Eurodollars Update From the Dec 2012 BIS Report

This is from the Dec 2012 BIS Report, which includes data up to June 2012.

As you may recall, the Fed's M3 Money Supply figures had included Eurodollars as a component.

The second chart represents the liabilities versus assets of foreign banks in their dollar holdings. I have related this to the eurodollar short squeeze in the past.

Eurodollar Update - Hunting The Black Swan - Gold and the Eurodollar

As you know eurodollars are US dollars held anywhere overseas by banks as a foreign currency liability or asset.

Eurodollars were formerly tracked by the Federal Reserve and were included in their M3 figures. In fact, the reason that the Fed stopped issuing its M3 is because it stopped tracking eurodollars. The other components remain.

But the Bank for International Settlements, or BIS, continues to track the dispersion and concentration of global currencies in their reporting banks in their quarterly reports. And this is the source I have been using to derive estimates in the magnitude and changes in dollars held overseas.

Based on my reading of their documentation these figures do not include 'official dollar reserves' of central banks, but rather the dollar holdings as foreign currency of their reporting private credit institutions.

From what I can tell, there is a definite difference between the Fed's tracking of eurodollars, which was based primarily on the foreign branches of their own member banks, and the BIS, which reports on dollars held by a greater universe of ALL banks around the world.  This seems consistent with the Fed's statement at the time that continuing to continue to track eurodollars reliably would become cost prohibitive.  I am curious as to their seeming lack of ability to exchange and share data with BIS.  I would judge the BIS number to be the superior number.  At the end of the day, dollars are dollars, unless there is a selective default, different currency classes, or some benign accounting notation.  The BIS data have every appearance of legitimate dollar claims.

For more on M3 and eurodollars read here.

Even a casual glance at the data shows that there was a trend change in the growth of eurodollars in the mid 1990's. This trend is something I have identified as one potential source of a US dollar crisis if the currency begins to fall in value or lose its appeal US in an uncontrolled manner.

I have not tracked the actual source of the eurodollar growth although it seems to be tied to the trade deficit and a variety of components in the Balance of Payments.

My current estimate of eurodollars is 2.25 trillion which is not insignificant even in these days of an exploding Fed Balance Sheet.

As an aside, the last time the US repatriated funds held by US companies overseas through a tax reduction program was in the 2005 Homeland Investment Act. That seems to have had no material effect on the level of eurodollars at least judging from the charts, and probably did more to inflate the income of the wealthy and stock prices.

During the financial collapse there was a eurdollar short squeeze, primarily in Europe. This is because the dollar denominated assets which they held against their dollar liabilities because to collapse in value, in large part due to the mispricing of risk and fraud.

The trend to an increase in Eurodollars has resumed after a steep drop after the financial crisis.

In the second chart we can see that the banks overseas have adjusted their shortfall, or 'the squeeze,' in part due to the swap lines that the Fed opened through their central banks to relieve the pressure.

There are correlations between gold, the US dollar, US dollar LIBOR and the related TED spread, and eurodollar demand that I have discussed in the past, particularly here, but also here and here.

Last Official Report on Eurodollars from the Fed was in 2006 when they were just over $400 Billion

Gold, Eurodollars, and the Black Swan That Will Devour the US Futures and Derivatives Markets

The Eurodollars estimate in the chart below is based on the BIS Banking Statistics from Commercial Banks and may not include official reserves held by Central Banks. 

As you know the Federal Reserve stopped reporting Eurodollars some years ago, with the consequence that it also stopped reporting M3 money supply.

I like to think of Eurodollars and banking system derivatives as the Fed's off-balance-sheet method of monetization and policy implementation, with plausible deniability.  

Swap lines are provided to other Central Banks, and they in turn make the loans to their member banks, and from there to their customers.  So this eurodollar creation is made outside the real domestic economy, and therefore has no immediate effect on domestic money supply and prices at the end of the money chain.  But the effect is there, and the smart money closer to the financial system sees it coming. 

I do not know if the Fed's swap line activity actually shows up immediately in their Balance Sheet and therefore the Adjusted Monetary Base.  But I think it is fairly obvious that if swaps are used to create dollars by foreign central banks, who in turn loan those dollas to their own members, the impact of that broader dollar creation will only be felt with a significant lag in the domestic US economy.   But it will be felt at some point.

