International Geopolitics and technology threaten America’s financial dominance

[Lead]

The Economist came out with a report on the future landscape of international banking. A key theme in it is whether China could begin to rise in prominence as a rival to the US. Key concerns here are the original infrastructure or "plumbing" with banking which has allowed the US to have far reaching international control could shift a lot in the near future with easier/faster digital payment methods. Beyond that, with America using it's cash reserve power to punish foes like Iran and others, does this cause enough pushback internationally to possibly a new globally-preferred currency than the dollar?

Geopolitics and technology threaten America’s financial dominance
The Economist

Three things are driving change. First, the “push” factor of geopolitics. America’s centrality allows it to cripple rivals by denying them access to the world’s liquidity supply. Yet until recently it refrained from doing so. The financial system was seen as neutral infrastructure for promoting trade and prosperity. The first cracks appeared after 2001, when America started using it to choke funding for terrorism. Organised crime and nuclear proliferators soon joined the list. It persuaded allies by presenting such groups as threats to international security and the integrity of the financial system, says Juan Zarate, a former adviser to George W. Bush who designed the original programme.
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Such advances result from the second driver of the new trends: the “pull” factor of attempts to meet the needs in emerging economies. Tech firms have sights on the world’s 2.3bn people with little access to financial services. Helped by plentiful capital and permissive rules, they have created cheap-to-run systems they are starting to export. Some also aim to enable commerce in regions where credit cards are rare but mobile phones common. Propped up by their huge home market, China’s “superapps” run ecosystems in which users spend their way without using actual money.
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The third factor helping insurgents is covid-19, which could lead to a tipping-point. Already hobbled by rising tariffs, global trade is likely to fragment further. As disruption far away causes local shortages, governments want to shorten supply chains. That will give regional powers like China more room to write their own rules. The economic fallout in America—not least the fiscal impact of its $2.7trn stimulus measures—could dent confidence in its ability to repay debt, which underpins its bonds and currency.

China wants to make the yuan a central-bank favourite
The Economist

Yet the flattering snapshot masks an ominous process. Aware of the power that issuing an international currency confers, China is on a charm offensive. Cautious to avoid past mistakes, it is advancing methodically. And it is playing a big trump card: opening up its $13trn bond market, which accounts for 51% of all bonds issued by emerging economies. So far, all is going according to plan.

There are three types of benefits to the issuers of a reserve currency. One is reduced transaction costs. Banks can access central-bank liquidity at will. Firms can borrow cheaply overseas and suffer less foreign-exchange risk.

A second, bigger prize is macroeconomic flexibility. To outsiders, dollars are an attractive asset they use for cross-border purposes. Yet, for America, foreign ownership of its notes is like a loan from abroad. Hunger for dollars allows it to finance deficits with its own money instead of forcing its residents to spend less. That reduces the elemental need to balance the money that comes in with what goes out, freeing America to pursue the monetary and fiscal policy it wants. When the country suffered its first-ever credit-rating downgrade in 2011, investors rushed to buy dollar assets, making it even cheaper for it to borrow.

That autonomy, as well as the world’s dependence on greenbacks, gives it leverage—its third big advantage. America can extract concessions by rewarding allies with vital liquidity while denying it to foes. Last year three Chinese banks pledged swift compliance when suspected of flouting sanctions against North Korea. Monetary clout grants influence on international regulation: European bankers complain that global capital-adequacy ratios are harsher on them than on Americans.

The financial world’s nervous system is being rewired
The Economist

China has gone furthest. In 2015 it launched cips, an interbank messaging system to ease international payments in yuan. It uses the same language as swift, allowing it to talk to other countries’ payment systems. For now just 950 institutions use it—less than 10% of swift’s membership. But “what matters is it’s there,” says Eswar Prasad of Cornell University.

The real revolution is happening in low-value transfers. Like swift, the network of American card schemes is tricky to displace. Member banks and merchants trust each other because they adhere to tested rules. They also like the convenience of the schemes’ settlement platforms, which compute “net” positions between all banks that they square up at the end of the day. So rival schemes struggle to make a dent. In 2014, fearing sanctions could block it from using American schemes, Russia created its own, which now accounts for 17% of domestic cards. But its 70m tally is dwarfed by Visa and Mastercard’s 5bn. Size is not a problem for UnionPay, China’s own club. Just 130m of its 7.6bn cards were issued outside the mainland, however, where it is mostly used by Chinese tourists.

If you get a free account, you will be able to read all five articles on this. You also could buy a subscription as it's a pretty great publication.

When people bring up ideas of WWIII or a war between developed countries, I come to think of this stuff as far more likely and inevitable. Countries have agreed to compete in a global financial system which the US had a large hand in creating. We haven't had a significant competitor to control that system since it's creation. Losing reserve currency status would signal a very big decline in the country and all the domestic arguments we have now would become much more harder with how we fiscally manage things the past few decades.

