The Rise And Fall Of The Eurodollar

In Part II of MacroVoices’s holiday special - which is all about examining the dollar’s hegemony over the world’ financial system and analyzing different theories pertaining to how much longer the greenback will reign as the world’s reserve currency.

In the previous installment - one of five segments that we will be sharing this week - the discussion centered around the question of how much longer the dollar will hold its position as the world’s reserve currency.

Rise and fall of the Eurodollar

This time around, MV host Erik Townsend begins by posing one simple question to his three guests  - Jeffrey Snider, CIO at Alhambra Partners, Luke Gromen, founder of Forest for the Trees, and Mark Yusko, founder and fund manager for Morgan Creek.

One of our listeners posted a question that I really think sets you up for this. Which is, is it possible that this Eurodollar system, which so many people don’t understand, that’s created so much money supply for so many years, could eventually break down and go into reverse and start causing the destruction of money supply that people don’t understand.

While the petrodollar regime is largely responsible for justifying the dollar’s position as the world’s reserve currency, the eurodollar system is the mechanism by which the US has maintained its dominance over the world financial system. It stands to reason that, if foreign banks can’t offer dollar deposits to their business clients then those clients wouldn’t be able to support the dollar’s hegemony by using the greenback as one of the main currencies to settle trade.

Snider posits that the eurodollar system began to break down in 2007 as the housing crisis unfurled across the US. The crisis forced foreign companies and governments to confront the risks inherent in holding dollars and US government debt.

That’s where we are now is we’re in a transition period between what was and what is. And the reason is, as Erik’s alluded to from the listener feedback, is that we had this massive offshore hidden – however you want to term it – Eurodollar system that for decades grew and grew and grew. Not just quantitatively, but qualitatively in how it actually interacts and how it actually works among different parts of the system. Until 2007.

And once 2007, everything that happened then, the system hasn’t been able to function since then. And that’s the reason why central banks keep doing various stimulus programs, whatever, and they never seem to get anywhere. They never seem to work. It’s because they’re quantitatively and qualitatively ill-suited to the actual monetary system.

And so I think what that’s left us with is this so-called rising dollar, which is really nothing more than a short squeeze. If you want to put it in terms of a synthetic short position, the world has a synthetic short position in US dollars. And that’s easy enough to do and easy enough to handle when the supply of dollars is free and easy, flexible and dynamic, as it had been up until 2007.

Starting August 9, 2007, it was no longer the case. And, as I said earlier, it’s been intermittently a problem ever since. So it’s a problem that hasn’t been fixed. And we go through these episodes of tightening and relative loosening.

Expanding on the theme introduced by Snider, Yusko attempts to draw an even tighter parallel to the last major turning point in the history of reserve currencies in the West: Namely, the collapse of Bretton Woods.

Using this logic, Yusko claims the first “default” of the euro-dollar system arrived in 2007. Subsequently, the 2007-2013 period is analogous to 1960-1967 period for Bretton Woods.

Where, if the first default under Bretton Woods was the setup of the London Gold Pool, the first default of the Eurodollar system was ‘07–’08, when you had to take rates to zero and you had to grow balance sheets the way you did at the Fed and around the world.

And so if you say, all right, the 1960 to 1967 period was the first default – and, say, that’s akin to the ‘07 through 2013 period – then, of course, beginning at the ‘67-’68 timeframe, the US’s creditors at that point were in the EU. And they began to look at guns and butter, what LBJ was doing, and how Vietnam was going. And they said, we’re done. We’re done here. Give us our gold.

And so then you had the breakdown of the London Gold Pool, and a lot of gold flowed out of the US at an accelerating pace to try to hold that system up, before Nixon closed the gold window. But that closing of the gold window by Nixon was going bankrupt slowly and then going bankrupt all at once.

And so, I look at it again – this time around ‘08 to ‘13 was sort of the London Gold Pool timeframe. And then in early ‘13, after the Fed came out in 3Q12 and said we’re going to QE forever, then you had in 1Q13 China (who is the creditor this go-around) showed up and said we’re done here, give us our gold.

