Episode 306 – China: Challenging Dollar Dominance with Paul Gambles

Steve Grumbine

00:00:42.925 – 00:03:03.473

All right, folks, this is Steve with Macro N Cheese. It’s been a hot minute since I talked to my friend Paul Gambles. Paul is a really neat guy. I mean, he is working with the bigwigs.

He is out there advising people in capital markets, private equity, you name it.

He’s the co-founder of MBMG Group, which is recognized as a leading provider of personal advisory, corporate advisory and insurance services, private equity, et cetera. The list goes on.

And what I really wanted to talk to Paul about today, just so we can get this out of the way, is China’s issuing sovereign bonds – which is nothing new. However, there is a bit of a new game here, okay?

And Arnaud Bertrand put a tweet out, an “X” out, or whatever we call it these days, and this was on the 20th of November, has 1.5 million views. So unfortunately, our little podcast here doesn’t quite have that footprint.

But what Arnaud Bertrand puts out there is quite compelling, even if it’s not necessarily MMT-informed, even if he doesn’t quite have the I’s dotted and t’s crossed. So I figured I’d go to Paul. Paul works in these markets. He understands the game probably better than anyone.

And I figured, what the heck, let’s go ahead and ride through this thread together since so many people have been consumed in this.

And so I’m going to do a little back and forth with Paul when I bring him on, where I’m going to read Arnaud Bertrand’s thread and I’m going to allow Paul and I to dissect it as we go through. We’re going to provide an MMT lens for you to understand, and we’re also going to provide some technical details that Paul understands.

Hopefully, I’ll be learning a whole bunch today, too. So buckle up. Here we go. Paul. Welcome to the show, sir.

So, as the intro indicated, a lot’s going on, right? We had a fiasco of an election.

Not unpredictable at all. Because when the Democrats ignore the working class, you get the Trump that, you know, it’s like you take your eyes off the working class and you apply the Trump to the problem.

Paul Gambles

00:03:03.609 – 00:03:07.765

Hey, thanks, Steve. Great to be back. I love the way that since then the Dems are complaining how the voters got it wrong.

Steve Grumbine

00:03:09.025 – 00:03:56.441

Exactly.

They have zero ability to do any form of self-reflection if, in fact, they really mean to do reflection. If it’s not just merely a part of a political theater meant to ensnare people. And we don’t have to go down that path. But that’s a path I frequently find myself going because it’s like, it defies logic.

Most of the stuff that happens, you just scratch your head and you say, really? Really? This is the new narrative. It feels like if you watched Mr.McMahon, the Netflix limited series with Vince McMahon about the WWE, and the WWF, and the WCW, and all the crazy nonsense that went on with wrestling, you realize this is part of, you know, kayfabe, as they call it in the carnival business, where you’re in character.

Paul Gambles

00:03:56.633 – 00:04:06.965

Look, I’m increasingly convinced that politics is just a form of, you know, theater or maybe even circus, just to distract everyday people from what actually goes on in the real business of government.

Steve Grumbine

00:04:07.545 – 00:04:26.013

Pretty sure that’s right. In fact, I’m going to put my money down that. That’s right.

So let me go ahead and read Arnaud Bertrand and I’ll break it up into sections when I come to a spot. Give me a second. If you hear something you would like to respond to, stop me, but in the meantime, let’s get going.

Paul Gambles

00:04:26.109 – 00:04:26.581

Sure.

Steve Grumbine

00:04:26.693 – 00:05:06.347

So the story around China issuing U.S. denominated sovereign bonds in Saudi Arabia is generating an enormous amount of buzz in China and could, potentially, be immensely important. This is the way he starts it off. I strongly suspect it’s a message to the upcoming Trump administration. Let me explain what seems to be going on.

On the face of it, it’s not a major story.

China issued $2 billion in U.S. denominated sovereign bonds in Saudi Arabia, which means that investors lent USD to the Chinese government that they promised to pay back. That’s what a bond is. So far, relatively boring.

Paul Gambles

00:05:06.491 – 00:05:14.653

Hi, Steve. If I could just jump in there with just a little bit of context, yeah? Before we start getting into the real nuts and bolts of this.

So just to give a little bit of context.

Steve Grumbine

00:05:14.819 – 00:05:15.505

Sure.

Paul Gambles

00:05:15.665 – 00:08:20.875

I think China’s indicated that it plans to issue about $300 billion of sovereign bonds during 2024. So, you know, you can see $2 billion out of almost $300. It’s, you know, it’s a relatively small proportion.

And historically, China has issued U.S. dollar denominated bonds in the past. Largely because it had to.

If we think back to the world in 1945. After World War II, there was a huge demand from what economists love to call emerging or developing nations for funding to rebuild their part of the world following World War II. Prior to World War II, we’d still been in a largely imperial-colonial era.

And so a lot of parts of the world were still using the currency of the kind of commonwealth that they were part of. So the British Empire – a lot of countries were, you know, using pounds or they were using, you know, pound-linked currencies.

The UK didn’t have the funding resources post World War II in still a gold-linked world – currency being linked to gold because of the Bretton-Woods agreements that happened just before the end of World War II – that were designed to build a new world order. And that whole new world order basically said, okay, well instead of the colonial currencies, let’s use U.S. dollar as the global funding currency.

You know – America is the richest nation in the world.

It’s going to provide funding for everybody in dollars, and in return it’s going to extract this “exorbitant privilege” [in the phrase of French President Valery Giscard D’Estaing] of being the world’s funder. Which, basically, means that all the emerging nations in the world become incredibly dollared and therefore America reliant for their economic development.

