The dollar is still king.

Two related Wall Street Journal stories:

A Bank China Built to Challenge the Dollar Now Needs the Dollar

A development bank China launched with its fellow Brics countries was supposed to reshape international finance. Russia’s invasion of Ukraine now risks turning it into a zombie bank.

Eight years after Chinese leader Xi Jinping and his counterparts from Brazil, Russia, India and South Africa established the New Development Bank, with headquarters in a swanky Shanghai skyscraper, it has all but stopped making new loans and is having trouble raising dollar funds to repay its debts, according to an examination of its finances and interviews with bankers and others familiar with the matter.

The Global Economy Looks Like It’s Out of Sync

In just 24 hours this past week the central banks of the world’s three biggest economic blocs came to starkly different conclusions, with the eurozone raising rates, the U.S. on hold and the Chinese cutting. It’s getting harder for investors to understand the global economy—and potentially getting harder for the Federal Reserve to put a lid on inflation.

The conflicting moves are caused by economies increasingly moving to local rhythms. Europe is in a technical recession, but the central bank expects inflation to last. China has no inflation problem but is suffering from the aftermath of its extended lockdowns and property bubble. The U.S. economy is doing surprisingly well, and inflation has plunged, but underlying price increases remain stubbornly high.

At its core, the fundamental problem is that the Chinese Yuan is not trusted because the Chinese Communist Party is not trusted–and for good reason: the Chinese Communist Party seeks to control the economy rather than to provide liquidity and allow the chaos of the markets to sort out where the world’s economy is going.

Of course the Chinese Communist Party can’t let go; in many ways it has the bull by the tail with all of the demographic changes that were fueled by Chinese meddling in its own society, and by promising China to the west as an emerging marketplace. And China has fueled the pump on property construction, which has so distorted the Chinese economy that, to let go means for a growing Chinese middle class to realize it is considerably poorer, both in absolute terms and in relative terms, to Mexico.

And of course the European Union’s Euro is backed by an economic block that has shown lackluster results since the formation of the Euro, in part because of structural problems with the way the Euro is managed, and in part because of European regulators who just can’t help but meddle, but whose regulations are inherently inefficient. Structurally, the Euro zone is not actually a free trade zone; nominally goods and services may flow across borders without restriction, but Europe tracks internal trade imbalances between member countries. (States within the United States do not track trade imbalances; there is no record, for example, of just how much in debt Mississippi is to New York, for example.) The European Union, however, cannot eliminate this tracking, because to do so would be to remove all monetary policy inputs from member nations. It would also require, to some extent, for member countries in the European Union to give up their identity: it would require Europe to become as comfortable with (say) Greeks moving to Germany as it is with (say) West Virginians moving to California.

Further, the European Union is caught in a bind with passing regulations: The Microeconomic Dimensions of the Eurozone Crisis and Why European Politics Cannot Solve Them

There are standard economic arguments as to why structural economic reforms affecting labor and product markets can be difficult: in particular, organized special interests often seek to block such changes. However, in Europe, where structural reforms are even more crucial given the absence of an exchange rate adjustment, they are actually more difficult. This is because countries joining the European monetary union were promised that their membership would not affect their social models and because the well-intended movement of economic policy discussions to the highest political level in Europe (observed increasingly in recent years) creates a “European political overlay” that actually distracts from national reform.


In order to be an internationally accepted global currency, you essentially need two things:

(1) You need a currency controlled by an organization whose primary purpose is simply to provide liquidity, and to allow the market to shape itself, rather than run by an organization which seems more intent on using that currency for non-economic political objectives.

(2) You need a currency backed by an economy that is relatively healthy and relatively dynamic, and relatively large enough so as to successfully dominate global transactions.

In both those cases, that points to the US dollar.

And it points to something else: the dominance of the US dollar in global transactions was never a deliberate plan for global hegemony. Certainly with the Bretton Woods Agreement, the dollar was established as a global currency, backed by gold bullion and with exchange rates between other currencies and the US dollar at fixed rates pegged to the convertibility to gold. But that system is long gone: the ending of the gold standard and the dismantling of the Bretton Woods Agreement in 1976 ended that era. Today, we have free floating exchange rates and no one currency theoretically dominates all transactions.

Meaning if you wanted to, so long as you do all the appropriate book keeping, you can decide to convert your entire international corporation’s currency operations to Brazilian Reals.

But today, decades after the death of Bretton Woods, the US dollar still dominates, for the simple reason that our government generally does not meddle all that much in the economy (though policies adopted first by President Trump and continued by President Biden point towards more future meddling, and the COVID-19 pandemic lockdowns showed to the degree our leaders are willing to meddle, even if it means the destruction of various local economies or even a fundamental reshaping of consumer behavior), and for the simple reason that the US still represents ~24% of the total world economy.

Graph plots the size of the US economy compared to the rest of the world starting in 1960. The percentage has declined from a high of around 38% in 1960–just 15 years after the end of World War II, when the rest of the world was still rebuilding from the damage done by the war.

All this points to the simple fact that if China wants to rule the world, they have to give up on trying to rule the world.

And if Europe wants to rule the world, it needs to get its shit together first.

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