9 ms·

Cash Glut in Eurozone Drives Dollar Demand

75 points by lxm 5y ago

eterpstra 5y ago
Believers in the Dollar Milkshake Theory are lacing up their shoes for some victory laps.
- JumpCrisscross 5y ago
  What’s the dollar milkshake theory?
  - ViVr 5y ago
    It's a theory by wealth manager Brent Johnson that the next big recession will trigger an enormous demand for dollars. The dollar will rise against most other currencies and non-US bonds thus sucking up all the liquidity (that's the milkshake part). He's been on many podcasts to explain his theory and provide updates. I will link you an interview at realvision from september 2020 timestamped at 51:55 where he goes through it in summary: https://www.youtube.com/watch?v=h_HCIyc6MaA&t=51m55s https://www.youtube.com/watch?v=h_HCIyc6MaA&t=51m55s
    - the_hob_code 5y ago
      I hadn't heard of the theory before but in googling it I came across this video[0] from mid 2019 where he claims the demand for US dollars will be driven by rising interest rates and a shortage of dollars. Obviously things went a very different direction in in the past year and a half or so as the Fed has kept interest rates low and monetary supply has increased. So it's odd to see him arguing in the video that you linked from late last year that the same outcome will result from very different circumstances. [0] https://www.youtube.com/watch?v=2qTOWuL7Zco https://www.youtube.com/watch?v=2qTOWuL7Zco
    - pphysch 5y ago
      1. 2008 recession was offset by both US Fed, PRC, et al. buying lots of UST and stimulating global economy. 2. 2020 was offset by US Fed buying tons of UST and USG printing USD. However, global economy cannot magically expand by 40% or whatever is required to balance that expansion of USD. Hence a persistent supply chain crisis. In current geopolitical climate, no foreign state will buy lots of UST. US Fed is still buying lots of UST, causing a liquidity glut causing inflation. Global economy physically cannot expand at the necessary rate to absorb this inflation, so stagflation or financial collapse is the only way forward for America.
      - landemva 5y ago
        For item 2, you may want to consider how the Fed stepped in to hush up the reverse repo inter-bank lending in Fall 2019. That rolled into 2020 bailouts.
        vlovich123 5y ago
        Any articles you can point me to? I can’t find anything about this.
        ViVr 5y ago
        This september 2019 article from Financial Times might be a start. Why is the Federal Reserve pouring money into the financial system? Answer lies in short-term issues and structural market changes https://www.ft.com/content/345da16e-d967-11e9-8f9b-77216ebe1f17 https://www.ft.com/content/345da16e-d967-11e9-8f9b-77216ebe1....
    - rsync 5y ago
      I prefer to get my economics pop-econ-theory from Lyn Alden. She has a very good post about this same topic titled "The Global Dollar Short Squeeze": https://www.lynalden.com/global-dollar-short-squeeze/ https://www.lynalden.com/global-dollar-short-squeeze/ Recommended.
cyb_ 5y ago
https://archive.md/lR2gR https://archive.md/lR2gR
pphysch 5y ago
...and a dollar glut in America is driving demand for everything, including virtual beanie babies apparently.
Archelaos 5y ago
The article explains the eurozone banks' rush from Euros to Dollars by the difference in interest rates. What puzzels me is that it should be the other way around when you take inflation into account: Euro central bank interest rates: -0.5 % [1] Euro inflation (Nov.): 4.9 % [2] This yealds a Euro netto interest rate of -4.95 % Dollar FED interest rates: +0.05 % [3] Dollar inflation (Nov.): 6.8 % [4] This yealds a Dollar netto interest rate of -6.75 % So it seems that the real interest rate difference is aprox. 2 % in favour of the Euro. [1] The article mentions -1 %, but I couldn't find a confirmation for this. [2] https://ec.europa.eu/eurostat/documents/2995521/11563387/2-30112021-AP-DE.pdf/06bc0f6f-5d50-b220-a634-c169f61d531b?t=1638263784054 https://ec.europa.eu/eurostat/documents/2995521/11563387/2-3... [3] Per article. [4] https://tradingeconomics.com/united-states/inflation-cpi https://tradingeconomics.com/united-states/inflation-cpi
- thow-58d4e8b 5y ago
  Very simple They count on the following set of assumptions: * The inflation we're seeing is transitory, and almost all of it has already materialized * FED will give in to the political pressure and increase interest rates * ECB is more isolated from politics and will not
- janmo 5y ago
  Inflation is calculated in a different way in the US and in the EU. If the calculation was the same, the inflation number would be quite similar.
  - granzymes 5y ago
    You have that backwards, the gap actually increases. The Harmonized Index of Consumer Prices (EU-style inflation) for the US is sitting at 7.25% YoY. https://fred.stlouisfed.org/series/CP0000USM086NEST https://fred.stlouisfed.org/series/CP0000USM086NEST
- rsync 5y ago
