Japan's economic stagnation and what it signals for the US and global financial system
Glenn Diesen interviews analyst Einar Tangen on Japan's decades-long economic decline and its implications for the United States.
Summary
Glenn Diesen speaks with Einar Tangen, senior fellow at the Taihe Institute and the Centre for International Governance Innovation, and author of the Substack newsletter Asia Narratives. Tangen argues that Japan's economic stagnation traces directly to the 1985 Plaza Accord, which linked the yen to the dollar and hollowed out Japanese industry by forcing manufacturing offshore. He contends that the same short-termism and financialisation now afflicting Japan — debt-to-GDP ratios of 250%, stagnant wages, and a carry trade that has become a structural dependency for US Treasury markets — is increasingly visible in the United States. Tangen warns that the AI investment bubble, with valuations he describes as far exceeding those of the dot-com and 2008 financial crises, could trigger a systemic collapse that spreads globally. He also outlines how China is quietly preparing alternative financial infrastructure — gold vaults, yuan-denominated trade settlement, and Belt and Road economic development zones — to position itself for a potential dollar crisis.
Key Takeaways
FULL TRANSCRIPT
Introduction and the US-Japan alliance under strain
Glenn Diesen: I want to ask about Japan today, because you've been writing about it. I guess there are two thoughts on my mind. First would be a good place to start: the Japanese economic model, which appears to have reached a grinding halt. But I thought it would be good to begin with the partnership between the US and Japan, which appears to be — well, not necessarily unraveling, but it's definitely weakening.
The alliance between the United States and Japan has always been a key pillar of the US-led security order and economic architecture after World War II. And if you look at the economic component, some of this is not going well. Washington threatened Japan with tariffs going up to 25% unless Japan invested $550 billion into America. There are demands that the Japanese buy US agriculture, US energy, Boeing aircraft — that they move critical industries to the US rather than exporting — and pressure for a stronger yen. In the short term the Japanese can buckle to pressure, but over the long run, if they want to survive, they're going to have to find a way of diversifying away from the US. What are your thoughts? Because if you look at both the economics and the security aspect of this partnership, it doesn't seem like it stands on very solid foundations anymore.
Einar Tangen: No, it doesn't. Unfortunately, we have to go back in history to World War II. The US in essence conquered Japan and has been occupying it since the end of the war in 1945. We have around 50 to 60,000 troops there, and we forced a peacetime constitution on them. There was an investment. Japan did rise. It used to be known — "made in Japan" was synonymous with cheap junk — but they climbed the value chain to the extent that in the 1970s they became a threat to the United States. A lot of the things that are said today about China were then said about Japan: that they were trying to ruin the US economy, take jobs, that they were going to take over the world, replace us, own us. You had senators and congressmen with sledgehammers, standing outside very visibly, calling press conferences, and then beating up on Japanese cars and Sony boom boxes.
The Plaza Accord and Japan's economic hollowing-out
As a result of that, Japan had to sign — or were coerced, in their opinion, to sign — the Plaza Accord, signed in 1985, which came into effect in 1986. Since that time Japan has been going sideways. The yen was linked to the dollar, which made the yen more expensive. As a result, Japanese goods became less competitive. The Japanese started responding by building car factories and other factories outside of Japan — not only in the US, but around the world: India, Africa, South America to a limited extent. But this kind of hollowed out the economy. Today, the net worth of the Japanese economy in real dollar terms is less than it was in 1986.
Japan's unresolved post-war political settlement
So let's put these things together. You have a country that is very proud. They lost a war. They actually never repented fully. The emperor escaped any kind of justice, although the war was fought in his name and he was intricately involved — that was quite clear. But Japan became a special case. It wasn't like Germany, where everyone was called to account, where there were numerous war trials and those responsible were in fact punished, many by death. In Japan, MacArthur had his eyes on Russia. He wanted to roll through Korea, China, and then into Russia. He saw the threat of a socialist-communist government as more important than punishing fascists for their war crimes.
