In the previous article "Why Printing Money Seems to Be Ineffective," I touched upon a few points, and my friends asked me to elaborate on them. I had an in-depth conversation with a friend who is in the foreign trade business, so today I will discuss with you all, and you can also compare it with the opinions of other bloggers to get a better understanding through comparison.

I won't go into the issue of industrial transfer, as it is indeed happening now, but on a small scale, and it may become a big problem in the future, but it's not yet. A consensus that can almost be reached now is that the short-term pressure on China's economy is the poor performance of foreign trade, and the long-term pressure is the lack of domestic demand. In other words, the weakness of foreign trade may be a long-term trend, after all, other countries are also developing industries, and we need our own people to have strong purchasing power to digest our own production capacity, otherwise, it is easy to cause big trouble.

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Let me first share a microblog post I made before:

A few days ago, a fan who is in the foreign trade business took the initiative to contact me and showed me a screenshot of their chat. His client is from Malaysia, and during this period, the client is particularly eager to purchase goods from China, but it is impossible to exchange RMB for US dollars at the bank (it requires queuing for approval, and there is a quota, so it is impossible to get the money). The banks in their country are tightening up foreign exchange and not allowing the exchange. The friend in the foreign trade business said that the situation is the same for customers from other countries. They have money in hand, but when they want to exchange for US dollars to buy things, they find that their own government has no US dollars, and now they can't do anything.

So where have the US dollar foreign exchange of these countries gone?

Back to the banks in the United States.

I have explained this principle before. People often say "the United States starts the printing press," which is not really printing money, but the US Treasury takes IOUs (Treasury bonds) to borrow money from the Federal Reserve, and also issues Treasury bonds in the market to borrow from the market, such as China, Japan, Saudi Arabia, and Norway, all of which lend money to the United States.

Of course, the largest holder of US Treasury bonds is their own rich people. And at this time, the bank interest rates are very low, and ordinary people and entrepreneurs can easily get loans, speculate in stocks, and consume, which is why the stock market was surprisingly good during the epidemic.

During that period, after the US government received the money, it was distributed to the people, and the people could buy everywhere with the money they received. Some of this money flowed to the world, and a part of it returned to China to purchase Chinese products. Because this money was given for free by the government, the enthusiasm for consumption among the people was very high, and other countries were in a state of suspension due to the epidemic, which led to the extremely hot foreign trade in 2021, and that year our economy stood out in the world.

Last year, the epidemic ended, the US government stopped giving out money, and due to the excessive money issued before, it led to large-scale inflation, and the US government and its central bank (the Federal Reserve) had to consider reducing inflation.Inflation is entirely a monetary issue; there is too much money in the market, so just take some back. The American method to reduce inflation is to raise interest rates. This is also easy to understand: if our banks raise interest rates, wouldn't you be in a hurry to repay the money you owe the bank? If you have extra money, you would also deposit it in the bank to earn interest. With less money in the market, inflation naturally decreases.

However, when everyone puts their money in the bank, the funds that were originally intended for entrepreneurship and production also return to the bank, leading to a reduction in the work and wages of the common people. They are not unwilling to buy more things, are they? This is also why the United States' imports have significantly weakened this year. With less money, people naturally have to cut back on spending. Similarly, since the interest rate hike, the U.S. stock market has been in disarray.

Moreover, such operations have also trapped a bunch of other countries.

Because the U.S. dollars of other countries also flow back to the United States to earn interest.

This is not complicated. Suppose you are a Malaysian businessman who sells mangoes to the United States and earns a lot of U.S. dollars, which you deposit in a Malaysian bank. Other people can exchange Malaysian currency for U.S. dollars to buy Chinese products.

Suddenly one day, you hear that the interest rate in the United States has been raised to 4%. You quickly exchange your Malaysian currency for U.S. dollars and deposit them in the United States. If everyone does this, won't Malaysia be short of foreign exchange? 4% is a terrifying interest rate, and you can ask at the bank; there are almost no deposit interest rates that can reach this high now.

At this time, the Malaysian government, seeing the sharp decline in U.S. foreign exchange, is also anxious because the government still needs U.S. dollars to purchase some essential items, such as oil, power system components, water plant pump parts, and so on. There are also some debts that are about to mature that need to be repaid. If these supplies cannot be met, it can lead to major problems. For example, Sri Lanka has completely run out of U.S. dollars, cannot repay the matured debts, and the country has gone bankrupt.

