eli5 De Dollarization


eli5 De Dollarization

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The vast majority of world trade is conducted in US dollars. Meaning like when goods travel from one country to another country, the seller almost always demands to be paid in dollars. Even if the US isn’t involved. Like when China sells goods to Nigeria, the Chinese expect to be paid in dollars. And when Brazil sells goods to Britain, the Brazilians expect to be paid in dollars.

The US dollar is just such a stable currency, and it’s backed by such a stable government, with such strong consistent demand behind it (because the US is the largest economy in the world), that it’s easiest and cheapest for most countries to just do business in dollars, rather than deal with the headaches of trying to trade with each other in their own currencies, whose values fluctuate and for which there is very low demand from any other country. For the most part, no international companies want to accept your Brazilian reals or Australian dollars as payment for goods, because they themselves will have a hard time finding *another* company willing to accept those reals or Australian dollars as payment for some later purchase.

But obviously not every country is happy about this. This all works to the benefit of the US, it subsidizes our economy at the cost of theirs. It makes our currency worth more and their currencies worth less, meaning it keeps inflation down for us, but worsens inflation for them. Therefore, many countries talk about working out trade deals where they might be able to start conducting business in other currencies that aren’t the US dollar. The most famous and successful example is the eurozone in the European Union, they conduct all their trade amongst themselves in euros, so they don’t have to use dollars. Other countries hope to create some kind of system like that where they can conduct trade in a different currency.

After WWII the US’ economy was left pretty much unscathed, unlike every other industrialized nation. The US told everyone, “let me help write your country’s security policy to fight the commies and I’ll let you sell your stuff in my country.” Anyone that took the US up on that deal became allies and any trade deals were made in terms of US dollars. After decades it just became standard, even if 2 countries don’t use the dollar traded with each other, they’d be very likely to trade in US dollars, especially when it comes to oil. Some countries want to get away from that being the standard since it gives the US so much power as demand for any currency is what gives it its value. If you go anywhere in the world and wanted to trade your US dollars for the local currency, they would be more than happy to take it, the same can’t be said for other currencies.

The problem is the US can deal a major blow to your economy by levying sanctions against it and preventing electronic transfers of dollars to and from your country. Countries on the receiving end of these sanctions or countries that don’t want the US to dominate the finance world would like to stop making all their international transactions in US dollars.

Imagine a bunch of kids trade their lunches with each other using a common currency: candy. A kid can sell their ham sandwich for 5 pieces of candy, a kid can buy a fruit roll-up for 8 pieces of candy, etc.

The kids’ parents don’t like them using candy as a currency, so they tell them to use pudding packs instead. Now a fruit roll-up costs 3 pudding packs, a PB&J sandwich costs a butterscotch pudding pack, etc.