A few months back I flagged a podcast where Grant Williams interviewed Luke Grommen discussing his analysis of the role of the USD in the international financial system. One of the issues covered was the way in which the USD pricing of oil has underwritten demand for USD and thereby supported the USD.
Tether recently released a post where it seems to be arguing that demand for Tether recycled into demand for USD safe assets can take over the role in US monetary policy that recycling demand for petrodollars has played under Bretton Woods II.
Not sure if the US government has any plans to respond formally to this generous offer but anyone interested in this latest instalment in the ongoing Tether story might find it useful to revisit Luke’s analysis of Bretton Woods II. In particular Luke’s contention that petrodollar driven demand for USD has had some downsides.
I recommend you listen to the podcast (to ensure nothing was lost in translation) but this is how I summarised Luke’s argument in my earlier post
The USD’s role as an international reserve currency has been described as an “exorbitant privilege” but Gromen argues that the arrangement has also come at a cost via the role it has played in the loss of US domestic manufacturing capacity (Triffin’s Dilemma).
The consequences of this trade off has come under greater attention post the GFC, initially as the social consequences of lost jobs started to impact domestic politics, and more recently as globalised just in time supply chains struggled to respond to the economic shocks created by the response to Covid 19
Gromen argues that the USD Department of Defence has wanted to see repatriation of the US industrial base for some time and hence will be happy to see a decline in the USD’s role as an internal reserve currency because they believe it will enhance national security
There is also the question of whether stablecoin driven demand just exacerbates a shortage of safe USD assets. I have talked about this issue here and more recently flagged a post by Steven Kelly on the same topic. This quote gives a flavour of Steven’s argument…
market- and regulation-inspired migration towards safer crypto assets is making stablecoins more popular, but that means there are more investment vehicles gobbling up the safe assets that otherwise grease the wheels of the traditional financial system. Absent rehypothecation, stablecoins will be a [giant sucking sound] in the financial system: soaking up safe collateral and killing its velocity.
Tony – From the Outside