Do we need a reserve currency?

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[00:00:20] I was very happy at his Economic Club of New York speech in August, when he reemphasized the importance of maintaining the dollar reserve currency status. So a strong dollar is credibility and a rule of law that is backing it up. We want the dollar to be strong. What we don't want is other countries to weaken their currencies, to manipulate their trade.

[00:00:49] This is the Debunking Economics podcast with Steve Keen and Phil Dobbie. Well that is the new US Treasury Secretary Scott Besant talking about having their cake and eating it. He and Donald Trump, well they want a strong dollar because that shows strength. But they don't want other currencies to be weak because that makes their products cheaper. The other products, not America's.

[00:01:15] So why is America the reserve currency? Do we need a reserve currency these days? And would America be better off out of it if it wasn't the world's reserve currency? We'll look at all of that this week on the Debunking Economics podcast. Well the US dollar has been the world's principal reserve currency since the end of World War II and is the most widely used currency for international trade.

[00:01:43] Will it always be thus? And what does it mean for the US if it doesn't? But also what are the repercussions now of it being the reserve currency? Now Steve we've spoken about how it all started but there's no official declaration is there? I mean there's nothing written down to say henceforth the US will be the reserve currency. It's just because it's seen as a safe currency and it's readily available. Would you say they're the two key requirements to being a reserve currency and it's got both of those?

[00:02:11] I think there shouldn't be a reserve currency. I think we should have, what Keynes' original idea back at Bretton Woods was to have a currency he called the Bancor and that was just basically a… A neutral currency in effect. Well it wasn't even a currency. The idea of the Bancor originally was that you would start with… Every country in the world would start with a zero balance of Bancors and every country's currency would be expressed in…

[00:02:38] You know there'd be a ratio between the currency and how many Bancors you got as well. So if you wanted to buy, if you had a Venezuelan company that wanted to sell oil to America, then the Americans would need to send dollars to the Bancor and get an exchange rate for that and then send Bancor to the Venezuelan government or through the Venezuelan account at the…

[00:03:07] So we're speaking about… Yeah, make that. So it acts as a sort of like an intermediate currency that everybody trades in. I mean I didn't want to go there straight away but you've started off down that road so let's carry on down it. How do you determine the exchange rate on that though? How many US dollars to get to the Bancor? Well it would be based on the strength of each economy. So like the American, there would have been a ratio worked out in terms of the size of the economy itself.

[00:03:31] And the exchange rate probably would have taken on from the historical value of the currencies at the end of World War II. And then you would have, you know, they might have one American dollar worth one Bancor and two British crowns worth one Bancor. So the exchange rate had to be worked out first of all. But then once it occurred, you didn't actually get Bancor as a currency created in the standard sense. And the accounts at the IMF were going to be overdraft accounts.

[00:03:59] So if America, if Venezuela ran a trade surplus with America, then Venezuela would accumulate Bancor and there'd be an identical negative Bancor for that amount in the American account. And then what Keynes had set around that were limits on how negative you could go and how positive you could go in your balances at the IMF. And if you went too negative, you were being forced to devalue.

[00:04:24] So you'd be required to go from, let's say the Americans ran a persistent trade deficit, then they would be forced to, as they'd run out, they'd hit the limit of the negative Bancor they could have in their overdraft account at the International Monetary Fund, or what became the IMF was supposed to be the sort of clearinghouse for global trade. And so you'd be forced to go from, say, $1 per Bancor to, say, $1.10 per Bancor.

[00:04:49] And then that therefore made imports for you from any country in the world more expensive. It made your exports cheaper. So that was a stabilizer for countries that were running. Which actually, ironically, we were quite good for the United States right now. Yeah, this is the thing. I think what America did was great for its ego and bad for its body. Okay. So then that's typical for Americans. Like, that's the only reason you can explain McDonald's hamburgers. Yeah. But then the- Or Donald Trump. Or Donald Trump. And all the fattening elements in the American culture.

[00:05:19] But for the surplus countries, countries running a piston-side surplus, they were ultimately required to pay interest on the surpluses they ran past, I think, about a 2% of their GDP trade surplus. And that interest is paid to developing countries. So it was going to be a way in which international trade would also lead to international development funds for underdeveloped economies. So it had all worked out. It had all worked out, didn't it? It had all worked out. Curious why no one's talking about it now.

