EC Previewing The Taper Theater

Eurodollar, not Evergrande. That wasn’t just the point of yesterday’s recall, it is the whole point of beyond fourteen years of going only the wrong way. The deflationary way. Defaults in China are nowadays a commonplace part of that trend, one which began early in 2014 with Shanghai Chaori Solar.

What was significant about Chaori was this: “It was the moment when the eurodollar finally caught up to China.” You can literally see it.

The problem is despite the deficiency being just this obvious, the orthodox of Economics prevents any correct interpretation. The public remains confused about cause and effect. Why does the dollar go up in value (and CNY down)? No Economist seems to know and so long as the stock market is up very few elsewhere seem to care (which, by the way, is the whole point).

The irony, such that there is one, is golden. Quoting myself again, this time way back in November 2014, just as that same post-Chaori flood of eurodollar destruction was cresting over the shores of lands far and away from the dollar’s “home”:

They hated gold so they allowed the creation of eurodollars. Now they hate eurodollars even though they don’t really know what they are or how they actually work (and maybe nobody really does). Japanification lingers onward…

Several years thereafter, the whole 2014-15 affair was easily flushed by those who hadn’t been able to explain what happened during it. Not to China or Brazil, and certainly not about Europe or the United States.

Again, this is an issue identified by Mr. Keynes himself during the last not-so-great depression. In the thirties, there was far more attention paid to these clear monetary aspects because there was just no getting around them; the Fed, as other central banks, hadn’t yet hired up all the Economists.

Writing more last week about this, here’s what Keynes had correctly observed:

At periods when gold is available at suitable depths experience shows that the real wealth of the world increases rapidly; and when but little of it is so available our wealth suffers stagnation or decline.

Notice, first, what Keynes did – money is not itself wealth. Our real economic wealth suffers when this medium is in too short supply. As a primary tool for legitimate commerce, you can appreciate why this would be. Anyone can build their own house using primitive devices, but they can do so far cheaper, faster therefore more efficiently availing themselves of the best tools.

Depending on their cost.

Money has a cost which is supposed to be regulated by central banks (elasticity). And therein lies the world’s entire problem: supposed to be regulated, instead what we are told are central banks are not central banks.

Without central banks there’s been no elasticity, therefore “our wealth suffers stagnation or decline.”

This was the whole point behind China’s transition around 2013-14, and why today the Chinese Communists are behaving more like, well, communists. Their capitalism phase had created the real wealth (not money) of modern China, and like all communists when the capitalism runs out that’s when Leninist-Maoist theory says it is time to throw out the capitalists and flatten the social structure with revolution.

Xi appears to understand the dangers of the all-at-once revolution (a lesson learned from Soviet Russia and all its satellites in the late eighties), taking his time with a more measured pace wherein China still finds itself in the same pot with the slow boiling frog.

But QE’s and money printing, they say. The Federal Reserve like its worldly brethren have responded time and again to the symptoms of deflation (or disinflation) as any central bank would. Or have they? The answer to all those questions depends entirely on a single distinction.

What is the currency that must be made more elastic?

If that currency involves bank reserves of the kind leftover on the Fed’s or ECB’s balance sheet, I wouldn’t be writing this same thing for essentially the fifth time. Here’s what I wrote, quoting myself again for a reason, during the middle of September 2017.

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William K. 4 weeks ago Member's comment

Sorry about that. I am not Superman, nor infallible. Nor invincible, although never "vinced" yet.

William K. 4 weeks ago Member's comment

What I have been seeing is that the federal reserve bankers have been pushing for inflation for a very long time, and gettting it to grow quite well. Unfortunately that is a lot like starting a fire, in that it can very rapidly grow more than intended. Thus I concluded long ago that the federal reserve officers are either cluless or evil, with a hidden agenda of destruction of our society as we have it.  Torepeat the same thing and get the same results many times should be a learning experience, but instead we are trapped in the bus with a drunken driver. 

The problem can be summarized as the fed producing money that the government did not earn to spend on things that the population does not need.

So what we really need is a solution. At that point I will defer to those who are more skilled  at lifesaving than I am, and have much greater resources than I have access to.