Author: Joy Liu
This article is a text version of the YouTube video " Why the Federal Reserve cannot control all dollars? | A 70-year-old dollar blockchain system ", which explores the role of the dollar in the global economy and specifically gives a counterintuitive view:
The Federal Reserve cannot fully control the dollar's global influence.
We all know that the U.S. dollar is the most important legal currency in the world, and its movements will cause fluctuations in the global economy. But have you ever thought about it from another perspective? This is actually in conflict with our real life. In other countries outside the United States, people use their own currencies to conduct commercial transactions. Since we don't see the existence of the U.S. dollar in these places, how does it control the world market?
Outside the United States, how much influence does the Federal Reserve have on the US dollar?
What attempts have other major economies, such as China, made to ensure that their currencies have a place in a world dominated by the US dollar?
So how do US dollar assets and US government debt affect other countries, and how do other countries in turn use the US dollar and US dollar debt?
In this issue, we will analyze all the above issues, and in this issue, I have found help again.
Yes, today's assist is Jeff Snider. His main research direction is the Eurodollar. Friends who often pay attention to English financial content should be very familiar with him. He is often jokingly called the Jesus in the Eurodollar field.
Why isn't it called overseas dollars?
Jeff:
For many people, this is actually a better term. The term "Eurodollar" confuses people because when they hear the word "Euro," they immediately think of the Euro, which is the only term that people have ever heard of in connection with the Euro. But in fact, the so-called "Eurodollar" originally referred to U.S. dollars that were primarily stored in Europe but located outside the United States because it originated in Europe.
In fact, the City of London acquired the name "Eurodollar" sometime in the 1950s. No one knows exactly when the name came about because it was all done underground. Banks at the time were trading dollars for various reasons. The Eurodollar was an offshore U.S. dollar system that began to take on the role of a reserve currency because it was useful in many different places, especially in Europe in the early post-war period.
As more and more dollars were created, it gradually became a reserve currency, and by the 1960s it actually replaced the Bretton Woods system as the reserve currency system. Although it's called the dollar, what we need to remember is that there aren't any actual dollars in it, no paper money printed by the US government. There are no federal reserve notes, and there aren't actually many bank reserves. It's a virtual currency, no reserve currency, ledger currency system that has filled the role of a reserve currency. So it's centered around banks and balance sheets, and the real players are the global banks. They are the dollars that are circulating around the world because it's a reserve currency.
There is hardly any part of the world that is not affected by the Eurodollar. The reason we had such a big global boom in the second half of the 20th century was because the Eurodollar system allowed a lot of innovation and technology to be adopted and funded around the world. So when the Eurodollar works well, the world actually benefits greatly from it.
But since August 2007, that's no longer the case. So the world is actually moving in the opposite direction. The drag on globalization, economic growth, etc. has been affected. But for all intents and purposes, you have to think of the eurodollar as a reserve currency system.
Is the dollar holding the world hostage? Or is the world holding the dollar hostage?
In the decades since the U.S. dollar has been widely used by countries around the world, our impression of the impact of the U.S. dollar is:
Joy: Does the US dollar hold the entire world economy hostage? Because it is the reserve currency, and the only country that can control this reserve currency is the United States.
Jeff:
This is also a misconception, even though it is called the dollar, the US government has no control over it. The only way the US government can control global economic and monetary considerations is actually through sanctions. When they tried to cut off Russia from the Swift system, they had to ask banks not to let Russians trade on Swift.
Swift is merely a messaging system owned by a global consortium of banks. Once again, it is a huge misconception that the dollar is controlled by the US government or the Federal Reserve. The US government would like you to believe that they have that power and authority, but in reality the Eurodollar system has been like this since the beginning.
One of the reasons initially was that the Soviet Union at the time didn't want to keep their dollar deposits in American banks because they were afraid that the Eisenhower and later Kennedy and Johnson administrations would confiscate their dollars. So they kept those dollar deposits in banks in Montreal, Zurich and London, and it was a big deal.
