Is Trump the last straw for the dollar system? (Uncut) 04-24-2025

Is Trump the last straw for the dollar system?

The central problem is that the United States spends far more than it earns. There’s a Chinese phrase, he who tries to go two roads at once will get a broken hip joint, and it looks like Trump is getting a broken hip joint. Hello and welcome to the 45th Geopolitical Economy Hour, the show that examines the fast-changing political and geopolitical economy of our times.

I’m your host, Radhika Desai. Will Trump prove to be the tipping point for the dollar system? As regular viewers of the Geopolitical Economy Report will know, we have done many programs on the dollar’s shaky basis and on how and why we can expect its role as world money to unravel in the not-too-distant future. Now, suddenly, the Western press is full of forebodings about the demise of the dollar system.

The Financial Times alone, normally a loyal proponent of the wonders of the dollar system, has published a series of stories, each marshalling a slightly different reason for the dollar system’s possibly imminent demise. It has published over a dozen in April alone. With me to discuss this new development and parse the hype from the sober reality are two of our most popular guests, Michael Hudson and Mick Dunford.

Welcome, Michael. Here I am. And welcome, Mick.

Thank you very much, Radhika, for the invitation. OK, so let me start us off with some observations. What is really interesting to me about these recent stories is how they attribute the dollar system’s possible demise, as evidenced recently by the simultaneous sell-off of US stocks, bonds, as well as dollars, which is surprising given that US bonds and dollars are supposed to be safe haven assets to which everybody rushes when there is a crisis and people, investors, are selling off riskier assets like stocks.

So they’re supposed to move in opposite directions. So what surprised people is that all three are being sold off and they are attributing all this to Trump. But is it really about Trump or is it about the longer-term developments, which we have been discussing on this show many times, and developments that Trump may only be accelerating? As the week began, much attention focused on Trump and his administration’s threat to fire Federal Reserve Chairman Jerome Powell.

As you can see here, this is his infamous tweet in which he did so. And so this is his true social tweet in which he basically said to Powell, he called him a loser and whatnot, and also said that he must reduce interest rates now, which was regarded as a major violation of the independence of the Federal Reserve. This was the latest straw in the already groaning back of the USD camel, raising fears that the replacement of Powell, a known quantity, would give markets a fright.

And so, as you can see here, this is a story from the Financial Times in which people are saying, you know, he’s the voice of sanity, he’s a known quantity. And also, making the interesting point that what many foreigners are inferring from Trump’s getting elected twice is that America itself cannot be trusted or relied on. So, essentially, this is what people are saying.

And meanwhile, Japanese and Chinese investors were also quoted as saying that the US’s asset credibility was slipping, and the dollar and US treasuries, normally regarded as safe haven assets, were now being regarded as risky assets. So, this is a big, important change. Further, the previous week, Robin Rigglesworth of the Financial Times and his colleagues were asking, is the world losing faith in the almighty dollar? Focusing largely on how the world has been dumping dollar assets, equities as well as bonds, when normally investors dump one to buy the other, and also dumping the dollar, which is normally expected to rise amid crises, thanks to its safe haven status.

The reason? Well, what are the reasons these people are giving? So, for one, it’s all about, for some people, it’s all about trust and friendship, or in this case, distrust and resentment. The authors of this article quote a US finance representative, who says, it’s not just that you can’t trust the US anymore, be it on geopolitics or trade, we have also managed to massively piss off the rest of the world. There’s genuine personal animosity towards us, namely towards Americans, and that hurts the dollar.

Meanwhile, on the other side of the pond, Bloomberg has published a story on how two months of Trump has shaken the pillars of American financial hegemony, and how with a trade war, an attack on the US Federal Reserve, Trump has sent investors, who until recently had been anticipating the so-called Trump trade, essentially turbocharging US exceptionalism, that is turbocharging the idea and the reality that the US dollar is the world’s money, even though US finances are in such a mess, to what looks like a sell America trade. So instead of the American exceptionalism, buy America, it is now sell America. So Michael, perhaps you want to go next.

I mean, how do you view these stories, these recent developments? Well, what’s changed the whole story is the amazing stock market gains Tuesday, today’s Wednesday, April 23. Tuesday went way, way up and Dow Jones average today, in a few minutes, according to the advanced sales, is going to be another soaring up back over 40,000 for the Dow Jones industrial average. So it’s as if in the last two days, almost the entire collapse of the stock market and the dollar and the exchange rates have all been restored.

It’s as if the whole world has suddenly gone back to normal. And Trump’s tariffs were all just a dream. And he’s changed his mind about declaring economic war on the rest of the world.

