Glenn Diesen interviews market analyst Sean Foo on the Iran war's impact on the US dollar, AI buildout, and global financial order
Glenn Diesen speaks with Sean Foo, a market analyst and China expert, about the economic consequences of the US war on Iran.
Summary
Glenn Diesen interviews Sean Foo about the geoeconomic dimensions of the US conflict with Iran, focusing on how the war is accelerating the decline of the US dollar's global dominance rather than reinforcing it. Foo argues that US Treasury Secretary Scott Bessent has effectively admitted that forcing Iran to price oil in dollars is a central war objective — a goal Foo sees as a sign of desperation rather than strength. He contends that the combination of soaring war costs, rising oil prices, an unsustainable national debt, and China's rapid advances in AI and semiconductors is creating a compounding crisis for the US economy. Foo also discusses how China is actively internationalizing the yuan, reducing dollar dependency, and positioning itself as a gold trading hub — moves that, combined with potential Saudi realignment toward Iran, could trigger a cascading collapse of the petrodollar system.
Key Takeaways
FULL TRANSCRIPT
Introduction and the dollar's role in the Iran war
Glenn Diesen: Welcome back. Sean Foo joins us today — a market analyst, China expert, and the go-to guy for gold. So, thank you for coming back on the program.
Sean Foo: Hey, always glad to be here.
Glenn Diesen: The war against Iran, like most of America's wars, has a very strong geoeconomic purpose — that is, to strengthen the US position in global markets. As we know, a key source of America's economic power derives from the exorbitant privilege of having the US dollar as the world's currency. I was wondering how you see the role of the dollar in the war now against Iran — and for that matter, also the war against Venezuela, Russia, and others. But especially with Iran, how is the US dollar being enhanced?
Sean Foo: Well, I think the US dollar is not going to be enhanced. It's actually going to be devolved over the coming months and years. The problem with the war in Iran is that firstly, the US doesn't seem to want to end it. We have seen a lot of cases where Trump said that the Iranian military is destroyed, the deal is going to be signed. But yet, just over the last 48 hours, we have seen them shell Iran eight times or more. The issue with this is the amount of war spending is just going to escalate. That's only one side of the equation. The US national debt has just crossed over $39.5 trillion, and that is simply unsustainable.
The problem with the war is it directly invites Iran to escalate. As we all know, Iran holds the Hormuz card, and they're going to replay what they have done over the first 60 to 90 days. They're going to hammer the entire Gulf states, all the oil-producing regions over there. That's why we are seeing a lot of attacks on Kuwait, Bahrain, as well as on the oil infrastructure. Now, what happens when you decide to shut down the Strait again? You're going to spike oil prices, and that's why we have seen crude climb from $70 all the way back to $90, and very likely we're going to push towards triple-digit oil.
This is where I think Trump really doesn't understand how precarious the situation is. The issue with higher oil prices now is that it just invites the threat of a consumer collapse where people get squeezed, they can't really spend, and at the same time it invites higher interest rates throughout the world. On one hand, higher rates will invite the US central bank, the Federal Reserve, to hike rates even higher down the road. And secondly, as you see rates go higher, what is that going to do? It's going to push the national debt closer and closer to default. So over time this is just going to destabilize the dollar throughout the world. We just need to look at the bond yields — they're rising. Investors are saying: if you want us to hold US paper, US debt, you've got to pay us more. And we are on an unsustainable path towards eventual default.
The Strait of Hormuz and US bond markets
Glenn Diesen: Yeah. Well, I think those are the two most painful things the Iranians are doing — destroying the US bases in the region across Saudi Arabia, Qatar, UAE, Kuwait, Jordan, Iraq, and Oman as well — but also shutting down the Strait of Hormuz, which impacts oil and fertilizers. But how is it impacting the US bond markets specifically?