So that, sort of, created a precedent that has lasted largely to this day where emerging nations, even though we’re now in a fiat currency world and we’re not, you know . . . since 1971, we haven’t been linked or we haven’t been constrained by, for instance, volumes of gold into how much currency can be issued. So even though for the last 50 years we could have moved away from that, old habits die hard.

And most emerging nations are still, sort of, accepting the discourse that’s imposed on them that if they want to borrow, they really need to go and borrow in U.S. dollars. That’s actually a real issue for emerging nations.

If any of your listeners want to know more about it, there’s a brilliant academic called Fadhel Kaboub [Macro N Cheese Episode 302] who’s explained an awful lot of how we could actually start to challenge this. The reality is still that an awful lot of emerging, or actually, you know, let’s call it Global South because that’s a more acceptable term.

I think a lot of Global South debt issuance is genuine debt because it happens in a foreign currency. And that’s what caused the peso crisis in ’96. It’s what caused the Asian currency crisis in 1997.

If you borrow money in somebody else’s currency, it really is a debt obligation because you have to be able to buy that foreign currency i.e U.S. dollars in order to repay it.

Steve Grumbine

00:08:21.495 – 00:08:28.463

I’m glad you provided that context because Arnaud goes into non-MMT-land very, very soon.

Paul Gambles

00:08:28.559 – 00:08:28.951

Yeah.

Steve Grumbine

00:08:29.023 – 00:08:44.783

And some of that history, hopefully, will help us to shape the real story here because it’s obviously . . . it’s fascinating. It’s really interesting stuff. You just want to make sure you get the facts right. So thank you sir, for, for bringing that.

Paul Gambles

00:08:44.879 – 00:08:51.123

Absolutely. And by the way, I think Arnaud posts some great stuff, but I think just on this he’s gone a little bit, kind of, over his skis.

Steve Grumbine

00:08:51.319 – 00:09:26.191

There we go. All right, so he says the first somewhat interesting aspect of it is that the bonds were oversubscribed.

Now this was new to me – oversubscribed by 20 times. Meaning $40 plus billion in demand for $2 billion worth of bonds – which is far more demand than usual for USD sovereign bonds. Typically, U.S. Treasury auctions see oversubscription rates between two and three times.

So there obviously seems to be a very strong market appeal for China’s dollar denominated debt.

Paul Gambles

00:09:26.343 – 00:11:53.005

Yeah, that’s true and it’s interesting. I wouldn’t get too hung up on that. I mean, I think you know, it reflects a few things.

As I say, emerging economies tend to have this presumed constraint that they might need to issue in dollars to find buyers. You know, China doesn’t really have that. China hadn’t issued any dollar bonds for, I think, three years, if I remember correctly.

So it had, basically, gone away from this situation where it had 25 years ago, as an emerging economy, China had needed to issue a combination of local currency and dollar-denominated debt.

But over time, Chinese requirement to issue dollar debt, basically, you know, diminished almost completely. You have to remember, China’s growth over the last 25 years has largely been built on exports primarily into dollar markets or Eurodollar markets.

But by the way, listeners who aren’t familiar, when we talk about the market for U.S. dollars outside the States, they’re generally referred to as Eurodollars. Doesn’t matter whether they’re in Saudi Arabia or whether they’re in London, we tend to call them Euro dollars.

So the Chinese exports growth boom, basically, generated huge amounts of dollars for China, which were primarily absorbed by the Chinese government. And because of that, China actually had more dollars than it could do anything with.

It ended up about 10 years ago owning about $1.4 trillion worth of U.S. Treasuries.

Because when the Chinese government found itself sitting on this massive pile of dollars, it didn’t just want to have the cash sitting there, so it converted them into interest-bearing instruments and, conveniently, the U.S. Government was issuing interest-paying Treasuries.

So the Chinese government was, basically, converting its dollar surplus into U.S. Treasuries because it was running such a dollar surplus. And because it was becoming the second largest – and today, arguably by some metrics, if you look on a currency parity basis – the largest economy in the world, it didn’t need to do dollars anymore.

So for the last few years, China has only been issuing renminbi [aka yuan] – locally denominated debt instruments.

And therefore, if you go into the market with such a niche, that is $2 billion amount of U.S. dollar denominated bonds, when you haven’t done that in the past, you’re going to get a massive, massive overdemand for it. And therefore, that’s going to help you drive down the interest rates. Which, I think, was Arnaud’s next point.

 

Steve Grumbine

00:11:53.465 – 00:12:08.841

Yes, as a matter of fact. But before we jump to his next point, I do want to ask this, how does this oversubscription work?

Is it the idea that they don’t think everybody’s going to take their money out? Help me understand how you oversubscribe bonds like that.

Paul Gambles

00:12:08.953 – 00:13:38.271

Okay, so when a sovereign issues bonds, it basically announces that there’s going to be an auction. I’m not sure that terminology matches what, you know, most of us would imagine an auction looks like, but that’s what they call them.

And for instance, in the States, there are approved participants who can place their bids for the auction.

And that would typically be the likes of JP Morgan or Citi or, you know, the big institutions [primary dealers] can, basically, say to U.S. Government, yeah, thanks for letting us know you’re going to sell half a trillion dollars of three year bonds next Wednesday at three o’ clock.

The government would cite the indicative rate that it expects to sell at and the institution then says, yeah, okay, well we’ll buy $100 billion at that rate, or slightly more than that rate, or slightly less than that rate, depending on, you know, their feel of what’s actually going to achieve a successful auction outcome. And so, typically, U.S. Treasury auctions might be two to three times oversubscribed.