Uh, this doesn’t make sense to me, certainly. How do you explain what’s happened for in the last two days? Other countries have already said that Trump’s actions are irreversible. His tariffs and is moving back and forth seems to be changed.

The world’s planning for who it’s going to trade with and who it’s going to invest with. Governments are looking to rearrange their foreign trade and investment patterns to avoid the US market, which Trump has just made very attractive while trying to make it attractive. I think that’s what the Financial Times articles have been saying.

So let’s look at what actually has happened. The dollar exchange rate has fallen by about 6% since he took office. This is an enormous decline in an exchange rate.

That means that everybody who’s holding dollars, whether it’s American bonds that are paying up to a little over 4% have lost money. If they bought stocks, they’ve lost money. Any investment you have, even if you have a positive interest rates on bonds or a dividend rates on stocks, if the dollar is going down, that wipes out whatever gains you have.

So what do other countries gain from putting their money in the United States, especially since Trump has said his overall objective is to lower the exchange rate of the dollar. This is unique. He and his advisors have said the whole idea of America’s exorbitant privilege, which you’ll talk about, the whole idea of having other foreign central banks have their foreign exchange savings invested in the U.S. dollar has created a demand for U.S. dollars that’s pushed up the dollar.

And Trump and his advisors, the Council of Economic Advisors have said, what if this weren’t the case? What if the dollar was not the investment vehicle for other foreign banks to hold? Well, then the dollar would have a much lower exchange rate. And somehow the pretense that Trump is making is that if the dollar’s exchange rate was lower, that would make American industrial exports more competitive. If we had any industrial products to export, which we really don’t.

And a falling dollar will make other imports from countries with a higher exchange rate more expensive. And Americans would buy fewer of them as if they really have a choice by many things that no matter what they’re dependent on. So the question really is, what is going to be the future of the dollar and how does this affect dollarization and de-dollarization? Even though Trump is saying we want a lower exchange rate, he said, we’re going to punish other countries that join the bricks and moving out of the dollar.

Well, of course, this is exactly the opposite of what he’s been saying. So I want to make just one point about how did it come? What is the character of this exorbitant privilege that the United States has since it went off gold in 1971? The United States has been opposing other countries in buying gold with their dollars. It’s opposing other countries buying foreign currencies, each other’s foreign currencies with the dollars.

All of this is pushing, is leading foreign central banks with no choice but to invest in U.S. Treasury securities. And Trump has said he’s of imposing a capital tax on anybody who buys a U.S. bond or financial security is going to have to pay a tariff to buy it, an extra charge that’s going to further reduce what foreign countries actually earn on their investments in the United States while generating income for the for the treasury that levies this. So we’re dealing with, I guess there’s a Chinese phrase, he who tries to go two roads at once will get a broken hip joint.

And it looks like Trump is getting a broken hip joint. And I think what he’s threatened to do is continue. He’s leaving the in place.

He said, yes, he’s going to leave the head of the Federal Reserve in place and not fight him. That’s really not very important. That’s not going to change things at all.

What’s important is that he hasn’t changed his tariff policy at all. And he said, I’m willing to negotiate with other countries not to impose tariffs that’s going to disrupt their trade and throw it into chaos. But I want to give backs.

One give back is they’re going to agree to impose sanctions on China and not to trade with China, but to join part of the U.S. currency area. And they’re going to also buy more American exports, specifically military exports. Last week, Italy’s prime minister, Giorgio Maloney, was here and was all in agreement.

Italy is going to increase its military spending from 1.5% to 2% of GDP. And Italy is going to buy more liquefied natural gas from the United States in addition to more arms. So you’re having Trump jawbone and sort of force other countries, well, if you do what I want and reorganize, reorient your trade patterns to the United States, don’t turn toward China, don’t turn toward Asia, then I will keep the tariffs low on you and you don’t have to worry I won’t disrupt your trade.

So we’re back to the strategy. What are going to be the effects of all this? And will Trump’s actions actually help dollarization or will it continue to drive other countries out of the dollar area as we’ve been speaking about in the last few shows? Michael. Okay.

If I just respond to one remark that Michael made, I mean, he pointed out that the dollar is falling. I think that the intention is actually to force other countries to revalue their currencies and to force other countries to reduce their interest rates, which would then leave a certain kind of premium for the dollar. But I wanted to comment first on the central problem, in my view.

You know, the central problem is that the United States spends far more than it earns. And, you know, the essential demand at the moment is give us your money so that we can continue to provide politicized public goods so we can provide liquidity globally, as most prices in trade are expressed in dollars. We can continue to conduct overseas wars.

We can continue to support Israel as it commits genocide in Gaza. So it’s a question of how do you finance public goods if the United States, in a sense, is one of the leading countries in the world that is meant to provide public goods, but in the very politicized way in which it routinely provides them. Now, Miran, you know, from the Council of Economic Advisors, was absolutely explicit.