 

[Lead]

@Grave Keeper
It's might not directly help you but that third article has some informative stuff or the old banking system of SWIFT and how different products are beginning to replicate it, which is causing part of the move to a cashless society. Also mentioned Visa and Mastercard's control at the moment:

The real revolution is happening in low-value transfers. Like swift, the network of American card schemes is tricky to displace. Member banks and merchants trust each other because they adhere to tested rules. They also like the convenience of the schemes’ settlement platforms, which compute “net” positions between all banks that they square up at the end of the day. So rival schemes struggle to make a dent. In 2014, fearing sanctions could block it from using American schemes, Russia created its own, which now accounts for 17% of domestic cards. But its 70m tally is dwarfed by Visa and Mastercard’s 5bn. Size is not a problem for UnionPay, China’s own club. Just 130m of its 7.6bn cards were issued outside the mainland, however, where it is mostly used by Chinese tourists.

 

[San Marino]

A key theme in it is whether China could begin to rise in prominence as a rival to the US.

Begin?
China is the second-largest economy in the world and the fastest-growing trillion-dollar economy. While the Chinese have argued that their exchange rate is purely a domestic policy matter, economists have begun to suggest that Chinese policy will soon shift to accelerate appreciation of the Yuan in order to reduce domestic inflation and to increase the wealth of Chinese citizens.

 

[Lead]

Begin?
China is the second-largest economy in the world and the fastest-growing trillion-dollar economy. While the Chinese have argued that their exchange rate is purely a domestic policy matter, economists have begun to suggest that Chinese policy will soon shift to accelerate appreciation of the Yuan in order to reduce domestic inflation and to increase the wealth of Chinese citizens.

Their size and growth in the economy isn't matching the control they have at this point in financial markets. The obvious expectation is they would seek that as time goes on (and thus the point of the OP).

 

[KONG-D'SNT-TAP]

I could’ve sworn I read an article last year about SWIFT and how they lose like 5%-10% failure rate??? Is that true? They were also getting hacked all the time.


Something about another banking processor called RIPPLE as well.

 

[Lead]

I could’ve sworn I read an article last year about SWIFT and how they lose like 5%-10% failure rate??? Is that true? They were also getting hacked all the time.


Something about another banking processor called RIPPLE as well.

Really? Anytime I’ve dealt with international wires, we used swift when possible. It’s still ridiculous trying to send money to certain countries however and a lot of times you need intermediary banks.

 

[San Marino]

Their size and growth in the economy isn't matching the control they have at this point in financial markets. The obvious expectation is they would seek that as time goes on (and thus the point of the OP).

China is a 'monster' in more ways than one. Its current population is 1,439,000,000. According to data published by the UN Statistics Division, China accounted for 28% of global manufacturing output in 2018. That puts the country more than 10% points ahead of the United States, which used to have the world's largest manufacturing sector until China overtook it in 2010. I don't believe China will come anywhere close to the economic downturn the U.S. is getting ready to face (COVID-19). We (the U.S.) have turned over all our major manufacturing to China. Cheaper when made in China.

 

[KONG-D'SNT-TAP]

Really? Anytime I’ve dealt with international wires, we used swift when possible. It’s still ridiculous trying to send money to certain countries however and a lot of times you need intermediary banks.

I just googled it and it seems SWIFT has a 6% failure rate.


https://www.google.com/amp/s/fortune.com/2016/09/26/swift-hack/amp/

This article says they were hacked 3 times in 2016. I would imagine as there is a move to international banking processors and intermediaries like this there will be a lot more hacking involved.

Also SWIFT and RIPPLE are in direct competition. I have a vague recollection I read some article about this at some point

 

[LS1Rx7]

China being China will shoot themselves in the foot.
The crypto guys are talking about this being the big break for blockchain / digital currency becoming the replacement for the dollar. It's not there yet, but maybe down the line

 

[Rod1]

America politicizing their currency is the most stupid thing they can do in order to lose their international dominance.

 

[ElKarlo]

If we go negative, it will crush US banks. Negative rates killed Europes and japan's banks.
I wonder how much whacky or even toxic debt in in Chinese banks. Japan had tons of it when they finally had their 80s bubble burst.

 

[Lead]

China is a 'monster' in more ways than one. Its current population is 1,439,000,000. According to data published by the UN Statistics Division, China accounted for 28% of global manufacturing output in 2018. That puts the country more than 10% points ahead of the United States, which used to have the world's largest manufacturing sector until China overtook it in 2010. I don't believe China will come anywhere close to the economic downturn the U.S. is getting ready to face (COVID-19). We (the U.S.) have turned over all our major manufacturing to China. Cheaper when made in China.

This is more specifically geared at the finance sector and whether China could or even wants to move toward making the Yuan a reserve currency or control the routes which countries can exchange money. That gives the US a lot of power that has been used since 2000.

I just googled it and it seems SWIFT has a 6% failure rate.

https://www.google.com/amp/s/fortune.com/2016/09/26/swift-hack/amp/

This article says they were hacked 3 times in 2016. I would imagine as there is a move to international banking processors and intermediaries like this there will be a lot more hacking involved.

Also SWIFT and RIPPLE are in direct competition. I have a vague recollection I read some article about this at some point

interesting. In five years, we only had two times sending something and it was because the country it went to. We had to contact the bank and verify a few extra things for the money to finally go through.

America politicizing their currency is the most stupid thing they can do in order to lose their international dominance.