When the Fed was tracking Eurodollars, I believe that they were not counting certain assets, or liabilities from the banks point of view, as money.  What exactly those assets might be and how liquid they are is a open question.  How much of them were held in Agency debt, and how much in Treasury debt?  Is a liquid obligation held by a foreign source part of the broad money supply, or not?  Since it can be quickly converted into dollars, and then into another currency, leaves little question that it is potential money at least.

At least part of the problem being faced by Europe in this crisis is the sharp point of the deleveraging of US assets underlying dollar denominated debt.   And if foreign confidence in the US dollar debt breaks, the losses would be daunting for the holders of that debt, so there will first be a rush into Treasuries and away from Agency debt and CDOs.  This will be like the ocean retracting, causing people to flock to the shore in wonder at the cheapness of the debt.  But eventually the returning tsunami of US dollars may very well swamp the Fed's Balance Sheet and the domestic US economy and the savings of many.

The hyper-inflation of financial paper is happening quietly and  off the books. The growth rate in derivatives held by the Banks is mind boggling.  And how this will manifest in the real world economy is not fully known.  A good sized chunks of the financial system may simply vaporize.  And I suspect that the policy makers will heavily allocate the damage to the least powerful members of the private sector. 

Ownership of the real economy will continue to be concentrated in fewer and fewer hands. Stagflation is the most likely outcome because of this lack of reform and the rise of a self-serving oligarchy.

As for the US Dollar, as I have said on numerous occasions, inflation and deflation are at the end of the day a policy decision.  Period.  Those who see a hyper-deflation or a hyper-inflation as inevitable elude my knowledge of the facts as they are.   The Fed owns a printing press, and it uses it selectively. 

Speaking of lags, I think the unusually long lag between the growth in Eurodollars and the price of Gold can be attributed to the gold sales programs by the Western Central Banks. Once those programs were suspended, and the Banks turned again into net buyers, the gold price rose dramatically.

The most recent Eurodollar operation of the Central Banks in relieving the Dollar short squeeze in euro is not yet in the totals.

It should also be noted that there are other correlations one can use in determining the gold price, most notable 'real interest rates.' However, there are linkages amongst all the variables, given a non-organic increase in the money supply and artificially low interest rates for example being among them.

So, when will the price of gold stop rising? Most likely when the Central Banks stop printing money, and return to transparently set market based interest rates and a productively reformed financial system.

'Not on the horizon' does come to mind.

I do not know if it will happen in gold or silver first, but the price management schemes that have been in place for a few decades now in the metals markets are reaching a tipping point.

To paraphrase what Kyle Bass recently said, 'There is $80 billion in open interest in gold futures and options, and there is $2.4 billion in deliverable gold at the exchange. The exchange is a fractional reserve system, and they plan for a one percent redemption. In the event of a greater demand for redemption, they assume that price will take care of it. The decision for a fiduciary is simple; take your billion in gold out now.'

And the situation in the silver market is even worse. It is a disaster waiting to happen.

At some point a 'black swan' event, or perhaps something the classical world would have simply called 'nemesis,' is going to knock the US futures market off its foundations.   The government and exchanges will seek to force a solution on market participants through the de facto seizure of positions and accounts, with a settlement dictated by the Banks.   MF Global looks like a dry run for that much larger default.

They will say once again that 'no one could see it coming.'  And the truth will fall into the same credibility trap that has swallowed all the other financial scandals, cover ups and bailouts since the S&L crisis.

"Why is surprise the permanent condition of the U.S. political and economic elite? In 2007-8, when the global financial system imploded, the cry that no one could have seen this coming was heard everywhere, despite the existence of numerous analyses showing that a crisis was unavoidable.

It is no surprise that one hears precisely the same response today regarding the current turmoil in the Middle East. The critical issue in both cases is the artificial suppression of volatility -- the ups and downs of life -- in the name of stability. It is both misguided and dangerous to push unobserved risks further into the statistical tails of the probability distribution of outcomes and allow these high-impact, low-probability "tail risks" to disappear from policymakers' fields of observation...

Complex systems that have artificially suppressed volatility tend to become extremely fragile, while at the same time exhibiting no visible risks. In fact, they tend to be too calm and exhibit minimal variability as silent risks accumulate beneath the surface.

