Ian Welsh believes that the ruble will become a major market currency if the U.S. succeeds in making it difficult for the Russians to accept and/or spend dollars.
No. Just no. Currencies have value because of what you can buy with them. Otherwise they are just fancy toilet paper printed with pictures of dead people. What can you buy with rubles? Natural resources and weapons. That’s pretty much it. What makes a currency a major currency is when there is a major market basket of goods that can be purchased with it. Right now, the number of goods that can be purchased with Russian rubles isn’t enough to do squat.
Ian’s other nominee for a currency that will replace the dollar as the world’s default currency is the Chinese yuan. This one is more realistic, in that the Chinese are now the manufacturers of the world. The shoes I bought yesterday were made in China. As was the computer that I’m typing this on. If the Chinese desired the yuan to be a major market currency, it would be.
The problem is that they don’t. They prefer dollars, and give a discount if you pay them in dollars rather than yuan (this is done via their yuan-dollar peg). The question is, why do the Chinese prefer dollars? Well, first of all, most of the factory equipment that they need to build up their industry is being sold by companies that prefer dollars. And secondly, oil is being sold by nations that prefer dollars.
And the final reason: Buying up what remains of the U.S. industrial infrastructure and shipping it lock stock and barrel to China is part of their long-term strategy to hollow out the US economy. A hollowed-out economy is incapable of maintaining a first-rate military — see former Soviet Union, or former Ottoman Empire. What they want to do to us is what the British and French did to the Ottoman Empire in the mid to late 1800’s, when the Ottoman Empire went from the world’s foremost military power to a fragile has-been. This happened because the Ottoman economy was hollowed out, flooded by cheap imports that discouraged the development of their own industrial infrastructure and what industrial infrastructure did develop was swiftly bought up by British and French investors. In the end the Ottoman Empire lost the resources necessary to maintain a first-rate military and ended up collapsing in the early 20th century.
The US military is still too strong for the Ottoman strategy to be said to have succeeded. Yet. But as the Chinese continue to hollow out the US economy using much the same strategy that the French and British used against the Ottomans, it will become more and more difficult for the US to maintain a first-rate military. We’re already seeing that with the F-22 program, which produced a fighter that can defeat any other fighter jet in the world, but the US lacked the resources to produce them in sufficient quantity to make a difference. The F-35 fighter jet is probably the last gasp of the US military-industrial complex, it is simpler than the F-22 yet is stretching the capabilities of the US military-industrial complex to its limits and seems unlikely to ever be deployed in sufficient numbers to replace the F-16 and F-18 fighter jets that it was supposed to replace.
So the Ottomanization of the United States has begun. But the process has not finished yet. At some point, China will start denominating its exports in yuan rather than dollars. At that point we’ll know that the game is afoot… but by then, it’s unlikely the U.S. will have any ability to do anything about it, just as all attempts by the “Young Turks” etc. in the early 20th century couldn’t save the Ottoman Empire.
– Badtux the Economic History Penguin
I’ve been told that one of the problems with rubles, or investing in Russia generally, is the absence of anything comparable to the (vanishing, I guess) accounting standards Americans take for granted. Being able to keep track of your money and get your principal back if you choose, is something that I’m told is not always an option in some nations. I’m supposing that the Chinese don’t have that problem, although I recall that a while back Bonddad said that it takes a decade or so to develop a bond market, which he said the Chinese had yet to do at that point.
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The parallel is interesting, but I would suggest a couple of additional ideas to consider:
1) The biggest restraint on modernization in the Ottoman Empire was, by the 1730’s, the Muslim population and leaders. The Christians were rapidly outstripping the Muslims in education and thus were the object of hatred, the Muslims being handicapped by a much larger body of religious material to learn, and a leadership that no longer valued scholoarship.
Now, if we compare that to the Religious Right and their actions to question science, prevent honest discussion of ideas, promote religious based education and such, we have a very interesting confluence.
2) On the flip side, a newly resurgent Russia might just provide the US with the proding required to temporarily reverse the slide.
