than a money transfer system. It's a signal system. It's exactly like the phone numbers.

[00:19:53] It's not actually the phone call. It's how the phone calls are connected. Yeah, that's right. Yeah. So that's the use of the American dollar. And therefore, you need to be converting your currency into the American dollar to be buying goods from anywhere else in the world. And as you say, a large country can get around that. So we're seeing a lot of trade now being bilateral in bilateral currencies.

[00:20:14] So Iran exporting to China, for example, and getting paid in the exchanges that use their two currencies and bypass SWIFT. Again, this is because Americans turn SWIFT into a weapon. One of the things they did was they banned Iran from using SWIFT. So Iran had to find an alternative means to get paid for its oil, which it did. And if you use something as a weapon, people aren't going to use it as a tool. This is the big mistake that America has made over time.

[00:20:43] Unless there's a financial advantage to them. I mean, so people who use the dollar, perhaps, because sometimes it's cheaper to convert to the US dollar than it is to go between two currencies. So the spread between, I don't know, between Myanmar. What is it that they use in Myanmar to the US dollar? It's going to be, you want to go from Myanmar to the Thai bar, for example.

[00:21:07] You'll probably go through the US dollar because the cost of going from whatever it is in Myanmar to the Thai bar is going to be more expensive than taking each of them via the US dollar. So it works out cheaper, I think. That's part and parcel of it because of the spreads between those currencies. Yeah, it is. But given how badly America has managed the monetary system, I mean, the British never tried to turn the pound into a weapon. They didn't ban particular countries from using the pound.

[00:21:37] This is a very big American type of behavior. So having set up a system which benefited their financial system but penalized the manufacturing sector, they've been the military industrial complex. So that's something which uses American things. Let's make it into a weapon. So they ban Iran from using SWIFT. There are numerous countries they do it to. So all this, even though it is more expensive to go for bilateral trade and you don't have the same mechanisms existing,

[00:22:05] America is actively encouraging countries to find some alternative to their system. So even Bitcoin is being used during direct currency transfers between different countries. So I think… Well, it's going to be the interesting thing, isn't it? What role technology, whether it's Bitcoin or whether it's just the technology that sits behind Bitcoin, but this idea of just trading over the Internet using direct connections rather than sort of like centralized connections.

[00:22:35] That's what is bad, isn't it? So, but why wouldn't Asia, given all of that, if everyone's saying, well, okay, dealing with America is problematic, why wouldn't Asian countries say, well, okay, let's do something like the old ECU. So if Thailand wants to trade with Myanmar, they wouldn't trade via US dollars. They would trade via some sort of Asian currency. So that's the question.

[00:23:01] You partially answered it with your example between Germany and Italy, is there will be countries that will be too dominant. Japan, Korea, China would be three of them, for example. Yeah. And, I mean, in that sense, the neutral idea that Keynes had, having a unit of account rather than a currency, and one which everybody, every country would have a floating exchange rate to. People criticize the bank or, again, I hate to say it, but it's an MMT thing. We'll criticize it and say, oh, that's fixed exchange rates.

[00:23:30] It doesn't have to be fixed exchange rates. You could have floating exchange rates and a unit of account as well. So we could easily go across to a floating exchange rate with a neutral account system. That's what I hope countries are going to put together. Because, I mean, if you look after, why did we almost get a reformed monetary system after World War II and the Great Depression? It was because of World War II and the Great Depression.

[00:23:54] There were such horrific experiences that there was a sense of goodwill amongst governments after the war was over to say we should reform the system to avoid setting up the same situation as we saw when the British pound was the dominant currency before World War II. What happens? We get the American dollar. It's the same system, only worse.

[00:24:16] So I hope that having learned how badly a national currency has performed for international trade now, when we can see it in a way we could never see this visibly before because of electronic data and so on. It's hopeful that we would get enough, not so much goodwill towards the rest of the world, but badwill towards America to say let's get these bastards out of the cage.

