https://twitter.com/RobMcNealy/status/1646548761169260550
Question of the Day
Brazil’s president, Luiz Inácio Lula da Silva, wonders: “Every night I ask myself why all countries are forced to do their trade backed by the dollar. Why can’t we do trade based on our own currencies? Who was it that decided that the dollar was the currency after the disappearance of the gold standard?”
This is more than a bit amusing. No one is forcing Brazil, Russia, India, and China (the BRICs) to do trade in dollars.
Countries Don’t Trade!
For starters, Countries Don’t Trade.
- Only individuals, separately and in voluntarily formed groups such as firms, create or take advantage of economies of scale, of scope, or of both in production; countries, as such, do not.
- Only individuals, separately or in voluntarily formed groups such as firms, spend, save, and invest; countries, as such, don’t.
- Only individuals experience income, wealth, or welfare gains and losses; countries as such experience nothing.
- Of course, we can – and do – talk, for example, about “America trading with China,” about “Germany having a comparative advantage in the brewing of beer,” about “India’s national income rising,” and about “Peru’s trade deficit falling.” But all this talk merely describes the largely unintended, aggregate results of countless choices and actions each made by a particular, flesh-and-blood person.
- And also, of course, governments do perform many of these activities – for example, spend. But no government is a country. Each government is merely a particular organization run by particular, flesh-and-blood persons according to a certain set of formal and informal rules.
Trade Example
- A Brazilian soybean producer sells soybeans to a merchant in China.
- A Brazilian scooter manufacturer buys Lithium batteries from a Chinese merchant.
- The soybean producer buys nothing from Chinese merchants.
- The Chinese battery producer buys nothing from Brazilian merchants.
Why would the Brazilian soybean producer want to hold yuan, especially given that the yuan doesn’t even float?
Why would the Chinese battery producer want to hold the Brazilian Real?
No one is forcing the soybean producer or the battery producer to do anything. By choice they prefer to trade in dollars, which by the way is instantly convertible to any currency the producers may wish to hedge in.
It is only at the government level, where for political reasons, the governments may wish to make agreements in other currencies.
How Significant is Government Trade in Other Currencies?
Not at all.
If the Brazilian government wishes to buy Chinese weapons, unless the Brazilian government has yuan reserves, it would have to convert dollar reserves, gold, or the Real to yuan to buy the weapons.
And why would the Brazilian government have yuan reserves in the first place unless the Brazilian government had a trade surplus with the Chinese government?
The only other reason the Brazilian government might accumulate yuan is if Brazilian merchants run trade surpluses with Chinese merchants and the Brazilian central bank sterilizes the trade, swapping Real for Yuan.
Sterilization is a monetary action in which a central bank seeks to limit the effect of inflows and outflows of capital on the money supply.
In contrast, given the US has a trade deficit with most other countries, and given those governments swap their local currency for the dollar, foreign governments accumulate dollars by default.
But foreign governments can trade reserve dollars or their national currency for some other currency at will.
So Mr. Luiz Inácio Lula da Silva, if you want to hold yuan, go ahead. What’s stopping you?
By the way, the US has a net trade surplus with Brazil. But there is no need or desire for US individuals or corporations to hold the Real.
De-Dollarization Nonsense
In conclusion, de-dollarization talk is 99% nonsense.
Meanwhile, please note that mathematically someone must hold every dollar 100% of the time.
Who is the holder going to be?
This post originated at MishTalk.Com
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https://www.visualcapitalist.com/countries-by-share-of-global-economy/
“Every night I
ask myself why all countries are forced to do their trade backed by the dollar.
Why can’t we do trade based on our own currencies? Who was it that decided that
the dollar was the currency after the disappearance of the gold standard?”
Lula is
wondering why the gold standard no longer exists. No country in the world has
their currency backed by gold nor is it used much for international transactions. You must remember that Lula is schooled in Marx and Marx wrote extensively about money and had a deep understanding of what money actually is. To be brief Marx believed that money is a commodity as another and that since monetary conditions within each country are unique to that country any international trade would have to be in a “universal currency” and he thought that this currency would have to tied to gold and silver essentially because they are universally recognized. In this Marx and Libertarians have common ground.
Yes, but if country X wanted to buy something (even if something other than oil, like textiles, wheat or machinery etc.) the country Y that sells it those things would want dollars. Why? Because it would need the dollars to buy oil.
But if country X and Y came to a deal on what non-dollar currency to use for their trade, then the dollar would be out of the picture.
When much of the global oil trade bypasses the dollar, the other countries will be just as inclined to hold dollars as the US is inclined to hold non-dollar currencies at present.
It’s not like the CIA, DOD or State Department bribes foreign governments to do their bidding.