You know, he gave countries five options. One of them was to write checks to the US Treasury. So in my view, you know, there are two fundamental roots of this problem.

The first is the exploitation of the use of the dollar as a reserve currency. And then the second is the uncompetitiveness, the decline in the competitiveness of the US economy. In relation to the first, you know, Bretton Woods, Keynes actually proposed the Bancorp.

In 2008, I think it was, Joe Xiaochuan, as he finished as the chair of the PBOC, the People’s Bank of China, actually argued that national currencies should not serve as reserve currencies. And in a sense, he was alluding to the so-called Triffin dilemma. You know, the countries whose currency is used internationally must run current account deficits to supply liquidity to the rest of the world.

Obviously, in doing that, you know, they’re able to purchase things for which they, in a sense, don’t pay because the dollars, for example, that they distribute do not come back to purchase goods and services from the United States, although in some cases they will come back, you know, as acquisition of US assets. So, as Michael said just now, you know, that Triffin dilemma kicked in, you know, in the late 1960s when European governments were asking for their trade surpluses and their dollar surpluses to be exchanged for gold. So, the US simply took it off gold and forced those countries to revalue.

And through doing that, it prompted the oil crisis, which then had serious consequences for the entire world. So, the United States is prepared to act in utterly irresponsible ways, you know, in the pursuit of its own narrow self-interest. After that, of course, after that, of course, you know, the United States, you know, was in a very advantageous position because basically it had, I mean, these are not my words, but it had a credit card with no expenditure limit and no repayment date, effectively, although in the end, the Triffin dilemma would kick in.

And in a sense, that is one of the problems. It’s kicked in. And it’s kicked in in the sense of a huge trade deficit, a huge budget deficit, and a corollary of them is a massive debt burden.

It’s nearly seven trillion in short-term debt that has to be refinanced this year. And it’s kicked in in a situation where basically the service of US debt is now greater than US military expenditure. You know, and a Scottish, Adam Ferguson, you know, actually pointed to that dilemma and explaining the fall of the Roman Empire and also the fall of Britain.

So, if I just add that the second problem is basically, you know, it’s got this 1.2 trillion trade deficit in 2024. It spent 4.1 trillion on imports. Basically, its problem is that it’s uncompetitive.

Its uncompetitiveness derives from a lack of industrial investment, a lack of investment in infrastructure, a lack of development of industrial skills on the one side. But on the other side, it represents the extraordinary achievement of other parts of the world that have not followed that course, that have improved the skills of their people, that have invested in their infrastructure, that have invested in industrial activities and are pushing now with these new technologies to play a leading role in the next industrial revolution. So, these are the two root problems.

And in a sense, I think, as Michael indicated, the Trump regime is trying to address them in a deeply contradictory way and is trying to impose as many of the costs as they possibly can on other parts of the world, and in particular, of course, on China, which is seen as its major challenger. Yeah, those are such good points. And I just wanted to show some charts and graphs supporting that.

But let me just first of all say, you know, Michael, you’re right, of course, that today, the Dow Jones has gone up. But let’s take a look at it. Here’s the Dow Jones industrial average.

We’re looking at five days of it. So, yes, it has gone up a little bit. But if you look at it from a one-month perspective, it remains down.

If you look at it from a five-year perspective, it has also, you know, it has essentially declined since, you know, the initial rally after the election of Trump, but it has since then declined. And of course, if you look at it from a max point of view, again, it’s back to the levels that it was back in about the end of 2023 or thereabouts. So, you know, the recovery in the Dow Jones industrial average isn’t great.

And this I just feel we should point this out because the whole point that we’re trying to make is not whether the United States has been, you know, essentially collecting tribute from the world in order that it may consume without end or at least its rich people may consume without end in order that it may encourage, sponsor wars and genocide. We know all this. The question we’re trying to answer today is how long can it go on? And our current developments, which we have been noted, the fall of all American assets, including bonds and equities, including the dollar itself, is this the beginning of the end of the dollar system? That’s the question we’re trying to answer.

And, you know, Mick, you’re absolutely right. So, you know, here is a graph showing the national debt over the last 100 years. And you can see that, you know, compared to the early 20s, compared to our mid 20s, compared to 100 years ago, we’re just at like, you know, 35 trillion dollars of total debt already in 2024.

So it’s absolutely, you know, this is unsustainable. And as you know, recently, we’ve seen that there has been a great softening of the treasury market. Essentially, more treasuries are being offered for sale than there are willing buyers for so that the value of treasuries is declining.