Although the stated intention of political leaders and economic policymakers is to stabilize the system by inhibiting fluctuations, the result tends to be the opposite. These artificially constrained
systems become prone to “Black Swans” — that is, they become extremely vulnerable to large-scale events that lie far from the statistical norm and were largely unpredictable to a given set of observers.

Such environments eventually experience massive blowups, catching everyone off-guard and undoing years of stability or, in some cases, ending up far worse than they were in their initial volatile state. Indeed, the longer it takes for the blowup to occur, the worse the resulting harm in both economic and political systems."

Nassim Taleb, The Black Swan of Cairo, Foreign Affairs

It is not yet clear when, or exactly how, but it seems inevitable that this scheme of the Anglo-American banking cartel will founder on the hard rocks of gold, silver, and the will of the people to be free, if they have but the mind to use it.

Euro Dollars - The Great Dollar Overhang and Missing M3 Component - Gold and Silver

These figures are from the Preliminary BIS Reports of November 2011 which reflect reporting bank positions as of the Jun 2011 quarter. Obviously therefore they do not yet reflect the recent Fed expansion of the swap lines for dollars.  The first chart represents the total dollars held by banks as 'foreign currency.'

As you will recall, a 'euro dollar' is any US dollar being held overseas, in currency or in electronic digits, whether in Europe or Asia.  I should add that a certain amount of physical dollars in private hands overseas are held outside the official banking system, particularly in the illicit substances and materials sector.

The 'Euro Dollar Gap' Chart which is the second chart reflects the difference between the reporting banks Liabilities and Assets in foreign held dollars. This gap can cause a Eurodollar short squeeze such as we had seen in 2008, and to a lesser extent in 2010. We are also in a eurodollar short squeeze now, as exemplified by the recent Central Bank effort to make more dollar swaps available to Europe. The BIS figures have obviously not yet caught up with this yet, but they will in time.

As discussed previously, one of the reasons that European Banks require Dollars is because customers were demanding the return of their dollar deposited financial instruments while the Banks dollar assets had markedly decreased in value because of bad investments in Dollar denominated Collateralized Debt Obligations.

In the third chart I compare the Fed's Eurodollar figures in the series that was discontinued in the beginning of 2006. Although the lines are relatively similar, it should be noted that the magnitudes of the numbers just do not match, with the BIS reporting significantly higher numbers even though the relative changes in the lines are similar. I do not know, for example, if the Fed was including Central Bank Reserves or not.

But I think one takeaway is that the amount of Eurodollars are significantly higher now than they have ever been as a result of the growth of the dollar bubble in US financialization of debt, much of which had been purchased by European banks.

The gap between Dollar Assets and Liabilities creates short term demand spikes, as we have just recently seen in the actions by the Fed and a few other Central Banks to make more US dollars available in swaps.

There is another set of BIS reports I am examining that render higher figures with current Eurodollars in the neighborhood of 3.2 Trillion.  I am trying to figure out what these amounts include that the other measurements do not.   In the interim I am using the lower of the two. 

The bigger picture is that this enormous growth in Eurodollars is a result of the US financialization, more colloquially known as 'The Credit Bubble' and the US ownership of what is still the world's reserve currency.

I have some queries into BIS to understand if these figures include official reserves held by Central Banks. I do not think they do.

However, IF the dollar is supplanted by something else, or some combinations of things, as the world's reserve currency, there are obviously going to be an excess of US dollars looking for some place to go from their current havens overseas. And it is mostly likely that they will come home to roost.

I am sure that the Fed has a plan to sterilize this expansion in dollars available for domestic use. Whether that plan can work is another matter altogether. I do not believe that there is any precedent for it.

But one thing that is clear to me is that since 2002 'we aren't in Kansas anymore, Toto,' at least with respect to the growth of the US dollar overseas. And I think there is a linkage between this and the rather impressive bull market in gold and silver.

Another Eurodollar Squeeze? - Lehman Flashbacks - Crazy Eddie Does the World

"We committed our crimes at Crazy Eddie for fun and profit and simply because we could. We had no empathy whatsoever for our victims...

I eventually pleaded guilty to three felonies: conspiracy to commit securities fraud, conspiracy to commit mail and wire fraud, and obstruction of justice. I was sentenced to only six-months of house arrest, 1,200 hours of community service, and paid approximately $10,000 in fines...In my settlement with the victims of my crimes, I avoided all civil liability...

