> Most international trade was historically priced in dollars for two reasons. The second was, until recently, the unique speed and breadth of the Fedwire system.

> The first is the American consumer. When Americans buy, we spend dollars. This puts dollars in vendors’ hands. Those dollars can be reused for trade or invested, the latter supporting dollar financial markets. Both support dollar hegemony, which in turn drives its dominance in global trade and finance.

That has certainly not been my takeaway from history (though those could be more minor and related points)

My understanding is that most international trade was historically priced in dollars because the dollar became the world's reserve currency after Bretton Woods. Why it became the international currency is more complex, but to the best of my knowledge it is because:

1. The US was in strong monetary shape compared to the rest of the world after WWII

2. The US held many foreign assets after that war (was a creditor to the world)

3. The US held most of the world's gold after that war

(edited for formatting)

4 The USA was the biggest economy, with something like 40% of total global GDP. That drove everything else.

Now it is down to 20ish % if I recall correctly and hence the motivation to diversify reserves is a lot bigger.

15% recently from the authors article, and falling from my calculations.

depends on if you adjust for PPP or not. Its 24% raw or 15% adjusted for PPP.

RAW: https://ycharts.com/indicators/us_gdp_as_a_percentage_of_wor...

PPP: https://www.statista.com/statistics/270267/united-states-sha...

I'd add that US political system is much more stable and trustworthy unlike countries without democracies and/or corruption perceptions. Presidential powers are far more limited, well scrutinized and things can easily be challenged in courts. If I held US dollars today I would be relatively more certain that it will retain value than other currencies. If all else fails one can count on US to exercise its military might to protect the dollar.

Although the US's reputation for stability has taken a severe hit over the last three years.

That seems to be changing though.

The US's war-might is limited. Look how poorly Afghanistan and Iraq went - the US's last two tests were seemingly ineffective. Syria was another trainwreck.

Internal polarization seems to be very high. Trump has eliminated or not replaced key diplomatic positions. The secretary of the navy was never confirmed and has just resigned. The defense secretary stepped down. A captain of a capital ship was ousted publicly to cheers of support from his crew.

NATO is a trainwreck. France and Germany have expressed desires to move away from US dependence while Trump demands more money.

The US's soft and hard power, to me, is just not fully there anymore.

The war in Iraq and Afghanistan were won almost as quickly as they began. It was the "peace" that was never won.

...but winning the "peace" isn't relevant for USD to be dominant. For that, the US just needs to be able to destroy enemy armies - which it can do globally with impunity.

That simply isn't true - the amount of cost sunk into not achieving objectives was enormous. Destroying the Iraqi army was never going to be the hard part. And how you can say we "won" in afghanistan, even though the taliban still exist and will have a part of the future there, is just...wow.

> ...but winning the "peace" isn't relevant for USD to be dominant. For that, the US just needs to be able to destroy enemy armies - which it can do globally with impunity.

Comments like these make me want to ask people who make them: how did empires ever fall, then?

The US army isn't a perpetual motion machine. It requires soldiers, equipment, and technology.

* 71% of young people between 17-24 are unfit to serve, 31% of that is due to obesity alone

* Equipment requires a strong manufacturing base, much of which has been decimated since World War 2, the skill required for that workforce simply doesn't exist.

* Cost. US military equipment costs are extremely high. The cost proposition is almost always a losing one for the US in any long term war.

Greater generals have overcome greater differences in strength than between the US and China. Pride comes before the fall.

>That simply isn't true - the amount of cost sunk into not achieving objectives was enormous.

The Afghanistan war is a different story, but the iraq war was won though in messy fashion. US achieved every objective it set out when it first initiated the war. Iraqis now also have a democracy and levels of violence in Iraq are at the lowest levels in a long time. Honestly, looking into the Iraq war doesn't demonstrate the US militaries inefficiency. It shows how far ahead it is of every other country on earth. No other nation would even be able to bring it's military over to the gulf. They just don't have the logistic capability.

The debate should not be on the efficacy of the US military, but on how to use it and I don't think congress has had such a debate since the mid 20th century. They need to pull back the military and then reassess what should be the next steps.

It remains to be seen whether the US objectives in Iraq were successful or not - the recent tiff b/w Trump and Iran shows that many Iraqi's are not pro-USA. Violence may be down, but at extreme cost in both dollars and men, and the problem really never left - it simply shifted to Syria. Not to mention the abandonment of key allies in Iraq, the Kurds. The fact is, US objectives are hard to quantify in Iraq, because people keep changing them to make the US look good.

You're overrating the "logistic capability" of the US here. The US used its network of allies for staging into these regions. Without that network, it would've been much more costly and difficult. On top of that, Iraq had no realistic threat to US dominance at sea. In a war against a real state actor (like China), the US would not be able to operate with impunity. Simply knocking out 2 or 3 capital ships would devastate the US capability to project force.

