Brad Setser on the War in Iran and the Future of the US Dollar

Summary

Odd Lots Podcast Summary

Episode: Brad Setser on the War in Iran and the Future of the US Dollar
Date: April 16, 2026
Hosts: Joe Weisenthal & Tracy Alloway
Guest: Brad Setser, Whitney Shepardson Senior Fellow, Council on Foreign Relations

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Overview

In this episode, Joe and Tracy are joined by Brad Setser to discuss the ramifications of the current conflict in Iran, the resultant oil shock, and what it means for global financial flows, reserve currency dynamics, and the future of the US dollar’s dominance. The episode frequently references historical analogues, especially the oil shocks of the 1970s, and examines whether today’s situation is truly comparable. Brad Setser lends his expertise on global imbalances, petrodollars, reserve management strategies, and how politics and geopolitics shape financial and commodity markets.

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Key Discussion Points & Insights

1. Comparing the Current Oil Shock to the 1970s

[06:18-11:16]

• Scale of Shock: Today’s oil shock, while significant, is not on the scale of the 1970s in terms of price magnitude or economic dependence on oil.

  “In 73 and then in 79, oil doubled or tripled and by the end of the decade oil had gone up by well 6, 7 times in dollar prices. ... We are not yet at the magnitude of the shock that we were in the 1970s.” — Brad Setser [06:18]

• Physical supply interruptions are severe but prices have not jumped as much, highlighting differences in market structure, substitution, and expectations.
• The current physical dislocation (10–15% of global oil supply disrupted) is enormous, but price responses are muted due to fungibility, futures market structure, and the US’s buffer capacity.

2. Winners and Losers from Higher Oil Prices

[12:02-15:33]

• Traditional Gulf exporters (e.g., Saudi Arabia, Kuwait, UAE) aren’t major beneficiaries because they can’t get their oil to market; their surpluses aren’t soaring as in past shocks.
• Current winners are countries like Russia, Kazakhstan, Nigeria, Angola, US shale producers, and Norway.

  “All the South American oil exporters will win... The biggest locus of production outside of the Gulf… are in the US south, southwest Texas, and then in Alberta.” — Brad Setser [13:06]

• The implication is less money going into the petrodollar recycling loop that historically supported Treasuries and dollar assets.

3. Legacy of the 1970s Oil Shocks

[17:46-23:49]

• Led to real economic shifts: less oil burned for electricity, rise of smaller fuel-efficient cars, general reduction in oil intensity.
• Sparked vast dollar accumulations (“petrodollars”) in Gulf states, most of which went into eurodollar bank accounts or were masked in official data for political reasons.

  “It wasn’t like in the 1970s you had to do a new deal to price oil in dollars rather than something else. Oil was in dollars.” — Brad Setser [19:38]

• Petrodollar era was cyclical: surpluses and dollar accumulation dissipated by the late 1980s after oil prices collapsed.

4. Where Did the Money Go in the 2000s Oil Boom?

[23:49-27:22]

• Gulf and resource exporters started by strengthening reserve buffers after the price collapse of the late 1990s.
• Transition to sovereign wealth funds investing more in equities (particularly US stocks) and alternatives.
• Russian and Chinese reserve management began to deliberately diversify away from dollar exposure before outright political breakups.

5. Changing Nature of Reserve Management and Financial Flows

[27:22-30:02]

• Reserve portfolios today are more conservative, underweight dollars relative to equity portfolios—not the main source of US inflows anymore.
• China’s official dollar share dropped from 79% (2005) to ~55%, although broader state portfolios are more dollar-heavy.
• Safe and liquid assets, not returns, define reserve management (unlike return-seeking equity portfolios).

6. Surprising Economic Cases: South Korea and Global Imbalances

[30:02-33:08]

• Korea: Unprecedented combination of strong export-driven growth (especially chips/AI), weak currency, massive equity outflows even as domestic corporate profits soar.

  “…retail decided even though Samsung is making money hand over fist, that they preferred to hold US tech stocks. So no, I haven’t seen anything like it.” — Brad Setser [30:47]

• Reflections on how terms of trade shocks (oil, semiconductors) affect currencies and policy.

7. Debunking “De-dollarization”

[35:22-39:36]

• Despite headlines, the dollar remains strong; dollar claims on the US are at all-time highs.

  “It is very difficult to have a credible story around de-dollarization when the dollar is strong, not weak relative to history, and when the total dollar claims on the US including dollar-denominated equity claims have continued to increase.” — Brad Setser [35:57]

• Slight shifts: some emerging borrowers issue in yuan, sanctioned countries settle more in non-dollars, but these are marginal trends.
• Most real shifts are rotations from US bonds to US equities, not away from the dollar system.

8. Sovereign Wealth Funds: Domestic vs Global Investment

[39:36-44:04]

• Gulf states, especially Saudi Arabia, are channeling more oil wealth into domestic investment (e.g., ambitious construction and entertainment projects) instead of recycling it abroad, changing their macroeconomic profiles.

  “If you don't have the level of wealth that the Emiratis or the Qataris have, you will find yourself in a position where you are no longer a source of petrodollars. You're a drain on the world's Eurodollar system.” — Brad Setser [42:28]

9. Europe’s Position in the New Global Order

[44:10-46:47]

• Europe faces manageable incremental energy cost burdens from the Iran conflict—far less severe than 2022’s loss of Russian gas.
• Long-term impact pushes Europe to diversify energy and invest more in defense.

10. The Limits of Geopolitics on the Dollar’s Role

[46:47-53:13]

• Even widespread global frustration with US political instability, unpredictability, and foreign policy may not immediately challenge the dollar’s dominance.
• Patterns of reserve accumulation and international trade efficiency still overwhelmingly favor the dollar.

  “You can still use our dollar to transact between Africa and Latin America efficiently. And that will not be viewed as a political statement. It’ll just be viewed as the most efficient way of getting something done.” — Brad Setser [52:20]

• True threats would require fundamental changes in how China and other surplus economies manage their currencies and financial flows.

