Trump's China-Sanctions Madness Imperils The Dollar

Last week US Treasury Secretary Steve Mnuchin warned the US will impose new sanctions on China if it doesn"t conform to UN sanctions on North Korea:

"If China doesn’t follow these sanctions, we will put additional sanctions on them and prevent them from accessing the U.S. and international dollar system, and that’s quite meaningful."

In other words, the administration wants to sanction one of the US"s biggest trading partners, and the world"s second-largest economy.

China is the world"s third-largest recipient of Americans exports, behind only Canada and Mexico. China is the world"s largest source of imports for Americans, slightly ahead of both Mexico and Canada.

In 2016, Americans exported $169 billion in goods and services to China while importing $478 billion of goods and services. Every year, both consumers and producers benefit from the importation of Chinese electronics, machinery, food, footwear, and more.

Ratcheting up economic warfare with China could serve to cut off these avenues of trade and thus will only cost consumers and small business owners who currently benefit from lower-cost machinery, clothing, and more.

For the mercantilists in the Trump administration, of course, American consumers import "too much" from China anyway, and Americans and ought to be prohibited by the US government from purchasing what they want. The North Korea situation could serve as a convenient excuse for slapping prohibitions on American consumers in the name of "fair trade" while also serving as a foreign policy tool.

The last thing the US consumer needs is a trade war with China.

At this point, however, the US isn"t talking about cutting off trade in such a blunt manner.

As Mnuchin notes, the strategy here is to "prevent [the Chinese] from accessing the U.S. and international dollar system." In practice, this would likely mean restricting access to the so-called SWIFT system which facilitates international transactions in dollars.

This idea is highly problematic in its own way. Were the Chinese to be cut off from the dollar, this would only create an enormous incentive for the Chinese to move away from the dollar into other currencies — including its own. China"s largest trading partners would likely follow China in this exodus. Moreover, China and Russia have already foreseen the possibility of SWIFT being "weaponized."

As Jeff Thomas notes:

China, Russia and others have seen this day coming and have created their own SWIFT system, world cable network and world banking system. All that’s needed to kick it all into gear is a major international need to bypass SWIFT. The US government has just provided that need with this threat. There would certainly be teething pains in getting the new system running on a massive scale, but the sudden worldwide need would drive the implementation.

Moreover, China is a key trading partner for Germany, Russia, Australia, Japan. Brazil, and South Korea. Will these countries simply write off China as a trading partner because thy can"t settle accounts in dollars?  It"s unlikely. 

While this would not necessarily destroy the dollar, a movement away from the US dollar would greatly diminish the dollar"s standing as the world"s reserve currency. It would diminish the dollar"s role as the go-to currency, and this would, in turn, drive up borrowing costs — i.e. interest rates — for the US government. This would turn the US"s currently sustainable debt problem into an unsustainable one. Massive domestic budget cuts in the US would follow. 

The fact is, as Foreign Policy noted last year, China is becoming "too big to sanction." Todd Williamson writes on how the IMF has now added China’s currency, the renminbi (RMB), to its basket of four reserve currencies known as Special Drawing Rights. In doing so, Williamson notes, the IMF "may have delivered a severe blow to the strength of a key tool in the West’s geopolitical arsenal: financial sanctions."

He continues: 

The RMB is currently the fourth-most traded currency on the global market (behind the dollar, euro, and pound). It now holds the third highest percentage in the basket, at just under 11 percent, placing it ahead of the pound’s 8 percent (though far below the dollar, which holds more than 40 percent). The IMF’s decision to include the RMB is more than a symbolic sign of the currency’s liberalization: It’s also a big step toward the RMB’s regular usage outside of China. The SDR determines the mix of currencies in which the IMF lends out — a total of $112 billion in 2015 — and the RMB’s inclusion in this distribution mechanism will likely drive up the currency’s demand. The comfort level of the RMB’s usage in global transactions among central banks, sovereign wealth funds, and other massive financial institutions will rise with the currency’s greater accessibility.

In other words, slapping financial sanctions on the Chinese is nothing at all like doing the same to the Iranians or the Venezuelans. The Chinese economy and the Chinese currency are already huge global players which huge trading partners. 

Now, as Thomas notes, if the US forces China away from the dollar will not be without pain. If it were painless, the Chinese state would have abandoned the dollar already. 

China Is Highly Motivated to Go Its Own Way on North Korea

Should the US force the Chinese regime"s hand, the regime will be highly motivated to stay the course on North Korea, in spite of the potential for economic disarray. 

China already feels itself surrounded by Western client states, including Japan, South Korea, Taiwan, and the Philippines. The Chinese state is not going to abandon its buffer state in North Korea. Were North Korea to be absorbed into a Greater Korea on American terms, this would be seen as a disaster by the Chinese, since it would place US forces right on a Chinese land border, just across the Yalu River. 

