Author: Joy Liu Source: joyliumacroeconomics Translation: Shanoubao, Golden Finance

We all know that the US dollar is the most important legal tender in the world, and the movements of the US dollar can cause fluctuations in the global economy. However, have you ever thought from another perspective that there is actually a contradiction between this and our real life? In countries outside the United States, people conduct commercial transactions using their national currency. In these places, since we do not see the existence of the US dollar, how does it control the global market?

Outside the United States, how much influence does the Federal Reserve have on the US dollar?

Other major economies, such as China, have made various attempts to secure a place for their own currency in the US dollar-dominated world. What kind of attempts have they made?

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

In this issue, we will analyze all of the above questions, and for this issue, I have invited some help.

Yes, the assistance for today is Jeff Snider. His main research focus is on the eurodollar. Friends who often follow English financial content should be very familiar with him, and he is often jokingly referred to as the 'Jesus of the eurodollar' field.

Why is it not called the overseas dollar?

For many people, this is actually a better term. The term 'eurodollar' confuses people. When they hear the term 'euro', they immediately associate it with the euro, which is the only term related to the euro that they have heard of. However, in actuality, the so-called 'eurodollar' originally referred to the US dollars primarily held in Europe but outside the US, because it originated in Europe.

In fact, the London financial center gained the name 'eurodollar' at some point in the 1950s. No one knows exactly when this name first appeared, as everything was done underground. At that time, banks were trading US dollars for various reasons. The eurodollar was an offshore US dollar system that began to assume the role of a reserve currency, as it was very useful in many different places, especially in early post-war Europe.

As more and more dollars were created, it gradually became a reserve currency. By the 1960s, it actually replaced the Bretton Woods system and became the reserve currency system. Although it is called the dollar, we need to remember that there are no actual dollars in it, no paper currency printed by the US government. There are no Federal Reserve notes, and actually not many bank reserves. It is a virtual currency, a non-reserve currency, a book currency system that has taken on the role of a reserve currency. Therefore, it centers around banks and balance sheets, with truly global banks participating. They are circulating dollars globally because it is a reserve currency.

There is hardly any place in the world that is not affected by the eurodollar. We experienced such great global prosperity in the latter half of the 20th century because the eurodollar system allowed a large amount of innovation and technology to be adopted and funded globally. So when the eurodollar system functions well, the world actually benefits greatly from it.

But since August 2007, the situation has changed. So the world is actually moving in the opposite direction. Globalization, economic growth, and other aspects have all been affected. However, from all intentions and purposes, you must consider the eurodollar as a reserve currency system.

Is the dollar kidnapping the world? Or is the world kidnapping the dollar?

In the decades when the dollar has been widely used by countries around the world, our impression of the impact of the dollar is:

Joy: Can we consider the dollar as hijacking the entire world economy? Because it is a reserve currency, and the only entity that can control this reserve currency is the United States.

Jeff: This is also a misconception, although it is called the US dollar, the US government does not control 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's connection with the Swift system, they had to ask banks not to allow Russians to trade on Swift.

Swift is simply a messaging system owned by a global banking consortium. Again, this is a huge misconception that the US dollar is controlled by the US government or the Federal Reserve. The US government wants you to believe that they have this kind of power and authority, but in fact, the Eurodollar system has been like this from the beginning.

One of the initial reasons was that the Soviet Union at the time did not want to keep their dollar deposits in US banks because they were concerned that Eisenhower, later Kennedy and Johnson administrations would confiscate their dollars. Therefore, they kept these dollar deposits in banks in Montreal, Zurich, and London, which was a significant transaction.

This allowed them to trade in dollars without being under US control or within the reach of the US government. Since this situation has persisted for a long time, no one really understands or knows what happened, creating a misconception that the dollar is a national currency operated by the US government, with the Federal Reserve System as its monetary institution, but this is not the case.

So when we think about whether the dollar has hijacked the world, there is actually a detail inside, which is how the dollar is transmitted, through this SWIFT channel. I have detailed the principle and some data on the use of different currencies in that episode about the renminbi.

The US Dollar Blockchain Brewing Since the 1950s

Jeff: You'll see why I use the term 'Eurodollar', because it distinguishes. What we're actually talking about is a bank-centric currency system called the dollar.

It is denominated in dollars, but there are no actual dollars. Therefore, it is essentially a bank currency. So the Eurodollar system is not controlled by the US government, nor is the US imposing dollar dominance globally. The fact is that the Eurodollar system is the most useful and widely available currency system. Because it is useful and widespread, that's why it is still in use today.

