Eurodollarize Your Cookiedollar

To Convert or Not to Convert, Horatio?

Much like Petrodollars, the Eurodollar system is widely misunderstood, and not just by people who are not using it!

Much like Petrodollars, the Eurodollar system is widely misunderstood, and not just by people who are not using it!

A friend recently proposed: “What if the tax credit was edible?” Lo! The Cookie-dollar system! Self-imposed taxation by digestion. Indeed, in some villages cocoa beans were used as currency tokens. Which entirely misses the point. The token material form is irrelevant, the face value is normally always higher then the intrinsic commodity value, otherwise you have a recipe for debasement, and one thing all economists agree upon is that debasement of the coinage is a stupid thing to promote. Once you’ve chewed around all the cookie edges, and picked out all the chocolate chunks and peanuts, leaving the face value barely visible, then that’s the end of the eating.

But I digress.

What Are Eurodollars?

This is from an expert financial analyst Nick Gomez, and is in accord with the Wikipedia entry :

“The Eurodollars are simply ledgers recording loans (bank assets) denominated in the US dollar."

I would put it in Dirtbag MMT terms:

The eurodollar system is all just shifting scorepoints around among the rich. So is disconnected from working class concerns.

Nick continues:

“The system arose from trade settlements (oil, mostly) using the dollar. It creates demand for the dollar. It is just ledger-keeping by foreign banks for (mostly) oil-rich folk and corporations.

“If they didn’t want to transact in US$, then nobody is stopping them from using a different currency. But that could make some things slower, more complicated, and costly for these wealthy entities.”

In other words, you can see there is some incentive for keeping the system “alive”. Though I would euthanize it myself if I were in the regulatory power position. Transaction in euro are sufficient for all intra-european transactions. If speed is an issue then the euro system should be improved with secure software updates. I would say the eurodollar system can create additional demand for US$. It is not a necessary source of USD demand.

Extra Liquidity?

No, or at least not needed. Nick Gomez explained again: The FED conducts foreign reverse repos to manage liquidity and demand. And all US$ transactions are recorded by the “mother” ledger at the NY FED. Same for any other central bank. No one needs the eurodollar system for macroeconomic liquidity management.

Secured?

No.

Similar to a Euroyen or “Europeso” (if there were such a thing), you would not have central bank or other government insured deposits, making these “euro-currencies” more risky to hold.

The social status of “eurodollar” is thus largely fictional, and is leaning on the “US dollar” for psychological support.

People still seem to believe these tokens have intrinsic value and are somehow metaphorically “dug up out of the ground.” But as you may say, if a myth persists it can be materially effective. Witness this in complete inverted (materially damaging) terms with the Samuelson myth of the “need” to keep the public ignorant of MMT. You know, the whole: “If people understood the government creates currency by fiat then the government would start spending like a drunken sailor and we’d have hyperinflation!”

Well dear Sirs, if the government caused hyperinflation by spending on hiring people to do nice things, then that’d be a darned good thing. For starters, a billionaire’s hoard of “$” from a decade ago would be reduced to pennies (in real terms).

There really is no real economic purpose for these euro-currencies. In many ways I view them as similar to cryptocurrencies, because there is no authority promising to redeem them, and so not only is their intrinsic value zero, their fair price real value is zero as well. Like baseball cards. Unlike postage stamps (you can redeem a postage stamp for postal delivery, if not for tax credits). But since the euro-banks will convert your eurodollars to USD cash (or equivalent) more or less on demand, then it looks as if someone is redeeming. It is charade in my view, since those bankers are not able to guarantee convertibility. Whereas the US government can always guarantee extinguishing your tax liabilities if you hand over US$.

Is it like Fractional Reserve Banking?

No.

Traditional textbook description of “fractional reserve banking” does not accurately describe how either US bank credit is created today, nor does it apply in the same way to the eurodollar system.

US Bank Credit Creation is Not Reserve-Constrained

In the modern US banking system, banks do not lend out existing deposits nor are they constrained by the amount of reserves they hold. Instead, banks create deposits “ex nihilo” (from nothing) when they make loans. They only need to ensure they have enough reserves to meet settlement obligations and regulatory requirements, which, I believe since March 2020(?), have been set to zero for transaction accounts by the Federal Reserve. If additional reserves are needed, banks can obtain them after the fact (ex post) from the interbank market or the central bank.

The key constraint for US banks is creditworthiness of the borrower and the bank’s own capital requirements, not the level of reserves on hand.

I think this covers the basics, for more depth it might be useful to write a little bit on the history and some operational details.

Issuance, Origins, and Convertibility

Who Issues Eurodollars?

Eurodollars are US dollar-denominated deposits held in banks outside the United States or in offshore branches of US banks. These deposits are not subject to US banking regulations and are created by foreign banks through the process of credit creation — essentially, they are “loaned into existence” via the same credit constraint banking practices as domestic dollars (my account here is an MMT analysis, see wikipedia or [Investopedia](Investopedia for other — potentially slightly erroneous — orthodox accounts).