> and the problem really never left - it simply shifted to Syria.

I think the reason that some say that the Iraq war was never won is because they keep moving the goalposts from the stated mission during 2003.

Make Iraqi military surrender check

Overthrow Saddam Hussein check

Eliminate al-qaeda leadership in Iraq check

Establish new leader check

Establish a democratic system check

Levels of sectarian violence are also low nowadays as a bonus. Did this all take longer than estimated. Yes, but all are objectively completed. The debate is not whether the war was won, but whether it was worth winning which is kind of what you are starting to get into. Anyway, nothing much more to be done in Iraq. It is up to the Iraqi people to now decide their destiny for good or ill.

>You're overrating the "logistic capability" of the US here. The US used its network of allies for staging into these regions. Without that network, it would've been much more costly and difficult.

A network of bases in ally regions is a part of logistical capability.

>In a war against a real state actor (like China), the US would not be able to operate with impunity. Simply knocking out 2 or 3 capital ships would devastate the US capability to project force.

They could, but China has never actually demonstrated capability of doing so. The only time we have seen China in a modern fight was during the Sino-Vietnamese War. They did not fair too well with their next door neighbor. They also haven't been able to test any of their technology since then while the US at least has been able to test some of theirs except their newest big tech.

Also, I don't see US using a fullout assault on China, but more so an embargo meant to starve the China of food and energy imports. China in it's current state would not be able to deal with that.

There is no clear benefit to war anyway so I don't see China and the US getting into a direct war. China fighting with one of it's neighbors and the US helping with supplies, resources, and money is the much more likely scenario.

1-3 are the same thing. The US held most of the world's assets (was a creditor during the war), so became the world's most well capitalized bank. In that capacity, the bank's notes, i.e. dollars, became the world's currency.

Despite a run on the "bank" in the 70's, this arrangement remained.

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.

"Because it's turtles all the way down?"

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.

They could exchange them for Euros.

Only if there is somebody selling the Euros for dollars - which by definition is somebody with a need for US dollars to settle some debt in the US.

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.

> You sell them to the US, and they pay you with green pieces of paper.

That's not how any of this works. It is far more common to price things you buy from the US in USD. Which is also why monetary policy works.

Half of exports from the eurozone is in EUR. About a quarter is in USD.

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.

just want to tag on that Ray Dalio's AMA a couple days ago also supports the argument that the world is facing a Dollar short squeeze https://www.reddit.com/r/IAmA/comments/fwpt19/im_ray_dalio_f...

Nitpick: There is a circular argument here. US has largest consumer because dollar is strong.

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.

There's a lot of weird statements here.

> This is the petrodollar hypothesis, a debunked theory of global trade.

The petrodollar is a real thing, I'm not sure what you mean by a debunked hypothesis. I assume you are speaking with knowledge that Nixon used the petrodollar to stabilize the dollar after the abandonment of the gold standard. [1] Can you elaborate on how this is "debunked"?

> Oil is globally traded. It can be and is priced in many currencies.

Not if you're buying oil from Saudi Arabia or OPEC. Which is the point of the petrodollar.

> Those dollars can be reused for trade or invested, the latter supporting dollar financial markets. Both support dollar hegemony, which in turn drives its dominance in global trade and finance.

There is nothing unique to the dollar in this statement. Swap the dollar for the pound, and it is also true. All currencies are traded, and more trade in that currency makes the currency stronger. The point is that the petrodollar artificially strengthens the US Dollar, because it is artificial demand for the US Dollar.

> Oil is priced in dollars, and countries borrow in dollars, because dollars reign supreme. Not the other way.

This is very circular logic. Please help me understand your point here. Because it seems like you are saying "The dollar is supreme, therefore the dollar is supreme." But _why_ is the dollar supreme in the first place? And it certainly isn't just because "American consumers spend in dollars." All countries's consumers spend money in their local currency. We must look at why the dollar is unique.

> Argentina and Turkey’s currencies devalued relative to their trade-weighted baskets of currencies. The dollar was not a driver of their problems.

The dollar is a large portion of their "trade-weighted basket of currencies". Seems weird to admit that and then say it had nothing to do with their problems.

[1] https://en.wikipedia.org/wiki/Petrodollar_recycling#History

So I am no expert and I am not the commentor you replied to but...

I thought the idea behind PetroDollar was that countries sold their oil, that gave them big trade surpluses, then they used that to buy US Government Bonds. They chose US government bonds because they are secure, inflation proof, liquid and it gives them geopolitical clout.