It is not the US government that made 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. However, 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 important, not what the US government says.

So, according to what Jeff just said, the linkage of the accounting systems of various banks actually facilitates the network of dollar transactions when the dollar flows between banks and is recorded. Unless the US government forcibly rejects the use of the dollar in a certain region, it is difficult to fully control the European dollar system.

Oh speaking of which, have you ever thought that if we treat the ledger of each bank as a unit, and the banks have accounting behavior towards the dollar, this system looks more and more like blockchain. But that's just my association, blockchain is not the focus of this issue.

One system does not equal a unified consciousness.

So I publicly disclosed some relatively limited one-on-one video appointment slots with the audience, and one of the viewers I made an appointment with expressed a perspective that I personally agree with very much that I really want to share with everyone. It is that we often simplify a system or institution as a huge entity with subjective consciousness, but in reality, every system will have many internal games, and the larger the system, the more so, which also leads to a lot of coincidence in the development of a system over decades.

The reason I agree with this perspective is because this perspective is often intentionally or unintentionally obscured by the media, because everyone wants to create a big news story, simplifying a system into the image of an individual, making enemies, or friends, appear very concrete, which easily resonates with public emotions. However, looking at it the other way around, it also serves as a catalyst for pushing public opinions to extremes.

So I think we should consciously remind ourselves when absorbing information that any system is complex and diverse, and does not have an absolute singular consciousness. This way, we will look at things more objectively and not so easily fall into conspiracy theories.

The text version of this issue is also in my description column. If you have any questions about certain views or terms, you can use my text as a study material. By joining my email list, if I have new ideas or new developments in my channel, I will notify my friends on the email list first, after all, the cycle of making a video is a bit long, so it's much faster to notify through emails of any new information.

What are the functions and significance of reserves?

In my conversation with Jeff, he mentioned something interesting about reserves. Everyone knows that it is currently the US dollar, but most people rarely think deeply about why reserves exist, what their deeper meaning and purpose really are.

Jeff: I think most people don't really understand what a reserve currency is. You don't think much about it, because why would you? This is not something that affects your daily life. Many people think that a reserve currency means you can price goods in your own country's currency, like oil.

In reality, this is a by-product of reserve currencies. But reserve currency is a medium, an intermediary. Therefore, you can have your own currency system, currency arrangements, and independent economic entities on the other side of the Earth. How do you make them trade? How do you make them trade seamlessly and efficiently? How do you make investment flows move from one place to another place in the world?

The role of the Euro and the US dollar is because they are intermediary currencies, or they used to call it 'tool currency'. You can start from, for example, the Swiss franc. Swiss banks have a franc deposit from a wealthy client. They want to invest in fast-growing Asian economies like Thailand.

In any other arrangement without reserve currencies, this would be very difficult because you would be offering Swiss francs to Thailand, which has no use for Swiss francs, the only way to convert is to have a currency as an intermediary. This currency should be available and usable at both starting and ending points.

Therefore, if a Swiss bank can convert their francs into US dollars and then invest these dollars in Thailand. Because the dollar is available in Switzerland and useful in Thailand. This allows funds to circulate globally through the dollar as an intermediary. Suddenly, a person holding cash in Switzerland can invest in Thailand without barriers.

The only premise that makes all this work is that the dollar is available and useful in many parts of the world, just as it does in the form of the Euro and the US dollar. Because it becomes useful and available in many parts of the world, this is why it can continue to exist. This is not for political reasons, but because it solves a huge problem, which is having a global economic entity without an international currency.

Euro-dollar has actually become the international currency, allowing different systems around the world to seamlessly integrate, or almost seamlessly. It's not perfect, nothing is perfect. And since 2007, the situation has become increasingly difficult. However, not even on the horizon are there other currency systems that can efficiently flow funds and credit from one end of the globe to the other like it does. Connecting places that you never thought could be so easily connected. That's why the euro-dollar is useful.

In other words, we can actually observe reserves from the perspective of a medium of exchange. This is actually linked to the development of human economic activities, just as thousands of years ago, humans used shells as a medium of exchange, or more recently, during Germany's severe inflation in the last century, they used money to paper windows and cigarettes as a medium of exchange.

Adjusting interest rates by the Federal Reserve does not count as monetary policy.