And you saw this massive run on physical gold out of London, most of it going east as best we can tell. And so – I guess a longwinded way of introducing the question – which is, if we think about the London Gold Pool setup in ‘60 as ‘07, and the breakdown of the Gold Pool as 2013, do you think (a) do you think that’s a valid comparison?

And (b) do you think we could get that same sort of binary dénouement to the whole situation where we get, over a weekend, a Sunday night surprise or something?

Branching out from his earlier point, Snider explains that the eurodollar system was deliberately adopted to help undermine Bretton Woods - and secure the dollar’s hegemony - by offering foreign banks a way to get their hands on dollars, and then use those dollars to pump up their balance sheets.

But because there’s no analogous system that would help the world financial establishment wean itself off of the dollar, Snider argues that we’re earlier in the transition process than some of his peers would have readers believe.

And that’s what the Eurodollar was. The Eurodollar was a way of providing global liquidity so that, in many ways, central banks could circumvent Bretton Woods. The rise of the Eurodollar system in the ‘60s had as much to do with foreign central banks circumventing Bretton Woods as it did with banks increasing their balance sheets.

What I mean by that is there was – 1971 happened, there was already an alternate means in place, operating for a very long time, and which all of the global participants were used to. So that when Nixon ended convertibility it was – I don’t want to say it was a seamless transition, but in operational terms it was. Because there was already another mechanism in place, in operation, at the time.

And I think that’s what’s missing here. We don’t have another settlement mechanism that is actually in place and operating right now that can replace the Eurodollar. I think that various parties want to do something about that. But they’re running into problems, because – you look at Western central bankers, and Western officials in particular, and none of them even think there's a problem.

And so, if you’re China, you’re essentially negotiating with yourself. Because you’re not going to get Janet Yellen to the table to talk about replacing the dollar, because she doesn’t think there’s a dollar problem at all. And there isn’t any other kind of settlement mechanism available at this moment that would allow for something to happen tomorrow. Any kind of weekend surprise would be catastrophic. Because there’s no way, there’s no mechanism currently in place to allow that to happen.

So that’s why I think that we’re earlier in the process of transition between reserve currencies than later.

Gromen, who largely sat out this segment, offers a few thoughts toward the end that add to the picture of weakness defining the contemporary eurodollar system.

Looking back to the summer of 2014, Gromen posits that the largest oil exporters were able to maintain current account surpluses because they’d already started settling an increasing percentage of their oil sales in dollars.

It’s interesting, Jeff and Mark (this is Luke of course) when you look back to September – and we put this in our slide deck (which we can touch on later) – but if you look back at the actual timing of events it’s kind of interesting. And it’s, to me it hints to motive. So I’d love to get your thought on it, Jeff or Mark, of – if you go back to August of 2014, actually back even to May of ‘14, you had the Holy Grail gas and energy deal signed between China and Russia. It was rumored that that deal was going to be done in non-dollars, but no proof of that. It was later proven to be the case.

In August of 2014, Putin announced that they wanted to start moving away from the dollar in oil trade, because the dollar’s monopoly in the global energy trade was damaging their economy. And, what’s kind of interesting – and we wrote about this at the time – at this point oil is still $100 a barrel. And then, all of a sudden, by late September, with oil still $96 a barrel, $95 a barrel, Russia’s having dollar shortages.

Russia was still – and they weren’t the only ones – Venezuela, Ecuador, a couple of others – you have three major oil exporters that are running still current account surpluses in the low- to mid-single digits at this point, starting to run into dollar shortages.

And it was, I think, an underappreciated point at the time that, basically, if you’re an oil exporter you’re only selling in dollars, you’re running a current account surplus. And so, if you’re only selling in dollars, in theory, there’s only two explanations for that, for those dollar shortages that began to pop up well before the price of oil crashed.

Which was (#1) Russia and other places got dramatically more corrupt in the three months versus the three months before. Or they were starting to sell energy at an accelerating rate in non-dollar terms. And, as a result, you were seeing – where you were getting $100 before, now you were getting whatever, $90, $80, whatever the mix was.

And at that point, then you started to see some of the devaluations etc. I guess I’d love to hear your thoughts on that.

