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20 April 2020

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elaine

Yeah, Right, I think most of the U.S. strategic oil reserves are located in TX & Louisiana, near the Gulf

blue peacock

Barbara Ann and eakens,

I'm willing to bet the USD will remain global reserve currency for at least the next few generations.

What many don't get is that USD didn't take over from GBP overnight and not by some committee decision. It happened by natural forces over a period of time.

What do you think the taxi driver in Buenos Aires or the oligarch in Moscow, London or NYC and the majority of Xi Jinping's private stash is going to be in - gold, bitcoin, CNY or USD?

All the petrodollar conspiracists, the China Yuan supremacy crowd now, just like the Japanese Yen taking over in the late 80s and then the think-tank opeds of the euro becoming dominant, continue to be proven wrong, yet they persist. Mostly because of their hatred of the US.

No doubt our policy makers keep screwing up big time especially the Ph.Ds at the Fed. But thats more a reflection of capture by the financial oligarchy than anything else. No world power ever dismantled its production capacity and shipped it overseas to an enemy state in the history of the world as far as I know. I wouldn't bet on that being a permanent state however.

Barbara Ann

eakens

Tantalizing. Feel free to expand on the significance of the personnel changes at the Fed (with our host's indulgence). My working hypothesis is that the Fed is clueless as to how to extricate itself from the sudden emergence of very real Triffin paradox problems brought about by the virus-induced global trade shock.

Alastair Crooke's latest piece over at Strategic Culture highlights the impossible position the Fed is in with this crisis.

This fear of a systemic dynamic destruction of the trading system has led the BIS (Bank for International Settlements: the Central Bankers’ own Central Bank) to insist that: “… today’s crisis differs from the 2008 GFC, and requires policies that reach beyond the banking sector to final users. These businesses, particularly those enmeshed in global supply chains, are in constant need of working capital, much of it in dollars. Preserving the flow of payments along these chains is essential if we are to avoid further economic meltdown”.

This is a truly revolutionary warning. The BIS is saying that unless the Fed makes bail-outs and working capital available on a massive scale – all the way down, and through, the supply-pyramid to nitty-gritty individual enterprises – trade collapse cannot be avoided. What is hinted at here is the concern that when multiple dynamic complex systems begin to degrade, they can, and often do, enter into a spiralling feedback-loop.

The Fed clearly cannot bail out the world, but not doing so runs the very real risk of a systemic collapse in the dollar-based trade system.

In my mind any question of what, if anything, ultimately replaces the dollar-based international trade system must first deal with how (and indeed if) the transition from the very wobbly status quo can be managed.

LJ

I confess I was a peak oil fan boy. And I am glad to say I was wrong.

turcopolier

All

I suppose some of you have noticed that entropy has set in and many connected systems have started to break down bit by bit. A lack of people available to keep them working has started to have an effect.

Fred

Col.,

Yes, and it will get worse as it is apparently the intent of a few governors to drive as close to the edge of collapse as possible. Michigan's governor is refusing to even consider opening the UP, with all of 11 deaths, yet tomorrow is going to attend yet another 'townhall' organized by a lefty group demanding a rasise in the minimum wage. (This time they are only fighting for 12 though, not 15.) As to the international oil system I'm curious just what is happening in Venezuala, and as a side note, just what is going on with the ilicit drug market (other than some stockpiling on the Southern border).

Yeah, Right

Yes, well put Colonel. A certain poem by Yates springs to mind.

Yeah, Right

Related news straight from Bizarro World: the Australian government has decided that it will take advantage of current oil prices to establish it own Strategic Oil Reserve.

To be stored - get this - in the USA.

Apparently there are no salt domes to be found anywhere on the Australian continent.

I suppose we also store our gold reserves in Fort Knox because, you know, why not?

That's if we have any gold reserves, which is not a given.

Jack
'A starting wage for a line cook is about $640 a week. Oregon’s unemployment offers about $416 per week. But thanks to the $600 federal bonus, that same worker now collects $1,016. Why would anyone take a pay cut to go back to work?' wsj.com/articles/payin…

https://twitter.com/jessefelder/status/1253343271184666626?s=21

Of course that depends on how long those checks keep coming.