This allowed them to trade in USD terms but outside of US control and out of the reach of the US government. Because this had been going on for so long, no one really understood or knew what was going on, and a misconception arose that the USD was a national currency operated by the US government with the Federal Reserve System as its monetary institution, which was not the case.
That is to say, when we think about whether the US dollar has kidnapped the world, there is actually another detail: how the US dollar is transmitted, that is, through the SWIFT channel. Regarding SWIFT, in the episode where I talked about the RMB, I mentioned in detail its principles and some data on the usage of different currencies. You can go back and look at that episode.
The US dollar blockchain was first conceived in the 1950s
Jeff:
You'll see why I use the term "Eurodollar" because it makes the distinction. What we're actually talking about is a bank-centric monetary system called the dollar.
It is denominated in dollars, but there are no actual dollars. Therefore, it is essentially bank money. So it is not the US government that controls the eurodollar system, nor is it the US that imposes dollar dominance on a global scale. The fact is that the eurodollar system is the most useful and widely available monetary system. Because it is useful and widespread, that is why it is still used today.
It's not the US government that makes it useful, it's useful. It does what it needs to do, at least within the minimum capacity of a reserve currency system. So, the US government wants you to believe that it controls the dollar. But the Russian example shows that they have huge problems with that because the euro dollar is out there, and the euro dollar is what's important, not what the US government says.
As Jeff said just now, the linkage of the accounting systems of banks in various countries actually facilitates such a network of US dollar transactions. When the US dollar flows between banks and is recorded, it is difficult to exercise full control over the European dollar system unless the US government uses hard political means to refuse a certain region from using the US dollar.
Well, speaking of this, do you think that if we regard the ledger of each bank as a unit, and the banks keep accounts for each other's US dollars, this system looks more and more like blockchain. But this is just my association, and blockchain is not the focus of this issue.
A system is not equal to a unified consciousness
I have made some limited one-on-one video appointments available to the public. One of the audience members I have made an appointment with expressed a perspective on things that I personally agree with, and I would like to share it with you. That is, we often simply regard a system or organization as a large individual with subjective consciousness, but in fact, there are many internal games in every system, and the larger the system, the more so. This also leads to a lot of coincidences in the development of a system over the past few decades.
The reason why I agree with this line of thinking is that this line of thinking is often covered up by the media intentionally or unintentionally, because everyone wants to make a big news, simplifying a system into an individual image, making the role of the enemy or friend particularly concrete, it is easy to resonate with the public's emotions. But on the other hand, it is also a catalyst for the public's views to go to extremes.
So I think we should always consciously remind ourselves when absorbing information that any system is complex and diverse, and does not have an absolute single consciousness. In this way, we will look at things more objectively and will not be so easily drawn into conspiracy theories.
The text version of this episode is also in my description column. If you have any questions about any ideas or terms, you can use my text as learning materials. If you join my mailing list, I will give priority to notifying friends in the mailing list when I have new ideas or new developments in the channel. After all, the cycle of making a video is a bit long, and it is much faster to notify new news through email.
Now let’s get back to the issue of the US dollar.
What is the function and significance of the reserve fund?
In my conversation with Jeff, Jeff mentioned a very interesting thing, which is the reserve fund. Everyone knows that it is the US dollar now, but most people rarely think about why the reserve fund exists and what is its deep meaning and function?
Jeff:
I think most people don't really understand what a reserve currency is. You don't think about it much, because why should you? It's not something that affects your daily life. A lot of people think a reserve currency means you can price commodities, like oil, in your own currency.
It's actually a byproduct of reserve currencies. But reserve currencies are a medium, an intermediary. So you can have your own monetary system, your own monetary arrangements, your own independent economy on the other side of the world. How do you get them to transact? How do you get them to trade in a seamless and efficient way? How do you get investment flows from one place to another in the world?
The Eurodollar works because it's an intermediary currency, or what they used to call an "instrument currency." You can start with, for example, the Swiss franc. A bank in Switzerland has a wealthy client with franc deposits. They want to invest in a growing Asian economy, such as Thailand.