The yield on treasuries is rising, even though the US authorities are doing everything in their power to encourage people to buy treasuries. So completely agree with you that the Triffin dilemma is kicking in. You know, now this Triffin dilemma is really important.

And Robert Triffin actually proposed it back in 1960, and even a year or two before that, because basically, the problem became very evident already in 1958, when European currencies became convertible. And a lot of people began to start choosing European currencies over the dollar as their choice for trade, for investment, etc, etc. And so the dollar was essentially, the loss of gold was beginning.

And so, you know, because the dollar was tied to gold, people said, well, we don’t want your dollars, give us gold instead. So Triffin testifying before Congress in 1960, basically said, proposed his dilemma, which is essentially that there is a contradiction contingent upon the fact that a national currency also plays the role as an international reserve currency, a sustained flow of dollars and liquidity fueling global trade implied continuous and persistent deficits in the United States, consequently eroding confidence in the dollar and its reserve currency role leading to instability. Now, this very often, you know, people, you know, then, as I’ve said before, you know, there’s an entire academic industry in the based largely in the United States, where, you know, important scholars are constantly talking up the dollar saying, you know, there’s no problem with the dollar, the, you know, the dollar is the currency of the most powerful country in the world, the biggest economy in the world, the deepest and widest financial markets in the world, which, of course, are also the most volatile, crisis prone, speculative, and jigged markets in the world, rigged, sorry, markets in the world.

So many people say that the Triffin dilemma does not apply because gold is no longer in the picture. After 1971, the dollar was no longer convertible into gold and the Triffin dilemma no longer applies. But Triffin was, the Triffin dilemma isn’t primarily about gold.

The Triffin dilemma is primarily about the fact that the United States provides the world with dollar liquidity by running deficits. And the size of these deficits, unless they are very, very small, in which case the liquidity will be very, very low, will lead the world to, will essentially lead to a decline in the attractiveness of the dollar declining the value of the dollar. And this logic still applies.

So you’re absolutely right, Mick. And, you know, this is, I should say, also the argument that I’ve made in my own works in these two books, Geopolitical Economy from 2013 and Capitalism, Coronavirus and War from 2023. And then a few years before that, Michael and I wrote this article, Beyond the Dollar Creditocracy, which also summarizes the argument of these books, particularly vis-a-vis the dollar.

So we’ve been making this argument, essentially what we’ve been arguing and what I argued in Geopolitical Economy is that after 1971, the only way in which the United States could counteract the operation of the Triffin dilemma could prevent its wide current account, as well as budget deficits, the so-called twin deficits, from leading to a decline in the value of the dollar and therefore an extinction of or an extinguishment of its role as the world’s money was essentially by increasing doses of financial deregulation, which expanded dollar denominated financial activity, and therefore gave the world reasons to hold dollars other than trade and investment alone, that is to say entirely financial and speculative reasons to hold dollars. And so currently, you know, the decline of the dollar, which, you know, the recent changes have not reversed is very interesting. And let me also show one other graph before I finish talking for this time.

And that is that the value of gold, which has always gone up when the dollar is in crisis, people will remember, some people will remember, or at least know about the crisis of the late 70s and early 1980s, when the price of gold reached about $800 or over $800 to an ounce of gold, which was, you know, that therefore devalued the dollar today, accounting for inflation, etc. We are far above that, essentially. So essentially, since 1971, this graph shows that the gold has risen 900%.

That is nine times in real terms. So it is now touching $1,000 of the old money. And of course, as you know, today, the current value is about $3,500 for an ounce of gold.

So really, this is the scale of the problems we’re talking about. And maybe I’ll just make one other point, you know, which I find very interesting. This guy, Ruchir Sharma, who is the head of the Rockefeller Foundation in the US, he wrote an article, this is before Trump was, Trump took office, this is written in December of last year.

And he’s basically saying that the United States and all American assets are in serious bubble territory, because the whole world is acting as though they’re kind of being encouraged by the rising markets in the United States, which are rising, not least because of relatively easy money policy, quite frankly, even if the Federal Reserve was raising interest rates, they were not high in real terms and money was flowing in. And so the rest of the world is acting as if America is the only nation worth investing in. It’s not a bubble in US markets, it is a mania in global markets, you know, and he says this is bigger even than the dot-com bubble.

And he said 70% of the flows into the 13 trillion global market for private investments is accounted for by the US. He’s pointing, ironically pointing out that most of the world may think that, most people may think the world is multipolar, but for investors, it is unipolar. And he ended that article by saying America is over-owned, overvalued and overhyped to a degree not seen before.

And here’s something else that you may particularly want to comment on as well. Of all the assets, so this is the size of a stock market. So the green is the US stock market, the green circle is the US stock market in which the information technology bubble is of which it is one part, which accounts for like a very sizable portion of this.

