On April 10, only a few days after Ed Quince’s pessimistic take on geopolitics, Alex Gloy came back to focus attention on the current position of the dollar:

At the risk of boring you to death I feel compelled to add a little twist on my musings on the dollar.

• First, you can do the following exercise: try to find out (Google it!) how many dollars exist. Possibly the simplest question you can ask. That number should be known, right?

• If I asked how many dollars, euros, etc. you own you would look it up in your bank statements (and by reaching into your back pocket). Every company needs to keep books. Same for governments. The number should be knowable. Yet you get many, vastly varying answers. A lot of search results will lead you to something like “at the end of last year, the estimated amount of debt was …” And you are stupefied, because you didn’t ask for debt, you asked for the number of dollars.

• The riddle solves itself once you realize you can’t create money without simultaneously creating the same amount debt. Hence money must equal debt, and vice versa. You can figure out the number of dollars outstanding by just looking at debt. Which leads to the next problem: how much debt is there outstanding? (My smallest estimate is $93 trillion USD onshore plus $40-60 trillion USD offshore).

• To complicate things, BIS (Bank for International Settlements, the central bank of central banks, recently reported $60 trillion in ‘hidden’ USD debt in the form of foreign exchange swap positions. A derivative contract becomes debt if a defined event happens (for example, a currency moves a certain amount, or interest rates). BIS, in their latest report (H1 2023), shows an astounding $714 trillion of global derivatives outstanding, most of them denominated in USD.

• Dollars are not equal to dollars. When living in Germany, I had a USD account in my name at my local bank (because I held some USD denominated bonds, and I wanted to avoid being charged FX fees each time the bond paid interest in USD). In preparation for a trip to the US I wanted to withdraw a small amount of dollars in cash from this account to avoid the big surcharge when buying foreign currency at the counter. The bank claimed this was impossible. I couldn’t believe it, but it is true. The dollars in my account were not in Germany. The bank, Commerzbank, has a US bank which holds a USD-denominated account for Commerzbank Germany. Every local non-US bank needs a “correspondent bank” to be able to offer USD payment services. If an Indonesian exporter of palm oil invoices his client, he will ask for the dollars to be sent to a certain account at “JPMorganChase for Bank Mandiri” (for example). The dollars never leave the US. This is why it is so easy for the US to cut off entire countries from access to USD – you simply tell US banks they’d be in trouble if they continued to bank with entities from certain regions.

• Side note: SWIFT (Society for Worldwide Interbank Financial Telecommunications) is simply a messaging system, where participants exchange account information. You could still convey that information by phone, for example. Russia wasn’t cut off from dollars because they couldn’t use SWIFT anymore – they were cut off because US banks weren’t allowed to act as correspondent banks for Russian entities.

• This enables the US to determine who gets access to the most important currency.

• But it doesn’t end there. Out of approximately $7.5 trillion in US Treasury securities held by foreigners, around half ($3.2 trillion) are held in custody for “foreign official accounts” (central banks, sovereign wealth funds) at the Federal Reserve Bank of New York. If you are the Bank of Japan, or Swiss National Bank, FRBNY is your broker. They hold your Treasury securities. If you wanted to “punish” the US and dump all your Treasuries into the market, you’d have to call in your sell order. And the person on the other side would simply hang up.

• There are ways to have US securities held abroad. Euroclear, for example, is a European custodian for US Treasuries. This is why tiny Belgium (where Euroclear is located) regularly shows up among the largest non-US holders of US Treasuries. According to rumors, the Chinese hold substantial amounts of US Treasuries via Europe.

• Similarly, the FRBNY holds substantial amounts of gold for “foreign and international accounts” (the distinction is unclear to me). They call it “earmarked” gold, valued at $42.22 per ounce.  An arcane regulation in US Code (USC 5116-5117) makes valuing gold in official transactions at more than 42 dollars and two eleventh per ounce unlawful. Anyway, FRBNY holds nearly $8 billion worth of gold valued at $42.22 an ounce, which translates into 189 million ounces (or nearly 6,000 tonnes), currently worth $443 billion. Small amounts of gold are stored below JFK airport (for trading), but most is under the control of the US military at West Point, NY and Fort Knox, KY. After WWII, Germany, the Netherlands and other European countries stored part of their gold in New York, tucked away safely in case of a Russian invasion into Western Europe. Recently (2013-2016), Germany and Netherlands “repatriated” some of their gold from New York. This was, of course, a very sensitive and political issue. But you don’t want to wake up one day, trying to access your gold, only to hear that it is gone (confiscated, sold or lent out).

