Why Dollars?

After helping visualize the exceptional dominance of the US dollar, FedGuy (Joseph Wang) offers a few answers to the question "why?" in this video (taken from our series on the topic here):

• Enormous liquid market. Many foreign financial markets are not as developed (capable) or deep (liquid) as the dollar markets.

Small deposits (up to the $250k FDIC insurance guarantee) are going to be keep in a bank, but larger quantities of capital will instead be parked in assets that can be easily sold for cash and/or borrowed against (i.e. in liquid assets). This is where the importance of well developed markets come into view – usually it requires a deep collateral market, and nothing compares to that for US Treasuries.

It often has little to do with politics, either. Or as little as can be afforded. Remember, these are major financial institutions from all over the world trying to make the most sound decisions possible. It follows that these firms are faced with a "Prisoner's Dilemma", where actually de-coupling from the dollar is only lucrative so long as dozens of other agnostic financial institutions do the same. But with no marginal advantage to do so, nor any political incentive, the result is a sure-fire way towards ostracization.

Other reasons named by Joseph include:

• Need USD for global trade. Most of global trade is conducted in USD, so many foreign businesses need USD even in transactions not involving the US.

• Cheap. Dollar interest rates have been historically low over the past decades, especially in comparison to interest rates in emerging markets (Joseph cites India and Mexico).

• Hedging/Diversification. Borrowers may have revenue in USD that can be hedged with USD debt, or seek to diversify their funding mix.

• Lenders are happy to lend to offshore borrowers because the returns are usually higher and it offers investors an opportunity to diversify their investments.

https://t.me/DTPrimers/98