But when the Chinese government basically said, hey, we’re going to do $2 billion in dollars and they’re doing it in Saudi, then the responses they got from global financial institutions was, you know, absolutely off the scale. Probably because of the rarity of this, the fact they hadn’t done it before, they hadn’t issued dollar bonds for three years now. So basically anybody who was anybody wrote in and said, yeah, you know, we’d like a big slice of that please.

And therefore, the responses that they got were, you know, 20 to 30 times the volume that they were issuing. Does that make sense, Steve?

Steve Grumbine

00:13:38.383 – 00:13:50.007

See, I was thinking oversubscription from an IT perspective, I used to, many moons ago, do what we call fast packet services like ATM, frame relay, things like that.

Paul Gambles

00:13:50.111 – 00:13:50.527

Okay.

Steve Grumbine

00:13:50.591 – 00:14:13.265

And it was standard fare to have a port that you would oversubscribe 200 – 300 per cent, knowing that most people weren’t going to burst to the full bandwidth potential. And so you could oversubscribe the circuit.

No, it’s kind of like the cable model where you’ve got a hundred people on one pipe knowing that most people aren’t using it at the same time.

Paul Gambles

00:14:13.385 – 00:16:10.487

All right. No, no, no. With all these institutions, when they say, you know, we’re going to buy that, they’re pretty much committed to buying it.

And so what then happens is on a Treasury auction, if you’ve got, say, say you’ve got three times, then everybody who’s subscribed at that maximum rate, then they’ll just get scaled back and they’ll all get given, you know, if it’s three times oversubscribed, they’ll all give them a third of what they’ve asked for. That’s the standard fare in Treasury auction.

One interesting thing is, and this really speaks, I think, to the MMT perspective. The accuracy of the MMT perspective on sovereign issuance is that if you look at the Japanese bond auctions for, I think most of 2023 and 2024, they pretty much have no subscribers at all. Nobody has expressed any interest in buying Japanese bonds. And so you would think that would be a failed auction.

You know, the Japanese government wants to raise sovereign funding to continue the operations of government.

And nobody puts their hand up and says they want to buy it. But that’s fine because they found out the Japanese government then just uses the State – the Treasury – or, you know, quasi-State organizations like the National Pension Fund or the Bank of Japan to just go and buy all the issuance, anyway. So it, sort of, speaks to the nonsense of Treasury Bond auctions.

We don’t actually need to issue Treasury Bonds because we found out in Japan that, actually, if nobody buys them, therefore they’re not really issued. If Steve decides he wants to borrow money, nobody wants to lend it to him, so he borrows it from Steve.

It kind of shows you that the system is really, you know, built on a bit of a nonsense.

And if I’m not explaining this clearly enough or it’s not making sense, I’d really recommend that listeners go and look in the chapters in Stephanie Kelton’s book The Deficit Myth, when she talked about U.S. Treasuries are actually just a different form of U.S. currency. They just happen to pay interest. And she talks about it in different colored dollars.

Steve Grumbine

00:16:10.551 – 00:16:12.757

Yellow versus green.

Paul Gambles

00:16:12.951 – 00:16:28.805

There’s these sort of normal standard dollars that you or I might carry in our wallets.

And there are these nice shiny dollars that the banks and the institutions own that actually do the same thing, but, also, pay a chunk of interest guaranteed by the Government.

Steve Grumbine

00:16:29.265 – 00:16:57.487

Well said. So, in other words, for those out there that haven’t heard this stuff, bonds really do not finance the government. This is all performative.

This is like standing in the corner putting tinfoil on your head, rubbing your belly and smacking your rump and calling it a funding mechanism, okay? But people with very serious faces – very, very serious – try to talk like the government is having trouble financing its debt. Which is hilarious.

Paul Gambles

00:16:57.631 – 00:16:58.311

Exactly.

Steve Grumbine

00:16:58.423 – 00:17:08.151

So they buy their own debt, folks. In other words, they issue the currency and then they buy it back from themselves. Because after all, we got to keep the illusion alive and well.

Hello. All right.

Paul Gambles

00:17:08.263 – 00:17:20.055

You would have thought the Japanese Ministry of Finance would just stop holding these auctions, but now they’ve carried on doing it and they’d be the only people turning up at their own auctions. And they carried on doing that with a really serious face. So, you know, it’s almost Kafkaesque.

Steve Grumbine

00:17:22.275 – 00:18:19.295

All part of the kayfabe that we were talking about. The carnival “personas” are alive and well out there, baby.

All right, so you are right, though. The second point that Arnaud brings up is, he said the second interesting aspect is that the interest rate on the bonds was remarkably close to the US Treasury rates, just 1 to 3 basis points higher, i.e., 0.01 to 0.03%.

Which means that China is now able to borrow money in US dollars at virtually the same rate as the U.S. Government, itself, borrows from itself. That was me adding that in there.

That’s the case for no other country in the world. As a benchmark, countries with the highest credit ratings, AAA, because this is a very serious thing right here, typically pay at least 10 to 20 basis points over U.S. Treasuries in the rare instances when they issue U.S. dollar bonds.

Paul Gambles

00:18:19.635 – 00:19:48.165

Yeah, I see – I wouldn’t get too excited about that last part of it.

I mean, most AAA-rated sovereign issuers, as Arnaud says, they don’t necessarily issue in U.S. Dollars because they issue in their own currency, because why wouldn’t they? Because again, stop me if I’m getting boring by repeating the same thing.

But if you have your own currency, but you borrow in another currency, that creates a genuine debt obligation in that you have to have enough of that other currency to repay. Whereas if you issue in your own currency, you are the manufacturer, you are the creator of that currency, so it’s an accounting debit rather than an actual debt.

So I wouldn’t get too excited about that, except that it’s incredibly important in terms of the message that it conveys, which Arnaud touches on there, that China has sent this very clear signal, you know, a bond shot heard around the world.