So what will the Malaysian government do? It will decisively require approval to delay the outflow of U.S. dollars. As a result, companies that want to exchange for U.S. dollars to buy Chinese products are also restricted, and they cannot exchange them. Everyone does this, and China's exports are also weak.

In addition, the U.S. dollars of developing countries flow back to the United States, leading to a lack of investment in those countries, a reduction in job positions, and people not being able to earn money. They have to cut back on spending, and naturally, they buy less from China, leading to a global recession.

The whole world has no money to buy things, which directly leads to a sharp decline in exports of the world's production countries. Not only are China's exports falling during this period, but the whole world is falling. In short, the U.S. interest rate hike has taken the whole world into a pit.Here lies a question: Do these countries have a problem with their thinking? The US dollar is so dark, why not stock up on some Chinese yuan?

This is a bit more complex. Remember the cycle we just talked about? To obtain US dollars, one must sell something to the Americans, and then use the earned dollars to buy Chinese industrial products, German equipment, Saudi oil, and Chilean cherries.

Everyone has noticed, right? Americans must import more than they export, which is a deficit. Only then can others have some remaining dollars.

This is also one of the biggest obstacles to the internationalization of the Chinese yuan: The most basic premise of the internationalization of the yuan is a trade deficit, that is, we spend more money than we earn, and only then can the yuan be internationalized.

The more money you spend, the more others can have a surplus of yuan, and they can use these yuan for mutual transactions.

So many people mock the significance of the US trade deficit, but the internationalization of the dollar, trade deficit, and the debt system are three sides of the same coin. If the US is not in deficit, other countries will not have dollars, and they will not be able to use its currency.

In the future, China's internationalization of the yuan will also need to be like this, otherwise, it is impossible. In addition, there must be free movement. How can an international currency not be freely movable? Who would dare to hold it? So, the foreign exchange control will be lifted at that time.

That is to say, when the exchange control is lifted and the emphasis on surplus is no longer emphasized, it means that the internationalization is really about to start. The current situation is very difficult.

In addition, there is a key issue. If we buy more from others than they buy from us, it will naturally lead to a decline in the competitiveness of our products and the outflow of industries.

Yes, the internationalization of currency can collect seigniorage, but the problem is the outflow of industries. You can't have the best of both worlds. The current predicament of the United States, in a sense, comes from this.In addition, the credit of our country's currency is not particularly high, and most countries cannot achieve unobstructed payment. For example, if Malaysia hoards a batch of US dollars, they can spend it freely, and everyone recognizes it. However, if they hoard a batch of RMB, there may not be many countries that recognize it. With this money, you can buy products from China, but it may not be able to buy products from other countries, so they are unwilling to hoard RMB.

As more and more countries recognize the RMB, more and more countries will hoard RMB, but the premise is that we have a way to get the RMB out.

This also explains the popular question in recent days, why can a piece of paper like the US dollar, which costs only 17 cents, buy goods produced by the hard work of people in other countries? In fact, the cost of the US dollar is far less than 17 cents, because most of the US dollars are a number on the bank account, and there is no need to print it out, and the proportion of real paper money is very, very low.

In fact, this question should not be asked about the US dollar, but about ourselves, why do we sell to them? Why can't we say with a clear conscience that we don't recognize that piece of paper? In reality, we not only do not refuse the US dollar, but also regard foreign trade data as a key barometer of the economy.

This is because we need to use US dollars to buy oil, iron ore, machine tools, chips, support African brothers, and the investment of "One Belt, One Road" all requires US dollars. Even in Russia, if you want to win over the Chechen group of small cards, they only want US dollars.

This is credit, you know that you can buy other things with that piece of paper, and you don't doubt it at all, so everyone is eager for the US dollar.

Similarly, you work hard every day, just for those RMB, is it because the RMB is made of gold? Of course not, because behind it is the national credit, and with RMB, you can let others work for you like you do.

The essence of credit is trust, trust that others also recognize this thing, and can spend it at any time, then this thing has value.

So where does this credit come from?

People may think of the strong military strength of the United States at the first reaction.In fact, military strength is indeed very important. It is hard to imagine a country with weak military power, yet everyone still regards its currency as an international means of payment. However, this is not everything. When the Soviet Union was at the peak of its military power, the credit of its currency was also very poor. The whole Soviet Union was collecting US dollars, both openly and secretly. The Soviet government even sold weapons through underground channels to exchange for US dollars, because the Soviet Union needed US dollars to buy grain, technology, and to bribe military strongmen in Africa and the Middle East.

That is to say, mere military strength is far from enough. Credit is something in people's hearts. When you force others to believe, no one will believe anymore.

