Making sense of the world through data
The focus of this blog is #data #bigdata #dataanalytics #privacy #digitalmarketing #AI #artificialintelligence #ML #GIS #datavisualization and many other aspects, fields and applications of data
The truth is out. We've got the data of the pandemic wrong! Now what?
The Wuhan Coronavirus was born under suspicious circumstances. China obfuscated, tried to hide the truth for as long as possible. First reprimanded the doctors who rang the alarm bells, then put the P4 laboratory in Wuhan under military supervision, ordered all samples destroyed and a shut down of independent publications. Finally, the country reacted strongly, putting the city, then the whole Hebei province under a two month long lock-down, while declaring that there was nothing to fear and the W.H.O parroting the Chinese position, prevaricated for months before declaring that a pandemic was on-going.
But thanks to the one major characteristics of this Coronavirus, its very high number of asymptomatic cases (people being sick but showing no symptoms), the virus did spread around the world, first to Korea and Italy, then to all other countries with very few exceptions. Asia reacted quickly by closing down stores early, requesting that people wear masks and comprehensive detection and tracking policies. The results were immediate and the number of cases slowed almost immediately to a crawl. Europe and especially the US did not. The number of sick people exploded and a couple of weeks later the death's curve followed suit.
Early on, based on a very limited number of test, a low R0 (spread of the virus), and an extremely high death rates of close to 3% were calculated, and models showing millions of deaths down the line were built, especially by the London Imperial College in the UK. Most countries panicked and followed the Chinese example of a complete lock-down... and all without exceptions got it wrong! The reason for the mistake was simple and basic; they got their statistics wrong. The extremely high number of asymptomatic cases created an illusion of a high death rate whereas we now know that this was not the case.
In the end, the Wuhan Coronavirus is a dangerous virus. For people with weak immune systems, mostly the old, obese and diabetics, the risk is clearly high and whenever someone gets sick, the road from emergency to respirator to death can be a quick one. But for everybody else... nothing. Not even mild flu symptoms! The one exception which in itself is a scandal is the very high number of doctors and nurses who have succumbed for the simple reasons of high viral loads and poor protection.
But bad statistics were not limited to poor projections, most countries went one step further by declaring that whenever the virus was detected, the causes of death should be attributed to the virus. Consequently, the number of old age people dying from the virus exploded, while the real number of death in most countries stayed flat. Now that the numbers are out, especially in France, we finally know that the total number of death did not show any uptick. 2020 is turning out to be another ordinary year, and in most case a rather low flu season in Europe.
But do not expect any countries to cancel their lock-down order any time soon, and even less to apologize, declaring that they got their numbers and consequently policies wrong! That's unfortunately not how things work.
Responsible people will hide their incompetence behind dubious numbers then politicians will focus their attention of the terrible economic consequences of their failed virus mitigation policies. Few will show that countries who did not implement a complete lockdown of their economies like Sweden did not see the predicted explosion, proving that these policies were an over-reaction.
But the legacy of this failure will be with us for years to come. In the end the virus, beyond a few very limited hot spots will not have killed that many people compared to any other ordinary year, but if, as it seems more or more likely, it becomes the pin which burst the financial bubble, it will then have proved far more dangerous than expected, by showing the weakness of our system and the real risks of the contagion of fear.
It may also have a positive consequence demonstrating that our over centralization and over reliance on the state have become toxic and destructive. But don't count on it. The isolated voices of reason will quickly be drawn in a tsunami of spin and propaganda proving that all the wrong decisions were taken for the right reasons; The destruction of millions of jobs and countless thousands of small businesses, the unfortunate byproduct of the need for precautions. The trampling of individual freedom, an absolute necessity for the better good of all.
It would be great if people kept clapping their hands and banging their pans once a day to remember this terrible episode of failed policies of social engineering. But most probably, they won't. They will be far too busy putting back their lives together and coping with the disastrous economic consequences of a virus most caught without even noticing.
As for the real economy, let's see what happens once the dollars, Euros and Yens stop dropping from the sky. But will they? Or conversely will we see the takeover of the whole economy by the states? We've seen how this worked, rather poorly, in the past. Don't expect miracles, this time won't be different!
While trying to understand the arguments about Coronavirus, slowly a clearer picture is emerging. The virus is neither benign not the end of the world, just in-between. Still, the economic consequences of our over-reaction will be beyond our expectations...