And the US stock market, as he pointed out in his article I just quoted, is absolutely huge because of all the money flowing into it. And much of it is driven by information technology. And of course, this was written before the deep-seek event happened.

So yes, Mick, I think you’ll have something to say about this, because of course, with the explosion of deep-seek onto the scene, which showed that all the money that was flowing into the magnificent seven tech stocks, which was largely driven by hype around AI and the extent of the investment, which would be necessary around that, that has collapsed. So that is definitely adding to this, which is really also quite interesting if you look at the fact that, you know, hype about technology and US technology in particular has been part of this, of the scene of, you know, essentially keeping capital flowing into the United States, going back to the days of the dot-com bubble. But anyway, I’ll finish there for now.

So I don’t know, Michael, do you want to say something? Yes, there’s something much too abstract about this whole discussion about foreign countries and investors investing in this US stock market. I think the key is, how are you going to get foreign countries to finance the Cold War? To me, that was the original problem that drove the United States off gold. My whole book, Superimperialism, describes 1950 through 1972, and on into the 70s, the entire balance of payments deficit was military spending.

The private sector was just exactly in balance. There was a trade deficit, but it was offset by an enormous inflow of US investment abroad, remitting earnings and dividends and capital gains from other countries. What’s left out of account in this purely academic market discussion is something that’s not a market function at all, military spending abroad.

Now, it’s true that since the 1970s, the United States has also run into deficit for its trade, run into deficit for its investment. But the fact that foreign central banks have stopped buying gold and bought American treasury securities or US agencies, FHA, Fannie Mae, things like that, which are just a few basis points paying more than treasury securities, all of that is political in nature. After all, since we call our show geopolitics, that’s really… Geopolitical economy, not geopolitics.

Right. That’s really the key that’s left out of account. Here’s basically what happens, quite apart from what we’re talking about in the market for investment.

America spends an enormous amount of money in 800 military bases abroad, an enormous military budget fighting Russia, China, and anyone else so it declares an enemy. These dollars are spent and end up in foreign central banks. What are they going to do with it? Now, if America were any other country like England, when it ran a deficit, it would have to either, the excess dollars would push down the exchange rate and the dollar would go down in price, or the United States would do what England did with its stop-go methods.

It would raise interest rates to make it to borrow the money short term from foreign investors to keep the exchange rate in balance. The United States has not had to do that. The United States tells foreign central banks, well, what are you going to do with these dollars you’re getting if you actually don’t recycle them to the United States? If you don’t buy U.S. Treasury securities or stocks and bonds or anything else, then your currency is going to go up against the dollar.

If it goes up, that’s going to make your exports less competitive and it’s going to hurt your export industries. You’re really stuck. If you don’t want your economy to be destabilized by this dollar glut that we’re pouring into the rest of the world, then you’re going to have to just lend us the money by buying Treasury securities.

Well, as we discussed earlier, the volume of these Treasury securities has gone so high that it looks like they’re unpayable. How on earth can the United States ever run a balance of payments surplus, enabling it to earn the foreign exchange to buy back all of the dollars that it’s poured into foreign central banks? It really can’t do that. And I think that’s the problem that Trump has said.

How can we make other countries somehow absorb all of these costs without really having to repay the foreign debt, but somehow just create fines? Well, he’s talking about withdrawing from NATO, certainly withdrawing from the costs of NATO. Let Europe pay its own costs of saving England from being invaded by the Russian troops as they march through Poland and France and Germany and lose 50 million men trying to invade the British shores. Let Europe pay all the costs of this phantom invasion.

It all gets so fictitious that I can’t even imagine how to describe a scenario that he might possibly have in his mind because they’re all crazy. But the key really is the Cold War, military spending, pushing dollars into the market. And the United States does not have to raise interest rates.

It can lower interest rates. The United States does not have to devalue the dollar. It can maintain the dollar.

Well, Trump says, OK, something has to go. What’s going is we’re not going to maintain the dollars exchange rate. It’s going to go down.

And somehow that’s going to help us. And we’re going to have lower interest rates and insist that other countries lower their interest rates. And that’s going to create an environment where American companies will invest more and foreign countries will want to invest in the United States to be behind the tariff barriers that we’re putting up.

All of this is a fantasy. And I don’t think it’s the fantasy that the stock market and bond market recovery of the last few days has recognized. Somehow there is just a hope, a dream that somehow there’s a fantasy that you can get out of this dilemma that the United States has painted itself into without really understanding how is it going to do it.

If you look at the balance of payments, you know what’s going to happen as a result of what Trump has done already. But the current account is not only trade, it’s services. One of the main services is foreign tourism in the United States.

