6 ms·

Interesting to see this topic posted here. I've gotten interested in eurodollars recently. Maybe it's one of those internet collective consciousness things? Th

Interesting to see this topic posted here. I've gotten interested in eurodollars recently. Maybe it's one of those internet collective consciousness things? The big takeaway for me with the eurodollar deep dives is that the global monetary system creates money (mostly dollars) through loans. These loans are given by parties that are not able, officially, to print dollars but, at the same time, 'print' by loaning them - or rather the promise to pay, in dollars mostly, some sum that the loaner has fractionally. That is, they don't own as many dollars as they're loaning. It's just entries in a database. In this way, more dollars can enter the global monetary system than can be controlled by the US at all. This is kind of a revelation. It means that the special power that the US has in printing dollars is only special in that it can never default on the dollars because it can, in the end, print them for real. I've long thought that the US has had a major advantage in that they can 'tax' trade by requiring the world to hold these dollars that only they can print. They still have something special in their ability to never default on them but not in their ability to print them.

boppo1 5y ago
> not in their ability to print them Bond buying & yield curve intervention is pretty special. And catastrophic, IMO.
kzrdude 5y ago
Doesn't the same apply to domestic banks? Most units of any currency is created by commercial banks, not by the central bank.
- walterbell 5y ago
  The scale is notable. > The results are as shown below as of end-2018: USD57 trillion, nearly three times the size of the US economy before it was hit by the COVID-19 virus. Even if this measure is not complete, it underlines the scale of the market.
- throwaway13337 5y ago
  Yes. The banks are the ones that ultimately are creating money through giving out loans. The fed, as far as I understand, can only influence this indirectly. Interest rate setting is supposed to throttle the demand for loans. Lower interest rates, higher loan demand. Therefore, more money enters the economy. However, the other side of the equation is the banks' appetite for giving loans. There are times when banks (due to regulation or market risk they perceive) that they'll be more or less likely to make loans regardless of the demand side. The fed seems to be only controlling the demand and not the supply. They cannot force banks to make loans more willingly directly. Another aspect is the appetite for the sorts of loans banks want to give. There's an argument that too many loans are now given for speculation (housing, asset purchase) and not for things that grow the economic pie like small businesses. Small business are more risky for the banks than speculation so we end up in this sort of undead economy.
- csomar 5y ago
  Sure but these are regulated and insured by these bank's said central banks. That does not apply for Eurodollars.
  - lottin 5y ago
    Eurodollars are dollars held in non-US banks, which are nonetheless banks and therefore subject to the banking regulations of their respective jurisdictions.
    - simulate-me 5y ago
      Yea but the central governments can’t insure the deposits because they lack the ability to print dollars.
      - lottin 5y ago
        I don't think it matters. Deposit insurance is independent from the ability to print dollars. It's an insurance fund that gets contributions from banks.
        simulate-me 5y ago
        And a 100 billion dollar line of credit from the treasury. The FDIC describes itself as being “ backed by the full faith and credit of the United States government.” If there was a systemic issue, the government would likely need to intervene.
        butlerm 5y ago
        The Fed currently has about $9 Trillion in assets (and corresponding liabilities). $100 billion from the Treasury for the FDIC is a rounding error. In 2008, the Fed doubled their balance sheet practically overnight from $1T to $2T. The Fed can do that any time they want by buying bank debt with newly created dollars, which effectively socializes the risk in the banking system, so it doesn't fail, hopefully at something resembling market rates. The Fed then runs the risk that they don't get paid back instead of an individual bank, but the modern Fed cannot fail, that sort of thing can only affect the currency as a whole, by weakening it generally speaking.
- onlyrealcuzzo 5y ago
  For a long time, dollars were almost exclusively created by banks. The only other way is for The Fed to monetize the Federal Government's deficit spending. This didn't regularly happen until 2008 - but I'm skeptical that the genie will ever be put back in the bottle.
dalbasal 5y ago
Imo, a useful next step from here is to read up o nmodern monetary theory's theory/description of central banking. Imo, we tend to start with a description of fractional banking for historic reasons, gold backed money and later dollar backed currency. It's enlightening (to me) to discard this for a moment, and start by forgetting about fractional banking. Just start with loans and follow the ledger as loans are created and distributed. Fractional banking can then be understood as a control mechanism imposed on a system that already exists. This isn't historical, but it is logical. Loan-based money makes simpler sense when you think of it as a purely in its own terms. So... Dollar or euro "Money," in a broad sense, is created every time any kind of loan is made. Bank money is when someone is owed money by a bank... like when you have a bank account. Central bank money is when a central bank owes someone money. ^not necessarily an endorsement of mmt's other ideas or goals.
