It’s A Dollar Double Whammy, Just Not Theirs

First it was inflation. No, it was nuclear war in Korea. Then something about T-bills and government debt. And the ECB tapering while others were, too. Of course, before any of those there was 2a7. There’s always something, it seems, something different every time. Maybe it’s not any of them?

Small “e” economics will survive where Economics will not. The reason is that the simple laws of supply and demand actually work whereas statistical models of the big aggregates are nothing other than Economists fooling themselves and anyone following them. A supply curve, unlike a DSGE model, describes a real-world process to a reasonably sufficient degree.

If the demand for a commodity rises, the price will follow. The increase in price leads suppliers to raise the level of supply in response (yes, all else equal). There are frictions and lags to consider, where producers may not be able to react in immediate fashion. Over enough time, however, that’s how it works.

Money is a commodity that can be conjured at the stroke of a bookkeeper’s pen, to use Friedman’s eurodollar phrase. It isn’t exactly frictionless, but in operation prior to August 2007 that is certainly how it appeared. The global eurodollar system would create any form of bank liability necessary to keep the system not just well-functioned but also growing exponentially. There weren’t bottlenecks (think subprime).

Even as Greenspan’s Fed raised the federal funds rate during the middle 2000’s, there was no slowing the monetary factory system. In fact, during those RHINO’s the global banking system actually kicked it up a notch or two more. The “weak dollar” continued without fail until Bear Stearns nearly did.

In trying to explain what has been going on this year, central bankers all over the world have put forth a lot of ridiculous ideas to avoid the main issue. That isn’t bank reserves, though they all seem to think it is (it’s not hard to imagine why central bankers would think this way; would only think this way). Our own FOMC tried to blame T-bills for the recent bout in LIBOR.

(Click on image to enlarge)

It was obviously untrue when the Federal Reserve first published the claim. Rising LIBOR (against OIS or whatever other control) is an indication of liquidity risk. It both preceded and followed global liquidations, including clear events in T-bills themselves.

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