Let me tell you something that may seem funny to everyone. In the long run, the issuance of the US dollar is indeed more restrained, or relatively speaking, it has always been better than other currencies, which objectively maintains its credit.

This may sound like a joke, but you can look up the comparison of various currencies. Even if the US dollar is so bad, it is still more reliable among all currencies. This also gives us an inspiration. If we want to replace the US dollar in the future, we must perform better than the US dollar. If the US dollar is over-issued, and we issue even more, then we will never be able to replace the US dollar in the next life.

Secondly, after World War II, the United States had a lot of gold, and the US dollar was directly linked to gold, which lasted for decades. The golden tiger skin endowed the US dollar with divinity, leading people to have a kind of worship for the US dollar similar to gold.

During those decades, some infrastructure based on the US dollar was established, such as the US dollar pricing mechanism. Now, when Russia and Iran do business, they are still using US dollar pricing. There is also the payment mechanism, almost all banks accept US dollars. If you have US dollars, you can buy highly liquid US Treasury bonds at any time to earn some interest. These infrastructures determined that after the US dollar and gold were decoupled later, everyone still got used to it and didn't want to change it casually, nor could they change it casually. Later, a super complex superstructure was built on this mechanism.

Now, even countries like Iran, which have been completely kicked out of the SWIFT system, only want US dollars when doing business with other countries. Moreover, Iran's foreign exchange is also US dollars. If you search online, you will know that Iran's currency is depreciating against the US dollar in recent days, and the people continue to line up to exchange currency. You may wonder, since Iran can't accept US dollars, how do they do business? It's not complicated. Iran sets up a company in Qatar and Dubai, and then you do business with these companies. The goods are sent to Iran, and the money is transferred to you from Dubai. Americans also know, but they turn a blind eye.

In addition, the "US dollar liquidity myth" is also established in this way. You can't accept any currency like the US dollar all over the world. This level of acceptance is very terrible. From the Soviet officials to the common people, even Russia is now saving US dollars, that is, those who hate the United States the most also love the US dollar. You can see how strong this credit is. Now, anywhere in the world, as soon as there is a little bit of wind and grass moving, people there will frantically collect US dollars and gold. You can see that this credit is difficult to shake in the short term.

Many countries do not reserve the renminbi, which is also a problem. This country may recognize the credit and value of the renminbi, but the countries it does business with may not recognize it, so they are not very daring to reserve more renminbi. We want to be widely accepted, it is a matter of making progress day by day, taking one country at a time, and we have to take it slowly.

After the US dollar was decoupled from gold, the binding of oil actually had less impact than imagined. You can think about it, if Russia says one day that their oil only accepts ruble payment, can the ruble become a world currency? If it can, why didn't they do it before? You should know that most of the time, Russia's oil production capacity is much larger than that of Saudi Arabia. Obviously, it's not that they don't want to, they can't. Not long ago, after Russia announced the ruble settlement, many companies have stopped doing business with it and have started to import from the United States.Other countries are not very daring in hoarding rubles, as the ruble fluctuates too much. If you are given 100 units, tomorrow its purchasing power might drop to 50, and the day after it could rise to 80. Who would dare to hoard? Therefore, they would rather not trade than hoard.

So, to speak, the current status of the US dollar requires restraint in issuing currency, technology, military, gold reserves, petrodollars, and other factors to be assembled. It took more than a century to accumulate the current credit. The internationalization of the renminbi does not necessarily have to follow the path of the US, but it will definitely take time. As long as we do better than the US, control the impulse to overissue currency, and establish a mature treasury bond system, it will be possible to become an international currency in the future.

Let's summarize at the end of the article:

1. Currently, foreign trade is weak, and there is indeed some industrial transfer, but the main factor is still the interest rate hikes by the US dollar.

2. The US dollar's interest rate hikes have led to a downturn in the economies of all countries, and everyone is short of foreign exchange, making many businesses unable to proceed.

3. If we also want the renminbi to have such capabilities, our currency needs to have more credit than the US dollar, be more deeply rooted in people's hearts, and we need to import more than we export so that other countries can have a surplus of renminbi.

4. The internationalization of the renminbi is almost certain to be achieved in the future. It is abnormal for such a large economy to have its currency not be an international currency. However, it will take time, after all, our real large-scale participation in international trade is still too short, at most thirty years, and now the status of the renminbi may be similar to that of the US dollar in 1900. With another twenty years of stable development, we will have everything.

The end of the article. If you think it's well written, give it a thumbs up.