Hello, and welcome to another episode of the Odd Locks podcast.
I'm Joe Wisenthal and I'm Tracy Alloway.
Tracy Dollar strength, dollar dominance conversation is not going away.
No, I mean it's never really gone away.
Is that?
Like?
That was our intro for the last episode we did on this topic, which is it seems like every couple of years you get this resurgence about oh, the end of the dollar. The dollar's going to lose its exorbitant privilege. I remember my dad sending me articles about like, oh, a Rack is invoicing oil in euros like in nineteen ninety eight or something. Lots of conspiracy theories around that one. But I will say we had that conversation with Paul McNamara.
It was a really good overview of some of the talk that's happening right now and why certain countries scifically emerging markets like China might want to get away from the dollar. But I feel like there's more to say.
All right, I'm going to make a confession, which is that in all of these conversations, there are certain things that people say and I just sort of like nod in my head to like, M that's right. That's right, but I don't totally get them. And one of them and it can it's not even so much about the dollar per se, but about dollar alternatives, right, And the big one is like, well, the redmon B cannot be a real dollar alternative until China runs a current account deficit.
That's right, that's right, But like beyond that, like I actually, like do not totally get what that means or what what actual constraint China's trade position with the rest of the world means for the future of renman B internationalization.
Well, I think the way I would frame it is, one thing we hear is that there isn't a viable alternative to the dollar. There are no other currencies slash country economies that are at the level the US's that could possibly replace the dollar. And so I think we need to talk about why that is, what exactly that means? What does it mean? So I get the idea that, Okay, maybe a country doesn't have enough financial assets for savers
to buy to put their excess money in. I get that, But what does it mean that it's not a viable alternative?
And I guess the question is like, okay, but what would it take yeah, right, Like it's like, I guess we could sort of agree this basic premise. Maybe there's some impulse for some countries to move away from the dollar. Also, there are no real alternatives at this point, but maybe at one point there will be. But actually, what would it take for another currency, maybe the renmand be, maybe the euro, to actually become a meaningful global reserve Now, if.
China woke up tomorrow and put this like at the top of its agenda, I don't think it's going to, but what would that sort of ten step plan actually look like.
That's a great way to sort of frame the conversation. What would it actually look like. So we're going to sort of be having part two to our recent conversation with Paul actually a long time a friend of Paul's, so maybe a similar, different perspective, but sort of like of what would it take for some other currency to
be a meaningful global reserve currency. I'm very excited we're gonna be speaking with karthik sonchron a true FX veteran, recently at Corpe, He's been at Eurrasier Group, multiple banks, an avid maker of dad jokes and puns on Twitter.
So just to actually cover Paul when he was trading right.
So a perfect guest for this conversation in many respects, and someone who I feel like I've wanted to have on the show for like years and is like, in my mind, an odd lot's guest even though he hasn't been on the show before. Karthik sonchron thank you so much for finally joining us here.
Thank you very much for having me. So that's a pleasure to be here.
And what does that mean?
Actually before I want to get to the alternatives just before we do, though, real quickly. I mean, you listen to our recent episode with your long time friend and colleague Paul McNamara, in which he said there is some global impulse for countries to stop using dollars, but there really aren't many alternatives. Do you basically agree with that premise?
Yeah, I mean there are. I'd say two things about that. One is I think going to replacement, and that's how this usually gets framed as replacements. I think that's silly. And the way I think about it is, would it makes sense to see creeping regional displacement rather than replacement?
And I think that's that's that's that's the possibility, and I would argue that the Euro has already done that to some extent in you know, not just in the Euro area, but also in Central and Eastern Europe, you know, And I remember when I started my career. You know, if you wanted to trade there's lotty, you traded dollar Polish and if someone asked for a price in Marx Lotti, you traded through the legs. Now it's the other way around. You know, if someone asked for a price in dollar Polish,
you trade. You're Polish and you're a dollar. So it's taken a long time, but I think that's this regional displacement idea. But what this also brings out to me at least is everyone is so excited about the re memby kind of this bricks currency and so on. And one way to frame why I think, you know, there is a desire but it's a very long way from being fulfilled, is that look at what the euro has, which is kind of a solid number two pretty you know, kind of like avis to the dollars hurts. At least
that's the way the old commercials used to go. But the re memb is really really really far behind. And one thing, just because I've been introduced as an avid maker of dad joke.