The best article I have found which resume this conclusion is the one below.
The Facts That Prove Almost Everyone Is Wrong About This Pandemic
Authored by Michael Snyder via The End of The American Dream blog,
When it comes to COVID-19, most Americans seem to be gravitating toward one of two extremes. Some are treating this pandemic like it is the end of the world, while many others are dismissing it as a “nothingburger”.
But the truth is somewhere in between. Nobody can deny that lots of people are getting sick and lots of people are dying. In fact, the U.S. death toll has doubled in a little over a week and
it has now shot past the 47,000 mark. And as this pandemic progresses,
a lot more people are going to get sick and a lot more people are going
to die, and this is going to be true whether the lockdowns continue or
not. The lockdowns were never going to stop COVID-19, and anyone that believed that was just being delusional.
The only time a lockdown should be instituted is if a
pandemic has gotten so bad in an area that hospitals are being
absolutely overwhelmed, because if people can’t get treatment that is a factor that could potentially increase the overall death toll substantially. In most of the United States that is not happening right now, and so in most of the nation the lockdowns should be immediately ended.
But won’t a lot more people start getting sick if that happens? Of course, and this is something that the “nothingburger” crowd doesn’t understand.
Lifting the lockdowns is going to cause the virus to cycle through our
population at a much faster rate, and the numbers will get pretty ugly.
But as long as the medical system can handle it, lockdowns are not
necessary.
What “the end of the world” crowd does not understand is that when
you are dealing with a virus that spreads as easily as this one, it is
inevitable that most of the population will eventually become infected.
You can “flatten the curve” and delay the inevitable with lockdowns,
but that also prolongs the pandemic. In the end, roughly the same
number of people will get sick and roughly the same number of people
will die no matter how the pandemic is “managed”.
This week, the “nothingburger” crowd has made a really big deal out
of the fact that a study conducted in L.A. county discovered that about 4 percent of
all residents had already developed COVID-19 antibodies, and they were
trying to use that study to prove that this pandemic is not much of a
threat at all. Actually, it shows just the opposite.
This pandemic is not going to be over until herd immunity is achieved, and according to Johns Hopkins that does not happen until 70 to 90 percent of a population has developed immunity…
When most of a population is immune to an infectious disease, this
provides indirect protection—or herd immunity (also called herd
protection)—to those who are not immune to the disease.
For example, if 80% of a population is immune to a virus, four out of
every five people who encounter someone with the disease won’t get sick
(and won’t spread the disease any further). In this way, the spread of
infectious diseases is kept under control. Depending how contagious an
infection is, usually 70% to 90% of a population needs immunity to
achieve herd immunity.
So let’s do some really quick math.
Let’s assume that the study conducted in L.A. County is
representative of the nation as a whole and that approximately 4 percent
of all Americans have now developed antibodies.
And let’s also assume that herd immunity for COVID-19 will be
achieved when 80 percent of the total population has developed
antibodies.
If 47,000 Americans have died at the current 4 percent level of
exposure, that means that we could potentially be looking at an overall
death toll of 940,000 once we hit an 80 percent exposure level. Does anyone in the “nothingburger” crowd want to try to claim that 940,000 dead Americans is not a big deal?
I keep hearing people say that this virus “is just like the flu”, and that is absolutely absurd. As Mike Adams of Natural News has pointed out, COVID-19 has killed more Americans in the last 17 days than the flu did in the last year…
In the last 17 days, the Wuhan coronavirus has killed more Americans
(35,087) than the regular flu kills in an entire year (34,157 for the
last year). It obliterates any last shred of the argument — still heard
across the independent media — that the coronavirus is “no worse than
the flu.”
The coronavirus remains the No. 1 cause of death in America on a
day-to-day basis, clocking in at 2,804 deaths just today. Total deaths
in the USA will exceed 46,000 tomorrow, confirming our earlier projection that estimated 46,000 to 93,000 deaths from coronavirus in
the USA by the end of July. It’s not even the end of April, and we’re
already beyond 45,000. (At the time we made the projection, it was
dismissed as “crazy” by the very same people who still claim the
coronavirus is “no worse than the flu.” Those are the people who can’t
do math.)
And actually the number of Americans dying from the coronavirus is being seriously undercounted.