Just to give people a sense of scale: just over 100 million people died during World War II. Of that, 35 million were Chinese. Now, they weren't all murdered in bed or raped. Many of them starved to death or died because they were denied any kind of medication — literally died because they were untreated. When the Japanese came into China, they took everything: the food, the medicines, anything that wasn't nailed down. In fact, today you can go to Japan and discover all sorts of wondrous treasures that were looted from various Chinese cities.
There is this unsettled point in history where Japan never repented. This is the 80th anniversary year of the Tokyo trials. Yes, there were Japanese war criminals — including some of the major ones — who were tried, convicted, and some of them hanged. But the rest got off, and within a few years, guess what? They were running the government. Shinzo Abe's grandfather was a Class A labeled war criminal, yet he became prime minister of Japan. How is that possible?
What happened is that MacArthur, as I said, had his eye on what he considered bigger fish. He needed Japan for his supply line. So he decided that after the first trial there would be no more trials. The people who had run Unit 731 — they had done the same horrible experiments that Josef Mengele in Germany had done: freezing human beings, operating on people, slicing them open to see if they could be infected, spreading large-scale viruses in cities, dropping globules from planes that would break and spread infection, poisoning grain. This happened in multiple cities.
So when I talk about 35 million people out of China's population at that time, there is really nobody in China who wasn't affected by what the Japanese did, and they still remember it. The Nanjing museum, which commemorates the anti-fascist war and the Japanese massacre in Nanjing, is the second most visited museum in China. That gives you an idea that not only do people remember, but they do not want to forget.
Unfortunately, in Japan they have basically tried to erase that part of history. Even in their textbooks, when they teach children now, they do not talk about what the Japanese army did. They emphasize that Japan lost the war — and perhaps that's the only crime — and that in Nanjing it was the brave Japanese army that was preventing Chinese warlords from raping and pillaging against each other. Of course, completely untrue. The reason many of the perpetrators were not convicted is that they had sufficient time to destroy all the evidence. In Germany the evidence was preserved, which is why prosecution was possible.
The current Japanese political faction and the drive to "normalize"
Why am I mentioning this in conjunction with today? The same group that was put into power in essence by MacArthur and then supported by the CIA and the State Department is still in control. Takayishi is part of that. Now, she didn't have a grandfather who was a war criminal, but they stand for the same kind of heritage. This is the same group that in 1954 was plotting how they could get the ashes of Japanese war criminals — who had been executed, cremated, and scattered at sea so they could not be deified — into the Yasukuni Shrine. Which they have done. That gives you an idea of how long and how important this was to them, that these fascist tendencies continue, that they are unapologetic.
So they are pursuing a number of complex ends. They do not like having American troops — many of whom are people of color — in Japan. Japan is not famous for welcoming foreigners, and they really don't like it, especially when there are incidents involving rape and murder. So there is this desire to get rid of the foreigners. But how do you do that when you have a peacetime constitution that specifies they cannot involve themselves in aggressive tactics — they can only defend themselves?
Slowly they have been salami-slicing their way into creating an active army. And why do they want to do that? Well, Takayishi and Shinzo Abe made it clear that they want to "normalize" Japan. What does that mean? They want to write their own constitution, rearm, and be a power just like any other power. They cite North Korea and of course China. China is somehow the enemy. Why? It's convenient — the US has a problem with China. If Japan is close to the US, therefore joining in unison and saying China is the enemy is easy, except Japan is intricately economically connected to China. There are factories there. It's a huge market. This is not something the Japanese can walk away from and find other markets or other production bases. They can try, but it will be extremely expensive and will make their goods less competitive.
So you have this group intent on "normalizing" their country, while at the same time suffering from that second self-inflicted wound from the Plaza Accord in the 1980s, which has basically reduced their economy to nothing. They have demographic problems that would have occurred either way. But right now there is no answer for them.
Bessant, the yen, and the carry trade
What we saw a couple of weeks ago, when Bessant — who was the architect, along with George Soros, of the Asian financial crisis — came to the "rescue" of Japan is instructive. For those wondering about the Asian financial crisis: that was a crisis seen and precipitated by Soros and Bessant to make money. They saw a lot of hot money flows going into Southeast Asia and deliberately figured out a way to collapse it and then make a tremendous amount of money — billions and billions of dollars back then, when that was a lot of money. So here is Bessant now coming to the rescue of Japan.
