Brick by BRICS

Yan Liang, an expert on MMT and the political economy of China, talks about BRICS, the weaponizing of the US dollar, and new possibilities for shifting the global balance of power.

Click the image to listen and read along on our website.

History doesn’t stand still, and every time we talk about BRICS on this podcast, there’s more to unpack. To understand the significance of BRICS, we must begin with (wait for it) monetary sovereignty.

Economist Yan Liang is an expert on China’s economy and MMT. She joins Steve to discuss the evolving role of the BRICS nations (Brazil, Russia, India, China, South Africa) and the increasing number of countries becoming involved in challenging US dollar hegemony and the current global financial system.

Weaponizing of the US dollar has reached an all-time high. Yan explains the specific ways in which US-dominated international institutions and dollar dependency impede development in the Global South.

The episode looks at the significance of de-dollarization and its possible longterm effects. Yan also touches on the importance of technology transfer and intellectual property rights in building sustainable economies.

Yan Liang is Peter C and Bonnie S Kremer Chair Professor of Economics at Willamette University. She is also a Research Associate at the Levy Economics Institute, a Non-Resident Senior Fellow at the Global Development Policy Center (Boston University), and a Research Scholar of the Global Institute for Sustainable Prosperity.

Yan specializes in the Modern Monetary Theory (MMT), the Political Economy of China, Economic Development, and International Economics. Yan’s current research focuses on China’s development finance and industrial transformation, and China’s role in the global financial architecture.

@YanLian31677392 on X

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FULL TRANSCRIPT with EXTRAS

Steve Grumbine
00:00:43

All right, folks, this is Steve with Macro N Cheese. Today’s guest is Yan Liang. Yan has been with us several times in the past. She’s a wonderful voice on China and MMT.

But to give you her bio for those of you who are unfamiliar with her, Yan is Peter C. And Bonnie S. Kremer Chair Professor of Economics at Willamette University.

She is also a research associate at the Levy Economics Institute and a non resident senior fellow at the Global Development Policy Center at Boston University. Yan specializes in modern monetary theory, the political economy of China, economic development and international economics.

Yan publishes all over the place and if you haven’t seen her or heard her, you’re in for a real treat with that. Yan, welcome to the show. Thank you so much.

Yan Liang
00:01:34

Thank you for having me, Steve. It’s been a while.

Steve Grumbine
00:01:37

It has been a while. And you know what’s funny?

Just as a little story, when we first got together, you were like, oh, we love the intro song, you know, lies, you tell me truth and blah blah blah. And we changed the song on you.

Yan Liang
00:01:49

Oh, really?

Steve Grumbine
00:01:50

Yeah, it’s a more accessible song because we had a lot of people whose sensitive ears couldn’t handle guitar. So we went ahead and made it a little bit more fun. So if you get a chance, definitely check out the intro.

Yan Liang
00:02:04

I will totally do that.

Steve Grumbine
00:02:06

I miss the old song, but I like the new song. So with that in mind, I just want to thank you for joining me.

We’ve done a lot of talk here recently with Fadhel Kaboub who came on and discussed Africa’s space within the potential burgeoning BRICS environment.

We had Paul Gambles come on here recently and talk about the Chinese issuance of sovereign bonds denominated in US$ out of Riyadh and got a lot of people just coming to us asking us for ‘more BRICS [Originally, Brazil, Russia, India, China, South Africa]. Tell us more about the BRICS.’ And last time we had you on about a year ago, we dove into the BRICS as well. And it was a really great episode, folks.

Definitely take a listen to it. But you know, a lot’s changed in a year.

I mean, we’ve witnessed a lot of geopolitical events occurring from Ukraine to Syria to Gaza and Palestine and throughout The Global South.

We’ve seen insanity in Argentina and there’s a lot of things that seem to be facilitating and ramping up and bringing a lot of attention to the possibilities of a multipolar world leveraging, you know, more than one payment system. Obviously the SWIFT system – the United States has abused it on many levels and has created a lot of desire to get out of US controlled economic systems and enter into the BRICS.

And so I guess let’s just start off before we get too far down the runway. Can you tell us what the BRICS project is supposed to be and give us kind of an overview of BRICS as a whole?

Yan Liang
00:03:48

Right.

So we know that BRICS really started with a very loose kinds of just a symbol of a title, right, that was given by a Goldman Sachs banker calling these large emerging economies, you know, China, India, Russia and South Africa later joined. So the initial idea is that, you know, these are just large emerging markets.

But I think later on this country group really gained a lot of momentum, especially in the recent years with a lot of, I would say dissatisfaction right, about the current world order. And so the BRICS has gained more momentum in terms of their active summit meetings and their plans going forward.

And they also just expanded, you know, this year with four other countries that join. Iran, Ethiopia, UAE [United Arab Emirates]. And I’m forgetting the last one [Egypt], it will come back to me.

But this idea is that there’s a lot of impacts, right, that BRICS are having in the Global South countries and many countries are willing to join. And in fact, I think there are over 40 other countries voice their willingness, right, that they’re applying or actively applying to join the group.

And now another 13 countries are added as the partner countries. They’re not really the formal members in the BRICS groups yet, but they are sort of on the sideline.

They’re participating in some initiatives in BRICS and so on and so forth.

This is going to be, I think, influential and impactful going forward because I think after all, these country groups represent over 31% of the global GDP on the PPP basis [purchasing power parity], which is actually more than the G7 countries. And they’re also having countries that have very unique weight right, in the global economy.

So now they’re controlling about 30% the global oil trading. If Saudi Arabia accepted and joined, they actually were still quite ambiguous about that. They were expected to join this year, but didn’t happen.

They didn’t go to the Kazan Summit this year in Russia, but they didn’t reject to join either. Right. Unlike Argentina. But in any ways, I think if they join then the group will control about 41% of global oil trade.

So this is going to be a weighty group and with very different agenda that’s trying to rebalance the global order. And I think it’s important to put this in context.

Again we look at the current landscape as you talked about, there are a lot of changes and all changes are to the worst, right?

Because as we all understand from Gramsci, you know, this famous saying that the old world is dying and the new world struggle to be born; now is the time of monsters. I think 123 countries in 2022 at the UN voted in favor for the so called new international economic order, right?

That’s 64% of the member states that are voted in favor. And this just shows that the Global South countries had enough, right? They are not happy with the current world order.

