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De-Dollarization Does Not Matter

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De-Dollarization Does Not Matter

Source: De-Dollarization Does Not Matter., hoser, 27:31, uploaded 2024-11-03, Watch Later position 699.

The US dollar is often described as a currency approaching its final days. Hoser opens with the familiar evidence: the dollar’s share of disclosed central-bank reserves fell from 65% in 2012 to 55% in 2022, whilst China, Europe, and Russia have each been presented as possible challengers. The surrounding stories tend to add two claims. Global trade depends on the dollar, so its decline would bring a financial collapse. The dollar’s tradability gives the United States military power, so the country spreads it to expand its army.

Hoser finds both claims broadly wrong. Trade depends on connecting excess resources with shortages, which does not require one particular currency of account. American power rests more on ships, planes, and productive capacity than on a banknote or the Treasury asset bought with it. The dollar still gives the US government a large say in global finance, although that influence falls short of total control.

The video follows four questions: why the financial system uses the dollar, how the US controls it, what might replace it, and what a replacement would change in global power. Its short answers are convenience, stable investment, and government policy in selected areas of trade. A reduction in dollar use would have limited financial effects. The dollar’s complete death would carry a much larger symbolic meaning.

The uses that keep the dollar in circulation

Money stores value and lets people exchange goods and services. Hoser takes the Federal Reserve’s account of the dollar’s international role as the starting point: the size and strength of the US economy, its stability and openness to trade and capital flows, its property rights, and its rule of law make dollar assets attractive. The dollar and the assets bought with it have held their value more reliably than many competing currencies. During the 2022 inflation crisis, the dollar index rose by about 20% against other major currencies. Hoser notes that this index excludes the Mexican peso and Chinese yuan, the currencies of two of America’s largest trading partners.

Around 90% of foreign-exchange transactions involve buying or selling dollars. Hoser links this to the need to access American assets. Around 55% of global exports are invoiced in dollars, whilst the figure falls to about 25% inside Europe because European countries trade heavily with one another and use the euro. Outside Europe, the dollar appears on 75% to 100% of export invoices in many countries. The Federal Reserve’s account gives a similar picture of a currency whose international use exceeds the size of the country that issues it.

The network effect makes this arrangement persistent. Hoser imagines an Indian farmer selling mangoes to a Thai supermarket. The rupee and baht may work for that transaction, yet people in other countries may have little reason to accept either currency later. A dollar gives the farmer a better chance of finding another trading partner who will accept the proceeds. The same logic makes the dollar the common measure for most commodity markets. Hoser names exceptions in which one country dominates a particular market: canola in Canadian dollars, wool in Australian dollars, chicken and beef in Brazilian real, and rare earth metals, steel, plastics, and lithium in Chinese yuan.

The dollar’s store-of-value function grew from the post-war monetary order. After 1945, many Western currencies were tied to the dollar, which was tied to gold at $35 per ounce. US deficits during the Vietnam War and the economic policies of the 1960s made that exchange rate impossible to maintain. In 1971, the Nixon administration ended the agreement and sent the major currencies into a system of variable exchange rates. Countries could still buy dollars, although their central banks had to manage the risk that their own currencies would rise or fall against them. The US government continued to influence the dollar’s value, most visibly through the 1985 Plaza Accord, when it pressured Japan and Germany to strengthen their currencies and support American exports.

Central banks then needed reserves that could protect them against economic and exchange-rate shocks. Treasury securities became the leading substitute for gold. A Treasury bill, note, or bond is a loan to the US Department of the Treasury that pays interest and can be sold with relative ease. At their peak in the early 2000s, dollar-denominated assets made up more than 70% of central-bank reserves. China and Japan each held more than $1 trillion in US Treasury securities.

These holdings can cover an unexpected downturn, provide dollars for future imports, or support a fixed exchange rate. A central bank that promises a particular dollar value for its currency needs dollars to buy its own currency when it falls and sell dollars when it rises. Hoser warns that a government cannot pretend to have enough reserves forever. Foreign-exchange markets eventually expose the gap between the official exchange rate and the reserves that could defend it.

Monetary policy with foreign consequences

The US government affects the global dollar system through domestic stabilisation. When prices rise too fast or business activity falls, the Federal Reserve changes the interest rate at which banks lend to each other. The Federal Open Market Committee sets a target and the Fed moves the market towards it through open-market operations. Selling Treasury securities takes money from banks and raises rates. Buying securities injects cash and lowers them.