The fact that many oil transactions are priced in USD isn't really relevant because if you get paid in Euro\Yuan\Rubble and immediately turn them into USD, then USD is where the demand will actually be. As OPEC members all wanted dollars because that's what you use to by US Govt Securities, that makes the USD the "petrodollar", even if they all insisted on being paid in say Euros and then sold those euros to buy USD it would make no difference.

So that answers why it doesn't really matter what currency oil transactions happen in.

But it represents another problem for the PetroDollar hypothesis: Who is buying US government debt and how much are they buying (net). Because that is where the real strength is, people want US bonds, not US Dollars.

When all this started, there were few countries with long term surpluses, just Opec really. But since then Japan and China (Japan apparently holds more than China as of 2020 I think, but the link says the reverse as of 2017) has eclipsed them. Saudi are minor holders actually, other Opec holders not even making the top 20.

https://en.wikipedia.org/wiki/United_States_Treasury_securit...

Also, oil prices for the last 20+ years have been very unstable. At times (Iraq wars, the 2008 crash etc) the oil price has been high and that means Opec have a lot of cash to purchase bonds. But at other times (like now) the oil price has been low. Right now, Saudi has a trade deficit. So they are SELLING their US securities to fund that. Also, the slow erosion of market share of Opec has meant that even high prices are no longer as big a revenue boon for them.

Similarly, China has become a much bigger purchaser of bonds. That sort of works in favour of the "petrodollar" (should it be petro\sino\japan dollar now?) hypothesis as it makes it easier for the US to run a government deficit. But right now, China is coming out of quarantine so their economic numbers are about to stall right?

So if the Saudis (and Opec) can't afford US bonds and the Chinese and Japanese are not buying them (as their economies stall), just how interest rate resistant is the US deficit? I suspect people know that the treasury will print dollars to maintain the deficit as they have been since 2008. But that only happens without inflation when everyone else (Brits, Eurozone etc) are doing it too. But if they manage Covid-19 better than the US (and respectfully that doesn't seem hard), they wont need the same deficit funding. And similarly EU social structures mean they can deal with disasters like this without the use of central government funds.

So really is this a case of Who Knows what will happen?

Sorry if I am missing something here or it's all armchair economics :)

> This is the petrodollar hypothesis, a debunked theory of global trade.

Who debunked this? Because I've seen this posited in dozens of places, so I'd love to see the rebuttal

I’m not sure where there’s a structured rebuttal, but the main reason why commodities are generally priced in dollars is due to currency liquidity and the forex markets. There are only a handful of currency pairs that don’t involve USD. If I have Japanese Yen and I want to buy Saudi Riyals, that trade needs to settled twice, JPY -> USD and then USD -> SAR adding both currency risk and settlement overhead. Pricing in USD cuts all of that out, along with the inertia of everybody being comfortable with dollars and the extremely liquid and large market for both dollars and dollar denominated debt. It’s just easier.

Why geopolitical is not involved here?

The US dollar isn’t the largest and most liquid market on earth because the US is mean to people, if anything that would make it less useful for third parties. It’s used because it makes the most sense. Look at the USD as a gift card. If Starbucks only accepted star-bux, requiring me to buy starbux to buy Starbucks, we’d still be valuing drinks in dollars regardless of the exchange rate. Even if I could use those starbux at Target, I wouldn’t start caring about my starbux currency risk as long as I could convert to dollars. It’s the same for other countries. Japan doesn’t care about its exchange rate to the riyal because both float reasonably stably to the dollar. Saudi doesn’t want yen and japan doesn’t want to buy riyals so they split the difference and transact in dollars.

Your explanation involved a bit of mind-reading here to deduce that the Japanese don't want riyals and that people wouldn't value things in star-bux.

Going by actual evidence, if the Japanese are trading with the Saudis it is pretty clearly they don't want riyales, yen or dollars; they want goods and services that they are trading for. They would be ambivalent about what they traded for that oil in as long as they ended up with the most product out for the least yen in.

There is evidence that the Japanese want dollars (their foreign reserves are jumping), but there is no particular evidence that they want to trade in dollars. If anything it is more likely that they are trading in dollars because SWIFT is the cheapest way of moving money around internationally and it has some sort of favouritism for US dollars.

Parent is making an accounting point. Unless you have perfectly balanced trade, your balance sheet will continuously expand in either your currency, the foreign currency, or both. The Saudi government either isn’t inclined or can’t find counterparties to run enough of a trade deficit to provide the rest of the world enough riyals to satisfy their demand for Saudi oil. The USA on the other hand is willing to run such a trade deficit, it's pretty much the only game in town.

Meanwhile, the USA is able to find counterparties for its massive trade deficit because the USA itself has a huge and incredibly diversified economy and demands dollars in payment. You can buy oil from the USA in dollars for the same price you can get it from the Saudis. You can also buy all kinds of other things you can't buy from the Saudis. The dollar has massively superior optionality compared to the riyal (and most or even all other currencies) and that increases demand for it.

