A True Horror Tale

The hell with eurodollar deposits! That’s kid’s stuff.

The actual monetary system had become even more derivative but had kept its monetary nature. This is the part central bankers didn’t understand because they lacked sufficient imagination (all their considerable intelligence would be focused instead on creating mathematical models to describe an economy and this eurodollar business would’ve made that impossible). Remember, this was the fifties, sixties, and seventies.

The genius, if you want to call it that, of the eurodollar system was in taking money to its next phase. It moved from a system where money or currency in possession was that system’s overriding constraint to one in which the balance sheet factors balancing instead “future cashflows from that asset” reign supreme.

External money that is conjured up from across time boundaries as well as geographical ones and it settled – for the banking system, anyway – real-world monetary obligations. Yep, real-world bank liabilities could be liquidated or cleared based upon external, non-contemporary exchanges of potential future obligations. These would accomplish monetary aims, but it wouldn’t look like what money had always looked like before.

Not just a virtual currency of ones and zeroes flying around the world, but a virtual currency, undead money where time, as well as geography, could be surmounted – at the right price.

Suddenly, banks would hungrily, speedily process payments for hamburgers eaten up today even though payments for them weren’t promised to arrive until Tuesday. In fact, depending upon balance sheet factors, the promise to be paid on Tuesday was the most lucrative part of the whole business (Why not? From horror movie template to Popeye metaphors, we’re way beyond traditional restrictions here).

Wimpy's: I'll Gladly Pay You Tuesday For A Hamburger Today

External money. Or, as I put it four years ago using Dickens:

The phrase Charles Dickens used to describe insurance companies can be refashioned to quite well characterize this monetary arrangement; a bank that holds no dollars gets another bank that holds no dollars to guarantee that everyone has dollars. It’s all a lie, but it works because nobody ever demands to be presented with dollars. Transactions are simply settled and worked out in the format consistent with that; Bank B used to have a number that said Bank B was owed a certain amount of dollars but then Bank B lent that number to Bank C so that Bank C could claim an ability to get dollars when neither bank has any interest in obtaining dollars just the whatever transformation that results from that transaction. Dollars are purely theoretical; thus “dollars.”

External and virtual, theoretical money. How scary is that? Not just a proliferation of products; that was merely the meat and potatoes, the details over how this was done. Rather, a true evolutionary step forward which so thoroughly confounded and fooled our distracted monetary authorities they then fooled themselves into thinking they could do monetary policy without any of it in their designs.

It all seemed to work (the so-called Great “Moderation”) compounding the error but only so long as the products kept proliferating: each global bank promising future dollars kept guaranteeing each other there would be future dollars…until August 9, 2007.

When the promises started vanishing, out came the 1930’s-style bank reserves which only made things worse right from the start (they really have no idea what they are doing).

This is why central banks aren’t central banks, as well as why they’ve been so slow to catch on. It isn’t a single error, subprime mortgages in 2008, that has been plaguing them and their multitudes of QE’s. A chain(saw) of errors which stretches back for decades, half a century and longer.

A monetary monster unleashed in true Frankenstein fashion. They even had a word for it once upon a time: benign neglect.

The monster’s unchecked pathology is what sure looks today like the impossible unit root which is common to every beast’s origin; a permanent, widespread asymmetric shock that goes undetected. And the error has made sure that each and every effort to thwart the fiend’s attack upon 20th century globalized civilization instead sows the destruction of 21st-century un-globalization – fragmentation in more than economy, finance, and money. The kind of widescale damage that we’d rather wish had been, this one time, fictional.

Happy 2nd Repo-ween!

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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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