"There's Something Weird Going On": Jeff Snider On The Global Dollar Shortage

Tyler Durden's picture

The first time we explained that one of the biggest risks facing a world in which the dollar is the reserve currency is a global USD shortage, was in mid-2009, when we wrote "How The Federal Reserve Bailed Out The World."

At the time, the IMF calculated that just ahead of the financial crisis, "major European banks’ US dollar funding gap had reached $1.0–1.2 trillion by mid-2007. Until the onset of the crisis, European banks had met this need by tapping the interbank market ($432 billion) and by borrowing from central banks ($386 billion), and used FX swaps ($315 billion) to convert (primarily) domestic currency funding into dollars." The IMF then extrapolated that "were all liabilities to non-banks treated as short-term funding, the upper-bound estimate would be $6.5 trillion."

Since then the shortage, which some have dubbed a potential multi-trillion dollar margin call, has only grown and became a prominent issue back in March of 2015, when this phenomenon was used to explain why the cross-currency swap had plunged to multi-year lows. As JPM explained at the time, "the fx basis reflects the relative supply and demand for dollar vs. foreign currency funds and a very negative basis currently points to relative shortage of USD funding or relative abundance of funding in other currencies. Such supply and demand imbalances can create big shifts in the fx basis away from its actuarial value of zero."

Fast forward a year and a half later, when none other than the Bank of International Settlements, or the "Central canks' central bank", warned last November that it was no longer the VIX that was the widely accepted barometer of market "fear", it was now the dollar's turn to become the global fear gauge: "just as the VIX index was a good summary measure of the price of balance sheet before the crisis, so the dollar has become a good measure of the price of balance sheet after the crisis. The mantle of the barometer of risk appetite and leverage has slipped from the VIX, and has passed to the dollar."

Shortly thereafter we once recapped the main risks emerging from this increasingly more prominent threat to global financial stability, and wondered at what point would the Fed finally address this risk pointed out not only by this website for nearly 8 years, but also by the BIS, in a post which piggybacked on the recent work by ADM ISI's Paul Mylchreest, who has made tracking the global dollar shortage one of his primary objectives.

* * *

Now, in an exhaustive, 70 minute interview, submitted by Patrick Ceresna at MacroVoices.com, another prominent analyst who has been closely tracking the global dollar shortage, Alhambra Partners' Jeffrey Snider sat down with Erik Townsend to explain - once again - why this is such a critical topic, even if it comes at a time of unprecedented global complacency (it's amazing what record high stock prices will do to concerns - or lack thereof - about the future).

As Snider puts it, while most other risk indicators imply smooth sailing, "there is 'something' weird going on" when it comes to dollar funding and global imbalances of the world's reserve currency, i.e., dollar shortage.

  • In the interview, among the many topics covered, are
  • Understanding the Eurodollar Money Market
  • Swap Spreads and Interbank Hierarchy
  • Dimensions in the Eurodollar Futures and Eurodollar Money Supply
  • Why does the World Need So Many Dollars?
  • How the Eurodollar market supplanted the Bretton Woods System
  • U.S. Dollar and the Dollar Funding Gap
  • Reflation Trade Debunked
  • Interest Rates Trapped
  • Failing Global Currency System

While we urge readers to listen to the full interview below, here are some of the highlights, starting with "why the Dollar shortage a symptom of an inherently unstable system."

As Snider explains, "the dollar shortage isn't so much the shortage per se, it’s the fact that it's a symptom of what is an inherently unstable system." He notes that "the reason banks are withdrawing from the system is that it's just is no longer tenable" and "so there has to be some kind of – whether you want to look at it like another Bretton Woods – conference, a global monetary system, a global monetary get together where people start to analyze solutions to the problem as they are rather than keep trying to apply band aids that are not going to work. "

But, he concludes, "step one of that task is to actually recognize the problem as it is and so doing more stimulus or doing more QE isn't going to solve anything it isn’t do anything just like prior QEs and prior stimulus haven't done anything either because the problem is an unstable system."

