According to Jeff Snider of Eurodollar University, consumer prices, particularly core consumer prices, are an important measure for measuring the economy's health and strength. While recent data show that core consumer prices are stable, it is critical to investigate the relationship between the eurodollar system, deflationary money, and the possible influence on consumer prices. Snider delves into the deep dynamics of the eurodollar system and consumer prices, offering insight into the system's frailty and its repercussions.
The eurodollar system, a worldwide monetary system that operates outside the sovereignty of any single country, has a substantial impact on inflationary or deflationary pressures. Examining previous events, such as the 2008 financial crisis, indicates a trend in which core consumer prices stayed constant until a disruption in the eurodollar system resulted in a collapse, indicating deflationary conditions.
Understanding the fragility of the eurodollar system is critical for forecasting future consumer pricing movements. Contrary to popular misconception, the Federal Reserve's actions have no direct impact on consumer prices. Instead, the eurodollar system has the ability to inflate or deflate inflationary pressures, emphasising the importance of monitoring its fragility.
Deposits from insolvent institutions are being transferred to money market funds and larger banks, which is an important factor to consider. The question is, however, why are these monies not efficiently recirculated or re-borrowed by the banks experiencing deposit flight. The answer is a lack of collateral in the repo market, where banks obtain short-term funding. Collateral shortages impede fund re-lending, interrupting the flow of money and potentially creating economic consequences.
Examining the GCF repo market reveals important information on collateral scarcity. This market runs blindly, disclosing collateral shortages through increases in Treasury bill prices and decreases in Treasury bill yields. The volume of GCF repo closely tracks these price variations, demonstrating a significant problem with collateral shortages in the repo market.
The eurodollar system's collateral deficit becomes a crucial factor leading to its fragility. As the demand for repo funding rises and US Treasuries become scarce as collateral, alternative instruments like non-benchmark securities (NBS) are used. This swap underscores the scarcity of high-quality collateral, thereby worsening the eurodollar system's vulnerability.
Understanding the interplay of the eurodollar system, collateral shortages, and consumer prices is critical for forecasting future economic changes. Although current core consumer prices appear constant, a dramatic shift is possible if the eurodollar system fails, resulting in deflationary forces. The health of the eurodollar system and its collateral market must be monitored in order to acquire a thorough view of the economy's trajectory.
According to Snider, the relationship between the eurodollar system and consumer pricing reveals a complicated web of interdependencies. The eurodollar system's fragility, as seen by collateral shortages and deposit movement patterns, has a considerable impact on inflationary or deflationary pressures. Policymakers and economists can better anticipate and respond to any disruptions by regularly monitoring the eurodollar system and its collateral market, protecting consumer prices and the wider economy.
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Source:
Eurodollar University, 27 May 2023, An escalating series of monetary tremors still shaking the eurodollar's world, 