Sean Foo: I think there are two fundamental areas we need to talk about when it comes to US debt right now. Firstly, there is the confiscation of Iranian assets. We have seen what happened back in 2022 and 2023 with the Russian assets — $300 billion gone. And next we have seen a lot of confiscations happen. Iranian crypto was confiscated, and Scott Bessent famously said there are very specific terms when it comes to the frozen assets. Trump was saying that they will release Iranian funds, and those funds will be used to purchase US agricultural products. So there are terms and limits being set on Iranian assets — they've been frozen, and in order to get an increase you need to buy US products. That alone creates a lot of resentment and a lot of fear in countries around the world.
On the other hand, we are starting to see a lot of trust breakdown when it comes to the dollar. It's not just the weaponization — it's the continuous amount of debt being piled onto the national burden, as well as the US just can't seem to stop propping up the markets by continuing their AI buildout. What's happening right now is the deficit is going much higher and the tariff war is collapsing at the same time. So we are now in a very strange loop where the US needs to import more in order to keep the economy growing, in order for all these big tech companies to keep investing back into the economy. But at the same time the costs are all elevating because the price of oil is going up. So the US is really caught in a very bad spending doom loop where they can't stop, but at the same time they have to pay more. And Trump can't stop the war because he just wants to get his maximalist demands, and Iran is not letting off the gas pedal either. So all this does not bode well for the US economy, for the dollar, or for the market.
Scott Bessent's admission about the petrodollar
Glenn Diesen: You mentioned the Scott Bessent comment, and I thought this was interesting because you sent me an interview with him. The reason I found it interesting is that our political and media elites tend to sell all wars as a new civilizing mission — an altruistic effort to defend human freedoms around the world. This is how all wars are pushed to the public. But Scott Bessent, when he was talking about the Iran war, also made comments about the war on Russia and the situation with Maduro — what looks like a neocolonial project. What was your takeaway from that interview? Because he did mention the role of the dollar and why this was a key goal.
Sean Foo: I think Scott Bessent gave a very big admission and essentially exposed the whole plan. He exposed the entire concept of the exorbitant privilege of the dollar and why, at the end of the day, trying to maintain the petrodollar system is still very important. During the interview he said that future peace deals with Iran would require them to price their oil exports in dollars and not in the Chinese renminbi or any other currencies. He also spoke about how he plans to get the Russians to price their oil in dollars again and get them back into the global dollar system.
The issue with this is: the more oil trade and global trade gets priced away from dollars, the more it breaks the entire recycling project — where countries get their trade surplus, they get their dollar surplus, and then they recycle it back into US Treasuries. In the past, that was a catalyst for US growth. But it's even more urgent right now.
Most recently, Bessent went on record saying that he believes the US is going to win the AI race and corner AI compute. Right now the US has 60% market share, but he said the US wants 80%. The only way to get to 80% is to build a tremendous amount of data centers. But the issue revolves around the money. Where are you going to get the funds? The US is flat broke and it can't possibly print the money without a disaster happening. So there are only two ways to do it. One way is to get your own domestic investors to pour money in. But the more popular way is to get money from the rest of the world to put into US markets, especially the bond market. Now, if you're a foreign investor and you want to invest in US assets, not only must you look at the yield — US bonds yield anywhere from 4 to 5%, especially on the 10 and 30-year long-term bonds — but at the same time you need to look at the strength of the currency. There's no point buying a bond for a 4 to 5% yield when the currency is dropping by 3, 5, or 10% every single year. You need to protect the strength of the currency. And that's why Scott Bessent just revealed the entire game. The US wants to protect the strength of the dollar, and that's why they're trying to reassure the world that oil will get priced in dollars once again.
Trump's demand for Iranian agricultural purchases and the BRICS challenge
Glenn Diesen: Yeah, I'm going to leave a link to that video in my Twitter feed because I thought that was quite extraordinary — the way he essentially argues that the key goal of the war on Iran is to force them to use the dollar in their energy trade again. But it had another interesting component. Trump made comments about forcing the Iranians to invest in US agriculture, and I guess this is also tied into the main problem — the Strait being shut down created an oil and fertilizer crisis. Now, if America can win this war, they can force the Iranians to sell their oil in dollars and compel them to — I think Trump used the word "give" the US exclusive rights to sell them agricultural products. This is the peace they're looking for. How are you seeing this?