That’s the core of what I wanted this OP to address. Was it a long term blunder for the US to wield this power with political foes to keep them in line with the global system? There’s European countries who weren’t in favor of the Iran sanctions and attempts to still trade with them regardless. When decisions like that are brought down and other allies choose to ignore them, it leads to finding a new system where the US can’t put a stop to trade so easily as they’ve been able to. I’m skeptical China could really step in as a trustworthy alternative but you have to believe there’s far more risk today about the system changing than ever since it’s inception.

 

[Orgasmo]

Murica:
+ World's most powerful and advanced military
+ World's most established and robust financial system
+ World's most advanced industries and technologies
+ World's largest economy
+ World's best STEM education
+ Abundance of resources and food secure
+ Rule of law and protection of individual rights
- Aging infrastructure
- Shit ton of debt
- Polarized political system hindering development
- Patchy healthcare system causing overspending

China:
+ World's largest military
+ World's largest population
+ World's largest industrial output
+ World's largest consumer market
+ World's largest STEM talent pool
+ Collectivist society able to implement long term strategies
+ Cutting edge infrastructure
- Lack of civil rights
- Insufficient in natural resources and food supply
- Aging population and gender imbalance
- Shit ton of debt
- Fragile political system dependent on economic growth
- Healthcare system below first world standard

Both countries in a nutshell

 

[Oceanmachine]

Agreed which is why Neocons arent wrong in wanting to act aggressive and first preemptively even. The US has limited time

Now I dont agree with neocons doomsday beliefs but if you want to act to dominate best do it when you hold the cards.

 

[Lead]

If we go negative, it will crush US banks. Negative rates killed Europes and japan's banks.
I wonder how much whacky or even toxic debt in in Chinese banks. Japan had tons of it when they finally had their 80s bubble burst.

Do you think there are key things that would prompt the world to find a different reserve currency? Or is the US just far and above the safest bet in the near term future?

 

[Orgasmo]

Agreed which is why Neocons arent wrong in wanting to act aggressive and first preemptively even. The US has limited time

Now I dont agree with neocons doomsday beliefs but if you want to act to dominate best do it when you hold the cards.

US does not have limited time. In fact, it is China that has limited time due to its demographic trend. Their gender imbalance and low birthrate are ticking time bombs. China needs to catch up and reach parity with US within two decades, or their aging population will send them into a slow decline and economic stagnation like Japan experienced since the 1990's.

Think of this as the middle of a marathon. China suddenly sprinted for the past few miles and looks like it's catching up with the frontrunner Murica. It may even surpass Murica for a while, but it can't sustain that speed forever and they will tire themselves out before the last few miles.

 

[Lead]

US does not have limited time. In fact, it is China that has limited time due to its demographic trend. Their gender imbalance and low birthrate are ticking time bombs. China needs to catch up and reach parity with US within two decades, or their aging population will send them into a slow decline and economic stagnation like Japan experienced since the 1990's.

And China is far less open to immigration than say Germany or the US. As much as people like to bitch about immigration, it sure as hell is an nice option to have if you want to keep the economy healthy and social programs intact.

 

[Oceanmachine]

US does not have limited time. In fact, it is China that has limited time due to its demographic trend. Their gender imbalance and low birthrate are ticking time bombs. China needs to catch up and reach parity with US within two decades, or their aging population will send them into a slow decline and economic stagnation like Japan experienced since the 1990's.

Are you really trying to deny how multiculturalism and how multicultural, divided and ethnocentrist and religious centrists population segments in the US are? In addition to the corrupt 2 party system and self serving interests of the populations. Senators only serving their select kin.

China is 90% han. Working on cloning to alleviate the demographic issues and their age population is no worse than Europea and it isnt the end of the world considering how large their population ia to begin with.

Then again maybe you arent naive and you are actually a CCP shill who is here to reassurw Americams that everything is amazinf and fine and nothing can go wrong and USA is forever unatoppable.

 

[Orgasmo]

Are you really trying to deny how multiculturalism and how multicultural, divided and ethnocentrist and religious centrists population segmentw in the US are? In addition to the corrupt 2 party system and self serving interests of the populations. Senatora only serving their select kin.

China is 90% han. Working on cloning to alleviate the demographic issues and their age population is no worse than Europea and it isnt the end of the world considering how large their population ia to begin with.


Then again maybe you arent naive and you are actually a CCP shill who is here to reassurw Americams that everything is amazinf and fine and nothing can go wrong and USA is forever unatoppable.

Maybe if you stop fear mongering and actually look at the demographic data of China, then you'll realize US is going to come out on top in the long game. I guess you're too busy calling people idiotic names to actually read these days.

 

[Oceanmachine]

And China is far less open to immigration than say Germany or the US. As much as people like to bitch about immigration, it sure as hell is an nice option to have if you want to keep the economy healthy and social programs intact.

Yeah Germany and most of western europe wont ever have future separtisim or ethno religjous conflicts or clash of cultures. All new immigrants are atheists capitalist shills who only see themselves as costs of goods sold and all wish to identify and direct germany in a united manner in addition to unity against science that is not PC.