Well no, they’re trading in dollars because that’s what the people they’re buying from want in exchange.

Another way of putting it is: dollars have a network effect going for them, and it’s stronger than Facebook’s network effect in social media. This network effect was intentionally built during the Cold War. And with the USSR’s collapse, it became that much stronger.

The Saudi Riyal has been pegged to the US Dollar since 1986, as are most Gulf countries: UAE, Qatar, Bahrain, Oman. Kuwait was the only one to break it under pressures from the 2008 GFC. This is the historical backbone of the Petrodollar and has survived decades of political and financial strain.

Also, >It's just easier< strikes me as very fragile logic, because it is only True until it isn't.

Is anyone pricing oil with Bitcoin? It seems that crypto would be the ideal type of currency for international trading. Is that not a thing because government wouldn't want to give up control to a decentralized system that they don't run?

Because, to use a technical term, the fuck is Saudi Arabia going to do with $400bn worth of bitcoin? After 1 year, assuming Saudi Arabia was able to procure every bitcoin that can ever be mined, past present and future, they would be worth $20,000 each. And then they have all the bitcoin that nobody wants.

Whatever anyone would do with $400bn worth of an asset?

If Saudi Arabia started buying Bitcoin in bulk, then the price of Bitcoin would go up. This would create demand for the asset that is increasing in value and other people would start buying and holding. Saudi Arabia would not be able to acquire all the Bitcoin, but it doesn't really matter anymore, because now everybody wants it, because it has increased in value.

The fact that cryptocurrency is prone to such fluctuations is a significant part of the reason it's a bad currency. Nobody wants to have a bank account that can halve or double in a few months.

I think most people view Bitcoin as digital gold nowadays. (with the added benefit that the supply is known) I would not use it for short term cash needs, but from a long term store of value it has provided real benefit over a 10 year period. If the monetary supply is going to be dramatically expanded by the Fed, then it is a great way to hedge against the dollar. Couple that with the recession and the likelihood that the effects of the global pandemic is seemingly going to be here for a while, I can't think of a better place to put my money right now.

I doubt "most people" think anything of the kind. Digital pyrite, perhaps. Considering that btc has tanked along with the market (only more so) why would it make a good hedge? BTC is for gambling, and everyone knows it, so when the world gets scary the bottom falls out of cryptocurrency first.

There is no reason to believe BTC will not crash that's more solid than people smiling knowingly and saying "it can't, it's the future". It's not, though.

A global pandemic is a pretty extraordinary event. All markets are going to react poorly. BTC is by its nature more volatile, so it has a tendency to experience more dramatic corrections

It acts as a hedge, because the dollar gets devalued every time the Fed expands its balance sheet. If nothing else happens, then the value of Bitcoin will increase relative to the dollar. This is the same reason why people buy gold. Only with Bitcoin the amount of the commodity that can exist is well known and finite. (i.e. there are not new discoveries of Bitcoin repositories that will suddenly increase the global supply)

Bitcoin is unlike most other cryptocurrency assets (except for maybe Ethereum?), because it has been around for more than 10 years and has become well integrated into the traditional economy. BTC crashing is pretty unlikely at this point. Maybe it gets replaced over the long term by some other asset, but that will take time and not be a sudden event.

BTC is absolutely not well integrated into the traditional economy. Getting it is difficult compared with any real currency, spending is difficult compared with any real currency.

> BTC crashing is pretty unlikely at this point.

BTC just crashed in the last month. It's extremely likely to happen, which you can observe easily because it keeps happening. It's value is not stable. It never has been.

You can buy BTC using USD via exchanges, you can buy BTC futures, you can buy funds that contain BTC along with a mix of other assets. This is what I mean by the traditional economy, NOT you can go down to your neighborhood grocery store and pay for your groceries. The point is that major financial firms have integrated fiat economies and the Bitcoin ecosystem, which makes Bitcoin much more valuable compared to other cryptocurrencies.

When I talk of BTC crashing I'm speaking of the price of BTC going to 0 and never recovering. What you are observing is the volatility of Bitcoin. Bitcoin is a highly volatile asset, but that doesn't mean it still can't provide good long term value. Plotting a linear regression on the price of BTC will show an upward trend and that's over a 10 year period even with all of its ups and downs.

Keep in mind that basically nobody else uses the word "crash" to mean "goes to zero and stays there". Traditional economy is generally a reference to the act of exchanging money for goods and services.

You can use words however you want, but if you want to be understood it's helpful to use the common definition.

I was trying to stay in context with how you originally phrased your response of..

