Popular Science | What role does the Federal Reserve play? How will the US interest rate cut affect the overseas economy?

Original title: "Why: The Fed cannot control all dollars?"

Original author: Joy Liu

This article is a text version of the YouTube video " Why: The Fed cannot control all dollars? | A 70-year-old dollar blockchain system ", which explores the role of the dollar in the global economy and especially gives a counterintuitive point of view:

The Federal Reserve cannot fully control the global influence of the dollar.

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 an assist.

Yes, today's assistant is Jeff Snider, whose 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 of the Eurodollar field.

Why is it not called overseas dollars?

Jeff: For many people, this is actually a better term. The term "Eurodollar" is confusing. 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 deposited 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 this name came about because it was all done underground. At that time, banks were trading US dollars for various reasons. The Eurodollar is an offshore U.S. 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 real players are the global banks. They're the dollars that are circulating around the world because it's a reserve currency.

There's almost no part of the world that's 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 worked well, the world actually benefited greatly from it.

But since August 2007, that's no longer the case. So the world is actually moving in the opposite direction. The resistance to globalization, economic growth, and so on 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, the impression we have of the dollar's influence is:

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

Jeff: This is also a misunderstanding. Although it is called the dollar, the US government has no control over it. The only way the US government can control the global economy 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 Russians trade on Swift.

Swift is just a messaging system owned by a global banking consortium. 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 fact the Eurodollar system has been like this from the beginning.

One of the original reasons was that the then Soviet Union did not want to keep their dollar deposits in US 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.

So that 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 episode about the RMB. You can go back to that episode.

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 just said, 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, unless the US government uses hard political means to refuse a certain region to use the US dollar, it is difficult to fully control the Eurodollar system.

Hey, speaking of this, do you think that if we regard the ledger of each bank as a unit, and each bank keeps accounts for each other's US dollars, how come 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 does not equal a unified consciousness

Well, didn't I make public some relatively limited appointment time slots for one-on-one videos with viewers? One of the viewers who had an appointment with me expressed this perspective on things, which I personally agree with 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 coincidences in the development of a system over the past 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 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.

Let's get back to the question of the US dollar.

What is the function and significance of the 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 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. Many people think that a reserve currency means that you can price commodities, such as oil, in your own currency.

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

That's what the Eurodollar does 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 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 providing Swiss francs to Thailand and Thailand would have no use for Swiss francs and the only way to convert is to have a currency that acts as an intermediary. This currency is available and usable in both the place where it starts and where it ends.

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

The only way this works is if the dollar is available and useful in many parts of the world, as it did in the form of the euro dollar. Because it became useful and available in many parts of the world, that's why it has been able to persist. It's not political reasons, but because it solves a huge problem, which is that you have a global economy and you don't have an international currency.

The euro dollar actually became that international currency, allowing different 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 get money flowing, credit flowing, from one end of the world to the other as effectively as it does. Connecting places that you wouldn't think you could connect so easily. That's why the Eurodollar is useful.

That is, we can actually observe the reserve from the perspective of a medium of exchange, which is actually connected to the development 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 adjustment is not considered monetary policy

Let's talk about the impact on the United States and 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 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 does not require US dollars at all. So the Fed's influence on the eurodollar is very limited.

It's not completely no influence, but it's not 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 with no reserves and was basically 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 seen before, such as derivatives.

People didn't really know what derivatives were or what they were used for, but in many ways, derivatives were 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 that was used in a very real way in the real economy. So throughout the '70s, the Fed was trying to figure out what was really going on with the monetary system.

Moreover, this was all happening offshore. This was the eurodollar part, which was outside the United States, denominated in dollars, and it was on the balance sheets of commercial banks around the world. The Fed had 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 didn't know how to monitor, let alone regulate, the dollars circulating in the global system.

So we tried to influence the behavior of banks and economic agents by raising or lowering a single interest rate. They ended up targeting the federal funds rate. If you stop and think about it, how ridiculous it is to think that they could 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 your federal funds rate changes year by year, 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 adjustment. So basically, this is what the Fed has been doing since the early 1980s.

Let me add one more thing, the Federal Funds Rate that the Fed adjusts, which is the benchmark interest rate of the Federal Reserve that we usually refer to, was actually only used in the 1970s, after the last major inflation in the United States. Before that, the most important interest rate was actually the discount rate.

I also mentioned this part of history in the previous video.

Jeff: In fact, starting in 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 to pretend that they have some kind of influence over the monetary system and the U.S. economy, they have been targeting the federal funds rate for years and calling it monetary policy, but in reality it is just interest rate policy, not monetary policy.

They hope that when they raise the federal funds rate, 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 crises 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 will cause inflation because the Fed is printing money. And we all know that when a government prints money, it causes inflation.

And yet, it never caused inflation. 2020 is a different situation, 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 Federal Reserve and its bank reserves are not currency, the Federal Reserve does not print money, and the Federal Reserve's influence on the monetary system itself is very limited.

Cognitive Bias/Confirmation Bias

If the video reaches this point, I believe many friends will feel that this is very different from some of the views and observation angles 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 an idea 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 find or listen to the views that we originally think are correct. Social media platforms take 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 constantly 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 an issue, 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 is why you will see me often replying to everyone's comments in the comment area, even if they are questioning my comments. Because only in this way can there be a kind of interaction in thinking, even if it is the audience who has been watching my videos but never leaving comments, after seeing my interaction with everyone in the comment area, these friends will also think about the problem from more angles.

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, 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.

