the strong usd

[jk]

i've been posting in a thread about dollar hegemony, the major thrust being that the dollar will eventually have to be devalued strongly. but "eventually" can be a long time, even if it occurs within a decade, and a lot can happen during the run up.

we appear to be living out marc faber's prediction that all the fiat currencies will be destroyed, with the dollar being the last to go. right now the em currencies are under attack as global dollar liquidity contracts. the theory would say that the euro and yen will go too but only after the em currencies. then king dollar..

meanwhile, however, various regs forcing domestic institutions into treasuries [e.g. the recent money market fund rules] combined with incentives for massive repatriation of corporate funds held abroad, are squeezing the eurodollar market. add rising us rates and the fed's qt, along with rising deficits requiring increased u.s. gov't borrowing. all of these phenomena squeeze the usd supply.

the turkish lira shows the earliest fallout of such policies.

https://www.zerohedge.com/news/2018-...nt-chart-world

a dollar spike would be accompanied by dropping asset prices along with dropping currencies, and economic contraction. i.e. "KA"

my dollar hegemony thread is about the "POOM" that will follow.

[thriftyandboringinohio]

Re: the strong usd

Thanks jk, I did read the article at the link.
I came away a bit confused, I would love to hear your thoughts. I see this as the author's thesis:

1. The global money supply of US dollars will be shrinking, the author calls this the dollar monetary base
2. The author discusses the bad results of this shrinking dollar monetary base, if premise 1 is correct

I don't exactly see how the premise is true. The author talks about how only the US can create dollars. Could that be wrong?
Remember that most US dollars are created by banks as credit when they make loans. The US government has almost no control over that lending which creates dollars out of thin air.
Why can't foreign banks create dollars exactly the same way by issuing loans denominated in dollars? If foreign governments are facing an economic disaster they might encourage their big banks to do just that.

A related topic is asset prices. By "asset prices" we usually mean prices of stocks, bonds, real estate, and exotic financial contracts like CDS, MBS, and derivatives.
It's easy to see how all those easy money dollars bid the prices up for assets. But an end to easy money doesn't require prices to go down, right?
It only means the prices stop going up. They can languish at current prices for years on end rather than crashing suddenly down.

[jk]

Re: the strong usd

i'm no expert of monetary theory, but my understanding is that bank loans are created based on reserves and limited by regulation to some multiple of reserves. triffin's dilemma is about the necessity of the global currency reserve holder to run deficits to get its currency out into the rest of the world.

for a foreign bank to create dollars without it being based on reserves at the fed or on eurodollars held, would be hard. suppose you wanted to withdraw $100 of your "dollar balance." ultimately the bank doesn't have the dollars to back the balances it created.

where is finster when we need him?

anyway if such a bank can "create" dollars why can't you or i? we can create iou's, and get goods with them if some vendor will accept our iou. but at some point the vendor would want to paid in a more widely accepted "currency," like dollars.

every time global dollar availability goes down there is a crisis, usually starting with the em's.

i make no claims as to the accuracy of any of what i just said. i'm groping based on not-much knowledge. perhaps someone else can chime in.

[thriftyandboringinohio]

Re: the strong usd

i'm no expert of monetary theory, but my understanding is that bank loans are created based on reserves and limited by regulation to some multiple of reserves. triffin's dilemma is about the necessity of the global currency reserve holder to run deficits to get its currency out into the rest of the world.

for a foreign bank to create dollars without it being based on reserves at the fed or on eurodollars held, would be hard. suppose you wanted to withdraw $100 of your "dollar balance." ultimately the bank doesn't have the dollars to back the balances it created.

where is finster when we need him?

anyway if such a bank can "create" dollars why can't you or i? we can create iou's, and get goods with them if some vendor will accept our iou. but at some point the vendor would want to paid in a more widely accepted "currency," like dollars.

every time global dollar availability goes down there is a crisis, usually starting with the em's.

i make no claims as to the accuracy of any of what i just said. i'm groping based on not-much knowledge. perhaps someone else can chime in.

Thanks jk, great reply.

[Milton Kuo]

Re: the strong usd

A related topic is asset prices. By "asset prices" we usually mean prices of stocks, bonds, real estate, and exotic financial contracts like CDS, MBS, and derivatives.
It's easy to see how all those easy money dollars bid the prices up for assets. But an end to easy money doesn't require prices to go down, right?
It only means the prices stop going up. They can languish at current prices for years on end rather than crashing suddenly down.

And end to easy money doesn't require prices to go down but, in all likelihood, prices will go down. This is because there are players in the system who are hoarders of money. This is especially true when you have very overpriced situations like today. When these players hoard money and easy monetary policy is stopped, you get a situation where the amount of money circulating falls and there will be fewer bids for various assets which typically causes bids (and thus prices) to be lower. Couple that idea with the fact that principal must be repaid and you have further tightening in the money supply.