- throwaway13337 5y ago
  I'm sorry I used the word 'fractional'. It's a bit of a red herring here. The making of loans does not require a reserve of any sort theoretically. It just requires trust in the institution loaning more of these imaginary dollars/points/beanie babies on a spreadsheet or in a database somewhere. It's just a promise. It was traditionally handled through a backing of some fractional reserve and is still guaranteed in a lot of places by a promise of holding so much reserve of the currency. The reserve fraction varies. I believe retail banks are more bound by risk and regulatory requirements than by their reserve in making loans. Modern monetary theory is scares the hell out of me. It seems to give way too much power to too few people. I like instead the idea of encouraging banks to loan to certain industries specifically. This has worked for all these 'miracle' economies like Japan/Korea/China.
  - neilwilson 5y ago
    MMT is a description of how money actually works. Ultimately we all create money all the time because it is just a promise by of something in the future. . The difference is that government can force you to obtain a particular promise via the taxing powers we give it at election time. No trust required. Banks then leverage that. For a dollar to be called a dollar there has to be a transitive clearance link to the entity that owns it. Otherwise it is just a liability of the bank in question - like a share or bond
CyanBird 5y ago
Correct, what you stumbled upon is merely the modern version of exorbitant privilege and US dollar international seigniorage and then you have the cantillon effect at the international level, but that's just less of an issue than the dollar seigniorage itself
wheelerof4te 5y ago
"These loans are given by parties that are not able, officially, to print dollars but, at the same time, 'print' by loaning them - or rather the promise to pay, in dollars mostly, some sum that the loaner has fractionally. That is, they don't own as many dollars as they're loaning. It's just entries in a database." Which is the exact way that Federal reserve creates dollars. Just that, in this instance, the creator is different. It makes no difference to the US government, though.USD is USD. In fact, this only benefits the US.
mensetmanusman 5y ago
The concept of money and how it works is crazy when you delve into it. It’s amazing how effective the system has been at raising billions out of poverty in the last century. At least, I would not predict the success if I were a random citizen from 100 years ago…
- 411111111111111 5y ago
  Money has been around for thousands of years, attributing industrialization to it is wrong. It did play a role, but more like an enabler instead of being the cause
  - marcosdumay 5y ago
    Money changed at lot on the 20th century. It used to be limited by natural supply. On the beginning of the 20th century it became limited by government policy, and on the end of the 20'th century countries started experimenting with letting it limited only by market forces.
rsync 5y ago
"This is kind of a revelation. It means that the special power that the US has in printing dollars is only special in that it can never default on the dollars because it can, in the end, print them for real." This is true - but it is true of any sovereign currency. The ECB can't default in euro-denominated loans, etc. The real special power of the US Dollar is that it is the only thing that is accepted to pay US taxes. No matter what you have and no matter how valuable it is - gold bars, Monets, diamonds, Malibu beachfront - you cannot use it to pay US taxes: you must sell those assets and buy dollars to pay them. That's not a minor detail or a quirk - that's the point of the whole system.
- DennisP 5y ago
  > only thing that is accepted to pay US taxes. That is also true of all sovereign currencies, for their own taxes. But not all countries get to borrow their own currency from foreign lenders. Hyperinflation in Germany and Zimbabwe happened because they owed money in other countries' currency.
  - rsync 5y ago
    "That is also true of all sovereign currencies, for their own taxes." Yes, certainly but it bears repeating: that is the entire point. That lever of control - being the sole provider of a resource that you must demand - is a core feature of the government as we know it.
gumby 5y ago
> This is kind of a revelation. It means that the special power that the US has in printing dollars is only special in that… Note that you Have this special power as well: when you write a check you spend dollars even though your bank balance has not changed. That also happens briefly when the recipient deposits the check. The same happens when you do a credit card transaction. We don’t really notice these because they are quite transient.
wife_is_md 5y ago
Check out Layered Money by Nik Bhatia. He expounds on the different layers of money, Eurodollars being a system of layered money, and how they evolve through time.