To get a sense of why the Chinese will not cave to US attempts at regime change in North Korea, imagine how the US would behave if China threatened the US with sanctions — unless the US permitted Chinese troops on the south bank of the Rio Grande. 

Add in the fact that the Chinese state is not subject to elections, and we can see the political will to carry on with de-dollarization in the face of US sanctions would be significant indeed. 

Another likely outcome of financial sanctions would be to encourage the Chinese to dump their holdings of US debt. China currently holds seven percent of all US bonds. Were the Chinese to dump these holdings, it will become far more difficult for the US and its central bank to continue paying rock-bottom interest rates on its 20-trillion-dollar debt. 

If the US wants to really continue with this sanctions game, it need also be prepared to face the reality that its not 1989, and that the world may not be willing to treat dollars and US sanctions in the way the US expects it to. The likely response will only be the latest evidence that the US "unipolar moment" is over.

Keynes: A Master Of Confused And Confusing Prose

[This article is a selection from Where Keynes Went Wrong]

Paul Samuelson, professor of economics at MIT after World War II and author of a best-selling economics textbook, was one of Keynes’s most ardent American disciples. Here is what he has to say about the latter"s General Theory:

It is a badly written book, poorly organized. . . . It is ar­rogant, bad-tempered, polemical, and not overly gener­ous in its acknowledgements. It abounds in mare’s nests and confusion.... 

In reading this, one recalls Keynes’s infatuation with paradox. Samuelson, the ardent disciple, is telling us that the master’s book is good because it is bad.

We do not, however, have to take Samuelson’s word about the bad writing, poor organization, and general confusion of The General Theory. Following publication in 1936, many lead­ing economists pointed to the same problems, although some of them hesitated to criticize or quarrel with Keynes and thus chose their words carefully.

Frank H. Knight, a leading American econ­omist, complained that it was “inordinately difficult to tell what the author means. . . . The direct contention of the work [also] seems to me quite unsubstantiated.”

Joseph Schumpeter noted Keynes’s “technique of skirting problems by artificial definitions which, tied up with highly specialized assumptions, produce paradoxical-looking tau­tologies. . . .”

 British economist Hubert Henderson privately stated that: “I have allowed myself to be inhibited for many years . . . by a desire not to quarrel in public with Maynard . . . . But. . . I regard Maynard’s books as a farrago of confused sophis­tication.”

French economist Etienne Mantoux added that the whole thing simply appeared to be “rationalization of a policy ... long known to be . . . dear to him."

In The General Theory itself, Keynes has a good word to say about clarity, consistency, and logic.He is quick to pounce on what he considers the errors of others. But he then leads us down a rabbit hole of convolution, needless and misleading jar­gon, mis-statement, confusion, contradiction, unfactuality, and general illogic.

It is not that Keynes is entirely opaque. It is quite feasible to make out what he seems to be saying, but it is worth taking a moment to focus on the particular rhetorical devices and obfuscations that Keynes employed.

Device One: Obscurity

A typical sentence from The General Theory:

We have full employment when output has risen to a level at which the marginal return from a representa­tive unit of the factors of production has fallen to the minimum figure at which a quantity of the factors suf­ficient to produce this output is available.

This means, in essence, that we have not reached full employ­ment until all factors of production are fully employed. We will recall that, per Keynes, only at this point do we have to worry about inflation.

Keynes took exception when other economists wrote in this convoluted way. For example, in a 1931 letter to the editor of The New Statesman and Nation, he charged Lionel Robbins with the same sin, even though Robbins was, on the whole, a very clear writer:

Professor Robbins wants “increased elasticity of local wage costs” . . . which means in plain English, I sup­pose, a reduction of average wages.

Given this stab at Robbins, can we at least assume that Keynes will avoid the term “elasticity” in The General Theory? No, not at all, he uses (and misuses) it repeatedly.

Device Two: Misuse of Technical Language

In the example above, Lionel Robbins was at least using standard economist’s jargon. Keynes liked to make up his own jargon, or worse, use standard jargon in a non standard way. This led to a scolding by economist Frank H. Knight in the review of The Gen­eral Theory that we have already cited: “Familiar terms and modes of expression seem to be shunned on principle.”

The only legitimate reason to use technical language is to make a sentence clearer, if not to the average reader, at least to the pro­fessional reader. Keynes habitually uses technical language to confuse, and as we shall shortly see, this may have been a deliber­ate strategy.

Device Three: Shifting Definitions

Keynes tells us in The General Theory that economists have not clearly defined the jargonish term “marginal efficiency of capi­tal” (which roughly means return on capital). He then proceeds throughout the book to use the term in many different ways, at least seven by Henry Hazlitt’s count. Another slippery word in The General Theory is wages, which can mean an hourly rate or total employee pay or something else. Keynes does not seem to notice the difference, which leads him into serious logical errors.

