I will use this blog as means to understand the Eurodollar-system. I was a die-hard inflationist for a long time, but I have changed my mind over the years because inflation was never coming. It didn’t matter how much money central banks were printing, the end result always seemed to be the same: no inflation.
Then I came across the work by Jeff Snider and Emil Kalinowski over at Eurodollar University where they explain that our analytical framework is wrong. Instead of looking at the money printed by the central banks as high-octane money, they instead should be looked upon as being bank reserves and bank reserves is a different animal from money.
Bank reserves are not money that banks simply can lend out to clients. They instead sit inertly on their balance sheets while the real scramble is going on elsewhere: In the Eurodollar-system. The Eurodollar-system is not the exchange rate between the US dollar and the Euro, but an off-shore monetary system that exists outside of the remit of the Federal Reserve.
This system was conceived in the 1950’s and has over the years grown bigger and bigger and is now multiples bigger than the money that central banks “print”. The scramble that I was alluding to in the former paragraph is about collateral, namely assets that banks can use in order to raise money in the Eurodollar-system. That is important because ever since August of 2007, the Eurodollar-system has not been working as it should.
Prior to 2007 banks were able to put up anything from lowly rated sovereign bonds to junk bonds in order to access the Eurodollar-system. They no longer can do that. Instead, they now have to put up the safest of the safest assets in order to be able to access funding the way they were used to before the GFC.
One of the consequences of the broken Eurodollar-system is that economic growth as we knew it is now not working anymore. We have had fifteen years of sluggish economic growth since the GFC, and it does not seem to improve. This has major societal implications everywhere, where the rise of populism is just one example.
Another consequence is that bond yields are stuck at historically low levels. The reason for this is that the collateral that the banks need in order to access the Eurodollar-system is in such high demand that their price is exorbitantly high (remember that prices of bonds move inversely to their rates).
As I said, this stuff is really complicated, and I don’t pretend to understand it all, but I will try to write in this blog once a week and update you on things that are going on in the plumbing of the monetary system and its repercussions on the economy.