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This may be the best, most perfect example of why the eurodollar standard isn’t going anywhere anytime soon. Since hardly anyone knows the world runs on that rather than the dollar, the two are constantly conflated for what is only nomenclature. As such, the dollar’s (really the eurodollar’s) demise has been forecast with regularity and intensity for around fourteen years now, ever since the Federal Reserve’s first QE effectively and efficiently fooled people into thinking dollars were being recklessly printed.

If they had been, it wouldn’t have taken far more than a decade for consumer prices to finally do something (consumer prices in 2021-22 were a supply shock, not money). That’s not a lag, rather a complete rebuttal.

What made the eurodollar into the reserve standard only begins by calling itself a “dollar.” Technically, eurodollar deposits a very long time ago were offshore claims on actual US dollars, but from the very beginning it had been clear real dollars would be a hindrance; inefficient and cumbersome.

The eurodollar from its start transformed into a reserve-less system of bank claims and liabilities.

Banks who make and transact in those claims must also make the rules along with the money. This arrangement very easily satisfied the real aim of any reserve currency framework: become available in as many places as possible as well as being acceptable in all those same places.

In no small part, a reserve currency grows to be widely accepted because first it can be made widely available. A commercial agent in one part of the world cares little about the politics behind national currencies, instead - self-interest - only wants to be able to maximize their business, favoring any tool which helps accomplish that goal.

Otherwise, an importer in Japan has to somehow find kroner sitting around Tokyo to send to a Norwegian exporter intent on selling its goods; or, the Norwegian exporter would have to agree to get paid in yen and then be able to do something with Japanese currency way on the other side of the planet. Neither is at all likely. Instead, the eurodollar makes “dollars” available in both places so that Norwegians and Japanese can easily, efficiently intermediate through them.

Therefore, to supplant the eurodollar means to at the very least come close to duplicating its reach. This is not something governments can simply wish into existence (though you so often hear about how governments control money this way). Nor is it a task they are any good at accomplishing (bureaucracies tend to rely on the brute force of legalities and often lawfare rather than try to match the bank cartel’s past masterful ability to satisfy users’ wants and needs).

The eurodollar was once the very definition of user-friendly. Everybody (almost) won.

It is true that the US government has attempted to wield the idea of a US dollar as a weapon in its political war with whomever it disapproves of at whatever time due to whichever partisan priorities are atop the government’s list at any particular moment. The response to Russia’s invasion of Ukraine last year merely the latest and most intense of those exertions.

Rather than forcefully demonstrate control, the initial phase instead reinforced authorities’ lack of it. Remember SWIFT? Right out of the gate, Treasury boasted of expelling Russian banks from the messaging system, quite purposefully ramping up rhetoric to make it appear as if the Russians were cut right out of “the government’s dollar system” entirely.

Symbolism is so much more important these days.

President Biden even released a statement on February 26, 2022, which claimed to soon achieve that very outcome.

“First, we commit to ensuring that selected Russian banks are removed from the SWIFT messaging system. This will ensure that these banks are disconnected from the international financial system and harm their ability to operate globally.”

Yeah, no. Very swiftly the White House was mocked for what had been a very limited measure. To begin with, SWIFT isn’t the eurodollar system; it isn’t even US-owned. It took some persuading to get the global banks who do own it and run it to cut off the Russians.

And even after they did, it didn’t really matter all that much. I wrote last March:

“Deprive some of Russia’s institutions their ability to message to correspondents using SWIFT and they’ll simply communicate (how’s that for more irony!) with them some other way (including just picking up the phone) because the offshore correspondents are still there. They will continue to conduct their monetary business regardless of the method payments requests are sent and received.”

The SWIFT matter was all about placating political pressure, making it appear as if something tangible was being done so that someone could issue so many more stern-sounding press releases.

In fact, I mentioned several times how Russian banks had options to use friendly correspondents still plugged in, starting with institutions in places like the UAE. A phone call to a bank there and the Middle Eastern correspondent would transact on the Russian’s behalf the world over.

In eurodollars.

Funny you don’t hear much about it these days, if only because the government might’ve realized it was only proving the cartel’s point – that the cartel, not the US, matters most when it comes to “dollars.” This doesn’t mean American authorities have given up; they just don’t want to be publicly embarrassed for their limited influence (a lot like the Fed; see: QE/QT).

One recent example, on March 31 this year, the Central Bank of the UAE published a very short press release, only three thin paragraphs containing suspiciously little exposition. Just the basics, what was happening and nothing more.

“The Central Bank of the UAE announced that it has been decided to cancel MTS Bank’s Abu Dhabi license, wind down its operations within six months from the date of the decision, under the supervision of the Central Bank, and close the branch.”

Who was MTS Bank?

Yep, a Russian firm which was granted a license to operate in the Emirates in early February 2023. Treasury caught wind of the scheme and placed the bank on another of its no-go lists. Initially, the UAE resisted and defended the authorization on the grounds so many Russians were doing business in the country on top of the tens of thousands who had already moved in (Russians are the largest class of foreign real estate buyers there).