  "What puzzels me is that it should be the other way around when you take inflation into account ..." You're not taking into account the very real risk that the Euro doesn't exist in 5 or 10 or 20 years. Many, many people in (PIGS)[1] do not appreciate being tied to the deutschemark. [1] No offense meant.
landemva 5y ago
The article says EU banks can borrow at up to -1%. The article also says, "put that cash into the Federal Reserve’s reverse repo facility, which allows banks to park cash for a return of 0.05%." They get paid to borrow and then paid to deposit what they just borrowed. Anyone see a problem with this risk-free infinite money mechanism?
- namdnay 5y ago
  If the dollar drops by just 1.1% compared to the euro, that “risk free” trade has suddenly lost you money
  - im3w1l 5y ago
    Could you hedge that in the futures market?
    - dkjaudyeqooe 5y ago
      Yes, but the margin on the futures contract may push you into a loss.
- sp332 5y ago
  No. Both sides are getting what they wanted, at a price they set.
  - landemva 5y ago
    I never agreed for Federal Reserve to shovel free money to euro banks. When does the working class become a side in the equation of the purpose and value of stable money?
    - ummonk 5y ago
      In this case it seems more like the ECB that's shoveling free money to the Euro banks.
redis_mlc 5y ago
[dead]
emodendroket 5y ago
So once again the worries about dollar hyperinflation seem a little overblown.
pezzana 5y ago
> Cash-rich eurozone banks are rushing to change their euros into dollars by the end of the year, driving a key measure of demand for the greenback. > The interest rates on three-month euro cross-currency basis swaps, in which one party borrows a currency and lends their own in return, have turned more negative in recent weeks. That means traders in Europe are paying a premium to exchange excess euros for dollars. Demand for dollars is on a tear, sending the value of the dollar higher. You can see this in the DXY, an index of the dollar's value against a basket of other currencies: https://www.tradingview.com/chart/?symbol=dxy https://www.tradingview.com/chart/?symbol=dxy This inconvenient fact about the strengthening dollar is swept under the rug by those focused on inflation and their claims that the US is headed for 1970s stagflation at best, or Weimar 1920s hyperinflation at worst. Also conveniently swept under the rug are the deeply negative yields on 10-, 20-, and 30-year treasuries. And then there's gold, which has failed spectacularly as an inflation hedge. If the inflation threat is real, gold doesn't give a flip about it because the price hasn't moved in one year. For that matter gold is about the same price in nominal terms that it was ten years ago. These three markets, gold, treasuries, and the dollar, don't fit the money printer go brrr narrative. What gives? What gives is that the Fed isn't printing money and lacks the authority to do so. QE is not a printing press. It doesn't conjure money into being. QE can't cause inflation and its effects on long-term interest rates are questionable at best. The dollar, debt, and gold markets are signaling that the next major move is toward slower growth and lower inflation. Maybe a lot lower. Whatever the Fed announces or doesn't announce tomorrow is mostly theater.
- landemva 5y ago
  I thought Treasury stopped issuing longer term notes some years ago. Can buy up to 10 years here https://www.treasurydirect.gov/indiv/products/prod_tnotes_glance.htm https://www.treasurydirect.gov/indiv/products/prod_tnotes_gl... Gold was captured and centralized in WW2. Formalized with Bretton Woods. Formally repudiated by Nixon in 1971. Gold and silver demonetization has been happening for decades and the gold bugs can't see it. Fed hot air is stupid show and provides reporters something to publish.
  - lettergram 5y ago
sebow 5y ago
I'm glad that my country hasn't switched to the disastrous euro despite being in EU.It's not for every country and economy, and in dire times(like these days) it's very unstable. When I (and many other euroskeptics) said that eurozone in decline and you de facto had a recession in some european countries(See germany) BEFORE covid(looking back from at least 2018 through 2019, ironically slowing down due to covid), people "chuckled" because there was no press agreeing with this narrative.Yet a lot of european banks and institutions (DB,etc) had a lot of problems internally, and euro was mainly growing/floating due to developing parts. I struggle to see how the situation improved on a continental-scale considering the fact that we've been locking down our society for 2 years, whereas China, Africa,even North America, all don't or didn't have nowhere near as many restrictions.
freewilly1040 5y ago
If dollars are inflated relative to the services and goods they can actually purchase, yet demand for dollars remains high in Europe, would that imply inflation in Europe?