That’s been a huge contributor to the U.S. balance of payments and helping support the dollar. Well, the Canadians are the major tourists have come the United States. There is such an anti-American feeling now that they’ve cut back other tourism.

Foreign countries are cutting back their tourism because of the hassles that they’re getting from the immigration authorities here. Another contributor to the U.S. balance of payments, of course, is the military exports that it makes. Well, you have Europe offering to wanting a kind of military Keynesianism.

Merz in Germany wants to spend 800 billion euros on reviving Europe’s economy by the arms industry, the European arms industry, not American arms, quite the opposite of what Georgia Maloney was trying to promise. So you’re having this coercion. All of these resolutions of every aspect of the balance of payments is political.

It’s not a market phenomenon. It has nothing to do with what economists are talking about and balancing and incentives for price incentives and all of this. This is all a distraction so that they can avoid the political elephant in the room, the Cold War spending and the U.S. control over foreign governments pursuing trade policies and investment policies that are not really in their own interest at all, but are in the American Cold War interests.

It’s all about the Cold War. And that’s what the whole dollarization versus de-dollarization issue is. It’s about the Cold War’s division of the world, as we’ve been discussing, between Europe and America on the one hand and the global majority on the other.

Which way is Europe going to end up going? Which way are Asian countries in Africa and Latin America going to go? That’s really what the issue is. And it’s much more than just charts about rates of return and comparative import and export prices. Me.

Okay, I can make, I mean, two comments, but I’ll make one first and then I’ll make the other one later on, which relate to a question that Radhika asked when she asked whether, you know, the international role of the dollar will continue, you know, well into the future. The first one is that a short while ago, you know, the People’s Bank of China announced that cross-border settlement systems for the digital renminbi will be fully connected to 10 ASEAN countries and six Middle Eastern countries. So it covers 38% of world trade, which is largely denominated at present in dollars, but they will enter, you know, the realm of the digital RMB.

In one trial with Malaysia, I think, it took, no, Abu Dhabi, okay, it took, it took normally three to five days, you know, for a settlement to be completed in the SWIFT system. This occurred in seven seconds and the transaction costs were reduced by 98%. Similar results came from a trial with Malaysia.

So, first of all, it means that, you know, the dollar, you know, clearly faces a major challenge from the emergence of these digital currencies. The second point that I think is very important is that although the United States has a deficit in goods, it has a surplus in services. These services include, of course, tourism, of which Michael spoke, but also, you know, many of the services connected with international trade and with the use of the dollar, accountancy services, various financial services, legal services are major sources of income for the United States and indeed for Great Britain, you know, which is almost entirely dependent, you know, for its GDP, not, you know, for its wealth, if you like, on the role of the City of London in the game, which essentially generates revenue from these kinds of transactions, insurance as well.

If we move into this world of these digital currencies and if this digital renminbi takes off, then those service revenues are going to decline very rapidly indeed. So, it means that basically the service surplus, you know, that is enjoyed at present by the United States and by some other European countries, especially Great Britain, is also in jeopardy. So, in a sense, that is another point, you know, to the scale of the challenge, you know, that these countries face.

And I mean, to some extent, it, you know, explains, you know, their resistance, you know, to China and what Michael was saying about, you know, the way in which what is happening at the moment is to a significant extent oriented towards attempting to contain China and prevents its progress. Yeah, I think we’ll have to wind this down very soon, but those are really interesting points, Mick, and I’d just like to say that, in fact, a large part of this service income is directly connected with the capital inflows into the United States, because you want to make investments in the United States, then you have to get an American company to manage it and so on, and then they take big fat fees and so on, and this counts as service income. But let me also show you something else, which is, you know, people are always, you know, talking about, you know, how, you know, like Michael, you were talking about how the US is compelling the rest of the world to hold treasuries and so on.

But I think, again, to me, this goes back to the question, which to me is the most important question, did the exorbitant privilege ever really exist? It seemed to exist for a long time, it seemed to exist for decades, but did it really exist? One thing that we should see, for example, this is from a recent article in Bloomberg, foreigners own 19 trillion of US equities, 7 trillion of US treasuries, 5 trillion of US corporate bonds, but together these are like big numbers, they account for between 20 and 30% of the total market, which means that between 70 and 80% of the market in all these things is actually owned by Americans. And so, the role of the foreign sector can often be highly exaggerated. So, let me also say something else here, which is quite interesting.

So, I’ve got this chart here, which, you know, which shows federal government debt holders, most people, when they talk about government, US debt, they only focus on the foreign holders of US debt. And then they say, well, China has so much and Japan has so much and so on. But the foreign holders here is only the bottom bit, which is in this kind of reddish color.