First one to the first one here.
It is is that or whenever this is played? But you know, you mentioned a ten step program for re memb internationalization, and I was reminded that the last person who had a ten step program that really worked with gengis Khan.
Okay, let's not go anywhere.
Okay, sorry, I'm gonna at the dad jokes. Just to back up a second.
Oh, it took me a second to get that one. Actually, sorry, I it took me a second to get that.
That's a good life. Okay, we're gonna have a fun time here.
Just to backup and ask this question in a different way. But I mean, there is there is this assumption that China would want to have renman be internationalization. Should they want that? You know, if you consider China as an export driven economy that exchanges goods in return for US dollars, which are a relatively stable currency, does it make sense that it would want to have a different economic model. What are the benefits that it gets out of that?
I mean, I disagree with this, you know, and the stuff that Joe mentioned in the beginning, does the country at the center of the international monetary system need to run deficits, and I don't think that's necessarily in fact, because you have a model written under the gold standard with a huge exporter of capital. The US, until the mid nineteen sixties was the center of the Bretonwood system
and was also a huge exporter of capital. So what that suggests is that it is possible for a surplus country to run to be the center of the monetary system. You just have to find a way to get that currency out the door in size, in massive size. And you can do that either through the trade account by running very large external deficits, or you can do it by externing great jobs of capital either in your currency or that other countries are denominating your currency. So I
think that's one way to think about it. But clearly China is not there, and they'll have a very long time getting there, not just because of the issues with capital con convertibility, but there's a lot of things in the basic way that Chinese financial markets operate that make it difficult even for other people to issue in REMN and BA size.
So let's jump into this because I think this is a point that I have not really heard many people make. So people make the point that it's like, Okay, one way to get your currency out there into the world is to run a big trade deficit. But as we know, and I'm even thinking back to some of our conversations with like lev men and about the rise of the shadow banking system in euro dollars, the other pot way is just for other entities to start issuing your currency
or assets that are denominated in your currency. And theoretically I could issue a renmon b denominated loan and off tell someone I'm going to pay them back in renman b.
But you made this point with respect.
It's a great thread with respect to Brazil, which is that actually like what we need to see as countries like Brazil being willing to take out renmon be denominated debt. Can you talk a little bit about the importance of that, Like, I think that's a very powerful thing.
Not many people have talked about like this element of it.
Yeah, And I think they are actually two issues in some ways. It might actually be a good idea for Bristol to issue remimbi debt, right because you have and I think this is one of the arguments for a
multipolar system. More broadly is if you're a country whose terms of trade are driven by what's happening in China, if your business cycle is much more responsive to China, that it makes sense to be able to issue in the Chinese currency, because what you don't want to be in the situation that you see emerging markets end up in all the time they issued in dollars, the commodity exporters, commodities are priced in dollars, the world slows Chinas, commodity
prices tank, the dollar goes up, and their host I mean this is like, you know, this is like this rinse and repeat cycle in the international financial system. So it might actually make sense for you know, that thread for you know, I was saying, like I'll get excited when cbr D issues like a huge amount in pandemonds. But that's difficult, that's really difficult, and there's so many different reasons for that related to the way Chinese financial
markets work. One is, if you issue in REDMENB, which remenbe do you want to issue in do you want to issue in the onhore market which is deeper, or do you want to issue in the offshore market, which you know, which where you might have more people able to transact, but it's a much sellower market. If you do end up issuing the entre market, obviously they're you know, and you may not want to. The reputation that Chinese investors have is of being somewhat more excitable. I think
we've seen that in via in the equity markets. On the other hand, if you issue offshore, the problem is that China not only have as to currency CNY and CNH and not your currency and off shore currency that trade reasonably closely together a lot of the time. But one of the ways they do that is by having different interest rates. And one of the things that Chinese do periodically is when their worried about the speculative pressure on their MMB, which they think is coming from offshore players,
is they will jack up interest rates on CNH. They will take it to the moon. They've seen it a few times, which might work in deterring the speculators, bring you know, speculative pressure back down again, get CNY and CNH to converge, but that's really not that comfortable if you've issued in you know, in the you know, in
the off shore currency. So you know, and one of the things that the US has the dollar has is incredibly deep derivative markets or instance, so if you want to issue, if you if you issue in dollars and you want to head your interest rate risk, you can do it by trading your dollars. Probably the most liquid, one of the most liquid financial futures contracts in the world, I would remember financial futures. Interest rate futures are just a are like a very very very small fraction of that.
