alt Hacker News> Foreign countries buy US dollars so they can trade with other people
Who are those other people and why do they want to be paid in USD so badly instead of their own currency in which they presumably pay their employees and taxes? I never understood that.
Replies
Because you can easily and cheaply convert USD to any other currency, and because it is the usual currency for international trade you can use it to pay someone else.
Suppose a British company imports tea from Sri Lanka and Kenya, blends and packages it, and exports it to retail chains in multiple countries. If all the buyers pay in the same currency used to pay the suppliers the British company does not have to convert more to GBP than required to meet its costs (and profits!) so loses less on converting currency at all. The usual currency used for this is USD.
So rather than:
customers currencies -> GBP -> suppliers currencies
we have customers currencies -> USD -> suppliers currencies.
Edit: I have not explained very well in the bit immediately above. The point is that the British company will not need to convert the currency at all as they will be paid in USD and will pay in USD. In most countries you get better rates converting to USD, and its easier to hedge this way. Even more so if there is a longer supply chain as then you get
A's currency -> B's currency -> C's currency to D's currency
vs
A's currency -> USD -> D's currency.
There are a few wrinkles on this in that customers may already have USD accounts, and suppliers might keep some money in USD, but obviously customers will be paid by their customers in their own currency, and will pay their staff and most other costs in their own currency.
Look up the petrodollar.
If I'm Romanian and my currency is leu (RON) and you're Mexican and your currency is pesos (MXN), you don't want my RON since you can't use it for anything except for imports from Romania and I don't want your MXN since I can only use it for imports from Mexico.
If we both agree on USD, I can go to any other country which wants USD (all of them) and buy whatever I want.
There are both hard and soft reasons for this.
Hard reason: Oil was traded in U.S. dollars. This was basically built off America’s status as the only open superpower and its military strength.
Soft reasons: U.S. political stability (yeah, it’s hard to understand that now after the past decade, but generally the U.S. has been extremely politically stable with Presidents largely maintaining their predecessors foreign policy even if they didn’t agree with them), US company culture which is much cleaner than the rest of the world (American companies are far less likely to bribe, for example), and strong financial institutions like the independent Fed and the publishing of reliable and open data.
Other currencies are not always great: for example, being under sanctions Russia sold oil to India for Indian rupees; then it found out that you cannot simply take rupees abroad or exchange and you need to invest them locally [1].
But I also wonder what's wrong with other currencies and why they are not used more often.
But of course, current US move will greatly help recent Russian efforts in persuading other countries to switch the trade from US-controlled dollars.
[1] https://www.asianews.it/news-en/Delhi-pays-for-Russian-oil-i...
This is called the euro dollar (look it up, it had nothing to do with Europe).
In short: when two non us countries trade, eg., oil they settle on USD.
So for south Africa to buy oil from Kuwait, they need USD.
That was the part of Bretton Woods agreement, 1944.
In simple terms, if you're the Philippines and you're selling fish to Russia, would you rather have Rubles or US dollars? Way back in time, US Dollars were one to one based on gold in fort knox. Right? But no country has a gold reserve now. Most countries have a dollar reserve to back the paper money they print themselves. This is the main reason the dollar hasn't collapsed already.
[edit] someone who graduated college with an economics degree please come and correct the following vague and possibly totally wrong perceptions I have as a subject of the American empire /edit
The value of a country's money is backed by a combination of how much they produce and how much foreign currency and assets from other countries they hold (euros, dollars, gold) they have on reserve. Only the US gets away with having no actual reserve ...because a combination of military might and cultural strategic dominance has allowed it to BE the reserve for everyone else. This is why it somehow makes sense for America's economy to be based entirely on consumption rather than production.
OP is right. Whichever superpower controls the levers of global trade is the one that can sell debt and enforce the currency regime.
Some of us think that it's a lucky thing that it's been America, rather than a more authoritarian power, who had held that control for the past 80 years. Europe would not have recovered from WWII otherwise, and be living behind an iron curtain. Anyone who controls global trade after America is likely to be worse from a human rights perspective.