75 points by lxm 5y ago

eterpstra 5y ago

Believers in the Dollar Milkshake Theory are lacing up their shoes for some victory laps.

JumpCrisscross 5y ago
What’s the dollar milkshake theory?
- ViVr 5y ago
  It's a theory by wealth manager Brent Johnson that the next big recession will trigger an enormous demand for dollars. The dollar will rise against most other currencies and non-US bonds thus sucking up all the liquidity (that's the milkshake part). He's been on many podcasts to explain his theory and provide updates. I will link you an interview at realvision from september 2020 timestamped at 51:55 where he goes through it in summary: https://www.youtube.com/watch?v=h_HCIyc6MaA&t=51m55s https://www.youtube.com/watch?v=h_HCIyc6MaA&t=51m55s
  - the_hob_code 5y ago
    I hadn't heard of the theory before but in googling it I came across this video[0] from mid 2019 where he claims the demand for US dollars will be driven by rising interest rates and a shortage of dollars. Obviously things went a very different direction in in the past year and a half or so as the Fed has kept interest rates low and monetary supply has increased. So it's odd to see him arguing in the video that you linked from late last year that the same outcome will result from very different circumstances. [0] https://www.youtube.com/watch?v=2qTOWuL7Zco https://www.youtube.com/watch?v=2qTOWuL7Zco
  - pphysch 5y ago
    1. 2008 recession was offset by both US Fed, PRC, et al. buying lots of UST and stimulating global economy. 2. 2020 was offset by US Fed buying tons of UST and USG printing USD. However, global economy cannot magically expand by 40% or whatever is required to balance that expansion of USD. Hence a persistent supply chain crisis. In current geopolitical climate, no foreign state will buy lots of UST. US Fed is still buying lots of UST, causing a liquidity glut causing inflation. Global economy physically cannot expand at the necessary rate to absorb this inflation, so stagflation or financial collapse is the only way forward for America.
    - landemva 5y ago
      For item 2, you may want to consider how the Fed stepped in to hush up the reverse repo inter-bank lending in Fall 2019. That rolled into 2020 bailouts.
      - vlovich123 5y ago
        Any articles you can point me to? I can’t find anything about this.
        ViVr 5y ago
        This september 2019 article from Financial Times might be a start. Why is the Federal Reserve pouring money into the financial system? Answer lies in short-term issues and structural market changes https://www.ft.com/content/345da16e-d967-11e9-8f9b-77216ebe1f17 https://www.ft.com/content/345da16e-d967-11e9-8f9b-77216ebe1....
  - rsync 5y ago
    I prefer to get my economics pop-econ-theory from Lyn Alden. She has a very good post about this same topic titled "The Global Dollar Short Squeeze": https://www.lynalden.com/global-dollar-short-squeeze/ https://www.lynalden.com/global-dollar-short-squeeze/ Recommended.

cyb_ 5y ago

https://archive.md/lR2gR https://archive.md/lR2gR

pphysch 5y ago

...and a dollar glut in America is driving demand for everything, including virtual beanie babies apparently.

Archelaos 5y ago

The article explains the eurozone banks' rush from Euros to Dollars by the difference in interest rates. What puzzels me is that it should be the other way around when you take inflation into account: Euro central bank interest rates: -0.5 % [1] Euro inflation (Nov.): 4.9 % [2] This yealds a Euro netto interest rate of -4.95 % Dollar FED interest rates: +0.05 % [3] Dollar inflation (Nov.): 6.8 % [4] This yealds a Dollar netto interest rate of -6.75 % So it seems that the real interest rate difference is aprox. 2 % in favour of the Euro. [1] The article mentions -1 %, but I couldn't find a confirmation for this. [2] https://ec.europa.eu/eurostat/documents/2995521/11563387/2-30112021-AP-DE.pdf/06bc0f6f-5d50-b220-a634-c169f61d531b?t=1638263784054 https://ec.europa.eu/eurostat/documents/2995521/11563387/2-3... [3] Per article. [4] https://tradingeconomics.com/united-states/inflation-cpi https://tradingeconomics.com/united-states/inflation-cpi

thow-58d4e8b 5y ago
Very simple They count on the following set of assumptions: * The inflation we're seeing is transitory, and almost all of it has already materialized * FED will give in to the political pressure and increase interest rates * ECB is more isolated from politics and will not
janmo 5y ago
Inflation is calculated in a different way in the US and in the EU. If the calculation was the same, the inflation number would be quite similar.
- granzymes 5y ago
  You have that backwards, the gap actually increases. The Harmonized Index of Consumer Prices (EU-style inflation) for the US is sitting at 7.25% YoY. https://fred.stlouisfed.org/series/CP0000USM086NEST https://fred.stlouisfed.org/series/CP0000USM086NEST
rsync 5y ago
"What puzzels me is that it should be the other way around when you take inflation into account ..." You're not taking into account the very real risk that the Euro doesn't exist in 5 or 10 or 20 years. Many, many people in (PIGS)[1] do not appreciate being tied to the deutschemark. [1] No offense meant.