I did not cooperate with the government and victims because of any sense of morality or remorse for my crimes. I simply cooperated with them to avoid a long prison sentence and reduce potential monetary penalties. If my crimes had remained undetected and the government did not seek to prosecute me, I would probably still be the criminal CFO of Crazy Eddie today."

Sam Antar

This report was at least partly responsible for the plunge in stocks and the rise in gold. It gave the markets a Lehman flashback.

This is the kind of moment where Greenie would announce he was ready to put out any and all fires in the markets with his großen Dollar schlauch.

In Bernanke's defense, when Greenspan was boss the US government was still a going concern, without crazy Uncle GOP trying to crash the car into a ditch to show Babbling Barry who is the boss.

And the politicians are only doing what the Banks have been doing for years.

Say what you will about it, the dollar is still the reserve currency, for now. And the financial system, in addition to the equity market carnival show, is based on nothing more fundamental than greed and fear, and short term positioning. The only capital allocation being done is from the real economy into the pockets of the financiers.

And that is the failure of Monetary Theory, Parts 1 and 2, and the Chicago School of Carny-nomics.

The market action here is a bit cynical, even by current standards, and tailor made for an option expiration this week and next. But the backdrop of danger is real. That makes it a tough play.

Bloomberg reports that 75% of the volume is High Frequency Trading. It adds no real liquidity, it only distorts and extracts. When one needs it, it is either gone or reinforcing the short term trends. That it still exists is a tribute to the dodgy nature of the markets, and the failure of US governance.

I took my profits. When in doubt, stay out.

"We have known for some time that the ECB has been holding both the Euro-based interbank liquidity market and the sovereign bond market together with its balance sheet. But as I reported late last week the international liquidity being provided to banks is drying up and this is an Achilles heel for the European banks. They have been borrowing short in US dollars to fund long term Euro-denominated assets. This means they constantly need a rolling supply of $US in order to meet the repayments on their prior short-term funding obligations as their Euro assets mature more slowly. If the holders of $US no longer think they are a safe bet then they are caught in a good old fashioned banking liquidity trap."

ECB Moves Into FX - Macrobusiness

At least some of the friends of Ben have dollar reserves, but they are hardly enough to hold off a panic, a modern variation of the classic bank run. These Ben Bucks are being used to put a little Spine-a-Cola into their balance sheets. Show-cash. A wad of Tens covered with a C-note.

From Phil's StockWorld's review of Sam Antar.  This is a nice description of what I have called 'the CEO defense.'

The Art of Spinning:

■ Sell people hope. My cousin ‘Crazy Eddie’ Antar taught me that “people live on hope” and their hopes and dreams must be fed through our spin and lies. In any situation, if possible, accentuate the positive.

■ Make excuses as long as you can. Try to have your excuses based on at least one truthful fact even if the fact is unrelated to your actions and argument.

■ When you cannot dispute the underlying facts, accept them as true but rationalize your actions. You are allowed to make mistakes as long as you have no wrongful intent. Being stupid is not a crime.

■ Always say in words you “take responsibility” but try to indirectly shift the blame on other people and factors. You need to portray yourself as a “stand up” guy or gal.

■ When you cannot defend your actions or arguments attack the messenger to detract attention from your questionable actions.

■ Build up your stature, integrity, and credibility by publicizing the good deeds you have done in areas unrelated to the subject of scrutiny.

■ If you can, appear to take the “high road” and have your surrogates do the “dirty work” for you. After all, you cannot control the actions of your zealots.

■ When you can no longer spin, shut up. For example, offer no guidance to investors or resign for “personal reasons.” Your surrogates and so-called friends can still speak on your behalf and defend you.

■ If you are under investigation always say you will “cooperate.” However, use all means necessary legal or otherwise to stifle the investigators. Remember that “people live on hope” and their inclination is to believe you.

■ When called to testify under oath (if you do not exercise your 5th amendment privilege against self-incrimination) have selective memory about your questionable actions. It is harder to be charged with perjury if you cannot remember what you have done rather than testify and lie about it.

■ Try not to have your actions at least appear to rise to the level of criminal conduct or a litigable action. Being stupid or being unethical is not always a crime or tortious action.

