David McWilliams

So basically what you had was the spread of dollars around the world issued by banks who were not...

regulated or mandated by the United States.

Now, what he's saying is this is very much like what happens when you go to buy a car, John.

When you go to buy a car and you look for your 40 grand to buy a car, 30 grand or whatever it is, the bank doesn't ring up the central bank and say, can I have permission to give John Davis money?

They just deposit the money into your account and the money exists.

So it's kind of magicked up out of nowhere.

So if you imagine that the euro dollar is the international equivalent of the bank creating dollars, right?

Now, what it means is that there are two systems in play in the world.

There is the regular dollar, which is in the United States, and there is this euro dollar, which is all offshore.

Now, how does the central bank in the United States, the Fed, square this circle?

Yeah.

That there are dollars which are redeemable in dollars in the United States, are worth the same, but are not actually produced by the Fed or regulated by the Fed.

The way they do this is they anoint certain central banks as friends and they give those certain central banks a swap facility, which means that if there's ever a run on the euro dollar, if there's ever a crisis of dollars in Europe,

or anywhere else outside the United States, that they will provide the liquidity to militate against the crisis.

So in a way, what he's saying is that the Americans, we talk about the reserve currency, you know, and everybody's talking, will the dollar remain a reserve currency?

It can only be a reserve currency if the central bank, the Federal Reserve, undertakes to honor those swaps.

So in a global crisis, the Central Bank of America will actually inject liquidity into the market, settle everything down, somebody's in control.

So it means that, I think the implication for the podcast and for people's understanding is that when you hear people saying, oh, the dollar's over, the death of the dollar, right?

You know, there's going to be a new reserve currency, whether it's the renminbi or the euro.

Our central bank, Europe, would have to undertake the same sort of swap facilities to inject euros into this whole system if we were to have a reserve currency.