Author: Joy Liu Source: joyliumacroeconomics Translation: Shanoebba, Gold 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 global economic fluctuations. 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 own national currencies. In these places, since we do not see the presence 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 national currencies in the US dollar-dominated world. What kind of attempts have these countries made?

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

In this issue, we will analyze all of the above questions, and this time, I've invited a special guest for assistance.

Yes, today's guest is Jeff Snider, whose 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 isn't it called the 'Overseas Dollar' then?

Jeff: For many people, this is actually a better term. The term 'eurodollar' confuses people. As soon as they hear the word 'euro', they immediately think of the euro, the only euro-related term they have heard. But in fact, the so-called 'eurodollar' originally referred to US dollars primarily held in Europe but located outside the United States because it originated in Europe.

In fact, the City of London was given the name 'eurodollar' at some point in the 1950s. No one knows exactly when this name came about, as everything was happening underground. At that time, banks were trading US dollars for various reasons. Eurodollars became an offshore US dollar system that began to play the role of a reserve currency, as it was very useful in many different places, especially in 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 a 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 ledger currency system that has filled the role of a reserve currency. Therefore, with banks and balance sheets at its center, the truly involved parties are global banks. They circulate dollars globally because it is a reserve currency.

Almost nowhere in the world is not influenced by the eurodollar. In the second half of the 20th century, the reason we experienced such significant global prosperity was because the eurodollar system allowed a large amount of innovation and technology to be adopted and funded on a global scale. So when the eurodollar system operates well, the world actually greatly benefits 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. But 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?

Our impression of the impact of the US dollar globally over the past few decades is:

Joy: Does the US dollar amount to 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 dollar, the US government does not have control over it. The only way the US government can influence the global economy and currency considerations is actually through sanctions. When they tried to sever Russia's connection to the Swift system, they had to ask banks not to let Russians trade on Swift.

Swift is simply a messaging system owned by a global consortium of banks. Once again, this is a huge misconception that the dollar is controlled by the US government or the Federal Reserve. The US government wants you to believe they have this power and authority, but in reality, the euro-dollar system has been like this from the beginning.

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

This allowed them to trade on a dollar-denominated basis but out of US control and beyond the reach of the US government. As this situation has persisted for a long time, no one truly understands or knows what happened, leading to 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.

When we are pondering whether the dollar has hijacked the world, there is actually a detail inside which is how the dollar is transferred, that is through this SWIFT channel. Regarding SWIFT, I have detailed its principle and the usage data of different currencies in the episode where I talked about the renminbi. Everyone can go back and review that episode.

The dollar blockchain brewing since the 1950s

Jeff: You will see why I use the term 'euro-dollar' because it distinguishes. What we are actually talking about is a bank-centered currency system called the dollar. It is priced in dollars, but there are no actual dollars. Therefore, it is essentially a bank currency. So, it is not the US government that controls the euro-dollar system, nor is it the US imposing the dominance of the dollar globally. The fact is, the euro-dollar system is the most useful, widely available currency system. Because it is useful and widespread, this is why it is still in use today.

It is priced in dollars, but there are no actual dollars. Therefore, it is essentially a bank currency. So, it is not the US government that controls the euro-dollar system, nor is it the US imposing the dominance of the dollar globally. The fact is, the euro-dollar system is the most useful, widely available currency system. Because it is useful and widespread, this is why it is still in use today.

It's not the USA 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 significant problems in this regard because the Eurodollar is outside, and the Eurodollar is the important one, not what the US government says.

According to what Jeff just said, the interconnection of the accounting systems of various banks actually facilitates the network of dollar transactions. When the dollar flows between different banks and is recorded, it is difficult to have full control over the Eurodollar system unless the US government uses hard political methods to refuse the use of the dollar in a certain region.

Oh, talking about this, have you all ever thought that if we treat the ledger of each bank as a unit, and the banks also have accounting behavior towards the dollar, then why does this system look more and more like blockchain. But that's just my train of thought, blockchain is not the focus of this episode.

One system does not equal one unified consciousness.

So, I publicly disclosed some limited one-on-one video appointment slots with the audience. One of the viewers who made an appointment with me expressed a perspective that I personally agree with and would like to share with you. It is that we often simplify a system or institution as a huge entity with subjective consciousness, but in reality, there are many internal struggles within each system, and the larger the system, the more pronounced this is. This also leads to a great deal of coincidence in the development of a system over decades.