[00:05:48] Why it's sort of like- Well, in some circles there are. I mean, in some ways the BRICS is a similar sort of proposal. But that's going to create a basket of commodities. You would actually have a- You know, there'd be a basket of commodities against which the various currencies were traded. But Keynes' idea was to get past all that stuff and to stop excessive trade surpluses and trade deficits. Yeah. All it would take, though, isn't it? It would take Europe and China. Oh, maybe China wouldn't want to be part of it because they've got too much of a trade surplus, though.

[00:06:18] Would they- I mean, they could lose out, couldn't they? Well, I mean, the scale of trade surpluses and deficits now is frankly ridiculous. You've got countries like, not necessarily China's actual surplus, but some countries like I think the Netherlands that sometimes has had a surplus of 10% of GDP. And, you know, Germany, Japan, South Korea, all the countries that specialised in export-oriented industrialisation successfully. And then, you know, China's the biggest that's done it.

[00:06:45] And that's, you know, something of the order of 20% of the world population. So, you can't sneeze at what they've done. And that policy benefited them in the sense that they accumulated these huge trade surpluses, which have financed a lot of the investment they've done domestically. You know, if you do the mathematics, which I do in my Ravel software, of what a trade surplus means, a trade surplus is identical to a government deficit.

[00:07:15] It creates money. Okay. And what it does, it creates money, not in a sort of general sense that a government deficit does, where, you know, fundamentally a government deficit is spread across the whole country. A trade surplus is focused on, in particular, companies that are making a product which wins on the global market. So, what that means is they get more funds for investment and they can continue growing.

[00:07:38] Now, that reality was just left out of the thinking of people like Milton Friedman, who was one of the main ones arguing in favour of a floating exchange rate and abolishing the gold standard. And the argument they made when the gold standard was abolished, this is back with Nixon after 1971, the argument was, well, what will happen is that international trade will be balanced by market movements and exchange rates. So, if the country runs a trade surplus, its exchange rate will be bid up, making its exports more expensive.

[00:08:08] When running a deficit, the opposite will happen and ultimately you'll get equilibrium. Well, whoopee-doo. Well, look, now we've got a country with a- 50, 60, yeah, we've got massive trade. Anyway, the pricing mechanism in the way that neoclassicals think it operates does not operate, period, and did not do what they thought it would do in international trade. So, Keynes' idea of getting rid of these huge trade services and trade deficits and limiting what he saw as beggar thy neighbour policies as well, that's gone out the window.

[00:08:36] And then, in some ways, that's the reason why we're seeing Trump put up tariffs now because America's necessarily run, this comes back to being a reserve currency, it's necessarily run a continuous balance of payments deficit. And it's been de-industrialised by the process. Yes, I want to look at that in a second. But by Friedman's reckoning, the US dollar will be a lot weaker now, wouldn't it? I mean, the fact that we've got a strong US dollar with a big deficit just shows how wrong he was. Yeah, absolutely. And there's all sorts of reasons for it.

[00:09:06] I mean, for a start, and this is one of my great friends, John Harvey, who teaches down at the university in Texas. I think it's called the Christian Texas University. And John's a great non-orthodox thinker in economics, post-Keynesian. And he took the standard model that economists do of all this stuff, you know, intersecting supply and demand curves and focusing just on the goods market and said,

[00:09:30] that's the sort of logic that economists have, that a trade surplus will mean your currency gets revalued up and a trade deficit means it's going down. But he then, he's doing that on the left-hand side of a blackboard and then drew a dotted line all the way to the right-hand side and said, now let's look at finance. And what you've got is finance flows are far bigger than trade flows. And that's the speculative element determines the value of the currency. And that overwhelms the trade thing.

[00:09:56] That alone is a reason that the mechanism hasn't worked the way neoclassicals thought it would. Well, also because a lot of U.S. dollars obviously are being used for transactions around the world that just don't involve the United States at all. And so here's the curious thing. There's 21.5 trillion U.S. dollars in circulation, which is about 65,000 for every man, woman and child in the U.S. If we compare that to 3 trillion pounds in circulation in the U.K., that's about 45,000 pounds in the U.K. or overseas.

[00:10:24] So allowing for the exchange rate, that means the U.K. is, there's about 56,000 per person versus 65,000 per person in the U.S. So no big difference. And yet, if these U.S. dollars are being used all over the world and it's sort of like the, you know, preferred reserve currency, wouldn't you imagine there'd be a lot more U.S. dollars in circulation? I think you better check out the euro dollar market as well. No.