The other issue with issuing on shore is you know what's your and I'm China has this huge domestic debt market. It's the world's second largest debt domestic debt market, but to a very significant extent, it's composed of entities with opaque finances. Right the CGB market, the Chinese government bond market is a relatively small fraction of the onshore market. Just true, you know which and treasuries are not the entirety of the US market either, but the opacity of
entities issuing domestically is significantly hard. You know. My one liner on this is everyone talks about China not having a rule of law. My view is that the real problem the China doesn't have rule of accounting. That's the real issue here, so expect that.
Yeah, I was expected I was stealing myself karthk So I guess this brings me to the big question, which is how much of this boils down to just capital controls and the fact that China does not have an open economy, and you might expect that one of the requisites for having an international currency would be to have relatively free movement of that currency.
Absolutely, I mean that's I think capital controls are a you know, and that's the obvious that's the obvious one, and they're trying to tinker with it at the edges, allowing in flows and outflows. But even at those edges, you know, what I was trying to get at was this idea that you know, you have in offshore rem MEMB.
That's much that's more freely tradeable than the onshore REMMB, But there are very sizable disincentives to issuing in size in the offshore REMMB because these things like a smaller market. How do you head? So capital controls are a huge part of it, But if you dig deeper into the capital controls issue, I think it raises more questions.
Well, then I would sort of want to maybe just go back to a question Tracy asked, which is, like, is there a reason China should pursue the internationalization of the renmen b or should pursue having more global central banks hold renmon be as part of their reserve stock, Like, is there some obvious reason why you know, it's not going to be number one on the agenda, but is there a reason why it should be in the top ten or top twenty of the agenda.
I mean, one of the things that they've said for years is that they want to see a more internationalizedrum, and but I think when they look at the trade offs that they might need to make, I don't think they're ready to, you know, take a to take a huge jump. And I think the the other issue is that we've seen this before, right Japan didn't want to.
Japan didn't want to either, And about thirty years ago people were talking about the extent to which Japan and the end could act as another reserve currency, and the Japanese just decided they simply didn't want to because of the pressure it would put on the profitability of their
industrial base. Things are somewhat different from China in the sense that they seem to have a hankering for kind of broad spectrum global power in a way that the Japanese did not have, and maybe having an international currency is part of that, but to the extent that it happens, it would likely be much more halting. But they've got a really, really long way though regard.
So Karthik, just going back to the deficit, I and I know you kind of spoke to this already, but what if instead of telling China to run like a massive deficit, what if China was able to retool its economy in some way where I mean, the reason it runs this big ball of savings that tends to roll around internally is because there isn't that much of a
social safety net. There isn't that much of a you know, social welfare in the state, and so people tend to accumulate a lot of savings or maybe rely on their children. But given the one child policy that's been in effect for a long time until recently, that wasn't really viable. What if China just built a social safety net to reduce the excess savings. Would that go some way towards retooling the economy in such a way that you could have r and b internationalization.
Yeah, I mean I think so. I mean, to my mind, it would actually take care of two or three different issues. And one is the underlying growth model in and of itself, right, because you've kind of, you know, all the low hanging fruit on investment, particularly real estate investment. You know, they're gone. And I've kind of tended to be an optimist about China because I think you kind of need two things.