Thus, the only issuers of eurodollars are banks (and sometimes non-bank financial institutions) that are licensed to accept dollar deposits outside the US. There is no central authority or state entity that issues eurodollars; they exist as promises by these banks to pay US dollars, not as liabilities of the US government or Federal Reserve.

Origins of the Eurodollar System

The eurodollar system originated in the aftermath of World War II, when large amounts of US dollars flowed into Europe through mechanisms like the Marshall Plan and international trade surpluses. European entities, including governments and corporations, preferred to keep their dollar holdings in European banks rather than repatriate them to the US. The first eurodollar accounts were often established to shield dollar assets from potential US government seizure, as in the case of the Soviet Union and Communist China during the early Cold War. Thus, the initial stock of eurodollars was indeed US dollars, physically or legally held offshore.

The Wikipedia entry on the eurodollar is fairly reliable as a source of much of this history, and as far as I can tell not too controversial on the history.

Are Eurodollars Now Decoupled from US Dollar Deposits?

Over time, the eurodollar system evolved from merely holding surplus US dollars offshore to a system where offshore banks create new dollar-denominated deposits through lending, independent of any direct inflow of physical US dollars. Today, eurodollars are largely “decoupled” from the original stock of physical US dollars; they are created as book entries by offshore banks, just as domestic US banks create dollar deposits through lending. The eurodollar market is now a vast, self-sustaining network of dollar-denominated liabilities and assets, not simply a pool of redeposited US cash.

However, more importantly as I remarked earlier, the eurodollar system is entirely a rich guys game, and decoupled from all working class interests. The government does not need eurodollar systems in order to drive full employment. The sole driver of full employment in non-ꕗꖹꝆꝆꕷꖾꕯꖡ jobs is government policy decision making, not “finding the money”.

Having eurodollars floating around the ledgers does absolutely nothing to diminish the government capacity to run full employment policy, and if expanded eurodollar credit was actually causing some inflation it would still not diminish the government capacity. Inflation is not a real constraint for the government, it is a psychological constraint, and so can be removed by a mysterious process called thinking.

Are Eurodollars “Backed” by Anything?

From an MMT perspective, the key distinction is that only the US government (via the Federal Reserve) can issue the dollars necessary to pay taxes or settle payments to the US state. Eurodollars are promises by foreign banks to pay US dollars, but these banks are not part of the Federal Reserve System and cannot directly access US central bank reserves. These banks may also run out of USD reserves or vault cash, and so can be at risk of needing to acquire USD through their own borrowings. Which begs the question why anyone bothers?

As the history mentioned earlier seems to record, the Europeans simply perhaps do not trust US banks to keep the deposits secure. This is slightly mad, since no one of decent repute has ever had a US bank default on a deposit guarantee. But there is sometimes little rational sense in accounting for the psychology of the ultra-rich. You can tell them there is no risk in holding accounts in US banks, but they have the power to act as if things are otherwise. (Though as do we all! I can swap my US dollars for NZD, if I am prepared to suffer the transaction fee.)

Therefore, eurodollars are not really “backed” by a promise of redemption by the US state. Their value rests on the ability and willingness of the issuing bank to convert them into actual US dollars if demanded, typically by settling through correspondent accounts with US banks. In times of stress, the risk is that eurodollar liability holders may not be able to redeem at par, introducing credit and liquidity risk absent from domestic US dollar deposits.

Are Eurodollars Directly Convertible to USD for Payments to the US Government?

No.

Eurodollars are not directly convertible to US dollars for settling payments to the US government. To do so, a eurodollar deposit must be converted into a US bank deposit— typically via a correspondent banking relationship — before it can be used to pay taxes or settle with the US Treasury. Only deposits within the US banking system, backed by Federal Reserve reserves (which are merely exchange settlement balance screoboards), can be used for such payments. There is no legal or institutional guarantee that a eurodollar can always be converted to a US dollar at par, especially in periods of financial stress.

Table: Eurodollars vs. US Bank Dollars

Summary

Only banks (and some non-banks) outside the US banking system issue eurodollars, via credit creation.

The eurodollar system began with surplus US dollars held offshore but now operates as a largely independent credit system, with new eurodollars created by offshore lending.

Eurodollars are not directly redeemable for US dollars by the US government; they must be converted through correspondent banking relationships.

There is no state guarantee backing eurodollars; their value relies on market confidence and the creditworthiness of the issuing bank.

From an MMT perspective, eurodollars are not “money” in the sense of being state liabilities usable for settling obligations to the US government — they are private promises to pay US dollars, with associated credit and liquidity risks.

In essence, eurodollars are a market-driven, offshore system of dollar-denominated account entries, with value determined by confidence and convertibility rather than any intrinsic or state-backed guarantee.