Akio Kawato
Since the 2008 financial crisis and the COVID shock of 2020, the United States has continuously expanded the supply of dollars. Federal debt has now exceeded the size of annual GDP. Policymakers fear that, at some point, this could erode confidence in U.S. Treasuries, trigger a surge in interest rates, and destabilize public finances.
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Could the current Iran war become the trigger? Through what mechanism? One plausible scenario is that a spike in oil prices prolongs inflation in the United States, pushing interest rates higher. That, in turn, increases the government’s debt-service burden. The critical threshold comes when interest costs outpace economic growth.
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Another risk lies in the roughly $1.8 trillion in non-bank corporate lending. If a significant portion of this turns sour, the damage could spread to major banks that finance these non-bank institutions, leading to a credit freeze reminiscent of 2008.
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The Dollar Surged in the 2008 Crisis
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But would such a crisis actually cause the dollar to collapse? In 2008, the opposite happened. U.S. Treasuries were treated as safe assets, demand surged, and long-term interest rates declined.
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Meanwhile, in Europe, the supply of eurodollars suddenly froze. Banks, fearing each other’s insolvency, stopped lending. As demand for dollars to settle trade transactions spiked, the dollar strengthened.
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As discussed earlier, dollar lending backed by deposits in European banks—the eurodollar system—supports a large share of global trade and finance. When that system seized up, the demand for actual dollars surged.
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Would Treasuries Lose Credibility This Time?
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Could U.S. Treasuries themselves lose credibility? It is possible. But as ChatGPT aptly notes:
“In that case, government intervention would follow. The Federal Reserve would likely purchase Treasuries on a large scale to stabilize their value. However, this would come at the cost of a significant depreciation of the dollar.”
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Fair enough. But would that push the dollar off its throne as the world’s reserve currency? History suggests otherwise. After the Plaza Accord in 1985, the dollar fell sharply, yet it did not lose its central role.
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The Eurodollar: A Global Settlement Token
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What, then, happens to the eurodollar system? Eurodollars are essentially offshore dollar-denominated claims circulating outside the United States—something like a global settlement token moving across balance sheets.
Originally, oil exporters such as the Soviet Union and Gulf states deposited their dollar revenues in European, especially British, banks to avoid political risk in the U.S. European banks then used these deposits as a base to extend dollar loans, often multiplying them many times over. These instruments are not directly regulated by U.S. authorities, yet once created, they function much like “real” dollars in global trade and capital flows.
Their value remains aligned with onshore dollars through arbitrage. If a gap emerges, market participants quickly eliminate it.
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Roughly half of global trade is invoiced in dollars, and a large share of that is effectively financed through eurodollar markets. During the 2008 crisis, when European banks stopped lending, the system froze—not because institutions had failed outright, but because the means of payment vanished.
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At that point, the European Central Bank coordinated with the Federal Reserve to obtain dollars via swap lines, which were then distributed to European banks. Similar arrangements were made by the Bank of England and the Bank of Japan.
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These swaps were largely accounting operations—no physical cash crossed the Atlantic in bulk.
In essence: the global system runs on dollars that the U.S. government does not fully control. Much of this liquidity is privately created offshore and inherently fragile. In times of crisis, it can disappear almost overnight. When it does, only the Federal Reserve can recreate “real” dollars.
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Is the Eurodollar System an Instrument of Empire?
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At this point, it may appear as if the United States has built a global empire through the dollar. However, that view is not entirely accurate. The eurodollar system operates largely outside direct U.S. control. It is not a tightly managed imperial tool but rather a shared global infrastructure—a kind of universal “points system” denominated in dollars.
Nevertheless, in a crisis, only the Federal Reserve can convert those “points” into actual liquidity. That reality creates a powerful, if indirect, form of influence: countries that wish to be supported in a crisis must maintain workable relations with the United States.
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The Advent of a “Euro-Renminbi”?
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The current dollar system dates back to the meeting between Franklin D. Roosevelt and King Abdulaziz Ibn Saud in 1945. The understanding was simple: oil would be priced in dollars, and the United States would provide security guarantees.
Since then, Saudi Arabia has recycled its dollar revenues through European banks, which in turn expanded eurodollar lending.
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But today, the situation has changed. The United States no longer depends heavily on Gulf oil imports. China has largely taken its place as the primary buyer. Moreover, as recent tensions suggest, Gulf states are no longer confident in U.S. security guarantees.
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If China increasingly pays for oil in renminbi—and this is already happening at the margins—and if those renminbi are recycled offshore, a “euro-renminbi” market could emerge.
However, there is a major constraint: Chinese authorities are reluctant to relinquish control over the renminbi. They prioritize domestic stability and are unlikely to allow full convertibility or unrestricted offshore expansion of the renminbi.