When I write, as I did again yesterday, Brazil may already be toast it’s not just Brazil who is likely to be on the painful end of the eurodollar. The balance of probability says that this one unfortunate South American country is potentially going to suffer more than most, for a second time, but they will not be unique in revisiting economic and financial misery.

When we look back on US experience, for one, we see that the economic break really dates back to the middle of 2006. It was at the end of that year when the eurodollar futures curve first started to trouble Bernanke’s Federal Reserve, an indication that things were already awry to a substantial degree. Inverted curves mean future recession in mainstream convention, when in monetary reality they mean trouble has already arrived.

What’s left to sort out is only the ultimate degree of damage yet to be accomplished by a contemporary dislocation.

In almost every major account, the slowdown appears more than a year before the Great “Recession” does. This makes intuitive sense given what was going on. The housing bubble peaked around May 2006, having already showed signs of stress in the middle of 2005. As I wrote yesterday, an inflection in real estate and really mortgage finance was a big deal no matter how hard Economists tried to pretend it wasn’t.

This, however, presents us with a clearly unfinished picture. If US debt and the US economy were already slowing in the middle of 2006, why don’t the few eurodollar statistics we have available slow down then, too? The money side seems to have been almost unbothered by this mid-2006 modulation.

Answering this question is relevant to the global economy in 2018, though it might not be clear why this is case.

Part of the problem is our perfectly natural domestic bias. We tend to see things US first, or US exclusive. Perspective matters, and with a nominal dollar standard underpinning the global network such chauvinism isn’t completely unwarranted. The old cliché of what happens when the US economy sneezes was and is true, only it was the “dollar” whose temperature we needed to monitor.

In the middle 2000’s, this bias narrowed our focus to the one bubble we could readily see: US housing. That it was in 2005 and early 2006 totally out of control only locked our attention on it even more. But the US real estate bubble wasn’t the only one produced by this rapid, uncontrolled global (offshore) monetary expansion.

Parallel to it was the economic “miracles” of especially EM economies like China and Brazil. In fact, Ross Perot’s “giant sucking sound” of manufacturing capacity and really jobs doesn’t happen without the money first. This is why Perot had to wait until 2002 for his prediction to be fulfilled; the eurodollar was the key catalyst to carrying out the paradigm change.

These distinct money bubbles weren’t homogenous to themselves, either. They were variable through time, as we well know through US real estate. The bubble was more modest up until 2003, and then took on truly staggering proportions in 2004 and 2005.

The EM bubble, by contrast, was more modest up until 2005 and 2006. Once the US bubble started to reverse, unbroken money growth meant that the focus of that growth shifted from US debt (which was becoming risky with less opportunity) toward EM debt. From 2006 forward, this reallocation of monetary attention accounts for a lot of what followed.

In fact, this shifting pattern kept up all the way until 2011. It was broken, obviously, in later 2008 and early 2009 but only by virtue of the scale of the banking panic and economic collapse in the developed world where the one bubble was already sharply in reverse. The other bubble, EM, was largely intact if delivered onto this pause.

This was the basis in early 2008 for the idea of “decoupling.” Foreign economies especially those in China and other EM’s were believed able to withstand softening even outright recession in the US simply because since 2006 they were given this huge monetary boost pulled out from under the other piece.

Decoupling as a mainstream term didn’t last past the end of 2008, but then it was reborn in 2009 as an idea without any catchy name. The US and European economies were mired in weak recoveries (new normal), but it was widely believed that wouldn’t stop China, Brazil, and the rest. With Japan firmly fixed in the middle of this post-crisis monetary redistribution, the Asian “dollar”, from 2009 to 2011 the EM’s once more appeared to decouple.

The crisis in 2011 was decisive not just in breaking the eurodollar system for good, but also in how it ultimately affected the other bubble of the EM’s. Brazil’s economy, for example, roared back to life out of the Great “Recession” but then collapsed starting in 2014 as the negative post-2011 eurodollar pressures built to a breaking point. Much of what happened in 2012 and 2013 was the EM world trying to handle this massive change, and being unable to withstand it for too long. 

Without eurodollar growth past 2011, the only possible fate was worldwide recoupling.

If the “rising dollar” was the rest of the world’s 2008, that’s because of the shifting nature of the system up until 2011. From 2006 to 2011, the EM focus offered these overseas economies a lot of shelter from the withering deflationary impulse that wrecked the US and European systems. It was, however, merely a delay in the reckoning not immunity from it.

This is also why Reflation #1 was so different from the two that have so far followed. There was real purpose and opportunity in 2010 and 2011 in the EM’s that wasn’t happening in the US and Europe. The monetary view of a Chinese economy that was sure to return to its precrisis growth state supported what might have looked an inflationary recovery.

The break in 2011 simply harmonized both sides of the eurodollar system; the stricken developed world side would remain diseased while the EM side would become diseased by the same contagion. Even seven years later, this week, very few people seem to realize just how much that 2011 event has mattered. It was the end of the end, where the eurodollar reached its final last gasp – appropriately overseas, offshore from the US perspective.

That’s the context by which we have to judge Reflation #3, as we did Reflation #2. We could put 2011 (and therefore 2008) behind us if Reflation #3 represented a meaningful change in the underlying condition. It’s always possible, however unlikely, that eurodollar banks might suddenly decide to embrace the insanity again like they did fifteen and twenty years ago. Egos die hard, and the management teams at the global giants undoubtedly crave long lost glories.

But it’s just not as simple as all that. You can’t ever put the toothpaste back in the tube. Plato’s parable of the cave is a useful analogy; once you see the world outside the cave in full color and clarity, you can’t just go back to the shadows. The eurodollar system, this credit-based money system, was inherently flawed.

I think a lot of people on the inside knew it then, but exponential growth overwhelmed prudent sensibility and created the conditions for widespread rationalizations. Too many otherwise intelligent and rational people really started to believe there was no risk that the banking system couldn’t handle; or that the ridiculous Greenspan put (or later QE1 and QE2) couldn’t save them from. And they acted on these beliefs for as long as possible, holding on for a further half decade in some parts of it.

In other words, the eurodollar system has been thoroughly explored and just as thoroughly exhausted.

Unfortunately, there isn’t a third side to the system. There was only the domestic side (which included Europe especially as it was European bankers who supplying all those eurodollars for the US housing bubble) and the EM side. The former ran into trouble all the way back in 2006. And while the latter kept it up until 2011, that part, too, is already far back in the pages of history. Seven years is a long time where if something meaningful was going to change it would have long before now.

That would suggest globally synchronized growth was little more than a globally synchronized pause in the same trend. In that respect, it further proposes recoupling that in the theory of everything growing sounds terrific but in light of the reality of the post-2011 eurodollar world serves instead almost regular helpings of toast.

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