The reason I agree with this approach is that this perspective is often consciously or unconsciously obscured by the media because everyone wants to make a big news out of it, simplifying a system into an individual's image makes the roles of enemies or friends particularly concrete, which easily triggers emotional resonance among the public. But looking at it the other way around, it also acts as a catalyst for extreme views among the public.

So I think we should often remind ourselves consciously when absorbing information that any system is complex and diverse, devoid of absolute singular consciousness. This way, we will see things more objectively, and it will be less likely for us to fall into conspiracy theories.

The written version of this episode is also in the description section. If you have any questions about certain perspectives or terms, you can use my script as a learning material. If you join my email list, I will notify my friends in the email list first if I have some new ideas or new trends in the channel. After all, the cycle of making one episode is a bit long, so it's much faster to notify new information via email.

What is the function and significance of reserves?

In my conversation with Jeff, he mentioned something very interesting, which is the concept of reserves. Everyone knows it is in USD now, but most people actually seldom think deeply about why reserves exist and what its deeper significance and role are.

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

Actually, this is a by-product of reserve currency. But reserve currency is a medium, an intermediary. So you can have your own currency system, currency arrangements, and an independent economy on the other side of the globe. How do you facilitate their trading? How do you enable them to trade seamlessly and efficiently? How do you make investment flow from one place to another in the world?

The role of the euro and the US dollar is because they are an intermediary currency, or what they used to call a "tool currency." You can start from, for example, the Swiss franc. Swiss banks have a wealthy client with franc deposits. They want to invest in the growing Asian economy, like 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 has no use for Swiss francs, the only way to convert is to have a currency as an intermediary. This currency is usable at both ends.

Therefore, if Swiss banks can convert their francs into US dollars and then invest these dollars in Thailand. Because the US dollar is usable in Switzerland, and the US dollar is useful in Thailand. Hence, this enables funds to circulate globally through the US dollar as an intermediary. Suddenly, a person holding cash in Switzerland can invest in Thailand without any barriers.

The only premise that makes all of this effective is that the US dollar is usable and valuable in many parts of the world, just as it does in the form of the euro and the US dollar. As it becomes valuable and usable in many parts of the world, that is why it can continue to exist. It's not for political reasons, but because it solves a huge problem, which is having a globalized economy without an international currency.

The Eurodollar has actually become the international currency, enabling different systems worldwide to seamlessly integrate, or almost seamlessly. It is not perfect, nothing is perfect. Moreover, since 2007, the situation has become increasingly difficult. However, not even at the horizon can other currency systems efficiently facilitate the flow of funds and credit from one end of the earth to the other as effectively as it does. Connecting places you never thought could be easily connected. That is why the Eurodollar is useful.

In other words, we can actually observe reserves from the perspective of the 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, in Germany, during the severe inflation last century, used currency to paper windows and cigarettes as a medium of exchange.

Federal Reserve's adjustment of interest rates does not count as monetary policy.

When we talk about the impact of the United States on the Eurodollar, I believe that friends watching the videos, including myself, at this point would raise a question: the Fed’s rate hikes or cuts obviously affect the price of the dollar and economic activities. So, if the U.S.'s control over the Eurodollar system is not that strong, how should we view the fluctuations caused by the Fed's interest rate changes on the overseas economy?

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 believes that the Fed oversees the dollar because the Fed has a printing press. In reality, the Eurodollar system does not need the U.S. dollar at all. Therefore, the impact of the Federal Reserve on the Eurodollar is very limited.

It is not completely insignificant, but far less significant than people imagine. In fact, it is very limited. As the Eurodollar emerged in the 50s and truly entered the 60s, the monetary system began to change. This meant a lot of things, as it was a system without reserves, controlled basically by transactions between banks. It was a blank canvas that allowed banks to trade in various unprecedented currency forms, such as derivatives.

People did not know what derivatives are or their purpose, but in many ways, derivatives are a different form of currency. Therefore, in the 60s and 70s, the Federal Reserve System realized that they did not even know how to define the currency that was actually being used in the real economy in a very authentic manner. Therefore, throughout the 70s, the Fed was trying to figure out what was happening in the monetary system.

Moreover, all of this was happening offshore. This is partially the Eurodollar, it is outside the U.S., priced in dollars, and appears on the balance sheets of commercial banks worldwide. The Federal Reserve has basically lost control over the currency system. So when Paul Volcker came on board, he did not fight against the high inflation. In fact, he admitted that we do not know how to control, let alone regulate the circulation of dollars in the global system.