Barbara Ann

Colonel

The entropy you highlight and the first signs of systems breakdown remind me of E M Forster's wonderful The Machine Stops.


blue peacock

TINA is a mighty powerful argument for the the dollar not being replaced by an alternate reserve currency. But the eurodollar machine cannot be allowed to stop, else all else will as well.

Ted Buila

Digging/sucking up and selling/shipping our back yard read West Texas/Mountain West+Dakota fracking and peak oil never made sense. The same holds true with exporting the nation's finite mineral and water resources. Once they're gone that's it..none of it is coming back to the America left on this side of the River Styx.

The continued digging/pumping up and selling the nation's natural resources for short term domestic and foreign private gain...I guess it's the American Way. America is better than that I'd like to believe.

eakens

blue peacock:

a. Gold and BTC/USD price action would seem to be suggesting not all is well. Still, I'm not saying the USD isn't the cleanest dirty shirt, but what I am putting for is that there is too much dollar denominated debt worldwide that cannot be paid back. The IMF doesn't have nearly enough of a bazooka to deal with this ticking time bomb. The defaults are coming, whether you like it or not. That will make the debts less and less likely to ever be paid back, creating a feedback loop that is going to cascade through emerging markets and developed markets.

So how to deal with it. One option is the debt is forgiven, and another is that an alternate reserve currency will need to come into existence. That alternate reserve currency may incorporate the USD, but something has to give.

Barbara Ann:

It's unprecedented in modern history that the cultural make-up of the FED has changed so drastically in one administration. The same can be said of the judicial bench. The merging of the Treasury and Fed through what is essentially nationalization of debt (and by virtue of that equity when it can't be paid off) is also unprecedented. Many disparate forces are merging, but we may wake up one day and realize they were not distinct.

I still contend the Federal Reserve is going to basically going to involve some international merger of the Central Banks of other debtor countries. It won't be outright, but it is going to some scenario that expands the US sphere of influence.

Fred

And just like that, WTI crude is no longer "we'll pay you to take it off our hands". Sadly none of the media pundits noticed that other oil prices never had that problem.

https://oilprice.com/oil-price-charts/45


Jack

eakens

Offshore banking and OTC markets which is where all the eurodollars trade is functioning normally. As global trade grew, eurodollars grew. As with any financial cycle leverage also grows. Global trade has been decelerating for sometime. Leverage has been continually rolled over in the anticipation of renewed growth in trade and financial speculation. But that wasn’t happening. So eurodollar liquidity has been waning as folks began reducing exposure. This is a normal behavior as risk is curtailed.

There is a reason why the idea of bankruptcy was enshrined in our constitution couple centuries ago. They knew then from experience that in boom times human psychology projects it out to the future and when growth wanes so does speculative fervor. Those caught offside need a way to restructure. Balance sheet repair is essential for renewal.

Preventing this natural restructuring to restore healthy balance sheets in order to protect failed investments is what’s new. Central bank monetization of failed financial structures is extraordinary. This only exacerbates and prolongs the misery. Dollar debt in emerging markets and here needs to be restructured not continuously rolled over and expanded. Equity holders and debt holders need to take haircuts and become more circumspect in their future investments and not bailed out by central banks debasing the money stock. Those that acted prudently and have liquidity should be rewarded as they can pick up good assets at discounts and restore real growth with sound investments and management. Until of course the next speculative cycle begins.

Central bank and government intervention in this process of exuberance and despair only increases the amplitude of each cycle. Despite the fervent belief of the Ph.Ds human behavior of fear and greed has not been repealed.

Gold and BTC markets are microscopic relative to the size of dollar markets. Just look at the volume of fx trades daily. They play a role in speculative trades as dollars slosh through them based on investor sentiment. The plumbing and mechanics of trade finance is all in dollars. You’re talking trillions of cross border transactions. That scale can’t be replicated overnight or even in decades.

TonyL

Fred,

Sorry I did not see your post above.

Regarding:

4. What other political "deals" could be made with individual OPEC countries to negate the effect of OPEC led market manipulation that is intended to destroy the shale industry, at least in the short term?

