Friday, May 20, 2016

Cashing Out of the Cathedral's Casino

The eurodollar, a creation of the banking system, has been in deflation since 2011.

The U.S. dollar started to rally in summer 2014.

The dollar tends to run in 15 to 18 year cycles, made up of 5 to 6 year sub-cycles. There is the bull phase, the bear phase, then the consolidation phase. The dollar bottomed in 1980, skipped a consolidation phase under Volcker/Reagan and peaked in 1985 with the Plaza Accord. It fell for about six years and then it went sideways making a triple bottom, before the 1997 crisis kicks off and the dollar peaks again in 2002. Next comes six years of decline until the 2008 crisis, followed by 6 years of consolidation to the 2014 bull market. By this formula, the U.S. dollar should peak in 2020, at the end of Trump's first term.
2015-2016 looks a lot like 1997-1998

The nexus of the current dollar rally is eurodollar decay. Eurodollars are pure credit money, the linked ledgers of the Western banking system.
In Financial Terms, Bank Reserves Are Arpanet
I struggle to answer because a eurodollar is not a thing like a dollar is a thing; the eurodollar system is therefore not a redistributable pile of eurodollars. If we are trying to be as specific and comprehensive as possible, the eurodollar is really just a system of standards that allows common functions to be carried out among various and often quite disparate systems - it resembles in so many ways the TCP/IP protocols that delivered the internet. That isn't so much an accident, either, as the eurodollar system grew up and evolved alongside the same technology and functionality as the internet. As computer power was shifting into the 1980's, so, too, was modern banking and finance: interest rate swaps were born then, as were eurodollar futures, the early forms of math-as-money (Basel) and bridging all of that together were computer networks that allowed more instantaneous settling and communication.

The eurodollar can thus be described as a multi-dimensional series of often parallel but intersecting financial functions all designed to encompass a single, global whole. The nature of those functions just happens to be monetary, so that the end result of eurodollar functionality is monetary or financial. In most simple terms, it solves the basic equation of how to get numbers all over the world to balance and stay balanced. That used to be quite cumbersome and often dramatic, as under the prior currency standard, gold or dollar/sterling, meant taking some accountant(s) down to the vault and performing a physical audit. By removing the dollars from the eurodollar (in reality, there weren't many in it to begin with) or money from the monetary, the system could perform in unimaginable ways since it would be free to reinvent itself over and over. The standards would remain but the methods and products did not.
The eurodollar is an unbacked credit and it has been in deflation since 2011, exactly the time when China's stimulus ran out of steam, Brazil's economy tipped over and global commodity prices began to drop.

State Of The Eurodollar System; The Outrageous And The Absurd
Global commerce was fueled by a purely credit money, backed by member banks and ultimately their national governments and central banks, operating in economies which had reached the maximum level of debt, were stagnating due to demographic headwinds, and could not increase debt levels. Countries such as China wanted more debt, but they too reached very high debt levels by 2011. The system stopped and went into reverse, or in the case of China, new debt is being added to pay off old debt, aka Ponzi finance.

The flipside of eurodollar decay is a bid for U.S. dollars. The banks can create unlimited U.S. dollar credit, but they cannot print U.S. dollars. The creation of derivatives and credit money is the inflation and it created a future demand for USD. Even ignoring the derivatives, there is a large bid for U.S. dollars in the $9 trillion in offshore bonds, most of which cannot tap the Fed for a bailout: The $9 Trillion Short That May Send the Dollar Even Higher

Once the system enters deflation, eventually there are defaults and holders of credit money swap it for fiat or real money (gold). This process is underway.

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