David Malone: China’s rise, America’s fall

David Malone, who wrote the excellent book, Debt Generation, writes on his blog about how now some countries have started trading oil in the PetroYuan which is backed by Chinese gold. Now we, as MMTer's, believe that pegging a currency to a precious metal limits what a government can spend to improve the life of its citizens through excellent public services, and also, to help the private sector to flourish and grow. (One of the reasons I like MMT so much is that the socialists get what they want while the conservatives gain too - and no moaning about taxes). So why does China peg its currency to gold (and why did Colonel Qaddafi try to do the same), well, maybe because it is the only way to get the the world to accept the Yuan as a rival reserve currency. What do you guys think? 

Excerpt:

Will the rise of China mean the fall of America?  In a word, yes. Although decline might be more accurate.

Why do I think this?  Because China is about to launch the PetroYuan and when it does so the demand for dollars and for dollar denominated debt will shrink. When it does I question whether the world will be so sanguine about the level of debt that America carries. If that happens then the value of the dollar is in question.

In regard to the excerpt below, do you think Qaddafi backed his currency with gold because the world would not have accepted his fiat money? Can all countries have a MMT fiat system?

Under Qaddafi Libya’s currency was backed by the country’s large holdings of gold and silver. This had allowed Qaddafi to finance, for example, the entire construction of the Great Man Made River without going to Western banks for a single loan. Libya was debt free and owned their own resources and infrastructure. Obviously a very unsatisfactory state of affairs for any third world country to get such ideas above their station.  Worse, he had a very public plan, which he had laid before the Pan African Congress, to create a pan African currency backed by gold and silver to be launched by 2023. It was not too long before Hilary Clinton arrived in a freshly bombed Libya and crowed to CBS, “We came, we saw, he died.” Charming woman.

Some more excerpts:

In addition Japan and China have agreed to trade in Yuan, bypassing the dollar, as has Iran. They are now trading their oil in Yuan or euros, but not the dollar. Ever wondered why Iran is ‘the axis of evil?  It’s because they don’t use the dollar.

Then came the news in 2015 that Qatar had opened the first and so far only financial centre in the Middle East, for trading and clearing oil, gas and anything else, in Yuan. Chinas’ ICBC is the central banking concern in the hub allowing any Middle Eastern country to trade oil and gas and settle in Yuan. In the previous few years China’s trade with Qatar had tripled.  And now, guess what? Qatar has been declared by the US to be a sponsor of terrorism and US allies in the gulf have begun to blockade Qatar’s trade.  Hmm.  Any pattern emerging?

The problem for the US is how much debt is too much for any country or business? Clearly it is not any magic figure or particular debt to GDP ratio. America and China carry huge debts and no one has balked…yet. How much debt you can carry is a function of debt to the estimated future productive  capacity of the country in question. That creates the demand for its currency and the demand for the currency creates a market and demand for debt denominated in that currency.

At the moment the US can carry a huge debt load because everyone needs dollars to trade oil. And China can carry a huge debt because everyone needs yuan to buy the goods whose production was off-shored to China by our globalist leadership.

David Malone: China’s rise, America’s fall