In New York City, if someone dies at home they are typically not
tested to see if they have the coronavirus. So even though the number
of city residents dying at home is now nearly ten times higher than normal, the vast majority of those cases are never showing up in the official numbers. But the “end of the world” crowd seems to think that
if we just keep everyone at home long enough that we can significantly
reduce the final death toll from this pandemic, and that just isn’t
accurate either.
Right now, the virus continues to spread even though most of the U.S.
has now been locked down for weeks. In fact, there were nearly 30,000
more confirmed cases during the 24 hour period that just ended. Whether
it does it relatively quickly or relatively slowly, this virus will
continue to rip through our population until we eventually get to the
point of herd immunity. “Experts” such as Bill Gates are suggesting that the
lockdowns are “buying us time” until our scientists can develop a
“vaccine”, but the truth is that is really not much more than a pipe
dream.
As I pointed out yesterday,
there has never been a successful vaccine for any coronavirus in all of
human history, and now that scientists have discovered approximately 30
different strains of the virus that will just make the task of trying
to develop a vaccine even more complicated.
Sadly, the reality of the matter is that this virus is going to be
with us for a very long time to come. Eventually herd immunity will
hopefully be achieved, but until then a lot of people are going to get
sick and a lot of people are going to die.
And fear of this virus is going to be with us for a long time to come
as well, and that is going to paralyze our economy whether there are
lockdowns or not. The bottom line is that this virus is not going to be
stopped, and the economic collapse that has now begun is not going to be
stopped either.
But this isn’t the end of the world, and most of us will get through this. Of course even bigger challenges lie beyond the end of this pandemic, but that is a topic for another article.
As of this moment, COVID-19 has killed more than 184,000 people
around the globe, and by the end of this pandemic the overall death toll
is likely to be much, much higher than that.
There is no way that you can possibly call that a
“nothingburger”, and sticking your head in the sand is not going to help
anything. But on the other hand, trying to lock down the entire planet
is not going to solve this crisis either. It will simply delay the
inevitable, because this virus is just going to continue to spread no
matter what actions our politicians take.
This is a Bombshell: Now that Dr Montagnier, French Nobel Prize of medecine on the HIV virus has confirmed that the Wuhan coronavirus genome contains HIV sequences in addition to the S protein, it is time for China to come clean and admit that these research were indeed being conducted in Wuhan and that the virus escaped from the laboratory.
Here's the interview. (in French unfortunately)
#wuhancoronavirus#wuhanvirus#breakingnews#chinacoronavirus#china#HIV#coronavirus#coronaviruswho
This is a superb article from Michel Every at Rabobank which explains the Eurodollar financial market and summarize the risks it represents for the world economy. Could the Eurodollar be the cause of the breakdown of our financial system? Quite possible and even likely! Read on!
Submitted to Zerohedge by Michael Every of Rabobank / April12, 2020 https://www.zerohedge.com/markets/down-rabbit-hole-eurodollar-market-matrix-behind-it-all
Summary
The Eurodollar system is a critical but often misunderstood
driver of global financial markets: its importance cannot be
understated.
Its origins are shrouded in mystery and intrigue; its operations
are invisible to most; and yet it controls us in many ways. We will
attempt to enlighten readers on what it is and what it means.
However, it is also a system under huge structural pressures – and
as such we may be about to experience a profound paradigm shift with key
implications for markets, economies, and geopolitics.
Recent Fed actions on swap lines and repo facilities only underline this fact rather than reducing its likelihood
What is The Matrix?
A new world-class golf course in an Asian country financed with a USD
bank loan. A Mexican property developer buying a hotel in USD. A
European pension company wanting to hold USD assets and swapping
borrowed EUR to do so. An African retailer importing Chinese-made toys
for sale, paying its invoice in USD.
All of these are small examples of the multi-faceted global
Eurodollar market. Like The Matrix, it is all around us, and connects
us. Also just like The Matrix, most are unaware of its existence even as
it defines the parameters we operate within. As we shall explore in
this special report, it is additionally a Matrix that encompasses an
implicit power struggle that only those who grasp its true nature are
cognizant of.
Moreover, at present this Matrix and its Architect face a huge, perhaps existential, challenge.
Yes, it has overcome similar crises before...but it might be that the Novel (or should we say ‘Neo’?) Coronavirus is The One.
