USD is the world's reserve currency, but what does that mean?

USD is the world's reserve currency, but what does that mean? for USD to be a reserve currency it must dominate in: 1️⃣ USD-denominated credit issuance (demand) 2️⃣ USD use a means of settlement for payments (liquidity) this dominance must be at least relative to alternatives

demand is created legal/regulatory environment and open market forces legal/regulatory environment includes international bilateral agreements and national laws open market forces influence the evaluation of USD against other currencies and assets

liquidity means availability, thus it comes down to being able to: 1️⃣ access USD credit 2️⃣ settle payments in USD this means balance sheet capacity and hybrid technological intermediation systems in place

balance sheet capacity is heavily dependent on regulations (e.g. Basel III & local) hybrid intermediation systems facilitate access to the payment and credit channels SWIFT, FedWire and digital private USD claims like stablecoins & PayPal facilitate USD's movement and usage

hybrid intermediation systems include all means of facilitating the issuance, servicing and transactions of USD and USD-denominated securities, including equities, bonds and derivatives

base money issuance and management is a responsibility of the US government - so it's always intermediated, even if by government-controlled systems

while hybrid intermediation systems don’t strictly need to be technological - in practice they vastly are as most of financial activity happens through computer and information systems

intermediation started with paper records, physical bank counters and now has mostly moved to technological - via computer systems

debt includes all form, tenor and issuers of USD-denominated debt are included, both public and private examples: US Treasuries, corporate bonds, commercial bank credit, epos, FX swaps, central-bank lines

the US will be able to sustain their debt financing for as long as US government debt and US dollar dominate in demand for as long as USD is the reserve currency - the US can finance its debt in other words, as long as there's enough buyers and users - it's all good! 😁

i wrote about how reverse repurchase agreements work and their importance in the global financial system in this thread: https://illya.sh/threads/@1751561045-2

i also wrote a thread explaining the importance of USD-denominated government debt for short-term funding/credit markets remember that most of credit is issued to refinance existing debt and not for new financing you can read it here: https://illya.sh/threads/@1751726431-1