#China

14 03, 2022

Karen Petrou: The Collapse of the Global Financial Order and What’s to Come

2023-04-03T15:09:21-04:00March 14th, 2022|The Vault|

The Great Depression’s role sparking the Second World War led the victors to create the Bretton Woods agreement establishing stable reserve assets under-girding a world prosperous and peaceful enough to prevent another conflagration.  After 2008, the world reinforced another set of global norms, setting cross-border financial standards over the next fifteen years by newly empowered transnational financial agencies.  Now, what was left of Bretton Woods is in ashes and national geopolitical interests will again dictate critical financial requirements.  Although it’s of course possible that Russia’s devastating invasion will end without still more cataclysmic carnage, it has done irreparable damage to the largely frictionless cross-border finance on which it and its oligarchs relied.  China should take a lesson.

To be sure, this globalized and increasingly financialized construct was imperfect even for the hegemonic states and systemic financial companies in whose interests it worked the best.  As Rana Foroohar pointed out last week, it was premised on the optimistic “end of history” reasoning that expected an interdependent world to be all-for one and one-for-all.  Quite simply, if you must go through someone else’s space to get where you want to go, then you are more likely to abide by the rules applicable in that space to ensure you get there.  Over time, this creates a macrofinancial system in which currencies, payments, assets, and risks moved with few speedbumps from one end of the earth to the other.  Even where rules might slow all of this down, safe-haven states constructed high-price bypasses.  This, …

7 03, 2022

Karen Petrou: Why Armies Now March on Their Wallets

2023-04-04T12:29:27-04:00March 7th, 2022|The Vault|

Napoleon famously said that armies march on their stomachs.  Now, it’s clear that armies also march on their wallets.

The dollar’s blitzkrieg triumph isn’t due to any love of the greenback — even America’s closest allies have long hoped to counterbalance US. economic dominance with rival payment systems able to operate unscathed regardless of U.S. sanctions.  However, the EU, U.K., and Japan have never gotten much past dreaming about payment-system challenges because the embedded dollar-based system has become essentially friction- and risk-free.  That’s hard to beat.

China might still have a shot at a yuan-based substitute, but it would have to ensure liquidity (essentially impossible when a currency isn’t freely convertible) as well as political neutrality.  China’s decision suddenly to mount de facto nationalization of what was once a thriving, privately-owned digital-commerce sector will at the least give pause to those whose funds would move through a Chinese-dominated system.

Any nation that wants to replace the dollar also has to have sovereign obligations readily understood to be a safe haven under acute stress that are issued in amounts sufficient to absorb extreme shock.  China and the EU has no single issuer of sovereign bonds in quantity and quality sufficient to substitute for Treasury obligations.  Most market participants think China is more likely to be the cause of a shock than ever to serve as a shock absorber, ruling out its sovereign debt even if it grows large enough to mount a challenge to the U.S. Treasury.

And, finally, there’s the …

31 01, 2022

Karen Petrou: CBDC’s Big Empty

2023-04-05T16:20:36-04:00January 31st, 2022|The Vault|

Anyone looking for even a scintilla of a clue buried in a hint of an intention in the Fed’s CBDC discussion draft hunted in vain for guidance on the most consequential strategic inflection point for the U.S. financial-services industry, the financial system, the global payment system, and even the future of money.  Once, we all would have had to wait for augers from the on-high Fed to see the fate the imperium decreed.  Now, the Fed still thinks it rules all it surveys even though it doesn’t.  Soon, it may find out the hard way that fast-moving companies crafting digital money care as little for the central bank’s wishes as they did for those of the media, hotel, and retailing magnates they have already supplanted.

This is not to say that we must necessarily have a central-bank digital currency.  As I noted in my book, a democracy must ensure privacy and competition in ways China, for one example, disregards.  Rather, it’s to say that the U.S. will not have a secure store of value or sound medium of exchange without a payment system on which the economy stands firm.  Payment-system finality, accessibility, ubiquity, and cyber-security are all at risk if the Fed cedes the CBDC field without first and fast establishing the new framework it knows we need.

Nor am I saying that CBDC is inevitable because stablecoins are a certainty.  Libra’s ignominious demise is ample evidence of the power regulators still have to set the terms of payment …

1 12, 2021

FedFin: HFSC Throws Partisan Brickbats without Financial-Policy Impact

2023-05-23T14:19:51-04:00December 1st, 2021|The Vault|

Continuing the partisan and often-acrimonious tone of the Senate Banking hearing (see Client Report FEDERALRESERVE64), HFSC today heard from Chairman Powell and Secretary Yellen.  Much of the session was preoccupied by differing views of whom or what is to blame for inflation, with Members also squaring off on the benefit of the BBB and infrastructure bills.  Many financial-policy priorities were sidelined by these big-picture battles, with the session omitting discussion of topics such as digital currency, bank consolidation, and even fair lending and diversity.

The full report is available to retainer clients. To find out how you can sign up for the service, click here.…

19 10, 2021

FedFin on: Banking Dems, GOP Demand More, Tougher Sanctions

2023-06-07T15:42:15-04:00October 19th, 2021|The Vault|

Today’s Senate Banking hearing with Treasury Deputy Secretary Wally Adeyemo showed bipartisan concern that the Administration is failing to implement sanctions required by law, especially when it comes to China, North Korea, and Russia.  Senators also stated that they will not tolerate what they call continued defiance of Congressional mandates without making clear what they intend to do to enforce their will should Treasury fail to act.

The full report is available to retainer clients. To find out how you can sign up for the service, click here.…

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