The Dollar Hegemony

Let's take a closer look at these ideas and see if they hold water. The core of this post seems to be a particular theory about why the US dollar is so strong, and it's laying out the mechanics of that.

Here's my take, breaking it down piece by piece:

The Main Ideas Being Argued:

1. USD Strength: System, Not "Exceptionalism." The argument here is that the dollar's muscle doesn't come from America being uniquely fantastic, but from how the global financial plumbing is set up.
2. Money = Debt = Leverage = Carry Trade. This is saying that all modern money systems are built on debt. Because they're debt-based, they're leveraged. And because of that, they function like a "carry trade" – borrowing (or creating money at a certain cost) to invest or operate, hoping for a return greater than that cost.
3. US: One-Currency Carry Trade (USD). The idea is that the US, for its internal economy, is primarily dealing with a carry trade in its own currency, the dollar.
4. Other Countries: Two-Currency Carry Trade (Local + USD). This suggests other nations are juggling not just their own currency's "carry trade" but also one involving the US dollar, because they need it for global trade, debt, or reserves.
5. The Problem for Others: A Zero-Sum Squeeze. Because exchange rates float and it's a zero-sum game (if one currency goes up against another, the other goes down), other countries are supposedly in a bind. If the USD rises, their USD-denominated obligations get more expensive (their "USD carry trade" hurts). If the USD falls (meaning their local currency strengthens), the argument is that their "local currency carry trade" suffers (perhaps making exports uncompetitive or reducing returns on local investments).
6. USD's Dominance. Finally, the point is that the USD (and the related Eurodollar market) carry trade is just so massive that it overshadows everything else.

So, Do These Arguments Stack Up?

• Argument 1 (System, Not Exceptionalism): This is pretty compelling. The US dollar is the world's main reserve currency. It's what oil and many other key commodities are priced in. US financial markets are incredibly deep and liquid. These are structural advantages built into the system, regardless of how "exceptional" America might be feeling on any given day. So, yes, this makes a lot of sense.

• Argument 2 (Money = Debt = Leverage = Carry Trade):

  • Debt-based? Yep, modern fiat money is largely created when central banks lend or when governments issue bonds. That's fundamentally debt.
  • Leveraged? Absolutely. The whole financial system runs on leverage.
  • Essentially a carry trade? This is a bit of a broader, almost metaphorical use of "carry trade." Traditionally, a carry trade is borrowing in a low-interest currency to invest in a higher-yielding one. Here, it's used to describe any economic activity where you're trying to make more than your cost of capital (interest rates, inflation, etc.). If we think of the "cost of carry" as the interest tied to holding or borrowing a currency, then this analogy works. You're essentially "paying" to use capital and expecting a return that beats that cost. It's a reasonable way to frame it.

• Argument 3 (US: One-Currency Carry Trade): For its domestic economy, this is largely true. The US operates in dollars. Of course, US companies and investors do engage in international carry trades with other currencies, but the post seems to be talking about the fundamental nature of the domestic monetary system.

• Argument 4 (Other Countries: Two-Currency Carry Trade):

  • Local currency: Fair enough, same as the US with its own currency.
  • USD: This also rings true. Many countries need to borrow in USD (think government or corporate bonds for international markets) or hold USD reserves. Their economies are definitely exposed to swings in the USD. If a country borrows in USD, they're effectively hoping their own currency strengthens against the dollar (or that their USD-generating assets outperform the borrowing cost). So, they're constantly managing this USD exposure, which feels like a component of a carry trade.

• Argument 5 (The Problem for Others: Zero-Sum Squeeze):

  • Floating exchange rates are zero-sum? In a direct, bilateral sense, yes. If the Euro strengthens against the Dollar, the Dollar has weakened against the Euro.
  • "One carry trade always going against them": This is the "damned if you do, damned if you don't" scenario.
    • If USD rises: Their local currency falls. Any USD-denominated debt they have becomes more of a burden to pay back in their local currency. So, their "USD carry trade" is working against them. Clear.
    • If USD falls (local currency rises): The post says their "local currency trade" then goes against them. How? Well, if a country relies heavily on exports, a stronger local currency makes their goods more expensive for foreign buyers, which can hurt sales and profits for domestic businesses. Or, if they borrowed in their local currency to invest in, say, an export-focused business, the returns from that business (when hurt by a strong local currency) might not cover the local borrowing costs as well as hoped. This part is a bit more nuanced, but it captures a real dilemma many countries face.