It sent this very clear signal that it can compete for dollars on the same price terms as the U.S. Government that is paying the same interest rate, but that it can be, you know, a much more attractive issuer. Twenty to thirty times oversubscribed, it can be a much more attractive issuer.

And so, you know, I think that the significance of the fact that China can issue dollar bonds at the same rate as the [United] States virtually, is that it highlights China’s credentials as a competitor for U.S. dollar denominated capital – if China wants to play that game.

Steve Grumbine

00:19:48.745 – 00:20:45.795

Very, very well stated. The humor to me here is that China, itself, what good does it have with dollars to begin with, really?

I mean, it uses its own currency pretty much for everything it does.

But when it goes outside of its borders having, you know, U.S. dollar reserves, it could, in theory, develop some sort of U.S.-denominated Swap Line where it could take people that are in the BRICs that have dollar denominated debt. It could use its own and, literally, pay them off, get them out of U.S. debt and free the world of U.S. empire, quite frankly.

I mean, could it not? I mean really, that’s the U.S.’s number one slave tool – colonizing tool – is its U.S. dollar and its ability to use the IMF and other tools like that to entrap these Global South countries. Could China not be the great emancipator here?

Paul Gambles

00:20:45.955 – 00:21:49.803

Spot on. And that’s a brilliant point, Steve.

I mean, that’s sort of what I was hinting at, but I think you just came out and said it, you know, much more clearly. That’s what I was hinting at when I was saying, you know, 1945, you were a Global South country, you wanted to, you know, redevelop again after World War II. You probably didn’t really have an alternative except to borrow in dollars with whatever terms U.S. Government demanded from you. Since 1971 you have had alternatives, but that hasn’t been really made very clear to you.

So you as a Global South country, you’ve generally tended to carry on having a large dollar component even though Asian Financial Crisis, Peso Crisis, you know, the countries got really, really burned by doing that. But still, there’s this practice of issuing sovereign debt in U.S. dollars to get a lower interest rate to attract buyers.

China has for at least a decade now been slowly at the margins chipping away at that.

There’s a lot of negativity, I think in Western media about some of these Chinese programs like the Belt and Road Initiative [BRI] or Chinese investment in Africa.

Steve Grumbine

00:21:49.899 – 00:21:51.535

I love China, by the way.

Paul Gambles

00:21:52.755 – 00:24:25.455

And I’m not saying that it’s necessarily completely altruistic or that it’s executed in a way that is absolutely beneficial for the borrowing countries. Because the most beneficial thing would just be for the countries to just go and issue their own currency, frankly. [Yep.]

But China’s done a great deal over that time to try to help dollar dependent jurisdictions, dollar dependent economies wean themselves a little bit off that dependence. And it’s been able to, because as I said, 10 years ago, China was holding $1.4 trillion in U.S. Treasuries. As of today, it’s holding about half of that.

So as the Chinese export boom into the U.S. has reigned back, China’s generated less dollars. But it’s also looked to pay down to convert the dollar holdings that it has.

We don’t have really good data on the exact mechanisms that it’s used for doing that. But, you know, in some cases it’s just like Treasuries mature and it’s not gone and then rebought them.

In other cases it’s gone into infrastructure projects in Asia or in Africa where it’s enabled local countries to reduce their potential dollar exposure and instead have either equity or other exposures to China. The margins that’s already happening and it’s something that’s already having a lot of knock-on effects in terms of U.S. policy and the U.S. economy.

So this, sort of, warning shot of $2 billion across the bows, that’s a very clear signal about how the potential power that China holds going forward if the U.S. gets too stupid about, the U.S. government, gets too stupid about things like tariffs or other anti-Chinese policies or even geo-politically. I mean, it might not be appreciated by listeners outside Asia, but American involvement in Taiwanese politics is a real sore point to the Chinese Government. And so I think, you know, this is a, this is a warning shot on a lot of different points.

Again, if you look at the fact that today China still has seven and a half trillion dollars, I think it is, of U.S. Treasuries.

If it needed to get $2 billion for its funding purposes, it could just sell $2 billion out of that seven and a half trillion and it wouldn’t need to go and raise this dollar denominated debt. So there’s clearly a non-financial reason why China has decided to do this. And I think a lot of it is about the messaging.

Steve Grumbine

00:24:25.795 – 00:24:57.475

I want to add one thing to this that . . . I want to make sure if I’m understanding.

So one of the problems, if you will, with the United States Government and its debt system is, also, the SWIFT system, which it holds with an iron fist. And you’ve seen them cut off Russia, you’ve seen them cut off people, not just tariffs, but, literally, hold their money captive, right?

What would prevent the U.S. Government from telling China, hey, we’re not going to grant you your dollar holdings, you’re done.

Paul Gambles

00:24:58.185 – 00:27:18.115

There have been a lot of suggestions over time, particularly, I think, the idea of Donald Trump returning to the White House and people who over the years have seen Trump’s M.O.

There have been situations, seemingly, where – when massively in debt – Trump has confronted his institutional lenders and made it their problem, not his problem, as to how much he actually owes them by threatening to default.

I think that for the U.S. to potentially threaten to strategically default on so much Chinese holdings, say $750 billion of Chinese holding, I think that would be so earth-shaking for the Treasury market. You’ve got to remember, China isn’t even the largest foreign holder of Treasuries now, or Japan, actually, is the largest.

But China is slipping down that league table of largest overseas Treasury holders.

If you’re going to cut off China again, you could try and justify it in whatever means, but I think it’s very difficult to see how you could do that without causing a huge panic in Japan, in London, which is, you know, roughly similar size exposure to China’s, and in all the other foreign holders. And we have this typical drama every year of the debt ceiling and totally unnecessary. But you see the chaos that that causes.

