The Electron Paradox: Deciphering the U.S. Dollar in a Changing World
The U.S. dollar, an emblem of American influence and the cornerstone of global finance and geopolitics, remains an enigma for many, wrapped in layers of policy, psychology, and global strategy.
Understanding Money
Every time I learn something new about our financial system, I understand how little I know. It appears that every principle I was taught in university while getting my degrees in both Finance and Economics, have been thrown out the window.
Understanding our financial system is like studying electrons. Position and momentum: The more precisely you know the position of an electron, the less precisely you can know its momentum, and vice versa. This is because measuring the electron's position requires interacting with it, which changes its momentum.
Although most economists are simply statisticians good at propaganda, there certainly is a degree of the above electron principle that makes a true economist job near impossible. There becomes a point where, when studying a world reserve currency that is also a fiat currency, you are working with a new invention that has no historical basis to refer back to.
So here are some principles around the U.S. Dollar I know thus far that continue to guide me on the logic of the economy, both foreign and domestic.
Understanding Taxation: Not Just Revenue
A common saying from libertarians is the following, “If we the United States Government prints money, why do they need my tax dollars?”
Despite the capacity of the U.S. federal government to manufacture money, American citizens remain tethered to taxation for multiple reasons. The reasons are more intricate than one might suspect:
A Currency Habit: The act of taxation ensures the U.S. dollar retains its central place in the American psyche and market, preventing potential drifts to alternative currencies. If Americans weren’t taxed in U.S. Dollars, the psychological need to U.S. Dollar would not be so prolific. Money is all about psychology.
Behavioral Economics at Play: Beyond mere revenue collection, the tax system is a complex dance of incentives and penalties, sculpting behaviors. While vast corporations often navigate these waters with ease, the middle class faces a multifaceted tax landscape. Modern taxation therefore is about influencing the choices of a populace, not about revenue collection.
Florida's sales tax holidays, for instance, serve as illuminating examples. With strategic tax breaks on essential goods and school supplies, these systems subtly guide consumer choices, shedding light on the broader strategy of fiscal incentives.
The Eurodollar's Global Footprint
The term "eurodollar" can be misleading. Far from a European concept, it signifies U.S. dollars operating beyond American shores. It's less a currency and more the backbone of international trade and finance.
A eurodollar is a U.S. dollar-denominated deposit held at a bank outside of the United States. The term "eurodollar" originated in the 1960s, when Eastern European countries began to deposit U.S. dollars in European banks in order to avoid U.S. currency controls. Today, eurodollars are held by banks and other financial institutions all over the world.
Eurodollar are an enigma. They are dollars, but also not at all. They act more like some advanced cell tower network for trade settlement where the actual amount of Eurodollars doesn’t always have a mean on trade settlement.
Unraveling Foreign Aid's True Purpose
The narrative surrounding U.S. foreign aid often evokes debate. Beneath the surface, however, lies a strategy to perpetuate the U.S. dollar's supremacy. Such aid ensures the world remains reliant on the dollar, solidifying America's economic influence.
Much like taxation, foreign aid ensure that countries have access to dollars. The U.S. cares more about dollar usage and liquidity then it does about saving foreign children through welfare programs.
The Federal Reserve's Global Tightrope
Originally conceived with domestic objectives, the Federal Reserve now finds itself in a global balancing act. As the U.S. dollar has evolved into the world's reserve currency, decisions made on Wall Street reverberate in markets from London to Tokyo.
So when the Fed makes decisions, it not just able to follow it's old mandate of low inflation and high employment in the United States. It must also factor in the entire global network of trade on which it is the sole liquidity provider. One might call the Fed the ultimate centralized database in which the worlds economic nodes must connect.
Demystifying Inflation
Traditional economic wisdom linking increased money supply to inflation is being tested in this global age. Today, a plethora of factors, from volatile oil markets to global supply chain disruptions, influences price stability.
It is very possible that the current money printing of the Federal Reserve has very little to do with inflation, and that inflation has mainly come from supply chain and commodities being disrupted in significant ways.
Money printing isn’t all that matters, especially when global liquidity seems to be tight. Whoever is getting the money from the money printer seems to be taking it out of total supply almost all together.
The Coming Debt Jubilee
The specter of global debt looms large, sparking discussions of potential debt jubilees. Yet, despite the challenges, the U.S. dollar's resilience underscores its unique role, not just as a currency but as an intricate gear in the machinery of global finance.
Driven by a combination of expansive fiscal policies, global economic pressures, and unforeseen crises like the COVID-19 pandemic, U.S. national debt has reached unparalleled heights. For many economists and policymakers, the sheer magnitude of this debt suggests that traditional solutions, such as incremental repayments or austerity measures, might be inadequate. Instead, the idea of a debt jubilee – a broad forgiveness of debt – is most likely.
Historically, debt jubilees have roots in ancient civilizations where rulers would declare periodic debt forgiveness to maintain societal order. In modern times, a debt jubilee would represent a bold, unprecedented step, essentially pressing the 'reset' button on the nation's financial obligations.
The U.S. dollar functions as more than just a currency; it's akin to a global public good, facilitating international trade and investment. Its widespread use and acceptance provide it with a resilience that few other currencies possess. Even in scenarios of domestic financial upheaval, the U.S. dollar's international standing could remain largely unscathed.
Conclusion
The U.S. Dollar, like Bitcoin, is something we have never seen before. We all use the dollar, but that doesn’t mean we understand it. It seems to evade normal economic principles almost daily. It doesn’t make sense. But the U.S. Dollar does not have to make sense for me to exist.
I can’t know an electrons momentum and position at the same time, but maybe I don’t have to know both. Maybe I can just focus on one.
Either way, all I truly know is that without electrons, I wouldn’t exist.
Funny thing about the Eurodollar: https://cyberpunk.fandom.com/wiki/Eurodollar
It's part of the dystopian world of Cyberpunk 2020 and 2077. Although, with a very different history and context.