* * *

Snider focuses on the Eurodollar system, which he defines as a problem of "decay and dysfunction" and explains that "nothing ever happens in a straight line even the Eurodollar problem has not been a singular event. It’s not been a decade long straight line of decay and dysfunction." 

He goes on to say that the fact that after enough time these markets have adjusted to the fact that the economy's going to be bad for a very long time until something actually changes and so true reflation is predicated on something actually changing rather than the hope that something might change.

Looking at history, Snider observes that "what happened in July 2008 obviously was the fact that everyone decided almost all at once that wasn't the right interpretation of what the Fed was doing nor was it the right interpretation of the dollar system overall. So, that reflation ended in reality which was the dollar system was eroding and it was eroding in a very dangerous way and that's why oil prices essentially crashed from July till I think January 2009."

An implication of the ongoing reserve currency funding shortage is that, according to Snider, despite the occasional blip (arguably funded by massive Chinese credit creation), "reflation is going to fail and there’s nothing the Fed can do about it." He goes on to state that "until they fix the global dollar problem we're not going to fix the global economy and so we're kind of stuck gyrating between various levels of really bad. We go from the lack of recovery to what looks like a global recession to the lack of recovery and back again" as a result he thinks that "reflation is going to fail."

Snider also said that "because of how they've defined the last ten years" even the Fed "no longer believes that it's in its interest to do anything." He agrees and sais that "there's nothing that the Fed can do about it."

"In other words, we want them to start considering the global currency system and how it actually is operating and failing rather than their stylized academic approach which doesn't apply. And until they're actually convinced that there is a role for the central bank in that condition output gap or not, we're kind of stuck."

The failure to stimulate benign inflation is captured on the next two charts which show "why this version of ‘reflation’ is so far less than even 2013’s version."

His troubling assessment: "I hate to think of what the next decade might look like because history is not very kind in these kinds of situations where you have prolonged periods of stagnation."

* * *

Putting it all together, Snider goes on to say that the Eurodollar futures market in particular is saying is that "if the Fed is going to raise rates it’s not to raise rates for a long or it’s not going to be able to raise rates for long." Echoing a warning we - and many others have made on many occasions - Snider says that if the yield curve happens to invert again "if they ever get that far" then it will "immediately be like in 2005 or 2006 all over again it won't stay that way for very long either the market will force the Feds’ hand or the Fed will realize the error and correct it. What's important about this is that "in each of these reflation episodes you can clearly see the market's faith in that reflation diminishes each time for these very reasons that we're talking about because these markets have become attuned to the fact the Fed isn't exactly what everybody thought it was, monetary policy isn’t what everybody thought it was."

Snider summarizes by saying that "the fact that these markets realize that there's a problem in Eurodollar system, there's no banking to be had, no additional marginal banking capacity being added and without it none of these stuff really matters, none of these other stuff really matters. That's the only thing that truly matters" and concludes gloomily that "the probability scenarios for economic and financial future are much darker now than they were three years ago."

* * *

Snider's full interview can be heard below (Here is a link to the entire podcast transcript):

The embed code for this episode can be found here.


We also urge listeners to follow along using Snider's prepared slides presented below.

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Wulfkind's picture

"By the pricking of my thumbs, something wicked this ways comes"

Bill Shakespeare

Perimetr's picture

Yeah, such a shortage of dollars these days

trillions and trillions and trillions for the banksters, for the military, all created on the magic keyboards of the Fed.

The only shortage of dollars is in the bank accounts of the deplorables, the neo-serfs 

Formerly known as the "middle class." 

SeuMadruga's picture

Shortage of dollars, or short age of dollars ?

cheka's picture

uhhh

see interest rates - that tells you demand v supply (including frbny and their ilk)

prices this high tell that supply is low relative to demand

mind reset's picture
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Tarzan's picture

The shortage of dollars is a factor of the glut in dark ops.  The secret budgets of rogue agencies are supplied by the magic of Fiat, and the ignorance of the people who's purchasing power is eroded by every dollar they spend behind the curtain. These are unaccounted for dollars floating around the system watering down every dollar we earn!

