Not long ago, I was talking about recent financial events related to an article I penned in The Prickly Pear with a small gathering of people, who are generally quite knowledgeable about money. A few got completely lost when discussing the dollar and its “reserve status”. It seems when one starts talking about the Bretton-Woods treaty and the “petrodollar”, eyes just want to glaze over. It just seems too arcane for most of us.

That is too bad because it really is important.

I used an example to try to convey the importance, and while imperfect, it seemed to turn the lights on in the mind of some of my audience. Like all examples, it cannot get into granular detail or it won’t be understood by most people. We will take the risk that we mistreat some of the complexity to be understood.

I explained: what if my neighbor was given a special license that allowed him to counterfeit his own money legally, and that he (the neighbor) could use this special money to pay all of his debts and also could use this money to purchase fuel for his car and home? This privileged neighbor could own multiple homes and properties because he could print money to pay his mortgage payments. He could own all the cars he might want because he could print the money for car payments and also print the money to buy fuel.

I then asked, “do you think this neighbor, having this special privilege would have a higher standard of living than you or me or any other of the households in the neighborhood?  

That is the power of the “inordinate privilege” bestowed on the U.S. dollar. We alone among the nations can print money to pay our external debts and our dollar is used exclusively to pay for oil. Many other commodities also are paid for in dollars.

How did the U.S. get this valuable privilege? And why is the Biden Administration destroying it?

There are three legs that support dollar hegemony. Here is a very brief story of how this support for the dollar was put in place.

The first is the inherent economic, political, and military power of the US. After World War II we had most of the gold, the largest economy, a good reputation for the rule of law, and the most guns in the free world. The United States, due to its tremendous power would take over the role of issuing the reserve currency of the world from a declining Great Britain that was destitute from two World Wars just 20 years apart.

Secondly, the power comes from treaties. In July 1944, scarcely a month after the Normandy invasion, 700 delegates from 44 nations gathered at a grand hotel in New Hampshire (The Washington Hotel in Bretton-Woods) and worked out the international financial architecture for the post-war world.

The net result was the use of U.S. dollars as a reserve for other nations’ banks, and other institutions were formed such as the World Bank, and the International Monetary Fund. In subsequent years, there were add-on institutions such as the G-7, G-10, and G-20 nations.

By treaty, the U.S. dollar was convertible on demand by foreigners to gold. That is why the world agreed to make the US dollar special. Ironically, U.S. citizens were denied this previous right in 1933.

This ability to convert dollars into gold was later abrogated by President Richard Nixon in August of 1971. But since the dollar was so important and so entrenched in the structure of trade and banking, the world continued to accept the dollar as if it were gold-backed because there was really no alternative.

But by 1974, it was clear that something additional was needed to shore up the dollar. Having broken the tie to gold, the dollar was in a sense tied to oil.

The third leg supporting the dollar was an agreement hashed out by William Simon, U.S. Secretary of the Treasury with the Kingdom of Saudi Arabia in 1974. We agreed to protect them, to arm them, in turn, they agreed to accept ONLY dollars in payment for oil. Hence, while gold was no longer backed by gold, everyone needed dollars to buy energy. That made the dollar more valuable. The so-called Petrodollar was born.

These arrangements have not been perfect by any means.  There have been recurring currency crises, and the world has chaffed at times at profligate spending by Washington, the issuer of the reserve currency. We have had to arm and support oil-producing regimes that we may not like. It has entangled us in Mid-Eastern war and intrigue. But with all that, we are that special neighbor who has it so good.

To remain in this position, we must remain powerful. We must remain a rule of law nation, control our spending and deficits, and keep our commitments to Saudi Arabia if we expect them to keep their commitments to us.

There is an added complication. The dollar is needed in great quantity for the growth of international trade. That means the U.S. has to supply those extra dollars by running a balance of payments deficit. This, in turn, can hollow out the industrial capacity of the nation because a deficit in trade means we import more than we export.

