Been catching up on some posts that I missed recently; glad I didn't skip this one. Tremendous work, succinct but full of information. I would not have guessed Japan as the biggest holder of US bonds. China's up there, so I wasn't too far off, but still interesting to see.
People vastly overestimate the power of commodity exporters in the modern day. The per capita income of the Gulf Arab countries stagnated in the 80s. For over ten years Saudi Arabia has been in budget deficit and has been drawing money from its SWF (except for 2021/2).
People also underestimate the size of the US economy. It's been ~25% of global GDP since the 90s while EU's share has fallen. People would want to be paid in dollars simply because of that and not because of oil.
Yaw, I think you miss something (correct if I missed it), the change in the Middle East to the Sterling as reserve currency was due to two simultaneous crises Iranian Nationalization of BP and Suez Canal Nationalization (for instance read Money, Oil, and Empire in the Middle East). I think similar dynamics are being played today in the Middle East which could effectively end US hegemony and the ongoing deterioration of American power projection will undoubtedly expose some structural imbalances that have been part of US economy for long time. Plus, it is important to look at other countries' directions (Southeast Asia) and the unlocking of countries that US hegemony has suppressed like Iran, Russia and Venezuela, the ongoing shift might hinder the ability of US to be in control of everything economically around the globe and might even bring back class politics into US (as we are seeing right now).
Southeast Asia isn't united are their stance in this America vs. China issue.
In order from Pro-America to neutral to China
Philippines and Vietnam are both willing to strengthen relations with America to defend their maritime claims on the South China Sea. Philippines itself is significantly more asserting than Vietnam.
Indonesia/Malaysia/Brunei/Singapore are not taking sides.
American hegemony doesn't really depend on power projection globally. America only did the policemanism to contain the Soviets and their allies. But economically America has never really depended on trade for strength. The existence of these policeman institutions is America going on autopilot, but it isn't a pillar of American strength. American strength comes from immigration of talented people, a relatively free economy and free flows of capital, and most importantly a synergy between Military-Industry-Universities to bring new ideas and commercialize them in hardware, software, AI, biotech, weapons, and etc.
America is the 2nd least trading nation on earth as a proportion of GDP:
By raw dollars, America trades a lot (~$6T+) and is the 2nd biggest trading nation, but as a proportion of its GDP its relatively small proportion (~$26T).
In addition to that, Asia, NAFTA, and Europe are way more important for American trade now than the Middle East, especially now that America is energy independent, which goes back to my point that the petrodollar isn't a pillar of American hegemony. The shale revolution in the mid 2010s was a game changer.
America can pull back and be fine, which is why global policemanism is a rising trend in American thought.
Iran is certainly a strong regional power with many militias and makes cheap drones. Economically speaking Iran isn't much. Russia is also a strong regional power and Putin has crafted a formidable war machine. But economic wise it is smaller than Texas. Venezuela is a failed state. It tried claiming land from Guyana but got scared from a clash with Brazil.
The competition won't come from Iran, Russia, or Venezuela, but from China, which is a bigger economy than America in PPP standards but not in US dollars at MER. But even then its a decade away as I discussed about the currency internationalization.
The US hasn't had a war on its home territory since the civil war in the 1860s. It has a fairly stable government. That makes it a fairly safe place for assets. Down near NYC City Hall, the office of the Federal Reserve has a basement gold vault that was really popular as a place to stash national gold reserves around World War II. I gather that there's a fair bit of gold still there even though most nations are off the gold standard. People talk about Fort Knox in Kentucky as the big gold reserve, but there has been more gold under the NYC sidewalks.
The US dollar is considered a good reserve currency for the same reason it was a good place to stash one's gold.
I don't think the dynamic of the Suez in 1956 is similar to America right now. If you look at international reserve currency composition: America is 59% and 2nd place is the Euro at 20%, Japanese yen is 6%, UK pound is 5%, Canada 2.67%, Australian dollars is 2.16%, and China is 2.15%,
We are a decade or two away before America has a rival.
None of this is similar to the table I showed above when America was on UK's heels and passed it in 1954.
China's currency still isn't fully convertible and has many capital controls, and they are still experimenting with liberalizing their currency since the Panda bonds (2005) and dim sum bonds (2014). China still has significant liberalization to do before their currency reaches the pound sterling or Japanese yen's international usage. This is like 1-3 decades away.
By America's structural imbalances do you mean Debt to GDP ratio? Yes its over a 100% but that's a terrible predictor of default, otherwise Japan or Singapore would default soon too. The measure to look at that has predictive power is net interest as % of government revenue.
If you look at America's net interest as a percent of government revenue.
America paid $659B in net interest and made $4.4T, roughly 15% of government revenue is soaked up paying interest.