Therefore, we try to influence the behavior of banks and economic agents by raising or lowering a single interest rate. They eventually use the federal funds rate as a target. Think about 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 such an important rate.

Therefore, when the federal funds rate changes year by year, how much impact do you think this has on your decisions? And now, what is your view on the federal funds rate, because your inertia discount rate usually exceeds additional rate adjustments. So basically, this is what the Federal Reserve has been doing since the early 1980s.

Let me add that the Federal Funds Rate adjusted by the Federal Reserve, also known as the benchmark interest rate we usually talk about, actually started being used in the 1970s, after the last major inflation in the United States. Before that, the most important rate was the discount rate.

I have mentioned this part of history in a previous video.

Jeff: In fact, starting from 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 influence on the monetary system and the U.S. economy, they have been using the federal funds rate as a target for many years, calling it monetary policy, but in reality, it is just an interest rate policy, not a monetary policy.

They hope that when they raise the federal funds rate, this method can reduce lending, thus slowing down economic growth, but this is not the case. 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 itself should raise serious doubts about the Fed’s ability, because if the Fed were such a powerful institution, there would not have been such a serious shortage of dollars in 2007 and 2008.

However, 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 massive printing of money. So, as the Federal Reserve continued quantitative easing time and time again, people said this would lead to inflation because the Fed was essentially 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 situation, but throughout the 2010s, people kept hearing that each round of quantitative easing would lead to uncontrollable inflation, but this 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, the impact of the Federal Reserve on the monetary system itself is very limited.

Cognitive bias/confirmation bias

If the film has reached this point, I believe many friends will find it very different from some of the viewpoints 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? Let me share one of my concepts with you. We are all very prone to fall into a state of confirmation bias.

Confirmation Bias, when translated into Chinese, means confirming bias or confirmation error, which means we are more inclined to seek out or adhere to viewpoints that we already believe are correct. Social media platforms, in particular, exploit this cognitive feature, or rather what I consider its drawback, by constantly pushing things that we subconsciously agree with. The result is that it continually reinforces our existing views, leading us to antagonize, attack, or resist people with different views, even if the other party is sincerely discussing the issue, it will be perceived as a threat in our words.

After realizing that our fervor is meaningless, when discussing an issue, we should actively allow our own views to be questioned and challenged. Because by often observing a problem from three or four angles, and constantly refining our own views, we can build a more complete thinking framework, avoiding falling into emotional resistance towards others' opinions.

Because this can very likely make us extremely biased and extreme. That's why you often see me responding to comments in the comment section, even questioning my comments. Because only in this way can a kind of intellectual interaction be generated, even if the viewers who have been watching my videos but never leave comments, after seeing the interaction in the comment section, will also consider issues from more perspectives.

In this way, as a whole, both me and my entire audience can continuously improve. Of course, I also hope that the audience of my channel, when facing practical or psychological obstacles in work, life, or investment decisions, can also use this multi-perspective observation method to approach the problems at hand. As the creator of this channel, haha, although I cannot force everyone to share my values ​​, I also try my best to practice what I believe is right.

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

So, returning to the monetary system discussed in the episode where I talked to Joseph, we mentioned the Federal Reserve conducting overnight repurchase agreements, which is the area he was responsible for when working at the Federal Reserve. The Fed helps other countries or financial institutions solve liquidity problems through overnight repurchase agreements or reverse repurchase agreements.

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

Jeff: That is their intention. I would consider the actual execution of swap plans to be worse. Listen, they have opened dollar swaps since December 2007. So they have been engaging in overseas dollar swaps with major central banks since 2007. Nevertheless, we still experienced a global dollar crisis. How effective could these dollar swaps be?

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

This triggered liquidity issues in markets around the world. So, again, how effective were these dollar swaps initially? Once again, this is one of those things you should not just look at superficially without delving deeper, because it aligns with the myth that the Federal Reserve is the global central bank.

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

Urjit Patel, Governor of the Reserve Bank of India, said in the Financial Times in June 2018 that there is a dollar shortage globally. Believing that the Fed's dollar swaps provide some form of liquidity support to other regions of the world, or even at the very least liquidity support, is not in line with what we observe in the entire system.

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

The possibility of regional reserve funds.