   "There is no reason to believe BTC will not crash that's more solid than people smiling knowingly and saying "it can't, it's the future". It's not, though."

This quote implies that BTC lacks long term value, which again I argue that BTC does have long term value for reasons previously stated. Certainly, I understand that sharp declines in value are often described as crashes.

In regards to the term "traditional economy", I actually meant to insert the words "integrated with", so the start of the sentence should have read "This is what I mean by integrated with the traditional economy..."; just an error on my part. The point I'm making is that the integration with the traditional economy is occurring on the backend finance side and adds legitimate value and use to Bitcoin over many other cryptocurrencies.

And voila! You’ve created an enormous speculative bubble. That hasn’t ever gone wrong.

Bitcoin has had several big moons/busts now, but the software and network has persisted and grown dramatically in size. The long term trend is up. I think it is really hard at this point to make the case that this is a bubble.

Bitcoin is an “asset”, not an intermediary. Saudi doesn’t just sit on their dollars, they buy stuff with it, either actual goods and services or fixed incomes. Since nobody wants bitcoin for their labor and it’s a highly speculative asset that isn’t a particularly good store of value, it doesn’t accomplish either of the key things that are needed.

Bitcoin is both an asset and an intermediary. I don't think it is a good intermediary due to its volatility and tax treatment, but it certainly has and can be used as such.

If you had bought a hundred dollars worth of Bitcoin back in April of 2011 and sold it at it's most recent all time low on December 16th 2018 you would have $320,000. If you sold it today you would have $681,800. Volatile? yes. Good long term store of value? All available data indicates yes.

It's speculative in so far as the software and the network are speculative. The speculative risk of both of these attributes has reduced over time. (i.e. The more time that goes by the more likely that bugs in the protocol will be discovered and the network size and volume has dramatically increased)

The real danger to Bitcoin is probably another cryptocurrency that comes along and does it's job better. This will be very hard though as Bitcoin is essentially the Facebook of the cryptocurrency world. I think that it is possible that this will happen, but it will likely be a process more than an event. Offering holders of Bitcoin to diversify overtime should other cryptocurrencies come into being.

Whether Saudi Arabia should buy it or not is an entirely different matter. IMHO if they have some reserves that they don't think they will likely need to touch for a 5 to 10 year period then I would invest some in it. It would be akin to trading in some of their dollars for Gold. (https://tradingeconomics.com/saudi-arabia/gold-reserves)

Dollars are similarly useless in Saudi Arabia. They use the riyal there. Outside of the US, dollars are really just government bonds that people hold as a store of savings. They have to be sold before you can do local transactions or pay local taxes.

Saudi needs dollars to buy everything else since they make nothing and import everything. Everybody else will take their dollars, so it’s a worthwhile thing to have around for them. Sure, you can’t buy a kebab on the streets of Jeddah with them, but the chicken that kebab was made with was almost certainly bought in some way using those aforementioned petrodollars.

How does the seller selling the kebabs in riyal get the chicken given they only earn riyal?

You need somebody who wants riyal for dollars. Why would the chicken seller not take the riyal since that helps his customers and do the FX magic themselves? "Local currency sales" is what marketing men recommend. It's just the latest form of vendor financing.

Who wants riyal for dollars. People who buy kebabs in Saudi. Those who live and work there.

As I said the dollars are useless in Saudi, because that's not the local currency stuff you need day to day is priced in.

The point again is that in aggregate you can buy things in the currency you have and you can sell things for the currency you want. The financial system smooths the path to that deal - for a price.

As anybody with a Paypal account and who trades internationally understands.

>How does the seller selling the kebabs in riyal get the chicken given they only earn riyal?

They buy the dollars they need to buy the chicken off the Saudi national bank for Riyal. That’s their job. Controlling that rate is a primary way the SA government manages their domestic economy.

> Dollars are similarly useless in Saudi Arabia.

This is simply outright wrong.

According to Wikipedia, the last arms deal that Saudi Arabia struck with the US was, that alone, around $350 billion.

That's more than most of the nation's GDPs.

Trying to put a Ponzi scheme such as Bitcoin on par with the US dollar is either an entirely clueless assertion or a disingenuous claim made in line with all the other pump-and-dump schemes that plague the so called crypto currencies.

Currency is slightly more fungible than this. Not enough to invalidate your point, but worth noting that I've purchased food, transportation, lodging, and knickknacks in Saudi/Bahrain/UAE and Oman using USD. All of the above items, in each country. It's certainly not a universal currency though, I'd say the vast majority of vendors were not interested in taking USD. Even then though, generally you could find a private citizen/local expats from many other continents that would be willing to perform currency exchange to/from popular currencies at a rate profitable for them.

