From: allin
Recent discussions highlight a potential shift in global economic dynamics, particularly regarding the dominance of the U.S. dollar and the rise of other economic powers [01:16:56].
China-Brazil Trade Agreement
China and Brazil have struck a deal to trade in their own currencies, no longer using the U.S. dollar as an intermediary [01:17:02]. This agreement involves a direct trade in yuan and reais [01:17:16]. China is Brazil’s top trading partner, having surpassed the U.S. in 2009 [01:18:08]. This bilateral trade is approximately $150 billion annually [01:17:41].
China’s Global Economic Strategy
China has historically made significant investments in infrastructure, railways, waterways, and ports in countries like Brazil, Africa, and Australia to support their agriculture and manufacturing economies [01:17:48], [01:18:13], [01:18:20]. This strategy allows China to participate in the economic value generated while supporting local economies [01:18:36]. If the U.S. continues to push for deglobalization, China will likely continue to develop deep trade and investment ties with other nations, potentially increasing the strength and importance of its currency [01:19:30], [01:20:07].
The Dedollarization Debate
The concept of “dedollarization” has gained traction, but experts offer differing views on its current significance:
Overhyped by Chamath Palihapitiya
Chamath Palihapitiya dismisses the current talk of dedollarization as a “nothing burger” [01:20:39]. He points out that the yuan is pegged to the U.S. dollar [01:21:01]. Therefore, whether countries trade directly in yuan or use the U.S. dollar, they are still indexed to the dollar [01:21:11]. China has effectively manipulated the yuan’s value by artificially suppressing it since joining the WTO, which has enabled its export dominance [01:22:23]. He argues that if the yuan were free-floating and not pegged, its value would likely skyrocket, crushing its export value [01:42:00], making it less attractive for trade [01:42:12].
A Growing Risk by David Sacks
David Sacks believes dedollarization has not happened yet but is a growing risk [01:32:04]. He cites several reasons:
- Massive Debt: The U.S. has $32 trillion in debt, which makes its debt less attractive as bondholders worry about potential monetization through printing money [01:24:02], [01:24:43].
- Weaponization of the Dollar: The U.S. has increasingly used the dollar as a weapon, for example, by seizing hundreds of billions of dollars of Russian reserves and excluding Russia from the SWIFT banking system [01:24:07], [01:25:02], [01:25:05]. This makes the dollar an unreliable store of value for other countries and wealthy individuals [01:24:35], [01:25:57].
- Alternatives: China has developed its own non-dollar competitor to SWIFT called CIPS, which it is signing up countries to use for direct currency swaps [01:26:24], [01:26:53].
Sacks highlights that while the U.S. dollar may still be “the most eligible bachelor in the leper colony” [01:38:54], the current path of deficits and unfunded liabilities “cannot go on forever” [01:39:14]. The shift away from the dollar would not be an overnight collapse but a slow devaluation over time, similar to what happened with the pound sterling [01:43:02].
U.S. Economic Challenges
The U.S. faces a looming government debt crisis [01:27:50]. Approximately half of the U.S. government’s debt, around 1 trillion annually, representing more than a quarter of the total federal budget [01:28:24].
Unfunded Liabilities
Beyond federal debt, the U.S. faces significant unfunded liabilities at the state and city levels, particularly related to pensions [01:30:26]. For example, Chicago faces a $44 billion pension hole [01:30:26], with 80% of its property taxes going solely to pay for pensions that are only 25% funded [01:33:02], [01:33:14]. These defined-benefit pensions often allow employees to get a high percentage of their final year’s salary, including overtime, for life [01:34:30].
Social Security is also projected to face bankruptcy between 2030 and 2035 [01:30:59]. The expectation is that the U.S. government will likely have to backstop these liabilities by printing more money [01:30:44], [01:36:47].
Paths to Resolution
Solutions to these macroeconomic challenges include:
- Higher Taxes: An inevitable step to source income and fill budget holes [01:32:32], [01:47:46]. Some suggest a return to 70% tax rates on the wealthiest [01:47:57]. Historically, federal tax revenue has consistently been around 19% of GDP, regardless of the top marginal tax rate, suggesting a broader, lower tax rate is more effective for economic growth [01:51:06].
- Austerity Measures/Spending Cuts: This is politically challenging as politicians are generally elected to provide more, not less [01:48:12]. Reducing spending requires extraordinary political will and public understanding [01:48:30].
- Productivity Gains through Technology: Innovations like AI can create leverage by enabling more output with fewer resources, potentially leading to new jobs and economic growth [01:49:08], [01:56:27].
- Intelligent Immigration/Entrepreneurship: Attracting global talent and fostering entrepreneurship can drive economic activity and job creation [01:37:26], [01:51:58].
Global Context and US Influence
The U.S. faces these issues relatively, as other major economies like the Eurozone and China also face their own challenges [01:29:11], [01:29:22]. Despite its problems, the U.S. is considered well-positioned due to its freedoms, innovation, and ability to attract talent [01:37:18], [01:54:02]. Some argue that the U.S. will continue to be exceptional and that its debt-to-GDP ratio will simply creep higher without a sudden crisis [01:52:57].
U.S. vs. China Engagement
A key debate centers on engagement with China:
- Historical Context: The policy of constructive engagement with China, which aimed to foster democracy and friendship through economic ties, has not worked out as predicted [01:02:42], [01:03:02]. Instead, China has converted its wealth into political power and seeks to dominate its region [01:03:18].
- Geopolitics vs. Economics: The relationship with China has shifted from primarily positive-sum economic terms to increasingly geopolitical, zero-sum terms [01:04:30]. The U.S. wants to avoid a rival power that could win a security competition [01:04:16].
- Investment Restrictions: There’s a call for strict rules against U.S. firms investing in China’s AI sector, similar to CFIUS regulations for foreign investment in sensitive U.S. technologies [01:10:10], [01:01:09]. While selling non-strategic products to China is acceptable, investing in their advanced technologies is seen as dangerous [01:09:25].
- Ally vs. Adversary Framework: A simple rule is proposed: if a country is a U.S. ally, business engagement is acceptable; if it’s an adversary, engagement should be avoided due to potential complications [01:04:58], [01:05:07].
Outlook
The U.S. is seen as “bending it” and potentially heading for a break in its economic trajectory if current trends continue [01:16:13], [01:16:17]. The need for productivity boosts, potentially through technologies like AI, is considered crucial [01:56:27].