One is a kind of demonstrated capacity for technological convergence and income convergence for the rest of the world, which they've shown. But the other thing you really need is internal convergence between kind of the coast and the interior, more.
Middle income in the Middle Kingdom. That's my dad joke. Thank you.
I like that. Thanks, And you know, and you kind of look at you know works, you know works about what rural China is like. There's just there's a huge
incentive both socially and economically to to do that. To do that, and think the other thing that lower precautionary savings would would achieve is that would be a contribution to ending this kind of like really horrible nexus of excess savings no place to put them, and underfunded mandates for local governments, which then end up having to sell real estate to developers in order to, you know, in order to get the money to provide the services the
central government want. So there's this really nasty nexus right there that a larger social safety net would also help with it help with financial stability.
I think, Joe, this is something that I've never really understood about China, that it's ostensibly a socialist country, but it actually doesn't have that big.
Of a say.
I think like anti unions and weren't there like some stories like they didn't want kids reading marks and stuff like that.
I don't know, maybe I may have.
I think I read something like that. Anyway, I don't want to expect it.
I think that I don't Well, you know, this is the socialist The Chinese road to socialism is the Lendinis road to capitalism. Is kind of how you could think.
Of there you go going back to the US real quickly. So you pointed out that like Japan decided in the end, it didn't want to make the trade offs that would have required for the for the end to be a big international currency, and maybe China will not anytime soon choose to make those trade offs. But that of course brings back to another sort of like other debate that people have and again Klein petests and some of these others, it's like, well, is the dollar strength of burden? And
you know, should we reverse that basically try? Should we try on some level, at least at the margins to deinternationalize the US dollar that maybe is not so great. I'm curious, like where you stand on that question.
My personal view is that the my response to the burden discourse is check your exorbitan privilege, because you know, I've been around, you know em long enough that I think that if you think being able to print dollars to pay your debt is a problem, try owing dollars without having any. So that's you know, that's that's extreme. But I guess more substantively, I would say that there are lots of reasons I don't think the dollar is
is a burden. It certainly is a burden for certain sectors of the US economy that are very exchange rates sensitive and very exposed to kind of catch up growth in other countries, you know, and those regions also fall basically along America's political fulcrum, which is the upper Midwest and western pensivey, you know, so, so I think that
adds a political urgency to this debate. That said, you know, the US in total, I think is a much more interest rate sensitive economy than it is an exchange rate sensitive economy. It's basically it's a much more closed to
economy than either China or Europe. And if you think that the flip side of dollar centrality leading to dollar strength, which I'm also not convinced is always true, is lower interest rates and otherwise, then you have to ask the question, why are we not doing more with that windfall from low interest rates? Why why did we sink it all in countertops as opposed to doing things like you know, improving Laguardi you know, fifteen years ago, or building a
better bque. I've only been here five years, so all my analogies is still East coast in egg. But you know, and I think there, I mean, I think finally we're moving that direction of having a more activist government that uses that potential windfall from issuing currency to do something more in terms of building out essential infrastructure, rather than being oh, the government always does stupid things, let's give it the households. So you know, then you end up
what happened before two thousand and eight. But that's said. The evidence that dollar centrality, which has been true basically since nineteen forty five in one form and since nineteen seven to one another, always leads to dollars strength, I think is not really true because in the fifty years since nineteen seventy one and Betton was essentially ended, the dollar. You know, I'm an FX guy, the dollar has appreciated for fifty five percent of that time and depreciated for
forty five percent of that time. The period of maximum current account deficits by the US, it's between two thousand and two and two thousand and eight. We're running currentcount deficit are close to six percent of GDP. In two thousand and six, the US current account death the largest in terms of the rest of the world GDP back then close to two and a half percent, and no one wanted to hold dollars. I remember that, I remember, you know, that was when that's when Giselle wanted euros.