The Americans weren’t buying it – nor should they have. Instead, MTS was likely (to be clear, I don’t have any proof, this is just my conjecture, FWIW) setting up to do (more of) just what I wrote above.

To keep the US government happy, at the end of March UAE obviously pulled the license. Win for Biden?

Hardly. That’s just the one US officials found out about. How many other shells and correspondents have been set up and still operate further back in the shadows? From the UAE’s perspective, they gave the American government its “win” on MTS then moved on quietly with any others no one else knows about without being so blatant about the whole process.

This is what the eurodollar does at its best (or worst, depending on your political perspective) and a crucial reason why its reach had expanded so far and so thoroughly.

Russia, of course, has used this mess – one absolutely of its own making – to decry this “weaponized” dollar (the dollar hasn’t been weaponized at all, if it had been Treasury wouldn’t have to have strong-armed UAE’s central bank; this is an example of naked political power) even while still actively participating wherever it can. The latter is simply a necessity.

What has brought a lot of attention recently, as well as sparked the dreams and claims of the dollar-doomers (while the dollar rises in exchange value yet again), bilateral and even multilateral trade especially among the BRICs nations (Brazil, Russia, India, China). Brazil’s President Lula quite loudly and boisterously traveled to Shanghai not long ago to very publicly sign twenty(!) trade deals allowing both countries to use their own currencies rather than the eurodollar.

Russia has already been doing something similar with its closest trading partners, the other BRICs like China (in yuan) and India (in rupees). But you always have to be careful what you wish for…because you just might get it.

From Bloomberg on June 1:

“Russia has emerged as a top supplier of oil to India over the past year, settling a greater share of trade in national currencies and redirecting shipments east as traditional customers in Europe shunned purchases after the war began over a year ago.”

Win-win, right? Nope. Lose-lose.

Because the Russian economy is a mess of a disaster of a growing catastrophe, there’s no demand from Russia for Indian goods. As a result, while Russian oil has flowed freely down to the south, nothing has been coming back from it. Instead, Indian banks are piling up with upwards of ten trillion rupees (around $150 billion and more keeps coming) that Russian energy sellers have no use for.

The Indian government has tried to persuade them to invest their rupees locally without much success. This means rupees are locked up; not usable by and for Indians, either.

What the Russians need instead is a correspondent connection between Delhi and, say, the UAE, looping the rupees back into what has become a key eurodollar hub. Why was the press release about MTS so short, again?

As it turns out, it isn’t so easy to do international trade on international money that isn’t actually all that international. This is true in a lot more situations than what the Russians have made for themselves.

It is the same issue Brazil is about to have with China, assuming those twenty agreements weren’t more about making a spectacle and trying to influence global politics (and get doomers excited). The truth is there wasn’t much in them. Rather, private companies in both places were intent on developing optional “mechanisms” for trading in each’s native currencies.

The dollar remains the primary transaction tool for both and will almost certainly be in direct exchange between the two. After all, does Brazil really want to end up with yuan it won’t be able to use the same way Russia is stuck with rupees? The Brazilians might be able to sell resources to China, but how much will Brazil be able to buy back in Chinese goods with any CNY?

In truth, both economies are desperate messes.

It is the same roadblock everywhere and in each capacity. The eurodollar continues to be the undisputed global standard despite the fact it doesn’t work at nearly the same capacity it had before August 9, 2007. There is no real alternative to it that has a prayer of matching even its limited capacities. That alone is why it remains the reserve.

Expedience, not politics.  

In fact, what China is doing with Brazil (with Beijing’s careful eye on the Russian predicament) is attempting nothing more than to lessen the dollar demands on each. If either can get away with some bilateral trade in local currencies, bypassing the eurodollar to a small extent, that’s fewer expensive and increasingly hard-to-source (as denoted by the rising exchange value) eurodollars.

What these “mechanisms” are really about is acknowledging Russia’s rupee problem. Understanding how easy an imbalance can come up, the real danger is being left with money you can’t actually use.

Money you can’t use is beyond counterproductive. It is, in fact, much worse than having a difficult time finding “dollars” you always can.

Functionally, this means the demand (synthetic short) for dollars is near-constant. Thus, supply is left to be the lone factor determining price. Therefore, when the price goes up against other currencies, in particular China’s yuan as it is right now, it’s all about supply. Not government action nor government supply. Forget the irrelevant Fed.

This is the part the dollar-is-doomed-folks continue to get wrong as they sit year after year absolutely certain the dollar is about to begin its plunge toward zero (when it only does the opposite).

The bank cartel which does the supplying has its own set of problems (Credit Suisse) unrelated to the US Treasury. Except when the US Treasury doesn’t supply enough top collateral, that is.

Jeff Snider is Chief Strategist for Atlas Financial and co-host of the popular Eurodollar University podcast. 

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