In any other arrangement without a reserve currency, this would be very difficult because you would be providing Swiss francs to Thailand and Thailand would have no use for the Swiss francs and the only way to convert would be to have a currency as an intermediary that is available and usable at both the place where it starts and where it ends.
So if Swiss banks were able to convert their francs into dollars and then use those dollars to invest in Thailand. Because dollars are available in Switzerland, and dollars are available in Thailand. So this allows money to flow around the world with dollars as an intermediary. Suddenly, a person holding cash in Switzerland can invest in Thailand without any obstacles.
The only thing that makes this work is if the dollar is available and useful in many parts of the world, as it has in the form of the Eurodollar. Because it becomes useful and available in many parts of the world, that's why it persists. It's not for political reasons, it's because it solves a huge problem, which is that you have a global economy but no international currency.
The eurodollar has effectively become that international currency, allowing disparate systems around the world to fit together seamlessly, or almost seamlessly. It's not perfect, nothing is. And it's become increasingly difficult since 2007. But there's no other monetary system even on the horizon that can do as well to get money flowing, to get credit flowing, from one end of the planet to the other. To connect places that you wouldn't think could be connected so easily. That's why the eurodollar works.
In other words, we can actually observe the reserve funds from the perspective of a medium of exchange, which is actually connected to the development process of our human economic activities, just like thousands of years ago, humans used shells as a medium of exchange, or more recently, when Germany experienced hyperinflation in the last century, it used currency to paste windows and cigarettes as a medium of exchange.
The Fed's interest rate changes are not monetary policy
Let's talk about the impact of the United States on the Eurodollar. I believe that friends who watch the video, including myself, will raise a question at this time, that is, the Fed's interest rate hikes and cuts have a clear impact on the price of the dollar and economic activities. If the United States does not have such a strong control over the Eurodollar system, then how should we view the fluctuations caused by the Fed's interest rate changes on overseas economies?
Jeff:
They try to create an image of a powerful technocratic institution. However, no one really thinks about what the Fed actually does. People just think that the Fed is in charge of the dollar because the Fed has a printing press. In fact, this euro-dollar system does not need American dollars at all. Therefore, the Fed's influence on the euro-dollar is very limited.
It wasn't completely without impact, but it was nowhere near as big as people thought. In fact, it was very limited. With the emergence of the Eurodollar in the 50s and really into the 60s, the monetary system began to change. That meant a lot of things because it was a system with no reserves and was essentially controlled by transactions between banks. It was a blank canvas that enabled banks to trade in all kinds of monetary forms that had never been done before, like derivatives.
People didn’t really know what a derivative was or what it was used for, but in many ways, a derivative was a different form of money. So in the ’60s and ’70s, the Federal Reserve System discovered that they didn’t even know how to define money, which was used in a very real way in the real economy. So throughout the ’70s, the Fed was trying to figure out what was going on with the monetary system.
Furthermore, this is all happening offshore. This is the Eurodollar part, which is outside the United States, denominated in dollars, and appears on the balance sheets of commercial banks around the world. The Fed has essentially lost control of the monetary system. So when Paul Volcker came in, he didn't fight the Great Inflation. He actually admitted that we don't know how to monitor, let alone regulate, the dollars circulating in the global system.
So we try to influence the behavior of banks and economic agents by raising or lowering a single interest rate. They end up targeting the federal funds rate. If you stop and think about it, it's ridiculous to think that they can control the entire monetary system by increasing or decreasing the federal funds rate, especially when the federal funds rate itself is not that important of an interest rate.
So when you have the Fed Funds rate changing year over year, how much of an impact do you think that has on your decision making? And your view on the Fed Funds rate right now, because your inertial discount rate is usually higher than the additional rate adjustments. So basically, this is what the Fed has been doing since the early 80s.
Let me add one more thing. The Federal Funds Rate, which is the benchmark interest rate of the Federal Reserve, was actually first used in the 1970s, after the last major inflation in the United States. Before that, the most important interest rate was the discount rate.
