What is the Eurodollar System? (2020) [pdf]
research.rabobank.com
research.rabobank.com
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.
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.
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.
Re:mmt.
Modern monetary theory seems to enjoy spooking people. Not sure that's a good thing.
However... You can and should separate between "how X works" and "what should we do." Mmt has the best description of how fiat money works. A lot of this is at odds with existing institutional structure in both the US & EU.
In any case, there is no contradiction between MMT and being conservative, anti-centralisation or any other value system. It is just a description of how bank money works.
The powers still exist, they're just non-explicit currently. EU members can, in effect, print euros. As we saw in the Greek crisis, the ECB's actual role/power is making euros exchangeable for euros, regardless of country.
This is very different to how these instructions were conceived, because they didn't understand the money system of their own time.
Similarly, the US Fed-treasury complex doesn't represent where power and control actually are. The whole discourse becomes jumbled.
Are you sure about that? As far as I know, MMT is considered an "unorthodox" theory (i.e. crackpot theory) by mainstream economists.
Notice though, that a lot of "orthodox" economsists tend to accuse mmt of being both crackpot and trivial. The trivial shot implies that it's trivially derrivate of Keynes.
I'm not sure where mmt begins and ends. Currently, a lot of mmt is associated with guaranteed jobs ideas. I don't like that policy idea at all.
That's why I caveat with "mmt's description of fiat money." Their description of central banking is far superior to monetarism and other "orthodox" theories of the past few decades. It's simpler, less abstract, more universal and more parsimonious with major, observable reality in more places.
By comparison, all neokeynesian models if central banking are cludgey minstrosisies.
But it is not a crackpot theory among central bankers.
I agree that it's tangential to a lot of half baked ideas.
So now, with inflation... Mmt explains why it is happening now, but didn't happen (eg) following the 2008 bailouts.
What do you mean? Greece half-jokingly threatened printing shitload of actual physical euros to pay back their public debt and the EU prevented them to do so. Greece defaulted. If EU members really could print, why did Greece default?
This is basically "where euros come from." They're spent into an economy by governments. The ECB keeps track of how much each government spends, less taxes collected. The diff becomes "national debt." Money owed to the ECB.
The ECB decides interest rates, but this is basically just accounting. Greece will never have a persistent surplus, where ECB loans are paid down. Neither will other member states. So, interest "payments" just determine how fast the national debt grows.
The ECB threatened to stop backing the Greek banking system, which basically would have turned euros in Greek banks into a divergent currency.
The Greek government cannot create EUR by fiat. Only the ECB has that power. Any EUR that they could place into an individual entity's account would need to come from tax receipts or some kind of loan (Gov Bonds, loan from IMF etc.). Developed economies run deficits by issuing government bonds and selling them to the open market. If for whatever irrational reason there were infinite market appetite for Greek bonds there never would have been a debt crisis - they could have kept on raising money in the market and running a deficit.
> This is basically "where euros come from." They're spent into an economy by governments. The ECB keeps track of how much each government spends, less taxes collected. The diff becomes "national debt." Money owed to the ECB.
National debt for developed countries is mostly money raised by issuing government bonds in the international bond market. The ECB does not loan member states money directly. In extreme cases like the European Debt Crisis[0] they buy sovereign bonds in the open market (effectively a loan). Money is created by the ECB's interactions with the banking system [1], not government spending.
> The ECB decides interest rates, but this is basically just accounting. Greece will never have a persistent surplus, where ECB loans are paid down. Neither will other member states. So, interest "payments" just determine how fast the national debt grows.
The interest rate the Greek government pays on its debt is not determined by the ECB. It determined by the open market when they issue bonds. The interest rates the ECB sets [2] directly affect the banking system and not government borrowing rates.
[0] https://en.wikipedia.org/wiki/European_debt_crisis [1] https://www.ecb.europa.eu/ecb/educational/explainers/tell-me... [2] https://www.ecb.europa.eu/stats/policy_and_exchange_rates/ke...
I think it is, explicitly, only the loan that is the source of the EUR in your example.
I think MMT suggests this very simple relationship:
Money is created by loans and destroyed by taxes.
This is unexpected as most people think tax receipts somehow bolster the "account" of the government but what MMT is telling us is that the account has no significance because the government arbitrarily controls it.
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
any recommendations?
https://www.goodreads.com/book/show/45731395-the-deficit-myt...
If you want a deeper dive in audio form, I really liked the MMT podcast sub-series embedded in Current Affairs' bird seed podcast. However they spend so much time on the basics and the "controversy" that they only focus on the central banking aspect of it; the critics they bring on are so bad at critiquing it that MMT really come out looking good. There are two aspects:
1) here's how money works with a central bank and what it means about, for example, US government "debt"
2) now that we have these concepts of money, and observe how monetary policy has been used to keep a pool of unemployed people, let's instead try to get full employment with a job guarantee to increase economic productivity.
