Let’s say you are Dongfang Optical, an eyeglasses manufacturer in Guangzhou, China. A pair of eyeglasses costs about 12 RMB to produce, and after marking up for profit, you sell for 15 RMB per pair (~$2 USD).

An American retail wholesaler placed an order of 50,000 pairs with your company, and you get paid for the quoted price of $100,000 (~720,000 RMB). We’ll skip through how the American wholesaler earned that $100,000, but let’s just keep things simple by saying that they earned it through a contract with the US government.

So, how does Dongfang Optical gets paid in USD? First, you need to open a US bank account, say an account under the name of Dongfang Optical in Chase bank. The American wholesaler then makes the payment to your Chase bank account.

Now that your bank account has been credited $100,000, there are really only two things you can do: spend them or save them.

Let’s say you spend $50,000 on importing new machine tools and raw materials, and another $20,000 investing in US index funds, you are still left with $30,000. You still need to pay your workers back in China in RMB.

So, to exchange that $30,000 USD into RMB, you sell the USD to the Chinese central bank (the People’s Bank of China), who also has a US bank account at the Federal Reserve. This $30,000 gets added to the asset side of the PBoC’s balance sheet, while it creates an equivalent amount of 215,000 RMB at the domestic bank in China that holds your company’s Chinese bank account (this goes to the liability side of the central bank’s balance sheet, therefore the net deficit is zero). Dongfang Optical can then spend that RMB in China, to pay your workers, to pay off debt, to invest in new factory expansion, or to save them somewhere.

So what happens to the $30,000 USD at the PBoC? Well, the Chinese central bank has to face the same two options: to spend or to save. It can spend some of that money to invest in dollar-denominated securities deemed safe for investment, and save the rest by purchasing US treasuries to earn some interest, since there is nowhere else to spend those money. And by purchasing US treasuries, it gets added to the US national debt.

As you can see, the entire sequence looks like this: US government first creates the money into existence to buy some stuff from American wholesaler -> American wholesaler spends the earned money to import eyeglasses from Dongfang Optical -> Dongfang Optical sells its dollar earnings to the PBoC to exchange for RMB back home -> PBoC takes the dollars it bought to purchase US treasury bonds to earn free interest -> the purchased treasury bonds get added to US national debt.

There are many nonsensical explanations out there, like the Petrodollar: “everyone is forced to buy oil in dollar because of this secret pact with the Saudis to finance the US government!” which is nonsense since any country can exchange their local currencies with the dollar as long as there is a forex trader willing to purchase their currency and this means we come back to the real terms - whether that country has the economy to back up the strength of their currency? If that country makes something that other countries want to import from, then that’s what gives the currency its strength.

Similarly, some right-wing propaganda claimed that foreign governments are “buying up US lands in secret! they want to own America!” which can only happen if permitted by the US government. And if it comes to that, then it is a political decision by the national leadership.

Finally, the propaganda that “but our children will have to work hard to pay off our debt” is equally nonsense since as you’ve seen, that “debt” is simply the money the US government has spent and not been taxed back yet.

But still, why do foreign governments want to hold the US dollars so much? One answer is that some countries have borrowed dollar-denominated loans, and have to pay back their external debt by earning dollars.

This is entirely valid, but why do they want to accumulate so much dollars and purchase US treasuries? The answer is simple: because the US is the only country willing to run a large deficit to import stuff from those countries! And since they have nowhere else to spend those dollars they have accumulated, they buy treasuries. Simple as that.

Think of this in real terms: your country has listened to the IMF and learned that “balancing the budget” is sound and responsible finance. So, to invest domestically without running a large deficit, you first have to earn foreign currencies through exporting goods and services. But who is going to buy them, if everyone wants to balance their budget?

At this point, one country that has a very attractive currency - it’s stable, liquid and ubiquitously accepted by almost everyone in the world - comes out and tell you that they’d like to import the goods from you. And so your businesses expand, new factories are built, more workers are kept employed, and you keep collecting the dollars. You can’t really use those dollars, but you don’t care, you keep accumulating them because it allows you to keep your deficit low, and more importantly, it keeps your economy growing and the people have jobs.

We can even turn this around and say that the US is really only stable, liquid and ubiquitous - the key features of a global reserve currency - precisely because the US is the only country willing to run a persistent trade deficit and pump those money into the global economy.

In real terms, the exporting countries allocate labor and resources into producing goods and services to be consumed by the importing countries, which could have gone into investing on the wellbeing of its own people, making its domestic economy self-sufficient and resilient. Meanwhile, the US as the importing country simply prints the money and gets real goods and services for free.

This is why I keep saying that the only way to defeat dollar hegemony is NOT for countries to stop using dollars, it’s to have some countries willing to run the deficit to absorb the surplus export goods from the exporting countries across the world. And this requires them to give up their neoliberal-brained indoctrination.

In an ideal world, you only earn foreign currency just enough to import from other countries (goods you cannot make yourself), and perhaps save some as reserves for liquidity purposes. But the huge trade imbalance we have in our world today, mostly driven by the large US trade deficit and large China trade surplus, is what makes the dollar so powerful.