I'm citing this so that people understand the situation Japan is in. On one hand, if they have a strong yen, 60% of their food comes from outside Japan and 98% of their energy comes from outside Japan. Therefore a strong yen is good — they can buy these necessities more cheaply. But on the other hand, a strong yen makes Japanese products less competitive, and the major component of the Japanese economy is exports. If they have a weaker yen, they pay more for necessities but can in theory sell their products more competitively. It's an exact push-pull situation that they find themselves in, with no clear answer.
She has never really addressed this. She just said we'll throw more money at it, we'll take our people's huge savings and try to convince them or shoehorn them into investing in the Japanese economy. But the problem with the Japanese economy is it doesn't need financing. It needs to be more competitive. Companies setting up in Japan — because of higher rates of everything, higher wages, importing goods — are not going to be as competitive as if you set up the same company in Indonesia, Malaysia, or Vietnam. So they're in this competitiveness trap and they have not figured out a way out of it.
It all came to a head a few weeks ago when the Japanese spent $50 billion US trying to defend the yen because it was plummeting. They couldn't afford to have that. Now, why did the US get involved? Because the Japanese were threatening to sell their US Treasuries to cover their short positions. And if that happens — they have significant holdings — the price of bonds falls and the interest rates on new issuances go up. That means the Treasury, which is going out for more and more borrowing to finance the massive amount of debt that Donald Trump has created, will pay higher interest rates. This scared Bessant. The US government is already paying over a trillion dollars out of a roughly $6 trillion budget in interest, and already about one-third of that — close to two trillion — is borrowed.
Let me put it simply: say I make $100,000 but I spend $150,000, and of that $150,000, about $25,000 just goes to interest alone. This situation is untenable. But Bessant and Trump are very short-term. They're hoping that somehow it'll all work out.
The reindustrializing of America isn't going very well. In fact, you've had more industry and jobs leave than you've actually created. All the talk about high-end technology, creating chip fabs and things like that, hasn't worked out either — long delays, higher costs, less competitive. They don't have the engineers in America, and America doesn't want to let in the engineers who could do it, who mostly come from Taiwan. There are so many endless contradictions going on as we speak.
So this is the situation Japan finds itself in. Bessant can't afford in the short term to allow the Japanese to sell US Treasuries because it would affect his borrowing costs. But is he a friend to the Japanese? No. Are they helping the Japanese? No. They're putting tariffs on them just the way they are on everybody else. Japan is in this situation where their leader is concentrating mostly on this kind of independence-normalization agenda while ignoring or not having a complete plan for the economic side.
Europe's parallel failure to reckon with its own history
Glenn Diesen: We have similar issues in Europe, as you know. After World War II, a lot of German Nazis from the army ended up working with the CIA, ended up in NATO's military committee, becoming NATO commanders. So it wasn't a complete cleaning-out in Europe either. Even now you see in Ukraine they're digging up and bringing home Nazis from World War II, having them shipped back to Ukraine and giving them burials with full state honors. So we haven't put the history quite to rest in this part of the world either.
Japan in the 1980s and the Wolfowitz doctrine
I did want to ask about the Japanese situation because if you went to Japan in the 1980s, you were visiting essentially what the future looked like. They were, as you said, the China of their day. But it's changed quite fundamentally now, and much of this originated in the 1980s. What I found interesting in the 1990s was the US outlining its strategy for global primacy, primarily with the Wolfowitz doctrine based on the 1992 Defense Planning Guidance, in which they outlined how to sustain unipolarity. And it was interesting because Japan was seen in two ways. On one hand, it was a key ally and a pillar of American power — if you want global primacy, you need partners, and Japan is a bridgehead in East Asia. At the same time, they recognized that Japan had the potential of being an independent central power. It was growing too powerful. As that US strategic document from 1992 outlined quite clearly: we can't accept countries like Germany or Japan becoming independent from the US. They still have to serve us. Which goes into the saying that the US doesn't have allies but vassals. There's a lot of truth to this.
