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.

Madoffed: Kevin Bacon and Kyra Sedgwick

Why do people trust enormous sums of money to a stranger without due diligence, often on the word of another person who they may know only indirectly?

A good part of it is reputation and past performance, and who that person knows.

So Kevin Bacon and Kyra Sedgwick, in a lapse of sound portfolio theory, entrusted a sizable share of their wealth to Bernie Madoff, and are now apparently regretting that decision.

The average person likes to read about celebrity events. It provides an excitement to what might otherwise be a dull period of life. It also makes the ordinary person seem fortunate, smart, to hear of the misfortunes of the rich and famous. Misery loves company, and there is a bit of the voyeur in all of us.

Who would trust their wealth to an opaque and inherently arbitrary store of wealth, based solely on past performance and general reputation?

You would of course.

Don't believe it? Check you wallet and you bank accounts. Where is the majority of your wealth being held, if not in US dollars and dollar related financial assets?

Its not the same thing eh? Let's see how you feel about it at this time next year when Zimbabwe Ben has the monetization machine up to ramming speed.


New York Magazine
Madoff’s Latest Victims: Kevin Bacon and Kyra Sedgwick
12/30/08 at 10:15 AM

...We'd heard that along with Hollywood boldfacers Jeffrey Katzenberg and Steven Spielberg, Bacon and his wife, Kyra Sedgwick, lost money in Madoff's devastating $50 billion Ponzi scheme, and Bacon's rep, Allen Eichorn, confirmed it for us.

"Unfortunately, your report is true," he wrote. He wouldn't elaborate on whether, as we'd heard, they'd lost everything except for their checking accounts and the land they own. "I can confirm that they had investments with Mr. Madoff — no further specifics or comment beyond that," he said, adding: "Please, let's not speculate or rely on hearsay."

But we can't help but speculate! Just think about it: Footloose money: gone. Wild Things residuals: gone. The Singles stash: obliterated. If there's anyone in Hollywood who didn't deserve this, it's Kevin Bacon and Kyra Sedgwick. Those two have worked. It sincerely pains us. At least they have The Closer to fall back on. (For the record I take absolutely no joy in their misfortune. They seem like fine people. I feel genuinely saddened by their misfortune, in the same way I would feel sorry for your misfortune if I knew you. They have a strong cash flow and will recover. You may not be as lucky. Take away a message. Diversify. - Jesse)

The United States of Ennui

Our friend at Some Assembly Required had an interesting reaction to the Wall Street Journal story about the Russian Professor who is predicting the breakup of the US into several independent groups of states:

"Some are predicting the USA will erupt and split in six or seven smaller nations. Nope, there is not enough gumption left in the US citizenry to mount a decent protest, much less massive separatists movements. More likely the US will simply thrash around a bit and then fade into irrelevance. Governments will be overthrown, in more places than you might suspect (think Europe). But the US populace will sit in front of the TV, waiting for someone to reward them with their god-given right to happiness and success."

We doubt that the US will become irrelevant for a long time, but it is hard to disagree with such a frank and insightful analysis of the American public. Our hallmark seems to be a deep and abiding boredom and self-absorption, a walking amnesia with an historical perspective measured in days, if not hours.

At times like these the Almighty will often send His people a wake-up call.