Based on my own exposure in the distant past as a consultant to national politicians and news commentators, both Republican and Democrat, Sam Antar is a talented amateur who makes up for a lack of finesse, and a seeming lack of willingness or ability to use blackmail and violence, with chutzpah.

There are many, many good people in government and the financial world who only wish to do the right thing, and serve their country faithfully. I admire them, with gratitude. They stand a lonely watch, unnoticed by the world.

But there are times when the tainted few grab the reins of power for whatever reason, and things get a little crazy, and those are difficult times for the honest individual, to say the least.

Dollar LIBOR Normalizes and US Dollar Index Declines as Eurodollar Short Squeeze Ends

Dollar LIBOR, and the related TED spread, is the 'tell' for these dollar index spikes related to eurodollar short squeezes. As european banks scramble to obtain US dollars to satisfy customer demand, they drive the 'price' of the dollar higher. The cause of the squeeze in this case was the euro uncertainty based on ratings downgrades on Greece and a few other EU member countries, and the hedge funds determined selling of the euro, which created a sell off in euros and a flight to dollar assets. There is also continued deterioration in MBS and other instruments denominated in dollars and held in the euro banks on behalf of customers.



The US dollar index tracks the eurodollar LIBOR to a remarkable degree. When the BIS data comes out for this period in time I am sure we will see a repeat of the squeeze in eurodollar deposits that we had seen in the last two dollar rallies.

Why is this significant? Because it shows that there is no fundamental trend change in the US dollar, which is in a long sideways 'chop' and still likely to head lower.



Although I am sure the Fed swaplines were utilized, the Financial Times reports that some of the european banks have been trading their own customers' gold for BIS dollar reserves.

M3 Hysteria and a Look M2, MZM, GDP and PPI

Ambrose Evans-Pritchard has a bold headline US Money Supply Plunges at 1930s Pace that is sure to provide much referential action for the UK Telegraph.

I like to read AEP, but have to admit that he is given to sensational headlines on rare occasion. That is because it sells papers, and also draws blog clicks, as posters on the web are sometimes wont to emulate. Fear sells. The financial sectors also thrives on rumours and panic selling. It clears the decks for new Ponzi rallies. And it seems as though fear has become an inseparable partner and helpmate to central governments these days.

But there were some mildly disappointing elements to this particular piece in addition to its somewhat overstated headline. The US stopped publishing M3 several years ago. At the time I was not happy about this, and complained quite a bit.

Several enterprising fellows, including my friend Bart over at Now and Futures, as well as John Williams at Shadowstats, have been attempting to extrapolate the M3 figures, and doing a fine job given what they have to work with. In an added footnote, AEP says he is using John Williams' service. He also incorrectly states that the still Fed publishes all the components. They do not disclose eurodollars. The basis for discontinuing M3 was to eliminate the 'inordinate expense.' Obviously if they still published all the components, that could not be a credible case. This is not just being picky. Eurodollars are a remarkably volatile component these days, and also a method of buying Treasuries via London if one were so inclined to monetize US sovereign debt that way. Could the BoE and the Fed be scratching each other's backs as they say? The BoJ has already paid for one false US recovery, so they deserve a break.

Here is a quick review of the components of the Monetary Supply figures including M3 for your review. You may also wish to refresh your knowledge here: Money Supply a Primer.

The chief component that is 'missing' these days which must be estimated is "eurodollars," which as you may recall are US dollars being held overseas. You know, those dollars that Bernanke has been sending over to Europe en masse lately through the swaplines.

The fellows can estimate this, but the reporting of eurodollars lags by a quarter or more, the only reliable source of information being the forex commercial banking reports from BIS.

I would very much like to have M3 back, but in particular I would like the Fed to be releasing a more accurate and contemporary measure of Eurodollars, the dollar overhang overseas, particularly in light of the huge swings in the DX index, and its almost undeniable relationship to the recent dollar short squeezes on the European banks. The Dollar Rally and the Deflationary Imbalances in the US Dollar Holdings of Overseas Banks.

But alas, we do not have this, so we can only estimate M3, particularly the eurodollar component. But the good news is that we still have both M2 and MZM.

Here are the most recent figures for MZM and M2 from the St. Louis Fed, expressed as a percent of change YoY, not adjusted for seasonality. For good measure I have added GDP and PPI Finished Consumer Goods in the mix.