Sean Foo: I think this is a pure act of desperation. We can trace this back over the last 12 to 18 months when we saw Trump actually request China to buy more soybeans, buy more wheat from the Americans. What we are seeing now is a geopolitical and geoeconomic shift from the BRICS nations away from the American system, especially away from what the US exports. We are beginning to see a lot of the BRICS countries — Russia, China, Brazil — begin to trade with each other. Especially China: they are buying a lot of food products, beef, agricultural products, and soybeans from Brazil.
So right now the US is caught in quite a quagmire. On one hand, their farmers are facing a lot of escalating costs. Let's not forget the farmers were hit with 30 to 40% tariffs over the last 12 to 18 months. So all their costs are elevated, and right now the price of gasoline, the price of diesel is flying up, as well as the prices of fertilizers, which are up at least 20 to 40%. So the price of US food is also climbing. This leads to quite a bit of a disaster — either consumption would drop, or the farmers would just close their farms and the US will lose even more of their food-producing base.
So what we are seeing right now is a last-ditch attempt by Trump to assure his base — a lot of whom are farmers — that yes, we are going to win the war, and at the end of the day the Iranians are going to use dollars to buy your farm products. But that is not a long-term solution. Even if the US does win the war, it doesn't solve the problems that BRICS is getting more advanced, lowering their cost of production, while for the US everything is just getting more and more expensive. So even if Trump does win this war, even if he does get Iran to purchase US agriculture, it does not really solve the structural problems inherent in the US economy.
Saudi Arabia, the petrodollar, and the risk of BRICS alignment
Glenn Diesen: Well, again, if the goal here is defeating Iran as a way of reviving the US petrodollar, obviously this is also seen as an effort to weaken BRICS. And Trump never shies away from explaining how he has defeated BRICS, how BRICS is irrelevant. At some point he made the comment that Spain was a BRICS country — I don't think he had his facts completely straight there. But all of this is premised on the idea that the US will defeat Iran. If the Iranians win — and one can discuss how you define victory — but at the moment, as you just said, the Iranians are destroying all the bases from Saudi Arabia, Qatar, UAE, Kuwait. You would think that the reason why a country like Saudi Arabia is sitting on the fence — it didn't join BRICS in 2023 because it's joined at the hip with the United States because of the security arrangement — but if the US bases are destroyed, if the US security arrangement is seen as a liability rather than a benefit, and the Iranians come out on top, the Saudis are going to have to make some peace with them. What would happen if the Saudis got off that fence and started aligning closer with BRICS? Wouldn't that be a very big nail in the coffin of the dollar?
Sean Foo: Yes, it would. Right now we can see the Iranians actually showing how dominant they are over the Strait and how they can actually control US inflation. Let's talk quickly about that. We can see that June CPI dropped from around 4.2% down to 3.5%, and everyone was cheering that the inflation crisis in the US was over. But that only came about because oil prices crashed from around $100 all the way down to $70 because of the promise of a temporary ceasefire. I think we can all remember that — because of the ceasefire, both Iran and the US so-called committed not to strike. Obviously that has been blown to bits today. But that shows that just from the commitment of the Iranians themselves to let some ships pass through Hormuz, oil prices did drop. Which actually means that Iran has a lot of leverage over the Saudis right now.
It is true that the Saudis can swing their oil away from Hormuz to the Red Sea using the Red Sea corridor — they have managed to swing 40 to 50% of it over, so the oil can actually go through the Suez Canal up north and through the Bab-el-Mandeb Strait. But we have reports that the Houthis have told the US that they might want to close that down if the US keeps hammering them. So that is under threat as well.