[00:10:53] Because that's where, like the domestic holdings of American dollars, I think again, I haven't got the stats in front of me, but I expect dwarfed by international holdings of American dollars. And that's precisely because the American dollar is the reserve currency. So if you even have the Venezuela America example, if Venezuela, if Turkey wants to buy oil from Venezuela, then it has to convert the lira into dollars.

[00:11:18] And the transaction actually goes, according to some of my friends who studied the technical details more deeply than I do, almost all these transactions are settled through the New York Fed. So you have to have an account at the New York Fed to actually go through and do that buying of Venezuelan oil by Turkey. So what that means is there's a demand for dollars over and above the demand for American goods.

[00:11:43] And that does have an impact because that means the value of the dollar is kept higher than it would be if it was just a trade-based valuation. Yeah, and that was the point I was trying to make. I mean, that figure, that 21 and a half trillion, I thought it was in circulation in total around the world. It's in the Fed database. I just thought that's how many U.S. dollars there are, not just contained within the U.S. because, I mean, how would you know? So it seems like, so I would have thought there'd have to be a lot more, a lot more than there are, for example,

[00:12:12] UK pounds in circulation relevant to the population, like twice as much or three times as much. Otherwise, you would have that intense pressure, wouldn't you, for the dollar to be so much higher to try and meet that international demand. But it would also mean there's less money available for the domestic economy. So could that be damaging as well? Well, it's not so much damaging in that sense. You've still got a central flow of dollars in the American economy because the money supply is elastic.

[00:12:42] This is the thing which you can't get through to gold bugs and so on. They see it as a flaw. It's actually a feature of a well-managed system. I'm not accusing our current system of being well-managed or well-designed, but the basic idea is that private money expands when there's demand from private borrowers, which the banks are willing to meet. And the government money tends to expand when there's a decline in economic activity in the private sector

[00:13:09] because their tax revenues go down, their welfare payments go up. And that's another way in which the money supply is more controlled by the economy than controlling the economy. It's elastic. But the weakness of the fact of being a reserve currency as America is now and it was written before World War II is that your finance sector does very nicely out of it, thanks very much,

[00:13:34] because everybody's going to negotiate with the American finance sector to get the American dollars and so on. But it's lousy for your manufacturing sector because your currency gets overvalued and you are therefore undercut, even with the same technology, by companies in other countries with exchange rates that are necessarily lower. And what are the advantages of being that reserve currency? I mean, one of the disadvantages, obviously, as we've said, is it pushes up the value of your currency

[00:14:03] because your currency is in demand. What are the benefits? I mean, if there's a US dollar transaction that doesn't involve a US trading partner, so if Europe buys oil, for example, from somewhere in the Middle East in US dollars, I mean, what's it to the US? How do they benefit from that? Specifically, again, it's financial power. I mean, it gives the American financial system enormous power in international trade and international finance.

[00:14:28] And that is why, you know, we talk about Goldman Sachs and the vampire squids of finance. They're American because America has American dollars. You don't have any major merchant companies like Goldman Sachs and Cohen. You don't have them in Europe or Britain or anywhere else in the world. They tend to be exclusively American products. So it makes the finance sector much stronger. And that's a very bad idea. Yeah.

[00:14:57] Well, unless you work in the finance sector, of course, in which case it's a fabulous idea. Absolutely. When we come back, I want to look at more about how we've talked about how money is created. We've touched on it just now about how it can be created by banks. So in good times, obviously, the supply of US dollars increases. And we talked last week about how governments could create money. And I just want to look at more about how money is created for reserve currencies. It might be exactly the same way. But how does it fluctuate in relation to international demand?

[00:15:27] So we'll do that when we come back. It's Debunking Economics Podcast. It's me and Steve Keen. Back in a moment. This is the Debunking Economics Podcast with Steve Keen and Phil Dobby. And before we go any further, I mentioned 21.5 trillion, which we think is the number for US dollars in circulation, which number I got from the Fed database. But you reckon the euro dollar adds to that? The euro dollar, I mean, various estimates of the euro dollar market.

[00:15:56] And this is largely accounts of what they fundamentally end up being is accounts of companies and countries, companies from other countries and countries themselves, which are denominated in dollars, held through various international relations between American banks, American non-banks and banks in Europe.