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Notable Quotes & Memorable Moments

• On the muted oil price reaction:

  "We’re kind of in this weird world where the physical interruption is bigger, the price reaction is smaller."
  — Brad Setser [08:01]

• On who’s really benefiting from today’s oil shock:

  "The Gulf countries are just not the winners... North America is producing well over 25 million barrels a day... That is one of the biggest shifts in the global economy."
  — Brad Setser [13:06]

• On dollar reserve portfolios:

  "A reserve portfolio will typically have a lower dollar share than a standard return-seeking equities fund."
  — Brad Setser [27:07]

• On the “de-dollarization” debate:

  "In 2025 the world was longer dollars than it was in 2024, despite all the hot air spent talking about de-dollarization."
  — Brad Setser [36:41]

• On the sustainability of dollar dominance amidst US political volatility:

  “It is very, very difficult for most countries around the world to respond by not trading with China. ... You can certainly make that argument [about the dollar losing dominance]. ... The answer so far has been yes [the dollar’s dominance is sustainable].”
  — Brad Setser [52:15 & 53:10]

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Key Timestamps

• [06:18]—Brad: Differences and parallels between today vs 1970s oil shocks
• [12:02]—Who benefits from the current oil price spike?
• [17:46]—How the 1970s oil shock changed global finance
• [23:49]—Petrodollars in the 2000s and evolution of SWFs
• [27:22]—Dollar weight in reserves vs. equity portfolios
• [35:22]—Assessing “de-dollarization”: what really matters
• [39:36]—Gulf SWFs: investing domestically vs. recycling abroad
• [44:10]—Europe’s vulnerability and outlook
• [46:47]—The global perception of US “recklessness” and currency power
• [52:15]—Why the dollar is still sticky, despite geopolitics

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Thematic Takeaways

• History Repeats, but Never Identically: Today’s oil and currency dynamics are different from those of the 1970s in key ways: lower oil intensity, more fragmented windfalls, and new physical bottlenecks.
• Winners & Losers Shift: Gulf states aren’t the main beneficiaries of high oil; US and other non-Gulf producers instead.
• Petrodollars Aren’t What They Used to Be: Resource exporters’ investment flows are more nuanced, fragmented, and equity-focused, making the classic “petrodollar recycling” less central.
• The Dollar’s Dominance is Resilient: Neither geopolitical rancor nor diversification by some official portfolios is making a dent in the global demand for US assets or the dollar’s settlement role.
• Global Finance is About Choke Points: “Control over strategic supply chains, resources, or transaction rails is the new measure of power.”
  — Tracy Alloway [54:06]
• Domestic Policy Shapes Global Flows: Gulf investment strategies and US policies affect global imbalances in unexpected ways.
• Structural Change Requires Structural Shifts: For the dollar’s dominance to be truly threatened, it would take major adjustments in how countries like China manage their economies and currencies—not just political dissatisfaction.

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This summary captures the main substance, arguments, and flavor of the conversation, making it accessible to listeners and readable as a standalone briefing on the episode’s ideas.

Transcript

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[Tracy Alloway]

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[Joe Weisenthal]

Bloomberg Audio Studios Podcasts Radio News.

[Tracy Alloway]

Hello and welcome to another episode of the All Thoughts podcast. I'm Tracy Alloway.

[Joe Weisenthal]

And I'm Jo Weisenthal.

[Tracy Alloway]

Jo, it is April 15. Yes, happy tax day to all who observe.

[Joe Weisenthal]

I'm so annoyed. I'm just speaking of taxes. I'm pro taxes, but I just had an email with my accountant.

[Tracy Alloway]

Anyway, I mean, I'm pro taxes. I resent the fact that we have to like actually file them in this massive bureaucratic exercise every year. But anyway, this is nothing to do with the, well, okay, taxes. You know, financial flows of a sort.

[Joe Weisenthal]

Well, taxes create demand for currency. Core MMC principle, right?

[Tracy Alloway]

There we go. Okay, well, let's see. It is April 15. The situation in Iran state still highly uncertain, very fluid. But you know, we have seen higher oil prices in general. We've seen people getting oil from new sources, new parts of the world and we've seen a lot of people reaching back to the 1970s oil shock as a sort of historic analogy for what we might be experiencing now.

[Joe Weisenthal]

Right, Absolutely. I mean, obviously again, in the context of like today, April 15th versus like say a version of this conversation and that we might have even had like two weeks ago, things are a little bit calmer right now, but we absolutely do not know that they're gonna actually have a durable ceasefire and so forth. Obviously, oil prices have come down. Nonetheless, it's a pretty big oil jump from where we were say in the middle of February. Even at that point, oil prices might have been priced against some sort of around war premium. So it's even further jump from that. And so yes, we've had this really big oil shock. And in addition to we might have some sort of shift in the global balance of power, particularly if Iran is a toll keeper in some way of the.

[Tracy Alloway]

So this is exactly it. And one of the reasons I mention the 1970s oil shock is because that moment is very intertwined with financial history and the development of the financial system itself. And we've done a number of episodes on the history of petrodollars and Euro dollars. We had a great series with Josh Younger before.

[Joe Weisenthal]

Yeah.

[Tracy Alloway]

And so I think when you have a moment like this where people are bringing up those analog, we can get into whether or not those are the correct analogies to make. Yeah, it kind of generates this longer term discussion about what the financial system is actually going to look like and where financial flows are actually going to go to.

[Joe Weisenthal]

Totally. Right. And you know, one of the things that I'm thinking about, like some of our old conversations like we used to have with Zoltan Poser, for example, and it was like, you know, one of the things that connected dollar dominance was this idea of, well, the U.S. navy is what police the high seas and made global trade flow and stuff like that. If that is under question of whether the US actually can keep ships going in the way they were, how does that change the equation? What if it happens to be the case that to go from one place to another you need to pay in Chinese yuan instead of dollars? All kinds of interesting things that arise about the relationship between power and currencies at a moment of crisis.