So it's not impossible for the Saudis to actually eventually side with the Iranians in an indirect way. And what did Iran actually want to do? Apart from just charging a $2 million per ship toll, they also want Gulf countries to price their oil in the Chinese renminbi. Now, if that does happen, that means a lot of the Gulf states — not just Saudi Arabia — will need to start accepting less dollars and price their oil in Chinese renminbi. If that happens, there are only so many ways you can actually use the Chinese currency: you can buy stuff from China, you can buy Chinese bonds, you can buy Chinese stocks, or you can buy an international reserve asset, which is gold, which China sells themselves. All of that is totally separate from the dollar system. You don't see any of the money actually going back into dollars. So if Saudi Arabia does go with Iran, this is just going to be devastating for the dollar. It might not be the final nail, but it could really trigger a cascading effect which won't be good at this precarious time.
We can see the desperation in the United States. When Marco Rubio gets up in front of journalists to make a passionate speech about the importance of the United Nations — that we can't have countries blocking international sea lanes — this is the same country that put blockades on Cuba and Venezuela, engaged in piracy, stole the sovereign assets of countries, continuously bombed countries, and toppled their leaders. To suddenly appeal to the UN and international law and maritime law reeks of desperation because it's so obviously hypocritical.
US leverage over BRICS and China's AI breakthrough
Glenn Diesen: But how do you see the US putting more pressure on BRICS? Because this looks like, as you said, the key institution that could facilitate de-dollarization and the dethroning of the US. It's almost now like a law of physics — BRICS doesn't need to come up with a very brilliant scheme. It only needs to facilitate alternatives, because it's the US that's burying the dollar on its own. All that BRICS has to do is facilitate alternatives in terms of trading in national currencies, bringing back some gold format, or internationalizing the yuan, or whatever it might be. But how do you see the possibility for the US to threaten BRICS?
Sean Foo: Right now, when it comes to the confrontation between the US and BRICS specifically, I think we need to admit that the US has lost a lot of cards. They're losing the currency card right now. The US is causing a lot of inflation problems around the world — not just with BRICS but the entire Asia region. So a lot of countries are not very happy with how the US runs statecraft and how they're actually squeezing the world for their own geopolitical objectives.
The only card the US has right now is the AI card, the semiconductor card. If the US manages somehow to control the world's AI compute power, the capabilities of the AI models, and to really ring-fence the latest capabilities away from BRICS and other countries, then perhaps the US might stand a chance to arm-twist BRICS. But the issue with that is it is rapidly collapsing.
The entire US plan of ring-fencing AI — building big walls to basically prevent the world from accessing some of their latest models, whether that be Anthropic's Claude, whether that be ChatGPT, some of the more powerful AI models that the rest of the world simply can't develop — that has been shot to pieces over the last 48 hours. China just came out with their own AI model that just broke through all the parameters, all the tests. It's called Kimi K3 by Moonshot. The big issue with this is that this AI model is open source — open weights. So you don't really need any government permission. You don't need Washington's approval. You don't need to be subjected to the threat of sanctions by any country. You can simply download that AI model onto your own computer or organization and just have it run by itself.
This just disrupts the entire US ecosystem of: we'll create our own AI models, and if you want to access them, either you've got to pay an exorbitant amount of money, maybe we'll force you back into the dollar system, or maybe you have to give us geopolitical concessions. All that has been blown to pieces. So when the conversation comes to what leverage the US might have over BRICS, I think economically there isn't much. When it comes to supply chains, there obviously isn't much. When it comes to AI, well, China has just dismantled that fallacy. I guess the only thing left is the US military, but using that is also going to be very problematic.
The Gulf states, AI investment, and the energy problem
Glenn Diesen: Well, the AI component of all this is interesting indeed. You can say it's even more directly involved in the Iran war because the Gulf states invest a lot of their proceeds from energy sales — first they sell the US their oil in US dollars, and then they invest a lot of this in American AI, which keeps this AI bubble alive. But what is the uncertain future of the Gulf states doing to this rivalry between the US and China? Because there's already a huge amount of investment in the US focused on AI. All of this can't simply be subsidies — there will have to be some return on investment. How do you see this?
