Ask Prof Wolff: US Dollar vs. China's Yuan - YouTube

Welcome friends. This is Richard Wolff from  Democracy at Work responding to another Ask  

Prof Wolff question from our Patreon community.  And this question comes from Marcus Allen.  

Marcus asks about dollars, the petrodollar, the  role of dollars in the world economy. And the  

big question on the world's mind these days: is  the Chinese yuan going to overtake the dollar in  

the world economy? Its role, and if so, when? And  how? And with what consequences might this happen?

So let me begin this with a couple of definitions  so we're all on the same page. The petrodollar 

is named that way because, for many many years  now, the global trade in oil is undertaken 

with dollars. Country A buys oil from  Country B and usually pays for it in dollars.  

It was a sign that all of the  important trade in oil that literally  

is what energizes many economies  around the world. To be reliable,  

to be sure that when you got paid you could rely  on the payment, what people who sold oil wanted,  

and what people who bought oil had to do  was provide a globally reliable currency,  

and the dollar was that. Coming out of World  War II, the dominance of the American economy  

in the world system was overwhelming. The only  potential competitors, Britain, Germany, Russia,  

Japan had all been decimated by World War II. They  literally destroyed each other, leaving the United  

States, on whose soil no war was fought, accepting  Pearl Harbor, in a position of total dominance.

And the dollar, which had been moving in that  direction, became officially the world's number  

one currency. And this has had and continues to  have enormous benefits for the American economy.  

Here's a way to understand that: if foreigners  hold dollars because they're going to be buying  

something tomorrow or next week or next month,  and dollars is the way you pay for it, oil or many  

other things, then we have a peculiar arrangement.  The United States sends dollars abroad,  

little green pieces of paper  that you're all familiar with,  

that cost virtually nothing to make, in order  to buy wine from France, rubber from Malaysia.  

You name it, we get really wealthy as a  nation, and we only have to give pieces of  

cheap paper in exchange. If people hold dollars,  this is an enormous subsidy to the United States.

Likewise, if banks around the world and countries  around the world hold dollars as reserves to show  

that they're in good shape, it's one thing to have  the currency of your own country - that depends  

on how strong the economy of your country is.  It's another thing to have reserves in dollars,  

which everybody respected. And that means  banks whole dollar denominations. Banks also,  

and countries, will take the dollars and hold  on to them, but they want to earn something,  

because if you hold a dollar you don't earn  anything. So what they do is they lend it 

to the United States government. They pick up the  interest that the government pays. They still have  

assets in dollars because it's a U.S. government  debt, and that of course provides an enormous help  

to the American government, because it can  do all kinds of things with money it borrows  

not from its own citizens, but from  banks, governments, citizens abroad.  

Many of the wars of the United States have  been financed by loans from other countries.

The rise of China is absolutely crucial now. It  is the second largest economy in the world. It's  

roughly two-thirds the size of the United States  economy, and gaining fast. It has been growing  

faster than the United States for the last 25  years. Two to three times faster every year.  

That's why it is as big as it is now, and that's  why most predictions have it be a bigger economy  

at the end of this decade than the United States.  And what that means is that all over the world,  

citizens who are planning to do all  kinds of growth and expansion and trade  

now need to have yuan in their wallets, yuan  in their bank accounts. Because more and more  

countries are saying we want to be paid in that  currency because we do more business with China  

than we do with the United States. And,  therefore, at the very least, we want to reduce  

the old use of the dollar, which was  virtually total, and now maybe 50/50  

you want. They're adjusting. Banks are  doing the same with their reserves.  

Countries are doing the same with what the reserve  is to back up their currency. People will have  

confidence in their currency not only because  they also have dollars, but because they also have  

yuan and with the prospect of the yuan becoming a  bigger factor connected to the biggest economy in  

the world within a few years. The pressure  is on. No one knows how fast it will go.  

It will diminish the subsidy we get as a nation.  It will squeeze American capitalism. It will be  

a boon to Chinese capitalism in just the ways  the dollar supremacy was for the United States.

And one important point: the sanctions imposed on  Russia are speeding up the importance of the yuan,  

because the Russians with their alliance on  the Chinese are doing more and more trade with  

the yuan because they are shut out of the United  States. In an ironic twist, American sanctions are  

undermining the future of the American economy  in this, among other ways. Be careful about your  

own investments, for those of you who have  any. Because the dollar isn't what it was,  

and it's part of the relative decline  of the American capitalist system  

relative to where capitalism has moved its  dynamic growth center, and that is to the east.

If discussions like this are of interest, please  know that we at Democracy at Work want you to 

please partner with us . Share this video with  friends, relatives, neighbors, co-workers.  

That's a way to extend our reach, to get  more people to understand and think about  

the great issues of our time that you  in our patreon community bring to us  

to work on. It's a way of our working together  that we need and that completes our project.  

And of course, if along the way you can  also provide us with some financial support,  

our website democracyatwork.info will tell  you all about how to do that. Thank you.