EC Souring, Not Soaring

We are starting to get a better sense of what happened to turn everything so drastically in December. Not that we hadn’t suspected while it was all taking place, but more and more in January the economic data for the last couple months of 2018 backs up the market action. These were no speculators looking to break Jay Powell, probing for weakness in Mario Draghi’s resolve.

There are real economic processes underneath. The more fundamental the market, the closer it is to actual economic transactions. These are influenced by the movement of real things, this real economy, not just the transposition of numbers on some detached Wall Street computer screens. Living in the financial services realm can make it seem like none of this is real.

This is where the eurodollar attains its primacy. So many people talk about a reserve currency without ever once considering what it means to be one. It is the ultimate medium, standing in between others so as to facilitate real economy transactions from very far afield.

In the example I often use, a Swedish firm intends to export goods to a Japanese buyer. Trade is made efficient and flexible, therefore probably and manageable, by the eurodollar system in between; it mediates the different characteristics of each disparate system so as to standardize and harmonize the terms. The explosion of globalization and trade alongside the advent of the eurodollar system isn’t dumb luck.

This eurodollar requires banks to be in the middle offering them. But if those banks just happen to notice how Japanese firms suddenly aren’t much interested in Swedish goods, or any goods, that can be a problem for more than Sweden and Japan.

And if banks are already scaling back their eurodollar involvement to then find how it is having an effect on both Sweden and Japan, it isn’t surprising to learn they’d cut back on pretty much everything in between (and maybe do so at great speed, focusing squarely on the exits above all else). This would include purely financial transactions, so-called hot money, otherwise having less or little to do with the real economy transactions of trade.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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Peter Cooper 3 months ago Contributor's comment

Agreed, thought the slump in US consumer confidence is far more important than China as it is 70% of the US economy, see: