Good point on the Petrodollar hypothesis being debunked, but I'd like to add more to the point that the US dollar is valuable simply because the US has the world's largest consumer base.
Imagine you're a foreign country. You've put in a bunch of labor and manpower to make goods for the US. You sell them to the US, and they pay you with green pieces of paper.
Now what? Why are these American dollars valuable to you?
Because you can give them to other countries and they'll give you goods in return? Then why are these American dollars valuable to those other countries?
Because it's turtles all the way down?
I think it's because somewhere along the line. Some country will take those dollars and buy a F35. Or a IP license from Intel. Or the rights to distribute the latest Marvel movie in their country. What do these things have in common? No other country in the world can produce a equally good substitute.
That's the core of what still gives the USD its value. The US being able to produce goods and services that the rest of the world has no substitute for. And because the rest of the world must have USDs to buy American technology and expects this to continue into the future, this allows the US to consume more from the world and have a large consumer market.
This is missing a huge piece of the puzzle. US Treasuries. Any excess dollars are simply used to buy T-Notes, lowering the US government’s borrowing costs and anchoring the US economy. There is simply no need to go hunting for someone to buy your dollars all the time when you can always go to the US government itself.
The US special role is based on two things, size and stability. Everything else is icing.
US Treasuries pay in dollars. Buying a Treasury is a bet that dollars will still be valuable in the future. Am I wrong to see the high value (low interest rate) of Treasuries as a consequence of the value of the dollar, not a cause? If people lose faith that the dollar will hold its value, the fact that the US government is willing to pay 1% interest in dollar loans will not help bolster confidence.
Foreign central banks don’t really care so much about making or losing money on their dollar treasuries. They’re not currency speculators. They care much more about stabilising their currency and economy with respect to the global economy.
I don’t think you can un-pick dollar stability from its desirability. The value of fiat currencies is based solely on confidence, nothing else. You simply can’t say a currency is stable because people are confident in it, or that they are confident in it because it is stable. They are both different ways of saying the same thing. We measure confidence in a currency by analysing how stable it is in the market.
Right up until the point you find a US citizen anywhere in the world with a bill from the IRS. Then you find the true nature of the demand for US dollars - you can always sell them to an American with the IRS breathing down their neck.
Yes this is basically the reason. Those countries need USD to buy american products.
If they exchange the dollars with the euro then someone in the EU will end up with those dollars and that person can't do anything but buy US products.
Ever heard of Eurodollars? That’s exactly what the original article is talking about. There are foreign banks that loan dollars—fractionally—outside of the US banking system. Dollars are needed to settle those debts, and they exist fully outside of the US.
You are leaving out the single most important element of this whole mess: Eurodollars. There are banks outside of the US that take “real” US dollars and multiply them through fractional reserve lending but totally outside of the Federal Reserve System. When the financial crisis of 2008 hit, everyone “discovered” that Eurodollar liabilities were so entangled with real USD liabilities that pulling them apart would be impossible without completely shutting down global trade and finance for an extended period of time. So, the Fed just temporarily gave access to its liquidity for foreign institutions outside of the FRS to keep things running.
Anyways, my point is that Eurodollars can be created, passed around among foreign entities, and destroyed without ever necessarily touching the US flow of funds.
I guess this explanation is flattering to US citizens but actually the reverse is happening: https://en.wikipedia.org/wiki/Triffin_dilemma. Due to reserve currency status of the US dollar, there is additional external demand for dollars. This means that the US will necessarily experience a trade deficit, importing more goods from other countries than exporting US goods to them.
> Why are these American dollars valuable to you?
You need them to service your dollar-denominated debt or to put them in your reserves.
Market is a dynamically evolving system with feedback loops. If you take into account the passage of time, then what looks like circular reasoning on a static picture, is often a feedback loop in a dynamic system. So it's both true that one came before the other, and that each needs the other to exist.
Imagine you're a foreign country. You've put in a bunch of labor and manpower to make goods for the US. You sell them to the US, and they pay you with green pieces of paper.
Now what? Why are these American dollars valuable to you?
Because you can give them to other countries and they'll give you goods in return? Then why are these American dollars valuable to those other countries?
Because it's turtles all the way down?
I think it's because somewhere along the line. Some country will take those dollars and buy a F35. Or a IP license from Intel. Or the rights to distribute the latest Marvel movie in their country. What do these things have in common? No other country in the world can produce a equally good substitute.
That's the core of what still gives the USD its value. The US being able to produce goods and services that the rest of the world has no substitute for. And because the rest of the world must have USDs to buy American technology and expects this to continue into the future, this allows the US to consume more from the world and have a large consumer market.