Sean Foo: I think the issue with the Middle East right now is a net negative for the US. Firstly, the US has a very big energy problem when it comes to the AI buildout. China has the ability to create limitless energy at a very cheap price — anywhere from 33% to even 70% cheaper in certain regions of China compared to the US. The entire idea before the war started — I think it was even as early as 2024 — was that the US was going to invest a lot of AI compute and build data centers within the Middle East itself. There were talks about building some in Saudi Arabia, maybe some in the UAE. Well, obviously that plan has now evaporated. You're not going to build data centers where missiles are flying around, where the whole region is unstable, and where the Gulf economies could plunge into a recession if things get nasty enough.
Secondly, unlike China, the US still relies a lot on oil for their power generation. So prices of natural gas are going up, prices of oil are going up as well, and the US is draining their strategic petroleum reserves at a very alarming rate. So the longer this war goes on, the entire structure of AI, big tech, and all the hyperscalers is going to get even more precarious.
The entire US economy is really riding on the hope that this buildout is going to continue. Over 2% of GDP relies on all this AI capital expenditure in order to keep the US economy away from a recession. Now if this unravels, the first thing to fall will be all these fantastical valuations of US stocks — which a lot of the wealth funds in Saudi Arabia and the Middle East hold. So they're going to get impacted as well. This is not going to end well unless the war in Iran really comes to a nice conclusion, but as it stands, I don't really see it happening.
China's chip development and the semiconductor race
Glenn Diesen: How is China's chip development impacting all of this? Because again, this is why it's difficult to follow some of the developments here — there are too many variables, too many things happening at once. The whole part of this drama began, of course, also with the United States putting bans on chip imports from China and encouraging the Europeans to do the same, because this was assumed to tear down the whole Chinese tech industry. But it did the opposite — the Chinese simply began to develop their own capabilities much more rapidly. And now the US market realizes they can't really survive without the Chinese market. They cut off a massive consumer who is now self-sufficient, and the US did this to themselves. But if a key problem is the AI bubble not being able to bring in a proper return on investment, how is this impacting the bubble?
Sean Foo: Here's the funny thing. Over the last one to two months, US imports from China soared — it was an astounding increase, I think 30 to 40%, and most of this came from electronic parts and inputs needed for the US AI buildout. So just think about it: the US AI bubble is supported by imports of electronics from China. So as this bubble continues to grow, the US is actually making China richer. And what is China going to do with this trade surplus? They're going to invest it back into their own companies, into their own economy, especially in the tech race.
Let's not forget that China has announced they're going to spend around $290 billion specifically for the AI race over the next five years — that's around $60 billion a year. And money really stretches further in China. Let's say you spend a dollar in the US, maybe you'll get $1.50 worth of output if you're lucky. If you spend a dollar in China, you might get $2 or $3 worth of output. So China is now creating their own chips. They have come to the point where they don't really need high-tech lithography machines from the Netherlands, from ASML, to deep-frog the US. They are investing a lot into talent and into creating better software code. Huawei themselves have created a kind of chip-folding technology that allows the transistors to be placed closer together, so that you don't really need the latest and greatest AI chips from Nvidia.
So China is closing the gap that way. The issue with the US is that they can't really close this gap because they are lacking a lot of revenue from China. China consists of 40 to 60% of the entire semiconductor market. And with China's new investment of $300 billion over the next five years, there's a very interesting clause: 80% of the materials will need to come from domestic Chinese companies. Maybe China will source 20% from the Koreans or the Japanese just to keep trade relations up, but the majority will be coming from Huawei. Those AI chips will be from that company. Memory chips will be from the Chinese CXMT, which is the Chinese equivalent of Micron in the US. So the money is just going to be locked in a circular economy within China, building it up, and the US won't even get a lick of that revenue — which is not very good, especially when you need money to win the race.