[Tracy Alloway]

Right. And if you're paying for oil in un, does that mean that you're going to save that like money in non dollar reserve assets or are you just going to put it like right back into Treasuries? All right. There are a lot of questions that we have about this Current moment, obviously everything's still highly uncertain. But who do we call when we're trying to untangle uncertain global flows? One man, and that is Brad Setser. He is of course the Whitney Shepherdson senior fellow at the Council on Foreign Relations man who holds the title of most opbots appearances. I think at this point what we

[Joe Weisenthal]

love about Brad is there has never been a crisis in which he doesn't have some relevant expertise to bring to bear.

[Tracy Alloway]

That's right Brad, welcome back to ODD Lots. Thanks so much for coming on.

[Brad Setser]

Oh no, thanks for having me back.

[Tracy Alloway]

So why don't we just start with that historic analogy, the 1970s oil shock. Lots of ink currently being spilled on whether or not that's the correct parallel for our current crisis experience. But in your view how much does this particular oil shock resemble that of I guess 50 years ago now?

[Brad Setser]

I mean not. Okay, well there's the obvious parallel in the sense that the 70s oil shocks 73 was a function of the Yom Kippur War, Israel, the Arab nation's reactions this or that. The second oil shock in 1979 was a function of the Iranian revolution. So same geographic region, different in the sense that the US and Israel are the instigators and different in the fact that so far at least the magnitude of the shock is not at all comparable now it's not at all comparable in price terms. In 73 and then in 79 oil doubled or tripled and by the end of the decade oil had gone up by well 6, 7 times in dollar prices. Less in real terms we've only gone up whatever 50% max from spot oil for Brent and for WTI and the next month future it's a little higher for delivery in Asia but we are not yet at the magnitude of the shock that we were in the 1970s. The obvious point is our economy as a whole for the US and for the world is a little less oil dependent. But I wouldn't push that too far. So I think the main distinction is we sort of started it, the US and Israel. We in theory can end it, although we would only end it if Iran finds its own equilibrium which it allows other countries oil to pass through the strait. And at least so far the market has not anticipated that this will need the same kind of jump in price to balance supply and demand. That could change. You look at it in terms of physical interruption of the flow of oil. Some of your guests who've been on here have noted we're similar, maybe even worse. So we're kind of in this weird world where the physical interruption is bigger, the price reaction is smaller.

[Joe Weisenthal]

I'm glad you brought this up. I would just love your take on this in particular. You talk to the commodity guys like we do, and they're like, this is crazy. This is the biggest shock ever. Guys like me, I'm efficient markets guys like, hey, I just see what's on the screen. It looks like what's not that big of a deal. You be the third party arbiter here. How do you make sense of the gap between what we see on our screen versus the shortfall in physical barrels, 20 million every single day that aren't coming to the market?

[Brad Setser]

It's not quite 20 since you got

[Joe Weisenthal]

the east, you're right, there's been some routing.

[Brad Setser]

It's somewhere between 10 and 15, which happens to be between 10 and 15% of global supply. Happens to be between 20 and 30% of global traded oil. It is still a massive, massive, massive shock. And my elasticities would imply a much bigger increase in price if that was a sustained expected interruption. Look, I think you end up dealing with the reality that oil is close to being a perfectly fungible commodity. But it is not a perfectly fungible commodity. A North Atlantic barrel can only get to China or Japan with a long trek around the world.

[Joe Weisenthal]

Yeah.

[Brad Setser]

So there's an extra shipping cost. A lot of the barrels in the North Atlantic are sweet and light. Light just as. How vicious? Easy to flow, like a measure of the weight of the oil. Sweet, less sulfur. And a lot of the refiners in Asia were set up to refine medium sour. And for some things, you want heavier grades of oil because you get more diesel out of the heavier grades. And refiners just configured for different grades of oil. So when you interrupt the flow, fundamentally the flow from the Gulf countries to Asia, there's no immediate instantaneous substitution for barrels in the North Atlantic. I think that's first point. Second point is what people think of as traded oil is not actually the oil for delivery tomorrow. It is the futures contract for the next month. Next month after that, the world could look completely different. The US has within its ability the capacity to kind of pull back. And if the US pulls back and maybe the Iranians insist on a toll, there is no shortage of oil that could come out now. It'll take a little longer now because of the physical destruction of some of the export facilities in the Gulf. But if you don't have this particular choke point strangled, the old global oil market was very, very well supplied. So I think the futures market has to balance between one possibility, which is that there is plenty of oil two, three months out and oil is on a trajectory not immediately because of the damage and everything else back to 60, and another possibility where this persists and oil's at 150 or above. The markets had trouble figuring that one out.

[Tracy Alloway]

Yeah. So, okay, speaking of oil at 150, potentially one of the key differences between now and I guess the 1970s is that the higher oil price is not necessarily accruing to the petro states. Right. Because if you're the UAE or someone like that and you can't physically get as much oil out, then you're not generating as much money and so you're not recycling that money into potentially US bonds or I guess nowadays US stocks and things like that. And if you think back to the 1970s and the birth of the petrodollar market, you know, it was because they were making a lot of money that they had to put somewhere, just talk to us on a very simplistic basis about who is actually like making money. Whose current account is benefiting from higher oil prices right now?

[Brad Setser]

Well, you made the key point, which is that the usual winners, like the big winners From Russia in 22, the big winners when Libya went offline, big winners with some periods of Iran sanctions, big winners with some of the periods of tighter Venezuela sanctions are the countries in the Gulf. They have the most oil and they also have some of the lowest break even prices. So any oil above 60 means a big current account surplus. Those countries are not going in a position to capture this windfall. So you've taken Kuwait, Iraq, UAE out of the picture. The Saudis at the margin because they can get some oil out, but they can't get as much oil out. And they actually had a really high break even. Their current account deficit country. They need $100 a barrel oil with 7 million barrels a day of exports in order to break even. Maybe they're going to get a higher price so they can make it up with 5 million. But the Gulf countries are just not the winners. Russia should win. The Ukrainians are doing their best to limit the amount of Russian oil that gets to the market. The Kazakhs will win. All the stands that can export oil will win. Nigeria will win. Angola will win. All the South American oil exporters will win. Then the biggest locus of production outside of the Gulf, even bigger than the production in the west Siberian fields of Russia, are in the US south, southwest Texas and then in Alberta. So North America is producing well over 25 million barrels a day, exporting 5 to the rest of the world. And while it's mostly a transfer from American consumers to American producers, that is one of the biggest shifts in the global economy. I left out Norway. Norway really, really bends, especially if gas prices go up. It is the salt. Brunei, you know, it's the smaller oil exporters who aren't at. Don't fit your mental image of the petrochic.

