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The MoA Week In Review – NOT Ukraine OT 2022-43
Last week's posts at Moon of Alabama:
Interesting summery …
… and a few corrections to it by Agitpapa:
1-This Swiss ex-gen staff colonel's Ukraine analysis has a lot of inaccuracies and speculation, as well as some interesting points. In 2014-17, the CIA/nazi Maidan coup regime's 1st attempt to exterminate Russian speakers in Donbass ended in a crushing …
— Other issues:
Europe's demise:
The JCPOA Nuclear Agreement is dead:
Use as open NOT Ukraine thread …
A 2nd economics note:
It seems likely that the Eurodollar is, at least right now, one of the primary pillars of the USD/Washington_Consensus supremacy in international finance.
Wiki says that the eurodollar market size is $13.833T in 2016; other sources say the eurodollar market is now $15T+ today.
Eurodollars are U.S. dollars held in time deposit accounts in banks outside the United States, which thus are not subject to the legal jurisdiction of the US Federal Reserve. Consequently such deposits are subject to much less regulation than deposits within the U.S.
To put the above numbers in perspective:
M1 = cash and very close equivalents. M1 today is about $20.7T but it was $4T in January 2020 St. Louis Fed source
M2 = M1 + savings accounts, money market accounts, small retail money market mutual funds. Cash plus so to speak. M2 today is about $21.8T today and was $15.4T in January 2020 St. Louis Fed source
M3 = M2 + large-denomination time deposits, balances in institutional money funds, repurchase liabilities, and eurodollars held by U.S. residents at foreign branches of U.S. banks. M3 size today is about $21.8T, and was $15.4T in January 2020.
Note the enormous shift above in M1 between January 2020 and later. Note also that M2 and M3 changed far less between January 2020 and today – is M2 and M3 truly including M1 now, according to definition?
The St. Louis Fed notes that the M1 change was due to a change in May 2020:
Before May 2020, M1 consists of (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and (3) other checkable deposits (OCDs), consisting of negotiable order of withdrawal, or NOW, and automatic transfer service, or ATS, accounts at depository institutions, share draft accounts at credit unions, and demand deposits at thrift institutions.
Beginning May 2020, M1 consists of (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and (3) other liquid deposits, consisting of OCDs and savings deposits (including money market deposit accounts). Seasonally adjusted M1 is constructed by summing currency, demand deposits, and OCDs (before May 2020) or other liquid deposits (beginning May 2020), each seasonally adjusted separately.
The change is the bold above, it seems. What does “other liquid deposits” mean?
Hmm. I will be looking into that, especially since it seems to correspond closely to the eurodollar market…
Anyway, the point of all this is: if a significant amount of the eurodollars is truly “outside of the US, including US citizen accounts in foreign banks”, then the eurodollar market is 1/2 to 2/3rds of the M1, M2 and even the M3 money supply of the United States.
This is effectively increasing the supply of existing dollars, which are devalued by issuance of new USD by the Federal Reserve, by at least 40%. I say 40% because $15T/($21.4T + $15T) = 40%, but if a significant amount of that $21.4T is actually eurodollar, then the eurodollar percentage is larger.
Now consider if say, 50% of global commodities are no longer financed in eurodollars – hence not denominated in dollars ($15T –> $7.5T).
($21.4T+$7.5T)/($21.5T+$15T)=20% fall in the “USD supply worldwide”
Put another way: the US deficit in 2021 was $2.8T
$2.8T/($21.4+$15T+$2.8T)=7.14% vs.
$2.8T/($21.4T+$7.5T+$2.8T)= 8.83%
This delta of ~1.7% would go straight to higher US inflation. The greater the eurodollars counted in M3, the more this delta would be.
Again, this is purely an example; I am almost certainly not including all actual USD in existence. The actual presence of the eurodollar market in M1/M2/M3 is pretty damn important, for example.
Side note: the petrodollar standard. The petrodollar standard plays into the eurodollar directly, but the petrodollar itself consists of oil exports. Oil exports are somewhere around 42 million bpd (from wiki, but wiki sources are 2013 era). Let’s make it 50 mbd for simplicity. And let’s set oil price at $100/barrel, again for simplicity.
50 million * 365 * 100 = $1.825 trillion. So even if 100% of oil is priced in dollars, it would be around 10% of the eurodollar market (note that there are interest costs, shipping costs, risks etc that would inflate the actual eurodollars used in importing oil).
That last note is that foreign central bank holdings of USD are, supposedly, to backstop trade. Or in other words, they’re also dependent on the percentage of trade in USD and thus have some kind of a relationship to the eurodollar market. The total official foreign holders of US Treasuries is $4.17T… Hmmm.
The picture still isn’t sharply defined, but the outline is getting clearer.
Trade + USD standard = eurodollar market.
Eurodollar market drives foreign CB Treasury holdings = additional USD outside the US.
Eurodollar market + foreign CB Treasury holdings = $15T+$4.17T = $19.17T – compared to $21.4T M3 in the United States.
This is effectively doubling the money supply of the United States for free, steady state.
The constant eurodollar flow likely has an even greater effect since eurodollars are not real – they exist only as interest bearing loans which drive income into banks.
What Pozsar is talking about is how the “Just In Time –> Just In Case” plus “Good commodities vs. Bad commodities (Russian)” paradigms will affect the eurodollar flows (i.e. shrink them).
He postulates that China will step in to replace the eurodollar with the “eurorenminbi” – this part is a lot less clear, but now I understand that it is a “somebody must step up” viewpoint.
I still think there are structural issues with China regarding the closed convertibility of the renminbi; it is not clear at all that the e-yuan is ready to step into this opportunity just yet.
Or in other words: If this was 2027 and the e-yuan was proven in practice for 2,3 years – Pozsar would be spot on.
But in the absence of a convertible renminbi – i.e. China totally changes its position on a dime or conducts a hasty and risky rollout of the e-yuan (something China just doesn’t do), I’m just not seeing the change anytime soon.
Posted by: c1ue | Apr 11 2022 11:27 utc | 86
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