Courtesy of Mish.
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