Jeff: One possibility is that certain country's currencies can become regional reserve currencies. Throughout history, currency systems have typically been regional rather than international or fully globalized. So it is possible that various groups may primarily use one or another country's currency for trades. However, I believe this is not enough. I think we have already entered a global system.

Therefore, we do indeed need a global currency system, without any country's currency even coming close to being able to achieve this. Most people first think of the Chinese Renminbi, but even the Chinese themselves do not want the Renminbi to be internationalized. About a decade ago, they made a half-hearted attempt, creating an offshore market, or at least starting to create an offshore market and offshore Renminbi.

However, they never really let it thrive as much as it could have. I am skeptical about this, but at least they started the experiment, and then they sort of gave up. They kind of pulled the plug, saying we are not too confident about this, which is why the Chinese authorities themselves have always advocated using the International Monetary Fund's Special Drawing Rights (SDR) as an international alternative to the Euro and Dollar.

But that is more impractical than any other possible framework, as Special Drawing Rights are just another bureaucratic creation.

What is the full name of SDR? It is Special Drawing Rights, an international currency established by the International Monetary Fund. The pricing of this international currency is currently determined by the currencies of the five major economies in proportion, namely the Dollar, Euro, Yen, British Pound, and approximately the Renminbi. Among them, the Dollar has the largest share, and the Yen has the smallest share. The price of this SDR is updated daily because the international exchange rates of these currencies constantly change.

However, the composition ratio of this SDR changes only every 5 years, and specifics of it, I talked about the Renminbi earlier as well, so you all can review it.

Japan's awkward position in the European Dollar system.

If we narrow our focus and take a 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 funds? Then, you have hardly any other option, except perhaps the Bank of Japan has some backup dollars to lend to you, because the Bank of Japan or the Japanese government have been accumulating dollar reserves, which is another warning signal.

Since the Asian financial crisis, the Japanese government has been accumulating reserves in the form of assets priced in dollars, which is also due to the shortage of dollars. 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 to you so that you can replace the refinancing funds that you have not been able to obtain in the market, as the market becomes increasingly difficult.

So what the Fed is doing is essentially turning 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 facing funding challenges 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 for a dollar loan through a dollar swap from the New York Federal Reserve Bank on your behalf.

Why is the level of U.S. deficits actually too low?

In March and April 2020, there was a very serious dollar shortage globally. Subsequently, the U.S. government significantly increased its debt in the market through fiscal policy. Just when everyone thought that the dollar would definitely depreciate, the price of the dollar instead remained very strong at historical highs, behind which there was a significant shortage of collateral in the European Dollar system.

Jeff: In the early days, you and I could trade 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 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 adjust 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, such as US Treasury bonds, then we can trade on a huge scale because I just need to know that I have a US Treasury bond as collateral. 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 allows the eurodollar system to reach scales and coverage previously unimaginable. Think about the 1990s when the federal government actually achieved a surplus, which meant there was a shortage of Treasury bonds that could be used as collateral. If there are not enough Treasury bonds as collateral, we have to find something else.

Otherwise, you and I cannot do business because I don't know you, 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 also one of the reasons for the rise of securitization. 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 US dollars in Treasury bonds when the market urgently needed such collateral.

Joy: Sounds like the US government needs to maintain deficits to keep issuing Treasury bonds, otherwise, they can only go to mortgage-backed securities and other higher-risk bonds (as collateral)

Jeff: Yes, that's the flip side 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 also explains why over the past 20 years, we've seen a proliferation of 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.

Risks in CRE CLO in the eurodollar system

In the previous video, I mentioned that in many lending institutions, a large amount of financial derivatives related to the debt contracts of commercial properties that they repurchase, such as CRE CLO (Commercial Real Estate Collateralized Loan Obligation), are not only traded significantly in the United States but also have become a very important financial derivative in the European dollar market circulating within the market.

Jeff: Several things are happening here. On one hand, you are correct, especially in the commercial real estate structure where there are indeed some opaque situations, and we do not have enough information. However, we continue to receive reports, especially from the initiators of CLO (Collateralized Loan Obligation), as they are trying to limit the losses they are facing. They are becoming increasingly concerned that if they begin to record these losses, the market will fall into chaos. This also harks back to 2007 when the main reason for triggering the mortgage shortage was that subprime mortgage bonds became increasingly illiquid.