Comments

MEFOBILLS Muh Raf Jan 1, 2018 3:43 PM Permalink

A shorthand way to think about it:  A private corporate bank in Europe, is allowed to make a debt instrument denominated in dollars (Federal Reserve Notes).

The dollar that emits from the debt instrument ostensibly returns to that debt instrument.  Because debts are physically located in Europe, then the dollars tend not to flow to the U.S. to buy TBills.  Hence, currency loop is Euro-peon, and is Euro-dollar.

I know it is not perfect analogy, but with a debt money system, you cannot ignore the debt instruments and dual entry ledger mechanics.  Private banksters lock hands and try to settle their credit.  Witness all of the currency swaps, and mutual QE that were recently coordinated across the Western World.  The people of the West do not control their own money power, that power was ceded to private "international" corporate banking.

www.sovereignmoney.eu

In reply to by Muh Raf

Max Hunter pitz Jan 1, 2018 8:59 AM Permalink

Pitz, are not large contracts like this eventually cleared in USD? Of course, a country's currency is used to purchase, but there is a USD stage it will eventually go through, when it hits the BIS, no?  Do you dispute the USD reserves of every country in this world to make up ovr 60% of said country's central bank?  The idea of the petrodollar is not conspircy. It's spoken about openly in the financial community.

In reply to by pitz

pitz Max Hunter Jan 1, 2018 1:23 PM Permalink

No, of course not, why would they?  Just because oil might be quoted in USD$ doesn't mean they actually settle in USD$.  The USD$ is held as a reserve currency for historic reasons which are only minimally applicable these days, ie: access to US exports.  

 

The 'petrodollar' may exist in practice, but its alleged mandatory nature for trading in oil falls into the bucket of being junk, or 'conspiracy' theory fomented by certain types.  

In reply to by Max Hunter

MsCreant pitz Dec 31, 2017 11:50 PM Permalink

1971, Nixon closes the gold window because France has figured out we don't have the gold to back our dollars and they are redeeming like crazy. In 1973, Nixon creates a bourse with Saudi Arabia. They agree to only accept dollars for gold. We agree, in exchange, to back them militarily. 

History, not conspiracy theory. 

In reply to by pitz

MsCreant pitz Jan 1, 2018 12:06 AM Permalink

From Zero Hedge: https://www.zerohedge.com/news/2017-06-01/chinas-next-step-destroy-doll…

"Since 1974, Saudi has accepted payment for almost all of its oil exports — to all countries — in dollars. This is due to an agreement between Saudi and the U.S., dating back to the days of President Nixon.

Beginning about 15 years ago, China ceased being self-sufficient in oil, and began buying Saudi oil. As per all Saudi customers, China had to pay in dollars. Even today, China still pays for Saudi oil in U.S. dollars and not yuan, which perturbs China’s leaders."

In reply to by pitz

MsCreant pitz Jan 1, 2018 3:11 AM Permalink

A bourse is an institution, a system of exchange. They have to be willing to break an institution. It would have to be unwound. They would need to decide they did not need US military aid any more. Anything can happen.

Your assertion that this is a conspiracy is flat out wrong, that is all I am arguing with. If you do business with Saudi Arabia for oil, you must pay in dollars. 

Yes, arrangements can change. That does not mean it is a conspiracy theory.

In reply to by pitz

bigkahuna pitz Jan 1, 2018 11:12 AM Permalink

p, Semantics might score you points with your pals with the barista, but I have never seen it work here.

If you want to discuss a topic - show up with some knowledge, or leave here with some knowledge to your betterment. Save the semantics for the debate club where you might score points with it.

You try and cut the usd out of oil transactions (in particular), it is not long before the usd you cut out is flowing to the mic as it expenses out the whooping of ass or in some cases - outright murder of leaders.

Therefore - not in word, but in deed - a dollar standard. Semantics do not count in this one.

In reply to by pitz

veritas semper… MsCreant Jan 1, 2018 1:44 AM Permalink

Yes.The great General De Gaulle ,who made US default.

The Kissinger arrangement with the US involves also the transforming of the excess $ into T Bills,this way  recycling them.