All the rest is owned by United States individuals and entities. So, this is just federal government and of course, recently, part of the reason why the price of gold has gone up as much as it has, which I showed in the graph earlier, is simply because central banks have increasingly been resorting to buying gold as an alternative to buying US equities. And a final point I’d like to make, which is really quite interesting.

This is from the most recent economic report of the President. It shows the top contributors and recipients of US flow. So, which are the countries from which money is coming into the United States and which are the countries to which money is going from the United States? Obviously, the incoming money in total is, of course, more than double the outgoing money or about double the outgoing money.

But you can see in here that all the countries that are normally fingered, China or even Japan, Japan figures here to some extent, but not among the top. Bulk of the money that is flowing into the United States is flowing from other Western countries and other developed countries into the United States. The rich people of these countries seem to be addicted to the US asset markets.

They are the ones who are overbuying overowning US assets. So, this is also really interesting so that if there is a crash in the markets in the United States, that crash is going to affect these flows. These are the people are going to be badly affected.

So, that’s kind of interesting. And the idea, by the way, that the United States does not have to because the rest because it somehow compels the rest of the world to hold treasuries, that it does not have to raise interest rates is not true. The Triffin dilemma acts not on treasuries or only on the rate of return, it acts on the value of the US dollar.

And there has been at least one instance in the past that I can think of where the Federal Reserve was compelled to raise interest rates with disastrous effects. In the 2000s, as the housing and credit bubbles were inflating, in fact, the US economy was doing very poorly, no matter the pronouncements of Greenspan and later Bernanke and so on. The US economy is doing very poorly.

And essentially, you know, and the United States Federal Reserve after 2000, after the bursting of the dot-com bubble, had essentially started a regime of very, very low interest rates. So, easy money policy was starting. But all of that, combined with the spectacular development in China and to a lesser extent in some other countries, was leading to increases in the prices of commodities, putting downward pressure on the value of the dollar, which compelled the Federal Reserve to start raising interest rates.

And so, they were raised in tiny increments as more recently, you know, 25 basis points and 50 basis points now. And from about 1 percent, they came up to about 5, 5.25 percent. And that was the point at which the housing and credit bubbles were pricked.

Because they were all leverage trading. And so, this time around, you can say either that the Federal Reserve increasing interest rates up to the same level again, 5.25 percent, but with high inflation, of course, the effective rate is much lower. Anyway, they have brought it up to 5.25 percent.

And after that, Powell started the mantra of longer, sorry, higher for longer. So, he has kept them at that point. Trump is now demanding that he should lower them.

Of course, if the Federal Reserve were really serious about combating inflation and the only way in which it would permit itself to combat inflation, namely by raising interest rates, it’s not doing its job. Inflation has been too high for higher than its 2 percent limit for a long time. And so, it’s essentially, and of course, the Federal Reserve would like very much to lower interest rates or at least not raise them further.

So, what Trump is demanding the Federal Reserve has will do probably do anyway. But the point is that if it increases them further, this bubble, asset bubble will crash and that will be essentially will lead to a lowering of the value of the dollar. And by the way, if it does not do this, it will lead, it will essentially mean that inflation will erode the value of the US dollar.

So, it is, the Federal Reserve has got been a rock and a hard place. So, you would not have been up stock prices in the last two days, soaring as they have. No, they have not been soaring.

I just showed you the they have gone up a little bit, but not compared to the… Three and a half percent in two days is really a big jump. I mean, it’s enormous when you look at how little people have to pay to buy options on this. Well, OK, but anyway, so I think we should probably wrap up this discussion.

Can I make a quick point? Longer than an hour. So, yes, please. I’ll just make a quick point and then Michael and you can wind up.

Um, I just wanted to mention, you know, that in 2019, US overseas assets were equal in value to 69% of GDP. Well, foreigners assets in the United States, US liabilities were… Oh, you should have shown that chart. No need.

162.4%. But, you know, the annual income on these assets received by the United States was actually greater than the annual income on a much greater value of assets of foreigners who place these resources, these monies in the United States. And the reason is that, you know, the rate of return that the United States gets on its investments abroad is far, far greater than the rate of return that foreigners get on investments in the United States. It also has important implications.

I mean, China, for example, was a country that bought US debt, but it gets a very, very low rate of return on those assets that it holds in the United States. So, you can argue that, you know, from the launching of the BRI, China has actually decided that a better thing for it to do is to use its surpluses and to use its resources to invest in infrastructure and promote development in the global South rather than purchase US assets. I think, you know, that is another important transformation, you know, that is very likely to significantly change the role of the dollar.

