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THE EURODOLLAR SYSTEM
INTRODUCTION
After documenting how the Eurodollar system was built (Part 1), how it repeatedly fails (Parts 2A & 2B), and where it's fragile now (Part 3), the inevitable question arises: Can anything replace the dollar?
For decades, analysts have predicted the dollar's demise. Yet dollar dominance persists: ~59% of global reserves, over 80% of international transactions involve dollars, Eurodollar system continues growing despite crises.
In this final installment, we examine why alternatives consistently fail, what dollar system collapse would actually look like, and the uncomfortable endgame: The system is irreplaceable AND unsustainable.
WHY ALTERNATIVES FAIL: THE FOUR PILLARS OF DOLLAR DOMINANCE
Pillar 1: Deep, Liquid Markets
US Treasury market: $27+ trillion, most liquid globally, can absorb massive flows. No other market comes close.
Pillar 2: Rule of Law
Independent judiciary, stable property rights, contract enforcement. Investors trust US assets won't be arbitrarily seized (ironic given Cold War Eurodollar origins).
Pillar 3: Network Effects (The Killer Advantage)
Self-reinforcing loop: Trade invoiced in dollars → need dollar reserves → invest in Treasuries → deepens capital markets → more attractive to hold dollars → more trade invoiced in dollars. Any alternative must convince EVERYONE to switch simultaneously. Classic network effect—incumbents extremely difficult to dislodge.
Pillar 4: The Infrastructure
$65+ trillion offshore dollar system, FX swap markets, correspondent banking, SWIFT, Fed swap lines. Building equivalent for another currency requires decades and trillions—with no guarantee of adoption.
CHINA'S CHALLENGE: DIGITAL YUAN & CIPS
The Investment
- Digital yuan (e-CNY): 261M wallets, RMB 7 trillion cumulative transactions
- CIPS: 1,530+ participants in 135 countries, $60B daily volume (vs CHIPS $1.8 trillion)
- Project mBridge: Multi-CBDC platform with Saudi Arabia, UAE, Thailand
Why It Remains Marginal
Scale Disparity: Despite 75% annual growth, CIPS processes 1/30th CHIPS volume. RMB is 4.3% of global payments vs dollar's 47%, 2.3% of reserves vs 59%.
Capital Controls: RMB not freely convertible. China won't liberalize (risks capital flight, loses monetary control). But reserve currency requires foreigners willing to HOLD it—can't hold what you can't freely convert or invest. Fatal constraint.
Institutional Credibility: CCP controls all institutions, no independent judiciary, opaque policy, arbitrary interventions (tech crackdowns, Zero-COVID). Creates uncertainty incompatible with reserve currency status.
Still Uses SWIFT: 80% of CIPS payments reportedly use SWIFT messaging. Not truly independent of Western infrastructure.
THE SANCTIONS DILEMMA
2022 Escalation: Western nations froze $300B+ in Russian Central Bank reserves. First time major power's sovereign reserves frozen. Established precedent: dollar reserves conditional on geopolitical alignment.
The Acceleration: Post-2022: BRICS currency discussions, bilateral arrangements (China-Russia trade in RMB), reserve diversification (dollar share declining from 70% in 2000 to 59% in 2024), infrastructure investment (CIPS expansion).
The Dilemma: US sanctions work BECAUSE of dollar dominance. But extensive sanctions use motivates alternatives. Every sanctions deployment demonstrates dollar system risk to neutral countries. The more the dollar is weaponized, the more incentive to build alternatives—even if those alternatives aren't yet viable.
Current Trajectory: US continues aggressive sanctions use despite knowing this motivates alternatives. Calculation: benefits today outweigh long-term risk to dollar dominance. This may be correct—alternatives remain weak—but it's a calculated gamble.
COLLAPSE SCENARIOS
Scenario 1: Muddle Through (85-90% Probability) - BASE CASE
What happens: System continues with periodic crises (every 3-5 years). Fed intervenes each time with progressively larger support. Dollar dominance slowly erodes (to 50% by 2035, 40% by 2050) but no alternative achieves >20% share.
Characteristics: Periodic crises, Fed role expands, moral hazard intensifies, alternatives marginal, political tensions rise but system persists.