I have mentioned this part of history in my previous video.
Jeff :
Actually, starting in the late 1970s, they realized that they had no control over the monetary system. They didn't even know the definition of money, let alone where to start defining it. So in order to at least pretend that they had some kind of influence over the monetary system and the U.S. economy, they had been targeting the federal funds rate for many years and calling it monetary policy, but in fact it was just interest rate policy, not monetary policy.
They hope that when they raise the federal funds rate, that this will reduce credit and thus slow economic growth, but that is not the case. As long as you believe that the federal funds rate controls everything, then no one will ask what the Fed is actually doing.
And then when the system collapsed in 2007 and 2008, first of all, the fact that we had a crisis in 2007 and 2008 should have raised huge questions about the ability of the Federal Reserve, because if the Federal Reserve was such a powerful institution, it would have been impossible for there to be such a severe shortage of dollars in 2007 and 2008.
But anyway, they responded to the 2008 crisis by doing quantitative easing, and everyone thought that was printing money, they were creating reserves out of thin air. It was massive money printing. So when the Fed did quantitative easing over and over again, everyone said, this is going to cause inflation because the Fed is printing money. And we all know that when a government prints money, it causes inflation.
Yet, it never led to inflation. 2020 is a different story, but throughout the 2010s, people kept hearing that every round of quantitative easing would lead to runaway inflation, and that never happened. No one stopped to ask why. Why didn’t it happen? Because the Fed and its bank reserves are not money, the Fed does not print money, and the Fed has very limited influence over the monetary system itself.
Cognitive Bias/Confirmation Bias
At this point in the video, I believe many friends will feel that this is very different from the opinions and perspectives we usually hear in the media. If you feel this way, then the purpose of my content creation has been achieved. Why do I say this? This is a concept of mine that I want to share with you. In fact, all of us are very easy to fall into a state of Confirmation Bias.
Confirmation Bias is translated into Chinese as confirmation bias or confirmation bias, which means that we are more inclined to look for or listen to opinions that we already believe to be correct. Social media platforms take advantage of our cognitive characteristics, or I think its shortcomings, to continuously push things that we have subconsciously agreed with. The result is that we will continue to strengthen our existing opinions, and then be hostile to, attack or resist people who have different opinions from us. At this time, even if the other party is sincerely discussing the issue, it will become a threat in our words.
After we realize that our excitement is meaningless, when we discuss a problem, we should actively allow our own views to be questioned and challenged. Because if we often observe a problem from three or four angles and constantly polish our own views, we can build a more complete thinking framework and avoid falling into resistance to other people's views.
Because this may make us very biased and extreme. That is why you will see me often replying to everyone's comments in the comment section, even if they are questioning me. Because only in this way can we have a kind of interaction in thinking. Even if the audience who has been watching my videos but never left comments, after seeing my interaction with everyone in the comment section, these friends will also think about the problem from more perspectives.
In this way, I and my entire audience can continue to improve as a whole. Of course, I also hope that when viewers of my channel face some practical or psychological obstacles in work, life or investment decisions, they can also use this multi-angle observation method to look at the problems in front of them. As the creator of this channel, haha, although I can't force everyone to have the same values as me, I also try my best to practice what I think is right.
Aren’t repurchase agreements a way for the United States to control the dollar?
So back to the monetary system. In the episode where I talked with Joseph, we mentioned that the Federal Reserve conducts overnight repurchase agreements, which is the area he was responsible for when he worked at the Federal Reserve. The Federal Reserve uses overnight repurchase agreements or reverse repurchase agreements to help other countries or financial institutions solve liquidity problems. So this -
Joy: The Fed has actually done a lot, increased a lot of swap agreements. So this has helped other countries to some extent solve some of the liquidity shortages. Does this provide the additional supply that the rest of the world needs when they need it?
Jeff:
That was their intention. I would argue that the swap program that was actually executed was worse. Look, they had dollar swaps open since December 2007. So they had been doing dollar swaps overseas with major central banks since 2007. Despite that, we still had a global dollar crisis. How effective were these dollar swaps?