They’re asking for more sovereignty, self determination. They’re asking to reform the current global system. And I think that BRICS is one representation of that kind of demand.

So this is significant.

Steve Grumbine
00:07:03

When I think about the US model of keeping itself afloat.

It has pushed most of its production out of the country and it has leveraged the long arm of the IMF [International Monetary Fund] to ensure that it can get the goods and services it wants from abroad and low cost production centers and so forth.

Would you say that the impetus for the BRICS is a direct backlash against the US system and the way that the US uses its power basically to keep them in a subjugated role? Or is there a more academic reason for the rise of the BRICS?

Yan Liang
00:07:42

Yeah, that’s a great question. I think again, the rise of BRICS represents a sweeping kind of desire to change the economic system in the current world.

Now I think the financial system is definitely a centerpiece of that. So when it comes to why countries want to do that, I think there are a couple reasons.

So one of them I think as you alluded to, is there is economic risk. What does that mean?

That means when the world, especially when it comes to global trading and global payment systems, when you’re so over reliant on the dollar, you subject your country to a really vulnerable position.

Because whenever the Fed, the US central bank makes their policies based on their own domestic national interest, this would have outsized impacts on the developing countries. So one example is the recent US interest rate hikes. And that really I think took a huge toll on the developing countries.

You know, really worsening that burden. We know that 80% of the external debt of developing countries is denominated in the US dollar. So when the Fed raises the interest rate, this causes the dollar to appreciate against many of the developing countries currencies.

And so what that means is that it really worsens their external debt when they convert the dollars into their own domestic currency or they would have to use a lot of their reserves to pay their debt.

Right, because when the interest rate is higher, means your interest payment is higher, your currency depreciates, that means the domestic currency value of your foreign debt is going to be higher. Not to mention there’s also a lot of capital outflows from the developing countries to chase a higher yield return from the US assets.

So there’s a large significant economic cost for over-relying on one single currency subject to the policy fluctuations of one country [the US]. That’s one.

And second is, I think it’s very clear as you just mentioned, that the United States and the European allies basically controlled a lot of these international financial institutions. They’re supposed to oversee and regulate and manage the global financial system.

But they do in such a way that really benefit just advanced economies at the expense of developing countries. So very quickly, just take the example of climate change and climate financing.

We know that 80% of the climate financing that is provided to the Global South is in the form of loans.

So what that means is that they’re not genuinely helping the developing countries cope with climate change to do climate mitigation adaptation, which these developed countries have a responsibility to do. But rather than really providing the needed finance, they are putting developing countries in debt.

And so that is very unjust, unfair and inefficient.

So that’s the second problem that with the US with its financial power and its control of all these Bretton Woods system, it’s not working, is not helping the developing countries. And last but not least, I think you see an acceleration of the move towards the so called de-dollarization in the recent years.

By the way, you know China has been calling for the so called de dollarization, right? A more multi currency system. After the Global Financial Crisis back in 2009, the Chinese already said this is too risky.

And the US it’s not responsible in its policy making in the way it regulates this financial system. We need to move away from the dollars.

But in the recent years I think you see a stronger call and the urge to do so largely because we see the United States has been weaponizing its dollar system, right? Over the years it has been using its control of the international reserve system to freeze many sovereign governments’ dollar reserves.

You know, 2011, they froze $160 billion of Libya’s reserves. You know, 2018, Venezuela, 2019, Venezuela, $342 billion of their reserves.

And then the most recent one, Russia, they essentially froze $300 billion of the Russians reserves and using the interest income from those reserves to finance Ukraine’s war. And also cut Russia out of the SWIFT system. Right, the international banking messaging system.

So all of this just showcased that the United States is using the dollar as a weapon to protect its own geopolitical interest.

I think this really gives a wake up call and warning call to these developing countries that they might need to hedge themselves against the over reliance on the US controlled financial system.

So this is a long answer to your short question, but I think it just shows the urgency of countries trying to set up a alternative financial system to protect their own interests in the broader context of reforming the entire global economic system.

Steve Grumbine
00:12:50

Very well said. I want to make a point. You know, we’ve seen Luigi Mangione gun down a healthcare CEO.

To his credit, he came out and said, I was going to use a bomb, but I didn’t want to hurt innocent people.

Yan Liang
00:13:03

Right?

Steve Grumbine
00:13:04

So he goes after the CEO of this company.

But I’ve been saying this and honestly, many people in the MMT community acted like I was insane saying this and they’ve distanced themselves from it, but I’m going to say it point blank. My tagline on Twitter is austerity is murder. And I don’t think enough people realize that the dollar, the economics is every bit as lethal as a rifle, only different. The, the way you die is different. It’s like instead of getting cancer, you get pneumonia, or instead of, you know, a gunshot wound, you drown.

But it’s still killing people. And the Global South is saying, ‘hey, enough of our people are in squalor trying to survive to meet our dollar denominated debt.’

You know, let’s be fair. Debts are only really debts when they’re payable in a foreign currency.

When they’re your own currency, you have the ability to deal with that very easily.

But when it comes to foreign denominated debt, which is how the US has used its system to impose dollar denominated debts, it has by extension created the conditions that are in effect murdering people around the world. Even though they don’t get to see who they’re killing, they don’t really know the person’s name, they probably don’t care who they kill.

These kinds of austerity measures, these kinds of debt arrangements are lethal to the well being. I mean, we look at this country, the US, and we realize that hey, when they cut the spigot off for spending, the poor really get hurt and people without healthcare really get hurt.

And it’s a very similar thing when interest rates go up or inflation is high and the US dollar becomes a lot more challenging for these countries that do not create US dollars on their own when they’re doing business with the US, when they’re buying things that are only purchasable in US dollars, when they take on foreign debt, that sets up this arrangement where they’ve got to do something to get US dollars because US dollar is not their national currency, not their unit of account.

And so what I want to do real quickly, is just do a backwards look at the scaffolding of sovereign nations, currency issuing nations, and overlay that with that international system. Because obviously MMT has a very important play on the international stage.

It’s not just, you know, oh, it’s in the US or oh, it’s you know, in a closed system.

