Wednesday, February 17, 2016

They Don't Know What They Are Doing

The problem with economists is that they are just a bunch of academic statisticians with no real world or business experience. They don't really know about how the economy or business works. Even worse, for our times, is that they know nothing of finance and the world of wholesale global finance. Everything in finance has changed and the Federal Reserve keeps showing the same ignorance and making the same mistakes.

The "eurodollar" and it's various derivatives took over the world from about 1990 until 2008, funded the US housing, debt and equity bubbles (confounding Greenspan), crashed in 2008/09, but was partially and temporarily resurrected until about 2013. It's has been shrinking ever since.  It's in full collapse in 2016 and taking world commerce with it.  See the chart below for the big picture view.

The "Eurodollar" has been the real money supply to the world for over 20 years and it's collapsing now.  That's why every country is struggling to find money and dollars these days.

The Fed and Yellen apparently know nothing about this.This is why they are completely lost. They are willfully blind!  And their "Keynesian" money manipulations are not working at all. And after years now of total and utter failure, evidence showing their continued failures is called "transitory" by our schoolmarm chairwoman.

Evidence of the demise of the "Eurodollar," crashing again like 2008, is revealed by distress at Morgan Stanley, Credit Suisse, Deutsche Bank, Barclays, RBS and other money center banks especially in Europe. All have been cutting dividends, raising capital repeatedly and firing employees in the past year. Their earnings have turned into huge losses as they exit the leveraged "Eurodollar" markets as fast as they can. The fact that the stock price of Deutsche Bank is cratering day after day to new post-2009 lows should be understood as a canary in a coal mine. Since "eurodollars" are a bank balance sheet phenomenon, this "money" is disintegrating or disappearing world-wide and taking down every asset class with it.  It explains the commodity collapse, China's collapse, oil's collapse and soon the world economy.

Into all of this, Yellen just tightened liquidity!!

"Eurodollar" FICC trading, repos, reverse-repos, interest rate and currency swaps/forwards/etc are virtually the entire basis of international trade. When a company in Sweden buys something from a company in Japan, their banks buy and sell "dollar" currency forwards/swaps to fund the transaction. Their traded "instruments" becomes part of the "Eurodollar" derivative complex which exists on (or off) bank balance sheets as "derivatives".

There are few dollars backing "Eurodollars". It's substantially unregulated and there are few margin or reserve requirements. It's nearly pure leverage. The problem is that, in times of crisis, like in 2008, there's no safe place to go --except to hold dollars. Thus the "eurodollar" system is essentially a huge dollar "short". That's why demand for dollars has driven the dollar sharply higher in the past year -- especially against weaker currencies like the Brazilian Real, Indonesian Rupiah, Mexican Peso, etc. There is a struggle for liquidity worldwide as this leverage collapses. The world is short of dollars in a $trillion QE world!

Commerce and trade is predicated on this market functioning normally. When it doesn't, there's a huge problem like in 2008 when world trade came to a standstill. Now, the "Eurodollar" market is not functioning again as banks like Morgan Stanley and Deutsche Bank scramble to exit these markets as fast as possible. The real economy is suffering and world trade is shrinking in 2016. No one knows enough to address the problem. So economic damage is ongoing and accumulating. And it won't stop until the underlying problem is addressed. By then, I'll be too late.

Yellen and all the "economists" (statisticians?) at the Fed apparently don't really see what's happening. Why else would they have raised the Fed Funds rate and withdrawing liquidity in the middle of a building dollar liquidity shortage? They literally don't know what they're doing. The Fed's complete failure to accomplish any of their goals such as creating 2% inflation, or to create a solid recovery, continues. Everything that confounds Janet is labeled "transitory". That song is getting real old.

She, and all the other central planners in the world don't know what they're doing.


John Doyle said...

I have to agree with this observation. Mainstream economists are just academic sphere operators and run with silly ideas such as all people being/acting rationally etc.
In the real world none [there are some] accept that the federal government does not spend your taxes. Tax is a social issue, and not done to raise revenue. In other words, taxpayers did not bail out the errant baks in the GFC. The Fed bought it all with created money. They do that with every federal cost and it can never go bankrupt in dollars it creates.

That's just one instance. There are several other false theories that need understanding, but you won't get it from economists!

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