[00:24:43] Let's create a neutral currency for international exchange and enable that to be the way one country trades with another rather than having to trade through the American dollar. So I don't think it will be an overthrow of the American dollar, but I think it's feasible that there will be an alternative system designed which has got the features that Keynes put forward and that will slowly replace the American dollar because the Americans, as usual, turn everything into a weapon. Why should I hold the pointy end of the gun? Because you've got the trigger in your hands.

[00:25:13] So in that example, how would it work then? So China was buying something from Myanmar. Would they – or selling something to Myanmar, that's the other way. Because they'll say, well, we don't want the Myanmar currency. That's useless to us. It's a liability hanging on to it. Why do we need that?

[00:25:33] Yeah, what happens, the currency – the International Clearing Union operates – would operate slowly in whatever currency was used, whatever unit of account was used inside of the Keynes called it the bank, or I'll call it the terror because I'm pushing this idea. So every country, Myanmar would have a terror account. China would have a terror account. If China had an export surplus with Myanmar, then it would build up positive balance in its account. Myanmar would have an overdraft.

[00:26:01] If there is an extreme imbalance, like 1% or 2% of GDP – of course, at the moment, trade deficits are up to 10% of GDP. But once you get about past 1% or 2% of GDP, then the penalties would kick in. And China, if it had an export surplus, would have to pay an interest bill. That would then go to a reserve account that the ICU created, and the funds in that account would go to developing countries, which would include Myanmar.

[00:26:31] If you just did that without that last part, then China would have that surplus, and China would invest it in that same Asian currency in the rest of Asia, which is sort of like the whole Belt and Road approach. They would just use that as a – which could be problematic. They'd use that as a way basically to buy up as much of – within that region as they possibly could because they've got such a huge trade surplus. Yeah, and that's why Keynes wanted to prevent the trade surpluses.

[00:26:58] I mean, a large part of China's industrial development has been driven by a huge trade surplus. The trade surplus has been up to 10% of GDP. And with that, that means they're getting an additional 10% of GDP to invest in advancing their goods. And that's what they've done. They haven't gone out and bombed the hell out of other countries, which is the American use of the American dollar. They've used it to dramatically improve their infrastructure and their technological level.

[00:27:26] So this would penalize countries like China, and that's the problem because America had exactly the same attitude. They didn't want to have a neutral currency because they thought we've got the trade surplus. We'd be penalized by Keynes' scheme. We can't have that. Well, by not having Keynes' scheme and by putting the American dollar into that central role, they set up – it wasn't the only factor, but a major factor that led to the deindustrialization of America. And that led to Donald Trump, and I can't think of a better way to say what a bad idea that system was.

[00:27:56] So I can't see China buying it for that very reason because they've got such a big surplus and they're selling to the rest of the region. But I can see them saying, yes, but we do like the idea of not getting taxed with just being able to have that currency that we can then use to buy stuff or buy – we just buy as much as we can from the rest of the region. And that's going to help the region develop. And why would we be helping the region develop if we weren't going to have a chunk of it? So it's sort of – it's almost like Chinese imperialism that's the result of all of that.

[00:28:25] Whether that's a bad thing or not, I don't know. Because perhaps it helps with the growth of Asia at a greater rate, but it also makes China an even more dominant global economy. Yeah, and I think you're quite right. I think in this particular case, China has done so well out of its trade surplus that it's not about to surrender it. So they would be against bringing up any system of penalized surplus nations. And we're back into the same situation we were after World War II where America made the same type of decision.

[00:28:54] So I think it's going to be something other than international agreements that lead to an alternative. In the meantime, we're likely to get plenty of bilateral trade using bilateral currencies rather than going through the American dollar. Well, yeah, and increasingly so. So in China – sorry, in Asia, they do have a local currency settlement system.

[00:29:18] So it's like just a way of just managing the exchange without it – it's just managing those bilateral agreements, I guess, by computer. And you can see more of that happening. So it doesn't necessarily need to go through the middleman. It just becomes an online system. It's like the euro is a bit useless now, isn't it? Because who cares about having a single euro? I mean, part of it was for tourism purposes.