That's when you know. So this idea that you have an excessive demand for the safety of US assets that leads to dollar strength is not true. It's not true in the nineteen seventies. It's not true between two thousand
in two. In two thousand and eight, people want to hold dollars when US interestrates are rising, when you have terms of trade shock like shale, when you have a perceived technological productivity miracle like the Internet book in nineteen ninety five and two thousand and two, those are strong dollar moments. But the dollar goes up and down all the time. It's been central and I think that's not appreciated enough of to burden discourse.
So what about x US And you know, I take the point about maybe, you know, the dollar's centrality doesn't always lead to dollar benefits necessarily. But one argument that has been made, and I think it came up in the episode with Paul, is that the dollar can be a problem for the rest of the world at various
points in time. And you know, we've had Yung Sunction on the show talking about this idea that the stronger dollar basically acts as an economic drag on other economies because of its role in the world and in trade and business activity. Is there an argument to be made that maybe it would make sense from a financial stability perspective for instance, to have alternatives to the US currency.
Absolutely, I am one hundred percent. I am like a
total multiple prolaetarian on that front, right. And the reason is this idea, you know, like I was saying earlier, if you think about the global real economies organized around some hubs and there are spokes, right, and you know, if you think about Germany or kind of Germany France as being a hub, what the EU has done and what the Eurozone has done and the extended EU has done has created a financial cycle that kind of parallels the real cycle in the hub, right, Because if you're
barring in euros and you're highly exposed to what's happening in Germany or the core European or the broader core European economies, when that economy slows, the euro will go down, the ECB will cut rates unless it's doing something really stupid, which it does periodically that could not be excluded. But still you have this kind of and to me, that's that kind of coincidence of real and financial cycles is
really important. And a world in which the dollar is the only currency and the most important cross border liability currency, which is something also I keep harping on is that the big role is as a liability denomination, not as reserves, not as invoices, none of this stuff. And that's where the financial stability issues come from. If you are indebted in a currency, the tends to strengthen every time the global economy slows. It's bad news for everybody, and that's consumptioning spart.
This is also like not to diverge. But this is also like what the bitcoiners never get the liability aspect, because people are like, oh right, sure, some people may like the idea of like getting paid in bitcoin, but no one really like wants to like take bitcoin denominated debt.
And that's like, and I understand I don't want to like have like a big like crypto or bitcoin tangent, but it really is like this like this idea of like the liability side is being like really crucial and in like you have to ask yourself, are you willing to take on debt denominated in this currency? And I don't think many people would say yes. And that really like sort of like blows up the whole thing.
Yeah, And but I mean I think the other thing that the you know, this is also I think the liability side is also really important to the broader discourse about this because you see all this excitement, you know about, oh my god, they're going to do their trade and they're going to do their trading dollars, and yeah, it's interesting because this is your classic economic comparison, right. One of the ways you and an argument of the economist
is you're confusing stocks and flows. But I think that's exactly what's a issue here. People are focused on the invoicing, which is a flow, but the stock of debt is a multiple both of reserves and of trade flows.
So okay, classic stock versus flow thing going on there. But one of the things you do hear from China every once in a while is, you know, it might talk about doing invoicing more stuff in renmon b but it also talks about special drawing rights so SDRs, which I have never quite understood what means are. But this idea of like, I think it's basically a basket of currencies, like a supercurrency that would involve a lot of you know,
different currencies from different countries. How viable is that? Like, maybe instead of trying to create a multi polar currency reserve system, maybe we should just move on to SDRs and use those.
I mean, I think that's and I think that's even less frankly, I mean in China. I mean, China's big tantrum over SDRs was in two thousand and nine, and one of the reasons for that was the FED did QI and you had a situation where the dollar had resumed weakening again after this huge dollar spike, you know, post Sleman, and what China was concerned about at the
time was that it was holding all these dollars. The FED was doing QI, and commodity prices were rising again partly because of Chinese in good part because of Chinese stimulus, you know, post crisis stimulus, and also because and also because of Hue. So that conjunction in China was like, oh my god, these are the Americans are doing things that's making the real value of our reserves go down. It's kind of very similar to the Arab reaction in
the nineteen seventies, for instance. And I think that's one of the things that kicked off Opeck was not just the young people wall on all the other stuff. It's like, we're holding all these dollars and now they're worthless because the US is now floating.
