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Why Putin is wrong about the USD


Vladimir Putin’s interview with Tucker Carlson, which has received 200mln views so far, will go down into history as the most watched interview of a political leader in the world.

Putin spent more than 2 hours laying out a world view that is born out of the tension and power struggle between the unipolar and the multipolar world order.

Putin’s main message is that the rise of the multipolar world is inevitable.  

What are the two key assumptions behind his assessment? Is it possible that he is too optimistic about China and too pessimistic about the dollar? What do the numbers tell us?


Putin’s interview with Tucker last week confirmed what we already knew: the world is rapidly falling into two opposing camps. 

Putin likened the polarizing world to a human brain divided into two disconnected hemispheres.  He described it as an illness, a serious adverse condition. 

Whether you agree with Putin or not, he attributes the polarization of the world to American arrogance. 

He gave examples of how the US, under successive administrations, spurned Moscow’s offer of rapprochement after the collapse of the Soviet Union. 

He talked about how he approached Bill Clinton in 2000 about joining NATO only to be told that it would not be possible. 

He talked about how the US, under Bush, provided financial and military support to separatist terrorist groups in the Caucasus over repeated objections from Russia.

He talked about being promised time and again by Washington that NATO expansion would never happen only to see NATO moving closer to the Russian border after five waves of expansion

When Tucker asked him why he thought the West had rebuffed Russia’s overture, this is what he had to say: 

“You said I was bitter about the answer. No, it's not bitterness, it's just a statement of fact. We're not the bride and groom, bitterness, resentment, it's not about those kinds of matters in such circumstances. We just realized we weren't welcome there, that's all. Okay, fine. Why we received such a negative response, you should ask your leader. I can only guess why: too big a country, with its own opinion and so on. I have seen how issues are being resolved in NATO. The US leadership exerts pressure, and all NATO members obediently vote, even if they do not like something. “

Whether Putin was bitter or not, he was definitely defiant

He made it quite clear that if the “civilized west” didn’t want Russia to be part of it, Russia would forge its own path. 

Putin spent much time talking about the rapid growth of the BRICS group of which Russia is serving as the current president:

“If memory serves me right, back in 1992, the share of the G7 countries in the world economy amounted to 47 per cent, whereas in 2022 it was down to, I think, a little over 30 per cent. The BRICS countries accounted for only 16 per cent in 1992, but now their share is greater than that of the G7. “

Central to Putin’s world views is the ascendancy of the BRICS:

“It is like the rise of the sun — you cannot prevent the sun from rising, you have to adapt to it. How do the United States adapt? With the help of force: sanctions, pressure, bombings, and use of armed forces. This is about self-conceit. Your political establishment does not understand that the world is changing, under objective circumstances, and in order to preserve your level — even if someone aspires, pardon me, to the level of dominance — you have to make the right decisions in a competent and timely manner.”

Putin’s confidence in the ascendancy of the BRICS, notwithstanding US sabotage, rests on two key assumptions.

One: Putin judges China’s rise to be unstoppable 

“The West is afraid of a strong China more than it fears a strong Russia because Russia has 150 million people, and China has a 1.5 billion population, and its economy is growing by leaps and bounds — over five percent a year, it used to be even more. But that's enough for China. As Bismark once put it, potentials are most important. China's potential is enormous — it is the biggest economy in the world today in terms of purchasing power parity and the size of the economy. It has already overtaken the United States, quite a long time ago, and it is growing at a fast clip. 

Two, Putin thinks the weaponization of the dollar by the Biden administration will backfire on America in the long-run.

“You know, to use the dollar as a tool of foreign policy struggle is one of the biggest strategic mistakes made by the US political leadership. The dollar is the cornerstone of the United States' power. I think everyone understands very well that, no matter how many dollars are printed, they are quickly dispersed all over the world. 

As soon as the political leadership decided to use the US dollar as a tool of political struggle, a blow was dealt to this American power. Look at what is going on in the world. Even the United States' allies are now downsizing their dollar reserves. Seeing this, everyone starts looking for ways to protect themselves. Until 2022, US dollars accounted for approximately 50 percent of our transactions with third countries, while currently it is down to 13 percent. “

The power struggle between the US led unipolar world and its multipolar challengers is the biggest story in the world today and will likely remain so for the years to come. 

Putin is right that which side will win will depend critically on China and the USD.

But are Putin’s assumptions of a strong China and a weak dollar supported by facts and numbers


The outlook for China and the outlook for the USD are intricately connected

Unlike stocks and bonds, currencies have only a relative value and not an absolute one

The USD can go down only if there is another currency to go up against it

Is the Chinese RMB ready to challenge the dollar’s reserve currency status?

This is a crucial question only because an appreciation of the RMB against the USD is a necessary condition for a general decline of the dollar

A necessary condition because the US and China are the two biggest importers in the world. (Chart 1)

No country can afford to have their currencies go up against the currencies of their two biggest customers at the same time and on a persistent basis.

Unless they want to commit economic suicide

Surely not even Putin wants that for Russia.  

The foreign exchange market gets the joke and this is why the implied correlation between the USD and the RMB is very high, even against another major currency like the euro. (Chart 2)

The bottom line is that for the USD to fall, the RMB has to go up.

Put differently, for the BRICS currencies to challenge the USD, the RMB has to challenge the USD.

What are the chances that the RMB will challenge the USD anytime soon, let say before Putin, who is currently 71, turns 80? (Chart 3)


Putin said in the Tucker interview that the US cannot stop printing money.

