The ultimate conflict between the US and China will be monetary
Stimulus plans, inflation, digital currency: the two powers have diametrically opposite approaches that will have major long-term effects on the monetary order.
This column has previously been published in Les Echos on 28th april 2021
History reminds us that major economic crises become financial crises before ending up as monetary ones. Government intervention over the past year has had the short-term advantage of generating a “crisis? What crisis?” situation in which it is claimed that economic collapse will have no financial effects. But the harsh reality is that, in the end, there will be a monetary adjustment that will bring the US and China into bitter conflict. Three aspects of their diametrically opposite approaches are bound to bring about a new monetary order.
Firstly, their stimulus plans. China is showing that it has learned from its 2008 mistake, saving the world with a stimulus towards non-profitable infrastructure whose losses continue even today to drag down the balance sheets of Chinese banks, whilst profits helped triple the S&P index over the 2010 decade. This is why today’s Chinese recovery plan is not only limited to 10% of GDP, but more than a quarter of it is focused on the profitability of “new infrastructure” that underpin the digital and environmental revolutions. On the other hand, the US is undertaking an unprecedented plan amounting to 40% of GDP, prioritizing a return to short-term consumption. Half of the plan concerns funding over a period of eight years infrastructure that suffered past under-investment.
Secondly, China is attempting, as far as possible, to put a brake on assets inflation — above all, non-productive assets — having realized from the revolt of young people in Hong Kong that there is a social danger attached to the real estate bubble. On the other hand, the Biden administration still believes in “trickle down” and continues to support an increase in monetary supply, which, for the last two years, has been 25% higher than the increase in GDP. This has favored the overvaluation of financial assets, starting with the US Stock Exchange, where a quarter of the government aid cheques to American adults are bound to end up being spent.
China is pushing digital currency, in the belief that use will bring credibility.
The Fed still appears to be having problems finding a strategy to combat the rise of the bitcoin.
Therefore, China has chosen to gradually strengthen the yuan — “no country can be strong without a strong currency” — whilst the US is prioritizing the competitive devaluation of the dollar, at the expense not only of future generations but also of the rest of the world.
Thirdly, the most glaring difference between the two powers is undoubtedly that of digital currencies. China continues to give aggressive support to blueprints that aim to deploy digital RMB on a large scale for the Winter Olympics in Beijing in January 2022, in the strong belief that future currencies will gain credibility from their use rather than from their issuer.
On the other hand, the US Federal Reserve, which is now in the hands of politicians, still appears to be having problems finding a strategy to combat the rise of the bitcoin, which seems to be heralding the end of the monetary order.
The time horizon is never the same: the US is rejoicing in a rapid recovery in 2021 of an economy that is under the effect of massive pain killers. China notes that a Swiss franc, half a century on, is now worth one Euro instead of one French franc. The fruit of “40 years of economic misguidance”, denounced by Jacques de Larosière, former Managing Director of the IMF… In 50 years’ time, will the same choice for laziness — now being adopted by the US — lead to the dollar being valued at 1 and not 6.5 RMB? By investing the record sum of $150 billion in China in 2020, some American large institutional investors seem to have begun to believe it.