3) Something to chew on, why is China so quiet on Ukraine and Russia in general? Of course, they have the Taiwan issue, and diverting US resources from the Asian Theatre seems appealing in the short-term, but I suspect they are very concerned that Russia might cause the US to rethink its current slow withdrawal from worldwide military commitments and drawdown of forces. I would expect China to actually finally enter the conversation in a muted fashion, trying to calm things.
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3) Something to chew on, why is China so quiet on Ukraine and Russia in general?
Apart from their informal alignment, and China’s own comparable situation in Tibet?
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No, China and Tibet are quite different. China and Taiwan are also different in that Taiwan is a break-away portion of China to most of the world…whether recognized as a country or not. Tibet, and Taiwan, were controlled by China until about 1913 for Tibet and 1949 for Taiwan. Their independence was never recognized by China…a difference from Ukraine. Yes, it is splitting hairs, but that’s what diplomacy is all about.
As for China and Russia, any informal alignment is well stretched by now. China and Russia often vote in a similar manner because they are supporting governments like theirs, or opposing the “West”. Russia fears the West more for now, but after China cements it’s influence over the SEATO area, China will inevitably turn its eyes either southwest or northwest. Given India has the population to counter China, a Russia with a shrinking population is a very attractive target.
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Carry on, godfuckingdamnit.
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It would take a lot longer than a blog comment to explain, but there are more complex currents behind the yuan than most people understand. On the negative side for the yuan is the fact that the Chinese currency is more over-printed and fraudulent than even the U.S. clownbuck. To keep it pegged to the rapidly-rising U.S. money supply, China must create ~6.7 yuan for every greenback Janet Yellen pays for a monetised bit of American national debt. Their official financial structure is as rickety as the US’s is. Then there’s the issue of the shadow banking system in China, which has all sorts of crappy credit certificates floating around, similar to the 1800s when American banks could issue their own notes. These don’t affect the yuan directly, but much of the business structure in China relies on the promises to repay represented by the shadow credit system. When those start falling like a stack of Jenga blocks, it’s going to be a giant short-circuit in the wiring of the money world. Then there are matters like the mal-investment of Chinese wealth in ghost malls, cities with no people, houses bought on credit to flip, not to live in… All sorts of weak underpinnings for the yuan.
On the positive side for China, they’ve been cutting lots of side deals with various countries to use the yuan to settle international trade deals. The .gov there realises the problem with having a currency that you can’t use to buy stuff with elsewhere. Australia is one of those countries that China has created bilateral exchange facilities with, in the range of $500 billion, IIRC. Because of the local angle, arrangements like that get attention in the local papers’ business section. Australia’s economy is like a Third World nation where they dig stuff out of the ground and grow food that they sell to smarter nations that will do something more creative with it. Now the Chinese can pay for more Aussie iron ore or lamb meat with their own currency instead of having to go onto the forex market to buy the U.S. reserve currency to settle. China is also using its accumulated trillions of U.S. dollars, which are ultimately illusory when you get down to the quantum physics level of money, to buy REAL stuff like agricultural land in Africa and mines in Australia. Use those dollars while you can still get something for them!
It’s the petro-dollar angle that keeps the U.S. currency in a dominant position worldwide. China, Russia and Iran are working quietly on end-arounds to blunt that. It doesn’t get as much publicity as the easier-to-understand diplomatic/political moves your other commenters mention. However, there’s a currency war going on behind the curtains. That’s less damaging to the lives of your subjects than a straight-ahead war against an opponent with lots of weapons, as the 18th Century Europeans found against the Ottomans. The currency wars get a lot of attention at ZeroHedge, Max Keiser, Jesse’s Cafe Americain and other econoblogs, which is how I keep up with the trends.
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It doesn’t get as much publicity as the easier-to-understand diplomatic/political moves your other commenters mention. However, there’s a currency war going on behind the curtains.
Cynically, I believe it will end up in blood anyway eventually.
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Да!
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