The Dollar’s Final Decade? China’s Rise vs. America’s Fall – Jeffrey Sachs (Transcript)

And you’re right. If you step back and take the century by century viewpoint that you do, you have a few blueprints you can study and then layover today’s landscape. Most recently, obviously, the British and the Dutch and look at the sunset years of those empires and say how many behaviors and activities are present today. And it kind of rolls it out for you a little bit. To your point, you called it natural. This is natural. This is the natural evolution of an empire. And maybe the budding empires as I guess the final Western Christian empire flares out over the next 10, 20, 30 years.

JEFFREY SACHS: Right.

JAY MARTIN: There’s not another Western Christian empire to replace it like there was with British, Dutch, Spanish, Portuguese.

The History of Empire Transitions

JEFFREY SACHS: That’s a very good point. You know, it went from the Spanish and the Portuguese who led this because they were the first into the Atlantic Ocean, they were the first across the ocean, they were the first around the Cape of Good Hope. And actually, in 1494, Pope Alexander divided the world not between the Europeans and the rest, but he divided the world between the Spanish and the Portuguese. They would own the world, the two of them.

And then it took another century, actually, for Holland and Britain to start getting their mojo and to start their overseas empires. Britain eventually dominated the seas. That was the key because after all, we’re talking about ocean trans-oceanic empires. So France was a land power, but Britain was the naval power. Britain defeated the Spanish Armada in 1588. That pushed Spain aside. Britain defeated the Dutch navy in the 17th century in several Anglo-Dutch wars that pushed them aside.

Suddenly there was Britain and there was France. One the naval power, one the land power, but the naval power was kind of bound to win because in the end, we’re talking about expanding power overseas. Interestingly, Napoleon made an overseas venture to take over the Middle East in 1798. I think I have the date right. And he was defeated by the British Navy. He escaped back to France in the final moment so that he could declare himself ruler of France and embark on his revolutionary continental wars.

But my point is, Britain ruled the oceans by the 19th century. And we say Pax Britannica, Britain ruled the world. It’s an interesting phrase, Pax Britannica, British peace. There was no peace. Britain just beat the hell out of everyone else, took over everyone else. So it wasn’t peace for the rest of the world, but Britain ruled the world.

Two world wars came, Great Depression, collapse of the British pound in the 1930s, of course, rise of Hitler, Second World War. By the end of that, despite Churchill’s energy and intentions, the British Empire was finished and the American Empire took the baton. We declared it the American century. We thought it would go on forever.

I came into this scene as a professional, decades later because I was born in the 1950s and I began work in the international sphere in the 1980s and I became an economic advisor to Mikhail Gorbachev in 1990-91 and to Russian President Boris Yeltsin in 1992. So I got to watch a lot of what’s happening now very much up close.

And I can tell you the mood in the U.S. when the Soviet Union ended in December 1991 was, hey, this isn’t just the American century, this is the American millennium. We are the most powerful country in the history of the world. Which in some sense of kilotons was true, but not in the sense that other countries had nuclear weapons that could ruin our day at the same time.

But in any event, the American leaders thought, my God, we don’t have anything close to a rival, an adversary. We can pretty much do what we want in the world. This is now the American-led world. And they couldn’t see that a country of rice villages, which China was by the way, back in 1991, could somehow in a 30, 34 year period, turn into a major modern cutting-edge economy.

Witnessing China’s Transformation

And if I may, I don’t want to ramble, but I can tell you I’ve been going to China since 1981. And when I first got to China, everyone was in Mao suits and with the whisk brooms and bicycles, no private vehicles anywhere, was an impoverished place, it really was. And it was a place that had been broken by the Cultural Revolution. So it didn’t look like it was a rival to the US in any sense.

But I’ve watched over 44 years the rise of a superpower through an incredible amount of hard work, foresight, planning, round the clock labor, I mean people, high saving rates by poor households scrimping so that they can provide an education for their children. Really remarkable efforts. And I’ve seen these cities rise from villages before my eyes over a 20 or 30 year period.

I was just in Shenzhen, China, which is the Silicon Valley of China, just adjacent to Hong Kong in southern China in the province of Guangdong. And I was there a couple of weeks ago and I was visiting robotics factories and all the phenomenal, remarkable things that are being done there now. That place, Shenzhen, is now in its metropolitan area, about 30 million people. So it’s mind boggling. But amazingly, in the 1980s, it was a village of about 25,000 people. It’s grown a thousand times by a flood of people from all over China coming to this high tech, high manufacturing center over a 40 year period.