landemva 5y ago

The article says EU banks can borrow at up to -1%. The article also says, "put that cash into the Federal Reserve’s reverse repo facility, which allows banks to park cash for a return of 0.05%." They get paid to borrow and then paid to deposit what they just borrowed. Anyone see a problem with this risk-free infinite money mechanism?

namdnay 5y ago
If the dollar drops by just 1.1% compared to the euro, that “risk free” trade has suddenly lost you money
- im3w1l 5y ago
  Could you hedge that in the futures market?
  - dkjaudyeqooe 5y ago
    Yes, but the margin on the futures contract may push you into a loss.
sp332 5y ago
No. Both sides are getting what they wanted, at a price they set.
- landemva 5y ago
  I never agreed for Federal Reserve to shovel free money to euro banks. When does the working class become a side in the equation of the purpose and value of stable money?
  - ummonk 5y ago
    In this case it seems more like the ECB that's shoveling free money to the Euro banks.

redis_mlc 5y ago

[dead]

emodendroket 5y ago

So once again the worries about dollar hyperinflation seem a little overblown.

pezzana 5y ago

> Cash-rich eurozone banks are rushing to change their euros into dollars by the end of the year, driving a key measure of demand for the greenback. > The interest rates on three-month euro cross-currency basis swaps, in which one party borrows a currency and lends their own in return, have turned more negative in recent weeks. That means traders in Europe are paying a premium to exchange excess euros for dollars. Demand for dollars is on a tear, sending the value of the dollar higher. You can see this in the DXY, an index of the dollar's value against a basket of other currencies: https://www.tradingview.com/chart/?symbol=dxy https://www.tradingview.com/chart/?symbol=dxy This inconvenient fact about the strengthening dollar is swept under the rug by those focused on inflation and their claims that the US is headed for 1970s stagflation at best, or Weimar 1920s hyperinflation at worst. Also conveniently swept under the rug are the deeply negative yields on 10-, 20-, and 30-year treasuries. And then there's gold, which has failed spectacularly as an inflation hedge. If the inflation threat is real, gold doesn't give a flip about it because the price hasn't moved in one year. For that matter gold is about the same price in nominal terms that it was ten years ago. These three markets, gold, treasuries, and the dollar, don't fit the money printer go brrr narrative. What gives? What gives is that the Fed isn't printing money and lacks the authority to do so. QE is not a printing press. It doesn't conjure money into being. QE can't cause inflation and its effects on long-term interest rates are questionable at best. The dollar, debt, and gold markets are signaling that the next major move is toward slower growth and lower inflation. Maybe a lot lower. Whatever the Fed announces or doesn't announce tomorrow is mostly theater.

landemva 5y ago
I thought Treasury stopped issuing longer term notes some years ago. Can buy up to 10 years here https://www.treasurydirect.gov/indiv/products/prod_tnotes_glance.htm https://www.treasurydirect.gov/indiv/products/prod_tnotes_gl... Gold was captured and centralized in WW2. Formalized with Bretton Woods. Formally repudiated by Nixon in 1971. Gold and silver demonetization has been happening for decades and the gold bugs can't see it. Fed hot air is stupid show and provides reporters something to publish.
- lettergram 5y ago

sebow 5y ago

I'm glad that my country hasn't switched to the disastrous euro despite being in EU.It's not for every country and economy, and in dire times(like these days) it's very unstable. When I (and many other euroskeptics) said that eurozone in decline and you de facto had a recession in some european countries(See germany) BEFORE covid(looking back from at least 2018 through 2019, ironically slowing down due to covid), people "chuckled" because there was no press agreeing with this narrative.Yet a lot of european banks and institutions (DB,etc) had a lot of problems internally, and euro was mainly growing/floating due to developing parts. I struggle to see how the situation improved on a continental-scale considering the fact that we've been locking down our society for 2 years, whereas China, Africa,even North America, all don't or didn't have nowhere near as many restrictions.

freewilly1040 5y ago

If dollars are inflated relative to the services and goods they can actually purchase, yet demand for dollars remains high in Europe, would that imply inflation in Europe?