East Asian allies caught between the US and China
Glenn Diesen: Well, I guess another problem here is that geoeconomics is often tightly linked to the military, as we see with the Iran war. The security dependence that frontline states have on the United States converts into economic or geoeconomic loyalty. You see this with the Gulf states — the reason why they trade in US dollars and reinvest all their profits into the US market is because they're highly dependent on the US for security. You see the same in Europe, you see the same in East Asia. Now, if this security dependency is weakened — if they don't see the US as reliable, if they see the US as inviting wars instead of preventing them — that can unravel a lot of this geoeconomic loyalty. The Gulf states are obviously a concern now. The Europeans are still doubling down hoping to preserve the political West. But how do you see East Asia being impacted by all of this? Because one thing I noticed in the war against Iran was that the first thing the US did was pull out a lot of its missiles — both interceptive missiles and others — from South Korea and other countries in East Asia and send them to the Middle East, more specifically to Israel. How are countries in that part of the world now responding to this? At some point Japan and South Korea will have to hedge their bets, won't they?
Sean Foo: They will have to. There are a lot of talks about how Japan plans to build up their military, and we have seen a lot of the missiles being pulled away from Korea as well, all the way to the Iranian front. So the Koreans are also freaking out. The issue with these Asian economies is that they are caught between a rock and a hard place. The US, if not abandoning their allies, is just making things worse with the entire Iran war — making prices go higher — and all these economies are getting squeezed. If we take away all the advantages of more semiconductor demand, the underlying economies there are actually getting weaker and weaker. I just came back from Japan and things are like 30 to 40% cheaper compared to where I'm from, so you can see that locals there are not exactly living the high life.
But the problem is that they also face China, and China is the big brother over there. So who are you going to listen to? Are you going to listen to China, with whom you have a lot of historical issues going all the way back to World War II, and who has the ability to cut off your rare earths and constrict your inputs? But if you do listen to China, you're going to incur the wrath of Washington. And a lot of the Korean economy and the Japanese economy is stuck with the US — they export a lot of stuff there, and Japan holds like $1 trillion worth of Treasury bonds. So all these legacy connections just can't be easily unraveled. I believe they are all trying to hedge their bets, trying to wait things out. I believe that unraveling their loyalty to Washington is not going to be easy. I don't even think it can happen in the next five to ten years. I think they're just waiting for someone more rational — if that's possible — to replace Trump over the next two to three years.
Europe's strategy and China's de-dollarization moves
Glenn Diesen: Yeah. Well, that's definitely the European strategy these days — it seems to be hope. Let's hope Trump goes away and somehow we'll magically return to the 1990s. I think they put too much focus on the person, the leader, and not so much on the economic situation in the US, because the US situation is changing quickly. As you said, they can't really win the tech race, they can't keep control of these maritime corridors around the world, their international banking systems are no longer in a monopoly position. But also the strength of the currency and the whole financial system is weakening because the US is increasing its money supply at a huge rate, which is a form of taxation on the whole world — because everyone holding dollars will see their current holdings reduce in value as the United States continuously grows the money supply. What is China now doing as a way of avoiding this tax?
Sean Foo: Well, I think China is actively de-dollarizing. They are getting rid of their Treasury bonds almost every single month. A big reason is to avoid confiscation — if it can happen to Russia, it can happen to you. But another problem is that holding US Treasuries, recycling your money back into US debt, is fundamentally not a good idea even though the US is paying 4 to 5%, because as you say, the money supply is increasing by 6 to 8% every single year. And the US just keeps spending even more — they're going to spend more to rebuild the military, Trump has pledged like $1.5 trillion, they have to build more data centers in order to keep the bubble moving, and the war on Iran is costing anywhere from $500 million to a billion dollars a day. That is not going to stop.
So China eventually sees the writing on the wall. Eventually, if things don't stop, the US will default on the debt. And there are only two ways you can default on the debt. The first way is to outright not pay the debt — you owe $100 to the bank, you tell the bank you're not going to pay it. But that's not going to happen, because it would just unravel the global economy just like that. So the most expedient way to do it is to print money and pay off the debt through inflation, and suddenly the whole world gets inflated away.