If you had a U.S. default on its overseas Treasury holdings, I think, you know, you ain’t seen nothing yet. It’s hard to imagine an orderly way in which the U.S. could repudiate its obligations to China without causing absolute chaos in global markets.

You know, the dollar and the Treasury is still the backbone of global capital markets. And you suddenly, you know, take away the idea that U.S. government obligations mean anything.

In a lot of ways we’ve seen that taken away but we’ve seen it taken away at the margin in very specific ways, such as confiscation of Russian assets, or whatever it may be.

And you know, Japan, London, everywhere else is able to convince themselves, well, that won’t happen to us because we’re friends, friends of the States.

But if you get a default on U.S. sovereign asset, it’s hard to imagine any way that that doesn’t just result in a form of absolute chaos that I can’t imagine any U.S. policymakers would see we’re benefiting from.

Steve Grumbine

00:27:18.455 – 00:27:20.315

Very good. Very well said.

Intermission

00:27:21.095 – 00:27:41.285

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Steve Grumbine

00:27:44.025 – 00:29:01.839

So this next one, I think, is the real red meat for a lot of people. The red meat in the water. The chum in the water. The sharks are swarming. This will get people’s attention. He says:

The third interesting aspect is the venue itself for the bond sales, Saudi Arabia. This is unusual since sovereign bonds are typically issued in major financial centers, not in Riyadh.

The choice of Saudi Arabia and the fact that the Saudis agreed to this, is particularly significant given its historical role in the global dollar system that you talked about earlier. And what he [Arnaud] says is, the so-called petrodollar system, which I don’t need to explain – I think a lot of people probably do need it to be explained to them. Maybe if you want to take a minute, that’s fine, too – he says, by issuing dollar bonds in Saudi Arabia that compete directly with U.S.

Treasuries and getting, essentially, the same interest rate, China is demonstrating it can operate as an alternative manager of dollar liquidity right in the heart of the petrodollar system.

For Saudi Arabia, which holds hundreds of billions in dollar reserves, this creates a new option for investing their dollars.They can invest it with the Chinese government instead of the U.S. government.

Paul Gambles

00:29:02.027 – 00:33:44.665

Absolutely. I think you’ve nailed a really key point there.

As we’ve been saying, this is, kind of, very much messaging, or performative, by the Chinese government to go and issue this, you know, relatively small in sovereign terms, amount of U.S. dollars Bonds is clearly a way of trying to get America’s attention and saying we can challenge dollar hegemony. We can challenge U.S. Hegemony in the Global Capital Market system.

Because the fact the rest of the world is such an important economic contributor, certainly on purchasing power metrics, China is now as large as the States. So the idea of issuing the bonds is very much a sort of challenge, saying, you know what?

We can, if we want to, come after the U.S. hegemony over Global Capital Market system. And that’s an incredibly important aspect of the U.S. economy that China is challenging there.

So for instance, if you just look at American corporates. An awful lot of the profitability of American corporates is derived from their activities outside America. You know, Amazon, Google, Facebook, whoever. Their non-U.S. revenues tend to significantly exceed their American generated revenue.

Because, at the end of the day, there are, you know, 330 million people out of an 8 billion population that live in the States. So we tend to refer to this as value extraction.

That America, by placing itself at the heart of the global capital system, is able to, basically, monetize the entire global population. And so this warning shot . . . it’s clearly threatening. Look, in the long run, if we want to, we can challenge that.

I think the extra twist on this, as you say, is doing this in Riyadh, in Saudi Arabia, which is not known as the global capital market, but it is known, obviously, as a major producer of petroleum.

And within global capital markets we have this petrodollar system, which is, basically, if you want to buy commodities, if you want to buy oil, you tend to do it through market intermediation. That is, you go and buy however many thousands of barrels of oil from global commodity marketplaces.

You don’t go to the place where it’s being pumped out of the ground and do a deal directly. So the fact that this is all intermediated means that the pricing is done in dollars and the settlement, the payment, is done in dollars.

And although we call it the petrodollar, it’s not just petroleum. It applies to an awful lot of global commodities. It applies to soft commodities, like wheat. It applies to hard commodities, like metals. And it applies to energy commodities, like oil.

So the fact that that part of the Global Capital System is part of this U.S. dollar hegemony over the Global Capital System is an incredibly important factor in American positioning at the heart of the global capital system, which allows this huge value extraction to take place for the benefit of American capital. The idea of sending the warning shot is saying, hey, you know, we can come after this if we want to.

The idea of doing that in Riyadh, where, effectively, the, sort of, home of the petrodollar, is actually saying – you know what, we can come after this right now if we want to. I think it goes back to your point about if there’s this accumulation of $750 billion of Treasuries in China.

If there’s that accumulation of them, it enables China to, effectively, participate in dollar funding, today. It enables them to do this replacement of parts of the Euro dollar system, of the petrodollar system. Yeah, they don’t have to wait.

It doesn’t have to be the long term project that they’re threatening. It can be the immediate project.

And there are few things that are more, you know, psychologically damaging to U.S. Government than the idea that their energy relationships – which is why the petrodollar is so important to them – the idea that those might be threatened.

And again, you know, post World War II Global reconfiguration, one of the key aspects of that, for America, was having this, kind of, strategic control over the oil producing countries – particularly in the Middle East. So by choosing to do it in Riyadh, it just maximizes the message. It’s not just saying we’re attacking the Eurodollar system.