[00:16:18] But JP Morgan estimated that it was in 2016 that it was 13.8 trillion. Now, I could probably say it's going to be 15, 16 trillion. So you need to add that onto your American dollars in circulation number. So I want to start Dobby Oil because it looks like you make a lot of money out of oil. I'm surprised I didn't think of this earlier. So Dobby Oil is going to sell domestically in the UK.

[00:16:44] And I go to the Middle East and they say, oh, yeah, but you've got to buy in US dollars. So I go to my bank and say, look, I want to borrow some money to buy some oil. Don't worry, you'll get it back because I'm going to sell it for a mozza. And the bank says, all right. But I say I need to buy in US dollars. So my bank gives me a loan in US dollars. That is adding to the US dollar money supply, presumably.

[00:17:11] It would work the same way as it would if I was buying domestically in UK pounds, wouldn't it? This, well, that depends. It's possible you're going to get a loan from an American bank, which in that case, yes, that's a money creation. But the other possibility is that the funds are built up in the euro dollar market. A lot of them occurred before the breaking of Bretton Woods, before 1971.

[00:17:36] And that would therefore be a transfer from some account to you without actually creating additional dollars. But the scale of the trade deficits and balance of payments deficits in America is running up before the breaking of the gold standard were huge. Because at that stage, on the gold standard, the promise was that if you presented one ounce of gold to the American treasury, they would then put that in Fort Knox and give you 35 US dollars. That was the original exchange rate.

[00:18:05] Then the first stage was Nixon broke it down and had an open market and an official trade channel. So the official trade channels were still at 35. You could buy the gold for 42 on the private markets. And then he basically abandoned convertibility into gold. And so, but there were one of the pressures, there were two pressures that triggered that decision to abandon the gold standard. One was de Gaulle in France.

[00:18:31] France was running such a huge trade surplus with America that ultimately the trade surplus that French companies had at the, in American dollars, stored mainly at that stage in American banks, exceeded the amount of the value of gold in Fort Knox. And de Gaulle threatened to simply present all those American dollars at Fort Knox and take out the entire contents of Fort Knox. Now, de Gaulle would have done it. Okay.

[00:19:00] He's that sort of character. But the second factor, and this is what a lot of people aren't aware of, is that American corporations realized that this was feasible at the same time. And I've read a congressional, I've got to go back and find a copy of it again. I read this back in the 1970s. But there was a United States congressional study into what was triggered there. There was a dramatic outflow of American dollars. What triggered that outflow? And what they found was that American multinationals realized that this was feasible.

[00:19:28] And so what they told their own branches is, you know, this is General Motors in America telling General Motors in Germany what to do. They changed their settlement terms. They said, rather than wanting you to repay any loan or any purchase you make from the German branch makes from the American branch in 30 days, we're going to give you 90 days. And on the other hand, when they were buying, American buying of Germany, that went from 30 days to 15 days.

[00:19:57] Now, according to this U.S. congressional study, that change alone precipitated the decision that America had to abandon the gold standard. So the euro dollar is just a term for reserves of U.S. dollars that were held outside the U.S. within the European market. That's a byproduct of the fact that it's the reserve currency. Right. And it's just a set amount of money. I mean, it's not getting added to. It's just a stock.

[00:20:24] It's like a legacy stock of- I think it's being added to as well. I mean, again, I'm not an expert on the euro market structure these days. I've got to take a good look at it before I'll stick my neck out on various comments. But I think it's still growing because America is running a trade deficit. So that deficit effectively means dollars are being accumulated by foreign companies in American dollars. And bang, that ends up effectively being what we call the euro dollar market. All right. So I buy something from-

[00:20:54] Well, go back to me with Dobby Oil. It's such a brilliant idea. I'm surprised I haven't started this. It is. You're drilling in your backyard as a heroic start. Well, I could. Well, I could. But now I'm going to get it all from the Middle East because they've got loads of stuff in the back garden. My wife would have something to say about that. I can't do that. But they've got the hang of it. I'm just going to buy it and ship it in and then ship it out again. I'm going to let them drill, baby. I'm going to sell, baby. It's going to be huge. It's going to be the best thing I've ever done.

[00:21:22] But if somebody buys something in the U.S. and brings it into Europe, the other way around, actually. Sorry. If somebody pays for something and sells to the U.S. and gets U.S. dollars back into their bank account, they obviously go to their bank and say, well, that's no use to me. I want euros. So that transfer happens. That would sit in that euro dollar reserve sitting outside the U.S. What would happen to that money? Then you're going to spend any of that domestically.