So going forward we're going to see a lot of countries within BRICS find alternative ways to invest — whether that's buying Chinese bonds or buying gold, they have to secure their reserves. And that obviously is not good for the dollar or the Treasury market. For countries with manufacturing economies like China — maybe even Japan themselves — they have to spend the money productively, so they're going to invest in their own economies, whether that's building new factories or building more chip capabilities. And this is going to leave the US in a lurch.
Right now, a lot of people are saying that countries in the world are still buying US Treasuries net on net. That's true because the money supply keeps going up — so if people buy a few more billion in US Treasury bonds, you can technically say the amount is going up. But on a percentage basis, central banks are holding less. The amount has been dropping since 2008. After the big bailout by Ben Bernanke, after the 2020 money printing from the lockdowns, the world is just losing more and more confidence. So they're just going to find alternative assets to put money into. Gold is obviously a big avenue, but we're going to see a lot of investments into their own economies. We're going to see countries like Japan, even Europe and Germany, spend a lot on their own military in order to boost their GDP as well.
China internationalizing the yuan and the gold market
Glenn Diesen: How about the internationalizing of the yuan? Because it appears that the Chinese didn't necessarily mind the US dollar having a role as a reserve currency — it comes with costs as well, and they didn't necessarily want their own currency to have too large a role in international markets. But on the other hand, investing so much in the US dollar when it's not sustainable, and when the dollar is weaponized against China, doesn't really make much sense. What are the Chinese doing in terms of strengthening their own currency and their own financial systems?
Sean Foo: I think China is going to internationalize the yuan to a much greater degree as the years and decades go by. We're not saying they're going to replace the US as the reserve currency, because to be a reserve currency there are a lot of disadvantages as well. But China's ultimate goal is to create a situation where they can buy all their inputs from the world in their own currency. China is able to do that around 50 to 60% of the time right now. Sure, 100% of their inputs from Russia are settled mainly in the Chinese yuan and to a smaller degree in rubles. But with the rest of the world they are still using dollars in quite a serious degree — at least 20 to 30% of the trade is still settled in dollars. China doesn't want that, so the only way is to internationalize the yuan.
The issue with internationalizing the yuan in the past is you need a stronger renminbi. You don't want countries to collect a lot of yuan and then over the next five to ten years the Chinese currency loses quite a bit of value — that's self-defeating. However, if you do appreciate the renminbi, that will also damage your own export value, because the higher your currency goes, the more expensive your exports become.
However, we have shifted to a whole new world where the import costs of all of China's competitors are going up at the same time because their currencies are collapsing. When Japan's currency collapses, when Korea's currency collapses, and when prices in the US go up and their manufacturing costs rise as well — while China is rising, the others are rising higher than China. Why? Because they are all very dependent on the price of oil. However, China has diversified their own energy mix. So in a sense, where everyone is collapsing, China is collapsing less, and that makes China more competitive. And this ironically allows the Chinese to appreciate their currency, which has been going on for the last 18 to 24 months. Suddenly the renminbi becomes a more attractive store of value — not only are you getting a bond yield, but at least your currency is not dropping. So you can reliably hold on to the Chinese renminbi.
Now, what's going to happen in the next few days is also quite groundbreaking. China is going to cancel gold derivatives trading. China doesn't really want their gold market to be full of paper derivatives, to be controlled by all these paper contracts unlike what's happening in the US. Why do they want to do it? Because they want the world to see China as a gold hub where you can put your money in and the price of gold is predictable. That just gives countries around the world even more avenue to invest their earnings from China. You get Chinese renminbi, you can put it into Chinese bonds. If part of you doesn't trust the Chinese government, fine, you can buy gold with it, and that gold will be sitting in China itself. So China is firing on all cylinders here, and yes, the Chinese renminbi is really going to be a big part of this equation going forward.