• Argument 6 (USD's Dominance): This is hard to argue against. The sheer volume of USD-denominated assets and liabilities globally (including the vast Eurodollar market – USD held in banks outside the US) is immense. This makes financial flows and interest rate differences related to the USD hugely influential worldwide. So, the "USD carry trade," in all its forms (borrowing/lending USD, hedging USD exposure), is a dominant force.

Overall Thoughts:

This set of arguments paints a picture of the global financial system that some (like proponents of the "Dollar Milkshake Theory," though it's not named here) find very convincing. The central idea is that the system's very structure, with its reliance on the USD and its debt-based nature, creates an almost built-in demand for dollars. This demand can keep the USD strong, even when other traditional economic indicators for the US might look weak, especially when global markets get nervous.

• The description of money systems as debt-based and leveraged is pretty standard and accurate.
• Using "carry trade" as an analogy for economic activity (aiming for returns over funding costs) is a useful, if slightly stretched, way to think about it.
• The idea that other countries are juggling both their local currency and USD exposures is a key insight and reflects reality, especially for emerging markets or any nation deeply involved in global trade and finance.
• The "zero-sum" nature of exchange rates (bilaterally) is a fact.
• The dilemma faced by other countries—where a rising USD hurts their USD debts, but a rising local currency can hurt their export competitiveness or the returns on certain local investments—highlights genuine policy headaches.
• The overwhelming global role of the USD and the Eurodollar system is undeniable.

Critiquing the "Carry Trade" Analogy a Bit More:

Just to be clear, the post uses "carry trade" more broadly than the textbook definition.

• For the US: It's like they borrow/create USD (where the "cost" is US interest rates or inflation) to fund US economic activity.
• For other countries:
  • They borrow/create their local currency (cost = local interest rates/inflation) for local economic activity.
  • They also need/borrow USD (cost = USD interest rates plus the risk of the exchange rate moving against them) for international dealings or reserves.

The "One Carry Trade Always Going Against Them" Idea: This is the crux of the problem for "other countries" in this model:

• USD up (local currency down): As noted, servicing USD debt gets tougher.
• USD down (local currency up): The post argues "the local currency trade goes against them." This likely means that exports become less competitive, potentially depressing returns on local investments tied to those export sectors. Or, if a company borrowed locally to fund an export business, a stronger local currency can shrink the local-currency value of their export earnings, making it harder to service that local debt. It could also imply that holding local currency assets underperformed compared to what they could have gained if they'd held USD assets (though the wording "trade goes against them" suggests an impact on active economic ventures).

The statement about the USD (or Eurodollar) carry trade being "orders of magnitude larger" and "dominating" is a strong claim, but it definitely reflects the huge global footprint of the dollar.

So, is this whole line of reasoning "true"?

This isn't like asking if "Paris is the capital of France." It's a complex economic argument, a theory or an interpretation of how the global financial system works.

• Is every single nuance and detail absolutely, universally true for every country, all the time? Probably not. Most broad economic theories have exceptions or require specific contexts.
• However, does it capture some really significant and widely recognized dynamics of the international monetary system? Yes, I think it does.

The core message is:

1. USD strength is baked into the system.
2. Debt-based systems inherently create these "carry" dynamics (cost of funding vs. expected return).
3. Other countries are exposed on two fronts (their currency and the USD).
4. This setup creates a structural advantage for, or pressure towards, the USD.

These points are largely defensible, especially within economic frameworks that emphasize the structural power of the country issuing the main reserve currency.

The statement is more of an analysis or an explanation than a simple, verifiable fact. To say it's "true" would mean you agree with the whole chain of reasoning and its conclusions. To say it's "false" would mean you've found a fundamental flaw in its logic or a key premise that's just plain wrong.

I don't see any glaring, fatal flaws that would make me call the whole thing "false." The "always" in "one of the carry trades is always going against them" might be a slight overstatement, as situations can be complex, and a stronger local currency isn't universally bad in all aspects for every part of an economy. Similarly, saying USD strength is not due to American Exceptionalism (implying zero contribution) is a strong claim; it's more likely that "exceptionalist" factors (like market depth, rule of law) contributed to the USD gaining its systemic role in the first place, even if the system's mechanics now perpetuate its strength.

However, if we interpret the core argument as: "The primary reason for persistent USD strength is the fundamental design of the global, debt-based monetary system, with the USD at its center, rather than just a reflection of America's unique virtues," then the argument is very strong and largely "true" in its thrust. It highlights powerful, structural forces that are indeed at play.

It's a coherent and plausible explanation for why the dollar often behaves the way it does.