The Peter Zeihan Podcast Series - The Truth About De-dollarization and What You Need to Know || Peter Zeihan

Episode Date: May 24, 2023

The topic of de-dollarization is like the weird cousin no one wants to talk to at parties. They only come around once every year or two, and most of what they say is complete bulls***. But when the day comes that you need to take that weird cousin (aka de-dollarization) seriously, here are the three factors to look out for. Full Video and Newsletter: https://mailchi.mp/zeihan/the-truth-about-de-dollarization-and-what-you-need-to-know

Hey everybody, Peter Zine here, coming to you from Colorado where the weather can't decide what it wants to do. Today it's sunny, so, you know, we're just going to work with it. A lot of you have written in asking me about all this hubbabaloo about de-dollarization. I'm like, this comes up every year or two, and so I have to explain it again. Fundamentally, nothing has really changed this time, but let me give you the three things to look for if you do want to take de-dollarization seriously in the future. This is not the time. Number one, size.

for a currency to be a currency of exchange, a currency of trade, and especially a currency of reserve, it has to exist in huge volume because that's to lubricate trillions of dollars of financial transactions and physical transactions every single day, and something in excess of $25, $30 trillion of annual merchandise trade. That's a lot. And there are really only four countries in the, four currencies in the world. We can even theoretically do that. The U.S. dollar, the European Euro, the Japanese and the Chinese you want. Okay, number one. Number two, access. You have to be able to get a hold of nearly unlimited volumes of that currency whenever you want to. Obviously, the dollar scratches that itch. The Japanese yen, not so much. The Japanese tried to go global back in

the 1980s. Turns out their financial system couldn't handle it. And it contributed, it was one of the many factors, as to why they have had on average zero percent growth since 1993, 94, something like that. And so they have kind of closed up shop. The currency is available. You can add it to the side, but it's never going to be a mainline exchange currency. Let's see. China is eliminated from that category as well. The number one concern that the Chinese have is for control, absolute total domineering dictatorial control over their own internal financial sector. That means they don't want to see large cross-border flows, especially from China

to the rest of the world. So every once in a while the Chinese will do what they're doing now and talk up the Yuan and talk up the internationalization. Then as soon as it starts to happen, a flood of currency from the Chinese goes elsewhere because the Chinese are the people who are the least confident in their own economic system. And then

the Chinese government slams it shut and we don't hear about it for a couple years again, like we are now. Okay, what's the other the big one? Trust. You have to trust that the currency is going to be worth something. that you have to trust that the government's not going to intervene. And that means this is kind of a subset of trade.

Now, with trade, if you are a major trading country and a large percentage of your GDP is gotten from exports and imports, then you have a vested interest in what the value of your currency is every single day. The U.S. is perfect for that because the U.S. trade to GDP ratio is only about 15%. And about half of that is either energy or NAFTA, and everything else falls into that other like 6, 7%. So the United States really doesn't care what happens to the value of the currents every day. The Chinese don't have a freely traded system so they can micromanage what the value is every single day.

There's also the issue of whether your money is going to be there the next day. Now, the United States maybe has taken a hit on this with the Russia sanctions and that it's weaponized the U.S. dollar in a few ways, but compare that to say what goes on with monetization. Now, I know I know a lot of you folks out there who are like gold bugs are like, oh, the U.S. monetizes like mad. And, you know, there's something to be said for that. We do have a large money supply. It's probably bigger than it needs to be, but a couple things to keep in mind. It's been shrinking for the last year as all the stimulus efforts from the last 15 years because of COVID and the financial crisis and everything else have finally wound down.

It's going in the right direction. And second, I compare it to everyone else. The Japanese, the Europeans, and especially the Chinese print currency in far greater volumes than the U.S. does. So the U.S. currency is the primary finance currency. It's the primary currency in everyone's foreign reserves. It's the primary trade currency. It's the primary store of value. The Chinese yuan is none of those things.

In fact, 99% of the issued currency of the Chinese yuan is held within the Chinese system. But their money supply is bigger than the United States because they print currency so ridiculously. So if you want to use that as a reason and talk down the dollar, that's fine. Just make sure you apply the same criteria to everyone else. Because the yen in the U.S.,

Even though the Japanese economy is less than a third of the size of the U.S., it's about the same currency exchange, and the euro's bigger too. So the U.S. runs the least bad ship if that's the right way to look at it. And then finally, of course, there's the euro. The Europeans for a long time have been moodying the U.S. dollar as a co-equal currency, if you will. The European euro should be right there with them. But they confiscated insured bank deposits back when they had their financial crisis in the late 2000s, early 2010s. And as a result, anyone who could move their money out of Europe did.

So it's a regional currency. That's not nothing, but it's no longer a serious contender for any sort of broad, dominant international role. There are a couple of other countries that have started to kind of join the shouting on this topic, but I don't take those seriously either. One of them is Bangladesh. Bangladesh has recently publicly pledged that the nuclear power plant that they're planning on buying from the Russians will be paid for with rubles. Yeah, that means nothing because the Bangladeshis don't have the money to buy a nuclear power plant. So to pledge for something that's never going to happen in a currency that they don't have,

yeah, whatever. And then there's Argentina who says it's gung-ho to join any sort of not dollar system. The Argentines are trailblazers in many financial matters, but currency adoption is not one of them. They're basically looking for a currency that can be printed without causing inflation for them and without them having to pay back in foreign currency later. So, you know, I wouldn't take that too seriously either. Now, all that said, there is one country out there that is,

seriously considering, maybe even implementing a degree of de-dollarization, because it doesn't care about these factors. It has something else that is driving its decision-making. And we'll talk about that tomorrow.