One of the more absurd ideas in recent years is the world is running out of dollars. From time to time that theory pops up, as it did again just a few days ago.
Telegraph writer Ambrose Evans-Pritchard proposes Economic Stress as World Runs Out of Dollars.
Surging rates on dollar Libor contracts are rapidly tightening conditions across large parts of the global economy, incubating stress in the credit markets and ultimately threatening overvalued bourses.
Three-month Libor rates – the benchmark cost of short-term borrowing for the international system – have tripled this year to 0.88pc as inflation worries mount.
Fear that the US Federal Reserve may have to raise rates uncomfortably fast is leading to an acute dollar shortage, draining global liquidity.
“The Libor rate is one of few instruments left that still moves freely and is priced by market forces. It is effectively telling us that that the Fed is already two hikes behind the curve,” said Steen Jakobsen from Saxo Bank. “This is highly significant and is our number one concern. Our allocation model is now 100pc in cash. This is a warning signal for the market and it happens extremely rarely,” he said.
Goldman Sachs estimates that up to 30pc of all business loans in the US are priced off Libor contracts, as well as 20pc of mortgages and most student loans. It is the anchor for a host of exotic markets, used as a floor for 90pc of the $900bn pool of the leveraged loan market. It underpins the derivatives nexus. The chain reaction from the Libor spike is global. The Bank for International Settlements warns that the rising cost of borrowing in dollar markets is transmitted almost instantly through the global credit system.
“Something more fundamental is at work. The cost of global capital is going up, full stop,” Mr Jakobsen said. Long-term bond yields are also soaring as the markets question the logic of a $70 trillion debt edifice priced on assumptions of a deflationary liquidity trap lasting deep into the 21st Century.
Marc Ostwald from ADM said the global dollar shortage is now palpable. “There is no depth to the market. The transmission mechanism is still broken and there is a poor level of liquidity as a result of regulations. Eventually things are going to explode,” he said.
Confusing Liquidity with Shortages
Let’s not confuse either liquidity or stupidity with a dollar shortage.
Borrowing money in foreign currencies is a speculative maneuver at best. Companies and individuals who do so, take risks. That the risks have backfired does not imply there is a shortage.
In fact, the notion is downright absurd.
M2 Money Supply
M2 Money Supply Percent Change From Year Ago
Pritchard stated “The M1 money supply has fallen 9pc over the last year.” Let’s take a look.
M1 Money Supply, Percent Change From Year Ago
The notion there is a dollar shortage and M1 is down 9 percent is so ridiculous I had to go back to the article and review. Here is the complete paragraph.
It is happening in parallel with Fed tightening, each reinforcing the other, and that makes it more potent. Three-month interbank rates in Saudi Arabia have soared to 2.4pc. This is the highest since the global financial crisis in early 2009 and implies a credit crunch in the Saudi banking system. The M1 money supply has fallen 9pc over the last year. The Bank of Japan has doubled its window of dollar credit for Japanese banks to head off an incipient dollar squeeze, drawing on the country’s ample foreign reserves.
Sorting out that hodge-podge of ideas involving the US dollar, Saudi Arabia, and Japan, it seems Pritchard believes that a collapse in Saudi Arabia M1 money supply equates to a shortage of US dollars.
The irony in this mess is that the Fed kept rates so low so long, it induced speculators to borrow in US dollars as an easy means to get cheap funding.
Now the trade has reversed, and oil prices collapsed, not only is the dollar strengthening, but interest rates are rising.
Pritchard labels this set of circumstances a “dollar shortage”. Idiocy is a better word. There is no shortage of dollars. A glut of dollars and manipulated interest rates led to speculative global borrowing on the assumption the dollar would weaken.
Pritchard, as always, wants cheaper money and lower interest rates, despite the fact that’s why we are in this mess in the first place. I keep emailing Ambrose asking a simple question “When does the madness stop?”
He never answers because there is no answer he can possibly provide. Nor does economist Paul Krugman have an answer to my simple question “what happens when the stimulus stops?”
Monetarists always want more money, and Keynesians always want more fiscal stimulus. Neither can answer the simplest of questions, as to how they stop the cycle ever balances when they are perpetually worried about slow growth.
Meanwhile, imbalances and asset bubbles grow by the very policies the Monetarists and Keynesians espouse.
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Mike “Mish” Shedlock