I am compelled by (2) but it's not as essential as understanding (1) IMHO.
MMTers also tend to focus on government (sometimes called vertical) money creation, and pay much less attention to bank creation of money (sometimes called horitzontal), because MMTers are focusing on monetary policy by currency sovereigns. But horizontal money is super important to understanding economic cycles too. A really good book about this, that focuses on the intricacies of the UK banking system to prove its points, is Where Does Money Come From:
https://www.amazon.com/Where-Does-Money-Come-Ryan-Collins/dp...
I notice that MMT discussion (esp. on [1]) focus very tightly on sovereign currencies for their examples and spend a lot of time describing the impossibility of default, etc., for governments that make loans in their own currency.
This is, of course, correct.
But I continue to wonder: in a world of MMT - a world wherein we fully adopt MMT as our model and pursue it explicitly - what is to happen to the Argentinas and the Ukraines and the Malaysias, etc. ? That is always glossed over ... is it just assumed that they will be as ill-served as always by the world order ?
AFAICT the answer that MMT has for Argentina (for instance) is: You'll be as fucked as you've always been.
https://denison.edu/people/fadhel-kaboub
In general the advice is to 1) maintain economic sovereignty as much as possible by avoiding debt denominated in foreign currency (IMF is pretty evil in this regard), 2) focus on maintaining economic activity that builds the basic needs of society, like food production, etc.
At its heart MMT is a really simple concept and pretty undeniable, just pointing out that the emperor has no clothes when it comes to rhetoric and political whining about debt. Inflation is still a big risk when spending capacity overreaches production capacity (or, as recently, production capacity seems to shrink...).
Imagine I pluck a leaf off a tree and hand it to you and promise that I will do an hours farm labouring if you or anyone else comes back and give me that leaf. I now have a debt, and money is invented to tokenise that debt.
However there are only 24 hours in the day so my productive capacity is limited to (at best) 24 leaves per day. (And yes this leads into time issues - that 24 leaves could buy an hour next week - but should there be 24 leaves for every day I am able to work? or just recycle the same 24 ? This leads us into money velocity which impacts the overall productivity calculation at the end)
Now MMT says that as there is only one farm labourer and there is only 24 hours in the day you can only have 24 leaves in the monetary system - but if you have say, 18 leaves in the system it's fine to pluck another six off the trees - that will allow the plucker to purchase another six hours of my labour with no inflationary cost.
Of course I need to sleep, and it's hard to judge how productive I am etc etc. But the idea is an economy is a whole system and a fiat government is able to purchase up to the productive capacity of the system - which seems quite sensible ... if we know what the productive capacity is.
I may of course be wildly wrong and interested in other peoples views
https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=968...
There are many other academic authors with plenty of critiqueable ideas, but Kelton has been the most prominent as far as I can tell, and also Bourne most of the burden of being critiqued, often completely unfairly and unseriously.
The absolute worst part of recent macOS is when it inserts completely embarrassing errors into presentation after a word has been completely typed. At least a typo can be deciphered, putting in the wrong word causes sentences that look like the mistake was intentionally included. Hate hate hate it.
Mmt is very simple, but needs to be explained with a bank ledger. Metaphors aren't helpful, imo.
Your way of seeing it differently is ahistorical, and strangely US-centric for a historical view of banking or currency.
The internet sometimes seems to think that making up plausible stories is a valid way of understanding what happened historically.
At least, I would not predict the success if I were a random citizen from 100 years ago…
It did play a role, but more like an enabler instead of being the cause
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.
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.
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.
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.
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.
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.
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.
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.
> 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.
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.
Bond buying & yield curve intervention is pretty special. And catastrophic, IMO.
So I'm confused. Does anyone know, or have a better source, whether there's actual cause for concern?
> You contend that there are massive amounts of US dollar money supply being created outside of the banking system and, therefore, outside of oversight and regulation by the Federal Reserve ... it wasn’t until 1964 that anyone in any kind of official capacity finally got around to investigating this thing, even though it was almost a decade old by then. The Bank for International Settlements finally published the first study on the subject of Eurodollars ... people like Milton Friedman and Paul Einzig, very highly respected people in finance that no one questions the credibility of, who are attesting that this was actually going on as long ago as the 1960s.
Cambridge University, March 2022, https://www.cambridge.org/core/journals/enterprise-and-socie...
> This article challenges current interpretations of the rise of the Eurodollar market. It argues that rather than being the exclusive innovation of British banks, the Eurodollar market had also Italian origins ... resulting from the fact that nonresident foreign-currency deposits were not subject to reserve requirements ... The comparison facilitates an approximate estimation of the size of the Eurocurrency market in the late 1950s and, even more importantly, a recalibration of the view that the City of London was the dominant Eurodollar player from the outset.