America's ratio isn't great for a developed country (e.g. In France its closer to 3% for comparison) and America's interest payments are certainly rising but I would worry about default when this hits above 50% like in Pakistan.
It doesn't even make sense that petrodollars hold up American hegemony since the Gulf states were never the largest buyers of American dollars or bonds nor are they particularly large borrowers. Oil is important but the petrodollar isn't a pillar of American hegemony.
I'll refer back to this point in my article:
"In 1980, Saudi Arabia’s US government bond holdings were $12.2B, only 1.3% of America’s $908B federal debt at the time. Even if I add other oil states like Bahrain, Iraq, Iran, Oman, Kuwait, Qatar, UAE, Libya, Nigeria, and Gabon’s holdings as well, that’s $16.3B, just 1.8%. This minimal percentage indicates that the dollar isn’t propped up by these holdings.
Currently, Saudi Arabia ranks 22nd in buying U.S. treasury bonds, with $122B out of the $13.1T total foreign owned debt, ~1%. Kuwait owns more U.S. treasuries than Saudi Arabia. The largest holders are Japan, the UK, China, and Luxembourg, each with over $1T. Thus, the idea that Saudi Arabia's bond holdings uphold American supremacy is unfounded."
Hi Ali! Thanks for the book suggestion. I'll definitely give it a read.
I have a few critiques on your points. So I'll make them in a few chunks.
Regarding your point about the Iranian nationalization of Anglo-Persian Oil and Nasser's nationalization of the Suez Canal, I'm well aware of these events. However, I don't believe they are directly relevant to my argument. My point was about why oil has been traded in dollars, which is largely due to network effects, the convenience of using the dollar, and the vast bond market that allows investors to earn returns on their dollars. This is evidenced by the following points:
1. Trades continued to occur in Pound Sterling even after 1974.
2. None of the archival records indicate an exclusive agreement requiring Saudi Arabia to trade oil solely in dollars.
3. The internationalization of the dollar created network effects, leading banks worldwide to use it.
Additionally, it's important to note that the Suez Crisis happened in 1956, and the US surpassed the UK in international reserves two years earlier, in 1954.
Yaw, this is pretty good summary. Will assign to my students in International Business class as reading.
Thanks!
Been catching up on some posts that I missed recently; glad I didn't skip this one. Tremendous work, succinct but full of information. I would not have guessed Japan as the biggest holder of US bonds. China's up there, so I wasn't too far off, but still interesting to see.
People vastly overestimate the power of commodity exporters in the modern day. The per capita income of the Gulf Arab countries stagnated in the 80s. For over ten years Saudi Arabia has been in budget deficit and has been drawing money from its SWF (except for 2021/2).
People also underestimate the size of the US economy. It's been ~25% of global GDP since the 90s while EU's share has fallen. People would want to be paid in dollars simply because of that and not because of oil.
Agreed.
Yaw, I think you miss something (correct if I missed it), the change in the Middle East to the Sterling as reserve currency was due to two simultaneous crises Iranian Nationalization of BP and Suez Canal Nationalization (for instance read Money, Oil, and Empire in the Middle East). I think similar dynamics are being played today in the Middle East which could effectively end US hegemony and the ongoing deterioration of American power projection will undoubtedly expose some structural imbalances that have been part of US economy for long time. Plus, it is important to look at other countries' directions (Southeast Asia) and the unlocking of countries that US hegemony has suppressed like Iran, Russia and Venezuela, the ongoing shift might hinder the ability of US to be in control of everything economically around the globe and might even bring back class politics into US (as we are seeing right now).
#4
Southeast Asia isn't united are their stance in this America vs. China issue.
In order from Pro-America to neutral to China
Philippines and Vietnam are both willing to strengthen relations with America to defend their maritime claims on the South China Sea. Philippines itself is significantly more asserting than Vietnam.
Indonesia/Malaysia/Brunei/Singapore are not taking sides.
#5
American hegemony doesn't really depend on power projection globally. America only did the policemanism to contain the Soviets and their allies. But economically America has never really depended on trade for strength. The existence of these policeman institutions is America going on autopilot, but it isn't a pillar of American strength. American strength comes from immigration of talented people, a relatively free economy and free flows of capital, and most importantly a synergy between Military-Industry-Universities to bring new ideas and commercialize them in hardware, software, AI, biotech, weapons, and etc.
America is the 2nd least trading nation on earth as a proportion of GDP:
https://data.worldbank.org/indicator/NE.TRD.GNFS.ZS?locations=1W&most_recent_value_desc=false&skipRedirection=true&view=map
By raw dollars, America trades a lot (~$6T+) and is the 2nd biggest trading nation, but as a proportion of its GDP its relatively small proportion (~$26T).