How did the Japanese economic model break? Many would trace this to the Plaza Accord.
Einar Tangen: Well, that's the whole point. The Plaza Accord was our way of putting a spanner in the mechanisms of Japan. It was basically connecting the yen to the dollar and making it more expensive, and therefore Japanese goods less competitive, and in essence forcing them — if they wanted to be competitive, especially with their cars — to start creating factories not only in the US but around the world: India, Africa, South America to a limited extent. But this hollowed out the economy. Every job that's lost in Japan is not replaced somehow magically, and this is the problem. Wages have stagnated. They just don't go up. The cost of living goes up, but actual wages aren't. So if you go around Japan today, you see an economy that is in decay.
The cities are still bustling, but if you look at how people live — matchbox-sized apartments, enough money to live and eat most of the time. You now have elderly who are resorting to other means in order to get by, including sitting on park benches and welcoming strangers. It's a real problem. It's a stagnant society. And if you go outside the cities, you see beautiful homes that are empty. No one wants to live there, no one can afford to keep them up or restore them, so they sit empty. You can in fact still buy a Japanese house in a village not too far from a rail line at a very inexpensive price. But there's really no hope.
Japanese students are being graduated from schools. In the old days they were more or less guaranteed a job — they would become salary men for the large corporations: Sony, Honda, you name it. But that option isn't open anymore. The employment-for-life golden rice bowl doesn't exist anymore. They will now get rid of people. If you're not profitable, obviously the company has to look at that.
Where is Japan's AI? The broader failure of Western innovation
So Japan is changing, but it hasn't changed in concert with the global economic order. Where is Japanese AI? Does everybody ever wonder about that? It's the same thing I wonder about Europe: where is Europe's indigenous AI? Right now it's basically China and the United States. But in theory, South Korea, Europe, Japan — they should be vying for it. They have the engineers, the technological expertise, they have industries related to this including chip manufacturing. But they're not there, and this really bothers me.
China is doing it because they have no choice. They're being locked out, and they say: if we get locked out, we'll be owned. Those who own the IP for AI will basically be served by those who don't. They're well aware of the extractive model that the US likes to push. The idea is: I invent AI, I extract as much value as I can from it, I have a monopoly for a limited amount of time, I figure out ways of extending that monopoly, and I use that to increase shareholder value.
And this is one of the great dangers to Western society that exists today — this idea that a headlong rush towards short-term value will somehow make everything turn out okay. I've talked before about MBAs. I don't have anything against MBAs — I know many of them, good people. But basically they're taught — and not only taught, they're required, especially if they're on the management team or on a board — to maximize shareholder value. And on boards they say: you have to maximize shareholder value. If you can't agree with that, you can't be on this board. In fact, you can't be on any board.
But what does maximizing value mean? Does it mean the short term, the next year, which is going to determine the bonuses of the executive group? Or does it mean the long-term benefits of the company — long-term planning, the people who work there, the suppliers and relationships? MBAs are taught that that doesn't matter. That's something you manipulate. Just get your bonus.
The ideology of shareholder capitalism and the Powell Memorandum
So there are real issues. It's not capitalism per se — capitalism is just a description of a process. But when you make capitalism into an ideology and say that it will solve everything, that the invisible hand is somehow all-seeing and all-knowing, and you become the Chicago school — you substitute mathematical models and in essence claim that you have found God, and that God is the invisible hand — it hasn't worked out well. You don't hear much about the Chicago school anymore, but MBA schools are still turning out bright people who could perhaps be used elsewhere. They understand business, they can make money, but they're graduated, put into the junior executive table, and many of them rise to the top. When they do, they implement what they were taught to do, and that is having a problem.
In Japan it's a little bit different. You still have large companies controlled mostly by individuals. We've seen what's happened with Samsung — a guy went to jail but is still in charge of the company, and there are even attempts to say it was all political. Concentration of wealth continues and it's not helping society.