This is the old Dick Beauvet argument that que was actually like a currency war in disguise. Almost right, That's what it's reminding me of.
Yeah, I mean it's a I mean, interestingly enough, I think to some extent not so much currency war, but more just a way to reflate, to reflate the US economy. And I think the FED was kind of koi about that. The FED had has been pretty coy about the dollar until twenty fourteen, twenty fifteen, when it was finally like, Okay, we'll just come out. We'll just come out and say it. And that's wonderful. If it's been much more open about
the way the dollar figures into his thinking. You know, the world needed reflation and it got it from US monetary policy and Chinese fiscal policy, and together that's what did a good deal to pull the world out of it. It's something in two thousand and eight was this combination of US monetary policy, eat a Chinese fiscal pause, huge investments.
I want to go back to Chinese domestic trade offs and this idea. You know, I think we have some idea that the elites might lose out in China. Were there to be some domestic reorientation towards more robust household consumption, or maybe just from the question of Japan in terms of they didn't want to make those trade offs that would take you know, that would allow the end to
become more international. What are we actually talking about in terms of the potential costs either to the country as whole or to a certain category, maybe the coastal elites within China, and what kind of like hit laws or meaningful shift, because it's hard to like, Okay, yeah, there's gonna be some domestic shift that happens everywhere. What are we really talking about in terms of how signify that would be?
I'm honestly not sure to be frank, And this is probably a question for form, you know, for for tom oi like Mike Pettis or you know, I'm not a I'm not a deep. I'm not a deep you know, China expert to the same extent I pretend to be an expert on f X for anything else like that. But but you know, one thing you do know about China is that it sets a fair amount of store.
The leadership sets a fair amount of store in kind of output legitimacy, right, and that you know, we're doing things that make people's lives better, which is a very significant difference from the Soviet Union, you know, or you know, or where the big calling card was we won the war, what do you want from us? We won World War Two? And increasingly that kind of became, you know, this is all we have to show. The Chinese leadership is not
like that. It's had real gains I think it can point to, and presumably it makes sense for them to want that to continue. Now the question is can the leadership deliver on those things? And to what extent are the forces are powers that be within China that are not the leadership that kind of intermediate level, to what extent are they against that. The one thing I can actually think of which seems to be a concrete issue
is changing HOOKU registration requirements. Affects the relatively privileged status that people who have that in the ability to live in cities.
This is allowing people from the country to move more freely into cities and vice versa, although no one ever really does the first part.
And then the other one, which is more obvious, is issuing some kind of tax on residential real estate, so you kind of increase the cost of carry on housing on housing, which is otherwise basically considered a pure appreciation asset. I can see those two being concrete disincentives to people
that I can distinctly identify. But as to why you shouldn't why China doesn't have a larger a larger healthcare, better social provision of healthcare, for instance, they only spend I think six percent of GDP on healthcare at one third of the United States, and France is kind of the sweet spot at twelve according to me. But I don't really see where the actual maybe I don't have enough granular understanding of the social structures as to why people might be opposed to that.
Well, I mean, I guess in the US we have the same argument all the time about well, why don't we just reform the healthcare industry, stud it's so easy, and like, clearly there are major issues with doing that.
But Karthink, just to go back to the original premise of this conversation, I don't expect you necessarily to come up with a ten step Genghis Khan style plan on the fly, but like, what would be the steps or the prerequisites that you would look out for in order for the renmen B to achieve some degree of internationalization.