The federal funds rate stayed near 0.25% for much of 2008 to 2022. Hoser links that capacity to the global demand for Treasury securities. The Fed can find buyers for the bonds it sells because investors and governments around the world hold them as investments or reserves. This gives the US government a large pool of demand for its debt and helps keep American borrowing costs low.

The comparison with other countries needs care. Hoser says that Russia’s and India’s interest rates never fell below 4% over the previous 20 years, whilst Brazil averaged around 10%, Argentina around 25%, and Iran never fell below 10%. Canada, Australia, the United Kingdom, and the euro area also kept rates low without losing financial stability. Iceland reached 0.75% even though its currency has little international demand. Hoser therefore leaves open whether cheap debt reflects a global currency privilege or the strength of a country’s financial markets.

US rate changes still spill across borders. A recession in the United States can weaken economies that depend on American demand. Higher American rates can draw investors towards dollar assets, which raises the dollar’s value and changes the price of foreign assets and dollar-denominated liabilities. Hoser says that dollar debt makes up a large share of global borrowing and places emerging countries under particular pressure when their currencies fall. The video connects the 1980 rise in US rates, when the rate reached 15%, to Latin America’s decade of hyperinflation, weak business confidence, and defaults. It also says that Latin American governments defaulted up to 40 times in total, although the source gives no method for this count.

Countries that fix their currencies to the dollar face a further risk. Exchange-rate movements can force a government to devalue its currency or abandon the peg, which can produce a balance-of-payments crisis or a wider financial collapse. The dollar’s reserve function therefore reaches countries that have never chosen it as their everyday currency.

Sanctions and the reach of the exchange system

The US can affect the dollar’s exchange function more directly through sanctions. Hoser distinguishes financial sanctions from the Bureau of Industry and Security’s import controls. The Treasury’s Office of Foreign Assets Control can freeze assets held in the United States, stop US banks from lending to a target, and remove an entity from SWIFT, the messaging network used by around 11,000 banks for international transfers. The result cuts a target off from exchanging assets, settling debts, or buying goods through the ordinary system.

The video puts the number of Treasury sanctions worldwide at around 15,000. They cover terrorist financing, drug cartels, human-rights abuses, nuclear-weapons programmes, and cybercrime. The Treasury’s 2021 sanctions review describes sanctions as resting on trust in the US financial system and currency, and presents them as a tool for imposing material costs on threats to US national security and foreign policy. Hoser adds that sanctions can serve a positive purpose when they exclude people who endanger others.

The same system can provide liquidity. Hoser points to the US sending trillions of dollars to Europe after the global financial crisis and to Japan after COVID-19. Asian states also built a network of currency swaps after the Asian financial crisis without US involvement. The dollar’s role therefore comes from policy as well as from the network effect.

Sanctions can also weaken that network. Their use rose ninefold between 2000 and 2021, before the invasion of Ukraine and the subsequent sanctions on Russia. Secondary sanctions can target foreign banks that help sanctioned entities evade punishment. Hoser points to the sanctions on Iran, Cuba, Venezuela, Afghanistan, and Syria, where economic control by the state means that punishment imposed on a government can reach ordinary people. As more economically productive countries face the possibility of exclusion, they gain a reason to build financial systems that the US Treasury cannot reach.

Gold, the yuan, and the limits of substitution

The combined gross product of middle-income and upper-middle-income countries rose from about 22% of the global total in 1992 to around 63% by the time of the video. Hoser treats that growth as evidence that more countries now have the productive capacity to build a separate financial system. Dollar reserves have also fallen from about 70% of global reserves in 2000 to about 55% today when exchange-rate and interest-rate effects are taken into account. Some of that fall may simply mean that countries have used their reserves to stabilise their economies during the financial instability of the twenty-first century.

The currencies replacing the dollar in reserve balances are not mainly the euro, yen, or pound. The Canadian and Australian dollars have gained small shares since 2020, which Hoser treats as diversification by central banks in small economies. Gold and the Chinese yuan present a more serious challenge.

Gold reserves rose steadily after 2008, reversing a 40-year decline. Global holdings increased from less than one billion ounces to almost 1.2 billion. Eight countries added more than one million ounces during the previous 20 years. Iraq, Belarus, Uzbekistan, and Turkey had each faced sanctions from the US, UN, or EU during their accumulation. Hungary and Qatar saw rising diplomatic tension with the West. Hoser reads this pattern as evidence that some governments want protection against sanctions or other geopolitical shocks. Argentina also increased gold to about 8% of its reserves during a period of severe inflation. The simpler explanation remains available for Kazakhstan, Uzbekistan, and Bolivia, where large gold reserves may follow from gold production in small economies.

