There is one undeniable fact. The current world trading system is based on the international role of the USD. As the primary reserve currency which is accumulated in the foreign exchange reserve accounts of central banks around the world it has been positioned for seven decades as the “must have” currency.
So when US officials begin to threaten a trade war with China, or remove China from the SWIFT international payment system, as well as suggest that the current trade system is unfair to American workers and has to be changed, those who understand the structure of that system can make some accurate educational predictions on what will come next.
These events and statements are aligned with the unfolding POM thesis as presented over the last four years. The transformation of the international monetary framework from the USD based structure to a multilateral and multi-currency structure, which will eventually evolve into a full SDR reserve system, will require fundamental changes, such as ending the existing USD based trade system.
It’s fascinating to watch the drama unfolding based on the Trump agenda and administration. The accuracy of the prediction that Trump would be used to sell the multilateral transformation to the American people, while re-packaging trade deals and geopolitical alliances to accommodate the monetary adjustments is undeniable at this point.
Whether its changes to NATO, the UN, exchange rates, trade deals, or geopolitical hotspots; all have been on the Trump radar since the beginning of the year. The incremental movements and adjustments on these fronts will continue into the months and years.
Ending the trade system will require conversations around the dollar exchange rate arrangements, and the necessary changes to that regime to facilitate the trade shifts. Right now the USD is the reserve currency and most trade agreements are engineered to support the dollar in that role.
Those promoting the dumping of dollars by China do not understand the situation. China cannot just dump dollars. Someone has to be on the other end to purchase those dollars. That is where America has a stronger position. Until a broad agreement has been hashed out about reserve accumulation, and the substitution of those reserve, there is little China can do about dollars, unless of course they can talk someone, like the EU as an example, into buying their hoard of USD.
This allows Trump and his administration to talk tough on China about everything from trade, deficits, currency manipulation, subsidizing industries, and international payment systems. But before any real measures can be taken, there needs to be a system of substitution in place and ready to accommodate the large capital flows which will be sure to follow.
This is unlikely to happen overnight, as all sides would need to avoid shocks to the existing system. Everyone is under pressure in different and varying ways. But the pressure exists and needs to be deflated with a unified approach.
The selling of these approaches and policies will be sold to each nation’s population through different measures and reasons. China will package and present the changes in a different fashion than Trump. Making America strong again is the slogan being used over here. Bringing jobs back through changing trade deals is easy for people to comprehend and get excited about. Understanding the complexity of the Triffin Paradox and effects of reserve accumulation on capital flows and trade deficits is not very stimulating or politically motivating.
Feel confident in the POM thesis and each transition point. It will never be presented in the manner we are learning it. But the changes and patterns will be clear to see and understand. Each passing year brings deeper and broader confirmation of everything we have been learning since January of 2014. There is no reason to think this will not continue. – JC
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JC Collins can be contacted at firstname.lastname@example.org