Kiss the Dollar Goodbye? China & Indonesia Go All-In on Local Currency Deal

Because if countries around the world stop using the dollar as their trade currency the US stops being able to print money infinitely and will see inflation, potentially to hyperinflation.

This is not true. As long as there are countries willing to sell their goods in US dollars, the US government will always be able to afford that.

The question is why would countries want to sell their goods to the US? The answer is because they cannot find another buyer elsewhere. The last 50 years of global economy has been shaped in such a way that allows the US to run huge trade deficits, and in turn, many of the developing countries followed the IMF “export led growth” model and rely on selling cheap goods to wealthy foreign countries to finance their internal development.

The only way for exports to stop flowing to the US is if there is another country, or another bloc of countries, willing to step up and run trade deficits (in another currency) in order to absorb the surplus export capacity in the Global South. Otherwise, goods aren’t going to stop flowing to the US simply because they have nowhere else to go. Demands don’t magically appear just because one country decides to spend less.

In fact, Trump’s global tariff is to deliberately start a mercantilist war among the exporting economies until their economies have been wrecked (and ripe for IMF harvest), or they eventually strike a deal with Trump by giving the US something it deems lucrative. This is why nearly every country is still looking to secure a trade deal with Trump, no matter how reluctant they all seem to be.

As to the issue of why countries trade in another currency, that’s because they want to shield themselves from US sanctions, which can be easily seized when they’re using the dollar, as exemplified by the US blocking Russia’s access to SWIFT. However, accumulating local currencies also presents its own problems: what are you going to do with them? If China is accumulating Indonesian rupiah, then they can only spend it on Indonesian goods, or else they’d have to sell it for dollars anyway and that screws up the exchange rate and adds more, not less, to the instability of the global financial system. This was the hard lesson that Russia learned when it sold huge volumes of oil to India but couldn’t find a use for the excess amount of Indian rupees they had accumulated.

Nonetheless, even if the countries trade in their respective currencies, if the trade flow in aggregate does not change, as long as there is no change in demand from the other countries.

Remember, the reason we have cheap goods is because there is a surplus in global capacity, and this is deliberately so to keep the export economies in competition with one another to drive their prices down. The only way to break this deadlock is if additional demands are created to shift those flows away from the US. This is what we call “de-dollarization” that Russia has been pushing for but few major countries (especially China) seem interested in.

For example, if China starts a Chinese-style Marshall Plan by flooding the Global South countries with yuan, which in turn creates a strong domestic consumer base that can absorb the global export capacities, then yes, it will work against the US favor.

Otherwise multilateral trade in their respective currencies will serve to provide additional protections against US sanctions, but without a change in global demand, it will not fundamentally challenge US hegemony. We are very far from that.