When we talk about the impact of the United States on the euro-dollar in Europe, I believe friends watching the video, including myself, will raise a question at this point, which is that the Federal Reserve raising or lowering interest rates clearly affects the price of the dollar and economic activities. So, if the United States does not have strong control over the euro-dollar system in Europe, how should we view the impact of changes in the Fed's interest rates on overseas economies?

Jeff: They are trying to create an image of a powerful technocratic institution. However, no one really thinks about what the Federal Reserve is actually doing. Everyone just assumes that the Federal Reserve controls the dollar because it has a printing press. In reality, this euro-dollar system does not need US dollars at all. Therefore, the Federal Reserve has a very limited impact on the euro-dollar.

It's not completely without an impact, but far less significant than people imagine. In fact, it's very limited. As the euro-dollar emerged in the 1950s and truly entered the 1960s, the monetary system began to change. This means many things because it is a system without reserves, basically controlled by transactions between banks. It's a blank canvas allowing banks to trade in various unprecedented forms of currency, such as derivatives.

People didn't know what derivatives were or their purpose, but in many ways, derivatives are a different form of currency. Therefore, in the 1960s and 70s, the Federal Reserve system realized that they didn't even know how to define the currency being used in the real economy in a very tangible way. So, throughout the 70s, the Federal Reserve has been trying to figure out what happened to the monetary system.

Moreover, all of this is happening offshore. This is part of the euro-dollar, it's offshore from the United States and priced in dollars, appearing on the balance sheets of commercial banks worldwide. The Federal Reserve has essentially lost control of the monetary system. So when Paul Volcker came to power, he did not fight against high inflation. In fact, he admitted that we didn't know how to monitor, let alone regulate, the circulation of dollars in the global system.

Therefore, we attempt to influence the behavior of banks and economic agents by raising or lowering a single interest rate. They ultimately target the federal funds rate. Just stop and think, how absurd it is to believe 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 a rate.

So, how does the annual variation in the federal funds rate affect your decision making? And what is your current perception of the federal funds rate, given that your discount rate is usually higher than the additional rate adjustments. Basically, this is what the Federal Reserve has been doing since the early 1980s.

Let me add one more thing, the Federal Funds Rate adjusted by the Federal Reserve, which is what we usually refer to as the benchmark interest rate of the Federal Reserve, actually started to be used in the 1970s, after the last major inflation in the United States. Before this, the most important rate was the discount rate.

I mentioned this part of history in a previous video.

Jeff: Actually, starting from the late 1970s, they realized they couldn't control the monetary system. They didn't even know the definition of money, let alone where to begin defining it. So, at least to pretend that they have some influence over the monetary system and the U.S. economy, they have always targeted the federal funds rate over the years, calling it monetary policy, but in reality, it is only an interest rate policy, not a monetary policy.

They hope that by raising the federal funds rate, this approach will reduce credit and slow down economic growth, but in reality, it doesn't work like that. As long as you believe that the federal funds rate controls everything, then no one will question what the Federal Reserve is actually doing.

Then, when the system collapsed in 2007 and 2008, the fact that we had a crisis in 2007 and 2008 should itself raise serious doubts about the Fed's capabilities because if the Fed was such a powerful institution, there wouldn't have been such a severe dollar shortage in 2007 and 2008.

However, regardless, they responded to the 2008 crisis through quantitative easing, which everyone thought was just printing money, creating reserves out of thin air. This was a lot of money printing. So, when the Fed continued with quantitative easing time and time again, people said it would lead to inflation because the Fed was printing money. And we all know that when a government prints money, it leads to inflation.

However, it has never led to inflation. 2020 was a different case, but throughout the 2010s, people kept hearing that every round of quantitative easing would lead to uncontrollable inflation, which 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 Fed does not print money, and the Fed has a very limited impact on the monetary system itself.

Cognitive Bias/Confirmation Bias

If the movie has reached this point, I believe many friends will find it very different from some of the views and perspectives we usually hear in the media. If you have this feeling, then my content goal has been achieved. Why do I say that? I want to share with you my view. All of us are actually very prone to fall into a state of Confirmation Bias.

Confirmation Bias, when translated into Chinese, means seeking or adhering to viewpoints that we already believe to be correct. Social media platforms, in particular, exploit this cognitive trait of ours, constantly pushing things that we subconsciously agree with. The result is that it reinforces our existing views, leading us to oppose, attack, or resist those who hold different opinions, turning even sincere discussions into threats in our language.