US stock markets, Trump's hype cycle, and the risk of collapse
Glenn Diesen: Yeah, because of all the criticism against the US dollar, the common argument is always that yes, it's a flawed, problematic currency, but it's the cleanest shirt in the hamper — that although there are alternatives, they're worse. I think that's something that's definitely not true anymore. But I just want to ask, lastly, about how you see the development of stock markets and well the international stock markets. Because there's a tendency for Trump to essentially go back to fighting wars on a Friday evening — escalate against the Iranians — and by Sunday night tell everyone how peace has broken out and how wonderful everything looks before the markets open again, to calm them. At least this seems to be a key trend now. And again, it's for good reasons as you have outlined — the US control over international markets and its economic situation is quite fragile, and this is a key thing they have to take into account when they fight their wars. But what does the US bond market and the stock market look like now? Because I think diplomacy is more or less dead — the Iranians don't really see much point in even talking to the US anymore, because diplomacy is just one long deception and the war is escalating and widening. What do you see in the future?
Sean Foo: Right now we're in a very interesting period in time where the US stock market is going up but the US bond market is collapsing. Now, this used to be the exact inverse — especially in a time of war, stocks should be collapsing while US bonds should be rising in value because of demand. So what investors are telling us right now is: we know the dollar is going to get debased down the road, we know the US is going to spend much more, and we likely believe bond yields are going to go up. So we are fleeing from that. But the issue with global capital is that it always needs a place to run to. And right now a lot of people still believe in the US AI story, and that's why a lot of money is still flowing into US stocks, especially the NASDAQ.
The big problem with this is that it relies on the AI buildout and Trump constantly hyping the markets up. Trump is almost every week talking about how the stock market is hitting all-time highs, how $19 trillion worth of investments is going to enter the United States — which is factually impossible, but he still keeps hyping it up. So the market still laps all this up because they do have an underlying hope that the war in Iran is going to end. And when it ends, oil prices are going to crash, inflation is going to come down, and US stocks are going to benefit from it.
However, the big problem is you cannot have US stocks collapse without the threat of a recession coming. A lot of US consumption is being done by the top 10 to 20%. We call this the K-shaped economy — where the lower earners are losing a lot of money, they're getting poorer, however the high-income earners, especially the stockholders in the United States, are spending more. Now, what happens if the market suddenly drops by 10 to 20%, or god forbid 30%? Suddenly you're going to feel poorer, you're not going to spend, and everything just grinds to a halt. And this is where Trump is really caught. He has created a prison of his own making — he cannot afford for stock prices to come down. So he needs to keep hyping the entire stock market game. However, the more he does it, prices need to keep rising and rising. But the fundamental situation doesn't really warrant that. Companies can't keep borrowing when rates keep going up. US AI is facing the threat of China. And he just recently re-escalated the war on Iran. So all these conflicting situations are just hammering down the entire US economy, and if he doesn't get a grip on this war, I think markets are not going to stay stable for much longer.
Glenn Diesen: Yeah, they say that political leaders tend to obsess or brag about areas where they're very vulnerable. So for example, the EU at the moment — at the time when freedoms are falling apart very quickly — the EU leaders can't stop talking about how wonderful their freedoms are. And the same is in the United States. Trump and a lot of US politicians can't stop saying how great the United States is, how it's the most powerful country in the world, how the stock market and economy is better than it's ever been. Usually this reflects some insecurities that things aren't going very well. Well, before you go, do you have any last thoughts?
Sean Foo: Right now we are in a very unprecedented time. Things are getting very, very risky. A lot of people in the markets are really rolling the dice. We can see it from the recent SpaceX IPO — it flew to the moon, after that everyone got rocked, and the prices are now collapsing back to Earth. So I guess the message is: don't follow the hype. Do your homework. And the only thing we can do right now is to pray for the war to be over.
Glenn Diesen: Well, thank you so much for your time.
Sean Foo: Great. Thanks, Glenn.