The Belgian-born U.S. economist Robert Triffin called this a dilemma because, over time, a country with a chronic trade deficit grows weaker, and you don’t want a weak country issuing the reserve currency. It is a paradox that is not easy to solve.

Now fast forward to today.

The U.S. government in the course of putting on punishing sanctions on Russia, seized without any legal proceeding, the sovereign reserves of Russia. That weakens the reputation for rule of law and moreover showed that owning U.S. dollars is a promise to be broken when it is convenient for the U.S. to do so. It also showed that owning reserves outside of the home country of the owner, may not be safe.

This seizure of Russia’s reserves assets was part of a package of sanctions that may well have been necessary and received the support of our European and Japanese allies. But the bank reserve part of this package may prove quite problematic and should have been avoided.

A bank reserve is not a reserve if it can be defaulted on or seized. And if the dollar reserves can instantly be made “not money”, then what the heck is it?

This move is extremely damaging as a precedent and other nations that potentially could get into conflict with the U.S. have taken note. Many of these nations are our biggest creditors and trading partners, such as China. But for sure Japan, Germany, Brazil, India, and Mid-East oil producers have some appreciation for what has just happened.

It is likely some sort of new reserve currency and bank reserve arrangements may have to develop. Certainly, something big has changed here that was not agreed to by all the countries that ratified and later joined the Bretton-Woods currency structure. The new arrangements will have to answer questions such as: where will reserves be held if they are to be secure? In what form can reserves be held and remain secure? This seems a logical response to what we did. We have weaponized the international reserve and payments system.

This likely adds to the stature of gold since it already is a competitive reserve asset to the dollar, it is not money backed by any given nation, is not a promise, and can’t default. It is politically neutral.

New arrangements might be gold, a basket of currencies, or a basket of commodities. However, that is a discussion for another day.

In addition, the exclusive use of dollars for oil payments is now in jeopardy. Biden and his State Department are about to sign a major agreement with Iran, allowing them over time to get nuclear weapons. That Russia is part of the talks is insane. This is extremely damaging to other non-Shia oil-producing countries that are fighting Iran in Yemen and elsewhere. The Wall Street Journal and others are reporting that Saudi Arabia and other producers are now discussing using currencies other than dollars for payment.Press reports indicate they would not even answer Biden’s phone calls.

In short, our addled President and his new age advisors, are busily tearing up the international banking and payments architecture as we have known it. It may be intentional or it may be because they are that stupid. It is hard to know.

Also, while tearing up the international currency system they also are blocking a rational response to this crisis, more oil production at home. Environmental fanaticism is more important than your standard of living.

As for the dollar, this could well start a trend, which already had some momentum, to move away from using the dollar as the reserve currency and the oil payments currency. Currently, there are no other currencies capable of replacing the dollar in the short term. But longer-term, if China and India start to pay for oil in other currencies, the process of dollar erosion begins in earnest.

The big dollar holders have a problem. How do you move away from, and weaken, the currency that you have so much invested in? It is a bit like milking a rattlesnake. It will have to be done carefully.

In practical terms, it means over time, it will reduce future demand for dollars. A falling dollar will add to our already punishing high rate of inflation. Foreign goods will become more expensive. All that cheap stuff in Walmart will get more expensive, as will oil, minerals, and credit.

A weaker dollar may make the U.S. exports a bit more competitive in the short run, but we could achieve much the same thing by deregulating, cutting taxes, and curbing the excesses of our legal system. In short, more productivity. But the tort bar gives huge sums to Democrats as do radical environmentalists, some of which get their funding from Russia.

What about the cost of borrowing, or credit? When foreigners hold dollars, they actually don’t hold them not in cash form, but U.S. Treasury Bonds. Thus, less demand for dollars means less buying by foreigners of our bonds. That means more bonds (which support our huge budget deficits) intersect with less demand. The value of bonds falling means higher interest rates for all of us.  

Even without adding any additional debt, the U.S. must roll over $17 trillion over the next two years. It is not helpful to make the dollar less attractive.