Vendors/citizens of some other countries - Jamaica, many parts of Mexico, many parts of Canada, also are happy to deal in USD as a customary business practice, at least in my experience.

Sure. It's the same here. I can buy stuff with Euros in York rather than the usual GBP. But generally people want the local currency because they have fixed liabilities in the local currency - taxes and debts. Chances are they'll take your money and then swap it out for the local version rather than hold it.

The point of the article is that around the world very large amounts of loans have been denominated in US dollars, even in countries that don't use USD. That means there is always a constant and large demand for USD to repay those loans.

So outside of the US, no USD is not just a store of savings, it's a means of repaying debt. Hence why people want it and will accept it as a first preference over most other currencies when international transactions need to be made.

Repaying debt is the same as an increase in the store of savings.

Your personal balance sheet moves in the same direction from a lower value to a higher one.

Not in USD it doesn't. You got your loan in USD, spent it to buy whatever you needed, you have assets, not USD. You need USD to repay the loan, where do you get them from?

He's talking about Saudi Arabia, not random people in Saudi Arabia...

Saudi is random people in Saudi. Countries aren't sentient on their own.

What is countries? I mean it's just atoms, man... This is all so trivial!

Well no, in this particular case it’s the house of saud.

Can always buy US weapons and politicians with dollars

The price of bitcoin would probably grow way way way way higher than 20k if Saudi Arabia decided they were only going to sell only for bitcoin, as in “add a large number of zeros” higher.

Not yet, but maybe they will when the dollar squeeze causes their economies to crash.

I'd say that is a good enough reason to buy. As they say, buy the rumour, sell the news.

Can you use Bitcoin to buy a few billion dollars in really safe and liquid treasuries when you need to park a trade surplus somewhere? If not, it isn't really useful in the oil trade.

No. Because Bitcoin has no use in legal industries.

Wrong. It's a great intermediary to buy and sell international assets cheaper and faster than with SWIFT. Also it effectively bypasses local bureaucracy.

It’s too volatile for this, sorry. If it’s so great, why isn’t everyone doing it?

I as an individual prefer to be paid by US dollars over Indian Rupees. Trust me, the Saudis would prefer the same

That's an outcome/result of decades of policy, not the source of the policy (which I'm trying to understand)

the user "JumpCrisscross" just debunked it just now, his evidence was saying "it was debunked". What other evidence do you need?

Just because something is priced in dollars doesn’t mean it is paid for in dollars.

Fundamentally in every real transaction in the world the seller gets the currency they want to hold and the buyer gets to use the currency they earn in. Because otherwise there is no deal.

The whole purpose of the global financial system is to sort out those mismatches so deals get done - and make a turn while doing so.

There are at least 96 oil producing countries in the world ([1]). It makes sense to trade oil with USD across the board instead of fragmenting the oil market into 96 different sub-markets (oil to each country's local currency).

Now, the buyer and seller can of course convert USD from/to their desired currency on FX markets. Oil trades tend to be big, so that would cause demand for USD liquidity. That demand, and the fact that these dollars are effectively "locked" inside the FX markets (reducing supply), would make the dollar price go up (everything else being equal), hence strengthening the dollar.

[1] https://en.wikipedia.org/wiki/List_of_countries_by_oil_produ...

You can't convert currency. You can only exchange it (outside of those currencies that are fixed to the dollar or whatever). That means that somebody has to want the dollars for you to get the local currency you need to pay staff and pay local taxes. In aggregate that's a wash.

Which is the point I'm making - expand your view beyond just buying and selling the oil, and think how you get into the position in the first place. From the ground to where it is used.

Whatever currency you hold those selling oil will take for their oil - because there is a big financial system whose job it is to make that happen and to shuffle the currency holdings around until everybody holds what they want to hold.

The FX system is part of the oil market. It lubricates the parts oil can't reach.

> and make a turn while doing so.

This is called settlement overhead, and is the reason you're incorrect. Every time you change one currency for another on any meaningful scale, it eats into your profit margin..

Tl;Dr - there's no such thing as "no foreign transaction fee!!!1!" in oil baron sized transactions.

Think a little bit wider than that. How do you pay your staff in the local area you work in? How do you pay taxes to the local government? How do you sell your oil to people who don't have, or don't want to, hold dollars. Are you really going to turn them down just because they hold GBP?

That's the whole point though, those people don't really exist. Basically everyone who does business internationally is, well, doing business internationally. You can either restrict your market to only people who hold your non-dollar currency, hold every currency in the world, or hold dollars. And keep in mind, everyone else holds dollars...

This is sometimes referred to as the network effect.

I'd like to echo the question of how that theory could even be debunked? It is a pretty reasonable theory to explain why the US has that bizarrely close relationship with the lunatics who run Saudi Arabia; and it is undebunkable with facts. Also reported by people like Bloomberg [0].