So, here is the key question to start with: What is the Eurodollar system?
For Neo-phytes
The Eurodollar system is a critical but often misunderstood driver of global financial markets: its importance cannot be understated. While
most market participants are aware of its presence to some degree, not
many grasp the extent to which it impacts on markets, economies,…and
geopolitics - indeed, the latter is particularly underestimated.
Yet before we go down that particular rabbit hole, let’s start with the basics. In its simplest form, a Eurodollar is an unsecured USD deposit held outside of the US. They are not under the US’ legal jurisdiction, nor are they subject to US rules and regulations.
To avoid any potential confusion, the term Eurodollar came into being
long before the Euro currency, and the “euro” has nothing to do with
Europe. In this context it is used in the same vein as Eurobonds, which
are also not EUR denominated bonds, but rather debt issued in a
different currency to the company of that issuing. For example, a
Samurai bond--that is to say a bond issued in JPY by a nonJapanese
issuer--is also a type of Eurobond.
As with Eurobonds, eurocurrencies can reflect many different
underlying real currencies. In fact, one could talk about a Euroyen, for
JPY, or even a Euroeuro, for EUR. Yet the Eurodollar dwarfs them: we
shall show the scale shortly.
More(pheous) background So how did the Eurodollar system come to be, and how has it grown into the behemoth it is today? Like all global systems, there are many conspiracy theories and fantastical claims that surround the birth of the Eurodollar market. While some of these stories may have a grain of truth, we will try and stick to the known facts.
A number of parallel events occurred in the late 1950s that led to
the Eurodollar’s creation – and the likely suspects sound like the cast
of a spy novel. The Eurodollar market began to emerge after WW2, when US
Dollars held outside of the US began to increase as the US consumed
more and more goods from overseas. Some also cite the role of the
Marshall Plan, where the US transferred over USD12bn (USD132bn
equivalent now) to Western Europe to help them rebuild and fight the
appeal of Soviet communism.
Of course, these were just USD outside of the US and not Eurodollars.
Where the plot thickens is that, increasingly, the foreign recipients
of USD became concerned that the US might use its own currency as a
power play. As the Cold War bit, Communist countries became particularly
concerned about the safety of their USD held with US banks. After all,
the US had used its financial power for geopolitical gains when in 1956,
in response to the British invading Egypt during the Suez Crisis, it
had threatened to intensify the pressure on GBP’s peg to USD under
Bretton Woods: this had forced the British into a humiliating withdrawal
and an acceptance that their status of Great Power was not compatible
with their reduced economic and financial circumstances.
With rising fears that the US might freeze the Soviet Union’s USD
holdings, action was taken: in 1957, the USSR moved their USD holdings
to a bank in London, creating the first Eurodollar deposit and seeding
our current UScentric global financial system – by a country opposed to
the US in particular and capitalism in general.
There are also alternative origin stories. Some claim the first
Eurodollar deposit was made during the Korean War with China moving USD
to a Parisian bank.
Meanwhile, the Eurodollar market spawned a widely-known financial
instrument, the London Inter Bank Offer Rate, or LIBOR. Indeed, LIBOR is
an offshore USD interest rate which emerged in the 1960s as those that
borrowed Eurodollars needed a reference rate for larger loans that might
need to be syndicated. Unlike today, however, LIBOR was an average of
offered lending rates, hence the name, and was not based on actual
transactions as the first tier of the LIBOR submission waterfall is
today.
Dozer and Tank
So how large is the Eurodollar market today? Like the Matrix - vast.
As with the origins of the Eurodollar system, itself nothing is
transparent. However, we have tried to estimate an indicative total
using Bank for International Settlements (BIS) data for:
On-balance sheet USD liabilities held by non-US banks;
USD Credit commitments, guarantees extended, and derivatives contracts of non-US banks (C, G, D);
USD debt liabilities of non-US non-financial corporations;
Over-the-Counter (OTC) USD derivative claims of non-US non-financial corporations; and
Global goods imports in USD excluding those of the US and intra-Eurozone trade.
The results are as shown below as of end-2018: USD57 trillion, nearly three times the size of the US economy before it was hit by the COVID-19 virus. Even if this measure is not complete, it underlines the scale of the market.
It also shows its vast power in that this is an equally large structural global demand for USD. Every import, bond, loan, credit guarantee, or derivate needs to be settled in USD.