In short, Biden is attacking all three legs which gave us dollar hegemony and the benefits of the special privilege. The end result will be higher inflation, higher interest rates, a lower standard of living for Americans, and continued conflict. It likely will cause the world to break into trading and currency blocs, and diminish the process of globalization and integrated trade. It unwinds much of the dominance the U.S. achieved after World War II.

Biden has done this with relatively few people understanding the full implications of these actions and with virtually no input from Congress. It appears he feels the best way to deal with a dictator like Putin, is to act like one himself. Or, he and his advisors are just that foolish.

Do you remember that wealthy neighbor who had the “special privilege” to print money to pay his debt and buy oil? He is just about to lose that special situation that made him wealthier than the other neighbors.

Remember in November who did this to the country and to your standard of living.

Peter Schweizer is no stranger to the seamy side of American life and politics.

Beginning with his 2011 book Throw Them All Out: How Politicians and Their Friends Get Rich Off Insider Stock Tips, Land Deals, and Cronyism That Would Send the Rest of us to Prison, Schweizer has routinely uncovered instances not just of malfeasance and self-dealing, but of deeply rooted, seemingly endemic corruption among America’s political class and ruling elites. Extortion (2013), Clinton Cash (2016), Secret Empires (2018), and Profiles in Corruption (2020) are more than one-off exposés. In the great tradition of American muckraker journalists, Schweizer’s diligently researched and detailed works caused a furor when they were released. Clinton Cash provided enough convincing evidence of “pay-to-play” dealings to prompt an FBI investigation that later roiled the 2020 Presidential Campaign. The Stop Trading on Congressional Knowledge (STOCK) Act was passed in 2012 after Schweizer appeared on the television program 60 Minutes to talk about his findings in Throw Them All Out.

Readers of Schweizer’s newest book, Red-Handed: How American Elites Get Rich Helping China Win, will come away with the conviction that even more needs to be done to root out corruption and self-dealing, not only on Capitol Hill, but in Silicon Valley, on Wall Street, and in the halls of the Ivy League. Schweizer and a team of forensic investigators spent more than a year combing through corporate records, legal filings, financial transactions, FBI and Congressional reports, and other documents to research this book. Their findings are the jaw-dropping story of how leading Americans have become unwitting and, more often, witting collaborators with the repressive Chinese government for personal gain. This is a book that reveals the Machiavellian design and the broad reach of Beijing’s long-term strategy of courting and buying influence in the corridors of power in the United States.

China’s Strategy

The Chinese Communist Party (CCP) has, since the days of Mao with his Leninist visions, insisted that the profligacy and degeneracy of western culture would be its undoing and that the greed and naivety of developed western nations would also ensure that strategic and economic benefits would always flow to China. The yang wei Zhong yong, or “make the foreign serve China” strategy is fully exposed in Red-Handed. Schweizer describes how “Beijing offers deals, inducements, praise, and access to seduce foreign elites into serving their interests.”

But Beijing is not looking to make American elites slavish devotees of the Party; there are enough of those in China. American collaborators, according to Schweizer, are permitted “some level of public criticism,” to preserve their credibility and especially so when they influence decisions that benefit the regime of China’s President Xi Jinping. It’s a shrewd tactic described as “big help with a little badmouth.”

The big help Beijing seeks from highly placed officials in government, including sitting members of the House and Senate, is needed to kill legislation inimical to China’s interests, forestall investigations and inquiries into the CCP’s abuses, and burnish the regime’s image. Schweizer details how members of Congress “have profited greatly from the financial largesse of Beijing,” and “pursued policies beneficial to the regime and verbally supported some of its most brutal actions.”