[00:21:51] You've got to convert it from euro dollars to your own currency. Yeah. Yeah. And that's one reason. Again, there is a moderate trend for the strengthening of countries running trade surpluses over those running trade deficits. But it's nowhere near fast enough to catch up with the effect that Japan and Korea and China have exploited. That by exploiting since you have additional revenues for investment you would not otherwise have had without the export surplus,

[00:22:18] you then go back and continue refining your products. And you continue getting a manufacturing lead on your rivals, including American rivals. So it's – and China's done this just brilliantly. So I remember seeing a video clip of Musk being interviewed about BVD cars, for example, about five, six years ago. I think it was. And he said, aren't you worried about competition from BVD? And he laughed and said, have you seen their cars?

[00:22:47] Five or six years later, you see their cars. They're better than – they're often better than Tesla. They haven't got the – you know, they're self-drived at the same level, but the sophistication is just off the scale. So the reinvestment of those funds means you can maintain a permanent advantage, and those trade deficits and surpluses never go away. So I'm trying to figure out how the U.S. dollar expands then. I mean, we know domestically it expands through government deficits, and it expands because people borrow money from banks.

[00:23:15] Is that the – but there's more demand for the U.S. dollar because it's being used all around the world. So how is the demand globally being expanded? Is it still reliant on those two things as the U.S. government – I think so. So the U.S. government really has to – to meet that insatiable demand for the U.S. dollar, the U.S. government really has to go into a deficit so there's enough money being spilled out to travel around the world then. And you also have the deficits of the lending of the private banks as well.

[00:23:42] So, yeah, all this stuff necessitates America running a trade deficit. So if they want to abolish the trade deficit, the best way is to say let's bring in the bank call. Yeah. And that's why I find it quite – you know, watching Trump's machinations over this in particular, it's – you know, the reason that America's in this situation of being de-industrialized is hubris. Because if you take a look at the – there's a great book called The Battle for Bretton Woods. I've read about 80 percent of itself.

[00:24:11] Still got to get through to the end. But in that, it explains the battle between Keynes at Bretton Woods arguing for the bank or no international currency, no domestic currency to be used in international trade ever again, controls on trade surfaces and so on. After the Second World War, the Americans thought that they were the ants' pants in manufacturing and they were always going to run a trade surplus.

[00:24:34] So Harry Dexter White, who was the bureaucrat mainly involved in the negotiations on behalf of the Americans, just insisted it had to be American dollars. And his intransigence was based on – partially on the belief that American manufacturing would always be stronger than manufacturing the rest of the world. Well, that worked out well.

[00:24:55] So the reason now, though, why we still trade in U.S. dollars, which gets back to my original question, is it because it's seen as being a safe currency and the fact that there's such a supply of it? There's so much of it sitting in reserves in banks all over the world. Yeah. And the same thing is supply to the British pound as well before they made the mistake of going for colonialism rather than industrialization. You can take that back to the 1840s and recessal roads.

[00:25:22] But the impact of this has just been to weaken the American manufacturing sector over time. So it's a poison chalice to be the reserve currency of a global system. And it does well for hubris, but it never works out the way the people who start it do. Because, again, if you go back to Cecil Rhodes, the argument is that he pushed for colonialism. And Rhodesia was named after Cecil Rhodes.

[00:25:51] He pushed for colonialism because he said he went to a meeting of working men in London. And all he heard was a cry for bread, bread and more bread. In other words, they were effectively finding them starving and the wages just weren't enough to live on. And Cecil Rhodes' response was we have to basically exploit colonies to make sure we don't have a revolution back at home in Britain. Now, what that meant was, if you look in 1840, that was pretty much the time that England's percentage of global manufacturers peaked.

[00:26:20] I think at about 15 or 20 percent of global manufacturing. It's been downhill ever since. So, in that sense, the decline of the British Empire, you can also trace back to it being the reserve currency and focusing on colonialism explicitly rather than implicitly as America does these days. And rather than local manufacturing and investment. So, the I'm African, there's eight major reserve currencies. The Australian dollar, the pound. There's the Canadian dollar.