Once again, Keynes criticized the same lapse in others. In a book review early in his career, he took an author to task for

us[ing] the [same] expression some thirty times in some apparently eight different senses.

Device Four: Misuse of Common Terms

In some cases, Keynes stretches the meaning of a commonly used word beyond recognition without explicitly redefining it. For example, he tells us that for every commodity there is an implicit rate of interest, a wheat rate of interest, a copper rate of interest, a steel plant rate of interest, and so on. This confuses commodity options and futures pricing with interest rates, a clear case of mix­ing apples and bananas. We have already seen that Keynes uses the word equilibrium to describe what is actually disequilibrium.

Device Five: Reversing Cause and Effect

Keynes says that entrepreneurs calculate how much revenue they will earn from x employees. But they do not. They calculate how many employees they can afford from x revenue. Keynes says that prices are low if production is low. In actuality, it is the reverse: production is low if prices are low. Keynes seems to like these reversals, perhaps because they dress up the ordinary with a gloss of novelty, even of profundity. But it is really no more than a parlor trick, and just piles error on error.

Device Six: False Determinism

Keynesian economist Alvin H. Hansen, whose book A Guide to Keynes attempted to de-mystify the master, tells us that “Keynes’s most notable contribution was his consumption function.” The so-called marginal propen­sity to consume (consumption function) tells us that people tend to save more as their income rises. Stated as such, it is a common­place, certainly nothing new. But Keynes calls it a “fundamen­tal psychological law,” which it certainly is not. We can nei­ther predict with certainty that people will always save more as their income rises, nor can we work out a forecastable schedule of increased saving, as Keynes assumed.

In the Keynesian model, the marginal propensity to consume is also treated as an independent variable. (It is supposed to deter­mine other variables, not be determined by them.) This is clearly false. As Benjamin Anderson, economist and early Keynes critic, pointed out, “The so-called independent Keynesian variables (1. The marginal propensity to consume, 2. The schedule of the mar­ginal efficiency of capital, and, 3. The rate of interest) are all influ­enced by each other. They are interdependent, not independent. Keynes even forgets himself and admits at one point that #2 is influenced by #1.” 

Device Seven: Slipping Back and Forth between Mutually Inconsistent Categories

Keynes uses the word “wages” to mean either a wage rate or total wages. He is also prone to move back and forth between physical commodities and services and money prices for commodities and services, another case of mixing up apples and bananas.

Device Eight: Unsupported Assertion

In the entirety of The General Theory, there are only two refer­ences to statistical studies, one of which Keynes partly dismisses as improbable:

Mr. Kuznet’s method must surely lead to too low an estimate.

Even when he discusses a subject that especially lends itself to statistical analysis, such as a suggested relationship between agri­cultural harvests and the business cycle, he simply takes a posi­tion without bothering to search for relevant data.

Device Nine: Misstatement

Keynes mischaracterizes the purpose of corporate sinking funds. How could he make such an elementary error? Probably because he had said the same thing many times when speaking on his feet, and, being busy, did not take sufficient time to check his written work.

Sometimes Keynes seems too busy even to think. He says that if a lender lends money to a business owner, this doubles the risk of a business owner using his own money, which doubled risk is reflected in the interest rate. This makes no sense, as Henry Hazlitt noted. Risk is not doubled when a lender enters the pic­ture. The lender and the business owner share what is still the same risk of failure.

Device Ten: Macro or Aggregative Economics

Keynes is usually credited with “inventing” macroeconomics, which looks at economy-wide flows rather than the micro-eco­nomics of specific firms or industries. This is not entirely accu­rate. Other economists adopted an economy-wide perspective, although they often extrapolated from the firm or industry to the economy as a whole, which Keynes wrongly criticized. Ironi­cally, Keynes attacked Say’s Law which is, itself, an example of macroeconomics. It is certainly fair to say that Keynes developed his own type of macroeconomics, which his followers developed into the macroeconomics of today. It is also true that a macroeconomic viewpoint makes it easier for a skilled casuist to mislead and confuse, and that Keynes fully exploited this opening.

Device Eleven: Misuse of Math

Keynes refers to sales in one of his equations, but it is expected sales, not actual sales. Expectations by definition are not verifiable and thus do not belong in an equation.