It’s what a lot of people that don’t understand MMT say. Can you help me paint the picture of that kind of scaffolding from the nation state through the BRICS through that international order? Because I don’t think people really understand, number one, what a reserve is, why you need a reserve, why you need foreign reserves, why does Argentina need US dollars at all? Or why does, you know, Ethiopia need US dollars? Or why does Russia need US dollars? Or nobody in Russia is sitting there using US dollars.

Well, I shouldn’t say nobody, I’m sure somebody does. But it’s really for facilitating transactions between countries that have differing currencies.

Can you build that layer cake of the financial system starting from the sovereign up through the international. That’s a lot.

And I’ll walk with you and I’ll ask you dumb questions, but I think it’s important for people that aren’t familiar with why this international stuff matters so much.

Yan Liang
00:16:24

Yeah, that’s a great question. I think we need to go back to the principle of the MMT, this idea that money is not just an outcome of a natural market bargaining or transactions.

Money is not just a veil, it’s not just something innocent and so neutral. Right? Money is a creation of the public authority and there is the political power and there’s a geopolitical power behind the currencies.

And so I think we need to make that clear in the first place. And as you alluded to, right.

Even with the United States, which is a monetary sovereign government and uses its own dollar, we are still seeing some of the self imposed austerity. That we can’t get universal healthcare, we can’t have the Green New Deal because we don’t have money. And that is outright a lie. Right?

It’s to protect the interests of the financial elites and the political elites at expense of the general public. And so that’s why you see this kind of social tension between people who really don’t have any means to protect themselves against the opposite.

All these medical issues. Right. Versus the big FIRE system. The finance, insurance, real estate sector that’s just simply raking in a lot of personal and corporate profits.

And at the international level, you’re absolutely right. Look at Argentina, people are hailing that they’re able to reduce external debt, but at what cost?

I mean this is the time that you need to ask at what cost? Right. That poverty rate has jumped up to 50%. Over half the country lives in poverty. And so the situation is very dire.

And what does this have to do with the international financial system, especially dollar hedgemony? Well, some economists call this the so called original sin. Right. Back in 1999 the phrase “original sin” was coined. Well, what does that mean?

It means when the dollar established its hegemony position. now we’re having dollar that accounts for about 58% of the total foreign exchange reserves around the world.

It’s used as an invoicing currency for 54% of the total exports in the world and account for over 88% of the foreign exchanges transactions.

So what that means is that dollar has established itself as an indispensable currency in the global trading system, in the reserve system, in the global payment system.

And in other words, if you are a country, let’s say Sri Lanka, or if you are Ethiopia, if you want to buy or you know, to sell in the global market, you need to use a dollar as your invoicing currency.

So your goods that you’re buying is invoiced in dollar and you most of the time pay in the dollars, especially for the global large commodity transactions. Oil for example. Right? And again, we don’t need to go into detail as to exactly how the US dollar acquires that status.

So this is to say it’s not just the pure economics, it’s not about just the U.S. economic size. Right. The U.S. account for 20% of the global GDP, about 20% of the global trade.

But again, the dollar has played a much more outsized role in the global financial system. So it’s not just about economics. There’s a lot of geopolitical military operations behind to put the dollar in that position.

But let’s stick to the world that we lived in now, as I just mentioned, the dollar becomes such an indispensable currency.

So if you wanted to trade with other countries, especially, especially if you want to buy food, energy, technology in the global market, you need to have the dollar, right? And I think that is exactly what Fadhel has been talking about.

The sovereignty is important because if you’re over reliant on global market, you need a dollar to be able to purchase all these products that are essential for your people’s survival. And because you need to purchase all of these, if you don’t have the dollar, what do you do? You borrow.

And that’s why you get this external debt problem denominated in the dollars primarily. And so that’s why countries now are, in a way, forced to accumulate dollar reserves, right?

Because the rule of thumb is that you need to have enough foreign exchange reserves, mostly again in dollar to be able to pay at least three months of your import bills or to cover 100% of your short term debt. Because if you don’t have the reserves, you, you could put yourself in a very vulnerable position, right?

If there are some fluctuations on your foreign exchange earnings, then all of a sudden you’re not able to pay for the imported food or energy. And that means in some countries your economy can’t function pretty much, right?

Or you know, if you don’t have enough reserves to pay for your external debt in the short term, then again that could in some ways create defaults and other undesirable economic consequences.

So that’s why countries scrambled to accumulate their dollar reserves again to continue to use the dollar to pay for their imports, to borrow in dollars and so on and so forth. And that is really a vicious cycle because again the more you need to acquire the dollar, the more you reinforce the hegemonic role of the dollar.

And that’s why BRICS say no, we want to diversify away from the over reliance on dollar. And it’s not just, you know, BRICS, right?

The African countries, 2022, they met in Ghana and they made a plan to build the so called Pan Africa payment and settlement system, you know, using the local currencies for their payments and settlements within the continent. ASEAN countries, the group of Southeast Asian association countries, they also met in Indonesia in 2022.

They also wanted to build this new payment system to use local currencies in cross border transactions. You know, China has made inroads in also diversifying its cross border payment system.

Now dollar accounts for less than half of the cross border payments. So just in general, I think countries realize all these economic geopolitical risks and the inefficiency. Right.

And also all the dire consequences of overreliance on the dollar system. And they have been trying and making efforts to diversify away from it.

In terms of the reserves, one of the things that you see is this year led by countries like India, Poland and I believe Iran, we have seen countries really start to accumulate more gold as their reserves and that drives up the gold price. This year the gold price doubled than what it was in 2019.

So you see this active efforts of the countries to diversify away from the reliance on the dollar. Now I think accumulating gold, it’s really just a makeshift. I think we need much more fundamental reforms as a global system. Right.

We may be able to talk about sdr, the special drawing rights [SDR] at the IMF later. Again, at this point there is a clear recognition of the over reliance on the dollar and danger and the risks of that.

And countries have been taking active ways to diversify away and they cannot do this alone. Right?

They have to do this in regional groups or better with the Global South and create some, maybe buy ins from some of the western countries as well. But this is I think the trend that we’re witnessing right now.

Steve Grumbine
00:23:26

So when I think for those that aren’t familiar with what reserves are, and I know we talk about this stuff so much and sometimes people are brand new to the show and haven’t heard some of these basic things, but reserves are within the banking system. It’s not like they’re sitting there in a safe at somebody’s house. You know, reserves are how we clear payments between dissimilar nations.