I think the most logical place to look for it, given capital controls and so on, is slow incremental remenbiization of bridge and road lending. That's the most logical place to look for it because you have all these other issues I think at capital controls just in the structure and nature of Chinese financial markets that makes it much harder to achieve more on that front. But bridge and road lending in particular seems to be a place where you know, you have a very large stock of debt
out to China. Almost all of it is in dollars, not in remenby, which is interesting in love itself, And the question is why is that? It's because they're just long a ton of dollars. Some of it is because of shadow, kind of shadow intervention by other entities that then pass those dollars, that passed those dollars along. Now, what you're doing in many of these distances opening up exactly those kinds of kind of real financial cycle mismatches
stock flow mismatches that I talked about more broadly. So could there be a way to change that stock of dollar denominated debt in bri I that's basically owed to Chinese development banks, is that it would change that a way to change that gradually into remmen be I mean, I mean that seems like the most the most immediate likely prospect right now. One interesting thing here is this idea that you know, Argentina is going to denominate all its trade with China and remmenby and obviously you know
that trade is small. There's you know, Argentina's problems that has I think two hundred billion dollars of debt, one hundred and twenty billion dollars of which are Oden dollars. But there's a very interesting thing from Brad from Bradcester and Daniel McDonald this morning talking about how this is really about Argentina really wants to hang on to its dollars. So what they're doing is changing the invoicing of their
trade with China into to rememby. But over a very very long time, what this allows is a replacement of a stock of dollar debt owed to the rest of the world with owing rememby to China. Because of the swamp line, they run a deficit, which they run a deficit with China, so you're gradually changing liability structure, but an incredibly slow paced My joke is, you know this is like the Ron Paul It's happening gift, only you played at the slowest possible speed.
It's imagining that like a very slow that it is, so it's happening.
Yeah, you know, how do you replace a stock with flows very very slowly? Right? And it may happen. You know, they're probably not end up having a restruction before then. I mean the other places people have talked about with this, allows and Cambodia, which gives me an opportunity's sake, you know, Cambodia might find a new nominal anchor, but.
Anchor of what? Sorry? Sorry, can I just ask what? One quick? Sorry? Can I ask one quick follow up question, which is why didn't China denominate built in road loans.
In rem and B And that's a complete mystery to me and someone who knows immeasurably more about this, Brad, I've asked him and he's like, he's not really sure about it either. I think it's just because they had
a ton of dollars. And one of the things that we're seeing around the world this reminds me of the conversation with Paul on this economist story, is that as reserve accumulation goes up, then countries find you know, if you're above precautionary reserves, you can find other things to do with those excess reserves for a sheet of you know, political,
geopolitical gains or influence. Right. So it's not and that's not just China doing that by bri it's what the GCC is doing with Turkey and Egypt for instance.
So and so, in your view, like in a world in which Brazil maybe we're doing renmon B denominated debt, or Cambodia or someone else, some of these countries that have a lot of dollars and we talked about this with Paul, that maybe have some political tension with the US, and Saudi Arabia comes to mind, is a country that accumulates tons of dollars and you know, depending on the administration at a given point, the political tension, ebbs and flows may want to acquire Brazilian issued R and B
denominated debt as a way to diversify. It's big, you know, it's money, it's portfolio.
I mean, it's it's it's certainly possible, And I would argue that. I mean, for me, the argument to do that is that if what you know about the way the global financial cycle works is that countries with dollar denominated debt that are commodity exported get into a lot of trouble, and this happens to them repeatedly, then it might make sense for you to look at buying their debt in a currency that more closely corresponds their real cycles.
Just you know, it's like asking from the point from a financial stability point of view, would you rather buy Polish debt in zlati, in euros or in dollar? And I would put it precisely in that order by Biden Slotti first that in euros than in dollars.
Because every once in a while you hear those stories about like in some European country and people have mortgages dollars or something like that and then it's cheaper until one day then they can't print them domestically and there's a huge shock, and so it's like a macro version of that story that you hear about from time to time.