A lot of this comes down to the question of what you think government should do. Is government there to provide a fair, equitable society where there's opportunity, where the basics of human existence — healthcare, roads, communication, sewers, water — are provided, along with a working economy? Or is it supposed to respond to those who are most powerful and wealthy — be lobbyists or trained dogs responding to the wolf whistles of their particular sponsors?
You can see this very clearly in the United States. We talked before about the Powell doctrine — and this is not the Powell who was Secretary of State. This is the Powell who in 1972 wrote a secret memo, six months before he assumed a position on the US Supreme Court, detailing that it was necessary for wealthy families and companies to literally take over the government: take over the judiciary, take over the media, take over the think tanks, take over the universities, and in essence create a society run by oligarchs. One of the ways he laid the groundwork for this was making corporations into individuals. When you make a corporation an individual in the United States, individuals enjoy freedom of speech. They have used this argument successfully to allow corporations and wealthy individuals to give unlimited money to the candidates of their choice.
Unsurprisingly, as we have seen with Trump and many others, those who pay also play. We've seen billions and billions of dollars given out to the very people who gave millions of dollars to candidates. For them it's a very good return on investment: I give you a couple of million, I make a couple of billion. That sounds pretty good. But what's lost? The people. Society.
We have a situation where the stock markets are at all-time highs, meanwhile the majority of people — 60 to 70% depending on who you believe — do not have enough money in case of an emergency. They don't have $400. They're living paycheck to paycheck, at least in their own minds. They're not seeing the good life. They're worried about the existing life they have. Is government helping them? Is government providing a safe place where they don't need a gun to protect themselves? Do they feel free and safe when their children go to school, when they go to their place of work, when they're out in a public area?
Japan's government and the limits of populism
So in Japan right now, going back to the subject, I don't think that most people in Japan think the government is actually helping them. They vote for populists who promise they can take care of everything — that it's pretty simple, all we have to do is throw some money at it. But Japan is at something like 250% debt to GDP. Now, a lot of it is what they call the carry trade, and we can dissect the debt and it's not as bad as it seems, but it's still a massive number, way exceeding where the US is.
So it seems like many of these countries are lost. People expect more from the government than the government is able to give. There are long-term problems that have been brewing — in Japan's case since World War II, and then since the mid-1980s economically and politically — and they cannot be solved by one populist waving their magic wand. These are deep problems. They need long-term planning, they need shifts, they need stable governments willing to implement them. And today we don't have that.
When we start talking about Japan, we can talk about the US, we can talk about Europe, we can talk about many of the democratically elected countries — but you can also talk about ones that don't have democratic systems. Long-term problems take long-term solutions. Good governance is about governments that can do it.
I mean, recently Zhu Rongji, who was the premier of China — basically in charge of the government as opposed to the party, although he was a party member of course — made some decisions that were wildly unpopular. He broke down the state-owned enterprises that basically offered you a job for life, but not a very good life — you got a salary but there wasn't much else going to happen. He said that has to change. He instituted in essence not private ownership of property but private rights to property through leases. And this was the largest wealth transfer in modern history.
The US Treasury market and Japan's role in it
Glenn Diesen: You mentioned before that the US doesn't want Japan to sell its Treasuries, and I was thinking this is a common theme. Back in April 2026, Scott Bessant said the US was discussing dollar swap lines with Gulf states as well as countries in Asia. Many people portrayed it as bailing out or helping out the Gulf states, but in his words he said it was to prevent the sale of US assets in a disorderly way. So there's something refreshing about the honesty — that not everything is altruism here.
But in your article you had this nice chart about how not just many salaries and economies have begun to stagnate across the West, but the Japanese case was quite staggering — how terrible things are going. And I'm thinking: as the Japanese debt continues to ramp up, the economic situation gets worse, economic competitiveness is disappearing, and the whole economic model has to go back to the drawing board — as all of this is happening, we're seeing now that the US is in a very difficult situation and is seeking to extract benefits, assets, and investments from its own allies or satellite states. Something's going to crack. You see this in Europe, but I think Japan is definitely a potential candidate as well. What will happen if Japan begins to really melt down? Because in terms of the US bond markets, they're very much connected.