Or we can, if we want to, attack the Eurodollar system, we can, if we want to, attack the U.S. dollar capital market hegemony. But we can, also, attack the petrodollar. And, therefore, we can really disrupt the way that the American economy has been able to benefit from value extraction of commodity and resource of producing countries and gain a benefit that no one else has been able to gain.

Steve Grumbine

00:33:45.125 – 00:36:03.699

Amazingly well said.

So this next piece that I’m going to read here is going to be a little bit long, so just bear with me because you covered quite a bit of this already. But I want to be able to give you a chance to summarize it.

I mean it sounds great and I’m sure the 1.7 million people that have read this already [Arnaud’s follwers] probably are reading this and are just – Yeah, yeah, yeah, yeah, yeah. And so the opportunity to debunk, perhaps, or add clarity where needed, I think, is valuable. So here’s what he says –

He says, okay, that’s all interesting, but still not the reason why Chinese social media is abuzz.

The reason why it is, because they postulate that this is a trial round by China to demonstrate to the U.S. that they can effectively use their own currency against them with potentially dramatic consequences. How? First of all, think it through.

Imagine China scales this up and instead of issuing $2 billion worth of bonds, they start issuing tens or hundreds of billions worth of it. What this means for the U.S. is that China would effectively be competing with the U.S. Treasury in the global dollar market.

Instead of countries like Saudi Arabia automatically recycling their dollars into U.S. Treasury bonds, they could put them into Chinese dollar bonds that pay the same rate.

This would create a parallel dollar system where China, not the U.S. controls part of the flow of dollars. The U.S. would still quote, unquote, “print the dollars,” but China would increasingly manage where they go. Imagine that.

And he goes on to say another critical aspect is that every dollar that goes into Chinese bonds instead of U.S. Treasuries is one less dollar helping to finance U.S. Government spending. He just totally slipped the plot, just lost it right there.

But at a time when the U.S. is running massive deficits and needs to constantly sell Treasury bonds to fund itself, having China emerge as a competing dollar bond issuer that can match Treasury rates could pose immense financing problems for the U.S. Government. You just sat there and explained this from Japan’s end. It’s just ridiculous that he . . . but this is what people think.

Paul Gambles

00:36:03.827 – 00:36:05.539

This is the prevailing narrative. Yes.

Steve Grumbine

00:36:05.587 – 00:36:18.595

He says it could effectively end the U.S.’s, so-called, exorbitant privilege. Now that is a different story. Totally different, saying it could end their exorbitant privilege than saying the government needs to fund itself.

Paul Gambles

00:36:18.675 – 00:36:19.065

Agreed.

Steve Grumbine

00:36:19.115 – 00:36:23.925

You know, needs them to fund it. It’s ridiculous, but go ahead. I, I’ll leave it there. Go for it.

Paul Gambles

00:36:24.085 – 00:40:06.045

Okay, there’s a lot of things there if, if we had infinite time, we could try and unpack all of them.

I think the point about scaling up – China has, as I say, $750 to 800 billion dollars of Treasuries, still. So it has the ability to scale up and not essentially be putting itself into debt.

As we mentioned earlier, the problem with issuing foreign currency denominated bonds is that you are creating an obligation. But, actually, China has this almost problematic asset now of almost $800 billion worth of U.S. Treasuries that it wants to run down or get rid of.

So, actually, there’s an extent to which it may suit them. It may, actually, be good monetary management to do some dollar bond issuance as a way of helping them to then offset the dollar bonds that they hold.

Because one thing about China having already unloaded, sort of, almost half of its Treasury position over the last 10 years is that that has a knock-on effect under the current system for U.S. interest rates.

If we have this nonsense performative Treasury issuance, and if China was a buyer and now it’s a seller, well, while ever we stick to this theater of Treasury issuance, that actually drives up U.S. interest rates.

And so China has, because of the adherence to the system, even though we all know it doesn’t make sense because of the policy adherence to the system. In the states, interest rates have been higher because of Chinese actions.

So while ever the U.S. maintains the fiction of sovereign bond issuance, China has still got this pretty chunky $750 billion bullet that it can significantly influence U.S. interest rates. And it can use that as well by issuing dollar bonds. And as I say, while ever it’s got $750 billion of assets, it can issue $750 billion of liabilities and not have an obligation to the state.

So it can certainly do that. And I think the recent pretty small issuance is a warning.

You know what guys, if you’re going to do things that are going to be seriously detrimental to Chinese interest, we not only have the remaining Treasuries as a bullet, we can also enhance that by doing more of this issuance.

I don’t know that they want to compete for dollars in the global market, but I think they do want to say that U.S. hegemony of global capital isn’t something that should be, you know, assumed to be able to continue indefinitely. And if it doesn’t, as I said, that would have massive, massive adverse knock-on effects for the U.S. economy. So that is really, really important.

This is flagging basically a sort of an element of control that China has over the U.S. economy. While ever the U.S. economy continues to run itself the way that it does.

I mean, I totally agree where Arnaud goes off on, you know, running massive deficits and things like that, people need to just take a step back and remember that every dollar that the U.S. Government puts into the U.S. economy actually benefits the U.S. economy pretty obviously. And so we don’t like the term running massive deficits, we see that as U.S. Government providing funding for the U.S. economy.

And over the last five years or so, the U.S. Government has played an increasingly large role in the noughties and the 2000 teens. We actually saw that bank credit was the major driver of economic activity. But you know, U.S.Government funding has now become a significant driver as well, as that credit is reduced.

So there are so many potential adverse effects from all this for the U.S. economy that if the current administration and the future administrations don’t, actually, sort of, sit up and pay attention to the warning, this could actually get pretty ugly.