It might also be wise also to keep in mind that after a period of sharp growth in response to a developing recession that flattens out afterward, the year over year percentage growth can fall precipitously and look quite impressive on a growth chart without necessarily providing a meaningful decline in the nominal values. This can be seen in the M2 chart below.

And it is also true that during a period of slack growth in GDP the demand for money is lessened such that normal or even flat money supply growth would seem to the Fed monetarists to be 'inflationary.' This does not mean that they have forgotten where the 'ON' button to printing press is located. Of all the things that might concern us about the Bernanke Fed, the least of them is that they will be too stringent in supplying liquidity when and where it might be needed, in substantial volumes, at least to the banking system.



MZM is the broadest measure of liquidity, and is very much a creature of the Adjusted Monetary Base. As one can see from the chart, the Fed, using their various policy tools, jams the short term money supply higher in response to a lagging economy, and the broader measures like M2 tend to follow with a lag.

The Fed then backs off, and waits to see the effect of their actions, as well as any accompanying fiscal programs, on the real economy as measured by GDP, with an eye on inflation. In this case I am using PPI, but I greatly prefer John Williams' unadulterated CPI measure. Unfortunately I do not have it in the proper format for this study. But PPI finished goods will do.

Now, looking at this chart, it appears that the Fed is following their usual gameplan. The excess reserves that the banks are holding, at least indirectly in response to the balance sheet expansion and interest rate payments on their own deposits by the Fed, are enormous and unprecedented. If the Fed were to start pulling some levers to motivate those reserves into the real economy through loans, the impact could be dramatic. The Fed will do this if their fear of inflation begins to be overcome by their fear of deflation.

For the moment, the great bulk of liquidity is being used by the banks to bolster their reserves, and their unresolved bad debt, as if the bad debt itself was the cause of the problem. The problem is that a credit bubble left consumers with the inability to pay their debts, and while nothing is done for the median wage, and the bad debt is not written off, the problem continues. This was the story of the zombie economy of Japan's lost decade, because their kereitsu corporate combines would not take the 'hit' for their land bubble.

Right now it appears to me that they are overly preoccupied with the status of the biggest of the banks and their asset quality problems an under stimulating the real economy. I think this will be regarded as a policy error as were the actions of the Federal Reserve in 1932 wherein the Fed overreacted to a spike in CPI and tightened prematurely. The Fed may be engaged now in a policy error of a different sort.



I am not saying what MUST or WILL happen. I am not arguing from theory. I am just attempting to demonstrate what is happening now based on the data. And right now Ben is indeed printing money, and figuratively dropping it from helicopters. The problem is that the helicopters are hovering over Wall and Broad Streets, and not Main Street. And so we obtain asset bubbles in paper favored by the denizens of the Street.

If you want to know the theory, in a perfectly fiat system (no external standard constraint) deflation and inflation are always the outcome of policy decisions amongst a number of variables and competing interests. Period. That is how it is, and that is why central banks prefer it to the discipline of an external standard like gold.

Once the US relaxed its adherence to the gold standard and devalued the dollar, deflation became a moot point. What was not handled well was the continuing lack of organic aggregate demand, and velocity of money, because of the resistance of the Republican minority in Congress to jobs creation, and the overturning the New Deal minimum wage initiatives and labor reforms by the US Supreme Court. Consumers cannot generate healthy demand when they are unemployed, or being paid near starvation wages. But if you are in a well-to-do minority, things couldn't seem better, unless of course you were living in Germany, Italy, or perhaps even Japan.





I am not saying what the 'right thing' to do is. But what I am attempting to get across is that one way or the other, excess financial sector debt is going to be liquidated, either through default, or through inflation, or through a mixture of higher taxes and sluggish growth with a disparity of income that increasingly resembles 19th century serfdom and political instabilty, the rise of demagogues, and some vicious ghosts from the past.

At some point this dynamic is going to become less 'economic' and more political and the equilibrium will be reached. A good leading example of this is found in Iceland.

See also The Case for Deflation, Stagflation, and Implosion

For those relying on the Output Gap and slack Aggregate Demand please see Price, Demand, and Money Supply as They Relate to Inflation and Deflation

People tend to become very emotional over this sort of topic. There are many who are afraid that what they have will be taken, and there is even a vocal minority of the self-identified elite who wishes to obtain greater power and riches by leveling the middle class and the poor to improve their own supreme vistas. The funny thing is that to the genuinely powerful these 'elites' are about as significant as a bug on the wall, and their turn will come if that is the way it goes.