But the Federal Reserve has been shrinking its balance sheet over the past 2 years. (Chart 4)

What Putin probably meant was the massive US budget deficit.

He was right about that.

Everyone agrees that the biggest structural problem the US dollar is facing is the spiraling US government debt that is now at $34 trillion. (Chart 5)

Let’s be more precise about the problem.

If the stock of US debt is growing faster than the stock of debt of other countries, investors will demand higher risk premium for holding US debt.

This higher risk premium is likely to involve a weaker dollar.

If relative supply of debt is an important driver of exchange rates, what about China’s debt?

China’s general government debt is about 40% lower than that of the US (Chart 6).

China’s household debt is about 25% lower than that of the US (Chart 7)

However, China’s corporate debt is 60% higher than that of the US. (Chart 8)

At the end of 2022, China’ total debt is 271% of GDP versus US total debt at 281% of GDP. (Chart 9)

Indeed, What Putin does not mention is that China has as big a debt problem as the US today.


Because rich countries can afford more debt and China’s debt is very high relative to China’s per capita GDP. (Chart 10)

If the biggest problem facing the US dollar is the size of US debt and the only currency that could potentially challenge the dollar hegemony is the RMB, the fact that China has a bigger debt problem than the US means USD domination is still pretty safe.



The size of China’s massive debt is posing a growing risk to the Chinese economy.

By the way, if Xi Jinping gets any credit for China’s economic policy under his watch, it is that he is at least more cautious about taking on even more debt.

Whereas his predecessors piled on more and more debt without thinking about the long-term consequences.

Xi has to consider the long-term consequences of the debt bubble, that is if he wishes to remain China’s president for life.

For economic or selfish reasons, Xi seems determined to rein in China’s debt growth

However, slower debt growth means slower economic growth.

Economists are forecasting 4.6% GDP growth in 2024, down from 5.2% in 2023. (Chart 11)

But slower growth will not solve Xi’s problem

In fact, it will only exacerbate it

The biggest problem with slower economic growth is that it weakens the creditworthiness of debtors.

Slower growth means that companies and households will have more difficulty servicing and repaying their debt

At the end of 2023, Beijing blacklisted 8.57 million borrowers who had missed payments on everything from home mortgages to business loans. (Chart 12)

This represented a 50% increase from the beginning of 2020.

As delinquencies and defaults go up, debt holders are forced to write down losses.

All throughout 2023, Chinese banks reported rising nonperforming loans  (Chart 13)

In 2023, issuance of securities backed by non-performing loans jumped about 40% from 2022. (Chart 14)

Rising nonperforming loans have made the banks more cautious about lending

This is the reason why China’s money multiplier declined last year despite further cuts in reserve requirement (Chart 15)

This is evidenced by the fact that bank lending to property developers fell again in Q4 despite growing pressure on the banks from the government to step up lending, including on an unsecured basis (Chart 16)

Problems that didn’t matter so much when China was growing at 8 to 10% are now mattering much more

Slower economic growth is exposing the problems that were hidden in the past by high growth rate

And the biggest shoe has not even dropped yet

House prices have been falling but very gradually (Chart 17)

But in December, home prices fell at the fastest rate in 9 years (Chart 18)

China’s home prices are the highest in the world as a share of household income (Chart 19)

High and rising home prices in China have been a key driver of debt growth over the past ten years

High home prices mean high collateral value which allows debtors to borrow more

High home prices by driving up land prices provided local government with a high revenue source to borrow against

Declining home prices lead to declining collateral value and declining land prices

All this will only serve to weaken economic growth further

In other words, the transition from high debt growth to low debt growth itself is fraught with risks

What is very clear is that China needs much lower interest rates.

With the growing risk of deflation (Chart 20), China should lower interest rates to zero.

So why hasn’t China brought interest rates to zero already? (Chart 21)

The answer is very simple.

Because we still live in a world dominated by the US dollar.

Dollar hegemony means unless the Federal Reserve is cutting interest rates, any country who tries to get ahead of the Fed will see their currencies depreciate against the USD.

This fact that this remain so is the clearest evidence that the USD has not lost any of its power

So what is the big deal of a weaker RMB?

Why should a weaker RMB stop China from cutting interest rates to zero to help ease the transition to slower debt growth?

I don’t know the answer but I can offer 3 hypotheses

1.    A weaker RMB could give the US even more excuses to pile up tariffs on Chinese imports

2.    A weaker RMB could accelerate outflows of foreign capital that has already wiped trillions from Chinese stock market capitalization. China and Hong Kong equities saw a combined net outflow of $3.8 billion in December, the highest in 2023 and third highest on record (Chart 22)

3.    Xi Jinping does not want his fellow BRICS countries, including his friend Putin, to question the RMB as a store of value and as an alternative to the dollar.

I don’t think Xi needs to worry too much about US tariff in a US election year. Biden needs lower and not higher inflation.

Foreign outflows are the result of Chinese policy paralysis. Beijing needs to worry less about the stock market and worry more about the economy. Direct interventions by Beijing in the stock market are accelerating outflows by giving foreigners a get out of a jail card at a subsidized price.

I was brought up by Chinese parents and I know something about pride.

Chinese are famous for caring a lot, too much in my opinion, about their pride.

No doubt a weaker RMB will make China and Xi Jinping look bad in front of the other BRICS countries, including friends like Putin.

But if Xi Jinping does not act soon, looking bad will be the least of his problems.

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