They made it essentially unlimited in the summer of 2008, right into the worst of the crisis. So in September, October, and even into November 2008, there were massive withdrawals on these foreign dollar swaps. And yet, we still had a crisis. We had the worst six months of global economic conditions since the Great Depression, largely because dollars were extremely scarce and unavailable.
This has created liquidity issues in markets around the world. So again, how effective will these dollar swaps be in the first place? Again, this is one of those things that you should just take at face value and not think too deeply about because it fits into the myth that the Fed is the central bank of the world.
The Federal Reserve is the primary provider of dollars to the rest of the world through its various very sophisticated and very effective dollar instruments. This is not the case at all. For example, in 2019 or 2018, central banks around the world complained about dollar shortages in their regions.
RBI Governor Urjit Patel said in the Financial Times in June 2018 that there is a global shortage of dollars. The view that the Fed's dollar swaps provide some kind of liquidity support, or even minimal liquidity support, to the rest of the world is inconsistent with what we observe across the system.
Which brings us back to the broader issue of this eurodollar system being broken. The Fed really has no idea how to fix it, assuming they’re even interested in fixing it.
Possibility of regional reserves
Jeff:
There is a possibility that certain national currencies could become regional reserve currencies, and historically monetary systems have tended to be regional, not international or fully global. So it's possible that there will be various groups that primarily trade in one or another national currency. But I don't think that's enough. I think we've moved into a global system.
So we really need a globalized monetary system, and no national currency is even close to being able to do that. The first thing most people think of is the Chinese renminbi, but even the Chinese themselves don't want to internationalize the renminbi. They made a half-hearted attempt about a decade ago to create an offshore market, or at least start to create an offshore market and an offshore renminbi.
But they never really allowed it to flourish as it could have. I'm skeptical, but at least they started this experiment, and then they kind of gave it up. They kind of pulled the plug and said we're not too comfortable with this, which is why the Chinese authorities themselves have been advocating for the use of the IMF's Special Drawing Rights (SDR) as an international alternative to the eurodollar.
But that is more unrealistic than any other possible framework, because the SDR is just another bureaucratic creation.
What is the full name of SDR? It is Special Drawing Rights, an international currency established by the International Monetary Fund. The price of this international currency is currently determined by the currency prices of five major economies in proportion, namely the US dollar, the euro, the Japanese yen, and the British pound, which is equivalent to the RMB. Among them, the US dollar accounts for the largest proportion and the Japanese yen accounts for the smallest proportion. The price of this SDR is updated every working day because the international exchange rates of these currencies are changing.
However, the composition of the SDR only changes every five years. As for the specifics, you also mentioned it when I talked about the RMB, so you can review it.
Japan's Embarrassment in the Eurodollar System
If we zoom out a bit and look at Japan's role in the Eurodollar system, we can see that -
Jeff:
If you are a Japanese bank and you are short of dollars, which, by the way, the Japanese banks are short of trillions of dollars every day, if you are a Japanese bank short of dollars, what if the market doesn't renew your funds? Well, you have almost no recourse, except maybe the Bank of Japan has some spare dollars to lend you because the Bank of Japan or the Japanese government has been hoarding dollar reserve assets, which is another warning sign.
The Japanese government has been hoarding reserves in the form of dollar-denominated assets since the Asian financial crisis, which was also caused by a shortage of dollars. So the Japanese government may provide you with some dollars. They sell some US Treasuries, create some liquid dollar assets, and then lend them to you so that you can replace the rollover funds that you are not getting in the market because the market is getting more and more difficult.
So what the Fed did was, through these foreign dollar swaps, it essentially turned the Bank of Japan into an extension of the Fed's discount window. So if you were a Japanese bank that had a problem with funding because the euro dollar market was no longer providing the dollars you needed, you could go to the Bank of Japan. The Bank of Japan didn't have to sell its Treasury bonds.
They can simply apply on your behalf for a dollar loan from the Federal Reserve Bank of New York via a dollar swap.