Where on one side of this gateway you use your peso or you use your yuan, or you use your yen and then as you go to the international payment system, you have various reserves for various countries that are used to facilitate payments between countries. And then on the other side of that the payment clears and the other side I guess turns it back into their native currency to be used domestically.

I’m not fully aware of how that shift occurs there, but I believe it’s close to that. Help people understand what happens when a nation acquires reserves. I mean, how does that come about?

Yan Liang
00:24:29

Right. So we can take any country as example, but let’s say China for example, when you have exporters that sell goods to the United States.

The exporters receive the dollar and they deposit in the bank. And the bank of course would then deposit the foreign exchanges at the central bank of China.

Well, actually it’s not exactly deposits in China because a lot of these foreign exchange reserves, because they’re denominated in the foreign currency, they’re actually deposited in some sort of custody depository institutions. And eventually the Fed would have an account with all these other countries reserves denominated in the dollar.

So again, you earn reserves, not to talk about all these technical details, but you earn reserves through basically net exports, or you can have net foreign inflows of investments. For example, if you are able to attract foreign investments into a country, they would have to convert their dollars into your local currency, right?

So you would be able to earn foreign currency in this case.

But all these investments or if you borrow, these are not really the earned foreign exchanges because the foreign companies can always retrieve their investments and they can always call in their loans. So the really ultimate way for a country to acquire foreign exchanges is through net exports.

So that’s why I think there are these comment about the US’s exorbitant privilege, which is the US is able to issue all the dollars they need in exchange for real goods and services from the rest of the world.

But for countries that earn these foreign exchanges, they cannot use the foreign exchanges in the domestic economy, other than some of the great economies or if the country is completely dollarized. But these exporters usually would convert the foreign currencies into domestic currencies.

And so then eventually this becomes the foreign exchange reserves. But again, they’re not really in a way sitting in the central banks in their own countries’ vault, right? It’s a depository of entry.

It is a account that eventually will end up in the Fed because the Fed is the one that controls the dollar, right? Issues the dollar.

And so that’s why in Russia’s case, as I just mentioned, they have $300 billion of the foreign exchange reserves, mostly in dollar and euros, are frozen because the US has the jurisdiction, they have the legal ways to freeze the account.

And that’s why again, countries feel that they could be in a vulnerable position, right, if they’re hardened for foreign exchanges, got frozen or taken away from them due to any of the things that the United States disagree with. Right? So I think that is probably important to note why countries accumulate reserves, how they do that, and why do they now want to diversify away?

The geopolitical concern is definitely one of the catalysts of the current move away from dollars. But there’s also many other reasons. One of the things, as you mentioned, the reserves is a safety caution.

So a lot of the dollar foreign exchanges are invested in the US treasuries. In China’s case, they have now over $770 billion of the treasuries as part of their foreign exchange reserves. And many countries do that.

And these securities, they’re safe, but the return is relatively low. And so the carrying class is somewhere between 1 and 3% of the GDP, meaning that the countries are exporting their hard works, right?

Resources in exchange for the dollars and then invest in the very low yield Treasuries.

So I think they’re really holding the short end of the stick, but at the same time they feel they have to do that because if they don’t have the reserves, they cannot pay for the imports or they cannot pay for the debt or they cannot stabilize their currencies.

I think in the most recent episode, as we know, that the US had hiked the interest rate by over 500 basis points in the short span of a year and a half. We see many countries, their currency depreciates.

And so what do they have to do is they have to sell the foreign reserves in order to support the currency. And so we’re seeing countries like for example, Czech Republic, they have run down 15% of the reserves to do that.

Hungary run down 19% of the reserves to defend their currency values. And so for both economic reasons and for geopolitical reasons, countries accumulate reserves. But that it’s really not most desirable. Right.

So that’s why they are trying to diversify away from the dollar reserves.

Steve Grumbine
00:28:52

So one thing that comes to mind, you know, the MMT basic message of taxes are not a funding mechanism, but taxes create the necessary obligation to keep you needing that money. And that is how the US government and all governments provision themselves at some level.

But it sounds to me like the IMF and these various means of US dollar denominated hegemony creates a de facto tax on these countries that are not necessarily under US jurisdiction, but because of the debt arrangement, have in essence become vassals. They’ve become kind of colonies of the US where they are dependent on US dollars now.

And I would imagine that that’s a pretty important arrangement to understand. It’s a power dynamic that I don’t think a lot of people are fully aware of.

I want to just say one more point about the concept of safe investment in Treasuries. You know, you hear a lot of people talk about, well, what if people lose faith in the dollar? What if they lose faith in the dollar?

And usually you just sort of laugh at them about that stuff because as long as we can enforce a tax, dollar’s not going anywhere.

But when you think about what the US did to Russia and you think about are countries willing to store their dollar holdings in the US, are they willing to hold dollar holdings for fear that the US will seize their assets, that does create a lack of confidence or a lack of faith in the dollar institution, not necessarily the dollar for buying sodas at the soda market, but like in general for international transactions and savings. In this case, does that not create instability?

Does that not create the very conditions that would create, quote, unquote, a lack of faith in the US’s willingness to support its own currency?

Yan Liang
00:30:45

Well, I think that’s interesting. I think it’s very interesting the way you put it, which is that there is this power dynamics.

We know that at the domestic level, yes, the government is the highest public authority that could impose obligations on the citizens and so that drives demand for the currency. So the global level, of course the US government cannot directly impose taxes on the other countries citizens.

But you’re right, there is still the kinds of power dynamics that in a way create a demand for the US dollar. So because the US is the country that holds the strategic assets, the dollar, it forces other countries to for example, trade in the dollars, right?

In terms of petroleum, the oil dollar trade, you know, if you don’t use the dollar you will be severely punished. Look at Libya and look at what Donald Trump has been talking about with the BRICS countries, right?

If you guys dare to use other currencies, then you will be subject to 100% tariffs. I mean there is a kind of coercion, there is the force, right?

There is a kinds of geopolitical power play here to make sure the dollar maintains the kind of hegemonic power also because again the US government will not at this point, as we very clearly see that the US government is not going to lose its power to impose taxes, right, and enforce the taxes and its citizens. So in that case there’s no loss in faith in the dollar.

