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Janet Yellen Warns of Creating A Bipolar Global Financial System

John Galt

Updated: April 14, 2022

US-china relations
Editor’s Note:

EDITOR'S NOTE: This MishTalk article is perhaps one of the most engaging we’ve ever curated. It begins with Janet Yellen’s warning to countries who are “sitting on the fence” with regard to the Russia-Ukraine conflict not to take the wrong side (aka, go against the US and its coalition of sanctioning nations). As for China, she warned that if it were to support Russia, that alliance would cause a “bipolar global financial system.” This is where the “ideological” takes over the “rational”; where a seemingly obvious and sound line of reasoning (doesn’t matter if you agree with her or not) gets mistaken for something that has absolutely nothing to do with what she was talking about, according to Mish. Because somehow we jump from sanctions on Russia to the demise of the US dollar’s global reserve currency status. We also jump (no clue how) to the threat of a gold-backed yuan. Those who made these leaps did express some sophistication in their arguments. But most were “ready-made” concepts whose intelligent application really depended on “context.” In the case above, somebody went to a rugby game to play American football. Doesn’t work. Still, the debate is about two important issues that threaten the US economy: the US dollar losing its reserve currency status, and China backing its currency with gold. What are the chances that either will happen? Mish says “no and no.” Seriously? What arguments does he have to debunk such notions? Read on.

Source: Mish Talk

Those wishing to watch the Full Presentation can do so at the preceding link.

Video Statements of Note

  • She warned those countries that were still "sitting on the fence, perhaps seeing an opportunity to gain by preserving their relationship with Russia and backfilling the void left by others" that their motivations were short-sighted.
  • "The future of our international order, both for peaceful security and economic prosperity, is at stake," she said. "And let’s be clear, the unified coalition ... will not be indifferent to actions that undermine the sanctions we’ve put in place."
  • Washington and its allies have sought to pressure India, China and other "fence-sitters" to take a clear stance opposing Russia and what it has called a "special military operation."
  • In a question and answer session, Yellen said that the United States needed to work hard with China to avoid a bipolar global financial system that pits democracies against autocratic countries. China has benefited from the U.S.-led financial architecture but its reliance on state-owned enterprises and other economic practices puts U.S. national security interests at risk.

The comment on a bipolar global financial system kicked off a huge discussion on Twitter, most of it silly.

Even without playing the above videos, it was clear from the Tweet that Yellen was concerned over the failure of US sanctions to stop Russia, not the loss of US dollar reserve currency status, China backing the yuan with gold, hyperinflation concerns or any such nonsense. 

I engaged in the following Tweets before watching the video or reading the Reuters article.

Reserve Currency

Why Impossible?

Loren needs to give this more thought, not me. 

It's impossible because short of ending fractional reserve lending it's not possible to maintain convertibility of fiat currency to gold.

The system will always break down which is why Nixon ended dollar convertibility. 

There is no country willing to end fractional reserve lending. 

Energy as a currency is ridiculous for hopefully obvious reasons. And as I have stated many times China does not want to have reserve currency status nor does it want a strong yuan because neither is compatible with export mercantilism. 

 Hyperinflation Nonsense Yet Again

The discussion over reserve currencies led to another silly idea, hyperinflation.

It's really quite amazing how misconceptions on the meaning of "bipolar global financial system" led to discussion not about sanctions but reserve currency status and hyperinflation. 

To me it was obvious what Yellen was concerned over but I sought out the videos to prove it.

What Would It Take for the Yuan to Dethrone the Dollar?

  1. China would have to float the yuan.
  2. End capital controls
  3. Respect property rights
  4. Have a bond market big enough (China has virtually no gov't bond market)
  5. Inspire global trust
  6. Be willing to have trade deficits
  7. Stop export mercantilism
  8. Have a currency market big enough

Perhaps China meets condition 8. It flunks the first 7.

The Yuan Will Not Replace the US Dollar, Nor Will It Be Backed by Commodities

For discussion of why China will not back the yuan by commodities, please see The Yuan Will Not Replace the US Dollar, Nor Will It Be Backed by Commodities

What Does China Do With a Dollar That's No Longer Risk Free? Buy Gold?

To understand escaping the dollar in greater detail please see What Does China Do With a Dollar That's No Longer Risk Free? Buy Gold?

Ramifications of US Actions

The main ramification of disastrous sanction policy started by Trump and escalated by Biden is that many countries including Russia, China, India, Iran, Pakistan, and Saudi Arabia are all damn tired of it.

Janet Yellen is very concerned over China working with Russia to avoid US sanctions.

Numerous countries will establish ways of avoiding the US dictating sanction policy for the world.

That will not cause hyperinflation nor the US its loss of reserve currency status. The latter needs a suitable replacement and none is remotely on the horizon. 

Weaponizing the US Dollar

To tie all of this together, please see US Sanction Policy Forces Russia to Default. Let's Go Over the Ramifications

I view the ramifications as primarily a good thing. And although I would like to see a 100% gold-backed currency no country will accept the conditions, primarily fiscal and trade discipline, that commodity backing of currency requires.


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