boppo1 5y ago

> not in their ability to print them Bond buying & yield curve intervention is pretty special. And catastrophic, IMO.

kzrdude 5y ago

Doesn't the same apply to domestic banks? Most units of any currency is created by commercial banks, not by the central bank.

walterbell 5y ago
The scale is notable. > The results are as shown below as of end-2018: USD57 trillion, nearly three times the size of the US economy before it was hit by the COVID-19 virus. Even if this measure is not complete, it underlines the scale of the market.
throwaway13337 5y ago
Yes. The banks are the ones that ultimately are creating money through giving out loans. The fed, as far as I understand, can only influence this indirectly. Interest rate setting is supposed to throttle the demand for loans. Lower interest rates, higher loan demand. Therefore, more money enters the economy. However, the other side of the equation is the banks' appetite for giving loans. There are times when banks (due to regulation or market risk they perceive) that they'll be more or less likely to make loans regardless of the demand side. The fed seems to be only controlling the demand and not the supply. They cannot force banks to make loans more willingly directly. Another aspect is the appetite for the sorts of loans banks want to give. There's an argument that too many loans are now given for speculation (housing, asset purchase) and not for things that grow the economic pie like small businesses. Small business are more risky for the banks than speculation so we end up in this sort of undead economy.
csomar 5y ago
Sure but these are regulated and insured by these bank's said central banks. That does not apply for Eurodollars.
- lottin 5y ago
  Eurodollars are dollars held in non-US banks, which are nonetheless banks and therefore subject to the banking regulations of their respective jurisdictions.
  - simulate-me 5y ago
    Yea but the central governments can’t insure the deposits because they lack the ability to print dollars.
    - lottin 5y ago
      I don't think it matters. Deposit insurance is independent from the ability to print dollars. It's an insurance fund that gets contributions from banks.
      - simulate-me 5y ago
        And a 100 billion dollar line of credit from the treasury. The FDIC describes itself as being “ backed by the full faith and credit of the United States government.” If there was a systemic issue, the government would likely need to intervene.
        butlerm 5y ago
        The Fed currently has about $9 Trillion in assets (and corresponding liabilities). $100 billion from the Treasury for the FDIC is a rounding error. In 2008, the Fed doubled their balance sheet practically overnight from $1T to $2T. The Fed can do that any time they want by buying bank debt with newly created dollars, which effectively socializes the risk in the banking system, so it doesn't fail, hopefully at something resembling market rates. The Fed then runs the risk that they don't get paid back instead of an individual bank, but the modern Fed cannot fail, that sort of thing can only affect the currency as a whole, by weakening it generally speaking.
onlyrealcuzzo 5y ago
For a long time, dollars were almost exclusively created by banks. The only other way is for The Fed to monetize the Federal Government's deficit spending. This didn't regularly happen until 2008 - but I'm skeptical that the genie will ever be put back in the bottle.

dalbasal 5y ago

Imo, a useful next step from here is to read up o nmodern monetary theory's theory/description of central banking. Imo, we tend to start with a description of fractional banking for historic reasons, gold backed money and later dollar backed currency. It's enlightening (to me) to discard this for a moment, and start by forgetting about fractional banking. Just start with loans and follow the ledger as loans are created and distributed. Fractional banking can then be understood as a control mechanism imposed on a system that already exists. This isn't historical, but it is logical. Loan-based money makes simpler sense when you think of it as a purely in its own terms. So... Dollar or euro "Money," in a broad sense, is created every time any kind of loan is made. Bank money is when someone is owed money by a bank... like when you have a bank account. Central bank money is when a central bank owes someone money. ^not necessarily an endorsement of mmt's other ideas or goals.

