Thursday, September 29, 2016

Deutsche Bank Listing, Global Financial System on Edge

The Run Begins: Deutsche Bank Hedge Fund Clients Withdraw Excess Cash
Deutsche Bank concerns just went to '11' as Bloomberg reports a number of funds that clear derivatives trades with Deutsche Bank AG have withdrawn some excess cash and positions held at the lender, a sign of counterparties’ mounting concerns about doing business with Europe’s largest investment bank.

While the vast majority of Deutsche Bank’s more than 200 derivatives-clearing clients have made no changes, some funds that use the bank’s prime brokerage service have moved part of their listed derivatives holdings to other firms this week, according to an internal bank document seen by Bloomberg News.
At heart, the global financial markets are short U.S. dollars. Any time you borrow in U.S. dollars, you are in a sense short U.S. dollars because you have to pay it back later. Most money in existence is created by banks and is ultimately a short position on the U.S. dollar. As long as everyone doesn't rush to convert to dollars (or repay debt), the system is fine. When the system went into deflation starting in 2008, the global central banks bailed out a very small slice of the existing debt. They didn't restart the system though, and the far larger bank balance sheets continued shrinking through today. Additionally, the stimulus ran out in 2011. Commodity prices topped, China started slowing along with most of the global economy. Negative interest rates and QE in Europe and Japan didn't work. Now the Fed is raising rates, Japan is not adding QE, and the ECB says QE could finish next year. China is trying to not collapse, and for its efforts it created another housing bubble. Even the Saudis are running out of dollars.

How can countries like China and Saudi Arabia, with hundreds of billions or trillions in U.S. Treasuries, have a shortage of dollars? The answer is their debts far exceed their assets. They don't have enough dollars if people start calling in their debts, and both countries' central banks are short dollars because they peg their currencies to the U.S. dollar. When they create new riyals or renminbi, they are creating a potential demand for U.S. dollars should the person holding that currency ask to exchange it. Effectively, the Chinese yuan, Saudi riyal and other pegged currencies are debt instruments backed by U.S. dollars. An American bank can call up the Fed and borrow money to cover a temporary shortage of dollars, but foreign banks and foreign central banks are on their own. Unless the Federal Reserve bails them out.

And there's a presidential election going on. One candidate will definitely make noise if the Fed sends hundreds of billions or trillions of dollars to foreign banks, especially if to China and Saudi Arabia.

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