So you see things as an economist you could not see anywhere else in the world, actually. But the long and the short of it is, yeah, they’re catching up for lost time and they’re doing a beautiful job of it. And American leaders came to see this as a dire threat about 10 years ago. I don’t see the threat, but the rise of China is indisputable.

China’s Historical Memory

JAY MARTIN: You know, that’s a really interesting point and I want to pull on that in a minute. There’s something else I want to get back to you, but when you talk about the vision, you know, if you were in 1991 in China, you described it as somebody who spent a lot of time there as a nation of rice villages, but it was also a nation with a history and remembered history of being the most powerful, the Celestial Empire.

JEFFREY SACHS: Right?

JAY MARTIN: This is the most powerful empire in the world. And so that’s in the recent memory. We might be rice villages today, but we know what we were and that’s going to impact how we act moving forward.

China’s Civilizational Depth and Historical Context

JEFFREY SACHS: That’s exactly right, by the way, and very good. And it’s not in the recent memory, it’s in the collective memory, I would say, in the sense that it’s hundreds of years earlier. But there’s a certain thing I’ve learned over time because I didn’t understand it and didn’t appreciate it.

I heard a phrase that I really liked that I had never heard before two days ago, “civilizational depth.” Somebody referred to India and China as having civilizational depth. What they were saying was that these are places of thousands of years. This isn’t some new happenstance. And there’s a kind of memory.

Even if the people don’t know the literal history of when the Ming became the Qing became the PRC and so forth, there is this sense of grandeur. And the fascinating thing about China, if I may just take a two minute digression on it, China was unquestionably the technological leader of the world for about a thousand years, from 500 A.D. to 1500 A.D.

China’s Historical Naval Power and Retreat

In the 1420s, so I’m talking about 600 years ago, China had this great imperial fleet of hundreds of huge vessels. It’s the fleet of Admiral Zheng He, who’s sometimes called the Eunuch Admiral. And he sailed this fleet around the Indian Ocean reaching all the way to East Africa. This is in the 1420s and the 1430s. There was nothing like it in the whole world.

In 1434, the royal court decided, what do we need this for? We’re the celestial kingdom, as you said. We are the center of the universe. We don’t need anything from anyone else. We’re not really getting anything from anyone else. We should just close up. And by the way, we have marauding tribes coming from our desert north, the so-called steppe regions invading us from the north. That’s where the Great Wall is built. So we should devote our resources to protecting our northern boundaries, not to taking these big naval expeditions.

So they scrapped the fleet in 1434. That was the end of the voyages. I call it the worst economic decision in the history of the world because China gave up the oceans. And simultaneously, by coincidence, on the other side of Eurasia was this tiny little kingdom of Portugal and a very clever king, King Henry, who we call Henry the Navigator, who started sending these small ships into the Atlantic Ocean and down the western coast of Africa. Why? Because the Turks had impeded overland trade to Asia and this king presciently was trying to find a sea route to Asia.

But China abandoned the oceans. So when the Portuguese navigator Vasco da Gama circled the Cape of Good Hope in 1498 and entered the Indian Ocean and made his way through the monsoon winds all the way to India, with the help of Arab sailors who knew the routes and the winds, China wasn’t there. So the Portuguese didn’t confront any naval power. The Europeans discovered the Indian Ocean was open for their vessels, for their pirating, for their cannons. China had closed itself up. And so Europe filled the gap.

Of course, the bigger discovery was the accident that going west from Spain, from Seville led you to the Bahamas, which was Columbus’s discovery in the same decade. And that vastly empowered Europe. Suddenly they had two whole continents basically to themselves. Because when they brought the Old World diseases like typhus and bubonic plague and smallpox, they wiped out the indigenous population substantially. So all of a sudden Europe had two added continents to its resource base, its mineral base, its precious metals base, its land base and so forth.

China’s Century of Humiliation

Not to go over all of world history, the point is that China led and then kind of disappeared from sight. From the years 1500 to 1800, China was still a big economy and it was a rich economy given the poverty of the whole world, but it was not present in an international sense in any way.

The British tried to force China to trade in a trade mission in 1795, the McCarthy mission. The Chinese rebuffed and said, you kowtow to us, you have nothing we want. You’re a bunch of barbarians. And the British came back three decades later in 1839 with warships in what’s now called the First Opium Wars.

And then China basically was attacked for 110 years from the arrival of the British. It suffered multiple invasions, civil war, conquest by Japan in several phases. In other words, disaster that they call the century of humiliation.

But what’s important for us as Americans especially and people in the Western world to understand is that really laid China so low. China was bound to bounce back. In other words, China wasn’t this impoverished country from history. It was a world leading society for millennia. And then suddenly for 100 years, they discovered Western technology, they were beaten by it, first by the Europeans and the Americans and then by their own neighbor Japan, which industrialized before China.