[Joe Weisenthal]

I'm looking at the dollar. How do you pronounce the tenge? Do you know the Kazakhstan? How do we pronounce the tenge?

[Brad Setser]

Is good.

[Joe Weisenthal]

The tenge. I'm looking at the $tenge. Cross, which is the Kazakh currency. It's been doing very well. And in fact, actually the tange, or dollar tengay, which is how I think you're supposed to quote it, hit its low in the very early April, which sort of coincides with the peak of some of these fears, at least in the local terms. So your intuition or your description of who are some of the big winners seems to be matched in the market.

[Tracy Alloway]

We need a catchy nickname for dollar tengay. Like, like cable. That's not that catchy, is it?

[Joe Weisenthal]

No. You know, we need. We need like an acronym for the non Gulf state, non sanctioned oil powerhouses. Like we need like Kazakhstan, Angola, who are. What was another one you said? Nigeria, Colombia, Ecuador, the cankers or something like that. We need. This is good. We'll play around with this. We'll workshop this later.

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[Brad Setser]

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[Joe Weisenthal]

Let's zoom back in time for a second because we brought up the 1970s, but if you know, okay, there's obviously differences. How did the seventies reshape the world? Like fundamentally, okay, you have these oil shocks, et cetera, and people then start talking about these things called petrodollars is a word that comes into existence. But in what sense did those shocks, what kind of legacy did they leave on the global financial system?

[Brad Setser]

Well, they had a real legacy. You're going into the 1970s, oil was so bloody cheap, people burned it for electricity. And going into the 1970s, Americans drove, which we now have gone back to doing, honking big cars, massive Cadillacs with big fins. So 15 years later, very little oil is being burned for electricity. You substitute for cheaper forms of fossil fuels, more nuclear.

[Joe Weisenthal]

They still burn oil for electricity in New England because they're so anti climate change that they refuse to build a natural gas pipeline. So they burn oil instead. Anyway, sorry, keep going. Just.

[Brad Setser]

And for a long time in Puerto Rico. I mean, there's also islands because oil is very energy dense and easy to transport. And look, we did move to smaller Japanese cars away from the big three, massive cars from the 1960s. So there is a very real set of adaptation in the economy. The economy becomes less oil intense because it was such a huge increase in the price of oil. Americans are very unhappy. If you remember, in the 1970s was not good for President Carter when the Iranian revolution, there was the hostages. But the oil shock did not help his popularity. And Americans in general are very, very unhappy when oil prices are high. It's one of our national quirks. But then in the short run, at that time, there was just a huge windfall into the Gulf states. The Gulf states piled up dollars, and there were dollars. Oil was priced in dollars. Before 1973. It didn't take a deal to price oil in do. The US had been the biggest producer of oil in the 1930s. We were the supplier of oil to the Brits and others during World War II. It was only over the course of the 1950s and 1960s do other parts of the world catch up with U.S. oil production. But the oil industry, in a deep sense, was born in the United States, and it was always priced in dollars. And the Gulf countries and Saudi Aramco was originally a joint venture with an American company or maybe even fully owned by an American company. I forget. So it was natural. It was priced in dollars. It wasn't like in the 1970s. You had to do a new deal to price oil in dollars rather than something else. Oil was in dollars. Those dollars piled up. And it was a period of difficulty in the international monetary system. The US Was going off the gold standard. Bretton woods was breaking down. Inflation was not well contained after the first oil shock. And there was an effort to convince the Saudis to keep their large stock of new petrodollars in dollars, not by euros, and use them, at least in part, to buy Treasuries. Now, even then, the Saudis were a little reluctant to visibly buy Treasuries. And some Bloomberg reporters several years ago went through this history. And the US started masking who was buying Treasuries at the request of the Saudis, because the Saudis, well, you guys are supporting Israel. We don't really want to be buying your bonds directly. Can you hide it? And we agreed. And then, because there was still this residual tension between the US and many parts of the Arab world, a lot of the dollars did not flow into the treasury market. They flowed into bank accounts in London, offshore, effectively Eurodollars originating from petro states. And then those got recycled and they got lent in no small part to oil importing emerging economies. And that is sort of viewed as the start of the buildup of the vulnerabilities that led to the Latin American debt crisis in the 1980s. Now, there's another part of this whole story that I think people forget, which has sort of Been on my mind and it's irritating me. After 79, 80, Saudis had built up huge, huge, huge, huge stocks of dollars. Great decade for the Saudis in the 1970s, in the 80s, in order to keep prices high, they had to cut production. And then eventually that wasn't enough and the oil price collapsed. And by the end of the 1980s and certainly by the middle of the 1990s, all the dollars that had been built up in the 1970s had been spent. The Saudi cumulative current account balance went back into basically being neutral or into a deficit by 95, certainly was there by 2000. So in some sense the petrodollar boom came and it went. By the time of the Asian financial crisis, oil prices were very, very low in the 20s and there were no flows of petrodollars, nor was there a very large stock of petrodollars. So there's sometimes a tendency to think the 70s just continued, continued, continued. The reality is, setting aside the really rich Emirates and Kuwait, the rest of the oil exporters were not in a position to continuously build up and save over most of the period after 1980. Until we get the big run up in oil from 03 to 14, the

[Tracy Alloway]

03 to 14 run up in oil, then talk to us about where those dollars actually went, what types of assets. Because my sense is that happens to coincide with the very moment that a lot of the wealthy Gulf states were talking about diversifying into things like tech stocks, equities generally.