Yeah, I think dollar centrality. I'm kind of mixed on that for the US. And one thing I do want to mention about dollar centrality as an advantage. Yes'm I have no faith in these kind of beliefs that you know, the loss of dollar centrality will lead to it crash the US economy in the whole treasuries. I mean, that's that's crap, right, because I mean, you know, the UK, Australia and use it. When you have all these countries that kind of printing their own currency, currencies go up
and down investors hold them. I think the one more concrete benefit to the US is the US as much lower inflation passed through when the currency weakens. Basically what ends up happening is that the combination of invoice currency
effects is inertia there. And the sheer size of the US economy means that when the dollar weakens, prices are slow to change and wanting access to the US market, which is the biggest market in the world, means that exports to the US will mostly just eat it their margins, right. And that's something that you know who's now who she was the ex chief Economists not first Deputy MD of
the IMF. She's written a lot about. So that's kind of a very concrete benefit which kind of brings us to another point, which is China is the world's largest manufacturing exporter. They're paying their workers in remenb. There's gotta be someone somewhere who wants these remenb. It can't be, you know, even taking into account the peculiarities of its
financial system. But I think this is where something The people who are buying the most from China are the US, right because that's the largest bilodal trade deficit, and there's no way that the US is going to rednominate. It's created with China into remybe, which kind of means that this idea that you know, being the world's largest exporter means someone is going to want your currency. I think that runs into that runs into a problem.
Karthik, this is such a great conversation. I feel like in the in like that spend of time, so many like these long standing things were like tied up and like several light bulbs went off. So really appreciate you coming on Odd Lots for the first time.
It's been too long, but definitely won't be the last time.
That great. I really love being there. Thanks very much, Thank you.
Thanks so much. So that was a lot of fun. That was great. The anchor lot was a beautiful moment of.
Like too great, too great, a word play, a fishing
auto making magic happened live on air, Tracy. I loved talking to Karthik, and the thing that like when I said, you know, at the end the light bulb moments for me was not even actually like the questions about the future of the renmand B, but in this idea that it would like solve some of these problems that we talked about with human soungtion all these times that there is there's like the economic cycle and the dollar cycle, and we know that like that's a big problem all
around the world. And so maybe the story is like in a more multipolar currency world, you just have fewer those mismatches.
Right, and you have less pro syclicality in the system. I mean, I thought his point about like is this actually possible. Yeah, it feels like we're converging. I guess, getting to a consensus where you know, we've switched from never going to happen to it might happen, but it'll
take some time. But I think Karthik laid out there reasons for that really clearly, which is the whole stock versus flow are in it, like it takes time to actually replace all those liabilities with something other than dollars.
Right, So you can have these announcements like you talked about the recent announcement with Argentina, Like you can have these announcements where you just improve the flow a little bit, or you could or you could have like a big change in stock. But if we're just going to do it through like these sort of bilateral announcements, we're going to denominate this and Redmon be we're going to denomince,
It'll happen just really slow. We'll just take a really long time as opposed to something sort of big, which is like okay, like China decides we're going to start making all these loans in Redmon b which is really interesting. Kind of makes me feel good that like even Brad sets Are doesn't know the answer to that one.
Yeah, well that was like the big question for me because it would make sense in a lot of different ways. But the other thing about that episode is I think it's another one that's just going to lead to further episodes because now we got to get Brad Setser on to eat yes, And I know we've had Michael Pettis one before, but I feel like we should maybe dive in a little bit more to the China's social safety
Net question. Yes, she and Matt Klein have written about in various ways, so we need to do that.
Many follow ups to come.
All right, shall we leave it there? For?
No?
Leave it there?
This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy.
Alloway and I'm Jill Why Isn't Thal?
You can follow me on Twitter at the Stalwart. Follow our guest Karthik soundchron all many many puns a day, even beyond his wisdom, just absolute must follow in my view. His handle is at Rajah Corman. Follow our producers Carmen Rodriguez at Carmen Arman and Dashel Bennett at Dashbock. And check out all of our podcasts under the handle at podcasts.
And for more odd loots content, go to Bloomberg dot com slash odd lots, where we have transcripts, a blog, and a newsletter, and check out the discord Discord dot gg slash odd lots talk.
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