Senator Diane Feinstein, for example, was an early and aggressive supporter of China’s entry into the World Trade Organization. At the same time her husband, Richard Blum, was investing hundreds of thousands of dollars in Chinese companies and building the foundation for a multi-million dollar fortune. In 1994, when the U.S. Senate considered sanctions on China for its continued human rights violations, Feinstein argued vigorously against taking action that would “inflame Beijing’s insecurities.” As she made these arguments, her husband was raising tens of millions of dollars for his Newbridge Asia fund to invest in Chinese companies. Feinstein has always maintained there was no connection between her political position and her husband’s business in China. “I don’t know how I can prove it to people like you,” she once said to reporters, “maybe I get divorced.”

Feinstein is not alone. Schweizer describes how politicians rely on family members to insulate them from charges of direct collusion for gain. Red-Handed delves into the myriad business dealings of Hunter Biden that leveraged the family name and political connections to amass $31 million in assets and hundreds of thousands of dollars in interest-free loans from Chinese companies and foundations. What separates Schweizer’s reporting from titillating hearsay are the sources he relied upon that include U.S. Treasury Department Suspicious Activity Reports, the U.S. Senate Oversight Committee Report, thousands of e-mails from Biden business associates, and nearly twenty-five thousand e-mails from Hunter Biden’s laptop.

Red-Handed also describes the business dealings in China of the families of Senator Mitch McConnell (a disappointing reprise of the reporting in Secret Empires), Speaker Nancy Pelosi, and both Presidents Bush. In every case these dealings are not investments in Beijing boutiques; these are multi-million dollar stakes in financial institutions, investment firms, and large Chinese corporations and industries.

The China Lobby

Schweizer also describes the ways China is getting big help from Washington lobbyists and consultants—firms that are packed with retired politicians and officials from past administrations—all of whom are skilled at working their networks inside Congress, in various federal agencies, and in leveraging their connections in China. These are firms that “advise and help the Beijing government navigate issues that will threaten their interests,” and steer both the Chinese government and corporate clients through the labyrinthine ways of Washington. Consultants—senior American diplomats, secretaries of state, ambassadors—trade on their Chinese connections to grease the skids for western countries seeking to do business in China.

What is especially disturbing about these registered and unregistered lobbyists is the work they do on behalf of Chinese companies wedded in what Beijing calls “civil-military fusion.” ZTE Corporation (military telecom support), Huawei (linked to Chinese intelligence operations), COSCO (often called the fifth arm of the PLA Navy), and others with solid links to China’s government-controlled defense industries and Chinese intelligence are all well-monied clients of K Street lobbyists. Consultants seem wholly indifferent to the deal-making that brings priceless intellectual property and dual-use technologies to companies that grow both China’s hotly competitive industrial and commercial base and its increasingly capable military forces.

Chinese-American Partnerships

Even more alarming is the support Beijing has received for both its military and the surveillance state from the tech giants in Silicon Valley. Here Schweizer describes Americans who are fueled by their technological ambition and achievements, “well-known for their wealth and the hubris that comes with it,” and who see themselves as enlightened “citizens of the world.” They also are strangely enamored of Chinese leaders (Facebook founder Mark Zuckerberg asked Xi to name his first child), the power of one-party rule to “get things done,” and of authoritarianism to make by fiat sweeping changes to Chinese society.

Schweizer, for example, describes how a hopelessly naïve Bill Gates, lured by China’s lucrative and massive market for tech, repeatedly claimed that Chinese efforts to censor the web would fail. That was in 1995. By 2005, Microsoft had launched new software, MSN Spaces, in China, that included sophisticated algorithms to automatically censor blogs, searches, and websites. The resulting controversy over state-orchestrated web censorship boiled over in 2010 when Google famously began its battle over search engine restrictions—blacklisted websites and search terms about religion, human rights, peaceful protest, and democracy— and eventually abandoned the Chinese market.

But there was more to the Google saga in China. Red-Handed describes how in 2017, the once uncompromising tech giant founded the Google AI (Artificial Intelligence) China Center, in Shanghai, supported by hundreds of Chinese engineers. Their mission was to research “machine learning that would classify, perceive, and predict outcomes based on massive amounts of data . . . the sort of work that military and intelligence officials would want from AI.” Other Google AI research partnerships were established with two Chinese universities in 2018. The help Beijing seeks from Silicon Valley’s tech industry giants is inextricably linked to dual-use technologies. The military-industrial complex in China is entwined with hundreds of Chinese companies and even with those that represent significant investments by U.S. corporations. Intel, Cisco Systems, Twitter, and Tesla have invested heavily in China and in Chinese organizations with deep ties to the military.