That gave the US the "exorbitant privilege " to be able to print and force the rest of the countries to support US deficit spending.

This is why  US is backing Saudi Arabia,with its wahhabi terrorism. Working hand in hand(remember the Donald visit ,the wahhabi globe and sword dance,the Faggot's bowing to the Saudi king,Bush the moron holding hands with the Saudi king,etc?)

That's why US can act as a Hegemon,through bribes,threats,wars.It can just print $.

That is why US is able to live beyond its means,on the back of other countries.Offering paper money for real goods.

Cut off the petro-f*cking-dollar and let's see how mighty and powerful Us is,and how great its economy really is.

That is why Russia/China will replace it for petro yuan,backed by GOLD.

Cut off the lifeline of the Beast.

In reply to by MsCreant

veritas semper… East Indian Jan 1, 2018 4:27 PM Permalink

Not quite the first.I think the first color revolution(colored red,bc of a lot of blood)was the Bolshevik Revolution thrown on the Orthodox Russia. Killing 66 Mil Christians and raping the country.(See Solzhenitsyn for ALL the details)

And it was done by the usual suspects(international joooos,with support from US/UK),working for the zionist banking cartel

In reply to by East Indian

BarkingCat Sandmann Jan 1, 2018 2:29 PM Permalink

Not sure about your point.

Are you saying that France betrayed the UK in 1931?

 

I do not know about what happened in 1931, but with regard to France withdrawing gold in the 1960/70s from the US, they were not the bad guys.

They recognized that the party entrusted with keeping the western financial system healthy was abusing that position of trust and decided to withdraw from it.

No different than a shareholder of a corporation who sells his shares after noticing that the CEO is running the business into the ground.

He who panics first....

LBJ pretty much fucked up the US in the 1960s. It has never financially recovered.

In reply to by Sandmann

new game MsCreant Jan 1, 2018 9:12 AM Permalink

and this has expanded to many other oil producer defacto by threat of military proxy wars. econ hit men, see i aye, ect. alive and flourishing from this secretive punishment of non-compliance.

and of course some funding as a fringe benefit from heroin trade. this secretive operation thrives on corrupt leaders that choose life over death.

iran is an example of a fly in the ointment. but they are powerful enough to not be corrupted and hence the new focus of ME policy.

In reply to by MsCreant

GreatUncle MsCreant Jan 1, 2018 10:01 AM Permalink

You could term it "the USA got caught out fraudulently creating more dollars than it had gold".

So a choice to be made stop fraudulently creating dollars or drop the gold standard?

We all know the one they chose now.

After that as they say the rest is history of a world where with fraudulent money creation all global institutions and so called representative governments were all purchased with the freshly printed fraudulent money. Now as populations want representation that their government now refuse to do as it conflicts with their globalist masters "we now have the rise of populism".

The globalists own everything, people own nothing and now they want you to be slaves to the new style of economy gifted them.

THE UN, NATO, IMF, WHO, etc. etc. all globalist controlled now rendered worthless regarding humanity unless humanity is slavery.

In reply to by MsCreant

MsCreant GooseShtepping Moron Dec 31, 2017 11:44 PM Permalink

Guess who I am?

 

Slapped together with lies, it's frightful
And the choir's not insightful
But since we've no place to go
Let it blow! Let it blow! Let it blow!

It doesn't show signs of topping
And I've brought some corn for popping
Their frights seem turned way down low
Let it blow! Let it blow! Let it blow!

Though we finally read last rites
Yet the Fed Res defies the wave form 
So if they're just full of shyte
On the way home I'll heap scorn

The mire is slowly frying
But on Zero Hedge, we're still goodbying
But as long as you .gov me so
Let it blow! Let it blow! Let it blow!

