Is the Era of US Dollar Dominance Coming to an End? Arthur Hayes Discusses the Future Mainstream Currency

From a historical perspective, empires will always decline, generations will always change, and news of de-dollarization has been surfacing constantly. If the US dollar no longer holds currency hegemony, who could potentially replace it? Will it be China, the current second-largest economy in the world?

In a recent lengthy article titled "Exit Liquidity", BitMEX founder Arthur Hayes delves deep into why the US dollar has been able to become the global reserve currency hegemon. He discusses China's objective conditions and willingness to replace the US dollar, boldly predicting that various currency groups will emerge in the future, but there will be no global reserve currency hegemony.

This article is excerpted and compiled from "Exit Liquidity." The views expressed are those of the author. For any doubts, please refer to the original text.

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The Conditions for Dollar Dominance

The U.S. has an open capital account, meaning anyone with dollars can purchase assets within the U.S. Foreigners can easily buy stocks listed in the U.S., U.S. real estate, and U.S. government bonds.

Additionally, the U.S. imposes minimal tariffs on imported goods. While no country practices truly free trade, the U.S. has always prioritized providing trade conditions as close to free as possible.

The status of reserve currency comes with its benefits, but it also carries certain costs. The primary benefit is obvious – the ability to print money at will to pay for real goods. However, this benefit is not evenly distributed among the citizens of the empire. According to PEW research data, in 2018, the top earners in the U.S. owned 79% of the wealth, with incomes 7.36 times that of the median.

To maintain its position on the currency throne, the U.S. must favor capital over labor, allowing Asian manufacturing plants to invest their earned dollars in U.S. financial assets. Investments require returns, prompting U.S. companies to continuously increase profit margins by reducing costs, which entails replacing expensive domestic labor with cheap foreign labor. As shown in the graph below, except for the purple representing the WBMFPUSA Index of the manufacturing industry continuously declining since 1999, the stock SPX Index, housing price index SPCSUSA Index, and global trade and services volume MWT VWT Index have all been steadily rising and maintaining high levels.

China's Conditions and Willingness

In contrast, China's capital account is closed. Foreigners face strict controls when investing in Chinese assets, with specific quotas on foreign ownership in stock and bond markets. Even if you have a pile of renminbi, you cannot use it to buy whatever you want like in the U.S. Additionally, socialist thinking does not allow China to implement high levels of capitalization and labor exploitation as the U.S. does.

Therefore, Arthur Hayes confidently asserts that China does not want to be the issuing country of the global reserve currency, nor does it want to be a necessary pillar of the global reserve currency, because it:

• Does not want foreigners to own any assets they desire on a scale they like.
• Does not want to largely exploit labor and is unwilling to elevate the rights of capitalists as in the U.S.
• Wants to leverage at its own pace, meaning it cannot allow foreigners to hold large amounts of government debt or other financial assets, nor allow foreign capital to come and go.

However, this does not mean that China hopes to continue accumulating and trading in dollars. Yet, as China holds a significant amount of U.S. treasuries, it cannot simply abandon the dollar, nor does it want a group of foreigners holding a large amount of renminbi to disrupt the stability of its financial system.

Note: According to the latest statistics, by the end of January, China held $859.4 billion in U.S. treasuries, making it the second-largest creditor to the U.S., only behind Japan with $1.104 trillion.

China's Efforts to Reduce Dependency on the Dollar

Therefore, China must safely undergo de-dollarization – not replacing the dollar with the renminbi as the global currency, but simply reducing its economic dependence on the U.S.

The first step is for China to start using the renminbi for payments with its major trading partners. Examples include settlement of liquefied natural gas transactions between France and China in renminbi, or trade between Brazil and China without using the U.S. dollar.

Another initiative is the promotion of the digital renminbi, the Central Bank Digital Currency (CBDC) that the People's Bank of China has been testing since 2020. It allows for instant, free, and zero-risk payments globally, positioning it to become a "hard currency" in regions like Africa, replacing the dollar.

Plurality of Currency Blocs Prevails, No Single Hegemony

Arthur Hayes believes that there will be various currency blocs in the future, but there will be no global reserve currency hegemony. Trade with the West will continue to be in dollars, while trade with other countries will be in renminbi, gold, among others. When there are imbalances between blocs, they will settle with a neutral reserve currency, historically gold, and this will not change.

For more on what Operation Choke Point 2.0 is and how the U.S. is hindering the progress of the crypto industry, see: U.S. Launches Full-Scale Assault on Crypto Industry, New York Department of Financial Services Refutes Choke Point 2.0

Arthur Hayes finally hopes that people will not be misled by the notion that this battle is about either the dollar or the renminbi.

In the future, the world will trade in multiple currencies, then hold gold when needed, and perhaps in the near future – hold Bitcoin.