The most touching example of delusion that I have witnessed recently was an unwavering prediction about what will happen in the future because 'the majority of the people on the this chatboard have agreed on it.' Well, perhaps history gives a hoot. But I suspect that we are in His hands now more than ever. And you might do well to prepare yourself accordingly.

By the way, and this is just a stab at my own theory, a strawman as opposed to an examination of the data, I think the US is hammering the ECB to devalue the Euro, because they wish to further devalue the US dollar. If the major fiat currencies can be devalued in a relatively uniform manner, and some other statistics and prices controlled, the people can be subtly relieved of their savings and wealth, and be none the wiser. But those stubborn Germans had to be brought to heel first. And so it is.

Here is something from an old trading acquaintance of ours. Stage Set For Another Bernanke Adventure - Brady Willett of FallStreet

Foreign Holdings of US Dollar Assets

Roughly analagous to Eurodollars, although it is not clear how much if any of the central bank reserves are actually captured here in these reports by BIS reporting commercial banks, especially in China and the non-European countries. Certainly the NY Fed Custodial Accounts for Foreign Central Banks show no decline whatsoever from the long term trend of accumulation to support their mercantilism and currency pegs.



But the takeway from this chart is that a long term trend of dollar accumulation was broken, and rather painfully, in the deflating of the Wall Street financial assets fraud.

One might not expect the Europeans and Asians to accept new financial instruments in dollars quite so readily. The US seems intent on maintaining a few mega-banks to serve as "competitive" instruments of national policy on the world financial stage.

They may find that maintaining the banks and their particular weapons of financial mass destruction may be just as costly as 700 military bases in diverse locations. Such are the burdens of empire.

The US Dollar Rally of 2008: The Consequence of a Bull Market in Fraud

The theory of a short squeeze in Eurodollars which we had first put forward last year "The Dollar Rally and Deflationary Imbalances in the US Dollar Holdings of Overseas Banks" seems to be confirmed by this paper from the NY Federal Reserve bank, and the latest figures on cross border currency transactions from the BIS.

"Highlighting the international dimensions of the financial crisis that began in the fall of 2007, authors Niall Coffey, Warren B. Hrung, Hoai-Luu Nguyen and Asani Sarkar examine the difficulties international firms encountered obtaining U.S. dollars and the ensuing effects on the foreign exchange (FX) swap market. Analysis shows that as firms increasingly turned to the FX swap market to obtain funding, the dollar “basis”—the premium paid for dollar funding—became persistently large and positive, primarily as a result of higher funding costs paid by smaller firms and non-U.S. banks." The Global Financial Crisis and Offshore Dollar Markets

Further, the latest data from BIS shows that the dollar rally tracked the acquisition of eurodollars with a significant correlation. This is shown on the chart at the right.

After the Federal Reserve alleviated the short squeeze through dollar forex swaps "The Fed's Currency Swaps" with the central banks in the affected regions, the dollar squeeze dissipated and the dollar fairly quickly resumed its downward trend. There is a case to be made that some of the big US money center banks were using the dollar shortage to reap windfall profits, but this could have also been a side effect of the seizing in the short term credit markets.

But much of the European outrage, as least, was in feeling that they had been 'set up' by the very banks that had sold them the foully rated instruments in the first place. A classic face ripping, as they say at Wall and Broad. And this similar to the reason is why the Chinese government declared that its own institutions could walk away from derivatives arrangements that had been sold to them by the Wall Street wiseguys under false pretenses. US towns and states are not so fortunate it appears.

What does this mean? It implies rather strongly that those looking for a repeat of the sharp dollar rally from last year are very likely to be sadly disappointed.

This was no flight to safety; this was the consequence of a massive fraud in dollar denominated financial assets having been sold to gullible foreign investors and their banks. Note too that the eurodollar positions do NOT account for the dollar rally in 2006. This is what was expected, because there was no corresponding spike in LIBOR to indicate a squeeze. Rather, that earlier dollar rally was due to foreign investment in US equities and financial assets at the height of the post tech crash Dollar Assets Bubble.

Here is a brief piece on The Backwardation in LIBOR and Its Divergence from Effective Fed Funds which shows the signs of the 'eurodollar squeeze' as opposed to net foreign investment in financial assets.