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 made it essentially unlimited in the summer of 2008, going into the worst part of the crisis. So in September, October, and even into November of 2008, there were massive draws on these overseas 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.

That created liquidity issues in markets around the world. So again, how effective were these dollar swaps in the first place? And again, this is one of those things that you should 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 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 complained that there was a dollar shortage in their regions.

RBI Governor Urjit Patel said in the Financial Times in June 2018 that there was a dollar shortage globally. The view that the Fed's dollar swaps provided 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.

This brings us back to the broader issue of the failure of this eurodollar system. The Fed really has no idea how to fix it, assuming they are 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 there could be various groups that primarily trade in one national currency or another. But I don't think that's enough. I think we've moved into a global system.

So we do need a global 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 got it to flourish like it could have. I'm skeptical, but at least they started the experiment, and then they kind of gave up. They kind of pulled the plug and said we're not 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 eurodollar.

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 currency prices of five major economies in proportion, namely the US dollar, the euro, the yen, and the British pound, which is equivalent to the RMB. Among them, the US dollar accounts for the largest proportion and the 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 5 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 zoom out a little bit 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 dollars, by the way, Japanese banks are short of trillions of dollars every day. If you are a Japanese bank short of dollars, what if the market does not continue your funds? Well, you have almost no other recourse, except that the Bank of Japan may have 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 caused by a shortage of dollars. Therefore, the Japanese government may 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 funds that you didn't get in the market because the market was getting more and more difficult.

So what the Fed did was essentially turn the Bank of Japan into an extension of the Fed's discount window through these overseas dollar swaps. So if you were a Japanese bank that had funding problems 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 Treasuries.

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

Why is the U.S. deficit actually too low?

There was a very serious dollar shortage in March and April 2020. Then the U.S. government, through fiscal policy, significantly increased the U.S. debt by injecting stupid money into the market. And just when everyone thought that the dollar would definitely depreciate, the price of the 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 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 are familiar with each other. So you and I can lend dollars to each other without collateral because we have this reputation and information advantage. But with the expansion of the Eurodollar system, now you are trading with people on the other side of the world on a larger scale in dollar transactions.

How do you mediate risk in 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 massive scale because all I need to know is that I have a U.S. Treasuries in my hand as collateral. I lent you dollars. If you default, I know I can sell that Treasury 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 fact that during the 1990s, the federal government actually ran a near surplus, which meant there was a shortage of Treasurys that could be used as collateral. If there weren't enough Treasurys to use as collateral, we had to find something else.

Otherwise, you and I couldn't do business because I didn't know you and I needed 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 is actually April 2020. I think the reason we came out of that crisis was that the federal government issued trillions of dollars of Treasury bonds at a time when the market was in desperate need of such collateral.

Joy: It sounds like the US government needs to maintain a deficit so that Treasury bonds can continue to be issued, otherwise, it can only 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 seen that the market has become particularly rich in financial derivatives. 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 circulated 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 keep getting reports, especially from CLO [collateralized loan obligation] originators, who are trying to limit the losses that they can take, and they are increasingly concerned that if they start recording these losses, the market will go haywire, 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 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 can get my money back. So if there's any doubt, even if the bond you're offering is the best,

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 could become illiquid, that means that these CLOs, especially commercial real estate structures, become less available as collateral for various forms of collateral, including cash collateral.

I talked about this before, swapping risky assets for U.S. Treasuries and then using them as collateral to borrow money, it can get complicated. Because the euro system itself is like Frankenstein's monster that's 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: 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 what we're basically talking about.

So as the commercial real estate bubble bursts, we're not going to get a lot of information from there, we're not going to get a lot of logic behind the prices. More and more people are starting to worry and they're starting to be like, should they sell? They may be more likely to sell, but there's 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 things that are going on.

But on the other side, we also have to remember that CLOs in particular have been highly bid over the last few years, and the bidders have come from different sources but primarily from Japan.

Japan has been squeezed by higher funding costs in dollar denominated terms. They've been buying riskier stuff. Especially the riskier CLOs, in their search for yield, are trying to create some positive carry to keep their trades going.

So they've been suppressing the margins on interest rates to make it look less risky than it actually is. But that could be more dangerous, which leads to a whole host of 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 are wrong, and they stop bidding, accelerating the decline in CLO prices, that will create more liquidity problems than would otherwise be the case.

(The interview was recorded in mid-July, so in fact, the Japanese stock market limit had already been fulfilled in early August)

Summary

Let's summarize the content of this episode. At the beginning of the video, we mentioned that the Eurodollar actually refers to the US dollar outside the United States, and the US dollar has become the world's most important trading currency. In addition to the fact that the United States has been a leading economic power since the beginning of 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 work backwards from now, the Soviet Union coincidentally became a driving force in the formation of the entire European dollar 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 setting up various swap agreements to help solve the problem of global dollar shortage, the results still cannot avoid the fluctuations in the financial market and the real economy.

Although there are almost no physical dollars in the European dollar system, from a financial perspective, in order to allow the globalized world economy to continue to operate, the United States, as the engine of the current global economy, has become the most recognized, most valuable, and most stable collateral among them. So a very contradictory scene happened. Although everyone thinks that the high debt of the US government will cause the US dollar to lose credit, in order for the European dollar system to operate smoothly, it requires the United States to continue to increase its debt. Otherwise, the participants of the Eurodollar system will have to settle for the second best and seek derivatives of US 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 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 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-gold coins 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 globalized economy, what the world trend is, and how money flows. These can help us - for example, lifestyle, career choices and investment targets, these issues that require decisions will have a clearer direction.

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

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