Indeed, fractional reserve banking means that an initial Eurodollar
can be multiplied up (e.g., Eurodollar 100m can be used as the base for a
larger Eurodollar loan, and leverage increased further). Yet non-US
entities are NOT able to conjure up USD on demand when needed because
they don’t have a central bank behind them which can produce USD by
fiat, which only the Federal Reserve can. This power to create the USD that everyone else transacts and trades in is an essential point to grasp on the Eurodollar – which is ironically also why it was created in the first place!
Tri-ffi-nity
Given the colourful history, ubiquitous nature, and critical
importance of the Eurodollar market, a second question then arises: Why don’t people know about The Matrix?
The answer is easy: because once one is aware of it, one immediately wishes to have taken the Blue Pill instead.
Consider what the logic of the Eurodollar system implies. Global
financial markets and the global economy rely on the common standard of
the USD for pricing, accounting, trading, and deal making. Imagine a
world with a hundred different currencies – or even a dozen: it would be
hugely problematic to manage, and would not allow anywhere near the
level of integration we currently enjoy.
However, at root the Eurodollar system is based on using the national
currency of just one country, the US, as the global reserve currency.
This means the world is beholden to a currency that it cannot create as needed.
When a crisis hits, as at present, everyone in the Eurodollar system
suddenly realizes they have no ability to create fiat USD and must rely
on national USD FX reserves and/or Fed swap lines that allow them to
swap local currency for USD for a period. This obviously grants the US enormous power and privilege. The world is also beholden to US monetary policy cycles
rather than local ones: higher US rates and/or a stronger USD are
ruinous for countries that have few direct economic or financial links
with the US. Yet the US Federal Reserve generally shows very
little interest in global economic conditions – though that is starting
to change, as we will show shortly.
A second problem is that the flow of USD from the US to the
rest of the world needs to be sufficient to meet the inbuilt demand for
trade and other transactions. Yet the US is a relatively
smaller slice of the global economy with each passing year. Even so, it
must keep USD flowing out or else a global Eurodollar liquidity crisis
will inevitably occur.
That means that either the US must run large capital account
deficits, lending to the rest of the world; or large current account
deficits, spending instead.
Obviously, the US has been running the latter for many decades, and
in many ways benefits from it. It pays for goods and services from the
rest of the world in USD debt that it can just create. As such it can
also run huge publicor private-sector deficits – arguably even with the
multitrillion USD fiscal deficits we are about to see.
However, there is a cost involved for the US. Running a persistent current-account deficit implies a net outflow of industry, manufacturing and related jobs. The
US has obviously experienced this for a generation, and it has led to
both structural inequality and, more recently, a backlash of political
populism wanting to Make America Great Again.
Indeed, if one understands the structure of the Eurodollar system one can see that it faces the Triffin Paradox.
This was an argument first made by Robert Triffin in 1959 when he
correctly predicted that any country forced to adopt the role of global
reserve currency would also be forced to run ever-larger currency
outflows to fuel foreign appetite – eventually leading to the breakdown
of the system as the cost became too much to bear.
Moreover, there is another systemic weakness at play: realpolitik. Atrophying
of industry undermines the supply chains needed for the defence sector,
with critical national security implications. The US is
already close to losing the ability to manufacture the wide range of
products its powerful armed forces require on scale and at speed:
yet without military supremacy the US cannot long maintain its
multi-dimensional global power, which also stands behind the USD and the
Eurodollar system.
This implies the US needs to adopt (military-) industrial policy and a
more protectionist stance to maintain its physical power – but that
could limit the flow of USD into the global economy via trade. Again,
the Eurodollar system, like the early utopian version of the Matrix,
seems to contain the seeds of its own destruction.
Indeed, look at the Eurodollar logically over the long term and there
are only three ways such a system can ultimately resolve itself:
The US walks away from the USD reserve currency burden, as
Triffin said, or others lose faith in it to stand behind the deficits it
needs to run to keep USD flowing appropriately;
The US Federal Reserve takes over the global financial system little by little and/or in bursts; or
The global financial system fragments as the US asserts primacy
over parts of it, leaving the rest to make their own arrangements.
