These things evolve, and they take time. There are a great many similarities between what is going on now and what happened in 2007 and 2008 pertaining to money, then finance, finally economy. Starting August 2007, the eurodollar system fell apart in condensed fashion, almost a typical “run” if but one of and between only banks. Starting in August 2011, it has been the same thing but in super slow motion. Where in the prior episode banks would frantically pull out in disorder and disarray, here they remove themselves a little bit at a time, in fits, starts, and the occasional small but violent outburst.
During the Great Financial Crisis there was the same unevenness, it was just more difficult to discern because it all happened so fast. But it was not a single panic, rather it was broken into several distinct phases that when combined produced the worst results. And in between those phases, particularly the weeks and few months following Bear Stearns, daylight emerged if only briefly so as to produce tragically false hope.
The year 2015 under the “rising dollar” produced a similar turning point, and one that was equally shallow. Largely because of economists’ misplaced faith and often enthusiasm for a global economy they were sure was about to take off, central banks largely sat out as events unfolded around them (“unexpectedly”). Even where they did not, such as China, what was done was more so half-measure than full commitment.
I would not go so far as to claim full commitment on their collective part this year, but there can be no doubt that they are and have been far more engaged and attentive. To put it in military terms, they launched a counter offensive after being resoundingly defeated through February 11. A counter attack can be highly effective but in the context of your enemy’s own offensive, which has its own momentum and power, it has to break through or else you are only delaying the inevitable (Battle of the Bulge) before actively contributing to it.
Of the “dollar” in 2016, I have little doubt that a great many “fell for it” all over again; in a way that was distressingly similar to what had happened in late 2007 and early 2008. Here is an article published by Bloomberg in early July about how though CNY was falling again it wouldn’t matter:
Global investors are growing more comfortable with a weaker yuan after China’s central bank improved its communication with markets and took steps to prevent a downward spiral of depreciation and capital outflows. HSBC Holdings Plc sees little chance of a return to January’s turmoil, while Beijing Gao Hua Securities Co. says the Chinese currency will be stronger against a basket of trading partners by year-end.
“This time, it’s different,” said Song Yu, the Beijing-based chief China economist at Gao Hua, the mainland joint-venture partner of Goldman Sachs Group Inc. He has been the top-ranked forecaster of China’s economy since Bloomberg began its ranking in 2013. “The recent depreciation in the yuan didn’t result in large volatility in financial markets around the world, and there weren’t heavy speculative positions shorting the currency or individuals trying to convert their yuan holdings into the dollar in a panic.” [emphasis added]
Was it really different? Or had central banks counterattacked the “dollar” through means and methods that don’t often show up in traditional accounting? In a constantly evolving, dynamic environment what “works” once usually won’t for long. For the eurodollar system, that would involve forward cover, forward operations, maybe even large term repos that while fooling the likes of Bloomberg (and all economists) come attached with expirations that at expiration actually adds to the “dollar’s” side of the (il)liquidity equation.
Central banks might have caught on to this “rising dollar” belatedly in the middle of 2016, but that doesn’t mean they solved its (to them) riddle.
And so once more we need to clarify all our terms. Using “dollar” in quotations as I do is purposeful and meaningful; a dollar is a statutory “thing” that has changed over the decades but as of the last accepted meaning was a physical piece of paper stamped with statutorily-approved imprimaturs. That is what most people think of when you write dollar.
When floating currencies were first introduced and widely accepted in the early 1970’s, as a consequence of monetary and financial evolution that had struck down Bretton Woods in the late 1950’s, for which the eurodollar had a big role in accomplishing, most people again held to misconceptions about what that meant. Floating currencies were thought of as only the ability of one currency to trade freely in price against all others. In reality, however, what it meant was altogether different because it opened a Pandora’s Box of monetary dimensions that still aren’t appreciated (even among those few aware of them).
When Nixon finally defaulted on US dollar convertibility in August 1971, it was the last stage of a more than decade-long change that was more than just the rigid, physically-determined value of a dollar. It opened the door for transformation into what would become the “dollar”, because when you end convertibility altogether in any form you leave it to the banking system about what would constitute “good delivery.” What the global banking system decided was that “good delivery” would increasingly take on weirder and more exotic forms because in reality these were just the exchanges of numbers. This is why I often refer to the eurodollar as more like a computer network than money or currency; it is monetary solely because the end result of the exchange of information is financial in nature.
That was what floating currencies actually meant, transforming the easy-to-understand dollar into the functional but incoherent “dollar.” Having ignored it even through 2008 and 2011, central bankers were left with little choice because of the economy of 2015 that fit with decaying “dollars” instead of the more popular and optimistic unemployment rate (in the US; there were different false signs of hope in other places). This year, 2016, has been their crash course. Being so far behind the curve, however, it would be wholly unreasonable to expect them to have figured it all out; or even enough of it to be effective beyond the very short run.
The “rising dollar” version of “dollar” decay is just a euphemism for “dollar” shortage. It works on several levels because in basic economics (small “e”) something that is in short supply is bid up in price, as the dollar exchange rate has been in often association with this shortage. But it also has manifested in ways that are well beyond the grasp of any dollar index or conglomerated exchange value, to truly express all the ways in which the “dollar” is a floating, relative concept convertible into nothing. That is one point of slow-burn failure; it’s as if it is trying to reduce itself into its null value, its non-virtual base, but there isn’t one.
This is why economists are the single biggest impediment to actual economic and financial recovery. As I wrote Friday:
Yes, the “dollar” is the primary immediate problem, but economists are no less so because by their very place they actively impede the public’s ability to see it. They are powerless as far as the “dollar” is concerned, but they guard all the doors and intellectual access points to do something about it. If you had asked Janet Yellen what’s been wrong, as countless politicians and media did, she during the first two years of her post would have denied that anything really was. Now, all of a sudden, she admits there might be something wrong, but hasn’t any clue about what it is even though she openly speculates “it” will seriously obstruct the Federal Reserve’s policy window…
The world will not recover until it stops asking Janet Yellen for the answers. It really is that simple. That means more than just looking to the FOMC to vote on some new scheme, or to raise rates because they view the economy as if great things are just around the corner. The recovery was just over the horizon at the last election in 2012, too, and despite QE3 (and 4) it “somehow” remains so? No, everyone needs to realize that Janet Yellen doesn’t have any answers because she doesn’t even know the questions – and barring a true miracle she never will. But by her position and the deference to it in the mainstream, media as well as politics, nobody is even given the opportunity to ask the right ones.
Because of that, when CNY sold off in July Bloomberg says it doesn’t matter anymore; and when it does so again this time with EM currencies once more frighteningly in tow, the “explanations” for it will be just as nonsensical: it’s Trump; it’s the FOMC raising rates; it’s the bond selloff and differentials; inflation; etc. CNY is the central pivot of the “dollar’s” current aim, but it isn’t the cause – it is the effect. Until the world overthrows orthodox Ecnomics and actually appreciates what floating currencies actually meant all this time, to view the dollar as appropriately the “dollar”, we are stuck with the perpetual but entirely predictable paradox of the “unexpected.”
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