And when China emerged independent in 1949, it was impoverished. And it said, we’ve just gone through 110 years of outright humiliation, the century of humiliation. It’s very important to understand that right now, because China’s dominant foreign policy idea is do not do that to us again. Do not divide us, do not weaken us, do not rule over us, do not boss us. We are back and we are not going to let happen again what the British did to us starting in 1839 and what the Japanese did to us starting in 1895. That’s the entire essence of the Chinese worldview right now, which is don’t do that to us again. We are a great country, a great civilization now. We have a strong economy. Don’t mess with us. Of course, and Donald Trump just walked into it.

JAY MARTIN: Well, I think that’s a great segue to what we might call the technology war. And just as an aside, when Vasco da Gama sailed around Africa, I’m pretty sure that was in response to tariffs on the spice trade across the land bridge. There’s some irony in today’s situation.

Historical Trade Routes and Technology Competition

JEFFREY SACHS: You’re exactly right, by the way. It was the fact that in 1453, the Ottomans conquered Constantinople. They renamed it as Istanbul. Suddenly the Christians didn’t have the land route, the Venetians couldn’t provide all the services along the Silk Road. And exactly what you said. The Portuguese did not want to pay trade tribute, the Spaniards did not want to pay trade tribute.

So they started with the idea we got to find a sea route somehow, a northern route, a southern route around Africa to the west. They tried everything and they ended up discovering in quotation marks the indigenous knew they were there, but the Europeans didn’t. They discovered the Americas and they found this Cape of Good Hope, which became the way to enter the Indian Ocean. Exactly what you said.

JAY MARTIN: Right. There’s good, timeless lessons there about the long term impact of trade restrictions. They forced innovation. So getting back to innovation, therefore, that journey, Vasco da Gama, was to get access to the Spice Islands, right? The commodity of the day was nutmeg and mace and pepper and whatnot. And competition for access to those islands is what led the Portuguese and the Spanish and the Dutch to develop better, faster ships to get to these lucrative places and get home quicker.

JEFFREY SACHS: Right.

JAY MARTIN: They could bring more products home faster.

JEFFREY SACHS: The point is. And stronger cannons.

JAY MARTIN: That’s it. It was a technology war. And the winner of the technology war got access to the resources. So my question spun off of that is today we’re all focused on the tariffs, right? And it’s of my view that they’re a bit of a sideshow. The real consequential competition is maybe the technology war, which is happening underneath the surface.

And we can play trade games. And I want to get into your thoughts on this and how consequential the tariff or the not tariff war really is. You know, much of this is just theatrics. It’s not lost on me that the 90 day delay means the next announcement happens on July 4th.

JEFFREY SACHS: Right.

JAY MARTIN: Trump understands marketing if nothing else. But what’s your take on that concept that the tariff war, the trade war, is becoming a bit of a sideshow. The consequential competition is the technology competition. That’s what’s led to real growth and prosperity in the past. It will continue in the future. And how does that landscape lay out today?

Beyond Competition: A Different Perspective

JEFFREY SACHS: It’s a great set of issues. It is the set of issues, but it also presupposes something that I would say is very much a Western and very much an Anglo-Saxon mindset, which is that somehow there’s a war or there’s a conflict or there’s a competition. And here again, I want to differ with the mainstream idea.

First, China doesn’t threaten us, so it’s not a war for survival. China’s powerful, but they cannot invade the United States. They cannot take over the United States, by the way, we cannot take over China. If we really got into it, and it’s not impossible, one or both sides would blow up the world because we’re in a nuclear age. This is something different from past history. We can’t mess around the same way. We know that we literally can end humanity in a few hours. And this is a difference of our time from all previous times.

Second is the mindset. It’s been a Western idea for centuries, a very core idea that life is a struggle and it’s a competition. And it’s very interesting. The Western world, meaning in this case Europe in historical time, was rather united 2000 years ago in the Roman Empire. The Roman Empire in the west was defeated by Germanic invaders in 476 A.D. After that, Europe never reunited. Europe became nation states. In the end, those nation states have basically fought with each other for 1500 years. The idea of competition is profoundly set in the European mind.

In China, there’s something quite different. China’s a vast continental scale, bigger than Europe in population by more than three times. And China did not fragment the way that Europe did. China has some natural geographic boundaries. On the north is the drylands. On the west is the Himalayan mountains. On the south is the tropical rainforest. And on the east is the Pacific Ocean. It’s kind of a box. That box has been China for about 2,000 years.