[00:26:49] There's the Chinese and imby. There's the euro, the Japanese yen, the Swiss franc and the US dollar. So, of course, of all of those, of all the foreign exchange reserves, 60 percent of them on the planet are the US dollar. So, again, that gets into the whole argument, doesn't it, about, well, it's getting traded because it's the most readily available. And that is part of it. It has to be readily available. Two reasons. One is your international currency.

[00:27:15] If you say international freight can only use your currency, there's got to be more dollars than is necessary for your domestic needs. And secondly, it means you can exploit the privilege of being the reserve currency. And this lies behind the one apart of modern monetary theory that I'm explicitly an opponent of. There are arguments that the trade deficit doesn't matter and that a trade deficit is a good thing in the sense they say exports are a cost, imports are a benefit.

[00:27:44] But that only country that can play that indefinitely is America, while it remains a reserve currency. If other countries do it, they'll be forced to devalue. They don't develop domestically. They're not investing properly. It's – and the thing about, like, MMT on government spending is fine because it's quite possible for every country on the planet to run a government deficit. There's no limitation on that at all. It is not possible for every country on the planet to run a trade deficit.

[00:28:14] The sum of all trade deficits is zero. So, the limit there should be – you know, you should be trying to limit. If they were right, they should be trying to limit trade deficits. The money that's sitting in – if you've got reserves sitting overseas, U.S. dollars sitting in reserves overseas. So, they are sitting in the reserves of banks everywhere, presumably. There's a whole load of banks that are sitting on U.S. dollars. That's because they've been paid for something in U.S. dollars. They put it into their reserves because that's money that's gone in.

[00:28:41] And I guess they say, well, okay, it's handy having a U.S. dollar in our mix of reserves because it's a stable currency. It's sort of like a hedge against, you know, world disorder in a way. So, can they – and we've talked about you can't – banks don't loan out reserves. But if they've got U.S. dollars in reserves and I want U.S. dollars, then they'll say, well, we've got those U.S. dollars. Change it for pounds. We'll stick the pounds in our reserves. Is that the way it works? It's – that's part of it.

[00:29:09] I mean, I remember having a conversation with a very bright ex-student of mine who works for a major Australian bank. And he was challenging me over the idea that bank lending creates deposits. We borrow dollars all the time on the global market. And I never – it hadn't worked it out as well as I have now. But the basic repositive to that is, well, you don't lend American dollars, do you? So, if you're borrowing American dollars, what you're actually doing, because of the way that accounting classifies long-term debt,

[00:29:38] is that you actually book that up as an asset, even though you borrowed money for it, you book it up as an asset, which increases your equity so that you get a high level of equity enabling you to continue lending. And then they have the double bonus. Because Australia normally runs a trade deficit, you've got people who need to borrow American dollars to buy American goods, and the bank will sell them to you at a slight profit.

[00:30:00] And so, that borrowing of international currencies by non-American banks is both – the way that they shore up their equity, because, again, there's so much American dollars floating, that's what you're going to be borrowing if you want to get a cheap form of long-term capital. And you can then sell it to people who need to have American dollars to trade. So, wherever it sits on the balance sheet, somewhere on that balance sheet, there's a column or several columns with U.S. dollars at the top of it,

[00:30:29] rather than British pounds or Australian dollars. And also, the central banks will also accumulate that. So, all the central banks have reserves of different currencies as well, including the American dollars. So, another reason then why it gets traded more, because it's more expedient, because those dollars are sitting in bank accounts somewhere so they can be used. So, why is China holding so much in the way of reserves? Is it just because they've accumulated so much?

[00:30:54] Because their trade surplus is – I haven't looked at that carefully. I've looked at their government surplus. The government deficit is about 9% of GDP on average. So, they're doing a very good job of harnessing the concepts of modern monetary theory to industrialize and develop domestically. But on the international trade front, I imagine they're running a trade surplus of something of the order of between 3% and 10% of their GDP. And therefore, they're accumulating American dollars.

[00:31:22] And they accumulate in the form of – they'll then use those American dollars to buy American bonds. So, that's – and then they get a revenue stream from the American Fed in terms of payments of interest on American bonds. Right. And they'll just keep doing that. There's no reason for them to – no reason for them to stop. So, that's – so, is that – is by China holding so much in the way of U.S. dollars? Is China just reinforcing that reserve status then for the U.S.?