See the Eurodollar system like this, and it was always when and
not if a systemic crisis occurs – which is why people prefer not focus
on it all even when it matters so much. Yet arguably this underlying geopolitical dynamic is playing out during our present virus-prompted global financial instability. Down the rabbit hole
But back to the rabbit hole that is our present situation. While
the Eurodollar market is enormous one also needs to look at how many
USD are circulating around the world outside the US that can service it
if needed. In this regard we will look specifically at global USD FX reserves.
It’s true we could also include US cash holdings in the offshore
private sector. Given that US banknotes cannot be tracked no firm data
are available, but estimates range from 40% - 72% of total USD cash
actually circulates outside the country. This potentially totals
hundreds of billions of USD that de facto operate as Eurodollars.
However, given it is an unknown total, and also largely sequestered in
questionable cash-based activities, and hence are hopefully outside the
banking system, we prefer to stick with centralbank FX reserves. Looking at the ratio of Eurodollar liabilities to global USD
FX reserve assets, the picture today is actually healthier than it was a
few years ago.
Indeed, while the Eurodollar market size has remained relatively
constant in recent years, largely as banks have been slow to expand
their balance sheets, the level of global USD FX reserves has risen from
USD1.9 trillion to over USD6.5 trillion. As such, the ratio of
structural global USD demand to that of USD supply has actually declined
from near 22 during the global financial crisis to around 9.
Yet the current market is clearly seeing major Eurodollar stresses – verging on panic.
Fundamentally, the Eurodollar system is always short USD, and any
loss of confidence sees everyone scramble to access them at once – in
effect causing an invisible international bank run. Indeed, the
Eurodollar market only works when it is a constant case of
“You-Roll-Over Dollar”.
Unfortunately, COVID-19 and its huge economic damage and uncertainty
mean that global confidence has been smashed, and our Eurodollar Matrix
risks buckling as a result.
The wild gyrations recently experienced in even major global FX
crosses speak to that point, to say nothing of the swings seen in more
volatile currencies such as AUD, and in EM bellwethers such as MXN and
ZAR. FX basis swaps and LIBOR vs. Fed Funds (so offshore vs. onshore USD
borrowing rates) say the same thing. Unsurprisingly, the IMF are seeing
a wide range of countries turning to them for emergency USD loans.
The Fed has, of course, stepped up. It has reduced the cost of
accessing existing USD swap lines--where USD are exchanged for other
currencies for a period of time--for the Bank of Canada, Bank of
England, European Central Bank, and Swiss National Bank; and another
nine countries were given access to Fed swap lines with Australia,
Brazil, South Korea, Mexico, Singapore, and Sweden all able to tap up to
USD60bn, and USD30bn available to Denmark, Norway, and New Zealand.
This alleviates some pressure for some markets – but is a drop in the
ocean compared to the level of Eurodollar liabilities.
The Fed has also introduced a new FIMA repo facility. Essentially
this allows any central bank, including emerging markets, to swap their
US Treasury holdings for USD, which can then be made available to local
financial institutions. To put it bluntly, this repo facility is like a
swap line but with a country whose currency you don't trust.
Allowing a country to swap its Treasuries for USD can alleviate some
of the immediate stress on Eurodollars, but when the swap needs to be
reversed the drain on reserves will still be there. Moreover, Eurodollar
market participants will now not be able to see if FX reserves are
declining in a potential crisis country. Ironically, that is likely to see less, not more, willingness to extend Eurodollar credit as a result.
You have two choices, Neo
Yet despite all the Fed’s actions so far, USD keeps going up vs. EM
FX. Again, this is as clear an example as one could ask for of
structural underlying Eurodollar demand.
Indeed, we arguably need to see even more steps taken by the Fed – and soon. To
underline the scale of the crisis we currently face in the Eurodollar
system, the BIS concluded at the end of a recent publication on the
matter:
“...today’s crisis differs from the 2008 GFC, and requires policies
that reach beyond the banking sector to final users. These businesses,
particularly those enmeshed in global supply chains, are in constant
need of working capital, much of it in dollars. Preserving the flow of
payments along these chains is essential if we are to avoid further
economic meltdown.
Channeling dollars to non-banks is not straightforward. Allowing
non-banks to transact with the central bank is one option, but there are
attendant difficulties, both in principle and in practice. Other
options include policies that encourage banks to fill the void left by
market based finance, for example funding for lending schemes that
extend dollars to non-banks indirectly via banks.”
