Indispensable Currency: Mapping the Global Dollar
The global US dollar underwrites financial stability in a global economy. Economic actors across the world, from central banks to corporations and pension funds, find increasing reason to hold assets denominated in US dollars circulating through the offshore trading networks that feed through the capital markets of London. At the forefront of these assets are US Treasury bills, which, in representing the debt of the most powerfully taxed state at the center of world economy, play a pivotal role as the investor's ultimate "safe haven" in times of crisis.
This project aims to visualise the build-up of dollar claims and liabilities over the decades as a proxy for dollar flows across national economies. The RShiny app to render this visualisation can be found here, and the code for it here.
The Bank of International Settlements presents a clean set of locational banking data, which aggregates banking activity reported by anonymised banks. The dataset, by tracking counterparties in over 200 countries from the offices of 22 advanced economies, 12 offshore financial centres, and 12 emerging economies, is a rich enough trove to begin approximating the extent of dollar flows.
For this visualisation, we reduce the dataset from over 130000 observations of 190 variables to fewer than 4000 by focusing on counterparty claims and liabilities denominated in the major reserve currencies: US dollars, euros, pounds sterling, yen, and swiss francs.
We normalise claims and liabilities by GDP. We took a world GDP dataset, standardised in 2010 US dollars, from the US Department of Agriculture. To match our primary dataset, we imputed several missing years, cleaned identifying columns, and reformatted the data into a CSV file.
We choose to further normalise our figures into basis points, or one-hundredth of one percent, in order to consistently scale the map between countries with little exposure versus countries highly exposed to the dollar network.
We achieve a visualisation that faithfully cross-references the past few decades of economic history. It paints, particularly, an excellent view of the Great Financial Crisis.
In 2000, the greatest accumulators of US dollar claims are the various offshore banking hubs, the only regions to reach 5000 basis points, or 50% of GDP's worth of claims.
Meanwhile in the United States, a sea change is being forced into the demand-curve for financial "safe assets." China's rise and the associated commodities boom of the 2000s brings with it an insatiable appetite, among emerging economies, for US Treasurys. Domestically the arrival of huge institutional cash pools amassed by corporations, life insurers, and pension funds ahead of an aging Boomer demographic leads to an overabundance of safe asset demand.
Banks, in response, spool up financial engineering techniques polished over decades into a new business model: supplying pseudo-safe assets at scale. The 30-year US mortgage becomes the designated engine of this manufactory.
By 2007, accumulated dollar claims have exploded worldwide. (Note: specific claims can be observed on the RShiny app by hovering over countries).
The London offices have become the unregulated dealers in mortgage derivatives, leveraging balance sheets to heights that Wall St. can only dream of. This is the age of the truly global bank, scaled to massive size with its businesses spread across the world.
To "roll over" massive claims in USD, a constant inflow of US dollars must be obtained by actors dealing in USD assets. But crisis hits when the system is shaken by the downturn in US housing markets. Funding grows expensive, and then lenders refuse to supply US dollars to counterparties even suspected of insolvency.
Contrary to common impressions, the crisis is not merely an Anglo-Saxon phenomenon. The European banks have mortgaged their Euro assets to borrow in US dollars, joining the bonanza in London. By doing so, they are able to scale up preexisting businesses and lend into infrastructure bubbles across all of Europe; bubbles that far outstrip the American housing market when normalised to GDP.
On the eve of crisis, the European financial system is short $1 trillion USD to continue rolling over their USD-denominated claims. These dollars will be supplied by global emergency swap lines mobilised at the US Federal Reserve. The rest of the world essentially becomes the 13th District of the US Federal Reserve banking system.
A time-series examination of claims and liabilities in individual countries can be rewarding, as well. The contraction in value of South Korea's dollar claims, from 2008 to 2009, is an excellent example on the risks of integration into the global financial system.
Korean banks are barely exposed to US mortgage derivatives, but corporations have found it advantageous to hedge their profits via the dollar-funding market, to the order of $150 billion in short-term dollar loans. Once the extent to which corporate finance is entangled in crisis becomes clear, even Korean government-backed banks find themselves cut off from funding markets altogether.
Only a swap line from the Fed to the Korean central bank prevents a severe export-led recession from turning into a depression.
We aim to achieve a visualisation of global dollar claims, and do so. Given time, we would segment and aggregate flow patterns in greater detail to conduct network analysis of the global financial system. The locational banking dataset provided by the BIS is versatile, and in combination with their consolidated banking dataset could also yield sectoral analysis of viable banking businesses in the global economic environment.