[00:29:42] But who cares whether you're using a different currency in Italy to what you're using in France? Because you're just flashing your credit card and swiping and paying. It's no harm to you that, you know, apart from the fact you've got to pay exchange rates. Well, you're coming from the UK or wherever. You've got to pay exchange rates for the euro anyway. So we're in this world where it's less important. So it's all the more reason why the dominance of a reserve currency will start to disappear.

[00:30:11] But also you start to get these other systems which are placing less requirements for the US dollar as well. And then you've got, well, we're going to be using less petrol, less oil. So the petrodollar is going to diminish over time as well. All of these are pointing to the reasons why demand for the dollar may be slowly, but it will be – well, it's already started to wane. And that's the start of the trend. So what would happen to America?

[00:30:41] Well, what is actually turning up in the data is seeing a decline in the value of the American dollar. And what that can mean, of course, is that America is not a major importer if you can be compared to other countries in the world. But it still imports a substantial percentage of its consumption. So you're going to get important inflation coming out of this. And, I mean, the big danger is that – and, again, I've got to bring up MMT's nonsense on trade here. They say that exports are a cost, imports are a benefit.

[00:31:10] And they basically say you should exploit seniorage. That's fundamentally what they're saying. So you make – you create the money very cheaply. It might cost you $1 to make $1,000 in terms of the cost of money creation. But it costs you $700 to make a car, a device you sell for $1,000. So you come out, you know, $700 to $1. Whoopie doo, aren't we great? We get the goods. They get the money. That type of argument. But what it means is you degrade your manufacturing sector over time.

[00:31:36] You lose the capacity to make investment goods in particular because you're going to be buying consumer goods. If it's cheaper to buy foreign goods than domestic and you're exploiting senior rich to do so, you're not going to be buying investment goods because you only buy investment goods to make goods domestically. So you're going to buy consumer goods. That means your investment sector runs down. You have less industrial capability over time.

[00:32:00] And then if you get to the point where people say we're sick of your dollar, we're being screwed over by your financial system, let alone your military-industrial complex, we're not going to accept the American dollar for international – we're not going to use it for international trade anymore. What that means is you end up with no – you lose the buying power that you have as a reserve currency.

[00:32:19] And what you've got left is your manufacturing sector, which has been denuded by 30 or 40 years of trade deficits and American corporations exploiting cheap wages, moving production offshore and creating the Rust Belt back in America. You end up with nothing. And this is in some ways what Britain went through, even more severely, of course, because they got damaged during World War II.

[00:32:44] But they ended up with no – the manufacturing sector helped them survive World War II. But they were already reduced in capacity against the German and Japanese and American in terms of overall productive capability. When they lost the reserve currency status as well, then they had nothing. The rundown manufacturing sector. So it's very dangerous.

[00:33:10] And to me, becoming a reserve currency is part of what sets an empire up for a fall. And America has set itself up for it again. And it's starting to happen. So, I mean, the other part of it is just this whole idea of exorbitant privilege disappear. So in the United States at the moment, if they issue more – if they get into heavy debt, I mean, in a way, that means they're issuing more bonds, more treasuries. There's demand, international appetite for treasuries.

[00:33:39] There can't be too much. Yeah, I'm not worried about them. I mean, the bonds to me is the furphy because people mix up the primary and secondary markets. And when you get some bond sales by – if countries start dumping the American bonds and selling American bonds in return for dollars and then using those dollars to exchange for another currency and so on, that has no effect upon the primary market.

[00:34:05] So people think that the declining dollar and people selling American bonds on the secondary market is going to affect America's capacity to finance this deficit. That's just wrong. It's not understanding the accounting structure. Yeah, okay. This is for another discussion this. But if the primary market is that big and the secondary market, like all those U.S. treasuries all around the world, is that big, the price of that is going to influence the price you get. It has a bit of influence.