There have been episodes of civil war where it fragmented. But China has been together in a unified, administrative, centralized state for most of the last 2000 years. Something unimaginable in the Western world and relatively self contained. And as we talked about, China never was too interested in what was going on in the rest of the world.

But China never invaded Japan, for example, not even once in 2000 years, even though it was the bigger power. Once the Mongols invaded China and used that as a stepping stone to try to invade Japan in 1274 and 1281 A.D. But that’s a little footnote. The Chinese never invaded Japan. The Chinese never invaded Korea. The Chinese never invaded Vietnam. These are their next door neighbors in East Asia. Vietnam one time, 1410 to 1426, if I have my dates correct. So 600 years ago.

The point I’m making is for China, the idea of “come on, we’re not fighting anybody” is actually normal. People in the west can’t believe this, but it’s true. Our mindset is so much, “oh my God, we have to compete with somebody.” Whether it’s the Germans, the Russians, the Chinese. We’re at war.

Beyond Zero-Sum Thinking

In the Western mindset, we have a kind of evolutionary mindset. We call it social Darwinism, which is nations are at war. Some people have said, including Hitler, races are at war, but there’s a struggle for survival. That became a kind of scientific mantra in the 19th and 20th centuries to our huge disaster in the Western world.

And the idea is, well, there’s not enough living room. Somebody has to go. Somebody has to give. Hitler literally called for more Lebensraum, more living room in the East. He was going to take over the Slavic land so that the German people would have enough place to eat.

As an economist, I know this whole approach is completely wrong. We actually have enough for everybody in this world. We are not in a struggle for survival. We’re not in a war to the end against China or Russia. And economics is not a zero sum game. The whole world can get richer. It’s not that I win, you lose, you win, I lose.

So I start with the mindset that, sure, okay, let’s compete. Who has the best chatbot, who has the best AI? We can even compete who has the best electric vehicles. But that’s market competition. That’s okay. That’s not competition for survival. That’s not competition for security. That’s not competition that we need an army about. That’s kind of the fun competition of the Olympics. Who’s better, who can do better, who can create something more attractive for consumers? Who can make their large language models more attractive? We take it though, in the Western world as, “yeah, who’s going to win this competition? This is dire. We’re going to lose.”

JAY MARTIN: What?

China’s Economic Approach vs. American Strategy

JEFFREY SACHS: It doesn’t even mean losing in economics, not military, but in economics you can be behind, you can be ahead. It’s true. If you fall so far behind in the old days, you could be invaded. I can tell you something absolutely definitive. The United States will not be invaded in the continental United States in the 21st century unless we fall apart internally. Internally we’ve got, as even Donald Trump says, we’ve got two great oceans and we’ve got 1,600 deployed nuclear warheads. We have 5,000 total nuclear warheads. China’s not invading us. China is not a threat to us. Hutchinson operating a port facility in Panama is not a threat to the United States, however paranoid we want to get.

Now, I want to come to your real question, but I just wanted to preface it that I don’t view this as this kind of competition to the end and who’s going to win and who’s going to lose, because real economics, in my opinion, is just not like that.

Having said all of that, China’s real good at a lot of things right now, especially at industrial production at the high end because it’s created over the last 20 years a remarkable ecosystem of production and it’s concentrated in a few places that are very, very strong. I visit them. There are a lot of good factories, there’s a lot of good engineering, there’s a lot of good technology. So they’re doing a very good job.

As I mentioned a couple of weeks ago, I was in Shenzhen, China, and I visited a robotics company and it’s pretty amazing, you know, when you shake hands with these robots and they’re these humanoid robots and they’re about to come into our lives in a big way in the next couple of years, and Shenzhen alone has probably a dozen of these major producers of humanoid robots. I don’t know who’s going to win in the end in that competition, but they’re doing a very, very good job.

My own view is, you know, you can throw on tariffs and other things, but that’s not what this is really about. What this is about is hard work, a lot of innovation, a lot of smart young people, very clever industrial policy in China, by the way, which is they are investing with national plans. They didn’t just come to AI. They made a national development strategy for artificial intelligence in 2017. And it’s bearing a lot of fruit right now.

We also have that kind of industrial policy, but we don’t call it that. It’s mostly Pentagon procurement in the US case. So even Google started with, or Google companies had CIA venture capital support. Not exactly. I don’t want to be misunderstood, but there is a CIA linked InQTel, which is a venture capital company for advanced technologies for security operations and so forth. And they’ve invested in Silicon Valley, not quite in Google or it’s debated, but in some of the companies that Google took over afterwards and so on.

