Why is it said that the Federal Reserve cannot control all dollars?

Author: Joy Liu Source: joyliumacroeconomics Translation: Shan Ouba, Golden Finance

We all know that the US dollar is the most important legal currency in the world, and the movement of the US dollar will cause fluctuations in the global economy. But I wonder if you have ever thought about it from another perspective. This is actually a contradiction with our real life. In other countries outside the United States, everyone uses their own currency to conduct commercial transactions. Since we don’t see the existence of the US dollar in these places, how does it control the world market?

How much influence does the Federal Reserve have on the US dollar outside the United States?

What attempts have other economic powers, such as China, made to make their own currencies have a place in the world dominated by the US dollar?

How do US dollar assets and US government debts affect other countries, and how do other countries use the US dollar and US dollar debts in turn?

In this issue, we will analyze all the above questions, and in this issue, I have found another helper.

Yes, today's helper 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 also often jokingly called the Jesus of the Eurodollar field.

Why is it not called overseas dollars?

Jeff: For many people, this is actually a better term. The term "Eurodollar" confuses people. When they hear the word "Euro", they immediately think of the Euro. This is the only term related to the Euro that everyone has heard. But in fact, the so-called "Eurodollar" originally referred to the US dollar that was mainly 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. Nobody 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 US dollar system that started 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 ones that are really involved are the global banks. They're the dollars that are circulating around the world because it's a reserve currency.

There is hardly any part of the world that has not been 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 worked well, the world actually benefited greatly from it.

But since August 2007, that has not been the case anymore. So the world is actually moving in the opposite direction. The resistance to globalization, economic growth, etc. have all been affected. But for all intents and purposes, you have to think of the Eurodollar as a reserve currency system.

Does the dollar hold the world hostage? Or does the world hold the dollar hostage?

In the decades that the dollar has been widely used by countries around the world, our impression of the dollar's influence is:

Joy: Does the dollar hold the entire world economy hostage? Because it is the reserve currency, and the only one who can control this reserve currency is the United States.

Jeff: It is also a misconception that even though it is called the dollar, the U.S. government has no control over it. The only way the U.S. 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 the banks not to let the Russians trade on Swift.

Swift is just a messaging system owned by a consortium of global banks. Again, it is a huge misconception that the dollar is controlled by the U.S. government or the Federal Reserve. The U.S. government would like you to believe that they have that power and authority, but in fact the Eurodollar system has been like this from the beginning.

One ​​of the original reasons was that the Soviet Union at the time did not want to keep their dollar deposits in U.S. banks because they were afraid that the Eisenhower and later the 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.

So they can trade in dollar-denominated terms, but not under the control of the United States, and not within the reach of the U.S. government. Because this situation has been going on for so long, no one really understands or knows what is going on, and a misunderstanding has arisen that the dollar is a national currency operated by the U.S. government, with the Federal Reserve System as its monetary institution, but this is not the case.

That is to say, when we think about whether the dollar has kidnapped the world, there is actually another detail in how the dollar is transmitted, that is, through the SWIFT channel. As for SWIFT, I mentioned its principles and some data on the usage of different currencies in detail in the issue about the RMB. You can go back to that issue.

The U.S. dollar blockchain that began to be brewed in the 1950s

Jeff: You will see why I use the term "Eurodollar", because it distinguishes. What we are actually talking about is a bank-centered monetary system called the dollar.

It is denominated in US dollars, but there are no actual US dollars. Therefore, it is essentially bank money. So it is not the US government that controls the euro dollar system, nor is it the US that imposes the dominance of the US dollar on a global scale. The fact is that the euro dollar 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 is not the US government that makes it useful, but it is useful in itself. It does what it needs to do, at least within the minimum capacity as a reserve currency system. So, the US government wants you to believe that it controls the dollar. But the example of Russia shows that they have encountered huge problems in this regard, because the euro dollar is outside, and the euro dollar is what is important, not what the US government says.

Then according to what 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 for the US government to fully control the Eurodollar system unless it uses hard political means to refuse a certain region to use the US dollar.

Hey, speaking of this, do you think that if we regard the account book of each bank as a unit, and each bank has accounting behavior for each other in US dollars, how come this system looks more and more like blockchain? But I just think about it, and blockchain is not the focus of this issue.

A system is not equal to a unified consciousness

Then I have made public some relatively limited appointment time for one-on-one video with the audience. One of the audiences who had an appointment with me expressed such a perspective on things. I personally agree very much, and I also want to share it with you. That is to say, we often simply regard a system or organization as a huge individual with subjective consciousness, but in fact, there are many internal games in every system, and the larger the system, the more so, which also leads to a lot of coincidence in the development of a system within a few decades.