Einar Tangen: A lot of people always ask: how is it possible that a country would be borrowing at 250% of its GDP? Well, you have to understand the carry trade. Companies — and very large individuals — could go to the Bank of Japan and basically borrow money at 0%. Then you take the money and buy US Treasuries yielding somewhere between 2 and 3%. It's free money, right? You're carrying some risk in terms of the dollar-to-yen exchange rate, but it was largely fairly stable. So this was very, very popular. Many companies did this. They saw it as a way of bolstering their bottom line.
The problem is: how do you unwind this? Especially when the Bank of Japan has been increasing rates trying to jumpstart the economy. The zero-level borrowing wasn't helping Japanese companies — they weren't investing the money into Japanese industry or anything like that. They were just investing in Treasuries. So it was helping the US because it was buying Treasuries and lots of debt, but no visible help to the Japanese economy. The Bank of Japan wants to get more money into the Japanese economy — real economic activity, companies that are producing something, R&D, manufacturing — more jobs, more economic activity, higher wages. So they have been trying to keep rates a little higher.
Here's the problem: I'm not going to borrow at 2% and take the monetary risk if the return is only 4 or 5% and I'm concerned about the exchange rate. So people are trying to figure out how to unwind their positions where they borrowed at zero and had 2–3% returns. And that is a concern to the US government because they need buyers of these Treasuries. If they don't have buyers, they have to increase the rate in order to attract buyers.
If you look at the United States — the chart I cited — what people should understand is that central banks around the world have been lowering their positions in US Treasuries. The reason the US government is selling more is because they have been increasing the interest rates paid on Treasuries, either refinancing old debts or creating new debt. In order to attract money, they have to offer higher rates. But this also has a bad side effect: if five years ago I bought a 10-year Treasury at less than 3%, and the rate right now is getting closer to 6%, I've lost a tremendous amount of value in that bond. Now, I may not recognize the loss — I might say, well, I'll just keep holding it. I'm not getting much interest, it's basically just keeping pace with inflation, but I'm not recognizing the loss. I'll just hold on. Maybe in a few years Trump is gone, somebody changes something, rates come down. I think personally that's a fantasy given the amount of debt the US has, but they don't want to recognize these losses.
And the same thing on the Japanese side: if you try to sell the bond you bought many years ago, you're at a loss. You owe the Bank of Japan more money than you're going to receive from your sale. This is the problem being created. This is what Bessant is paying attention to.
The AI bubble and the risk of systemic collapse
You'll notice there's really no long-term plan. The reindustrialisation of America hasn't worked. That was Trump's big idea — he's going to beat everyone into submission with tariffs, force companies to start producing in the US in order to access the US market. But it hasn't been happening. So basically it's a bunch of short-term things, a headless horseman running in circles and getting very near a cliff.
And one thing that people should be paying particular attention to is the AI bubble. You start looking at the valuations, and then all of a sudden China came out with this different model. The thing you need to know is that Anthropic wants to sell you a token that does so much work for $30, and the Chinese will sell you the same token that can do approximately the same work for $0.50. Now, Anthropic's projections of profits and everything like that are based on $30, but the reality is that China has undermined that by coming up with a different, open system which is going to reduce it to $0.50. So that model is dead.
But the valuations of the companies involved — whether they're building data centers, developing AI, or making chips — they're all betting that somehow it'll all work out. And many of us believe that what they're betting on now is that they're too big to fail. They're such a large component of the S&P, such a large component of the American economy. Remember: over 50% of investment last year was related to these server farms. Think about that. If you withdraw 50% of that, if it all collapses, you have a huge bubble that would precipitate a massive problem for the US. Money disappears, people are broke, paper billions turn into paper nothing. And you have something akin to the Wall Street crash and the financial crisis all rolled into one.