[Brad Setser]

Yeah, I think there's two stages. At the very beginning of the run up in oil prices, there are an awful lot of countries that remember basically being out of money in 98 and 99 when oil prices collapsed, when Russia defaulted, the Saudis were almost out of reserves too. And so the first stage is we're rebuilding our precautionary balances, at least in the biggest, most visible countries, Russia and Saudi Arabia. Now it's a little different in Abu Dhabi, the biggest emirate, the one with the most oil in Kuwait. Kuwait had to make up for the first Gulf War and some of the destruction. But in Abu Dhabi and Qatar with its gas, they from the beginning had felt they had a decent precautionary buffer and started doing the sovereign wealth fund style investments more into alternatives, more into equities. As time goes on, the Saudis build up a bigger buffer and they conclude they have enough reserves. And then they start doing a mix of spending at home and buying equities and taking direct stakes in companies over time. The Emiratis, who used to be Kind of conservative and behind the scenes just put the money in. ADIA invested in a fairly diversified portfolio, don't take controlling stakes. They become very active investors looking for the home run. The Royals become more involved in. The management is a little bit less of an outpost of London professional fund managers and a bit more of a playground of some of the younger sheikhs. And then it kind of varies across the world. The Norwegians build up a massive professionally run sovereign wealth fund which is a predictable portfolio balancer. And since equities have gone up over the past four years, all the new flow has gone into bonds because they hit a predictable target. And then the Russians actually started off building up dollars, but then they got worried about their political relationship with the us. The reset with Obama didn't really work. Even before Crimea and the Donbas they had taken their reserves dollar reserve share down to 40 or 50 and then after the Donbas they took their dollar reserve share down to, we now know to be basically zero. They certainly took everything out of US custodial accounts. So you do see diversification over time across currencies and then even more so across assets. Now the last point I make, and this is just sort of to be provocative because I'm tired of people blah blah blahing about the dollar as a global reserve currency and how that's the foundation of everything. Remember this, an international large cap equity portfolio will have a US share of roughly 2/3 65, 70%. The Saudi public investment fund, my friend Alex Etra has done some work on it. Its international Portfolio has a dollar share of 80 and that's probably typical because most private equity funds are going to be pretty dollar heavy. Atypical global reserve portfolio is now at 57% dollars. So the notion that reserves are the source of inflows into dollars is a bit dated. A reserve portfolio will typically have a lower dollar share than a standard return seeking equities fund which just because of the outperformance of the US large caps will be more overweight dollars.

[Tracy Alloway]

Joe, mildly annoyed. Brad is the best. Brad, I think we should ask a question about the IMF report on global imbalances. No, no, we have a lot.

[Joe Weisenthal]

I mean actually, could you just expand on this further? So we look around the world and we see that actually reserve portfolios are arguably or all things equal maybe underweight dollars. Was that always the case? Is there a structural reason for that? Like what's the story behind this mismatch? I didn't actually realize that, well, reserves

[Brad Setser]

can be managed for safety and liquidity. And not for return.

[Joe Weisenthal]

I see.

[Brad Setser]

And so the pressure to get the most returns is weaker. You don't have to chase the tech stocks, you don't have to match an index. And if you don't have the tech stocks, you're underperforming the index. You're under forming your benchmark. Your benchmark as a reserve manager will be more bespoke, higher priority on safety and liquidity. That's observation one, observation two, and this is where things get funky. A quarter of global reserves, to the first approximation are in China. Now China still manages its currency against the dollar, but China as a matter of policy brought its reserves formal reserve. Dollar reserve share down, last disclosed number down to 55% from 79% in 2005. They did not like the optics of financing their strategic rival and holding a lot of Treasuries in visible ways. Now that's a bit misleading because the dollar share of the portfolios of the state banks, which now have a very large share of the total state portfolio is much higher, 70%. And if you actually net out the offshore liabilities of the state banks and just look at the net, the euro offshore portfolio is matched by euro offshore liabilities. So that nets out the dollar offshore are matched by dollars onshore. In a sense the BOP flow through the state banks was almost setting aside some of the CNY lending which has gone up was like 100% dollars. A Taiwanese lifer portfolio. One of my other favorite topics would be 95% dollars. Remember, central banks are holding reserves as an asset against liabilities. Money that don't pay interest, some have to sterilize so they don't have the same pressure to generate returns. And so therefore they can hold lower yielding, safer assets. And a couple of big players, China and Russia just didn't want to be too heavy dollars.

[Joe Weisenthal]

God, there are so many things now that I'm thinking about. We could like different avenues I want to ask Brad about, but just since you mentioned Taiwanese life insurance companies, that got me thinking about East Asia a little bit. I'm just curious, like have you ever seen anything like what's going on with South Korea right now?

[Brad Setser]

No.

[Joe Weisenthal]

I only say it because East Asia, where it's just like this insane. I mean this is a real obviously like a big generally rich developed economy by and large. And it's just having this insane growth spurt both in the stock market and actually the real economy because of how the incredible margins and sales it's getting on essentially memory chips right now. Is there any analogy that comes to Mind for what we're witnessing here right

[Brad Setser]

now, not that comes to immediately to mind. I mean huge growth in exports, very rapid real growth, particularly in Taiwan actually, but narrow one sector expanding and then weakening currency. You have growth outperformance, you have a terms of trade positive shock from the semiconductor prices. And then you have a weak currency and then you have an economy like last year. All of the outflow from Korea that matched the current account surplus was into equities. A third of that was from their national pension fund. So a policy flow, 2/3 of it was just retail. And retail decided even though Samsung is making money hand over fist, that they preferred to hold US tech stocks. So no, I haven't seen anything like it. What is also interesting right now is that Korea is a very petroleum intensive economy. A lot of petrochems, energy intensive industries in addition to the memory chips. And it's energy poor, fossil fuel poor. So it is on the one hand benefiting from this giant positive shock memory chip, surge in price, surge in demand. AI is helping Samsung print money hand over fist. And then the economy's on the receiving end of a pretty big negative shock because of the loss of oil flow. And so we've sort of stayed in a. That mix has kept the yuan weak. The interesting thing to me is that the Koreans are now starting to complain that the yuan is too weak despite being a country that historically likes a weak currency for exports. And the National Pension Service has just announced they're going to expand their hedging program. I hope they succeed. The world economy does not benefit from won at 1500 and an even bigger Korean surplus over time.