In addition to that, Asia, NAFTA, and Europe are way more important for American trade now than the Middle East, especially now that America is energy independent, which goes back to my point that the petrodollar isn't a pillar of American hegemony. The shale revolution in the mid 2010s was a game changer.
America can pull back and be fine, which is why global policemanism is a rising trend in American thought.
Iran is certainly a strong regional power with many militias and makes cheap drones. Economically speaking Iran isn't much. Russia is also a strong regional power and Putin has crafted a formidable war machine. But economic wise it is smaller than Texas. Venezuela is a failed state. It tried claiming land from Guyana but got scared from a clash with Brazil.
The competition won't come from Iran, Russia, or Venezuela, but from China, which is a bigger economy than America in PPP standards but not in US dollars at MER. But even then its a decade away as I discussed about the currency internationalization.
The US hasn't had a war on its home territory since the civil war in the 1860s. It has a fairly stable government. That makes it a fairly safe place for assets. Down near NYC City Hall, the office of the Federal Reserve has a basement gold vault that was really popular as a place to stash national gold reserves around World War II. I gather that there's a fair bit of gold still there even though most nations are off the gold standard. People talk about Fort Knox in Kentucky as the big gold reserve, but there has been more gold under the NYC sidewalks.
The US dollar is considered a good reserve currency for the same reason it was a good place to stash one's gold.
#3
I don't think the dynamic of the Suez in 1956 is similar to America right now. If you look at international reserve currency composition: America is 59% and 2nd place is the Euro at 20%, Japanese yen is 6%, UK pound is 5%, Canada 2.67%, Australian dollars is 2.16%, and China is 2.15%,
https://data.imf.org/?sk=e6a5f467-c14b-4aa8-9f6d-5a09ec4e62a4
We are a decade or two away before America has a rival.
None of this is similar to the table I showed above when America was on UK's heels and passed it in 1954.
China's currency still isn't fully convertible and has many capital controls, and they are still experimenting with liberalizing their currency since the Panda bonds (2005) and dim sum bonds (2014). China still has significant liberalization to do before their currency reaches the pound sterling or Japanese yen's international usage. This is like 1-3 decades away.
By America's structural imbalances do you mean Debt to GDP ratio? Yes its over a 100% but that's a terrible predictor of default, otherwise Japan or Singapore would default soon too. The measure to look at that has predictive power is net interest as % of government revenue.
If you look at America's net interest as a percent of government revenue.
America paid $659B in net interest and made $4.4T, roughly 15% of government revenue is soaked up paying interest.
https://www.cbo.gov/publication/59727
America's ratio isn't great for a developed country (e.g. In France its closer to 3% for comparison) and America's interest payments are certainly rising but I would worry about default when this hits above 50% like in Pakistan.
https://unctad.org/publication/world-of-debt/dashboard
#2:
It doesn't even make sense that petrodollars hold up American hegemony since the Gulf states were never the largest buyers of American dollars or bonds nor are they particularly large borrowers. Oil is important but the petrodollar isn't a pillar of American hegemony.
I'll refer back to this point in my article:
"In 1980, Saudi Arabia’s US government bond holdings were $12.2B, only 1.3% of America’s $908B federal debt at the time. Even if I add other oil states like Bahrain, Iraq, Iran, Oman, Kuwait, Qatar, UAE, Libya, Nigeria, and Gabon’s holdings as well, that’s $16.3B, just 1.8%. This minimal percentage indicates that the dollar isn’t propped up by these holdings.
Currently, Saudi Arabia ranks 22nd in buying U.S. treasury bonds, with $122B out of the $13.1T total foreign owned debt, ~1%. Kuwait owns more U.S. treasuries than Saudi Arabia. The largest holders are Japan, the UK, China, and Luxembourg, each with over $1T. Thus, the idea that Saudi Arabia's bond holdings uphold American supremacy is unfounded."
#6 You may be on to something about class politics, I am curious who wins this election.
Hi Ali! Thanks for the book suggestion. I'll definitely give it a read.
I have a few critiques on your points. So I'll make them in a few chunks.
Regarding your point about the Iranian nationalization of Anglo-Persian Oil and Nasser's nationalization of the Suez Canal, I'm well aware of these events. However, I don't believe they are directly relevant to my argument. My point was about why oil has been traded in dollars, which is largely due to network effects, the convenience of using the dollar, and the vast bond market that allows investors to earn returns on their dollars. This is evidenced by the following points:
1. Trades continued to occur in Pound Sterling even after 1974.
2. None of the archival records indicate an exclusive agreement requiring Saudi Arabia to trade oil solely in dollars.
3. The internationalization of the dollar created network effects, leading banks worldwide to use it.
Additionally, it's important to note that the Suez Crisis happened in 1956, and the US surpassed the UK in international reserves two years earlier, in 1954.