I mean the dollar is still very well desired, very highly demanded within the United States and at this point, you know, outside of the US as well. And so I don’t think there is a loss in the face, so to speak, in the dollar.

But what I mean is again from the Global South point of view, there’s tremendous economic risks and geopolitical risks of relying on the dollar, which they can’t control. Right. But does that mean if the countries move away from the dollar, the US would be in trouble?

Well, I think we have to understand this in a number of ways. First of all, I don’t think there’s any financing constraint, right? On the US government, as you and I both know.

Steve Grumbine
00:32:48

Sure.

Yan Liang
00:32:49

Even if the rest of the world said we’re not going to invest in the Treasuries, well, there’s still plenty of demands for Treasuries from the US’s investors. Right? And even if, let’s say there’s no demand for the Treasuries, well, the US government doesn’t need to sell the Treasuries in the first place.

Especially what we’re talking about now with abundant reserves, you know, the whole open market operation is basically out of the sea. We don’t do that anymore. We don’t need to sell the Treasuries to drain the reserves. In the banking system.

The Federal Reserves are now simply paying interest on the reserve balance for the banks, you know, as a way to anchor the Fed funds rates. So there’s really no reason to continue to issue the Treasuries, you know, domestically or abroad for that matter. Right?

Intermission
00:33:34

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Please consider becoming a monthly donor on Patreon, Substack or our website real progressives.org. Now back to the podcast.

Yan Liang
00:33:49

This could benefit all those rich people that have the US Treasuries that they’re getting, you know, billions of hundreds of billions, closer [to] trillions. Right? Of interest payments. That’s why, you know, [Elon] Musk. Right? That is heading the DOGE [so-called Department of Government Efficiency].

If they really want to cut government spending, start with the Treasuries, stop issuing it, stop paying the interest on the Treasuries and then stop paying the interest on reserve balance. And by the way, that’s about $280 billion a year the Fed is paying on those reserve balance.

So yes, I don’t think if the rest of the world stop investing that much in the Treasuries, it’s not going to create a financing crisis for the US government at all.

But what that would do though is if there is less demand for the US dollar, that means the US may not be able to buy the same kinds of resources at the same price from the rest of the world, which again to some people may be a good thing. Right. If you’re really worried about oh, the imports are reducing our jobs at home. Well then here you go.

You are not importing as much as you used to or not at the price. Right? That’s very low. When you paying the dollars then maybe you would create more resources domestically.

You can create more jobs in those used to be in substituting industries and so on and so forth. Now I need to again make a quick clarification.

I’m not saying that the job losses in the United States, especially in the manufacturing sector is due to globalization, is due to the imports and so on and so forth. We know if the federal government wants to do it any day, they could create for employment. Right.

They don’t need to worry about the imports taking away the jobs. They can create jobs at home. And we also know that the US has been losing manufacturing jobs way before China joined WTO [World Trade Organization] and so on and so forth.

You know, when the US imported a lot, you know, from the Global South countries, this momentum started from 1960s and 50s on. So I don’t think it’s globalization that creates job losses.

I think technology is a structural changes in the US and then recently is due to financialization. Right.

It’s companies that move their operations abroad to save costs and so on and so forth and reduce the workforce and use automations in the first place. Or not even build anything, not produce anything anymore. Right. The US is producing financial assets pretty much. Right?

That is where the US’s comparative advantage is. But you know that that kind of goes a little further away from our discussion of BRICS. But I think it’s just important to understand the dynamics.

What are the real impacts when we have a more so multipolar system in the currency space.

Steve Grumbine
00:36:26

I think it’s very important and I just want to say it’s one of the things that attracted me to modern monetary theory. Aside from the aha moment. Right? That the initial aha moment that comes from recognizing currency issuer, currency user, kind of.

What does this really mean to me now?

Yan Liang
00:36:43

Absolutely.

Steve Grumbine
00:36:44

Once you get past that, I’m going to say something. It may be somewhat controversial. I know I talked to Bill Mitchell about this as well. But I’ll bring it up to you.

The saying is that money doesn’t exist in the government sector. It only exists once it’s spent into the economy.

So when you think about governments across the world, even they all have the ability at some level, provided they have the real resources to absorb the spending. And as long as they’re able to enforce a tax with the way that the US has taken its position here.

I think it’s important to understand that we, I say we being the United States, but we, you could be the royal we all countries, if you think about your own domestic world, full employment is possible by the government making a decision that full employment is what we want to do. And so this fear of immigrants taking our jobs is a function of government failure. It’s not a position of immigrants taking your jobs.

All these things are interconnected. They’re not like in separate little boxes over here, separate little box over there.

So when you look at some of the problems that the US is trying to fight, which I believe are fraudulent and fake, you know, anti immigrant and this, that and the other, it creates a lot of the instability that I believe also makes breaking away from the US Swift system, the US control, the US hegemony, it makes it that much more important because the US is quite cruel. I mean, as a citizen here, I’m almost mortified of what I see now that I understand.

So as I think about all these factors rolled in, MMT taught me that you have to look at all sorts of different disciplines to understand. You gotta look at history, you gotta look at other countries, you gotta look at culture. There’s so much that has to be undone once you understand MMT, once you understand the way the system really works. A lot of the stories we’ve told ourselves just ain’t so. It’s not just one.

And that’s what makes MMT so both nerve wracking and also exciting, is that it really does force you to rewire all those synapses in your brain, to reconsider problems that were once seen as impossible, and to really, really understand the realm of what is possible. And I think that the BRICS represent an opportunity for us to teach people these key truths.

And I, I don’t know if you notice this, but I noticed this. A lot of these folks running around, they’re right nipping at the edge of MMT information. They want to know these answers to questions.

But the word MMT makes them go, you’re just printing money. They only assume MMT is printing money.

They don’t have any idea that MMT brings in the concept of the state and the creature of law and all these other elements there that their own governments lie to them about, quite frankly. Can you help me understand the MMT angle with BRICS? What is the MMT insight to BRICS? What do you feel is the aha moment here?

Yan Liang
00:39:50

Right. So I think I wanted to make two quick points responding to what you just said I think is very great. It really is very insightful.

Two things that you mentioned, one is that yes, there are so many dimensions we can talk about, right, in the current world, especially, you know, the US’s behaviors, right? And the way that how the system is set up is so unjust and unfair and, you know, unsustainable and so on and so forth.