Red-Handed is a book that exposes how both Republicans and Democrats, liberals and conservatives, those on the far right and the far left, are all engaged in sometimes naïve and often heinous self-dealing with China.

The author also argues that China’s spectacular rise as a world economic power would not have been possible without significant investment capital from the West. But the source of that capital counts for more than lucrative investments in China.

Beijing has benefited enormously from its close relationship to Wall Street, in ways that are similar but also different from the ties it enjoys in Washington and Silicon Valley. Wall Street titans clamoring for opportunities in China have been seduced with financial riches, accolades, and appeals to their self-importance. It has worked fabulously well for Beijing, leading America’s top capitalists to praise the dictatorial regime, help finance its operations, and even fund some of its propaganda efforts.

Over the years, whenever Congress or any administration would threaten to take a tough stance on China’s trade protectionism, currency manipulation or technology theft, “Wall Street chiefs used their influence to persuade them to back-off.”

Some Omissions

Red-Handed is a fine piece of investigative journalism marked by solid research, good reporting, and clear writing. That said, some of the research draws on secondary sources, and Schweizer also leans here on his previous works. In addition, there are in this book odd digressions in the narrative and curious omissions. In the chapter, “Higher Education,” for example, Schweizer describes the $30 million donation Chinese billionaire Joe Tsai made to Yale and probes the implications of unreported Chinese donations to U.S. colleges. Then the author launches an odd segue to discuss Tsai’s ownership of the Brooklyn Nets, the National Basketball Association’s growing dependence on its market in China, and how the league now genuflects in the direction of Beijing.

Schweizer also omits any discussion of the Beijing-funded Confucius Institutes on American campuses. A discussion of the ways in which China uses that soft power approach would have been illuminating even if the number of Institutes has dwindled from a high of 103 in 2017 to just 21 today. That decline came in the wake of the 2017 study by the National Association of Scholars that laid bare Beijing’s goals to indoctrinate American students, disseminate propaganda, conduct espionage, and monitor the activities of Chinese students and Americans of Chinese heritage. Except for a brief mention of Alibaba’s purchase of the South China Daily News and the resulting censorship of its editorial content, Red-Handed is surprisingly silent about America’s media elites and the power they exercise in American society and on social media to shape views of China.

Leveling the Playing Field

But there is more to this book than its eye-opening record of greed and hypocrisy on college campuses, Capitol Hill, Wall Street, and in Silicon Valley. Schweizer argues that Americans, since the days of the founders, understood foreign money, influence, and corruption were a danger to the Republic. He also argues that existing laws—the Foreign Agents Registration Act (FARA) that requires individuals in the United States who act on behalf of foreign entities to register and describe their work to the Justice Department, and the Federal Election Campaign Act (1974) that bans foreign nationals from making political contributions to U.S. elections—need to be strengthened.

In Red-Handed, Schweizer sensibly calls for an outright ban on lobbying for companies linked to the Chinese military and intelligence. He also recommends delisting those companies and China investment funds from the American stock exchanges, in effect closing off market capital to a sizeable sector of the Chinese economy. Schweizer is also asking to level the playing field with his recommendations that Wall Street firms and shareholder activists demand more transparency and apply the same environmental, social, and governance standards to Chinese companies as are demanded of those in the West. American colleges and universities, investors, and corporations should also be banned from joint research on Chinese military and intelligence projects.

These are draconian measures by any standard, but they are also rooted in a hard-headed appraisal of the decades-long policy of engagement with China. That policy has failed, Schweizer argues, and instead it has only enriched a corrupt class of elitists and emboldened a wholly authoritarian, repressive, and aggressive regime in Beijing. It has given that regime economic muscle and increasing military might and fueled the ambitions of its leaders to amass power and mount a serious challenge to the liberal, democratic world order.