[jk]

Re: the strong usd

it took a few years for the southeast asian crisis to spread. u.s. markets didn't peak until years after the baht crisis that started things. i don't know how to draw the connections but i suspect they exist.

tighter money raises interest rates and lowers equity and commodity values since you've raised the discount rate with which to value future returns. in finster's terms, if the dollar is rising and everything else is falling the essence is that the dollar is getting more valuable. therefore that dollar can buy more "stuff" of any and every kind. since we're used to taking the dollar as a given, we see this as a fall in asset prices.

[dcarrigg]

Re: the strong usd

The big issue in EMs right now is leveraged dollar-denominated corporate debt by firms that bring in most of their revenue in non-dollar denominations. Non-financial corporate debt has never been so large before; it's not historically the elephant in the room, but it will be this time. It's a much cleaner direct vector for a disease that can start in EMs getting to the big boys, the idea being corporate junk goes toxic and people start indiscriminately dumping it. Here, I like this chart, I think it clarifies the situation:



Worldwide, corporate debt is bigger than government debt. It grew just about as fast in the past decade, but the terms are shorter and the rates are higher. Think about government debt like a mortgage and non-fin corporate debt like a car loan to give a rough idea of what I'm saying. If you buy a car as expensive as your house, the monthly nut's going be much higher, right? So you need returns that can chase it down and beat the loans, and you need them to be available soon and to be consistent. A temporary downturn, you take a 10% pay cut or something, can easily cause a cash crunch. Now, imagine that you're paid in lira and that big fat car loan is due in dollars. And it was 5 lira to the dollar last week, but it's 7 today. And you're not getting a raise. F. Bad news.



I mean, I don't have any great insight into reserves or reserve currencies or whatever might be happening there. Finster can field that one. But the US is still the safest game in town. Turkey went pop. Hungary's Altman-Zs aren't looking too much better. Neither are many others. The exposed banks take the immediate hit. But then the non-bank equities fall in order. Actually, by this measure, China looks by far worst of all--even worse than 97. But China is also special in its own way, its currency is not subject to quite the same exposure to public markets, and the line between its corporate and government debt is blurred by SOEs. My guess is the CCP can manage it. But I'm not sure, and it will be interesting to watch.

[dcarrigg]

Re: the strong usd

Also, these sorts of graphs might be interesting:



Russia's another trillion dollar economy, about the same size and population as Mexico. Similar story.

















Then realize it's kind of all over:
















And then there were the elephants...













And for reference, here was Turkey:

[jk]

Re: the strong usd

look at asia ex-china





so if you have money invested in brazil, or south africa, or russia, do you feel any urge to divest?
how do you spell C-O-N-T-A-G-I-O-N?

[dcarrigg]

Re: the strong usd

This is a good one too: https://www.oecd.org/eco/outlook/Res...esentation.pdf

[vt]

Re: the strong usd

Good article DC!

[jk]

Re: the strong usd

effects on em's
https://www.themacrotourist.com/posts/2018/08/15/contagion/

[jk]

Re: the strong usd

from steve blumenthal's trade signals last night:

My two cents on how the “Great Reset” might unfold: Emerging Markets falls first, then Europe (lost confidence leads to a Sovereign Debt Crisis), then Japan and/or China are next in line and last in my mind will be, and to a lesser extent, the United States. There is no way the U.S. avoids recession if the balance of the world is in recession.

This today from Marty Armstrong, “The European Central Bank is instructing banks to restrict the conversion of Euros to dollars. The Euro has fallen to 113006. Once again, the dangerous game here is when we cross that line of demarcation between CONFIDENCE in government and the REALIZATION that there is nobody in control but the free markets. Once all the talk and all the promises are no longer considered to be worth listening to, that is when the monetary crisis begins to really shake the foundations. We are moving closer to that point of no return.

[jk]

Re: the strong usd

@santiagoaufund

Divergent Monetary Policy-
Fed: Tightening-
Int'l: Easing-
EM: Scrambling for $ funding

Triffins Dilemma-
Trump: MAGA via Tarrifs & Trade War-
Powell: Not our job to bail out EM

Divergent Political Policies-
in US- in EU- in China

It is the perfect #Dollar storm...


and

gold in yuan [gold was very stable in terms of yuan for a while, until it suddenly isn't]

Close

Santiago Capital @SantiagoAuFund 1h1 hour ago
"Gold is very stable in terms of Yuan..."

4 replies4 retweets15 likes


K

KKA?

[Mega]

Re: the strong usd

I was thinking more "Strong $" like the 1980's.........trump will just have to live with a Mega Recession (Like Regan did).......am more worried by the dropping £.
Back in 2007 it was $2.23 to £1......now £1.26 ish............Northsea oil/gas are gone, limted water for fracking.........not looking Good
mike