How the Manufacturing and Circulation Mechanism of the US Dollar as a Special 'Commodity' Leads to Global Wealth Transfer

The US dollar's creation and circulation, controlled by the Federal Reserve, facilitates global wealth transfer; low interest rates cause dollar inflows into emerging markets, while rate hikes trigger asset sell-offs and repatriation, benefiting US investors.

In the intricate web of the global financial system, the US dollar holds a unique status, functioning much like a special "commodity." Its creation and circulation mechanisms have far - reaching implications, enabling a significant transfer of wealth on a global scale.

The Creation of the US Dollar: A Centralized Power Play

The Federal Reserve, the US central bank, wields the power to create dollars almost at will. Through policies such as quantitative easing (QE), the Fed injects vast amounts of liquidity into the economy. For instance, during the 2008 financial crisis and the subsequent economic slowdowns, including the one in 2020 due to the COVID - 19 pandemic, the Fed engaged in multiple rounds of QE. By purchasing financial assets like government bonds and mortgage - backed securities, the Fed effectively creates new dollars. This process is akin to a manufacturer producing goods in large quantities. These newly minted dollars are then introduced into the financial bloodstream, ready to set in motion the mechanisms of wealth transfer.

The Circulation of the US Dollar: A Global Dance of Capital

The Dumping Phase: Conquering Emerging Markets

During periods of low - interest rates, which are often a result of the Fed's expansionary monetary policies, the cost of borrowing dollars plummets. This makes the dollar an attractive currency for investors seeking higher returns abroad. As a result, a flood of cheap dollars flows into emerging markets. In these regions, the influx of dollars drives up the prices of various assets, such as real estate and stocks. For example, in the 1990s, prior to the Asian financial crisis, many Asian economies experienced a massive inflow of foreign capital, much of it in the form of dollar - denominated investments. Foreign investors were able to acquire valuable assets at relatively low costs, as the local currencies were buoyed by the dollar influx. This was a form of "dumping" of cheap dollars into emerging markets, allowing foreign investors (predominantly from the US and other developed economies) to gain a foothold in these markets.

The Repatriation Phase: Forcing a Global Reckoning

When the Fed decides to tighten monetary policy and raise interest rates, the dynamics change dramatically. As the interest rate on the dollar rises, the cost of servicing dollar - denominated debts held by entities outside the US increases significantly. Entities in emerging markets that had borrowed dollars during the low - interest - rate period now find themselves in a difficult position. They are forced to sell off their local assets, such as stocks and real estate, in order to raise the dollars needed to repay their debts. This leads to a sharp decline in the value of these assets in local currency terms. At the same time, the strengthening of the dollar means that the value of assets held by US investors in these emerging markets, denominated in local currencies, increases when converted back into dollars. For example, during the 2013 "taper tantrum" when the Fed signaled a potential reduction in its bond - buying program (which eventually led to higher interest rates), many emerging economies faced severe currency depreciation and capital outflows. The wealth that had been built up in these emerging markets during the dollar - inflow phase was effectively transferred back to the US as investors repatriated their funds and the value of dollar - denominated assets increased.

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