In my opinion, this is the key in solving this problem. We cannot win this oil "war" with shale oil industry being the target of oil producing countries, from time to time. Russia and Venezuala should be our friends. Unfortunately the neocons and neolibs would not accept this, and they are practically running the country right now.

With Rosnef in Venezuala became Russian government property, US cannot invade this country like it did to Iraq (note that I did not believe oil was the main reason for the invation). Putin has been always one move ahead in the chess game.

Fred

Tony L,

Thanks for your response. You left out items 1,2 and 3. Rosnef now owns some a derilict company with an exhausted capital base located in a socialist dictatorship? Good luck to them.

"shale oil industry being the target of oil producing countries, from time to time."
That is precisely what OPEC has been doing to the US and Western economies since '73.

TonyL

Fred,

Items 1,2 and 3 are beyond my ability to discuss intelligently at this point.

"Rosnef now owns some a derilict company with an exhausted capital base located in a socialist dictatorship"

I can't argue with that "socialist" moniker . But that's Russian business and they have become Venezuala protector (like has Syria has been). And the business of Venezuala should not be of our concern. What our concern should be is to have a cordial relationship in trading and oil industry development with Russia and Venezuala. The neocons have been gunning for Venezuala and they never give up. And so have been the neolibs for Russia. And I think we should not be messing with other countries business, unless it is really in our national security interest.

blue peacock

Barbara Ann,

Offshore banks create eurodollars and as they expand they create new assets. They also package these dollar assets into securities for sale to investors. Fractional reserve banking uses the credit multiplier. During boom times, as companies cash flows grow on paper they have the ability to show sufficient capacity to service the debt. Many debt covenants have CLTV ratio tests and other such protections. However, in boom times as financial institutions compete for asset growth both pricing and covenants get relaxed.

With central bank artificially suppressed rates, and even negative rates in Europe & Japan there was a mad scramble to acquire ANY yield further relaxing lending standards. Naturally this led to financing on projects which would not have received funding under a more natural rate environment as the hurdle rates would have been higher. Creating excess capacity and allowing the ability of even financially weak businesses to compete. Add to this that the Chinese banking system has been on steroids with no regard to credit quality, financing all kinds of marginal projects particularly in infrastructure and export driven industries.

This backdrop needs to be taken into account.

As the volume and profitability of global trade began to decline a while ago, many of the businesses began having difficulty servicing these loans. As NPLs and the prospect of them began to rise, eurodollar lending began to decelerate. Add in the tariffs and other sand in the gears of global trade. This has increased the need for more higher quality collateral in the inter-bank lending market. One of the features of the eurodollar market is that the Fed and US banking regulators have no control over asset creation growth as these are offshore banks beyond the reach of US regulators.

One of the flaws in Jeff Snider's analysis is that he fails to take into account the possibility that all the underwater eurodollar debt can be restructured. That would naturally increase the bar for new lending as offshore banks take a hit to capital and the weaker financial entities would need to raise fresh capital. Restructuring are not painless events.

Recall the S&L crisis. The Fed didn't bail out creditors and shareholders and particularly managements of these enterprises. Those with capital were able to buy all the S&L assets from the RTC at clearing prices. OTOH, remember the trouble the big money center banks got into lending into Latin America in the 80s and the Brady bonds to essentially bail them out. Recall the dollar mortgages in Scandinavia and Spain that went belly up in 2008-2009.

With global trade slowing, commodity & manufactured goods prices declining, dollar cash flows are declining in export driven economies. Couple that with flight to safety as the dollar rises against nearly all currencies. There's very little the Fed can actually do. It can take risk onto its balance sheets by offering currency swaps lending on the basis of other countries deteriorating credit quality sovereign debt. All that does is postpone the day of reckoning for all the malinvestment that was financed. Another approach is to do nothing. Let the system clear and have the unpayable debt restructured as was done during the S&L crisis. Let the Singaporean property developer or the Brazilian mining company or the Vietnamese apparel manufacturer or the Chinese steel company be forced to restructure their capital stack. That's not what the financial oligarchy want. If the Fed had to do anything it should have leaned against the credit boom. But then ..... Instead we have the heads I win, tails you lose financial system.
.

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