Steve Grumbine

00:40:06.425 – 00:40:13.465

Absolutely. So what I’m going to do in the spirit of time is I’m going to read a larger block this time because we’ve already captured some of this here.

Paul Gambles

00:40:13.545 – 00:40:13.929

Sure.

Steve Grumbine

00:40:14.017 – 00:41:46.685

What he says is: But wait, you might ask yourself, what’s the point of China having so many dollars? Don’t they transfer the problem to themselves? They, too, need to find a place to invest all these dollars, don’t they? You’d be right.

The last thing China needs is more U.S. dollars. In 2023, it ran a U.S. dollar trade surplus of $823.2 billion. And for 2024 it’s expected to be $940 billion.

China is already absolutely awash in U.S. dollars. But that’s the beauty of the Belt and Road initiative comes out. Out of 193 countries in the world, 152 of these countries are part of the BRI.

And a very common characteristic many of these countries have is this. They owe debt in U.S. dollars. The U.S. government or the western lenders. This is where China’s strategy could become truly clever.

China could use its dollars to help Belt and Road countries pay off their dollar debts to western lenders. But here’s the key.

In exchange for helping these countries clear their dollar debts, China could arrange to be repaid in yuan, or strategic resources, or through other bilateral arrangements. This would create a triple win for China.

They get rid of their excess dollars, they help their partner countries escape dollar dependency, and they deepen these countries economic integration with China instead of the U.S..

Paul Gambles

00:41:47.145 – 00:42:14.885

Yeah, I think, I mean, just very briefly, Steve, I think, you know . . . this is what we were saying earlier, this is already happening. I think Arnaud’s a little bit behind the curve here. This is already happening at the margins.

I think the significance of the recent dollar denominator bond sale is China is sending out a very clear warning that it can really ramp up this process if it needs to. So I think, you know, this is already underway. But the bond issuance is just a way of saying, you know, what if we need to, we can turbocharge this.

Steve Grumbine

00:42:15.785 – 00:42:42.041

So jumping ahead, he says: In effect, this would be China placing itself as an intermediary at the heart of the dollar system. Where the dollars still, eventually, make their way back to the U.S., just through a path that builds Chinese, rather than American, influence and progressively undermines the U.S.’s ability to finance itself – Whatever. Every time we talk about finances, so we just got to ignore that, I guess.

Paul Gambles

00:42:42.153 – 00:43:25.745

Yeah, and I wouldn’t pay a great deal of attention to that paragraph, in general, I think, you know, China is, basically, sending a warning that it can replace U.S. intermediation at the heart of the global capital system.

But I think, you know, ultimately, that’s actually a threat to the dollar denomination – the U.S. global capital system. So I think, I think, you know, he’s slightly wrong in saying that China’s looking to control the Eurodollar.

It’s showing that it can influence the Eurodollar. But the significance of that is that China is, also, saying, hey, the global system might just be able to operate without Eurodollars.

It might be able to operate in it’s own way, and that’s actually a much, much bigger threat, frankly. And then the idea of undermines U.S. ability to finance itself, well, I think Arnaud needs to go and read The Deficit Myth.

Steve Grumbine

00:43:26.885 – 00:45:14.715

Yes, indeed. So the rest of this is really interesting because we kind of touched on this already. The idea, you know, just to keep it simple, he’s like, the most obvious response would be to threaten sanctions against countries like Saudi Arabia or institutions that buy the Chinese dollar bonds.

But this would further demonstrate that the dollar assets aren’t actually safe from U.S. political interference, further encouraging countries to diversify, compounding the problem.

Anyway, he goes on and on and on, but the very end, and I’ll just use this as the kind of closing, and I’ll let you go. He says the U.S. could, also, go for the nuclear option of restricting China’s ability to clear dollar transactions. That would be the SWIFT system.

But this would, effectively, immediately fragment the global financial system, undermining the dollar’s role as the global reserve currency. Exactly what the U.S. wants to avoid.

And, with China being the most important trading partner of the immense majority of the world’s countries, nothing is less sure that the U.S. would win at this game.

In short, it seems like some sort of Tai chi. Four ounces moving 1,000 pounds moved by China, using minimal force to redirect the dollar strength in a way that benefits China. Like I wrote at the beginning, however, at this stage, it’s most likely just a message by China to the upcoming Trump administration – We Can Do This.

So maybe think very carefully about all the nasty things you have in mind for us. The beauty of this move is how strategically elegant it is.

It costs China almost nothing to demonstrate, but forces Washington to contemplate some very uncomfortable possibilities.

Paul Gambles

00:45:15.135 – 00:46:06.285

I think that’s a really good summary. I think the point is that, in the long term, the global capital system is changing. It’s changing in a way that is going to reduce U.S. Hegemony.

And, I think, what the recent bond issuance shows is – China is saying, you know what, if you did things that are really detrimental to China, we have ways that can accelerate that. We don’t particularly want to accelerate that. We’re happy with the pace that we’re moving at – partly because you guys don’t seem to understand all the things we’re doing. So we’re getting there by stealth. So we’re happy with the pace we’re moving at.

But you know what? If you put a gun to our heads, we will accelerate the pace that we’re going at. And frankly, there’s an awful lot of really detrimental things for the U.S. economy that we can go and do tomorrow. And we’re ready to do them.

And I don’t think that’s a bluff. I certainly wouldn’t want to be calling that a bluff.

Steve Grumbine

00:46:07.265 – 00:47:01.317

That’s very well said. All right. Paul, any final words before we go? Because this was fantastic.

First of all, you’re trying to put all these puzzle pieces together because you got all this different information. Me, as an activist, not you as an expert, right? You’re trying to put all these little pieces together.