In other words, the BIS is making clear that somebody (i.e., the Fed)
must ensure that Eurodollars are made available on massive scale, not
just to foreign central banks, but right down global USD supply chains.
As they note, there are many practical issues associated with doing that
– and huge downsides if we do not do so. Yet they overlook that there
are huge geopolitical problems linked to this step too.
Notably, if the Fed does so then we move rapidly towards logical
end-game #2 of the three possible Eurodollar outcomes we have listed
previously, where the Fed de facto takes over the global financial system. Yet if the Fed does not do so then we move towards end-game #3, a partial Eurodollar collapse.
Of course, the easy thing to assume is that the Fed will step up as
it has always shown a belated willingness before, and a more proactive
stance of late. Indeed, as the BIS shows in other research, the
Fed stepped up not just during the Global Financial Crisis, but all the
way back to the Eurodollar market of the 1960s, where swap lines were
readily made available on large scale in order to try to reduce periodic
volatility.
However, the scale of what we are talking about here is an entirely
new dimension: potentially tens of trillions of USD, and not just to
other central banks, or to banks, but to a panoply of real economy firms
all around the Eurodollar universe.
As importantly, this assumes that the Fed, which is based in the US,
wants to save all these foreign firms. Yet does the Fed want to help
Chinese firms, for example? It may traditionally be focused narrowly on
smoothly-functioning financial markets, but is that true of a White
House that openly sees China as a “strategic rival”, which wishes to
onshore industry from it, and which has more interest in having a
politically-compliant, not independent Fed? Please think back to the
origins of Eurodollars - or look at how the US squeezed its WW2 ally UK
during the 1956 Suez Crisis, or how it is using the USD financial system
vs. Iran today.
Equally, this assumes that all foreign governments and central banks
will want to see the US and USD/Eurodollar cement their global financial
primacy further. Yes, Fed support will help alleviate this current
economic and brewing financial crisis – but the shift of real power
afterwards would be a Rubicon that we have crossed.
Specifically, would China really be happy to see its hopes of CNY
gaining a larger global role washed away in a flood of fresh, addictive
Eurodollar liquidity, meaning that it is more deeply beholden to the US
central bank? Again, please think back to the origins of Eurodollars, to
Suez, and to how Iran is being treated – because Beijing will. China
would be fully aware that a Fed bailout could easily come with political
strings attached, if not immediately and directly, then eventually and
indirectly. But they would be there all the same. One cannot ignore or underplay this power struggle that lies within the heart of the Eurodollar Matrix. I know you’re out there
So, considering those systemic pressures, let’s look at where
Eurodollar pressures are building most now. We will use World Bank
projections for short-term USD financing plus concomitant USD
current-account deficit requirements vs. specifically USD FX reserves,
not general FX reserves accounted in USD, as calculated by looking at
national USD reserves and adjusting for the USD’s share of the total
global FX reserves basket (57% in 2018, for example). In some cases this
will bias national results up or down, but these are in any case only
indicative.
How to read these data about where the Eurodollar stresses lie in Table 1? Firstly, in terms of scale, Eurodollar
problems lie with China, the UK, Japan, Hong Kong, the Cayman Islands,
Singapore, Canada, and South Korea, Germany and France. Total short-term
USD demand in the economies listed is USD28 trillion – around 130% of
USD GDP. The size of liabilities the Fed would potentially have to cover
in China is enormous at over USD3.4 trillion - should that prove
politically acceptable to either side.
Outside of China, and most so in the Cayman Islands and the UK,
Eurodollar claims are largely in the financial sector and fall on banks
and shadow banks such as insurance companies and pension funds. This is
obviously a clearer line of attack/defence for the Fed. Yet it still
makes these economies vulnerable to swings in Eurodollar confidence -
and reliant on the Fed.
Second, most developed countries apart from Switzerland have opted to
hold almost no USD reserves at all. Their approach is that they are
also reserve currencies, long-standing US allies, and so assume the Fed
will always be willing to treat them as such with swap lines when
needed. That assumption may be correct – but it comes with a
geopolitical power-hierarchy price tag. (Think yet again of how
Eurodollars started and the 1956 Suez Crisis ended.)
