Question of the Day

Brazil's president, Luiz Inácio Lula da Silva, wonders: “Every night I ask myself why all countries are forced to do their trade backed by the dollar. Why can’t we do trade based on our own currencies? Who was it that decided that the dollar was the currency after the disappearance of the gold standard?”

This is more than a bit amusing. No one is forcing Brazil, Russia, India, and China (the BRICs) to do trade in dollars.

Countries Don't Trade!

For starters, Countries Don't Trade. 

• Only individuals, separately and in voluntarily formed groups such as firms, create or take advantage of economies of scale, of scope, or of both in production; countries, as such, do not.
• Only individuals, separately or in voluntarily formed groups such as firms, spend, save, and invest; countries, as such, don’t.
• Only individuals experience income, wealth, or welfare gains and losses; countries as such experience nothing.
• Of course, we can – and do – talk, for example, about “America trading with China,” about “Germany having a comparative advantage in the brewing of beer,” about “India’s national income rising,” and about “Peru’s trade deficit falling.” But all this talk merely describes the largely unintended, aggregate results of countless choices and actions each made by a particular, flesh-and-blood person.
• And also, of course, governments do perform many of these activities – for example, spend. But no government is a country. Each government is merely a particular organization run by particular, flesh-and-blood persons according to a certain set of formal and informal rules.

Trade Example

• A Brazilian soybean producer sells soybeans to a merchant in China. 
• A Brazilian scooter manufacturer buys Lithium batteries from a Chinese merchant.
• The soybean producer buys nothing from Chinese merchants.
• The Chinese battery producer buys nothing from Brazilian merchants.

Why would the Brazilian soybean producer want to hold yuan, especially given that the yuan doesn't even float? 

Why would the Chinese battery producer want to hold the Brazilian Real?  

No one is forcing the soybean producer or the battery producer to do anything. By choice they prefer to trade in dollars, which by the way is instantly convertible to any currency the producers may wish to hedge in. 

It is only at the government level, where for political reasons, the governments may wish to make agreements in other currencies. 

How Significant is Government Trade in Other Currencies?

Not at all.

If the Brazilian government wishes to buy Chinese weapons, unless the Brazilian government has yuan reserves, it would have to convert dollar reserves, gold, or the Real to yuan to buy the weapons.

And why would the Brazilian government have yuan reserves in the first place unless the Brazilian government had a trade surplus with the Chinese government?

The only other reason the Brazilian government might accumulate yuan is if Brazilian  merchants run trade surpluses with Chinese merchants and the Brazilian central bank sterilizes the trade, swapping Real for Yuan.

Sterilization is a monetary action in which a central bank seeks to limit the effect of inflows and outflows of capital on the money supply. 

In contrast, given the US has a trade deficit with most other countries, and given those governments swap their local currency for the dollar, foreign governments accumulate dollars by default. 

But foreign governments can trade reserve dollars or their national currency for some other currency at will. 

So Mr. Luiz Inácio Lula da Silva, if you want to hold yuan, go ahead. What's stopping you? 

By the way, the US has a net trade surplus with Brazil. But there is no need or desire for US individuals or corporations to hold the Real.

De-Dollarization Nonsense

In conclusion, de-dollarization talk is 99% nonsense. 

Meanwhile, please note that mathematically someone must hold every dollar 100% of the time. 

Who is the holder going to be?

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