Red-Handed currently sits atop the New York Times best-seller list and is likely to remain there for some time as the book attracts readers on both sides of the ideological spectrum. The author has been skewered by some critics as a mouthpiece for the right wing of the American political scene. Schweizer has even described himself as a conservative libertarian and has earned the enmity of voices in the media and on the political left. But there is no conservative bias that can color the work of exposing corruption in high places. Red-Handed is a book that exposes how both Republicans and Democrats, liberals and conservatives, those on the far right and the far left, are all engaged in sometimes naïve and often heinous self-dealing with China.

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This article was published in Law & Liberty and is reproduced with permission.

The last couple of years has witnessed extraordinary spending by the federal government. It has been quite the party. Figure 1 shows government spending since 2000.

The increase to 30 percent of Gross Domestic Product (GDP) in 2020 stands out. Government revenue, also shown in Figure 1, does not jump. Federal government revenue in 2020 and 2021 is not particularly higher or lower than in earlier years. The increase in spending was financed by dramatic increases in debt. Public debt issued by the federal government increased from 107.4 percent of GDP at the end of the fiscal year 2019 to 127.6 percent two years later. As Figure 2 shows, the increase and the level are quite extraordinary.

Interest rates have been relatively low recently, which makes this level of debt not as onerous as it could be. In fiscal year 2021, the average interest rate on public debt was 1.8 percent per year. The low level of interest rates in the economy has made it possible for the federal government to borrow at historically low rates and to have relatively modest interest payments.

There is every reason to expect these low rates to disappear in the next year or two. In 1981, after the Great Inflation, the federal government paid an average interest rate over 13 percent in 1981 and 1982.

Inflation in the United States today is running over 7 percent per year; the low level of current rates will not persist. Whether the level of rates gets to 13 percent depends in part on the Federal Reserve. The Federal Reserve increased short-term interest rates at its meeting on March 15. Given the level of inflation of over 7 percent per year, there is little doubt that the Fed’s target interest rate and the interest rates paid by the Treasury will be rising quite a bit over the next year or even two if inflation is to be subdued.

The implications of higher interest rates for the federal government’s budget are not appealing. Even at the low average interest rate of 1.8 percent per year, interest payments were 12.7 percent of federal government revenue in fiscal year 2021.

What will happen when average interest rates on public debt increase? Holders of public debt today at 1.8 percent are losing on average more than 5 percent of the purchasing power of their funds in a year. An average interest rate of 5 percent on public debt suggests interest payments equal to 35 percent of current federal government revenue. This interest rate is hardly an attractive proposition though. At an interest rate of 5 percentage points, anyone holding public debt at current inflation rates still would be losing 2 percent a year in purchasing power. An average interest rate of 7 percent, high relative to recent interest rates but not high relative to recent inflation rates, would require 50 percent of the government’s revenue.

The Federal Reserve is currently committed to a slow increase in interest rates. A slow pace carries its own risks for controlling inflation. It does imply, though, that these extraordinary levels of interest payments compared to federal government revenue will not be reached in the near term. Just later rather than sooner.

There is a dilemma here though. Raising interest rates slowly given the current high inflation will let inflation get worse. Raising interest rates quickly has the potential to make the federal government’s budget deficit dramatically worse.

Sooner or later, absent substantially lowering government spending or raising taxes, interest payments will overwhelm the government’s budget. The situation might even be termed a sovereign debt crisis because all the spending, revenue, deficit, and inflation choices are unpalatable.

One plausible resolution of the dilemma is to increase inflation even more than people expect. This would inflate away the extraordinary debt issued in the last couple of years. In a way, it resolves the dilemma, just not in a very desirable way from the viewpoint of holders of depreciating US dollars.

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This article was published by AIER, American Institute for Economic Research, and is reproduced with permission.