It is an unproven theory. Unless someone believes what they read from Andrea Wong; in which case it would be a proven theory.

[0] https://www.bloomberg.com/news/features/2016-05-30/the-untol...

The US gets very little oil from Saudi, so why does it care? Because oil is the penultimate (after water) commodity, incredibly liquid. If the supply to big Saudi consumers (e.g. China) is disrupted those consumers will seek oil elsewhere, driving up the cost in the US (and giving US producers an incentive to export). So stabilizing the flow of oil from Saudi and, yes, Iran is in the interest of US consumers who never use a drop.

The import and export statistics are all in the US Energy Information Administration web site. The US imports (mostly from Venezuela IIRC) and exports about the same amount of oil, and so is essentially net 0.

Sorry but this is nonsense. US wants higher prices because US shale producers can only profit with higher oil prices. The US only recently even legally allowed export of oil. You are linking a state that has only existed for the past few years with a 50+ year old foreign policy.

US needs to control oil because it is the ultimate power lever.

> is in the interest of US consumers who never use a drop.

What is in the interest and what the actions of US government vs interest of US consumers are very often diametrically opposed.

>historically priced in dollars for two reasons

I think you've missed the most obvious one in that you have to price in something and the US$ is the best known to use. I'm about to buy some petrol and it really doesn't make a difference to me if the price is £1 or $1.23 or 41 baht or whatever.

Same reason the contract will be in English - you have to use something and that's the best known.

Pretty sure it's all about liquidity. Money exhibits strong network effects after all. $XDR exists but doesn't get used.

The full sentence is: The dollar’s claim to fame is that almost all oil is priced in dollars, globally. If France buys oil from Saudi Arabia, for example, they don’t pay in either of their own currencies; they pay in dollars. The same holds true for many other commodities.

Can you provide an explanation to the petrodollar hypothesis debunking?

Indeed, I’ve anecdotally noticed that whenever a dictator trading oil threatens to switch to another currency he ends up dead in a ditch.

On the contrary, dictators that do insist on $$$ and use them to enthusiastically buy US weapons are celebrated and given honor seats.

That's because dictators who are well on their way to end up in a ditch usually start embracing "anti-imperialist" rhetoric to paint their opposition as being western traitors and legitimize their struggle for power. They dont just wake up and decide to ditch the dollar, it's just a convenient talking point that really seems to attract a huge portion of western sympathy. It switches the narrative from a revolution caused by brutal oppression to a "revolution" caused by US economic interest trying to topple a resistance leader or whatever.

I'm not saying the US doesn't usually have a lot to do with their demise, but simply that their fall isn't caused by moving from the petrodollars. Because it literally does not make any economic difference for the US , at all.

The difference between "This is the only currency that matters" and "You can do these transactions in any currency and it doesn't matter" is critical politically.

Currencies trade confidence, not fundamentals, and if confidence in a currency disappears to the point where it stops being the default choice for transactions, the effects are almost literally incalculable.

Short term trades can go up or down within a range bound by fundamentals. The further things get from their ‘correct’ value the more obvious the correlation becomes.

Aka, when people change their vacation plans etc based on currency fluctuations that’s a massive effect in aggregate.

Some of those dictators are even allowed to murder American journalists with no repercussions

You say journalist, I say imperialist spy. The line is blurred more and more these days, especially given the CFR's influence over American/Western media.

Please provide context on the imperial spy claim. I am guessing you and parent are referring to Khashoggi.

Try to look at this from the perspective of a country whose resources you are trying to protect from non-local usurpation by global Western organisations:

https://www.cfr.org/localjournalists

And no, I was referring to the spies posing as journalists in Venezuela, Libya, Syria, Afghanistan, and so on. This is most definitely a rabbit hole any enlightened western observer of world affairs should go down.

I don't understand anything of what you are implying nor does that link provide any information (at least to me).

The question is, putting people to death for crimes against the state, i.e. death penalties, etc.

A lot of "states" murder "spies". [ * ]

The proposition was that only a select few states murder journalists for such crimes. Journalism is the opposite of spy craft, so combining them for political purposes is deadly, indeed.

It should be stated up front that I, personally, don't think the state should have the right to murder anyone, and I also mean by means of war, asymmetric or otherwise.

( * -The moment someone murders in the name of the state, the state is over and its time for a new one.)

Similarly, I have heared that the main cause of Irak war was that Sadam Hussein wanted to sell oil in euro.

Or Muammar Khdaffi's idea of the gold dinar (African currency with a 1:1 gold equivalent) supposed to be the future standard to express oil prices.

https://millenium-state.com/blog/2019/05/03/the-dinar-gold-t...