> this document is barely coherent.
Then say
> I don’t have a problem with the definition
To a reasonable person, these two statements are not consistent.
edit: I just get a feeling that you're relying on logical fallacy [0]
Note that "coherence" and "definition" are two different concepts. Definition may be required, but is not sufficient, to achieve coherence.
Also note that the definition of eurodollar is only a small part of the document. I was commenting about the overall document, and never said anything about the definition of eurodollar.
And what, specifically, was not "logical" or "consistent" in the rest of the article?
To my other point, and fundamentally where you're coming from, how is your statement here not guilty of committing an appeal to purity fallacy?[0]
> It definitely doesn't have the decorum I'd expect from a serious expert.
When sovereigns in developing countries issue bonds they tend to need to do it in USD to get any takers; else the risk of their inflating the value of their currency away is just to great.
As US dominance decreases it's currency will face competition from e.g. the yuan. Ray Dalio writes about this in his "The Changing World Order".
- Neal Stephenson, The Confusion
Good discussion in Wired interview: https://www.wired.com/2004/04/clearing-up-the-confusion/
They explain it in more detail here: https://www.core-econ.org/the-economy/book/text/10.html#108-...
1. It is common to use USD because it is convenient, but it is not a standard. There is no structure that forces it.
2. The world does have dozens of liquid currencies already. Banks do offer rates on them. And banks do trade in them without the USD being in play.
3. It is simply not true that the current system of floating exchange rates would fail to function without the USD.
The author moves on to talking about it being a privilege to be a reserve currency. It is not a privilege to be the reserve currency - countries generally go out of their way to avoid it happening - the Swiss central bank headed it off within the last ten years. Patrick Boyle's recent video /The Weaponization Of The Dollar/ touches on this in the last few minutes.
I stopped reading here.
The concept of Eurodollars (US-denominated debt outside the reach of US foreign policy) has been effectively obsolete in the developed world for decades.
Any bank who has a balance sheet large enough to be involved in significant trading operations (e.g. operating as a top-level general clearing member at a clearing house, or acting as a prime broker for foreign exchange transfers) is also able to qualify for an account with the US central bank. This gives them access to cheap lending (free money).
When you take on this membership, you sign up to align with aspects of US foreign policy. And not just for stuff you do that is denominated in USD - it applies to all your business globally.
A recent example of this - Deutsche Bank got fined for money laundering done by Danske's Estonian Branch. Danske were operating on DB's balance sheet, which means that DB had failed to ensure that their balance sheet use aligned with US standards on money laundering, so DB got fined in the US even though they had no direct hand in the wrong-doing.
It is these arrangements that allow the US to be so effective in launching sanctions against other countries. Consider how Trump decided to go after Iran even though European countries wanted to stick by the Obama-era deal, and how thorough those sanctions have been.
Is it possible to have a top-tier western bank who choses not to have a relationship with the US central bank? Hypothetically, yes, but who would do such a thing? Such a bank would lose access to cheap lending in the world's largest economy and would lose economies of scale.
It is not the USD that is powerful, it is the US. The US is a vast economy with a strong rule of law tradition. Common use of USD is a side-effect of that.
Changes in regulation/monetary policy meant the function of the market has changed significantly since then. So Eurodollars tends to just refer offshore dollars, and this is still a huge market.
The rest of the article is basically accurate in identifying the huge role that the offshore dollar market plays in the economic cycle, particularly of EMs (the article identifies CBs, the demand for USD there since the mid-90s has grown exponentially...it is huge). The Fed opening swap lines en masse in 2008 (really a continuation of what occurred in the mid-90s) was a turning point.
[...]
>It is not the USD that is powerful, it is the US. The US is a vast economy with a strong rule of law tradition. Common use of USD is a side-effect of that.
I wish the legions who, in online discussions of the US dollar (or almost anything US foreign policy/military-related), always bring up how the US dollar/economy's strength is based on the "petrodollar", how the US goes to war to preserve the dollar's role as a reserve currency, how Russia/China/Saudi Arabia can cause the dollar to crash by using another currency, etc., would understand this.
No, kids, if Saudi Arabia suddenly started selling all its oil in Euros or Yen on renminbi, the US would not send the Sixth Fleet off its shore, any more than it did so to force KSA to use the US dollar to price its wares in the first place. Saudis (and Russians, and Chinese, and everyone else) use the US dollar because they find that a) using it is more convenient than another hard currency like the Swiss franc or British pound, and b) no one else wants riyals, rubles, or renminbi.
IMO the use in the article isn't notable enough to scoop me.
[1] https://www.cmegroup.com/markets/interest-rates/stirs/eurodo...
It's simply not part of my reality.