• A digital dollar abroad is hence either a credit by a US institution (local dollars) or a non-US institution (in which case they are so-called Eurodollars). Access to dollars for non-US participants usually means access to dollar-denominated credit. During financial crisis, credit becomes tight (unavailable, or only at punitive rates). Since money is only created by issuing credit, lack of lending leads to dollar shortage.

• Digital dollars are created by issuing credit and destroyed by redemption of said credit. In a crisis, lenders are less willing to extend risky loans, licking their wounds from credit losses, forcing redemption and hence reducing the number of dollars outstanding. This is why you often see the dollar strengthening during times of crisis.

• The power of the US dollar extends well beyond its function as global currency for pricing of goods and commodities; it dictates access to credit to many emerging market economies (which lack sufficient savings due to distrust in their local currency).

Digesting such a rich meal

Several members of the team thanked Alex for clarifying so many complementary pieces of information, This proved — to me at least — that for a “Candide” like myself there is no simple way to line up all the pieces of the puzzle, with their odd colors and shapes, and claim that we can assemble them into a distinct landscape with a clear message. Unless, of course, people like myself decide that the message is the same that Voltaire’s gave us in the conclusion of Candide: Let the financiers, the experts and philosophers carry on as usual, while the rest of us focus on tending our own gardens.

Without yet giving up, I responded to Alex, attempting to identify themes that might make sense to me, while at the same time signaling another element that caught my attention.

My takeaway — which may be completely misguided, so please correct any of my speculation — is that there are three levels of reality that need to be analyzed.

• The mechanics of debt, obviously complicated in all the ways you’ve described.
• the psychology of control via the manipulation of the mechanics of debt. I assume everyone — governments, banks and holders of funds — is maneuvering to optimize control).
• The exercise of power, which raises the question of sovereignty and may be approached from either a political or financial position and more probably a combination of the two.

The ensemble is too complex for any single party or cabal of powerful interests to control. Nevertheless, what I would call the “cultural position” of the dollar places the US at the summit of the power game. But even if labelled in dollars — which have the easily perceived advantage of providing some kind of clarity — the status of debt can be obfuscated, transformed and even undermined by specific events (a meltdown or a crash) that could, at a given moment, change the power relationships.

Now I’ve just come across an article in Forbes quoting billionaire Tim Draper:

“Draper predicted the U.S. dollar will go the way of the Confederate dollar after the U.S. civil war, eventually becoming ‘completely worthless’ and triggering bank runs.”

“There will be a moment in time, and I don’t know whether it’s a day or a month or maybe over the course of two months or something, but I don’t know when it will start, whether it’ll be a year or five years or whatever, maybe even ten years out,” Draper said. “But it’ll happen very rapidly.” 

Is Draper just speculating, the same way we speculate about wars that cannot be predicted through scientific analysis but do occur regularly? The article focuses on speculation about the future of bitcoin, which you haven’t mentioned. My sense of what the Forbes article is saying is that bitcoin is capable of providing the spark that ignites the conflagration everyone else is maneuvering to avoid. So that raises two questions:

How could bitcoin or crypto in general muddy or even poison the waters?

Is bitcoin important enough or a cataclysmic bitcoin event likely enough to take seriously?

In short, how many balls have we put in the jugglers’ hands? And how skilled are any of the jugglers?

Alex replied with these words:

Thank you! Of course, I see geopolitics through the viewpoint of finance, which excludes other valid viewpoints. For example, it is hard to explain the US’ support for Israel (which will — most likely — cost Biden the presidency) with financial considerations.

So, we come back to geopolitics as well as current events. The discussion continued and is still developing. More pieces of the puzzle appear regularly. We will bring you the next phase of the discussion in next week’s “Money Matters in a Multipolar World.”

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