The U.S. vs. China: Money and Governance

Written by Frank Li

Money is not everything – Money is the only thing, not only for a business, but also for a country!

Here is the key difference between the U.S. and China in terms of money and governance: In China, the government controls money. In the U.S., it’s the other way around!

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1. Three basic concepts and definitions

1. Fiat money: Read Wikipedia – fiat money. Simply put, fiat money is paper money. Both the US Dollar and China’s RMB are fiat money.
2. Reserve currency (RC): Read Wikipedia – reserve currency. An “RC” is earned! The currency of the country with the strongest economy on earth earns the honor of being the “dominant” RC. Currently, the dominant RC is the U.S. Dollar. Before that, it was the British Pound Sterling (for about 200 years). What is the key behind an RC? Confidence and trust!
3. Petrodollar: Read Wikipedia – Petrodollar recycling. Simply put, the US can buy oil by printing money, while other countries must earn the US Dollar to buy oil.

2. Money and economy

Fiat money was invented by China about 1,000 years ago, for the purpose of “printing money as the government sees appropriate.” Since then, it has been used, misused, and abused by many governments around the world.

A [sovereign] government can print its own money (aka “money supply”), at any time and in any quantity, through a central bank. For example, the Federal Reserve Bank (FRB) controls the money supply in the U.S., and the Peoples’ Bank of China (PBOC) controls it in China.

When the currency is not an RC (e.g. Ethiopian birr), the impact of money-printing is limited: domestically of course, as well as to the country’s trading partners.

However, when the currency is a dominant RC like the U.S. Dollar, the impact of massive money-printing is world-wide and huge, with two net implications abroad (without causing big inflation at home):

1. You devalue the holdings of your foreign debtors, such as China (China Is Sitting On $3 Trillion In Currency Reserves, But Is That Enough?).
2. A [further] loss of confidence and trust in that currency as the dominant RC.

Historically, when a dominant RC is being massively and “irresponsibly” printed (US is ‘printing’ money to help save the economy from Covid-19, but some wonder how far it can go), it signals the beginning of the end of that currency as a dominant RC. This was what happened to the British Pound Sterling (How the British Pound Sterling Fell from Grace), and this is just what is happening now to the U.S. Dollar.

Which currency, then, has been challenging the U.S. Dollar?

China’s RMB!

It’s widely recognized that China’s RMB is well on the way to becoming a major alternative RC to the U.S. Dollar. Here is a 2015 news story: Is the Yuan About to Replace the Dollar as the World’s Reserve Currency? Below is an excerpt.

A country’s rise to economic dominance tends to be accompanied by its currency becoming a reference point, with other currencies tracking it implicitly or explicitly. For a sample comprising emerging market economies, we show that in the last two years, the renminbi (RMB) has increasingly become a reference currency which we define as one which exhibits a high degree of co-movement (CMC) with other currencies. In East Asia, there is already a RMB bloc, because the RMB has become the dominant reference currency, eclipsing the dollar, which is a historic development.

Two major news stories since then:

1. In 2016: The Chinese RMB has officially joined the IMF’s elite currency club.
2. In 2019: China Wants Russia To Use More Yuan, Fewer Dollars.

In short, China is well on her way to becoming the world’s #1 economy by 2040, and its RMB will inevitably become a major RC.

3. Money and governance

China is the only major economy whose government controls its own central bank (PBOC) as well as many other big banks. Because of it, the Chinese government can order the PBOC to issue (or print) more money as it sees necessary, as part of the control of the [macro] economy. For more, read: How Does China Manage Its Money Supply?

Now, why is money “nothing” in Chinese politics?

Read the image below!

In contrast, in America, the FRB is (supposed to be) independent of the government. Worse yet, the FRB can’t issue the US Dollar without going through some big banks that the government does not own or control. In other words, the banks control issuance of money in America, and the power to issue money is the power to control the economy and the government that needs money! For more, read How the Federal Reserve Manages Money Supply.

Now, why is money “everything” in American politics?

The image below is worth more than 1,000 words.

For more, read: Career Politicians.

Why is there such a huge difference in money, from the issuance to politics, between the U.S. and China?

The U.S. was founded by/of/for the rich, and remains so today. In contrast, China was founded by/of/for the poor, but has transformed itself, over the past few decades, to a form by/of/for the people (i.e. rich and poor).

For more, read: American Revolution vs. Chinese Communist Revolution.

4. Discussion

The U.S. dollar is losing its status as the dominant RC.

Why is that and what does that mean?

4.1 Why is the U.S. Dollar losing?

Two main reasons: China’s rise and America’s self-destruction.

How has America been self-destructing?

Below is a simple equation Americans must understand about our monetary policy and our economy:

Simply put, QE is not only irresponsible and additive, but also suicidal in the long-run!

Domestically, it does not solve our real problems (e.g. a failing political system and a less competitive economy). Internationally, it signals the beginning of the end of the U.S. Dollar as the dominant RC, and hence the beginning of the end of America, as we know it.

Unusual times require unusual measures. This is an unusual time, thanks to Covid-19. But we have been printing money for decades, with Covid-19 being merely yet another exacerbator!

The image below says it all …

For more, read: https://zfacts.com/national-debt.

4.2 What does that mean to America?

Our standard of living will plummet eventually, because we can no longer massively import by simply printing more money, as we have been doing over the past few decades, especially ever since the creation of the Petrodollar in the early 1970s!

In short, America has been living on borrowed times since the 1970s!

4.3 What is the solution?

America, reform our failing political system, as I have suggested (American Democracy – Why is it failing & how to fix it?), or become a fiddle, second to China!

5. Closing

Money and politics are both huge subjects. This article has only briefly touched upon them.

Now, please sit back and enjoy the video below.

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