If anybody's interested, they should take a look at the graphs that show the different bubbles — the dot-com bubble, the financial crisis, the savings and loan bubble. These are all in the US. Then compare that to the amount of money going into AI. These bubbles all kind of follow a certain line. AI is so far above that. It is so dangerous, and unfortunately it's unsupportable. Even at best-guess revenues, it doesn't support the valuations of these companies. So it's heading to a problem, and unfortunately we might be getting very near the point where the balloon bursts. And then it has not just one effect on the American economy — it's a virus that spreads through the world and would bring down economies. It would have really, really bad consequences for everybody, including China. This is not something where everyone gets off scot-free.
China has been preparing for this a lot longer. They have been very strategic about possibilities. But in the West, the gates are unguarded. You hear nothing from Europe talking about these dangers in any real form. You have a few economists saying, yeah, we should be concerned. Michael Burry, who called the financial crisis, is aggressively taking short positions, thinking he's going to profit by the demise of the financial system. Well, he might do that, but then the question is: what do you do with your money? If we have the kind of cataclysmic economic downturn that I anticipate here, having lots of cash isn't necessarily going to be great. What is that cash? Dollars? Well, dollars might have a precipitous fall, because no one wants to buy the debt of the US amid economic contagion. Things are going to be less about gold and more about rice and potatoes and oil — things that are absolute necessities. You'll still have commerce, but it could be very, very different. And I'm not trying to be alarmist. I'm just pointing out that we are heading towards a cliff and no one seems to consider it — kind of like Brexit for the British. They jumped off hoping the rocks would be nice and soft. So far, they haven't been.
How China and others are preparing for a dollar crisis
Glenn Diesen: What are countries doing to prepare for this? Because as you said, if the whole world economy goes down with it, it's hard to avoid the splash zone. But when you look at countries like China, what are they doing specifically to minimize the impact on themselves?
Einar Tangen: It's not just China. China has almost 140 primary trade relationships where they're the largest importer or exporter to those countries. And they've set up alternative financing systems, because if the dollar goes and no one wants to use the dollar, then you have a real problem. Also because the US has been weaponizing SWIFT and putting pressure on the system — we all know this. And lately there's been a lot of talk about the fact that the US has just transferred all of Venezuela's gold into their own vaults. I don't even know what that means. You just took the gold. I mean, generally I would say it was a heist.
You have these situations where the US is acting with impunity. There is less and less faith in the US dollar system. China has CIPS — the Cross-Border Interbank Payment System. They've been putting up entities that can do cross-border trade, and it's very interesting how they're arranging this. They are not making the Chinese yuan fully convertible. That means that if I'm in China right now, in order to convert yuan to US dollars, it's difficult. I have to show how I made the money, there are certain prerequisites, and there's only so much available — you have a limit. So for Chinese individuals it's very hard to convert. Now, that's separate from the Chinese yuan as a trade currency.
What you can do is — a lot of trade right now, for instance between Russia and China, between Iran and China, and many other countries, is being done in renminbi. So what they're doing is making it easier. Two things people should pay attention to.
One: they recently created a mechanism so that if I need to pay somebody off — there's a balance of trade issue and I need to settle a debt — in the past I might have had to sell the Chinese bonds I held, and that's expensive because then I might have to buy them back. Instead, the Chinese said: we're going to be more like the dollar. We will create mechanisms so you can borrow against your bonds to do any settlement that's necessary. It's less expensive — very, very cheap in terms of interest rates — and then you can pay off the interest or pay off the debt when that's done.
The second thing, which I find very interesting, is that China is setting up secure gold vaults in other countries. Why would this be important? Well, you start looking at the amount of gold China has, and you figure that if the US dollar goes down, probably gold goes up. China will have enough gold where they can back their overseas Chinese yuan with gold. And why would that be important when the world is going topsy-turvy? I think it would be very, very important. It adds a level of security, people would have more faith in it. And because China is not using any kind of ideological litmus test for the trade they do — they trade with countries that are democratic, they trade with countries that are not very democratic, it's not about the internal politics, it's just about the trade — this could be very, very attractive.
The fact that they're putting these vaults overseas — they have one in Hong Kong and there are plans for others in the Middle East and other places — makes it clear in my mind that they're preparing for the possibility of a run on the dollar. And then what do you do? You have to have an alternate currency. There has to be some sort of alternative.