But our industrial policy is just directly a national security state issue. Right now, the Pentagon is teaming up with Palantir, it’s teaming up with Elon Musk, with Starlink, with SpaceX and so on. In China they do it a bit differently and it’s got a lot more civilian side to it. It’s got a lot more general economy, more, I would say more kind of economic strategy making. We don’t have economic strategy in the US; we have military and security strategy.

But the point is, yeah, China’s become a formidable economy. We can put on tariffs, but that doesn’t do what the President thinks it’s going to do. That doesn’t make innovation strong companies. It basically is actually going to hand the world markets over to China because China is going to be the low cost producers of these technologies. America may build up a little bit more industry behind the tariff barriers, but they’re going to be high cost and uncompetitive.

JAY MARTIN: And I just want to make sure I emphasize the psychological difference that you describe between the Western mindset and what’s much more common inside China. And it struck me as like, you know, I grew up in the west in psychology of like individual prosperity.

JEFFREY SACHS: Right.

JAY MARTIN: Versus maybe a larger goal in China would be collective stability.

JEFFREY SACHS: Exactly. By the way, and the word that they use more than any other word is harmony.

JAY MARTIN: Harmony, sure. Yeah, exactly.

JEFFREY SACHS: Great.

Cultural Differences and Economic Competition

JAY MARTIN: And hard for a Westerner to wrap their mind around that. So for the next few questions, I’m going to try to step outside of my lens and do my best. But you also mentioned the work ethic issue a few times. And again, a natural behavior in the varying stages of empire. When you move from being poor and you know you’re poor, you work really hard, you get a bit of wealth, but you still think like you’re poor. That’s a great place to be.

JEFFREY SACHS: Right.

JAY MARTIN: Versus when you’ve been wealthy for a while and you know you’re wealthy, you get a bit complacent, you work less hard, you become a bit poor, but you still think you’re wealthy. And that’s maybe a bit of a couple labels we could put on the two different cultures right now in terms of where they’re at in their various stages of growth.

Back to a couple things you said about electric vehicles. And this is just market competition. This is not a war. Don’t make it more than it is. And so let’s look at the trade competition, maybe similarly.

And specifically, what I’d love to know is the US is playing this game of tariffs. No tariffs, let’s make a deal. Right? And one of the hotspots of activity seems to be the ASEAN countries, the 10 countries that make up Southeast Asia and nearly a billion people, like 700 million people. Not lost to me that President Xi is making a tour of those countries right now. He’s in Hanoi. He’s going to Malaysia. He’s going to Cambodia. I don’t think he’s going to Indonesia. But I want to talk about Indonesia because I think you’re becoming involved in a society.

Here’s my question. You could be complacent and a pacifist, but if there’s somebody else in the playground who’s being an aggressor, you are forced to respond to some degree, Right? And so if the Western mindset is competition, war, we have to win, and the Chinese mindset is harmony, you know, you eventually get to a point where you have to react, Right? You’ve been pushed up against the wall. Your key geopolitical strongholds, maybe being Southeast Asia, are under threat from trade competition. How do you balance those two things? Right. Well, you have one aggressor and one pacifist. But eventually they got to meet.

The Security Dilemma Between China and the US

JEFFREY SACHS: This is a great, really, really great question and very complicated. And there are a lot of moving parts to this. But one is we should understand China’s security situation and China’s security concern, because this explains a lot of the problems.

China absolutely depends on its sea lanes to eat and for its energy. So the sea lanes now are the Indian Ocean trade, the South China Sea, and the East China Sea. And those are lifelines for China. The United States has a military all along the sea lanes from Japan, Korea, the Philippines, and throughout Southeast Asia and islands in the Indian Ocean as well.

The US actually writes manuals, strategies, books that we have choke points on China. A choke point means you control some critical part of the sea lanes, like the Straits of Malacca in Southeast Asia or like the South China Sea around the Philippines. The Chinese read what we write, and they see our military all over the place. So they have responded in the last 15 years by building up their naval capacity and their military in the South China Sea. They have militarized these coral reefs, these atolls. And the US points at that and says, you see, you see, China’s out to take over East Asia.

This is what a wonderful political scientist who was a colleague of mine and who passed away a few years ago, Robert Jervis at Columbia University, called the security dilemma. And what he meant by that was that one side takes an action that it views as defensive and the other side interprets it as offensive and then responds to that in its own way, which it views as defensive and the other side views as offensive. And the psychology, because of profound distrust, leads to a spiral that can end up in war.