And I think it’s an issue that one could think about. Absolutely. And in fact, the situation is even worse than what you’re saying, because here is a graph which shows the blue line shows the net international investment position of the United States, which has been in negative territory since the late 80s and has continued to worsen.

And then there is a red line which you can barely see, but about here you can see that it is just a fraction above zero. So, this red line shows the balance on primary income. This is the income that you are talking about.

Even though the international investment position is negative, the United States still earns more from the rest of the world than the rest of the world earns from the United States, chiefly because the rest of the world is not allowed to buy the more lucrative assets. They have to hold, they have to essentially, they’re confined to buying US treasuries and so on. And there is always a big brouhaha, you know, when, for example, in the 80s, Japanese holders of dollars wanted to buy important assets in the United States.

They were essentially hounded out. But here you can see that this excess, you know, this excess that the United States makes over what the foreigners make in the United States, despite this mismatch of assets, is actually barely in positive territory. It is not that much.

And it is remarkable because, you know, this, you know, for a long time, you know, when back in the 60s, when the United States, when the United States was bleeding gold and people, the Triffin dilemma was operating in a way that was, you know, essentially draining gold from the United States. As far away as, as early as that, US authorities started using the idea that, you know, our net international investment position is positive. So, you know, up to up to this point, it was in positive territory.

But then, of course, it began going in negative territory. When it started going in negative territory, all the dollar boosters started saying, oh, well, it doesn’t matter because we earn more from our assets abroad than foreigners earn from their assets in the United States, and that this was somehow going to save the dollar. But this is a very, very small amount of excess that the US is earning.

And I doubt this has any effect on the dollar. The real issue is, in terms of the dollar’s position, is for how much longer will the rich people of the rest of the world and other institutional entities, such as Canadian pension funds or what have you, keep pouring money into the United States? When that stops, when that merry-go-round stops, then the role of the dollar will be over. And I think we may be very looking at the developments of recent days and weeks, I would say.

And in fact, since Trump’s inauguration, we can, you know, since the Trump trade began to become the sell America trade, we might be close to that point. Radhika, I have to make a technical observation on the chart. You said before that much of it is misleading.

What is a foreigner? An enormous proportion of these foreigners are foreign affiliates of US firms. The foreign remission of earnings to the United States is very largely, if not primarily, by foreign affiliates of US manufacturing firms. The money that’s being made abroad is by American investments abroad that it’s been able to make because of the high value of the dollar, making it cheaper to buy foreign investments.

And imagine if the US dollar goes down in value, all of a sudden, this is going to make the earnings on US investments abroad even higher in dollar terms. So if you’re an American head office, you’re going to say, hey, let’s not invest in the United States because the dollar is going down. Let’s invest in Asia or Europe whose currencies are going up.

And all of a sudden, the earnings we make there are going to be much bigger for our US dollar balance sheets. So the failure of these charts to indicate foreign investment by the United States, as you said, it’s the United States to the United States. That has to be taken into account.

And the newspapers are not discussing this. Absolutely, Michael. You know, you’re absolutely right.

But actually, you’re reinforcing my points in a couple of different ways. Yeah, that’s my invention. OK, OK, sorry.

I thought you were not. But anyway, you’re reinforcing my point. No, no, I’m criticizing the statistics and saying how the statistics of the papers are reprinting.

I was marshalling these statistics in favor of my point. So let me just say this then, whether or not you agree, you know, whether or not you were agreeing or disagreeing. But let me just say this.

Number one, if a large number of the foreign entities are really American entities, then that only reinforces my point that should the dollar system crash, should the dollar decline in value, the worst sufferers, because, you know, yes, they may make more elsewhere to the extent that they have investments, but the dollar will be able to buy less. And so it will be Americans who will be affected. And the second way in which you’re reinforcing my point, which actually comes back to a point that Mick was making, you see.

Since 1971, the dollar has relied on an ever expanding amount of financialization, ever expanding number and scale and volume of transactions in U.S. dollars, which are purely financial, not related to real economy, trade, investment, et cetera. Now, as the more you have the kinds of arrangements that Mick was talking about and, you know, that most of the international transactions have nothing to do with trade or investment, trade or investment are very small amounts. And if they are essentially taken out of the dollar system, and they can be if they’re taken out of the dollar system, the dollar system essentially can continue its speculations or crash, whatever it may do, the investments and economies of the rest of the trade and economies of the rest of the world will not be badly affected.

And so in that sense, precisely because trade is now such a small part of international payments and international transactions, it is actually relatively easy to get that out of the dollar system. And I think that, yes, it seems that China and other countries are making some progress in that department. So but perhaps we can end this discussion here for today.

It’s been really interesting and entertaining. Thank you very much, both of you again, and hopefully we’ll do this again sometime soon. Bye.