The primary reason I focus so much on time is that I believe it is running out. No one possesses a crystal ball, least of all me, and while making such a statement might presume to be intensely negative (doom and gloom) it’s not always that way and it certainly doesn’t have to be. For all the innumerable frustrations, there are glimmers of hope.

The time to have had this discussion was 2008. The Great Financial Crisis was a eurodollar event, nothing less. Therefore, to have made any kind of meaningful progress would have required investigating and truly understanding this massive offshore currency system. Instead there were QE’s. And then more QE’s.

We can’t go back so we must look forward. To that end, there are occasional attempts to address this intellectual deficiency. The BIS last year inquired about what I call footnote dollars by the mere expedition of trying to analyze something other than the narrow mainstream constructs for money. They “found” trillions upon trillions, maybe tens of trillions, which “…are functionally equivalent to borrowing and lending in the cash market. Yet the corresponding debt is not shown on the balance sheet and thus remains obscured.”

These are not obscured except in any official or orthodox capacity. The mainstream constraints placed upon them are entirely ideological. They have been out there for decades doing things, good and bad, all this time. We need only realize this fact to make the great and necessary leap.

That’s the problem, ultimately. The world even officially is trending toward appreciation and recognition of the eurodollar. It takes time, however, which is why it would have been expedient to undertake what is really Step 1 back in 2008 (if not on August 10, 2007).

The reason it takes time is largely because upon first finding out about all this hidden and strange monetary nature you don’t really know what you have. It is difficult to make sense of it and its full range of ramifications from the very start. I know, I can attest having gone through a lot of the basics fifteen and twenty years ago. Even then, I really hadn’t put enough together (and still haven’t) until the panic itself started to illuminate in practice what I had suspected in theory.

The IMF published its latest Global Financial Stability Report (GFSR) for April 2018 (thanks to M. Daya, a true offshore dollar enthusiast, for flagging it) and the eurodollar system finally gets included. To be sure, the term “eurodollar” doesn’t once make an appearance in about 150 pages of material. What we get instead is, The International Dollar Banking System Faces a Structural Liquidity Mismatch. Close enough.

They describe it as:

This section, therefore, assesses funding and liquidity across non-US banks’ international US dollar balance sheets, defined to include non-US banks’ dollar positions outside the United States plus their US branches, but excluding their US subsidiaries.

The big problem is still the eurodollar, though. What I mean by that is the eurodollar money markets that form the backbone of the overall global dollar system. There is a reliance upon short-term “borrowing” techniques even today. The reason there was up until 2007 was because of the system’s evolution toward pure ledger money and thus every form of liability imagined. It could, essentially, invent new ways to fund itself.

That may not seem like a positive now but before August 2007 it was perceived as perhaps its greatest strength (I’ll cover this in more detail in the upcoming Eurodollar University Season 2 with MacroVoices).

This is the global dollar “short.” Everyone thinks they have “dollars” on the liability side until suddenly they disappear; rollovers become inflexible and prohibitively expensive often without sufficient warning (at least for those who listen to central banks and supranational Economists like those working at the IMF). This is the potential for “dollar shortage.”

The IMF’s GFSR notes what’s obvious to everyone analyzing the real monetary system as it is outside of conventional theory:

This use of short-term funding makes international US dollar balance sheets structurally vulnerable to liquidity risks.

Its principle conclusions in this area are that offshore banking operations have improved dramatically if by holding HQLA (high quality liquid assets). This is the major motivation behind Basel 3’s Liquidity Coverage Ratio (LCR), that if banks possess a higher proportion of largely government bonds that can be easily liquidated at reasonable prices they can effectively deal with a severe dollar shortage playing havoc on their continued large dollar short.

We can be highly skeptical of this claim for several reasons, starting with the entirety of the “rising dollar” period. Not only that, in 2008 what was once assumed “high quality”, US agency paper, was almost completely repudiated. Had the LCR been invented concurrent to the adoption of Basel 2 it almost certainly would have overstated bank funding safety. Furthermore, the IMF lumps in bank reserves with government bonds as if some positive attribute to that effect:

Overall, US dollar liquidity ratios have improved since the global financial crisis. This improvement has largely been driven by large increases in High Quality Liquid Assets (HQLA, reserves at central banks and holdings of official sector bonds), probably in response to intensifying regulatory scrutiny of short-term liquidity positions.

It’s not all this way, though. The GFSR does take note of one dimension of the system that mattered probably more for the “rising dollar” and its continued aftermath (still in 2018) than they seem able to truly appreciate:

Non-US banks use foreign exchange swap markets to meet short-term currency needs. While some banks have lengthened the tenor of their swap positions, banks still plan to tap swap markets when liquidity is tight. Non-US banks’ dependence on cross-currency swaps varies, but two facts stand out: their use has increased overall over the past decade, and Japanese banks rely relatively heavily on these instruments.

We really have no idea, and the IMF report doesn’t bother to say (even that it doesn’t know), just how big the aggregate dollar short is in its FX dimensions. All that stuff about the liquidity coverage ratio is therefore null and void because it is a ratio only compared to what is known. If your answer to, who owes what to whom?, is, I have no idea how to even begin, a whole lot of work remains to be done – and little stands behind any assurance that risks are manageable if not low.

So, their conclusions are a mix of good and bad, though mostly bad if only due to this being closer to Step 1 for them. Among the bad is, of course, downplaying recent developments such as LIBOR-OIS by repeating the FOMC lie. In all likelihood, that was probably the impetus behind including The International Dollar Banking System Faces a Structural Liquidity Mismatch in the report in the first place. 

And the IMF never once addresses the clear structural shift in eurodollar behavior that began more than ten years ago and what that really has meant.

Among the good, the GFSR does leave us with important risks that the IMF at least is struggling to consider:

The combination of balance sheet vulnerabilities and market tightening could trigger funding problems in the event of market strains. Market turbulence may make it more difficult for banks to manage currency gaps in volatile swap markets, possibly rendering some banks unable to roll over short-term dollar funding. Banks could then act as an amplifier of market strains if funding pressures were to compel banks to sell assets in a turbulent market to pay their liabilities that are due. Funding pressure could also induce banks to shrink dollar lending to non-US borrowers, thus reducing credit availability.

Again, time is not just a major factor it is the remaining one. That paragraph written in April 2018 describes almost perfectly what happened starting August 2007. What went on nearly eleven years ago, what really went on and why central banks were so powerless to stop it and its repetition, has yet to be fully explored in these places. We might have avoided so much economic costs had such honest inquiry been allowed and included in some official capacity more closely in the aftermath.

These are just introductions into the more visible parts of the shadows. Having seen what’s in them, we can choose to be optimistic that it might spur more determined efforts moving forward. The history of discovery is never linear, and often takes the form of massive, condensed jumps (such as classical physics giving up to quantum physics in the early 20th century). We can simultaneously be upset and angry it has taken this long while still holding out hope that the world, so to speak, is moving in the direction of the eurodollar and could do so more comprehensively (balance sheet capacity) before it’s too late.