Once we realize that our excitement is meaningless, when discussing a topic, we should actively allow our own views to be questioned and challenged. By often observing a problem from three or four angles, continuously refining our own views, we can build a more comprehensive thinking framework, avoiding getting trapped in a defensive emotional state against others' opinions.

Because this can easily make us very biased and extreme. This is also why you often see me replying to comments in the comment section, even those questioning my comments. Only through this can a kind of intellectual interaction be generated; even for viewers who always watch my videos but never leave comments, seeing the interaction in the comment section can prompt them to consider issues from multiple perspectives.

This way, both I and my entire audience as a whole can continuously improve. Of course, I also hope that the viewers of my channel, when facing practical or psychological obstacles in work, life, or investment decisions, can also approach current issues with a multi-perspective observation. As the creator of this channel, I may not force everyone to share my values, but I strive to practice what I believe is right as much as possible.

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

So back to the currency system we discussed in the episode with Joseph, we mentioned the Federal Reserve conducting these overnight repurchase agreements, which is the area he was responsible for at the Federal Reserve. The Federal Reserve helps other countries or financial institutions solve liquidity problems through overnight or reverse repurchase agreements.

Joy: The Federal Reserve has actually done a lot, increased many swap agreements. So this has helped other countries to some extent, solving some liquidity shortage issues. Does this in some way provide the needed additional supply when other regions in the world need it?

Jeff: That's their intention. I would think the actual implementation of swap plans is worse. Listen, they opened dollar swaps from December 2007. So since 2007, they have engaged in overseas dollar swaps with major central banks. Nevertheless, we still experienced a global dollar crisis. How effective can these dollar swaps be?

They basically made it unlimited in the summer of 2008, entering the worst period of the crisis. Therefore, in September, October, and even November 2008, there were significant withdrawals from these overseas dollar swaps. However, we still went through the crisis. We experienced the worst six months of the global economy since the Great Depression, mainly due to the extreme shortage and unavailability of dollars.

This triggered liquidity problems in markets around the world. So, once again, how effective were these dollar swaps in the beginning? Again, this is one of those things you should not just consider on the surface, as it fits into the myth that the Fed is the central bank of the world.

The Federal Reserve is the main institution providing dollars to other countries worldwide through its various complex and highly effective dollar mechanisms. However, the reality is quite different. For example, in 2019 or 2018, central banks worldwide complained about dollar shortages in their regions.

Urjit Patel, the Governor of the Reserve Bank of India, stated in the Financial Times in June 2018 that there was a global dollar shortage. The belief that the Fed's dollar swaps provide some sort of liquidity support to other regions of the world, or even minimal liquidity support, does not align with what we observe throughout the system.

This brings us back to the broader issue of the euro-dollar system's failure. The Federal Reserve really doesn't know how to fix it, assuming they even have an interest in fixing it.

The possibility of regional reserve funds

Jeff: One possibility is that certain countries' currencies can become regional reserve currencies. Historically, currency systems tend to be regional rather than international or fully globalized. So, it is possible that various groups may primarily use one country's currency or another for transactions. However, I believe this is not sufficient. I think we have already entered a globalized system.

Therefore, we do need a globalized monetary system without any national currency even coming close to achieving this. Most people first think of the Chinese Renminbi, but even the Chinese themselves do not want the Renminbi to be internationalized. They made a half-hearted attempt about ten years ago, creating an offshore market, or at least starting to create an offshore market and offshore Renminbi.

But they never really let it prosper as much as it could have. I am skeptical about this, but at least they started this experiment, and then they sort of gave up. They sort of pulled the plug, saying we're not quite comfortable with this, which is why the Chinese authorities themselves have always advocated using the International Monetary Fund's Special Drawing Rights (SDR) as an alternative to the euro and the US dollar.

But that is even more unrealistic than any other possible framework because Special Drawing Rights are just another bureaucratic creation.

What is the full name of SDR? It is Special Drawing Rights, which is an international currency established by the International Monetary Fund. The pricing of this international currency is currently determined proportionally by the currencies of five major economies, namely the US dollar, euro, Japanese yen, British pound, and approximately the Renminbi, with the US dollar having the largest share and the Japanese yen the smallest. The price of this SDR is updated every working day because the international exchange rates of these currencies are constantly changing.

However, the composition ratio of this SDR only changes every 5 years, as for the specifics, I will mention the Renminbi in a bit, and you all can review it later.