throwaway13337 5y ago
I'm sorry I used the word 'fractional'. It's a bit of a red herring here. The making of loans does not require a reserve of any sort theoretically. It just requires trust in the institution loaning more of these imaginary dollars/points/beanie babies on a spreadsheet or in a database somewhere. It's just a promise. It was traditionally handled through a backing of some fractional reserve and is still guaranteed in a lot of places by a promise of holding so much reserve of the currency. The reserve fraction varies. I believe retail banks are more bound by risk and regulatory requirements than by their reserve in making loans. Modern monetary theory is scares the hell out of me. It seems to give way too much power to too few people. I like instead the idea of encouraging banks to loan to certain industries specifically. This has worked for all these 'miracle' economies like Japan/Korea/China.
- neilwilson 5y ago
  MMT is a description of how money actually works. Ultimately we all create money all the time because it is just a promise by of something in the future. . The difference is that government can force you to obtain a particular promise via the taxing powers we give it at election time. No trust required. Banks then leverage that. For a dollar to be called a dollar there has to be a transitive clearance link to the entity that owns it. Otherwise it is just a liability of the bank in question - like a share or bond

CyanBird 5y ago

Correct, what you stumbled upon is merely the modern version of exorbitant privilege and US dollar international seigniorage and then you have the cantillon effect at the international level, but that's just less of an issue than the dollar seigniorage itself

wheelerof4te 5y ago

"These loans are given by parties that are not able, officially, to print dollars but, at the same time, 'print' by loaning them - or rather the promise to pay, in dollars mostly, some sum that the loaner has fractionally. That is, they don't own as many dollars as they're loaning. It's just entries in a database." Which is the exact way that Federal reserve creates dollars. Just that, in this instance, the creator is different. It makes no difference to the US government, though.USD is USD. In fact, this only benefits the US.

mensetmanusman 5y ago

The concept of money and how it works is crazy when you delve into it. It’s amazing how effective the system has been at raising billions out of poverty in the last century. At least, I would not predict the success if I were a random citizen from 100 years ago…

411111111111111 5y ago
Money has been around for thousands of years, attributing industrialization to it is wrong. It did play a role, but more like an enabler instead of being the cause
- marcosdumay 5y ago
  Money changed at lot on the 20th century. It used to be limited by natural supply. On the beginning of the 20th century it became limited by government policy, and on the end of the 20'th century countries started experimenting with letting it limited only by market forces.

rsync 5y ago

"This is kind of a revelation. It means that the special power that the US has in printing dollars is only special in that it can never default on the dollars because it can, in the end, print them for real." This is true - but it is true of any sovereign currency. The ECB can't default in euro-denominated loans, etc. The real special power of the US Dollar is that it is the only thing that is accepted to pay US taxes. No matter what you have and no matter how valuable it is - gold bars, Monets, diamonds, Malibu beachfront - you cannot use it to pay US taxes: you must sell those assets and buy dollars to pay them. That's not a minor detail or a quirk - that's the point of the whole system.

DennisP 5y ago
> only thing that is accepted to pay US taxes. That is also true of all sovereign currencies, for their own taxes. But not all countries get to borrow their own currency from foreign lenders. Hyperinflation in Germany and Zimbabwe happened because they owed money in other countries' currency.
- rsync 5y ago
  "That is also true of all sovereign currencies, for their own taxes." Yes, certainly but it bears repeating: that is the entire point. That lever of control - being the sole provider of a resource that you must demand - is a core feature of the government as we know it.

gumby 5y ago

> This is kind of a revelation. It means that the special power that the US has in printing dollars is only special in that… Note that you Have this special power as well: when you write a check you spend dollars even though your bank balance has not changed. That also happens briefly when the recipient deposits the check. The same happens when you do a credit card transaction. We don’t really notice these because they are quite transient.

wife_is_md 5y ago

Check out Layered Money by Nik Bhatia. He expounds on the different layers of money, Eurodollars being a system of layered money, and how they evolve through time.