Happy Holidays,

Love MsCreant

In reply to by GooseShtepping Moron

JIMSJOE2 Yen Cross Jan 1, 2018 5:19 AM Permalink

Eurodollars are what dollars held in foreign markets are called and has nothing to do with euros. On the CME Eurodollar futures are traded and this is the largest trading market on the exchange in volume terms as the dollar is the most traded currency on the planet. Now starting last August with the acceleration of capital flight out of Europe there was so much capital being converted from euros to dollars that this actually caused a dollar, (Eurodollar), shortage in foreign markets by the end of the year causing the massive dollar strength which we saw. This prompted the FED to ask all central banks to flood the international system with dollars. China being a huge importer of US commodities saw these be too expensive so they sold billions in treasuries for dollars and then sold dollars complying with the FED. China has not bought any gold for over a year and instead since early 2017 has been buying billions monthly in treasuries restocking what they had previously sold. They now have again over $1.2 trillion in dollar based assets and can been verified on the PBOC website. Russia also has been buying treasuries and now are over $100 billion so the idea being promoted on the web that these two countries want to collapse and abandon the dollar is just total nonsense. Countries simply do not buy another country's debt if it has no faith in its currency.

      Most people simply do not understand that countries do not like to hold large amounts of foreign currencies as they pay no interest so they are forced to buy treasuries as this is the second most liquid market on the planet behind currencies. China is at least 10 years from having a large enough and liquid enough bond market to compete with treasuries. Europe has no federalized bond market backed by all member countries so this leaves treasuries as the only game in town.

      Countries are not going to buy most of the sovereign debt in Europe as there is no market except the ECB creating 60 billion euros of month out of thin air and buying all the toxic sovereign and corporate debt. The largest consulting firm on the planet, Armstrong Economics, has computer models which track both domestic and international capital flows and they have forecast that in 2018 Europe collapses as both the Monetary and the Sovereign Debt Crisis hits along with the pension crisis. Just recently Italy announced they are working on the plan to abandon the euro, another bank there is in trouble, many German cities and provinces are broke from the migrant cost, two weeks ago mayors across France ask the government for help as they are also broke for the same reason and the pension crisis has hit Spain and will run out in 2018. This is when the shit hits the fan there as many will lose pensions, access to deposits will be denied causing businesses to fail, governments will default on sovereign debt along with many large corporations there. 

     Just recently Martin Armstrong and his staff were in Europe meeting with clients. China is so concerned about Europe they flew in PBOC officials and met in London. He then flew to Brussels and met with EU officials and to say they are in panic mode is an understatement. They all finally realized that Europe is not only going to collapse but has been since 2011 as capital is running out. Even many of the central banks met with the firm and also many government officials as they are scared shitless what happens when funds are finally gone. Europe will not survive in its present form.

     Now back in 2009 the models forecast that the Dow would hit 22,000 then 23,000 and onto eventually around 40,000 all due to the capital flight out of Europe. First two targets have been hit. Next year the forecast is to around 25,000 to above 28,000. Capital has simply been parking in markets where there are huge pools of liquidity and that has been dollars and US equities and not only will continue but will accelerate. 

     The problem with many Americans is that they fail to follow global macroeconomics events beyond US borders. They see US markets rise and do not understand why always claiming it is the FED propping up markets and all are in bubble territory. This is all total nonsense! The FED needs and wants a much weaker dollar and to stop the capital from flowing out of Europe to dollars and US equities but except for jawboning they are powerless.

     Of course all of the above is why for a number of years the web has been full of forecasts about a dollar and Dow collapse and they have been totally wrong and will continue to be.

     Folks buckle up as we are witnessing the largest financial and economic collapse with Europe the world has seen!

       

In reply to by Yen Cross

Norfry JIMSJOE2 Jan 1, 2018 12:36 PM Permalink

 

There are vital social, military and geo-political reasons for China and Russia to work towards creation alternative financial arrangements, institutions, networks, control systems. It's an extrication process. They have to do so cleverly, step by step, with short term tactics as reactions to real world developments and surprises. Some current 'dances' with the dominant financial paradigm is necessary but love and faithfulness and ultimate submission are not there. 

In reply to by JIMSJOE2

GreatUncle Yen Cross Jan 1, 2018 10:06 AM Permalink

Agree, but that is because the EU is a derivative of the dollar.

The "eurodollar" narrative would be needed though to make the transition to a one world currency don't you think?

So underneath all the horse shit they lay the foundation of their plan.

Globalists never lose they just keep trying until they win and only their destruction ends it!

In reply to by Yen Cross