Japan's awkward position in the European and US dollar system

If we narrow our focus a bit and look at Japan's role in the European dollar system, we can see -

Jeff: If you are a Japanese bank and you lack dollars - by the way, Japanese banks are short of trillions of dollars every day. If you are a Japanese bank short of dollars, what do you do if the market does not provide you with funding? Then, you have almost no other option, except maybe the Bank of Japan has some spare dollars to lend to you, as the Bank of Japan or the Japanese government has been accumulating dollar reserve assets, which is another warning sign.

Since the Asian financial crisis, the Japanese government has been accumulating reserves in the form of dollar-denominated assets, also due to the dollar shortage. Therefore, the Japanese government may provide you with some dollars. They sell some U.S. Treasury bonds, create some liquid dollar assets, and then lend them to you so you can replace the funding renewal you did not get in the market, as the market becomes increasingly difficult.

So what the Fed does is essentially turn the Bank of Japan into an extension of the Fed's discount window through these overseas dollar swaps. Therefore, if you are a Japanese bank experiencing funding problems because the euro-dollar market no longer provides the dollars you need, you can turn to the Bank of Japan. The Bank of Japan does not need to sell government bonds.

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

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

In March and April 2020, there was a very severe dollar shortage globally. This was followed by the U.S. government significantly increasing its debt in the market through fiscal policy. Just when everyone thought the dollar was sure to depreciate, the dollar's price remained extremely strong, hitting historic highs, largely due to a shortage of collateral in the European dollar system.

Jeff: In the early days, you and I could transact in dollars. Because I know you. We have reputations. You have a reputation. I have a reputation. We know each other. We are familiar with each other. So you and I could lend dollars to each other without collateral because we have this reputation and informational advantage. But as the euro-dollar system expands, now you are transacting in dollars on a larger scale with people on the other side of the world.

How do you adjust the risk when doing this? Well, one way is to say, well, I don't know you, Joy. But you need US dollars. I have US dollars. If you have some financial assets 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 US Treasury bonds, then we can trade on a huge scale because I only need to know that I have a US Treasury bond as collateral in my hands. I lent you US dollars. If you default, I know I can sell this bond tomorrow because I have the right to seize and sell it.

So, collateral allowed the eurodollar system to reach a scale and coverage previously unimaginable. Think about the 1990s, when the federal government actually almost achieved a surplus, which meant there was a shortage of Treasury bonds that could be used as collateral. If there were not enough Treasury bonds as collateral, we had to find something else.

Otherwise, you and I cannot do business because I don't know you, I need some form of security. So the monetary system, the eurodollar system, all these banks not only created new forms of cash, but they also created new forms of collateral. This is also one of the reasons for the rise of securitization. My view on what happened in March 2020 is actually in April 2020. I think the reason we came out of that crisis is because the federal government issued trillions of dollars in Treasury bonds when the market urgently needed such collateral.

Joy: It sounds like the US government needs to maintain deficits so that Treasury bonds can continue to be issued, otherwise, we can only go to mortgage bonds and various riskier bonds (to be used as collateral).

Jeff: Yes, that's the downside because the more debt the federal government issues, the better the system operates. So, basically, you are rewarding the government for all its worst behavior.

This section also explains why in the past 20 years, we have seen a particularly large number of financial derivatives in the market. The emergence of these products is directly related to the shortage of US dollar collateral in the eurodollar system.

CRE CLO Risks in the Eurodollar System

In the previous video, I mentioned that now, many lending institutions have a large amount of financial derivatives in the form of repurchasing commercial real estate debt contracts that they have sold, which are known as CRE CLO (Commercial Real Estate Collateralized Loan Obligation). This type of commodity 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: Several things are happening here. On one hand, you are correct, especially in the commercial real estate structure there are indeed some opaque situations where we do not have enough information. However, we keep receiving reports, especially from the CLO (Collateralized Loan Obligation) initiators, as they are trying to limit the losses they bear. They are increasingly concerned that if they start recording these losses, the market will descend into chaos, which dates back to 2007 when the main trigger for the mortgage shortage was the increasing illiquidity of subprime mortgage-backed securities.

As they become more and more illiquid, their acceptability as collateral diminishes. Because if I lend you money and get collateral from you, I don't care what the collateral is, I only care if I can sell it tomorrow and reasonably ensure that I can get my money back. So, if there is any doubt, even if you provide the best bonds with the most optimal credit characteristics, if the underlying market becomes unstable and unreliable, I will not accept your collateral because I do not know if I can sell it at the price I need in a timely manner. Therefore, if the CLO market may become illiquid, it means that these CLOs, especially in commercial real estate structures, as various forms of collateral, including cash collateral, become less available.