The reason why I agree with this idea is that this idea 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 makes the role of the enemy or friend particularly concrete, which can easily 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 easy to fall into conspiracy theories.

The text version of this issue is also in my description column. If you have any questions about any views or nouns, you can use my text manuscript 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 trends in the channel. After all, the cycle of making a video is really a bit long, and it is much faster to notify new news through email.

What is the function and significance of reserve currency?

In my conversation with Jeff, Jeff mentioned something very interesting, which is the reserve currency. Everyone knows that it is the US dollar now, but most people rarely think about why the reserve currency exists and what is its deep meaning and role?

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. Many people think that reserve currency means that you can price commodities, such as oil, in your own currency.

In fact, this is a byproduct of reserve currency. But reserve currency is a medium, an intermediary. So you can have your own monetary system, monetary arrangements, and independent economies on the other side of the world. How do you let them trade? How do you let them trade in a seamless and efficient way? How do you let investment flows flow from one place to another in the world?

The reason the Eurodollar works is because it is 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 a deposit of francs. 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 giving Swiss francs to Thailand, and Thailand would have no use for Swiss francs, and the only way to convert is to have a currency as an intermediary. That currency is available and usable in both the place where it starts and where it ends.

So if the Swiss bank can convert their francs into dollars, and then use those dollars to invest in Thailand. Because dollars are usable in Switzerland, and dollars are useful in Thailand. So this allows money to move around the world with dollars as an intermediary. All of a sudden, a person with cash in Switzerland can invest in Thailand without any obstacles.

The only thing that made this work was that the dollar was available and useful in many parts of the world, as it did in the form of the eurodollar. Because it became useful and available in many parts of the world, that's why it persisted. It's not for political reasons, it's because it solved a huge problem, which was that you had a global economy and no international currency.

The eurodollar actually became that international currency, allowing different systems around the world to fit together seamlessly, or almost seamlessly. It's not perfect, nothing is perfect. And it's become increasingly difficult since 2007. But there's no other monetary system even on the horizon that can be as effective as it is in getting money to flow, getting credit to flow from one end of the world to the other. Connecting places that you wouldn't think could be connected so easily. That's why the eurodollar works.

That is to say, we can actually observe the reserve from the perspective of the 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 let's say 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 adjustment is not considered monetary policy

We are talking about the impact on the United States and the European dollar. 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 European dollar system, then how should we view the fluctuations caused by the Fed's interest rate changes on overseas economies?

Jeff: They are trying to create the image of a powerful technical bureaucracy. However, no one really thinks about what the Fed is doing. People just think that the Fed is in charge of the dollar because the Fed has the printing press. And in fact, this eurodollar system doesn't need American dollars at all. So the Fed's influence on the eurodollar is very limited.

It's not completely no influence, but it's not nearly as great as people think. In fact, it's very limited. As the eurodollar emerged in the 50s and really into the 60s, the monetary system began to change. This meant a lot of things because it was a system without reserves and was basically controlled by transactions between banks. It was a blank canvas that enabled banks to trade in all kinds of forms of money that had never been seen before, like derivatives.

People didn't 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 found that they didn't even know how to define money that was used in a very real way in the real economy. So throughout the 70s, the Federal Reserve was struggling to figure out what was going on with the monetary system.

Also, this was 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 to power, he didn't fight the Great Inflation. In fact, he admitted that we didn'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, how ridiculous it is 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 a year-over-year change in the federal funds rate, how much of an impact do you think that has on your decision making? And your view on the federal funds rate now, because your inertial discount rate is usually higher than the additional interest 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 that we usually mention, was actually 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 also mentioned this part of history in the previous video.

Jeff: In fact, since the late 1970s, they realized that they could not control the monetary system. They didn't even know the definition of money, let alone where to start defining it. So at least in order to pretend that they have some influence on the monetary system and the US economy, they have been targeting the federal funds rate for many years and calling it monetary policy, but in fact it is just an interest rate policy, not a monetary policy.

They hope that when they raise the federal funds rate, this method will reduce credit and thus slow economic growth, but this is not the case. As long as you believe that the federal funds rate controls everything, then no one asks what the Fed is actually doing.

And then when the system broke down 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 Fed's ability, because if the Fed was such a powerful institution, there was no way that there could have been such a severe shortage of dollars in 2007 and 2008.

But anyway, they responded to the 2008 crisis with quantitative easing, which everyone thought was printing money, they were creating reserves out of thin air. It was massive money printing. So when the Fed did quantitative easing again and 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.

However, it never caused inflation. 2020 is a different story, but throughout the 2010s, people kept hearing that every 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's influence on the monetary system itself is very limited.