There are so many layers of problems, but everything seemed to trace the back, right, to that money, right? Money seem to be really at the center of all these complexities because money moves things, right?

We’re talking about real resources, but money is what behind who gets access to these resources, who gets to put these resources in what uses. And so I think money is so important and so complex.

And that’s why I think you’re right, MMT is so important and it’s so frustrating, you know, when people are not really pilling all these complex layers and to really understand why money sits right in the middle, right, of all these problems. And so that’s why I think you’re right. We should be excited.

We should really learn about MMT and see how this is a useful lens for us to understand, you know, all these complex and very dynamic, very much evolving problems.

And the second thing that I think you mentioned that really resonate with me is this idea of money issuers and money users, right?

The currency issuers and the currency users. So put it in the BRICS context, right, or global sales context is that we are the users of the dollar, we are not the issuer of the dollar, right?

So we resubject ourselves to that kind of dominance and the power, right? And we subjugate ourselves to the kind of money issuing power of the United States and some of the Western allies.

So I think that is a clear recognition of the BRICS countries, right? You may wonder, there are so many things that the BRICS countries can work on why this alternative financial system is such a centerpiece, right?

Of their most recent, for example, Kazan summit, they spend a lot of time talking about this financial architecture. They want to build a clearing system and to make sure that they have interbanking operability.

They wanted to build these insurance mechanisms that would ensure trading and payment system function smoothly. They talked about how to really empower the BRICS banks and increase local currency lending and financing.

They also talk about the contingent reserve agreements, which is basically that, well, we need a dollar, right, as reserve currencies, as emergency funding mechanism, but we don’t get them.

Well, that’s because first of all the United States only has provided contingency reserve agreements with 14 countries, six permanent countries, and then after the COVID crisis. But only two out of those 14 countries are developing countries.

And the large developing countries are very relevant for the United States when it comes to geopolitical alliance. One is Mexico, one is Brazil, right? Only these two developing countries have a direct line of credit from the Fed.

All the rest of the countries don’t have that luxury. So in other words, if there’s a crisis, if there’s a liquidity shortage, these countries are left on their own, right?

They’re not going to be able to get the liquidity support from the United States. Now one could say, well, they also have the IMF, but we all know the problem with IMF emergency lending, right?

First of all, it takes actually quite a long time for them to approve. And again, that gets a little bit into the technical details of IMF functioning.

But the point is that the United States single handedly have 17% of the veto power. And some of this lending outside of their quota requires 85% of the votes. So the US alone can veto any of these emergency lending facilities.

Not to mention the IMF also comes with a whole package of structural adjustment policies that pretty much would ask countries to liberalize and privatize austerity to their bone. So I think there’s just a lot at stake that countries don’t get the liquidity they need at a fair and just way.

And so that’s why they get together and they need to create this alternative financing system, rely less on the dollar for their clearing, for their transactions. They need the local currency lending and financing, they need the insurance among themselves.

They need to set up this contingency reserve requirements so they can provide liquidity to each other in terms of needs. So I think all of this again is centered around money is centered around the currency issuance, the monetary sovereignty, the monetary power.

And that’s why I think the BRICS countries are putting into the centerpiece of their current initiatives.

And again, like I mentioned, you know, many other regions in Africa, in Asia, you know, Asia already have the Chiang Mai agreement after the global financial crisis. So countries now more and more realize that money sits really in the middle of these international economic order.

And they need to reclaim the kinds of money to sovereignty. If it’s not as a individual country, then at least as a regional bloc, as country bloc.

So I think that is why it’s important that we need to use MMT to understand how money works, right? If you still believe money is just gold, right?

Money is just precious commodity money is just a market derivative, then you can’t really understand any of these complexities in this current geopolitical world as you’re watching.

Steve Grumbine
00:45:29

As you’re watching them put together the scaffolding of what would make up this BRICS series of institutions. To me, I almost can’t fathom them not understanding MMT, if they have to build this from the bottom up.

I mean, you have to build the blocking, tackling the software, you know, all the different components that make up a payment system. You’d like to believe that these truths would become self evident as they have to reverse engineer and build their own thing.

But you know, I’m hearing that there are elements there that are baking in some really, really silly ideas that maybe should be known by this time. Where are they at?

I mean, do you see an MMT awakening happening in this space or do you see them bringing back some ideas that maybe just aren’t some silly gold standard logic or anything else like that?

Yan Liang
00:46:23

Yeah, you’re right on, I think you’re absolutely right. I think these countries would have to come to terms with what they want, what exactly the clearing system is going to do.

So I think now very quickly they have correctly abandoned this idea of having a common currency. Right. I think the Euro lesson should be well learned.

And we also understand monetary sovereignty means that you should be using your own national and sovereign currency. So they kind of move away from that.

I think initially there has been some noise, not necessarily from these countries themselves or with the architects that are building these financial architectures, but we hear things about, you know, common currency that’s backed by oil or by gold and all these things. But I think from Kazan summit declaration you can see that idea is abandoned.

I would say, even though I think Russia said that, oh, this is going to be our long term goal. But I don’t think they’re going to go anywhere with a sort of regional common currency to replace the individual currency so that it’s gone.

The second possibility is to really create a common clearing unit similar to what, you know, [John Maynard] Keynes would call a bancor.

So use that as a common clearing unit so you still have your national currency, but using this currency unit as a way to clear the different balances across countries. So that can be done. You could set a unit, you know, the value would be based on all these BRICS currencies.

But it’s a counting unit, it’s not backed by anything. Right. It’s just used as a denominator to record who owns whom by how much that is a possibility.

But again, I don’t think they quite have either the political will, let’s say, to set this up, nor do they have, I think a clear institutional arrangement to make this clear clearing unit happen anytime soon. So the most likely one that they’re working on is a digital currency clearing system.

So what that means is that, you know, you don’t have a clearing sort of unit but you have central banks among themselves clear their balances through a digital platform. So it’s likely the technological prototype has already been existing. Right. Has already been established.

So for example, the BIS has the so called Enbridge and there’s other similar type I think is pundant, some other kind of digital clearing platform that also have countries that are experimenting as a group right. With it. So I think that is actually a direction for them to work on.

Even though the BIS now has exited from the Enbridge project, it doesn’t mean that other countries cannot pick them up and continue to develop it. Right. And China and Hong Kong are actually part of the Enbridge system.