[Tracy Alloway]

Well, we'll have to bring back former Odd lots guest Hyun Sun Shin to talk about all of this.

[Joe Weisenthal]

Good luck.

[Brad Setser]

I mean, he's got a promotion.

[Joe Weisenthal]

He has a good job these days.

[Tracy Alloway]

Yeah, I just refer to him as former Odd lots. Best from now on and forever.

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[Brad Setser]

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[Brad Setser]

only, not investment advice.

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All investing involves risk of loss. See complete [e-mail] disclosures just going back

[Tracy Alloway]

to the de dollarization idea. As you point out, there's a lot of nuance with reserve portfolios. And then one of the things you always see when a headline comes out saying that, you know, foreign countries reduce their share of US Treasuries is this idea of the custodial accounts. And maybe we're not getting a full picture of exactly what they're buying. When it comes to gauging de dollarization, I'm doing air quotes. No one can see me because this is a podcast. But like what are you actually looking at to score and gauge whether that's a real trend and whether or not it's accelerating over the past five weeks or so?

[Brad Setser]

It's hard to track in real time. I mean the, the obvious indicator is if the world is de dollarizing, they're going to be buying fewer dollars and the dollar should be falling in value, which it general is not. So I mean, I think that's the simple high frequency metric. To me, it is very difficult to have a credible story around de dollarization when the dollar is strong, not weak relative to history and when the total dollar claims on the US including dollar denominated equity claims have continued to increase. And so in 2025 the world was longer dollars than it was in 2024, despite all the hot air spent talking about de dollarization function of the fact that we have a current account deficit of over a trillion dollars, so we have to sell a trillion of financial assets and we are not selling euro or yen or yuan denominated claims to the world. So last year was sort of financed 50, 50 with dollar debt and US equities which implicitly settle in dollars. So in that sense I find it a silly discussion. In order to de dollarize the world has to stop funding the US in dollars. Now there's a whole bunch of other things that can happen around the world and there is a small sub trend where some emerging market borrowers are borrowing in yuan to save money. And so I think that is an interesting cross current, but it is a modest cross current. The sanctioned countries of course don't use dollars or euros to settle payments because they cannot now in general, they seem to want to get rid of the sanctions. They're not saying oh this has been great, we are so lucky that we have to settle payment in yuan and sell our oil to China at a discount. They generally would like to say, well, we would love to be unsanctioned to sell in dollars and to have a competitive market for our our oil, not just some monopsony buyer in China. But look, you look for indicators of changes in hedge ratios. You look for individual countries or individual institutions that have changed their portfolio allocation in a meaningful way. And I think over the past nine months there was decent evidence that some of the Scandinavian pension funds, institutional investors, hedged or reduced their dollar bond holdings partially in response to some overheated rhetoric around Greenland. On the other hand, unambiguous evidence because of some silly changes in regulation, but had a big impact that the Taiwanese lifers reduced their hedge ratio by a really big number. And the Japanese lifers continue to see they let their hedge ratios slip because hedging is costly in Taiwan, it's costly in Japan and you haven't been rewarded for hedging because the currencies have stayed weak. In fact, in Taiwan, when you reduce the hedge ratio, that works as a bid for the dollar and it pushes the dollar back up and pushes the Taiwan dollar down, it becomes self reinforcing circular Soros reflexivity You see parts of the global economy that are hedging. You see parts of the global economy that have really reduce their hedge ratio just gone all in long dollar fixed income. And you see parts of the global economy that are less comfortable holding dollar fixed income but they are absolutely unwilling to be underweight US equities. And so what you really end up seeing is not de dollarization it's just more a little bit of a rotation towards holding US equities and a little less bonds.

[Joe Weisenthal]

Going back to sovereign wealth funds. And just thinking about them abstractly, countries particularly big commodity exp various good reasons to have sovereign wealth funds. Their revenues are going to be very volatile and cyclical. And so you want to smooth them out. In some instances though, one factor is that you have these countries that get incredible dollar inflows but don't really have big domestic industries. And so you can't spend it all domestically without creating a lot of inflation. But now we see in the Gulf countries in particular that there was just a lot more domestic economic activity happening, period. We know that sort of Abu Dhabi and Dubai are just growing bustling cities in their own right. And so there is actually opportunity, there might be domestic capacity. We know that Saudi, they're trying all kinds of stuff from, we've talked about this in the past, from soccer teams to mile long, multi mile long cities in a vertical, in a horizontal line or whatever. But just generally does the growth of some of these countries just in terms of domestic economic activity change the calculus about how some of these revenues are used? It's like, oh, we can actually deploy this domestically in a productive way, maybe by building data centers and so forth. That it won't just be we're going to add to inflation.

[Brad Setser]

Well, we can debate about whether yet another data center is going to truly prove productive. Our AI barons certainly believe it to be.

[Joe Weisenthal]

Yeah, yeah.

[Brad Setser]