Audit the Fed and the MIC and you will find trillions of unaccounted for spending, from a Government who hasn't had a real budget for decades now.  All this will blow up in our face, in one huge flash crash, where your "money" becomes worthless inside of an hour!

prefan4200's picture

".....these markets have become attuned to the fact the Fed isn't exactly what everybody thought it was, monetary policy isn’t what everybody thought it was."

I'll bet more than a handful of ZHers knew right from the start that QE was BS and wasn't going to do anything but extend the problems and make them worse.  So, to that quote's author I would say, "no, not everyone thought the Fed was what you thought it was, and not everyone thought monetary policy was what the Fed thought it was."  Not everyone is clueless, although the general level of cluelessness in the Fed, MSM, and general population on this issue is beyond disturbing.

auricle's picture

Trumps attempts to reduce trade deficits with tariffs and bringing jobs back will put further pressure on the dollar decline of foreign central banks. Yet Trump wants a weak dollar. These two ideas seem to contradict each other. 

PlayMoney's picture

QE was nothing more than more bailout for the banks

ArkansasAngie's picture

There is no velocity of money

 

The crisis was NOT a illquidity problem.  It was (and is) a solvency issue ... as in insolvency.

 

The trillions upon trillions have been going into the blackhole named debt service.  Gotta keep derivatives in brownian movement.

 

Redistribution of wealth occurrs when Chapter 7 is imposed.  Just as it is supposed to

LawsofPhysics's picture

^^^this. I will only add that debt=money and debt is still growing exponentially so there is NO shortage of PAPER CLAIMS on real assets.

However, I will not be as polite as Angie.

Tick tick motherfuckers.

East Indian's picture

In a completely cashless society, velocity of money = 1.

 

Am I right?

Orly's picture

No.

"Money" does not mean "cash."  Money can be seashells or digits in a computer.  Money now means debt and debt creation and the servicing of said debt.

Once there is no more quality collateral to use to create money, the increasing movement of money, or the velocity of money hits a wall and cannot inflate the balloon any longer.

To rectify that, debts have to be destroyed, collateral has to be re-valued and an equilibrium must be attainied before the velocity of money (growth...) can pick up again.

Looking at median home prices in the United States, Australia and some parts of Canadia should offer the best example of this.  Without Chinese trying to milk the system and hide their cash from the government, the collateral value of the property would hit the wall and begin to retreat (deflate...) until a balance of equilibrium is restored.

:D

Quantum Bunk's picture

Anyone who useses the term "dollar shortage" to discribe low velocity of dollars is a f"ing moron.

 

There is no dollar shortage. There is an epic glut. And we are in a phase of transitory low velocity

pizzedoff's picture

I think he means ATM shortage when Clem panicks and trys to empty it out..Not the CUMputer keystroke ones the Fed issues

GooseShtepping Moron's picture

Jeffry P. is talking about Eurodollar shortages in the offshore funding markets. He is a very smart dude and he knows what he is saying. You ought to listen to him.

OpenThePodBayDoorHAL's picture

Amen. The captains of the world monetary ship have no friggin idea even what kind of ship they're operating. After WW II everywhere but the US was flat so a USD system made some sense, but all the other nations of the world would *only* accept it if dollars were redeemable for gold. When the US defaulted on that obligation we are without a friggin rudder, or anchor.

Folkvar's picture

There'll be a serious dollar shortage when dervatives start blowing up and counterparties demand their dollars that don't exist.

buttmint's picture

Perimetr---

"neo-serf?"

aw dawd, spot on! See you in the chainFEMAgang.... 

markpower49's picture

It's a credit bubble. Deflation will return with a vengeance. Your house will be worth half of its current price.

saveUSsavers's picture

Exactly! Reflation "trade" is a trader's momentum conjob, deflation is here and will get worse, corporations doubled debt since 2009, consumers have hit wall, of course traitor corps can't issue easy junk since rate went up 1%, so they WANT REPATRIATION$$$ for slushfund for buybacks continuation aka legal fraud earnings

New_Meat's picture

When you go to Bretton Woods by train, you get off at "Fabian" station.  Can't make this shit up.