Now, do they want to be like the US dollar? Absolutely not. I've talked to many economists here and they say: we learned our lesson. The warping effects of trying to be the world trade currency are too great for any country to handle, even China. What we want to do is secure overseas payments and keep our domestic economy apart. China does not want what are called hot money flows — investment flows, basically betting money — coming into China and roiling their stock markets. They want the stock markets to perform based on the real economy: you invest, four or five years later the company has a good idea, starts making profits, the value of your shares goes up — the old way, as opposed to betting on what the Bank of China's interest rate is going to be or figuring out if there's a quick play on one particular stock. It's one of the reasons they're not interested in the options trading business here in China.
So they're saying: we want to keep our economy real, and we want to make sure that people have confidence making trades with us. This is what they're preparing for. Russia, Iran, many other countries — not just those hostile to the US. The UAE is a clearing house for Chinese yuan trades, and they're obviously very close to the United States. So there's no ideological litmus test. It's just: those who are willing to work with China, China wants to work with.
The Belt and Road, dim sum bonds, and the shift away from dollar-denominated debt
It'll be a very different game from the one the United States played with the IMF and the World Bank — putting conditions on loans and things like that. China has switched to a model which is less about government-to-government borrowing and more about: is the project viable? So they'll lend based on the project, and that's very important because it keeps them out of the political back-and-forth when governments change. If the project is a good project and can support itself, chances are it'll continue and continue to make money. It's not a political link. But if the money was lent to a political party that was in power and they get out of power, then of course the other side will say corruption, this is a bad project, this is debt-trap diplomacy, and all of these things. So China has learned a hard lesson and they're continuing to adjust.
China is also committed to the Belt and Road Initiative. As Xi Jinping said last year, the framework of the Belt and Road is there — you have ports, airports, seaports, roads, railways — and this sets up a basic connection within many countries where they can get their goods out and get goods coming back in. Now he's been talking about "coloring in" this framework, and what I understand from that is they're talking about economic development zones — actually pushing Chinese companies to start investing and creating jobs in those countries. Why? Because from the Chinese perspective, the world grows together. If they create jobs in these countries, people can live, they have disposable income, and guess what? They're going to buy goods. China believes it has the ability to sell those goods to those people because they have the right technology, the right quality, and the right price. So they're willing to be competitors. Whereas the US and European model — the Europeans seem to be complaining a lot but doing very little, and the US says you've got to buy our stuff or else — I don't think either one of those is very sustainable.
China is definitely preparing. Other countries — I've talked to representatives from South America, Africa, and elsewhere — they understand the broad brush strokes of what's happening. They're very interested. They're just trying to figure out how it affects them. Right now they're all in difficult situations. A lot of them have dollar-denominated debt, and they're trying to figure out how to exchange it. Dollar-denominated debt for countries — say Morocco — they'll be paying anywhere from 8 to 10% on project loans, 6 to 8% on sovereign loans. Whereas dim sum bonds — bonds issued in Chinese denomination — those are less than 3%. So right now you see countries from all over the world descending on Beijing asking how they can convert their dollar-denominated loans into dim sum bonds.
But this creates a problem for the US. If there's no appetite to buy US bonds, to invest in the US, or to take loans from US banks and institutions, you're drying up a pool of capital. People don't want to hold these instruments. It'll be very interesting to see how it goes.
I caveat here for anybody listening: I'm generally pretty good on the direction, but not the timing. If I were good on the timing, I would be George Soros and I'd be a lot wealthier — pricing up large yachts or small countries.
Glenn Diesen: Jim Rogers often makes the same point. He sees the direction, but his timing is not great. But I think it's difficult to get the timing right. Anyway, thank you so much for coming on the program and fleshing out this development.
Einar Tangen: It's always a pleasure to talk to you, Glenn, and I really appreciate the work that you're doing. Having an independent voice that's bringing forth a lot of the nuances that are lost in the dominant press is extremely important, especially for those who are willing to engage with it.