The yuan works as a trading currency in places already cut off from the American system. China has promoted commodity deals in yuan and created the Cross-Border Interbank Payment System in 2015 as an alternative to SWIFT. CIPS had around 150 participants in 2022, compared with SWIFT’s roughly 11,000. The video gives the yuan about 2% of cross-border payments in 2022. After the 2022 sanctions on Russia, nearly all of the growth in Russian trade was denominated in yuan. Hoser says the yuan’s share of Chinese trade rose from 17.7% to 27% in the first half of 2024, although the automatic captions render the first figure as “177%”. The yuan’s share of global trade then reached roughly 3% to 4%.

China has kept the yuan from becoming a global store of value. The government restricts money moving into and out of the country and manages the exchange rate. The US Department of Commerce’s account of China’s foreign-exchange controls describes a closed capital account, reporting requirements for large cash transactions, and a managed float overseen by the People’s Bank of China and the State Administration of Foreign Exchange. Hoser gives a limit of 50,000 yuan for reportable cash transactions and says that overseas yuan payments in one year cannot exceed 10% of the previous year’s imports. Each morning, the People’s Bank of China sets a rate within which the yuan may move by 2%.

That control protects China’s export-led growth. A yuan that became too valuable would make Chinese goods more expensive abroad. The currency has therefore taken some of the dollar’s place in trade whilst losing share in central-bank reserves from 2022 to 2024. It offers a route around American sanctions and a useful way to invoice selected trade. The restrictions that make that route safe for China also limit its ability to replace the dollar as a reserve asset.

The petro-dollar story and the actual mechanism

Oil supplies the usual test for dollar dominance. Crude is the world’s most traded commodity and Saudi Arabia is its largest exporter, so stories about the dollar often focus on Saudi oil receipts. The common version says that a 1974 agreement required Saudi Arabia to sell oil in dollars and invest the proceeds in US Treasury securities in exchange for American military protection.

Hoser says the agreement did not exist in that form. Saudi Arabia had sold oil in dollars and other currencies, including pounds, for decades. American companies developed the Saudi oil sector, and the 1974 agreement created a general security relationship and closer trade links without specifying the currency in which oil had to be priced. The oil embargo and the tripling of oil prices had left Saudi Arabia with large dollar holdings, which it invested in Treasuries alongside many other sovereign states.

The alliance then developed its own logic. The United States has geopolitical reasons to support Saudi Arabia militarily. Saudi Arabia has financial reasons to hold Treasury securities. If it accepted euros or yuan for oil, it could still sell those currencies for dollars and buy Treasuries. Changing the currency of an invoice would leave the wider relationship intact.

That distinction carries the video’s central answer. Copper could be traded in yuan in the future without changing who mines it, who buys it, or what happens to the profits. Dollar-denominated trade creates a route through which money can reach the US government, yet any currency can be exchanged for dollars and lent to that government because the United States is open to capital, has a large economy, and offers a stable legal system. The dollar’s strongest direct power lies in its ability to stop a transaction through sanctions.

Limits and the symbolic question

The video treats de-dollarization as a matter of degree. Fewer trades in dollars would change the currency in which accounts are settled. It would leave many of the underlying flows in place: production, trade, investment, and the decision to hold US Treasury securities. The financial landscape of the United States and the wider world would therefore change slowly.

The death of the dollar would mean something larger. Hoser calls it a symbolic change in global power and perhaps the end of one of the most prosperous and democratic periods in human history. That judgement depends on how a viewer sees American sanctions. They can appear as part of a rules-based order that punishes serious crimes. They can also look like a tool that grows more arbitrary as US power reaches further into other countries’ economies. The video leaves that political judgement open.

Several figures remain claims made in the video rather than measurements reconstructed in the note. The source list supplies the Federal Reserve, Treasury, World Bank, IMF, CNAS, LSE, and other references, yet the video does not show the calculations behind every number. The captions also contain errors in names and figures, including the yuan trade share. The accessible sources support the general mechanisms around reserves, monetary spillovers, capital controls, and sanctions. They do not turn every statistic in the narration into an independently verified fact.

Further reading / references

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