China absolutely believes that it’s protecting its vital sea lanes. The United States probably believes truly that China is threatening Southeast Asia. This is the security dilemma. I hear both sides all the time because I’m both in the west and I’m in the east, so I hear it all the time. The countries of Southeast Asia say, oh my God, we don’t want a war here. This is their main point. If they could have good relations with the United States and China both, they would love to have that. I know it because I advise many of these governments, that’s what they want. They want quiet.

The United States has huge military buildup all around China right now. Our very anti-communist Secretary of State in 1951, he was not yet Secretary of State, he was the leading foreign policy adviser to the Republicans, John Foster Dulles coined the phrase “the first island chain.” This is a set of islands that starts in the north with Japan and includes Taiwan, includes other islands. And the US views that chain as a barrier to China’s projection of power into the Pacific, even a barrier to Chinese submarines entering the Pacific. So China feels it’s cornered. And we say, oh, they’re a threat to us. My God, this is a recipe for war.

Add in one more problem here, and that’s Taiwan. Long, complicated story, but China says Taiwan is part of China. The United States says China, you said it when we made diplomatic relations, the one China policy, which is true. And yet the United States arms Taiwan and could give advertently or inadvertently encouragement to Taiwanese separatists to declare independence of Taiwan, in which case there’d be a war, and that war could become a world war. So there are flashpoints in all of this as well. To my mind, completely unnecessary.

And incidentally, I want people to understand the asymmetry of our thinking or the lack of our willingness to think from the other perspective. Donald Trump says that if a Hong Kong company has a port facility in Panama—this is Hong Kong, mind you, not the mainland—even a Hong Kong port in Panama, that is a dire threat to US Security. And Vice President Vance says the same thing. And if a Chinese submarine or Russian submarine appears around Greenland, that’s a reason why the United States must take Greenland.

Okay, whatever one thinks of that. I don’t think much of it. But apply it in East Asia. We’ve got military bases, troops, naval fleets, missile systems all around China. And we say, yeah, that’s our business. Why are they concerned with us? And so the asymmetry, the inability to think from the other side can get us into a hell of a lot of trouble.

And this is really a major point. If we’re concerned about a little port facility in Panama, think about how the Chinese are concerned with American military bases in Japan, in Korea, in the Philippines, in Australia, in AUKUS nuclear powered submarines being developed for naval bases in Australia right now. And we’re telling the Chinese, what are you afraid of? Why do you care? Why are you so belligerent? You know, this is partly a game and partly an unwillingness to think from the other perspective.

JAY MARTIN: Okay, let me ask you a question about the American mindset then. Because if there is a substantial threat to the US dollar as the world’s primary reserve currency, that it wouldn’t be an existential threat, but it would be a very serious one to the United States, they are far too indebted to allow that to happen. And so is there therefore internally, is that mindset somewhat justified? Because they need to protect the USD trading rails in order to protect their future in a way that other countries don’t have to because they’re not as vulnerable from a debt and leverage standpoint as the United States is, in a way.

# U.S. Dollar Dominance and Debt Concerns

JEFFREY SACHS: Yes, and it’s a very good point, but semi-ironic, let me say. Because what you’re saying is very astute, very apt. But what you’re saying is we’re in so much debt, damn it, that we have to keep control because we’re in so much debt. Well, okay. If you plead that to the court of public opinion, if you say that’s why we have to go to war, whoa, how about getting out of debt? How about more responsible budgeting?

But what you’re saying actually is right. And Donald Trump, he doesn’t like to show weakness. Let me put it that way. But this is one area where he absolutely displayed fear twice. Once last month, he declared, “Anyone who threatens the role of the US Dollar, we’re going to destroy.” That is not a statement of strength, that is a statement of weakness. Absolutely. And I’ll come back to that in a moment.

And then the second show of fear: when he put on the tariffs, the financial markets cratered. Not the trade per se, but the financial markets. And that’s real, too. The United States borrows from abroad hundreds of billions of dollars. We’re running a current account deficit of a trillion dollars a year. That means that there has to be financing from the rest of the world of that amount, not all in debt, but a lot of it in debt.

Trump thinks we have the upper hand in that we’re the debtor. But we’re not only the debtor, we’re the debtor and we’re continuing to borrow. So I would say in that circumstance, be polite and trustworthy, not be a son of a bitch who’s going to threaten the rest of the world because they don’t have to buy the debt after all. And they can disgorge the trillions of dollars of debt that they have if the US Dollar stops being the safe haven.

# The Coming Multi-Currency World

But let me give maybe an unfortunate piece of news in all of this, just in a purely economic side. Putting aside all the geopolitics we’re talking about, the United States will not remain the key currency of the world. We are moving to a multicurrency world, and we’re already paying higher interest rates because of that, because we can’t just borrow to our heart’s content in dollars anymore, because others are not going to hold all that debt anymore on easy terms.

And there are three reasons for that very quickly:

1. The share of the US in the world economy is diminishing over time and it can’t be stopped. And that means that the weight of the dollar as the dominant currency has less and less fundamental support.

2. The US very unwisely weaponized the dollar by confiscating the foreign exchange reserves of other countries by using the dollar as the sanctions enforcement vehicle. We tell other countries, you don’t trade with that one, you don’t trade with that one. And you say, well, how could we stop them from trading short of war? And the answer is we threaten their banks. If the banks engage in dollar transactions to facilitate the trade we’ve said is not allowed, we cut the banks out of the payment system. Well, if you use the dollar that way enough, other countries begin to say, hey, we don’t want to use the dollar. We’ll settle in renminbi, thank you. We’ll settle in some other currency.

3. The literal mechanics of how you make a settlement, how you make a payment from the United States to make a purchase in Europe, or even a purchase in Europe from a seller in India, the mechanics of that goes through banks. And the banks settle through a clearing system called SWIFT. This system is out of date, it’s outmoded in our modern digital world. And so it’s going to be replaced by what’s called central bank digital currencies, where basically central banks will just be settling directly. They won’t need the commercial banks to be the settlements mechanism.

So for these three reasons, the dollar’s unique role is basically doomed in my view. And I’m a little bit of an outlier among macroeconomists in this. I think it’s going to happen sooner than the mainstream. I think in 10 years the US dollar won’t play anywhere near the role that it plays today. So I don’t think this is a 50-year proposition. I think it’s a 10-year proposition.

# The Debt Spiral

Then it comes to exactly what you pointed to. We can’t just borrow by issuing dollars or low interest debt anymore. We’re paying already 4.5%, 5% interest rates on U.S. treasury bills and bonds. That’s costly because we’ve already run up a debt of 100% of GDP of the part of the public debt that’s owed to governments and to the public, domestic and foreign. That means that each percentage point or 100 basis points of interest on our debt means that the deficit rises by 1 percentage point of GDP. It’s a lot.

So we’re in a kind of debt spiral right now. And unfortunately Trump and the Republicans, and I’ll add in the Democrats too, because they do the same thing. They have their hearts set on tax cuts at a time when we’re hemorrhaging debt already. Nobody’s serious in Washington. Nobody looks at real numbers, no one looks at real budgets. They look to their donors and the donors say, cut my taxes. And they say, absolutely, we want to be in office two years from now. We need your campaign contributions.

So basically we’re in a debt spiral at the same time that the role of the dollar, like you said, is going to diminish and we’re going to rail against it, but we’re not going to stop that.

JAY MARTIN: Okay. I know we’re bumping up against the clock. I have two more questions for you. We got time?

JEFFREY SACHS: We do.

# The Belt and Road Initiative

JAY MARTIN: All right, first of all, I got to get your thoughts on the Belt and Road Initiative. And specifically I’d like you, because I think you’re for it, in favor. It’s positive, in terms of global economic growth. And I know you have that opinion. From a boots on the ground standpoint, you’re not reading headlines. You were recently in Ethiopia, I believe, among other things, visiting with some farmers who are the beneficiaries of this program. How do you balance that with the concept of debt diplomacy and predatory infrastructure lending?

JEFFREY SACHS: So basically, the Belt and Road Initiative is a bit like what the United States did in the 1950s, which is to say our industry, our technology is going abroad and we will help build infrastructure, power grids, power systems and so forth to facilitate that. We did that in the 1950s in our development aid programs. China started to do that basically about a dozen years ago in this Belt and Road Initiative.

And their idea is modern infrastructure could be fast rail, and it would be nice if the United States had a little of that. It could be power grid, electricity, it could be port facilities and so forth. And China will finance that substantially with institutions like the China Development Bank or the Bank of China or the China Export Import Bank. And the partner countries will get a modern rail service or a modern power grid.

I’m all for it. I just think, gee, that spreads development. It’s good for China. They sell exports. This is Chinese businesses. By and large, China would like to get its debt back, so it wants to be repaid.

I have one piece of advice to the Chinese which I repeat to them all the time, which is instead of the typical 7 to 10 year loans that they’re making in the Belt and Road program, they should be 20 to 30 year loans. Because if you lend to Ethiopia, don’t ask for the money back in seven years or 10 years. That’s an impoverished country. It’s going to take 20 or 30 years to get your money back.

So I do have one piece of advice. This is the first time China’s done this, and I’m pointing out to them that the maturity of their loans really matters when you’re lending to poor countries, because you don’t want to trap them.

