Eurodollar Shortage


I am presuming that when people around the world sell “US paper” as described below, they get dollars for it. Outside the U.S, those are called Eurodollars.

“As we pointed out one month ago, what has become increasingly obvious is that both foreign central banks, sovereign wealth funds, reserve managers, and virtually every other official institution in possession of US paper, is liquidating their holdings at a disturbing pace, something which in light of the recent surge in yields to over 2 year highs, appears to have been a prudent move.” (http://www.zerohedge.com/news/2016-12-15/china-belgium-dump-treasuries-foreign-central-banks-liquidate-record-403-billion-us-)

The world outside of the U.S. is drowning in U.S. dollar-denominated debt. Debt is up and has been used to build overcapacity. There is no more collateral available to take on more debt, so the existing debt just has to be paid (now there is a novel idea). But the dollar is up, and payments are therefore higher in terms of local currencies; and the world economy and trade is down. So these debt holders are starving for Eurodollars to make their payments with. How do they get them? If this situation is forcing the sale of “U.S. paper”, as described above, by which I suppose is meant U.S. treasury notes and bonds, then that will push down the price of this paper and therefore its interest rates up.

So I theorize this is behind the recent rise in interest rates on U.S. treasuries and bonds. I have seen it said, and it seems likely, that the Federal Reserve does not really set interest rates, but follows them. The Fed has been forced now, by the market, to raise their interest rate targets.

Here is the rub. Rising interest rates on U.S. paper will make the dollar rise. A rising dollar, in the present stalled economy, will intensify international need for Eurodollars and therefore selling of U.S. paper. More selling of U.S. paper, yet higher U.S. interest rate. Yet higher interest rate, dollar higher still. Rinse and repeat and you have a nasty feedback loop.

Perhaps this will will lead to the fulfillment in early 2017 of the HalfPastHuman Web bots prediction.

 

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About icliks

Biding my time in central ms ... yours too, if ur reading this.
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