The foreign banks have now unwound a significant amount of the dodgy US dollar financial assets that caused the short squeeze through their fraudulent valuations.

Yes, there will be more rallies in the ongoing decline in the US dollar. There always are countertrends in every long term trend. This is how traders make and lose their gains, as the market makers skin them slowly but surely. We can only wonder for now how much money has come into the US equity and bond bubble in the past six months, and how much is leveraged via the dollar carry trade.

But we ought not to see such a large rally in the dollar again unless there is a precipitous decline in stocks that forces a painful unwinding of the dollar carry trade. Foreign banks ought to be on the lookout for this development, because it is in their regions that the short squeezes have most of their effect. The Fed is awash in dollars and does own a printing press, and is not afraid to use it.

And for those desperately waiting for a free ride and easy money from a synthetic dollar short on debt, they should be reminded that the chief monetarist himself, Milton Friedman, also reminded that "There Ain't No Such Thing As a Free Lunch."

Or more civilly perhaps, "even fraud has its limits in conferring more value upon that which has less."

Dollar Assets and Liabilities in the International Banking System Update

On 2 October 2008 in The Dollar Rally and Imbalances in the US Dollar Holdings of Overseas Banks we said that:

When a multinational company deposits US dollar receipts from an export business in their domestic banks those deposits are frequently held in dollars... If those dollar assets decline because of a financial event as we are seeing today, the depositors may choose to withdraw their dollar deposit from the bank as they mature. This places the bank in an awkward position since the corresponding assets have deteriorated in value, but the nominal value of the certificate of deposit liability remains the same with the requisite interest accrual. As a result, a demand for dollars can be generated in the foreign country that is artificial but very real in terms of day to day banking operations. This is the 'artificial dollar short'

In the chart below we have updated the data from the BIS report to June of 2008, and the DX dollar index to today. In our October blog entry we forecasted that:

The resulting sharp rally in the US dollar is therefore likely to be an anomaly which will correct, and perhaps quite sharply, once the effect of the short term imbalances dissipates.

Although it is too early to say with certainty, it does appear that the hypothesis may be valid, and that the correlation is significant. The recent dollar rally was as the result of an artificial short squeeze resulting in an anomalous demand for dollars primarily in Europe.

The actions by the Federal Reserve and the foreign central banks to open their swap lines to relieve the dollar liquidity short squeeze appears to have been successful. We will see in the next series of BIS data how effective that effort has been, and if it will need to be continued as the imbalances are worked out of the system. As the ECB announced on September 13:

In order to facilitate the functioning of financial markets and provide liquidity in dollars, the Federal Reserve and the European Central Bank (ECB) have agreed on a swap arrangement. Under the agreement, the ECB would be eligible to draw up to $50 billion, receiving dollar deposits at the Federal Reserve Bank of New York; in exchange, the Federal Reserve Bank of New York will receive euro deposits of an equivalent amount at the ECB. The ECB will make these dollar deposits available to national central banks of the Eurosystem, which will use them to help meet dollar liquidity needs of European banks, whose operations have been affected by the recent disturbances in the United States.

We assume that at some point the ECB and BIS will take steps to modernize the international currency system to remove its exposure to the fluctuations of a single currency and the need for ad hoc arrangements to facilitate the proper functioning of international trade. Although a crisis has apparently been averted for now, it serves to expose the artificiality of the existing currency regime which may exist but not be as noticeable or measurable under more common conditions.

TED Spread Soars to a New Record - Symptom of the EuroDollar Squeeze?

There is a real possibility that the TED Spread blowout is not an artifact of risk per se, but a symptom of the US dollar squeeze in Europe.

US Dollar Rally and Deflationary Imbalances Overseas

TED is an acronym for Treasury and EuroDollar. A Spread is just the difference or 'distance' between one thing and another.

Eurodollars are bank deposits denominated in U.S. dollars but held at locations outside of the U.S.

Initially, the term only referred to dollar deposits in London but has been expanded to include dollar deposits at any offshore location.

T bills are US Treasury debt of short duration are considered to be risk free.

TED Spread = Yield on Eurodollar deposits - Yield on T Bills

The TED Spread is the difference between U.S. Treasury bill yields and yields for Euro deposit contracts of the same maturity, generally three months.

Demystifying the TED Spread