Why is the U.S. deficit actually too low?
In March and April 2020, there was a serious shortage of US dollars around the world. Then the US government used fiscal policy to inject money into the market and substantially increase US debt. Just when everyone thought that the dollar would definitely depreciate, the price of the dollar remained very strong at its highest level in history. Behind this was the problem of a large shortage of collateral in the Eurodollar system.
Jeff:
In the early days of the past, you and I, we could trade in dollars. Because I know you. We have a reputation. You have a reputation. I have a reputation. We know each other. We're familiar with each other. So you and I could lend each other dollars without collateral because we had this reputation and information advantage. But as the eurodollar system expanded, now you're trading dollars with people on the other side of the world on a much larger scale.
How do you moderate risk in doing that? Well, one way is to say, okay, I don't know you, Joy. But you need dollars. I have dollars. If you have some financial asset that can be used as collateral, then we don't need to know each other.
I just need to know what the collateral is. If the collateral is standardized and widely available, like a U.S. Treasury bond, then we can trade on a massive scale because all I need to know is that I have a U.S. Treasury bond as collateral. I lent you dollars. If you default, I know I can sell that bond tomorrow because I have the right to seize it and sell it.
So collateral allowed the Eurodollar System to reach a scale and reach that was previously unimaginable. Think about the 1990s, when the federal government actually ran a near surplus, which meant there was a shortage of Treasury bonds that could be used as collateral. If there weren't enough Treasury bonds to use as collateral, we had to find something else.
Otherwise, you and I can't do business because I don't know you and I need some kind of security. So the monetary system, the eurodollar system, all these banks not only created new forms of cash, they created new forms of collateral. That's one of the reasons why securitization took off. My view of what happened in March 2020 was actually April 2020. I think the reason we came out of that crisis was the federal government issued trillions of dollars of Treasury bonds at a time when the market was desperate for such collateral.
Joy: It sounds like the US government needs to maintain a deficit so that the national debt can continue to be issued. Otherwise, it can only use mortgage bonds and various riskier bonds as collateral.
Jeff:
Yeah, that's the flip side of that, because the more debt the federal government issues, the better the system works. So you're basically rewarding all of the government's worst behaviors.
This part also explains why in the past 20 years, we have found that there are so many financial derivatives in the market. The emergence of these products is also directly related to the shortage of US dollar collateral in the Eurodollar system.
Risks of CRE CLO in the Eurodollar System
In the previous video, I mentioned that many lending institutions now have a large number of financial derivatives that repurchase commercial real estate debt contracts that they have sold, namely CRE CLO (Commercial Real Estate Collateralized Loan Obligation). This part of the product is not only widely traded in the United States, but has also become a very important financial derivative in the Eurodollar market and circulates in the market.
Jeff:
There are a couple of things going on here. On the one hand, you're right, there are some things that are not very transparent, especially in commercial real estate structures, that we don't have enough information on yet. But we continue to get reports, especially from CLO (collateralized loan obligation) originators, who are trying to limit the losses they can take, and they are increasingly concerned that if they start recording these losses, the market will go into a mess, and this also goes back to 2007, when the main trigger for the collateral shortage was that subprime mortgage bonds became increasingly illiquid.
As they become less liquid, they become less acceptable as collateral. Because if I lend you cash and take security from you, I don't care what the security is, I only care if I can sell it tomorrow and be reasonably sure that I'll get my money back. So if there's any doubt, even if the bond you're offering is the best,
I'm not going to accept your collateral if the market behind the bond with the best credit characteristics becomes unstable and unreliable because I don't know if I can sell it in a timely manner at the price I need. So if the CLO market could become illiquid, it means that these CLOs, especially commercial real estate structures, become less available as collateral for various forms of collateral, including cash collateral.
I've talked about this before, exchanging risky assets for US Treasuries and then using the US Treasuries as collateral to borrow money, it gets complicated because the Eurosystem itself is like Frankenstein's monster that is just stitched together in many elements. It's been so incredibly complex and difficult to understand for many years that almost no one really understands how it works and how it fits together, including all the people involved.