[00:31:51] Fundamentally, it is. But it's also undermining American manufacturing because, again, that means – It's a double win for them then. America's under – American dollars are overvalued. The renminbi is undervalued. The Americans can complain as much as they like about it, but they can't do anything to increase the valuation of the renminbi. And the fact that China's running a trade surplus means it's got plenty of money, plenty of American dollars to fight a war on that front if it needs to, which it won't.

[00:32:21] So, it double benefits. So, there's absolutely no reason for China to push – because people talk about, well, you know, maybe the renminbi becomes, you know, a challenging reserve currency. There's absolutely no reason for them to want to do that, is there? It would – I would prefer them not to – I certainly don't want to want to see the American dollar replaced by the Chinese renminbi. What I'd rather see is the whole damn circus replaced by the Bancor concept that Keynes first had. Yeah.

[00:32:46] But as a second best, you then – what you then save is not a single currency, but a basket of currencies. And that's what the BRICS idea is about. Yeah. But, I mean, it's not going to be the renminbi, is it? Because there's no reason why China would want that, is there? Because – They would want a bundle of currency. The renminbi, the Russian ruble, you know, all the countries that are going together into it are supposed to put a bundle of currencies together.

[00:33:12] And then they value – the idea of the BRICS trading, that would be a way – another way clearing house effectively for international trade, where the rates were based on a bundle of currencies rather than a single currency. Like the old ECU in Europe. So – but actually, if BRICS is going down that road – I mean, I mentioned before that, you know, the IMF says it's the Australian dollar, the pound, the Canadian dollar, the Chinese renminbi, the euro, the Japanese yen, the Swiss franc, and the US dollar.

[00:33:41] If you're looking at a basket of currencies, why not that? Why not say, well, okay, let's set up something like BRICS is trying to set up, but let's use those countries because they are all relatively stable, established economies, and they've got volume in their favor. And let's do that. Let's, you know, let's start – almost like let's start the bank hall, but – well, not the bank hall, but let's start something like the old European trading unit, the ECU, like BRICS is trying to do, but for those countries.

[00:34:07] Yeah, but the trouble is, again, that most of the countries that are going to do that, the South of the Trade Deficit countries. So it doesn't solve – I mean, you want a balance of currencies, and that's – the sum of all international deficits is zero. So that's – in some ways, the – Keynes' design of the bank hall aped that because the sum of all the bank hall was zero as well, and if one was positive, the other was negative.

[00:34:31] So it aped the actual nature of international trade, the zero-sum nature of it, and then used that zero-sum, first of all, to prevent particular economies having too much of a trade surplus. Keynes saw a trade surplus as a positive for a particular economy and beggar thy neighbor impact on countries running trade deficits. And it also – because anything that went outside the banks, I think it was 2%, I'm not sure.

[00:34:58] I think 2% of GDP was the point beyond which you had to consider devaluing if you're running a trade deficit or revaluing and also paying interest to developing economies if you exceeded that as a trade surplus. That was – it made sense. It was a coherent extension of the domestic financial system at the international stage.

[00:35:22] Instead, we've got this bloody dog's breakfast, and I think a large part of the problems we have globally in the economy and ecology are due to that dog's breakfast that we got courtesy of Harry Dexter White. But could we now – I mean, do we need a reserve currency, actually? I mean – No. No. We need a trade – that's where the bank hall came in. It wasn't a currency. It was the system. Right. But do we need – do we even need that? I mean, maybe. But, I mean, does that become stage two? Well, you've got to send Vikings out to get the goods you want. Yeah.

[00:35:51] But if I want to buy – but if you're part of a major currency, why would somebody selling petrol to me in Saudi Arabia for Dobby Oil – very good prices, by the way. You're going to be surprised. You're going to be amazed. Particularly when the oil arrives. I don't know where I'm going to keep it. That's the problem. You're going to have to dig up the lawn. That hole in the backyard I was talking about before. Yeah, exactly. I'm going to have to put it in there. So, yeah.

[00:36:19] Why not – why wouldn't they just say, well, okay, if you want a – you know, pounds is a stable currency. Just pay a person in pounds. Why would they worry about me paying any U.S. dollars? Well, because, again, if you're in national trade, you need currency which is accepted everywhere. So it could have been possible to have that sort of, you know, accumulate the currency you want, you know, the currency of the person you're trading with. But it would have been, again – But is anyone going to turn down, again, those eight major currencies that I mentioned?