It seems unlikely that horror at the invasion of Kuwait, and concerns that Iraq might annex the Saudi oil fields were all just pretend. Certainly the Saudis didn’t seem to be pretending to be worried.

I could make a fair moral case for invading anywhere bigger than the mini-states like Switzerland.

Are there any countries in the Middle East where there isn't a good justified reason to invade them? I can think of reasonable reasons to invade Israel, Iraq, Iran, Afghanistan, Syria, Saudi Arabia, Yemen and Pakistan. Some of those reasons have actually been used.

Similarly I can think of great justifications for an invasion of China, North Korea, Russia, pretty much all of Africa, the United States (they have a substantial amount of blood on their hands!).

Europe I personally struggle to think of dirt on in the last 50 years, South America I don't know much about. Most of South East Asian nations seem pretty well behaved to me which makes them a global rarity.

The fact that the US invaded somewhere where there were real reasons for concern is nice, but as far as I can tell that would be true of any invasion of any country short of sending the troops into Canada or re-invading Germany. In the Middle East it doesn't really mean much.

No, you really couldn’t. You could come up with all sorts of reasons for disliking them, or wanting to harm them, but that’s not the same as a reason for expending the huge economic, military and human cost of invading them. To invade a country you have to be willing to pay the price of doing it. Nobody has a good reason to want to pay the price of invading Pakistan. Not even India.

That could change, sure, but that’s not the situation as it stands, and if you can’t see how that works, I’m not sure how I can help you get there.

Well I know tensions have risen with regards to Iran but they recently signed a deal with China to trade oil in Yuan.

https://www.telegraph.co.uk/business/2019/09/20/chinas-400bn...

Wait, explain me to this: Why isn't Saudi Arabia pricing oil in Saudi Riyal? This is their gateway to dominate large portions of global economy. Who ever holds this golden key can print whatever sums they need at whims and offload it to rest of the world (just like US doing massive QEs at whims and never have to experience bad side of it). KSA infact is not just pricing oil in dollars but also mandating riyal to exactly follow the dollar! Most other countries do sell their produces in their own currencies such as China.

A large fall in oil prices (like the one we just saw) would wipe out the currency before Saudi Arabia would even be able to print anything to respond to the crisis. The USD is stable because of the full faith and credit of the United States government, not because oil is traded in USD.

>a debunked theory

Where is this debunked?

> Domestic demand for cash eclipses foreign demand. The Fed and Congress have printed trillions, yet we’re still on the precipice of deflation.

And this is where the long expected boogyman of "a run on the Dollar" can happen after all.

Private players will be dumping capital assets by gigatons in the foreseeable 2-3 years.

> Argentina and Turkey’s currencies devalued relative to their trade-weighted baskets of currencies. The dollar was not a driver of their problems.

The dollar was certainly not a driver of their problem. They had chronic issues and a strong dollar pushed them over the edge.

Our consumer economy just shrank by 30% or more. We've used up all our credit. We were spending beyond our means. And now our consumption will shrink. What's this do to king dollar?

Probably not much if every other economy responds in exactly the same way.

It's too early to say; what matters more is what a recovery, if any, looks like. The US has a history of enduring greater short-term pain but bouncing back faster.

Yeah, but if you read: https://www.lynalden.com/great-depression/ That spells out the case pretty clearly that this time is different.

People have been talking about unsustainable US debt for decades. The market can stay irrational longer than you can stay solvent.

It's very early days, and this is a recession unlike any other, so it's hard to say what will happen, because this type of recession has not occurred in modern history.

The US will ensure global dollar hegemony is maintained(1). Just ask some of the countries - Libya, Iraq, Venezuela - that tried to move away from king dollar how that went.

If you are lucky the US applies economic pressure. If you are disliked enough, things have a tendency to get downright kinetic.

(1) or die trying...

Exactly. The most dominant military in the world needs to eat.

> And now our consumption will shrink. What's this do to king dollar?

Every time we consume we're exporting those little green pieces of paper, you know?

Shrinking consumption actually props up the dollar, because we're giving out less, and the rest of the world, with dollar denominated debt and liabilities, has bills to pay.

You have to take a macro view however.

China was in recession/depression before shutting down their entire economy for almost 2 months and have barely recovered. They suffered a supply shock. And now because the entire worlds demand has declined, China is now suffering from demand shock. And foreign manufacturers are now FLEEING which adds to massive loss of permanent jobs. That’s on top of a debt overload and they don’t control the worlds main currency

Japan and Germany were close to recession before the virus hit. Plus they are mainly exporters. Plus automobile is their big export...which now the demand has collapsed around the world.

US comparatively is safer.

Do you have a source about the claim that manufacturing leaving china? I could find US companies leaving the country because US policies — not covid-19.

Because literally every country is worse?