Third, most developing countries still do not hold enough USD for periods of Eurodollar liquidity stress,
despite the painful lessons learned in 1997-98 and 2008-09. The only
exception is Saudi Arabia, whose currency is pegged to the USD, although
Taiwan, and Russia hold USD close to what would be required in an
emergency. Despite years of FX reserve accumulation, at the cost of
domestic consumption and a huge US trade deficit, Indonesia, Mexico,
Malaysia, and Turkey are all still vulnerable to Eurodollar funding
pressures. In short, there is an argument to save yet more USD – which
will increase Eurodollar demand further.
We all become Agent Smith?
In short, the extent of demand for USD outside of the US is clear –
and so far the Fed is responding. It has continued to expand its balance
sheet to provide liquidity to the markets, and it has never done so at
this pace before (Figure 5). In fact, in just a month the Fed has
expanded its balance sheet by nearly 50% of the previous expansion
observed during all three rounds of QE implemented after the Global
Financial Crisis. Essentially we have seen nearly five years of QE1-3 in five weeks! And yet it isn’t enough.
Moreover, things are getting worse, not better. The global economic
impact of COVID-19 is only beginning but one thing is abundantly clear –
global trade in goods and services is going to be hit very, very hard,
and that US imports are going to tumble. This threatens one of the main
USD liquidity channels into the Eurodollar system.
Table 2 above also underlines looming EM Eurodollar stress-points in
terms of import cover, which will fall sharply as USD earnings collapse,
and external debt service. The further to the left we see the latest
point for import cover, and the further to the right we see it for
external debt, the greater the potential problems ahead.
As such, the Fed is likely to find it needs to cover
trillions more in Eurodollar liabilities (of what underlying quality?)
coming due in the real global, not financial economy – which is exactly
what the BIS are warning about. Yes, we are seeing such radical
steps being taken by central banks in some Western countries, including
in the US - but internationally too? Are we all to become ‘Agent
Smith’?
If the Fed is to step up to this challenge and expand its
balance sheet even further/faster, then the US economy will massively
expand its external deficit to mirror it. That is already happening. What was a USD1 trillion
fiscal deficit before COVID-19, to the dismay of some, has expanded to
USD3.2 trillion via a virus-fighting package: and when tax revenues
collapse, it will be far larger. Add a further USD600bn phase three
stimulus, and talk of a USD2 trillion phase four infrastructure program
to try to jumpstart growth rather than just fight virus fires, and
potentially we are talking about a fiscal deficit in the range of 20-25%
of GDP. As we argued recently, that is a peak-WW2 level as this is also
a world war of sorts.
On one hand, the Eurodollar market will happily snap up those
trillions US Treasuries/USD – at least those they can access, because
the Fed will be buying them too via QE. Indeed, for now bond yields are
not rising and USD still is.
However, such fiscal action will prompt questions on how much
the USD can be ‘debased’ before, like Agent Smith, it over-reaches and
then implodes or explodes – the first of the logical endpoints for the Eurodollar system, if you recall. (Of course, other currencies are doing it too.)
Is Neo The One?
In conclusion, the origins of the Eurodollar Matrix are shrouded in
mystery and intrigue – and yet are worth knowing. Its operations are
invisible to most but control us in many ways – so are worth
understanding. Moreover, it is a system under huge structural pressure –
which we must now recognise.
It’s easy to ignore all these issues and just hope the Eurodollar
Matrix remains the “You-Roll-Dollar” market – but can that be true
indefinitely based just on one’s belief?
Is the Neo Coronavirus ‘The One’ that breaks it?
_______________________________________________________________
ORACLE: “Well now, ain’t this a surprise?”
ARCHITECT: “You’ve played a very dangerous game.”
ORACLE: “Change always is.”
ARCHITECT: “And how long do you think this peace is going to last?”
ORACLE: “As long as it can….What about the others?”
ARCHITECT: “What others?”
ORACLE: “The ones that want out.”
ARCHITECT: “Obviously they will be freed.”
The artificial origin of the Wuhan Corona Virus is now clear.
In spite of Chinese propaganda to the contrary, ALL the assumptions we made two months ago about the virus have been confirmed as the video below makes clear.
The virus escape from the P4 laboratory was an accident, but the research being done was not. The consequences will be far reaching.
(PS: To view the video, click on the YouTube link below. The video is too large to embed in the article. The first part of the documentary, the research side is the most interesting. The second part is political. It veers toward anti communist propaganda and is much less interesting.)