Theta_Burn's picture

Anybody know what he said? hands?

TBT or not TBT's picture

Moar dollars are wanted, shifting the dollar demand curve, duh.  

bunnyswanson's picture

Runnin' outta dollas?

http://www.chinalawblog.com/2016/03/getting-money-out-of-china-the-reali...

"Money will not be sent to certain countries deemed at high risk for fake transactions unless there is conclusive proof that the transaction is real — in other words a lot more proof than required months ago."

https://www.wsj.com/articles/chinese-consumers-race-to-buy-dollars-as-yu...

"Chinese consumers have been scrambling to change the currency for U.S. dollars, causing cash shortages at some mainland banks."

Quantum Bunk's picture

This is the most laughable closet dollar bull garbage that Ive ever seen. There is no dollar shortage. Just the opposite

CNONC's picture

A eurodollar is different from a dollar.  The argument he has made over the years is that the real reserve currency of the world is the eurodollar, or dollar denominated liabilities created by non US based COMMERCIAL banks, and not the dollar.  Eurodollars can be created at will, but must be serviced by dollars.  In the absence of an expanding supply of eurodollars, those dollars needed to service the liabilities must be earned as dollars, or purchased on the FX market.  Most eurodollar liabilities fund activities which produce income streams denominated in other currencies, requiring the purchase of dollars, which tends to strengthen the dollar.   

Xena fobe's picture

If they are dollar denominated liabilities and must be repaid in dollars, why are they not called dollars? 

CNONC's picture

Because they are created outside the supervision and control of the US Fed.  Eurodollar supply does not respond to Fed policy actions, nor does it affect US measures of money supply, as usually defined. 

Dilluminati's picture

I hear people on Bloomberg radio pimping China which is a huge stinking turd ready to swirl

so many NPL's in their REIT and cooked books

China is sooo much like greed everywhere, they sell the hope but privately bank the truth

EU is done.. China follows it down the swirling crapper

 

Mike in GA's picture

I have read this stuff and tried to gain an understanding of it for years without success.  I still don't get it.  

Kendle C's picture

Perhaps there is no "there", there. I get suspicious also when each paragraph or conclusion ends with "dollar shortage". I suspect they think we will accept their mumbo jumbo through repetition, and sign up for their service/newsletter/whatever. There needs to be a filter to capture the credulous dupes in any grift and, remember, "there is no fraud without a fairytale."

beekeeper's picture

The more I read about economics, the less I understand. One camp of highly educated economists say we're headed for hyperinflation. Another camp says we are headed for major deflation. If these highly educated economists can't even agree, what's a normal slob like me supposed to think? What if neither of these scenarios happen? What if we just continue to limp along?

I have no clue. I'll continue to save and stack as much as I can and get out of debt.

 

BandGap's picture

Deflation first, then hyperinflation.

Don't even consider the subtle warning of a ramp in inflation (say, 10% a month or something like that). Ain't gonna happen.

Dollars, PM, bullets, chickens and a nice big garden.

saveUSsavers's picture

It's deflation b/c consumer debt has hit the wall, just look at credit expansion latest, they use creditcards to maintain lifestyle.

We "could" be starting "stagflation" in some pricing, especially if they artificially goose oil again.

I lean towards deflationary spiral, overvalued top in all assets. Not a fan of gold either.

consider me gone's picture

To me it sounded like the low growth translates into low demand for new debt which translates into too little  money growth. That though there are a lot of dollars, it doesn't meet the demand for $, particularly since many want to be positioned in the $ (As the least lousy option or at least the most flexible.) when the shtf because they can see were not going to grow our way out this time. That's why The $ represents the fear  that The VIX once did. The too low rates didn't work and there's nothing to do but eat your meat. How can ya have any pudding if ya don't eat your meat?  Or sumptin.