[00:36:48] Is anyone going to turn down any of those currencies? I wouldn't have thought so. Well, SWIFT tends to be the problem because, you know, SWIFT, which is supposed to be a political system just for enhancing trade and it doesn't matter what you're buying or selling. Unless it's durable. That's been politicized by the Americans. So they've actually – I think they've banned Iran and a couple of other countries from using SWIFT.

[00:37:10] Now, that's politicizing what's supposed to be a distributive – it's simply a mechanical part of the global financial system. But if it hadn't been politicized, I mean, why not? You know, it's a bit like, you know, the euro was invented and part of the argument was, oh, it makes it easier to trade, you know, between – across borders in Europe. But really, these days, I mean, you know, with electronic transfers, who cares? You know, it's not – Exactly. And that's the situation like you and I experienced. I've been into particular.

[00:37:40] You know, I use WISE for all my transactions and I just use whatever the domestic currency is when I get to another country. So can't world trade more generally just work on that basis? It could. It could. That's true. Like that's something, again, that's possible in an era of electronic money. It wasn't possible in an era of paper money and paper accounts. But we are there now. So the only thing that would stop that happening is people saying, well, okay, we could accept, you know, your currency.

[00:38:10] But look, we've got loads of dollars. We can get a cheaper exchange rate just because it's more readily available, I guess. I mean, that would be the only determining factor, wouldn't it? Yeah, I would actually prefer something to look at, frankly, because the dominance the American dollar has has been bad for America. It's been great for the financial sector. But as Marx once called them, the roving cavaliers of credit and these parasites who know nothing about production, should have nothing to do with it.

[00:38:35] It's made them far too powerful that we live in a financialized world largely courtesy of the fact that the American dollar is the reserve currency. Right. But will it – final question because we're running out of time. But could that just fade away because for the reason for it to be a reserve currency because of the, you know, because of the electronic payment system, the convenience factor of it all starts to disappear and maybe the other factors, you know, the other benefits start to wane as well. Could it just be that it just withers over the next 10 years?

[00:39:03] It could, but it still technically still passes through swift. So that's the limitation that puts you through the American conjure. But yeah, one reason that Wise developed was they realized – again, it's a bit like how banks function in a national currency system when they meet to net out the transfers from one bank to another.

[00:39:22] They realized they could do a huge amount of the trading between USA, America and Europe by transferring money between European bank accounts for the various sales that are occurring, the triangular sales, and drastically minimize the need to actually access swift in the first place. So swift, everything goes through the US dollar, does it? Yeah. Well, that does have to change. Well, that is – but that makes no sense. And that – yeah, and a lot of these companies that we've seen that have developed in Forex, I think as you're saying, they've started because they're saying, well, okay,

[00:39:53] we'll manage the trades. And you can see how – as they've scaled up, we'll manage the trades. If there's a multitude of currencies all being traded at any one time, we can take the mid-market value on that – look at what's being traded, take the mid-market value and facilitate that without going through the US dollar. That would be feasible. It's a possibility. Like, there have been some private money attempts like that as well. Well, can't you just see that happening? No, well, not with Donald Trump in the White House. Well, I'm more to the point with Donald Trump in the White House.

[00:40:23] I mean, all the more – wouldn't it be all the more – The ego comes first there. So the American dollars, yeah. But the fact that – you know, doesn't it make the US dollar a little bit more precarious? And, you know, and we said, you know, it's availability. Well, the availability might disappear because the advantage is less so if you've got the ability for you to trade more easily electronically. And then it becomes safety. It's a safe currency.

[00:40:50] But if you've got a volatile leadership, then that second argument disappears as well. It is. But you actually need a mechanical system to be devised that enables these transactions to occur. And, you know, that's the one that – the BRICS was a potential way of getting there as an alternative to the American dollar. I mean, God knows where things are going. It might be cryptocurrencies that do it. I've given up on ever expecting people to understand the monetary system. Maybe we're stuck with cryptocurrencies.

[00:41:16] I guess the issue is that if it was all sort of like a triangular system that may or may not involve the US dollar, depending on whether the US dollar is needed in that particular transaction or not, what happens if that system fails, if it falls down? You're left stranded, aren't you, as a result of that? So, yeah. Okay. Gets back to the safety argument. All right. We'll leave it there for now. Thanks, Steve. Catch you next time. Welcome. Yep. The Debunking Economics Podcast.

[00:41:47] 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.