You hear little things that they say that are wrong. You’re like, what is the impact of that incorrect statement on this larger body of great information? But there’s these things they get wrong.

And, you know, your ability to not only understand it as a financier or somebody who advises people on these kind of global capital markets, commodities, all the above legal, you name it. I mean, there’s a lot of implications here.

And I think it’s important that people know what the right things to be afraid of are and what the right things to just, kind of, go – yeah, yeah, yeah – and keep moving. I think you did a great job of explaining every bit of it.

Paul Gambles

00:47:01.461 – 00:48:50.825

That’s too kind, Steve.

But look, I think the key for everybody is that there’s a massive amount of, you know, disinformation in Western media, in national medias, about almost everything. And why does that exist?

Well, it primarily exists for the benefit of elites in various countries who mostly benefit from the way that the status quo currently operates. Gotta give a shout out to my wife here who, a few years ago, went back to studying after our kids grew up. They went off to college, she decided to get back into studying, and she went into a field that she’d never previously had any involvement with, which is Criminology and, especially, Zemiology, which was something totally new to me.

But it’s, basically, the study of the harm that the state inflicts, which, because the state is the one who sets the legal framework, is able to, you know, the state is able to legally inflict on citizens. And I think she’s taught me an awful lot about questioning.

You know, I think I mentioned on the first time you were kind enough to have me on that, you know, my interest sort of stemmed from, I saw things that were happening in capital markets that I knew weren’t true.

And then that gradually led me to question things that happen more globally in society that I know aren’t true but get reported as though they’re fact. I think for all listeners, you know, when you look at this story, just when you look at any other story, question it as best you can. Which is very, very difficult with the amount of information out there. But ultimately, the one question I always ask when I look at any issue is, you know, cui bono? Who actually benefits from this?

And when you think who’s benefiting from it, you’ll understand, you know, what the slant is on the stories that you’re being given.

And whenever we hear American policymakers talking about China, be very, very skeptical about what you’re hearing and think why they’re giving you the narrative they’re giving you.

Steve Grumbine

00:48:51.205 – 00:49:07.541

You know, every time I think of what China’s doing – I’m watching their Belt and Road initiative – they’re not out there dropping bombs on anyone. They’re not out there invading any countries.

They’re, I mean, don’t get me wrong, I’m sure they’re not Boy Scouts. I’m sure they got their own issues. I’m sure there are people out there have legitimate grievances.

Paul Gambles

00:49:07.653 – 00:49:08.069

Absolutely.

Steve Grumbine

00:49:08.117 – 00:49:43.261

I’m sure there’s oppressed people that get hurt by them, just like every country around the world.

But what I’m seeing is the pluses, the assets of what their focus is and how they take care of their people, overall, is night and day. Like, give me China 100 times out of 100, at this point, because nothing about the country that I live in today makes me feel proud. In fact, I feel a great sense of disgust.

And by the way, folks, in case you’re getting excited, I had that disgust long before Donald Trump was elected, okay?

Paul Gambles

00:49:43.413 – 00:49:47.037

I think, I think Trump versus Harris is just a distraction. It’s just, you know, it’s . . .

Steve Grumbine

00:49:47.101 – 00:49:47.639

Amen.

Paul Gambles

00:49:47.717 – 00:49:56.067

It’s which kind of disaster do you want? Which kind of, you know, anti-democracy do you want for America? The Harris flavor or the Trump flavor?

It’s, it’s, it’s distracting from the real issue.

Steve Grumbine

00:49:56.171 – 00:50:09.619

You got it? Yep. Absolutely. So with that, Paul, I’m going to do my closing here real quickly. I want to thank you, sir, of course, for spending the time with me.

It took a little bit to get you on here, but my goodness, what a great time it was.

Paul Gambles

00:50:09.707 – 00:50:10.075

Thanks.

Steve Grumbine

00:50:10.155 – 00:51:16.151

And folks, we are a nonprofit. We’re a 501c3. The end of the year 2024 is fast approaching. If you are looking for a place that you can get a tax write-off as you close out the year, Real Progressives is a 501c3 not-for-profit. So we will happily take your needed donations because we need to fund ourselves as well.

These things, as much as we love doing them, they do cost money to create. So your help is very, very appreciated.

I also want to tell you about a couple things that we do here. On Tuesday nights at Real Progressives – Tuesday nights, Eastern Standard Time, that is – we have at 8pm a hearing of the podcast. We have a video that we put out. The service is called Macro N Chill because we all sit around and “chill” together, and we listen to the podcast together, and we discuss it as a group.

It’s great to build community. It’s also great to help us, all. Iron sharpens iron, right? We also have a Substack, like Paul – go ahead – what’s your Substack again?

Paul Gambles

00:51:16.263 – 00:51:17.715

MBMG Flash.

Steve Grumbine

00:51:18.175 – 00:51:53.901

There you go. We have a Substack, as well. It’s  realprogressives.substack.com and our website – we’ll keep saying it now because our website had been down. It is back up. RealProgressives.org is back up in service. So please consider going to Patreon becoming a monthly donor. Go to our website under donate.

You can make a one time donation. It is again all tax deductible. And Paul, thank you, once again, for joining me.

I hope you have a wonderful holiday season with your family, and I hope I can have you back on soon.

Paul Gambles

00:51:54.053 – 00:52:05.515

Thanks Steve. Love to come back anytime.

And I’m on my way to the Real Progressive’s website now to make a donation. Because I think it’s really important that  we keep this questioning voice out there functioning. That we do everything we can to support it.

Steve Grumbine

00:52:05.855 – 00:52:44.505

Thank you so much, sir. All right, so on behalf of my guest, Paul Gambles, and Steve Grumbine with Macro N Cheese, we are out of here.