I have previously discussed exchanging high-risk assets for US Treasuries, and then using US Treasuries as collateral to borrow money, which can become very complex. Because the Euro system itself is like Frankenstein's monster stitched together from many elements. Over the years, it has been incredibly complex and difficult to understand, with almost no one truly grasping how it works and how it all fits together, including all those involved.

So, it always takes this form: information and the risk of information asymmetry could become greater than reality. I don't want to use the word 'need.' But this is basically what we are talking about.

Therefore, with the burst of the commercial real estate bubble, we will not obtain much information from there, we will not understand the logic behind many prices. More and more people are beginning to worry about whether they should take action. More people are likely to sell, but there is no reliable information behind it.

This makes the market even more illiquid and less reliable. This means there is less collateral, and it is less useful. Then you are stuck in an overall collateral crunch, and all the other bad things.

This makes the market even more illiquid and less reliable. This means there is less collateral, and it is less useful. Then you are stuck in an overall collateral crunch, and all the other bad things.

But on the other hand, we must also remember that, especially in the past few years, CLOs have been highly bid, with bidders coming from different sources but mainly from Japan.

Japan has been constantly squeezed by higher financing costs priced in US dollars. They have been purchasing riskier commodities. Especially high-risk CLOs, in order to pursue yield, attempt to create some positive arbitrage behavior to keep their trades going.

So they have been suppressing the profit on interest rates, making it appear smaller than the actual risk. But this could become more dangerous, leading to a bunch of really terrible possibilities.

If the heaviest CLO market buyers in Japan start feeling that perhaps all the assumptions that made them decide to buy CLOs were actually wrong, then they stop bidding, accelerating the decline in CLO prices, which would create even bigger liquidity problems than under other circumstances.

Summary

So let's summarize the content of this issue, at the beginning of the video, we mentioned that European dollars actually refer to dollars outside the US, and the US dollar has become the most important global trading currency, not only because the US has been a leading economic power since the last century, but also because of the trend of globalization that has made the US dollar the most widely used and valuable medium of exchange globally, and this is the deep meaning of the concept of reserve currency. Looking back from our current point in time, in the process of forming the entire European dollar system, the Soviet Union coincidentally became a catalyst.

Now we see that the US Federal Reserve controls the interest rate between banks to control the price of the dollar, a method that actually started during the major inflation period in the US in the 1970s. Although the Federal Reserve has been very proactive in establishing various swap agreements to help alleviate the global dollar shortage, the results show that it still cannot avoid the fluctuations in financial markets and the real economy.

Although practically there are almost no physical US dollars in the European dollar system, from a financial perspective, in order to keep the already globalized world economy running smoothly, the United States, as the current engine of the global economy, has made its government debt the most widely recognized, valuable, and stable collateral. A very contradictory scene unfolds, even though everyone feels that the high US government debt will damage the credibility of the dollar, for the European dollar system to continue to operate smoothly, it actually requires the US to continuously increase its debt. Otherwise, the participants in the European dollar system would have to resort to seeking derivatives of US dollar debt as collateral for lending and borrowing, but this actually has significant risks, and the commercial real estate debt derivative CRE CLO we mentioned in the end is a very good example.

An interesting phenomenon that we can see here is that there are two somewhat intersecting yet relatively independent operating systems for the US dollar in the USA and overseas. Although the movement of the US dollar can impact the world, it is not so much about the US controlling the world with the dollar, but more like a mutual agreement. For example, China has also attempted to replace the dollar with the RMB, but currently, the confidence in the RMB as a measure of value is much lower than that of the dollar.

It is not to say that the US dollar or the Eurodollar system is a flawless system; it actually has many issues and of course, it cannot continue indefinitely. However, given the current situation, we indeed have to accept that there is currently no alternative to the US dollar in the world of trade and finance.

Understanding the principles of the Eurodollar and understanding the entire field of macroeconomics is not just something that remains at the theoretical level. Macroeconomics is a system of society, human behavior, political science, psychology, and more disciplines. Understanding macro money can actually help us better understand the operating mode of the world we live in, making us aware of our position within the global economic body, the world's trends, how money flows, and all these can help us have a clearer direction in issues where decisions need to be made, such as lifestyle, career choices, and investment targets.

After all, we need to understand the rules of the game first to be able to go with the flow, right?