CNONC's picture

Right.  In particular, low demand for new commercial dollar denominated debt, which leads to a falling supply of eurodollars, requiring existing non US dollar denominated debt to be serviced by dollars earned from US sources or purchased on the FX market, resulting in a rising dollar.  Without expanding US commercial debt, FED created dollars become sequestered on US commercial bank's balance sheets as excess reserves.  Again, eurodollars and dollars are not the same.  The problem comes as they are linked in value.  This tends to create a similair problem to that of a "bimetallic" system like the US had before 1873, where the dollar was defined as a fixed quantity of both gold and silver.  Silver and gold have independent fundamental values, and trying to maintain them in a fixed ratio becomes impossible as arbitrage between them creates rent seeking behavior. 

Orly's picture

The question I would have is that when deflation begins in earnest, equity markets will panic and switch over to holding US bonds, thus bringing the yield down on US Treasuries creating a dollar sell-off, the demand for USD in the 4X market will fall dramatically and make Eurodollars cheaper to create, won't that relieve some of the pressure we are now seeing in the European commercial banks?

Is it then a self-correcting mechanism?

Thanks for helping us understand the importance of this idea.

:D

CNONC's picture

I think the deflation we will see will be a result of lower demand for borrowing (less debt creation) caused by lower growth, deleveraging, writing off of bad debt, and deteriorating demographics.  Given that eurodollar creation is driven by demand for borrowing, the commercial banks will have no incentive to create dollar liabilities.  So deflation continues, potentially even as interest rates continue to fall.  Deflation ends when the remaining debt load is serviceable by the real economy value produced by the debt. The economy will be much smaller then.  Inflation comes when the government attempts to service its liabilities, and thus maintain aggregate demand (think social security, medicare, medicaid, pensions, etc. and also refunding the FDIC and PBGC after the deflationary recession) with borrowed money newly created by the FED, or honest to God helicopter money. 

So I do believe that the coming crises will be deflation followed by inflation.  The funny thing is, as you suggested, there are both positive and negative reinforcement elements in these dynamic events.  Which ones are more powerful is guesswork.  The one thing I know from experience is that, whatever I think will happen, I will be wrong.  So you will find me in a cave in Missouri.

 

Orly's picture

" Deflation ends when the remaining debt load is serviceable by the real economy value produced by the debt. The economy will be much smaller then."

Your statement has sparked an interesting idea:

Deflation will be necessary for equilibrium to be achieved but it is not going to happen all at once and overnight.  The elite owner/bankers will not go all aflame together.  Rather, they will begin to cannabalise the group, much as a herd of gazelle has stragglers and fat-laden sows to be picked off.

I wonder how the economic picture will unfold- the sequence of financial events- as the monied begin to throw each other under the bus.  Who is going to be holding the chips when the economy is much smaller?

:D

CNONC's picture

Slow grind down, rather than Stockman's "thundering crash."  Those with liquid assets during the reset end with all the chips.  So, have no debt, hoard various currencies, including physical dollars (and of course gold).  Since so many liabilities must be serviced using fiat liquidity, having liquidity means you are the supplier of the means to service debt, and thus retain the assets securing the debt.  For a while, fiat goes way up in value. 

Too bad I'm broke.  At least I don't have debt.  They'll have to shoot me out of my cave.

Consuelo's picture

 

 

 I was gonna suggest not so much a shortage of dollars, but rather a lack of confidence in the dollar, but what the hell right...?

I Write Code's picture

Maybe what he said is that the dollar is remaining the world's reserve currency in spite of everything, and the dollar is remaining strong in spite of everything, and other central banks are going goofy so fast that the rest of the world's financial system is holding on more strongly than ever to the dollar.

Or maybe he said never mix whiskey and wine.  In fact that seems more likely.

Quantum Bunk's picture

Its all the opposite. Eu is a net creditor. Euro is criminally undervalued. Dollar is in an epic bubble