Cognitive Bias/Confirmation Bias

If the video is played here, I believe many friends will feel that this is very different from some of the views and observations we usually hear in the media. If you have such a feeling, then the purpose of my content creation has been achieved. Why do I say that? This is a concept I want to share with you. It is actually very easy for all of us 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 find or listen to the views that we already think are correct. Social media platforms have taken advantage of our cognitive characteristics, or I think its shortcomings, to constantly push things that we have already subconsciously agreed with. The result is that we will continue to strengthen our existing views, and then be hostile to, attack or resist people who have different views 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 actually often actively allow our own views to be questioned and challenged. Because if we often observe a problem from three or four angles, and then 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 is likely to make us very biased and extreme. That's why you will see that I often reply to everyone's messages in the comment area, even if they question my messages. Because only in this way can we have a kind of interaction of thoughts. Even if the audience who has been watching my videos but never left a message, after seeing my interaction with everyone in the comment area, these friends will also think about the problem from more perspectives.

In this way, I and my entire audience group as a whole can continue to improve. Of course, I also hope that when the audience who watch my channel faces 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, ha, 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.

Isn't the repurchase agreement a way for the United States to control the dollar?

So back to the monetary system, in the episode where I was talking to Joseph, we mentioned that the Fed conducted overnight repurchase agreements, which was the area he was responsible for when he worked at the Fed. The Fed used 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, adding a lot of swap agreements. So this has helped other countries solve some liquidity shortages to some extent. Does this provide the rest of the world with the additional supply they need when they need it?

Jeff: That was their intention. I would think that the swap program that was actually implemented was worse. Listen, they opened up dollar swaps since December 2007. So they started doing overseas dollar swaps with major central banks in 2007. Despite this, we still experienced a global dollar crisis. How effective were these dollar swaps? They essentially made them unlimited in the summer of 2008, going into the worst of the crisis. So, in September, October, and even into November of 2008, there were massive withdrawals on these foreign dollar swaps. Yet, we still had a crisis. We had the worst six months of global economic conditions since the Great Depression, primarily because dollars were extremely scarce and unavailable. That created liquidity problems in markets around the world. So again, how effective were these dollar swaps in the first place? Again, this is one of those things that you should just take at face value and not think about deeply because it fits the myth that the Fed is the central bank of the world. The Fed is the primary provider of dollars to the rest of the world through its various very sophisticated and very effective dollar instruments. And that is simply not the case. For example, in 2019 or 2018, central banks around the world were complaining 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 in the system as a whole.

That brings us back to the broader question of the breakdown of this eurodollar system. The Fed really doesn't know how to fix it, assuming they're even interested in fixing it.

Possibility of Regional Reserve Currencies

Jeff: There is a possibility that certain national currencies could become regional reserve currencies, and historically monetary systems have often been regional, not international or fully global. So it's possible that there are various groups that primarily use one national currency or another to transact. 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 that 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 ten years ago to create an offshore market, or at least start to create an offshore market and an offshore renminbi.

But they never really let it flourish as it could have. I'm skeptical, but at least they started this experiment, and then they kind of gave 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 the use of the IMF's Special Drawing Rights (SDR) as an international alternative to the euro dollar.

But that's more unrealistic than any other possible framework, because the SDR is just another bureaucratic creation.

What's the full name of this SDR? It's Special Drawing Rights, an international currency established by the International Monetary Fund. The pricing of this international currency is currently determined by the prices of the currencies of five major economies in proportion, namely the US dollar, the euro, the Japanese yen, the British pound and the equivalent of 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 ratio of this SDR only changes every five years. As for the specifics, you also talked about it when I talked about the RMB, so you can review it.

Japan's embarrassing situation in the Eurodollar system

If we narrow our perspective and look at Japan's role in the Eurodollar system, we can see -

Jeff: If you are a Japanese bank and you are short of US dollars, by the way, Japanese banks are short of trillions of dollars every day. If you are a Japanese bank short of US dollars, what if the market does not continue your funds? Well, you have little recourse, except perhaps that the Bank of Japan has some spare dollars to lend to 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 because of a shortage of dollars. So the Japanese government might provide you with some dollars. They sell some U.S. Treasuries, create some liquid dollar assets, and then lend them to you so that you can replace the rollover funding that you are not getting in the market because the market is getting more and more difficult.

So what the Fed has done is that through these overseas dollar swaps, it has essentially turned the Bank of Japan into an extension of the Fed's discount window. So if you are a Japanese bank that has a problem with funding because the euro dollar market is no longer providing the dollars you need, you can go to the Bank of Japan. The Bank of Japan does not need to sell Treasuries.

They can simply apply on your behalf for a dollar loan from the Federal Reserve Bank of New York through a dollar swap.

Why is the US deficit actually too low?

In March and April 2020, there was a very serious shortage of US dollars around the world. Then the US government used fiscal policy to increase US debt significantly to the stupid money in the market. And just when everyone thought that the US dollar would definitely depreciate, the price of the US dollar remained very strong at its historical high, and behind this was the problem of a large shortage of collateral in the Eurodollar system.

