Comment by maxglute
16 hours ago
>demand is still there today
Not all demand the same. There are broadly 2 types of USD buyers
1. price insensitive: sovereign banks, who buys for liquidity/storage
2. price sensitive: hedge funds, private buyer who buys returns
Type 1 buyers are bailing out of treasury. Type 1 are marginal buyers, the close auction regardless or rate, this keeps rates low -> debt servicing low. They artificially depress yield to non market rates, without them rate go up because you have more price sensitive buyers who buy for returns. This increases borrowing costs, hence US debt repayment rising massively.
Type 1 buyers, i.e. US allies (and historically even adversaries) soaked up treasuries are now de-dollarizing / buying gold in lieu of _more_ USD. Type 1s underpin the "privilege" part of exorbitant privilege. The more they de-dollarize the more dollars become exorbitant, aka debt like everyone else. Type1, sovereign held 60% of USD to 40% in last 5 years. This large part of why interest tripled and debt servicing went from 350B to 1T in 5 years. Type1s exit to 20% in another 5 years and maybe interest goes to 5%, debt servicing 2T+. It's the difference between 10%/20%/30% debt servicing as % of federal revenue.
This not to mention USD reserve ticking down at 1% per year means meaningful changes in our lifetimes, and velocity may increase with developments like Saudi no longer locking oil to dollar. Less USD as % of global reserve = more network effects of alternate payment = increased potential velocity of USD reserve drop. This doesn't mean other currencies pickup all slack, i.e. central banks seem to be going in gold / commodities with no counter party risk for new storage. The net result is USD will still be around, in large volumes, but the cost/debt to sustain the system will be "normalized" while US budget is historically is built around USD debt being privileged. AKA difference between borrowing money from family vs payday loans.
>Nearly all commodities are still priced in USD
PRICED as in benchmarked in USD, but =/= USD is being spent to settle them. There's a fuckload of commodities where PRC alone buys 30/40/50%+ of global production, and while quoted in USD, increasingly settled in rmb/CIPS, bilateral currencies, BRI infra or other swaps mechanisms that bypasses USD. This one of the largest source of dedollarization - PRC went from single digit % to plurality of cross-border settlements in RMB/non USD. Though this is just very recent leading indicator that USD is functionally circumventable.
There is another type of demand that I rarely see mentioned. Not only does the United States owe trillions of US dollars, other nations do, as well. They hold many trillions worth of loans denominated in US dollars. They must be repaid in US dollars and not in any other currency.
And not just to the United States but to other nations, as well. South Africa owes US dollars to Australia, Australia owes US dollars to Brazil, Brazil owes US dollars to Argentina, etc.
These nations are hungry for every dollar we print. Even if every trading partner dropped the dollar for trade tomorrow, and if everyone who owned Treasuries all sold them at once, there would still be demand for US dollars to repay their loans.
The IMF made them an offer they couldn’t refuse, and spun a sticky web of a debt trap as a result.
Three minute video: https://m.youtube.com/watch?v=_SaG9HVXMQg&pp=ygUQZG9sbGFyIG1...
>They must be repaid in US dollars
IMO this one of those cases where dollars is ultimately benchmark than requirement, IOU/settlement forms can always be restructured/renegotiated if USD is no longer lender of last resort, i.e. alternative payment systems enables take it or leave it deals in medium/long term.
USD/reserve status snowballed because US controlled techstack postwar which US leveraged (along with military hegemony) to USD controlling primary energy (petrodollar). Civilization/modernity was locked behind USD. Money followed existential goods provider, that's the real USD / unipolarity moat. There's no take it / leave it from US company scrip because leaving eurodollar system = technical default (most usd loans hardcoded on newyork/english law) from eurodollar western financial system = death sentence. Once that lock/dependency erodes all kinds of force majeure geopolitics can rationalize breaking dollar contracts. AKA multipolarity.
If alternate techstack/payment systems pops up and reach tipping point, country A can just say to country B who only wants USD (due to alignment or whatever), I don't have enough USD, here's RMB & cips/Brics+ & mbridge basket of equivalent value. This geopolitical layer, if BRIC+ can offer fossil, food without US and PRC can offer renewable energy, capital goods, consumer goods, technology, including 80% as good semi and civil aviation... etc if chokepoint goods are no longer exclusively under USD perview, then USD enforcement mechanism simply dies.
If we're talking about loans/aid, IMF is really pittance, low hundreds of billions. It's why PRC is now using their 3T USD surplus to basically do their own shadow USD lending without IMF conditionalities... countries now don't need to buy USD from US. And somehow PRC currently lending / providing swaplines with their USD at lower rates than US treasury. Incidentally, this dollar recycling also lowers demand for new USD bonds, further reduce type1 margin buyers. This circles back to other nations own trillions of USD to each other... when you remove type1s, you're left with type2 private sector / non bank financial institutions - these are the buys where each USD bought increases triffin burden, i.e. they are the exorbitant curse / payday loans traps that makes USD reserve more expensive to maintain. Their demand is a trap, not a benefit.
> If alternate techstack/payment systems pops up and reach tipping point, country A can just say to country B who only wants USD (due to alignment or whatever), I don't have enough USD, here's RMB & cips/Brics+ & mbridge basket of equivalent value.
Alternate payment systems aren't even required for this. If other countries are trying to divest US dollars and country B is owed "US dollars" and country A wants to pay in something else, country B would want to accept the something else of equivalent value because it's trying to reduce its US dollar holdings and would just be immediately turning around to resell them anyway.
Conversely, if country B is insisting on US dollars for alignment reasons while other countries don't want them then that's only providing country A with the opportunity to divest its US dollars by using them to pay the debt. Then country B ends up with them, but now what is it supposed to do with them?
The real reason those sorts of debts result in stability is that all the countries owed a lot of US dollars are going to do what they can to prevent the US dollar's value from declining.