A Global Eurodollar Shortage

  • Trade, Shipping Finance, Settlement etc  is conducted in US$
  • World Requires Dollar Credits (Usually Sourced  from US Debt Obligations)

 

THE REDUCED US TRADE DEFICIT HAS ADDITIONALLY COMPOUNDED A WORSENING PROBLEM!

What many don't fully appreciate is that US debt liabilities become foreign bank assets and as such as part of their capital ratios become a basis for increased foreign fractional reserve lending. Reduced US trade deficits and improving current account deficits place a 'choke hold" on available foreign US denominated lending. This is a well-documented phenomenon referred to as the "Triffin Paradox".

 

THE PROBLEM IS TEMPORARILY BEING “HELD TOGETHER” BY THE USE OF US DOLLAR LIQUIDITY SWAPS

Few realize that in a stealth manner Liquidity Swap Agreements are replacing foreign currency funding in the marketplace with foreign currency credit provided by the central banks.

My friend Thorstein Polleit via The Mises Institute, recently  published the graph below (annotations are mine) and outlined:

The graph shows the Fed’s supply of newly created US dollar liquidity sent to other central banks around the world. It also shows the so-called “euro cross currency basis swap,” which can be interpreted as a “stress indicator”: If it drops into negative territory, it means that euro banks find it increasingly difficult to obtain US dollar credit in the free market place. The Fed’s injection of new US dollar balances into the financial system has helped to reduce the euro currency basis swap. Since late 2016, however, it has started to venture again into negative territory — potentially signaling that euro banks are again heading for trouble.

 

The financial and economic crisis 2008/2009 has increased further the dependency of the world’s financial system on the US dollar. As early as December 2008, the Fed provided so called “liquidity swap agreements.” Under the latter the Fed is prepared to lend newly created US dollars to other central banks around the globe. For instance, the European Central Bank (ECB) can obtain US dollars from the Fed and lend the funds on to shaky domestic banks in need for US dollar funding. In other words:

Liquidity swap agreements can easily replace foreign currency funding in the market place by foreign currency credit provided by central banks.

Meanwhile, all major central banks around the world — the European Central Bank, the Bank of Japan, the Chinese central bank, the Bank of England, and the Swiss National Bank — have joined the liquidity swap agreement club. They also have agreed to provide their own currencies to all other central banks — in actually unlimited amounts if needed.

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Disclosure: Information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, ...

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