So there's always this pattern of information, and the risk with that information asymmetry could become larger than it actually is. I don't want to use the word "need." But that's basically what we're talking about.
So as the commercial real estate bubble bursts, we won't get a lot of information from there, and we won't get a lot of logic behind the prices. More and more people are starting to worry about whether they should sell. They may be more likely to sell, but there is no reliable information behind it.
That makes the market less liquid and less reliable. That makes the collateral less available and less useful. And then you get into the whole collateral crunch, and all the other bad stuff.
But on the other side, we also have to remember that CLOs in particular have been very highly bid over the last few years, with bidders coming from different sources but mainly from Japan.
Japan has been squeezed by higher funding costs denominated in U.S. dollars. They have been buying riskier commodities, especially riskier CLOs, in search of yield, trying to create some positive carry to keep their trades going.
So they've been suppressing profits on rates to make it look less risky than it actually is. But it could be more risky, which leads to a whole host of really, really bad possibilities.
If Japanese buyers, who are the heaviest buyers in the CLO market, start to feel that maybe all their assumptions that led them to buy CLOs were wrong, and they stop bidding, accelerating the decline in CLO prices, that could create more liquidity problems than would otherwise be the case.
(The interview was recorded in mid-July, so the Japanese stock market limit had already been fulfilled in early August)
Summarize
Let's summarize the content of this episode. At the beginning of the film, we mentioned that the Eurodollar actually refers to the US dollar outside the United States. The US dollar has become the world's most important trading currency. In addition to the United States being a leading economic power since the last century, the trend of globalization has also made the US dollar the most widely used and most valuable medium in the world, and this is the deep meaning of the concept of reserve. If we reverse from this point in time, the Soviet Union coincidentally became a driving force in the formation of the entire Eurodollar system.
Now we see that the Fed controls the interest rate of loans between banks to control the price of the dollar. In fact, this method started during the last period of inflation in the 1970s. Although the Fed is very proactive in establishing various swap agreements to help solve the problem of global dollar shortage, the results still cannot avoid fluctuations in the financial market and the real economy.
Although there are almost no physical dollars in the Eurodollar system, from a financial perspective, in order for the globalized world economy to continue to operate, the U.S., as the engine of the current global economy, has made its national debt the most recognized, valuable, and stable collateral. So a very contradictory scene occurred. Although everyone thinks that the high debt of the U.S. government will cause the dollar to lose credit, in order for the Eurodollar system to operate smoothly, the U.S. needs to continue to increase its debt. Otherwise, the participants in the Eurodollar system will have to settle for the second best and seek derivatives of U.S. dollar debt as collateral for borrowing and lending, but this actually has very big hidden dangers. The commercial real estate debt derivatives CRE CLO we mentioned at the end are a good example.
An interesting phenomenon we can see here is that the US dollar in the United States and the US dollar outside the United States have two sets of relatively independent operating systems with some overlap. Although we see that the movement of the US dollar will affect the world, it is better to say that the United States uses the US dollar to control the world than to say that this matter is actually a matter of willingness. For example, China has not tried to replace the US dollar with the RMB, but at present, the confidence in accepting the RMB as a medium for measuring value is still far lower than that of the US dollar.
This is not to say that the U.S. dollar or the Eurodollar system is an excellent system. It actually has many problems and of course cannot continue forever. But according to the current situation, we do have to accept that there is currently no substitute for the U.S. dollar in world trade and finance.
Understanding the principles of Eurodollars and the entire field of macroeconomics is not just a theoretical thing. Macroeconomics is a collection of social systems, human behavior, political science, psychology and many more disciplines. Understanding macro coins can actually help us better understand the operating mode of the world we live in, and make us realize where we are in the entire global economy, what the world trend is, and how money flows. These can help us have a clearer direction in issues such as lifestyle, career choices and investment targets that require making decisions.
After all, we have to understand the rules of the game first before we can go with the flow.