So again this is a distributed ledger and this is when countries are able to settle their balances among themselves, you know, through the central bank digital platform. Now of course there are still a lot of institutions need to be built.

You know, things like who are those foreign exchange dealers that can operate on this platform, platform, what would be the exchange rate that, you know, that we can execute these trades. They need to agree with who provides liquidity and what are the dispute settlement mechanisms look like and so on and so forth. Right.

And there’s also all these other privacy laws, data protection practices that they need to work out. But again institutions are built, right. And they’re not built overnight.

But I think that now the BRICS countries at least have seemed to come to terms with what would be the most likely way to promote the kinds of local currency trading and clearance among themselves. And they’re actively pursuing this kind of technological solutions and institutional building to make that happen. So I think that is encouraging.

But as you said, you know, it does require a lot of understanding of how monetary system works. Right. How this clearing system works.

So not to go back to this whole idea of well, we need to have a common currency backed by gold or oil that is not going to get them anywhere. Yeah.

Steve Grumbine
00:50:23

So this is probably my final question to you regarding BRICS. So once this is stood up and it’s a system, obviously China has done an amazing job with their Belt and Road Initiative.

The ports around the world, they’ve tied countries together In a less than predatory way. I won’t call it non predatory, but I’m sure it’s less predatory than what the US is doing.

But within that space, would you envision countries doing direct action through the US or would you see it going through the BRICS payment system to the US Swift system to create a bit of a demarcation, if you will? Or would you see these countries operating in two different payment systems? How do you envision interoperability?

Or would they be completely closed loops?

Yan Liang
00:51:11

I think as the way things evolve now, it does seem that there will be parallel payment system and here’s why.

Even if the BRICS architecture is able to build up and the Global South countries withdrawing, and again, many of them are on the line of partnering countries and that includes some of the very large emerging markets like Turkyei, Indonesia, Algeria and so on and so forth.

So it’s likely that you could have this kind of BRICS system expanded system to have a local currency trading and settlements clearance system within the Global South. But let’s face it, G7 countries still exist. They still hold a large weight of the global economy.

And at this point, I think it’s very unlikely they’re going to join the kinds of BRICS payment system.

So I think the very likely scenario is we do have the kinds of peril system where when the Global South trade with each other and invest with each other, they would use their settlement system within their own.

But then when they have to work with the G7 countries, then they would have to in some ways, I think, you know, use the current SWIFT or the US system for the clearance. Right?

That said, I think when you look at again the trend, it used to be that the developing countries, in terms of the emerging market trade back in the mid, I would say 90s, it’s very little, it’s about, you know, only 10% that the trade is between developing countries. By 2032, as a forecast, it will be 30%. So in other words, one third of the global trade is between the Global South countries from 10%.

And I think that would actually accelerate, right? Because a lot of these very important critical resources are in the Global South. Global South are really resources rich, right?

Be it in terms of young labor or critical minerals or any sort of agricultural and other commodities, they’re very rich in these natural resources. So it’s likely that trade among the Global South is going to continue to expand and accelerate.

And so that’s why I think this payment system will be really useful. And at some point, I think the G7 cannot ignore it, right?

If they wanted to buy these critical resources from the Global south, they would have to follow the terms of the Global South countries.

Now financial investment is another story, right, that I think in terms of financial investments, it’s still quite small.

In terms of global direct and portfolio investments between developing countries now it’s only about 11% of the total investment. So it’s still rather small. But the question is, does it really matter that much, right?

I think a lot of these financial transactions, if it’s not FDI [foreign direct investment], well, even for FDI, I think a lot is for tax evasion purposes and it’s for speculation purposes. So it is okay that, you know, we’re not attracting a lot of the portfolio inflows from the Global North countries.

I think, you know, it’s probably good to keep that kinds of financialization at bay.

And as you just mentioned, China does have a lot of interest to engage in belt and road initiative, even though they did make some sort of pivot, right? They, they don’t want to continue to finance very large infrastructure projects.

Just giving the fact that many developing countries are heavily in debt. Even though again, China is not accounting for a great majority of the debt in the developing countries, right?

Even for some of the countries that always said it’s China’s fault, like Sri Lanka, China actually only account for about 15% of Sri Lanka’s external debt. And for countries like Zambia or Ghana, again, China’s, it’s only about 10% of their debt. I mean, it’s a large bilateral creditor.

But these countries owe a lot more to bondholders instead of bilateral countries. So I do think that among the Global South countries, China could be a big investor, right?

Brazil or Gulf countries, Saudi Arabia, they have a close to $1 trillion in their wealth management funds. I think there’s a lot more real kind of investment that could take place among the Global South countries.

And in terms of technological sharing, and I also think there’s a lot of potential for China to, for example, share some green technologies. And we’re seeing that happening now.

So again, I think it’s important to understand that this kind of alternative payment system, even though they’re not going to replace the current dominant, you know, G7-led financial system, but at least I think they will be very helpful, right? To provide an alternative, a supplement and exert some pressures for these G7 countries to get their act together, right?

To behave in a way that it’s not always predatory, so to speak.

So I think there’s still a lot of value to create that kind of attractive payment system to facilitate trade payments and also investment for the matter.

Steve Grumbine
00:56:11

So this is a clarifying follow up and then I’ll let us close. But from a standpoint of transferring IP, intellectual property, to these countries that lack the value- added production.

You know, you mentioned earlier the role of SDRs and you said maybe we’ll get back to that. I see both SDRs and transfer of intellectual property rights to be key to any kind of real break to making this a viable system.

Can you touch on IP and the Global South and SDRs?

Yan Liang
00:56:43

Yes. So I think those are like you said, it’s connected, but they’re also kind of separate questions. Right.

So I think for SDR right now the biggest problem of course is still the SDR issuance is very much under the control of the United States. The most recent issuance of $650 billion worth of SDR, you know, it’s insufficient. It needs to be much larger. Right?

To really for COVID pandemic relief and for recovery and all of these. But the reason that only $650 billion was issued is because that is the minimum for the U.S. treasurer to approve. Right? Without going to the Congress.

So they only issue this match because clearly the US Congress is not going to approve it. Right?

So that’s one of the problems is that how much to be issued is pretty much controlled by the United States and the issuance is relatively small. And also the great majority of the insurance goes to the developed countries.