Jeff:In the early days, you and I could trade in US dollars. Because I knew you. We had a reputation. You had a reputation. I had a reputation. We knew each other. We were 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 are trading with people on the other side of the world on a larger scale in US dollars.

How do you mediate risk while doing that? Well, one way is to say, OK, 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 U.S. Treasuries, then we can trade on a huge 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 Treasury 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 period during the 1990s when the federal government actually ran almost a 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 also created new forms of collateral. This is one of the reasons why securitization took off. My view on 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 keep running deficits so that Treasury bonds can continue to be issued, otherwise it would have to go to mortgage bonds and various riskier bonds (to be used as collateral)

Jeff:Yeah, that's the flip side, because the more debt the federal government issues, the better the system works. So you're basically rewarding all the worst behaviors of the government.

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.

The risks of CRE CLO in the Eurodollar system

In the previous video, I mentioned that many lenders now have a large number of financial derivatives that buy back the commercial real estate debt contracts they have sold, that is, CRE CLO (Commercial Real Estate Collateralized Loan Obligation). This part of the product is not only traded in the United States, but has also become a very important financial derivative in the Eurodollar market and circulated in the market.

Jeff: There are several things happening here. On the one hand, you are right, especially in the commercial real estate structure, there are indeed some opaque situations, and we don’t have enough information yet. But we keep getting reports, especially from CLO (collateralized loan obligation) originators, who are trying to limit the losses they're taking, that they're increasingly concerned that if they start recording these losses, the market is going to go haywire, and this also goes back to 2007, when the main trigger for the collateral shortage was that subprime mortgage bonds were becoming increasingly illiquid. As they become increasingly illiquid, they become less and less acceptable as collateral. Because if I lend you cash and I 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'm going to get my money back. So if there's any doubt, even if the bond you're offering is the best, the bond with the best credit characteristics, if the market behind it becomes unstable and unreliable, I'm not going to accept your collateral because I don't know if I can sell it in a timely manner at the price that I need. So if the CLO market is potentially becoming illiquid, that means that these CLOs, particularly commercial real estate structures, become less and less available as collateral for all forms of collateral, including cash collateral.

I talked about this before, swapping risky assets for U.S. Treasuries, and then using the Treasuries as collateral to borrow money, it can get complicated. Because the Euro system itself is like Frankenstein's monster that's just a lot of elements stitched together. It's been so incredibly complex and hard 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: that information, and the risk with information asymmetry can become greater 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 don't get a lot of information from there, we don't get a lot of logic behind the prices. More and more people are starting to worry and they're starting to like whether to sell or not. They may be more likely to sell, but there's no reliable information behind it.

This makes the market less liquid and less reliable. That makes the collateral less and less useful. And then you get into the whole collateral crunch and all the other bad things.

But on the other side, we also have to remember that CLOs in particular have been getting very high bids over the last few years, and the bidders have come from different sources but mainly from Japan.

The Japanese have been squeezed by higher funding costs in dollar denominated terms. They have been buying riskier stuff. Especially riskier CLOs, in search of yield, trying to create some positive carry to keep their trades going.

So they have been pushing down their margins on rates to make it look like less risk than it actually is. But that could become more dangerous, which leads to a whole bunch of really, really bad possibilities.

If the Japanese buyers who are the heaviest buyers in the CLO market start to feel that, maybe all of their assumptions that led them to buy CLOs are actually wrong. So they stopped bidding, which accelerated the decline in CLO prices, and that would create more liquidity problems than under other circumstances.

Summary

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 Federal Reserve controls the interest rate of lending between banks to control the price of the US dollar. In fact, it started from the last period of inflation in the United States in the 1970s. Although the Federal Reserve is very proactive in establishing various swap agreements to help solve the problem of global dollar shortages, from the results, it still cannot avoid fluctuations in financial markets and the real economy.

Although there is almost no physical dollar in the Eurodollar system, from a financial perspective, in order to keep the globalized world economy going, 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 happened. Although everyone thinks that the high debt of the U.S. government will cause the U.S. dollar to lose credit, in order for the Eurodollar system to run 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 a very big hidden danger in it. 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 U.S. dollar in the United States and the U.S. dollar outside the United States have two sets of relatively independent operating systems that have 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 US dollar or the Eurodollar system is such an excellent system. It actually has many problems and of course it cannot continue forever, but according to the current situation, we do have to accept that there is currently no substitute for the US dollar in the world trade and financial fields.

Understanding the principles of the Eurodollar and understanding 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 the macro-coin can actually help us better see 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 decisions.

After all, we must first understand the rules of the game before we can follow the trend.