[00:34:33] But again, the capacity – again, this is why we've got to understand the accounting of the financial system, not just American dollar but globally, to realize why that's not effective. Because if there was $20 trillion of bonds held by foreign corporations and they said we're going to dump them on the market, the Federal Reserve could buy them all tomorrow. Because all it has to do is credit the accounts with the sellers with American dollars and put the bonds on its books as assets at the same time.

[00:35:02] It literally has an unlimited capacity to defend the dollar against that sort of attack. But the secondary market will have some effect in – it will influence how much the Federal Reserve will feel inclined to move interest rates up or down. But the main thing which determines demand for primary market sales is not what's going on in the secondary market. It's the rate of return on reserves versus the rate of return on bonds. But that primary market is more domestic than international, of course. I mean, you know.

[00:35:31] Yeah, it starts over – once the bonds are purchased – I mean, to purchase bonds in the primary market, you must have an account at the central bank. Of course, foreign central banks have those accounts because that's how they trade with each other. So, it's – foreign central banks can take part in those primary auctions. But the whole idea that if they don't do it, the demand is going to collapse again is just completely wrong.

[00:35:56] Because when you look at the scale of outstanding reserves – and I just did these numbers yesterday for a podcast – the scale of outstanding reserves is 360 times the size of the average auction. Okay? Now, that therefore means that, you know, less than one quarter of – about one quarter of 1% of the existing reserves are necessary to finance each auction.

[00:36:20] So, that's so trivial that there's just no danger of the primary auctions not being fully met. There may be price effects coming out of it. But generally speaking, the fact that there are bonds held by foreign countries is not a weapon against America. Okay. Simplest argument to finish with, which we've touched on already.

[00:36:41] If there's less demand for the U.S. dollar, because everyone's finding ways to avoid it in international trade, obviously less demand means a weaker U.S. dollar. China wants a weak currency. How does it all balance out? Who wants a strong currency these days? Yeah.

[00:37:00] Well, one of the fascinating things about history – like when the war – the Second World War ended, I think the ratio of yen to dollars was set at 360 to 1. Okay.

[00:37:15] Then, because Japan industrialized so well by following the advice of Deming, who was an American that Americans didn't listen to, that's where just-in-time manufacturing was developed and all the improvements that he put in to reduce defects and therefore increase both quality and speed of production and reduce cost. It finally fell to 100. So – and that what that meant was, of course, when Japan had to buy the inputs it needed for production, it was paying less for the inputs.

[00:37:44] So there's an advantage to a strong currency to some extent. But you've got to maintain a trade surplus to be able to do that. And Japan has maintained the trade surplus where, of course, America's in a massive deficit. Well, we'll watch it happen, I guess. And is there any way that America can stop it? And are they aware of it? And, you know, what policy decisions would they make to try and stop it? Obviously not.

[00:38:06] I mean, remember I had a session on Piers Morgan's show not long ago where the chief – one of the – the guy that Trump wanted to have made Federal Reserve chairman. I've forgotten his last – forgotten his name now. But he said, we're the good guys. I mean, Jesus Christ. Talk about delusional. So I don't think the top levels are aware of it. But there are plenty of commentators who are looking at it and saying the American dollar going down, being useless for international trade.

[00:38:35] We've exploited our exorbitant privilege too much. And we're now paying the price. And that price will turn up in imported and inflation. Yeah. Well, well, what should happen? As you say, end of the empire. Yeah. And perfect timing. The 250th anniversary is July the 4th. It's not going to happen in a day, though. It's not going to happen in a day. It's pretty terrible. Trump is in charge. Maybe it could. Yeah. Hold my beer. Okay? All right, Steve. We'll catch you next week. Okay, Matt. See you then.

[00:39:04] The Debunking Economics Podcast. If you've enjoyed listening to Debunking Economics, even if you haven't, you might also enjoy The Y Curve. Each week, Roger Hearing and I talk to a guest about a topic that is very much in the news that week. It's lively. It's fun. It's informative. What more could you want? So search The Y Curve in your favourite podcast app or go to ycurve.com to listen.