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The hegemony of the US dollar

I was in a heater conversation a few days ago where the guy I was talking to insisted that you didn't need to be a US bank to clear the US dollar -- he said that because he read it in the Economist.  What utter BS.

Money is a funny thing, and it is an old concept but the idea that states control the money supply is a very 20th-century thing.  I lived in Asia in the late 1990s and the money was issued by the Hong Kong and Shanghai Bank (HSBC to most people), it was not the Hong Kong government, it was money issued by a private entity.

Less you think it was unusual, it was the same in the US and Canada until the 1930s...

The issue was trading, and somehow the Economist got it into its mind that it was possible to trade dollars outside the US banking system.  While it is true at the margin, in the greater scheme of things it is not.  There is a vast difference between accepting a few US dollars and trading goods with US dollars, its not at all the same thing.

Now, what is true is that Eurodollar bonds (created in the 1970s) can be traded outside of the US, but the settlement is not in the US dollar, but rather the spot rate equivalent.  So if you borrow US$ 100 million as a Eurodollar bond the coupon in principal payments are notional in US dollars but in reality, they were generally paid in Sterling (99% of Eurobonds were issued out of the UK).

The problem with trading in US dollars is the sanctions, something the Americans discovered in 2001 when Saudi Arabia attacked the US (hey 42 of the 42 terrorists were Saudi nationals).  What killed the Irish conflict was not all the agreements, it was the death of the transfer of money from the US to Ireland to support the cause, no money no conflict, simple as that.

Since then, the US government has used its control over its currency to create additional restrictions, just ask Iran and the Russians how much fun they are having.  So the idea of using some other currency is appealing, the problem is that these countries too find it convenient to get out of their obligations; China and India are good cases.  Both owe substantial amounts to Russia (not in US dollars) and therefore find it convenient to forget their repayment obligations to Russia.

All trades in any currencies eventually have to be cleared by a bank in that Nation (case and point India and China), we are talking massive transfer, of course, there is some clearing of amounts before it goes to a US financial institution, but at the end of the day, the US dollar is legal tender only in the USA, and nowhere else.  

If you present US dollars to a vendor in Mexico City he is totally allowed to reject such a form of payment, but if you are in Boston he has to accept your US dollars.  Fundamentally, that is the difference.  Why the US remains the largest player in international trade is volume and convenience, there are a few very clear rules you have to follow -- you cannot say the same for the Rupee or the Yuan.  That's the issue


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