As Henry Hazlitt has pointed out,

A mathematical statement, to be scientifically useful, must, like a verbal statement, at least be verifiable, even when it is not verified. If I say, for example (and am not merely joking), that John’s love of Alice varies in an exact and determinable relationship with Mary’s love of John, I ought to be able to prove that this is so. I do not prove my statement—in fact, I do not make it a whit more plausible or “scientific”—if I write, solemnly,

• let X equal Mary’s love of John,


• and Y equal John’s love of Alice,


• then Y = f (X)

—and go on triumphantly from there. Yet this is the kind of assertion constantly being made by mathemat­ical economists, and especially by Keynes.

Given the Alice in Wonderland quality of The General Theory, it should not surprise us that Keynes interrupts his own misuse of math to tell us that he (apparently) agrees with Hazlitt:

To say that Queen Victoria was a better queen but not a happier woman than Queen Elizabeth [is] a propo­sition not without meaning and not without interest, but unsuitable as material for the differential calculus. Our precision will be a mock precision if we try to use such partly vague and nonquantitative concepts as the basis of a quantitative analysis.28

He also warns of

symbolic pseudo-mathematical methods . . . of eco­nomic analysis.

After some of his own algebra he adds that:

I do not myself attach much value to manipulations of this kind.

It is quite typical of Keynes now to attack, now to disarm, now to shout, now to whisper, now to qualify his mathematical claims, now to ignore, even blatantly ignore, the same qualifications. On occasion, Keynes was even capable of a crude bluff. Writing a pri­vate letter to Montagu Norman, Governor of the Bank of Eng­land, he said that his theories (the same theories that would later appear in The General Theory) were a

mathematical certainty, [not] open to dispute.

Keynes certainly knew better. Some of his disciples did not. Economist Wilhelm Röpke noted in 1952 that

The [Keynesian] revolutionaries [take a stance of] . . . vehement self-assertion and barely veiled contempt, such as are habitual to the “enlightened” in dealing with those who remain in the dark. They seem to re­gard themselves as all the more superior in that they can point with obvious pride to the difficulty of their literature and to the use of mathematics, which lifts the “new economics” almost to the lofty heights of physics.

One could go on, almost indefinitely, citing Keynes’s obscuri­ties, convolutions, inconsistencies, factual or logical lapses,and so on, but it is time to ask the obvious question: why did he write The General Theory this way? Keynes could be orderly, orga­nized, consistent, relevant, clear, complete, and factual, in addi­tion to being playful and witty, when he wanted to be. This is apparent from the earlier books and many of the shorter pieces. There are some snippets from The General Theory that also reflect these characteristics. So why is most of The General Theory so different?

There are many possible answers. Historian Paul Johnson has said, unrelated to Keynes, that “In financial matters, the object of complexity is all too often to conceal the truth, to deceive.” The French economist Étienne Mantoux, reviewing The General Theory shortly after publication, quoted an earlier English econo­mist, Samuel Bailey, from 1825: “An author’s reputation for the profundity of his ideas often gains by a small admixture of the unintelligible.”

This may be part of the explanation, that Keynes intended to deceive or impress. But we must bear in mind that Keynes was a salesman. He was trying to sell a particular type of economic policy, and he was prepared to utilize any rhetorical device, from crystal clarity and wit all the way to complete unintelligibility, in order to make the sale.

Why would unintelligibility help to make the sale? Not just because it can be used to impress. Equally important, it can be used to intimidate. Keynes liked to make people feel, as his very intelligent friend Bob Brand said, like “the bottom boy in the class.”

Keynes probably developed obscurity as one of his speaking styles. He obscured, confused, and scrambled the mental “chessboard,” because he felt confident that he could always keep the position of the “chess pieces” in mind, and combine them as he saw fit for an attack in any direction, whereas his opponents could not. This is a very impressive skill indeed, especially when one is speaking extemporaneously. No wonder that Sir Josiah Stamp, a very respected economist who often partnered with Keynes on BBC broadcasts, said on the air that “I can never answer you when you are [verbally] theorizing.”

Whether this was a deliberate style on Keynes’s part, or just a habit, we cannot know. But it was natural for him to fall into the same scrambling, intimidating style when writing The Gen­eral Theory. The problem is that it does not work as well in print as in conversation or debate. When confined to print, it can be examined, and all the myriad flaws, the errors of fact or reasoning, the rhetorical tricks, the pseudo originality, may be revealed.

A few prominent economists, notably Ludwig von Mises, Friedrich Hayek, Wilhelm Röpke, Jacques Rueff, and Henry Hazlitt, among others, saw through it completely. Others per­ceived that something was wrong, but hesitated to say so out of fear of Keynes’s position and powers of retaliation. Regrettably, no major economist published an immediate book-length ref­utation, so that the influence of The General Theory spread and spread, notwithstanding its all too apparent flaws.

Today many people - economists, financiers, investors, busi­ness owners, and managers - say that Keynes is their intellectual hero. Have they actually read The General Theory? Have they read more than the few clear and witty passages so widely quoted?