As they become more illiquid, their acceptability as collateral diminishes. Because if I lend you cash and obtain security from you, I do not care what the security is, I only care if I can sell it off tomorrow and reasonably ensure that I can recoup my money. Therefore, if there are any doubts, even if you provide the best quality bonds with the highest 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. So, if the CLO market may become illiquid, it means that these CLO, especially in commercial real estate structures, as various forms of collateral, including cash collateral, become less available.

If the credit characteristics are excellent, even if it is the best quality bond, if the market behind it becomes unstable and unreliable, it makes the collateral less usable. Therefore, if the CLO market might become illiquid, it means that these CLOs, especially within commercial real estate structures, as various forms of collateral, including cash collateral, become less available.

I have previously discussed trading high-risk assets for US Treasury bonds, and then using US bonds as collateral to borrow money, which would become very complex. Because the Euro system itself is like the monster of Frankenstein, where many elements are patched together. Over the years, it has been incredibly complex and difficult to understand, with almost no one truly comprehending how it works and how it all fits together, including all those involved.

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

So with the bursting of the commercial real estate bubble, we won't get a lot of information from there, and we won't get a lot of the logic behind the prices. More and more people are starting to worry about whether they should sell. More people are more likely to sell, but there is no reliable information behind it.

This makes the market less liquid and less reliable. It leads to fewer collaterals and less helpful ones, and then you get into the whole collateral crunch, along with all the other bad things.

On the other hand, we must also remember that, especially CLO, have received high bids in the past few years, with bidders coming from different sources but mainly from Japan.

Japan has been squeezed by USD-denominated higher financing costs. They have been buying riskier commodities. Especially high-risk CLOs, in order to pursue yields, attempt to create some positive arbitrage behavior to keep their trades going.

So they have been reducing profit margins on interest rates, making it look like it is less risky than it actually is. But this could become more dangerous, leading to a lot of really bad possibilities.

If the largest CLO market buyers in Japan start to feel that perhaps all their assumptions that led them to purchase CLOs were actually wrong, they stop bidding, accelerating the decline in CLO prices, which would create greater liquidity issues than in other situations.

Summary

So 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 US. In addition to the US being a leading economic power since the last century, the globalization trend has also made the US dollar the most widely used and valuable medium globally. This is also the underlying significance of the concept of reserves. Looking back from our current point in time, during the formation of the entire Eurodollar system, the Soviet Union coincidentally became a catalyst.

Now we see that the way the Federal Reserve controls the dollar price by controlling the interest rate for interbank lending between banks actually began in the 1970s during a period of high inflation in the US. Although the Federal Reserve has been very proactive in setting up various swap agreements to help alleviate the global dollar shortage, the results still cannot prevent the fluctuations in the financial markets and the real economy.

Although there are virtually no physical US dollars in the Eurodollar system, from a financial perspective, in order to keep the already globalized world economy running smoothly, the US, as the current engine of the global economy, has its government bonds become the most recognized, valuable, and stable collateral. Thus, a very contradictory scene unfolds. While everyone believes that the high debt of the US government will undermine the credibility of the dollar, the Eurodollar system, in order to operate smoothly, actually needs the US to continuously increase its debt. Otherwise, the participants in the Eurodollar system would have to settle for seeking derivatives of dollar debt as collateral for borrowing and lending, but this actually carries a significant risk, and commercial real estate debt derivatives such as CRE CLO that we mentioned later are a good example of it.

One interesting phenomenon we can see here is that there are two somewhat intersecting but relatively independent operating systems for the US dollar in the US and outside the US. Although we see that the movements of the US dollar will affect the world, it's more like a mutual choice rather than the US controlling the world with the dollar. For example, China has also attempted to replace the dollar with the RMB, but currently, the confidence in using the RMB as a medium of value measurement is much lower than that of the dollar.

It's not to say that the US dollar or the European dollar system is a perfect system, as it actually has many problems and of course cannot continue indefinitely. However, given the current situation, we do have to accept that there is currently no substitute for the US dollar in the world of trade and finance.

Understanding the principles of the euro-dollar system and understanding the entire field of macroeconomics is not just a theoretical matter. Macroeconomics is a collection of social systems, human behavior, political science, psychology, and many other disciplines. Understanding macroeconomics can actually help us better understand the operating mode of the world we live in, make us aware of where we stand in the global economic body, what the world trends are like, how money flows, and this can help us have a clearer direction in issues where choices need to be made, such as lifestyle, career choices, and investment targets.

After all, we need to understand the rules of the game before we can move with the trend.