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Last week a symposium gathered in Beijing to begin planning the People’s Republic of China’s 14th five-year plan. The event opened with a speech by Chinese President Xi Jinping, who called for the gathered experts to “look at the new opportunities and challenges… with dialectical thinking.”
The main subject for such “dialectical thinking” right now: preparing for a desperate United States rapidly falling from power. A sagging U.S. dollar is the most immediate consequence of this slip, and looking at it the way China’s leaders might can give us all a bit more clarity in uncertain times.
“Dialectical thinking” is a complex topic, but at its heart is the idea of contradiction. Dialectical philosophy -- developed first by the German philosopher Hegel but then adapted by Marx -- acknowledges that contradictions occur all the time in nature, and how they change and resolve determines how the world really works.
U.S. dollar power is contradictory in that it depends upon American military-political power while also creating the conditions for that power. Suppressing commodity prices keeps the dollar stable, making it a useful global currency. That global dominance -- 80% of dollar transitions do not involve U.S. entities as a party -- then holds down commodity exporting economies.
But the contradictions within the dollar itself are now threatening this system. The United States always has to run a current accounts deficit so that the rest of the world has all the dollar liquidity it needs. If the United States took in more investment than it sent out and sold more than it bought internationally, the global dollar supply would shrink, putting pressure on commerce virtually everywhere in the world.
An analogous situation happened earlier in the COVID crisis when uncertainty sparked a rash of dollar hoarding. The Federal Reserve had to open its floodgates in order to keep all the other central banks -- and by extension their national economies -- afloat.
This also makes it advisable for the federal government to run perpetual fiscal deficits, as the world needs U.S. debt as a secure, easily convertible, interest-bearing place to park all those dollars. The world economy runs on U.S. consumers living above their means, buying more than they sell and borrowing more than they raise.
Now, however, this debt has outstripped economic growth. Debt is future earnings pulled into the present; borrowing today diverts income away from money-making investments tomorrow. If that diversion is too much, it means even more borrowing, sapping growth even further into the future.
This contradiction is playing out right now, and investors are already starting to respond, selling off U.S. debt globally and showing weak interest in long-term Treasuries.
The only real thing dollar advocates have to hold onto in response is the “no alternative” narrative, but if some other currency can offer greater convenience for trade and stronger fundamentals in the country issuing it, why wouldn’t markets make the switch?
This is yet another contradiction: the need for and impossibility of a new global reserve currency, now playing out in a global crackup between regional economic blocs, with China already leading the way in connecting a Eurasian bloc that would dominate the world economy. The Shanghai Cooperation Organization -- China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan, India and Pakistan -- is already shifting internal trade away from the dollar and towards their national currencies.
The only thing left for the United States to do is to try and leverage the political dominance underpinning the dollar by blocking Chinese access to key semiconductor technology, restricting allied investment in Chinese technology companies, and deploying sanctions to cut rivals off from the dollar.
But the very dialectical thinking Xi is encouraging knows that each of these responses is doomed: China’s “dual circulation” strategy is building up their own domestic demand, and every country the U.S. sanctions gets pulled into the same orbit. “New contradictions and new challenges enhance the awareness of opportunities and risks,” Xi said to the symposium. “(We must) be good at turning crises into opportunities, and strive to achieve higher quality, more efficiency, more fairness, and more continuous and safer development.”
The dollar’s dominance is the very cause of its decline, a dialectical outcome if ever there was one. Those who study these things are the best placed to rise up as it falls.
Disclaimer
Our only investment advice: Hourly workers, slow down.
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