But there is a scenario where they've kind of drunk their own Kool Aid and are overbuilding data centers. Saudi Arabia is a great example. The line looks like it's not going to be a line. It's scaled back. The desert ski resort with artificial snow is no more. That's been canceled. Everything was getting pulled back in. Well, not everything. The big cube in Riyadh I guess is still going forward. But yes, it did fundamentally change Saudi Arabia. When MBS came and said I am going to throw a ton of money into domestic development, basically real estate, but also sports entertainment. Da da da da. Combined with some social liberalization around women's role in society, huge change what it in practical terms meant. Some people use the fiscal break even. I think fiscal spending, some things can be kept off budget. I prefer to just look at the good old fashioned balance of payments. The balance of payments breakeven of Saudi went from 60 to 90 to 100. So in order to have a current account surplus that needs to be invested abroad, the Saudis now need an oil price of roughly 95. They did not get that last year. So they are running budget deficits. They are running a current account deficit which was financed by borrowing from the world. And since MBS not only wanted to do all these domestic economic developments, he wanted to play in the big boy league with the Emiratis and do big investments in the US and be chums with Donald Trump. The Saudis, in order to do all that, buy equities, da da da da. As well as build all the domestic projects, they borrowed 100 billion last year. They were the biggest borrower in the emerging world. So if you don't have the level of wealth that the Emiratis or the Qataris have, you will find yourself in a position where you are no longer a source of petrodollars. You're a drain on the world's Eurodollar system. And the Saudis have flipped and become a drain on Eurodollars. The Emiratis can do whatever the hell they want. I mean, the Emiratis just have so much money and so few people. So few people as in Emirati born residents who have a claim on the oil surplus, not the high end. I know, Tracy, you were a high end guest worker when you worked in Dubai. And the low end guest workers or don't have a claim on the oil. And so the Emiratis are just in a position in some sense. The Emiratis can. They are like the Rockefellers. If they had not given their money away, they wouldn't actually need to run an oil field in order to invest in all sorts of things just because they'd made so much money from oil over the past 50 years that they can just become investors.

[Tracy Alloway]

The Rockefellers, if they hadn't donated to the Council on Foreign Relations. Right, Spent all the money.

[Brad Setser]

I'm very happy that they gave some money.

[Tracy Alloway]

We all are very happy. Okay, So I realize in this conversation we haven't talked at all about Europe yet. And it feels like lately, whenever we do talk about Europe, the only certainty is always that it's gonna come out in a worse position than it was before. If you're looking at Europe right now with the Additional burden of higher energy. With all the focus on AI with China's export boom, is Europe just inevitably in a structurally weaker place than it was before?

[Brad Setser]

Not enormously. At the margin, losing Qatari gas means they're going to become more dependent on American gas. They're not thrilled with that. They're of course not thrilled with any increase in oil price. But where we are now, this is a manageable shock. This is a much, much smaller shock than the loss of Russian pipeline gas in 22, which I think we underestimate how big of a shock that was to the European economy. So I don't know that this particular shock is enormously negative to Europe. It is modestly negative because Europe's a net importer of 12 million barrels of oil. So every $10 lose 40 billion on the current account. Europe is wealthy enough it can afford that. It's not going to impinge them. It causes political problems when gas prices go up. The Germans want to cut fuel taxes to offset that, as rich countries sometimes do. I don't think it fundamentally changes much about Europe. It does highlight fossil fuel dependence because Europe is fossil fuel light. It does add to pressure to do more nukes, to be more serious about renewables. And it certainly doesn't help Europe figure out how to respond to the China shock, which I think is a much bigger shock to Europe than at least this kind of petroleum shock. And then the other baseline problem, which we'll see if it's solvable or not solvable, is that we're going to be in a world where missile interceptors are constrained and there's going to be a scramble to make missile interceptors and the US is going to be even less willing to provide missile interceptors to Ukraine. So we're in a world where Europe, its missile defense will have to come from its own production to a much greater degree, which is arguably a positive for long term development. But it does create a near term sense of vulnerability. But I think the central shock in this case is going to be much more heavily felt in oil importing Asia.

[Joe Weisenthal]

Yeah, so you talked about the high bar that would have to clear for some meaningful change in the dollar's role in the global economy or the dollar's dominance, et cetera. But setting, look, there was a widespread view around the world that the US has become a very reckless nation. Right. I mean, there's these complaints. Why does global policy, the prospect of a war being started by the US depend on what, 10,000 voters in Michigan and Wisconsin, other people, you know, this is some Quote from some European every how they view things every four years we have been extremely hostile to formal allies for reasons that most people around the world can't comprehend.

[Brad Setser]

The Greenland Joe, you were not on board with with Canada becoming our 51st state.

[Joe Weisenthal]

I'm disappointed.

[Brad Setser]

This is a great example.

[Joe Weisenthal]

Greenland, like these things just pile up, right? And so like even like setting aside the. And then of course now there is this current war which most countries are clearly not on board with. Hard to understand most people. Most countries don't really understand what the goal was. It may end up being a huge own goal if it permanently gives Iran. It's unclear what's going to happen. Could these things pile up in such a way, such that. Look, setting aside these flows the US ends up being kind of a trends more towards a global pariah. We know that polls about the US's favorability continue to decline throughout much of the world, et cetera. How sustainable is it to have the dollar as a reserve global currency, the thing that everything priced in. If so much of the world essentially views the US as a rogue state,

[Brad Setser]

when it's framed in those rhetorical terms it almost feels like the only possible answer is that the dollar will become less dominant in global transactions. And as I mentioned, as a share of cross border financial assets, the equity share is bigger than the reserve share. It's not no longer just the flows. The flows coming from holding safe reserves are nowhere near big enough to have a net international investment position of negative 100 or even a net debt position of negative 50. So you can certainly make that argument. I can also make an argument that before the Iran war, China, because it was unwilling to let its currency adjust, was intervening in the foreign exchange market to the tune of $100 billion a month. And that $100 billion was flowing into dollars. So unless China changes how it manages its currency, and this is a much bigger flow than anything around petrodollars and it was hard to track flow, it was going into bank funding markets, so forth and so on. But in some sense until China, which didn't love the US before decides that it is willing to change how it manages its currency and how it manages its economy, it is compelled to go into the market and buy if its exporters want to convert dollars for yuan. And when exporters are not converting dollars for yuan, they're still holding dollars. Now they could hold euros, but if they hold euros they get less interest. So it hinges on a little bit more than just global perceptions of the us. The Chinese have not loved the US For a long time the Chinese have not found a way to really extricate themselves from a world where they often need to really buy a lot of dollars and add dollars to their system. The world doesn't love China. I think China can be a coercive power. President Trump basically had a theory around last year's trade negotiations which, to put it in this year's terms, he wanted other countries to pay a toll for access to the US consumer market. They should be giving us things because this is the world's greatest market. The Chinese have wanted people to pay a political toll, treating China or the great nation with respect, not criticizing the ccp, various other things to have access to certain industrial products, rare earths. And it sometimes have suggested, well, you cannot criticize us on trade, you not show us respect because otherwise those permanent magnet licenses won't come. So they extract a toll. They can be coercive. Think of how they treated Australia after the Australians said some impolite things about China's handling of COVID Yet it is very, very difficult for most countries around the world to respond by not trading with China. Right. So I think in the foreseeable future, countries may not respect the U.S. they may view the U.S. as a reckless and a rogue power, but you can still use our dollar to transact between Africa and Latin America efficiently. And that will not be viewed as a political statement. It'll just be viewed as the most efficient way of getting something done. So that's kind of how I would expect things. Now I do think we are in a world where an enormous share of the world's financial wealth, both people looking for safety, the reserve assets, people looking for a bit more yield than you can get out of a safe G10 government bond, the private credit CLO World and then people wanting the equity home runs, all those investors globally are now quite overweight US assets and as a result the dollar is quite strong. And so to me the core question is not really whether the geopolitics will change things assuming we don't get into a full on blow up with Europe, which would I think accelerate some shifts. I think the real question is is this intense overweight in the dollar sustainable when we have have fairly reckless policies. And the answer so far has been yes.