As a matter of fact, 58% of this issuance goes to the advanced countries. And they don’t really need them. Right? The developed countries, they don’t really need as much SDRs.

In fact, they have very low utilization rate of the SDR. In the developed countries it’s about 6%, the historical average.

Whereas for the developing countries who could really make use through those SDRs, their utilization rate was like 43%. They are not getting really much. Right? When you think about the great majority of the developing countries, way outnumber advanced countries. Right?

150-some developing countries only get about 42% of the new SDRs. China gets about 40 billion. And African countries getting, I think it’s about 5 billion.

I haven’t double checked the number, but it’s, it’s a very small amount. So I think that is a problem with the SDR.

If we wanted to use the SDR and make it really into an effective tool of providing liquidity and also I think in some ways could be more useful for development financing. We might need a separate episode to talk about the SDR mechanisms.

But at this point again, very little of the new issuance goes to the Poverty and Growth Trust which is basically used for development financing at the loan or no interest rate for the low income countries. So again, we need to change the way the SDR is both issued and distributed and also re channeled to really make good use of it. Right? So that’s one.

And of course to do all this right then you need to have a governance reform at the IMF and the World Bank. Well, it’s always easier said than done. Then in terms of the technological transfer, I think that it’s also a very interesting question.

I think it’s clear there is a technological monopoly by the United States, to a lesser degree by the Western European countries. Right?

Looking at AI [artificial intelligence], looking at these large language models, we know that it’s a developed country thing, it’s a US thing, then they are not going to transfer technology. By all means. Right now China could play a role here. Now China of course has its own interest, right, to protect the proprietary knowledge.

But at the same time, when you look at China’s engagement in Africa, for example, they did set up a lot of agricultural demonstration zones. They do set out a lot of technological demonstration centers and learning centers.

So I do think that, you know, when it comes to core technology, China is probably not going to transfer for free, of course, but in terms of sharing some technologies that China believes is in its interest, and a lot of times China does believe that there is mutual benefits, then I think there will be technology sharing in that space.

Again, I think that what Fadhel has been talking about, this grand bargaining that developing countries in Africa, in Latin America, they do have a lot of these critical minerals that China wants. Lithium, cobalt, copper, you know, you name it. China is very good at processing and refining these minerals.

But a lot of these raw materials are deposited in Africa or Latin American countries.

And so the way I think this grand bargaining could work is for these Global South countries to say, okay, if you want our critical resources, you have to come invest here. You have to share technology with us. Otherwise, we’re not going to just directly export some of these raw materials to you. Right?

Indonesia has been doing this, right? They have pretty much restricted and banned their raw nickel exports.

And so that enticed a lot of Chinese companies to go into Indonesia and set up these processing refinery facilities. Now it’s not a perfect system.

There’s still a lot of environmental issues and so on so forth, because mineral refining and processing is a very dirty business. So things could be done better.

But at least that demonstrates that for Global South countries, when you deal with China, not to mention the Western countries, is that you have to recognize collectively you do have bargaining power and you need to utilize the bargaining power, right? Instead of simply just ask for investors come in and take your resources and pocket benefits for the government officials and the political elites.

You really need to think about what would be the long term sustainable path, right. For the country’s development.

You maybe have some personal benefits in the short term, but this is not going to get you very far as a politician or as a country for that matter.

Steve Grumbine
01:02:09

Right?

Yan Liang
01:02:09

So I think that is important to, you know, work with China, cooperate with China, but also gather that kind of resolve and your bargaining power so that you can share the technologies and share the financing capacities and so on and so forth.

Steve Grumbine
01:02:25

That was wonderful. I think that it’s really important for people not to just say the word BRICS and not tie the other in, you know, these interconnecting points. Right?

Like all systems are complex at some level. The inputs, outputs, the connections, the various means of power and how things get done. And to me, IP is a real resource, right.

If you don’t have productive capacity to do X, Y, Z, you’re always going to be at the bottom of the value chain. And I think that part of the problem today is the structural adjustments of the IMF.

And the way the US has leveraged the SWIFT system and leveraged their dollar hegemony has really left these countries in a position where if that doesn’t change in the BRICS, that’s going to ultimately create another power vacuum where they are once again at the mercy of someone else. And to quote our friend Fadhel, you either have a plan or you’re part of someone else’s plan.

And I just want to make sure people think about these things because it’s not just to open shut. Okay, here’s the system. Okay, here’s the system. There’s a lot of things going on there, a lot of neural synapses in this new brain they’re creating.

And I really appreciate the way you laid this out. Yan, tell everybody where we can find more of your work.

Yan Liang
01:03:40

Right. So, you know, I think I joined a lot of interviews and, and so on and so forth, but I’m also writing a series of short essays.

A lot has to do with, you know, China’s global engagement and also China’s own domestic economy. So my working papers will appear in like, Levy Institute. And also I just recently joined a Global Development Policy Center at the Boston University.

So I think I would also, you know, start posting some of my work there. LinkedIn is the place where I think I will start to post some of my writing there. X or Twitter.

I usually post some of the short comments so you can find me there as well. And I also appear on CGTN quite a bit talking about Chinese economy and then some other medias and of course here. Right?

That I hope that we will be able to come back and talk about some of these very important issues and again, all money related, but goes far beyond that. So I think, yeah, I’m really grateful for this opportunity. Right.

That we convene and I always loved your thought provoking questions and some of the questions would really motivate me to do more research. So this is a cool learning process and I think again, clear understanding of the world that we lived in is very important.

And I think for people who very quickly go to, you know, disparaging MMT or BRICS, either out of genuine misunderstanding of what this is about or they have an agenda. Right? That they just don’t want it to be open about it.

So I think, you know, the more we learn, the more we clarify, the more we engage critically with these ideas, I think the better we’re able to really fasten through these thickest of complexities as intellectuals. But also in some ways we are active in promoting a more fair and just world.

And I think, you know, that it’s really important to come here and talk about this stuff.

Steve Grumbine
01:05:32

Yeah, absolutely. I really love this talk. Thank you so much, Yan, for Macro N Cheese and the parent organization Real Progressives.

We are a nonprofit, 501c3 based in the United States. We live and die off your donations. So please consider becoming a donor.

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End Credits
01:06:27

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