It seems that we have some misunderstanding about the place the US Dollar commands in the world. This is not surprising considering how many believe the USD is going to crash and everything is going to collapse. Of course, it is an idea that was espoused for more than 30 years.
Yet here we are, still forging ahead.
That does not mean, however, that everything is rosy. There are obviously major problems, especially when it comes to debt. Nobody can deny the explosion over the last few decades, to a level that is causing tangible results. That said, it is also part of the situation with the USD.
Source
Global Debt
There is an estimate $300 trillion worth of global debt. That is truly an astounding figure. What is all entails is anyone's guess at this point. When you have derivatives built on top of synthetic derivatives, things can go haywire. Even the lending market that is viewed as secure, real estate, is being questioned by many.
Naturally, looking at anything in terms of the global economy through the lens of a single variable can be misleading. It is a complex system with many integrated parts. This leads people to not understand what is counterintuitive to what they believe.
For example, many look at the $29 trillion in US debt as a problem. In reality, the issue is the world needs a great deal more debt from the United States. Yes, you read that correctly. The United States needs to provide a great deal more debt for the situation globally.
How does this make any sense?
The answer lies in the fact that United States Treasuries are the most desired form of collateral. Remember, the US Government produces assets, at least to those who buy them (it is debt on the balance sheet of the USG). Therefore, the world is craving more high quality collateral. With an estimate $20 trillion in US Treasuries out there, we are left with a lot of global debt backed by garbage.
Debt is never the problem, it is the collateral backing it. The worst borrower in the history of the world could be good for a $100,000 loan. Simply back it up with a $5 million house and it is an easy lending decisions. The debt is not the problem as long as the collateral is sound.
Obviously, this is not the case we have globally.
Which brings us to the Petrodollar.
The Petrodollar Myth
The USD is often called the Petrodollar. Many like to espouse that the USG will do anything to protect this, including waging war. That is untrue. The reason why the US wages war is because it is highly profitable. Wars mean a lot of money and the military industrial complex in the US still wields enormous power. They will always find a war somewhere to fight. The reality is they do not need a reason, just an excuse. Any will do, even if it is made up.
Many are claiming that the Petrodollar is under attack by the fact that China and Russia are starting to engage in oil transactions outside the USD. They take this as a sign of their misguided beliefs about the USD and its role internationally. Naturally it should be pointed out this is nothing new. Here is an article from 2018 discussing the same move by China.
Nevertheless, if we focus upon the entire oil industry, this is just a small portion of oil transactions. Yet, even if it does grow, this is still a drop in the bucket compared to all international transactions. Not only is oil traded in USD but so is every other commodity. In fact, why stop there? When we look at the numbers, 80% of all international transactions take place in the USD. Thus, even if all Chinese oil purchases were in Yuan, that is still a minor piece of all international trade.
Hence, the idea that the USD is the reserve currency only due to its hold on oil is omitting a major piece of the puzzle.
Yet there is another piece to this puzzle: debt.
Of the $300 trillion in global debt, probably 2/3 (or more) is denominated in USD. Have you ever noticed how almost all major international deals have a US bank involved? In fact, it is often the lead entity. What this means is the debt is going to be established in USD.
This also makes sense because guess what most banks around the world have? They operate within the Eurodollar market, which is far larger than anything within the United States.
Therefore, we are looking at roughly $200 trillion in global debt where USD is required to remit payments. The debt is written in USD and that is what is required.
USD Shortage
Here is where another issue arises.
Why is China looking to get oil from Russia in Yuan? Is it because they want to cease American imperialism? While China would love to do that, the reality for the Chinese is more pragmatic: they are starved for USD.
This mirrors the rest of the world.
There is a shortage in USD globally. That will come as a surprise to those who believe in the fictitious "money printer" that seems to be espoused by those online. However, once people learn that the Federal Reserve does not print USD, their entire economic premise crumbles.
We are seeing a dollar shortage, especially internationally, due to 20 years of fiscal stimulus. When this is opted for, the USG creates Treasuries which are sold for USD. This is how it pays for Congressional spending.
When the Fed holds the auction, selling the Treasuries, it is attended by the primary dealers (banks) that re-sell to their clients. These entities are all over the world and include the likes of PIMCO, the Saudi Sovereign wealth fund, the ECB, and whomever else wants them. The issue is that any international sales ultimately bring USD into the domestic banking system. This is not truly a problem until the Fed starts it QE programs which end up locking the dollars in the banking and financial system. Hence we end up with a shortage of USD.
And this is a situation that occurred for most of the last 20 years, at an accelerating pace.
So not only does the growing US debt slow the economic growth rate, it eats up desperately needed dollars from the international economy.
Which is why China is mostly likely seeking to use YUAN as the currency to buy oil and not USD. With the debt that is within China that is held offshore, denominated in USD, the country is going to be desperate. This is also why they are starting to sell US Treasuries.
Of course, this is what Western Europe has been doing since 2014. The lack of USD is causing them to have to dump the high quality collateral since they need cash. It is a situation they do reluctantly since their backs are against the wall.
The key here is to understand the USD is integrated into an $80 trillion global economy that has many layers. To simply look at the Petrodollar, as big a market as that is, really misses the bigger picture. Holders of debt are not going to simply go away without payment. This means that borrowers, at every level of the international scene, are going to have a lot of USD on hand. If not, they end up becoming like Evergrande.
Another situation that destroys the idea that the USD is going to lose its status as the reserve currency out of the water is the fact more debt is being created. Is it a situation that is unsustainable? Most likely. However, even with massive defaults, that still is not going to dent the system.
With an estimate $200 trillion in USD denominated debt, and growing, even if half of it defaults, that still leaves $100 trillion. This would still make up half of all the debt out there, presuming none of the other currency denominated debt defaults.
Keep this is mind when someone starts touting how the USD is done as the global reserve currency and the "dam is starting to break". If that is the case, what about the hundreds of trillions in debt that is denominated in the USD?
It is time to put the myth to bed. The USD is much bigger than just the Petrodollar.
If you found this article informative, please give an upvote and rehive.
gif by @doze
logo by @st8z