Now the United States says, “Aha, it’s a trap, it’s a ploy.” This is false completely. This is US propaganda, bad mouthing PR operations. Why? Because the US doesn’t have a program like this. If the US just said, “Okay, you don’t want the Chinese, we’ll build the fast rail.” Oh my God, if we only had fast rail, we would do it. By the way, we don’t even have fast rail.

But the point I’m making is that the US has to badmouth this as part of its geopolitical play. I go to these countries, I see the investments, I talk to the governments, I advise some of the governments. This is a good thing. If there is a debt trap, and there has been in some countries, it’s not because the loan is bad or because the infrastructure is bad. It’s because the maturity is too low.

So that’s what I’m working on right now is to extend the maturity structure of this. But otherwise it’s a very good project. And the United States should have a similar project if we want friends and connectivity for our industry.

# Indonesia and ASEAN

JAY MARTIN: Okay, thank you for that. Now my last question is a selfish one because I spend about half my life in Indonesia. That’s where my kids go to school.

JEFFREY SACHS: Wow.

JAY MARTIN: And I was very impressed with some of the moves that President Widodo made. You know, they’re the world’s largest nickel exporter. When he banned the export of raw nickel, not to cut off importers, but to own more of the supply chain and refining country. Things like this I’m massively in favor of. I think it’s very intelligent. The press covering the new president, President Prabowo has been a bit critical in terms of the expansion of military, the role of the military. There’s been maybe some nationalizing of real estate. The headline, the sensational headline has been, “We’re going back to 1990s Indonesia.” Now, I know you’re, I believe you’re advising him on a new sovereign wealth fund, or it’s close. Is this correct?

JEFFREY SACHS: Just to clarify, I’m not even sure in the following sense. He asked me as he was coming into office to be a special advisor. And I of course said yes. I do all of these things on a pro bono basis because I don’t take money from governments and I do it on my academic basis. But I love Indonesia. So I said, of course I will help you, Mr. President.

Then I was asked to join this Janatara, which is a new sovereign wealth fund putting together some public assets. In truth, I haven’t had one minute of briefing on this. So I’ve only said yes, that I will do it, not compensated on the basis that I’m an advisor to the President and I haven’t heard another word about it yet. So I can’t answer any specific questions about that sovereign wealth fund because I haven’t done anything, literally not even a moment of briefing.

But I am available to President Prabowo as a special advisor to help think through the economy. Nobody’s going back to the 1990s by the way. Indonesia is looking forward.

I’m a big believer in ASEAN which is as you mentioned, it’s the regional grouping of 10 countries of which Indonesia is by far the largest. But I want all 10 countries to work together. It includes Vietnam, Cambodia, Lao PDR, Thailand, Malaysia, Singapore, Indonesia and so forth. I want them to work together. It’s about almost 800 million people. It’s a fast growing region.

I want them to have an integrated strategy on digital, on rail, on ports, on hydrogen economy, on long distance power transmission. In other words, to really think like an 800 million grouping of a fast growing middle income region because I think it can be tremendously successful.

And it links back to the Belt and Road because I think the region should absolutely be integrated with the Chinese economy. Not only the Chinese economy, but yes, of course with the Chinese economy. If the United States were to tell Southeast Asia, “Hey, you’re with us or you’re with them,” that would be absurd. Of course they’re in East Asia. Of course they’re going to have trade with China. Of course they’re going to have physical infrastructure links, transport links, power links, digital links with China.

So don’t force that kind of separation and expect anything good to come out of it. But I do know what the ASEAN countries would like is good relations with the United States and good relations with China.

JAY MARTIN: I really appreciate that perspective and thank you. And it also made me think, just as I’m watching the headlines about U.S.-China relations right now, there’s a lot about Canada-US relations right now. There’s a lot of headlines saying Canada’s future is with China and all this, you know, in response to trade aggression from the south and exactly what you just said. It’s like the proximity really matters. Yes, $1.2 billion worth of goods cross the largest shared land border in the world every single day. You know, it’s like gravity. That’s why that works so well. Right?

JEFFREY SACHS: By the way, we call it the gravity equation in trade, which is that the amount of trade between two countries is inverse to the square of the distance. And this is one of the established empirical points of international trade for decades.

JAY MARTIN: Look, I know I ran over time. I really appreciate you talking.

JEFFREY SACHS: Great to talk with you. Really great.

JAY MARTIN: Super fun conversation. I’d love to do it again sometime. Thanks again.

JEFFREY SACHS: We’ll do it. Thank you. Take care.

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