Duration: Decades, possibly indefinitely. Network effects powerful, Fed willing to provide unlimited support, alternatives face insurmountable barriers.
Risks: Doom loop acceleration (each crisis larger), political backlash (domestic constraints on Fed), credibility exhaustion (markets test limits), geopolitical shock overwhelming system.
Scenario 2: Fast Collapse (2-5% Probability) - CATASTROPHIC
Trigger: Major shock triggers Eurodollar crisis. Fed unable to provide sufficient liquidity OR politically constrained from intervention. System disintegrates in weeks to months.
Timeline Week 1: Major shock → dollar funding stress → FX basis explodes → asset fire sales → Fed activates swap lines but stress escalates.
Week 2-3: Treasury dysfunction, money market funds break, commercial paper freezes, credit markets seize, Fed provides more liquidity but markets question adequacy.
Week 4 - The Breaking Point: Fed either announces UNLIMITED everything (historical pattern, markets stabilize) OR Fed politically constrained/credibility exhausted, market calls bluff, panic intensifies.
If Actual Collapse (Month 2-6): Foreign liquidation of ALL dollar holdings, Treasury market breaks (no bid), US government funding crisis, global trade halts, banking failures worldwide, emergency G20 restructuring, regional currency blocs form by necessity, global recession/depression.
Impact: Global GDP contraction 10-20%, trade collapse 40-60%, unemployment 15-25%, sovereign defaults cascade, banking failures, geopolitical instability.
Scenario 3: Controlled Demolition (<1% Probability) - IMPOSSIBLE
Mechanism: International agreement to transition gradually from dollar-centric to multi-polar system over 10-20 years.
Why impossible: Requires US to voluntarily surrender privilege (no constituency), China to liberalize capital account (CCP won't risk), Europe to federalize (voters reject), coordination across geopolitical rivals. Even if agreed, execution would face enormous challenges.
THE ENDGAME: TWO PATHS
Path 1: Indefinite Muddling Through (85-90%)
System continues with periodic crises. Fed intervenes each time. Moral hazard compounds. Alternatives remain marginal. Dollar dominance erodes slowly but persists as plurality for decades.
How long: Decades, possibly indefinitely. Network effects powerful, Fed committed, alternatives not viable.
Risks: Doom loop acceleration, political backlash, credibility exhaustion, geopolitical shock eventually overwhelming capacity.
Path 2: Eventual Catastrophic Restructuring (10-15%)
At some point (2030s, 2040s, 2050s?), crisis occurs that muddling through can't handle. Fed intervention insufficient or politically constrained. System breaks.
What follows: Emergency international coordination creates new monetary architecture during crisis (not by design). Multi-polar currency system emerges by necessity. Regional blocs form. IMF SDRs expanded. Massive economic cost during transition.
Why No Middle Path Exists
The architectural trap: Stable reform requires cooperation and sacrifice impossible given current geopolitics. US won't reduce dollar role, China won't liberalize, Europe won't federalize, no country trusts rivals enough.
We're left with: muddle through indefinitely with periodic crises, OR muddle through until crisis too large triggers forced restructuring.
CONCLUSION: THE PARADOX
After four parts spanning 70 years of history, we arrive at an uncomfortable conclusion: The Eurodollar system is irreplaceable AND unsustainable.
What we documented:
- Part 1: Cold War paranoia and regulatory arbitrage created $65T offshore dollar system
- Part 2: Five crises in 23 years, same pattern, same Fed response, zero reform
- Part 3: System more fragile now than 2020: persistent basis, geographic stress, doom loop
- Part 4: All alternatives face insurmountable barriers; network effects protect dollar
The paradox:
- Irreplaceable: Network effects, deep markets, institutional credibility make dollar dominance nearly impossible to challenge
- Unsustainable: Doom loop of crises → rescues → moral hazard → bigger crises creates trajectory toward catastrophic failure
The Eurodollar system will endure until it doesn't. It will muddle through crisis after crisis until one day it doesn't. The architecture serves too many powerful interests to be reformed voluntarily but contains too many fragilities to be permanently stable.
We live in the interregnum—between a dollar-dominant system that can't be replaced and a multi-polar future that can't be planned. The transition, when it comes, will be forced by crisis rather than designed by cooperation.
That is the endgame.
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