[Tracy Alloway]

Brad Setzer, thank you so much for coming back on the show. Really appreciate it.

[Brad Setser]

Thanks for having me again.

[Joe Weisenthal]

Thanks Brad. That was fantastic.

[Brad Setser]

This is like, you know, now every episode is going to get ranked and I was like, yeah, that was probably

[Joe Weisenthal]

one of his favorites. We'll have the community.

[Brad Setser]

Nothing like. And I know I'm never going to hit Taiwan Life or.

[Joe Weisenthal]

Yeah, this was a good one. There's a good one. And excellent.

[Tracy Alloway]

Job. Always good talking to Brian.

[Joe Weisenthal]

Always good.

[Tracy Alloway]

You know, one thing that struck me in that last answer, he mentioned the word toll quite a lot. You know, the idea of China trying to extract a political toll now, potential tolls in the Strait of Hormuz. And I've been thinking about that a lot because, you know, if we, if we think about the. Back in 2022.

[Joe Weisenthal]

Yeah.

[Tracy Alloway]

I wrote a piece called Choke Point Capitalism. And it was the idea that governments around the world were waking up to the importance of strategic supply. And this idea that because of COVID you have to have a certain independency in important things. And I think like we're starting to see that kind of translate into the geopolitical sphere in terms of like power nowadays is basically being able to control those choke points.

[Joe Weisenthal]

Right.

[Tracy Alloway]

And so a lot of diplomacy, a lot of geopolitics is now focused on, you know, Trump is going to affect this. A choke point in semiconductors or a choke point in the world's oil supply. Yeah, I don't know if I'm saying that.

[Brad Setser]

Right.

[Tracy Alloway]

But like there's something there.

[Joe Weisenthal]

Yeah, well, I mean, I thought it was interesting. So Brad, talking about, you know, Europe is going to have to spend more money on missile defense, for example, the US Is going to be less reliable, stocks are being depleted, et cetera. This is like the phenomenon of our time, which is that every region, every country, or at least every region feels it has to spend on its own. Right. The capacity of another nation that it may have assumed it could trade with will not necessarily be reliable. The other thing I was thinking that I've been thinking a lot about is, okay, Chinese manufacturing dominance exports is a very thoroughly discussed issue in the US And Europe. Right. But it's not, it doesn't really get as much attention in the rest of the world. So, you know, you don't hear about, for example, the effect of Chinese exports in undermining Mexican exporters nearly as much or Brazilian exporters, et cetera. These are also countries that are trying to climb.

[Tracy Alloway]

You might if we were in Mexico or Brazil, but.

[Joe Weisenthal]

Right, I agree. But the upshot is, I think because we are in a sort of US Europe dominated media landscape, we mostly hear about China as a sort of pressure point to rich countries. We are not discussing the fact that also there is going to be this domestic stress that will emerge from manufacturers in these countries. In other words, what I'm saying is you look at the rest of the world and you say, well, they're going to pivot to China because the US Is this reckless rogue state, et cetera. Except that they're all going to be facing the same, the same issue. The same issues as the US And Europe are. We're just not talking about them because that's not the center of our conversation. But the idea of like, okay, it's very obvious for Mexico or Brazil or Kazakhstan or whoever else to quote, pivot to China, whatever that means, they're facing all of these same issues in many cases as well.

[Tracy Alloway]

Yeah, I think the middle power theory gets really interesting in that context. Anyway, shall we leave it there?

[Joe Weisenthal]

Let's leave it there.

[Tracy Alloway]

This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.

[Joe Weisenthal]

And I'm Joe Weisenthal. You can follow me at thestalwart, follow our guest Brad Setzer at bradsetzer, follow our producers Carmen Rodriguez at carmenarmon, Dash o' Bennett at dashbot, and Kale Brooks. And Kale Brooks. And for more Odd Lots content go to bloomberg.com oddlots we have a daily newsletter and all of our episodes and you can chat about all these topics 24. 7 in our Discord, Discord, GG, Oddlauts

[Tracy Alloway]

and if you enjoy Odd Lots, if you like it when we have mildly annoyed Brad Setzer on the podcast, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad free. All you need to do is find the Bloomberg Channel on Apple Podcasts and follow the instructions there. Thanks for listening. If you follow markets, you know the value of long term thinking. You plan, you diversify, you prepare for volatility. But even the best strategies can't prevent every bad day. For more than 75 years, Cincinnati Insurance has helped individuals and businesses navigate tough moments. With expertise, personal attention, and independent agents who focus on relationships, not transactions, the Cincinnati Insurance companies let them make your bad day better. Find an agent@cin fin.com Ryan Reynolds here from Mint Mobile.

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[Brad Setser]

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Switch upfront payment of $45 for three month plan equivalent to $15 per month required. Intro rate first three months only, then full price plan options available, taxes and fees extra. See full [e-mail] you ever wonder how

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