The european economy is in bigger trouble. A rush of ugly economic data shows that the recession is accelerating to the downside. Love say that's not good news for europe.
It's also not good news for the dollar. I don't mean the dollar is exchange value, rather why it's going up in the first place. I'm talking about you out of circulation, which is what really matters in every monetary context.
European banks have been leaning on the U. S. Based to phillips, borrowing massive amounts and repo and issuing loads of commercial paper. They transfer those virtual funds through the europe dollar networks back to europe, where their parent banks read in us dollars through out the rest of the world.
This year, dollar redistribution business is got ten to be so big, the ecb estimates accounts for a wapping twenty three percent of european banks entire funding and allow those funds have been funding non big investment funds, creating a number of vulnerabilities. In fact, we may have seen one of those in a big way in the massive deposit of U. S.
Treasuries during july, in August that I went over on thursday's lifestream. And you can catch a replay of that lifestream if you missed IT. This means that the fly in the otment is once again european bank constrains, very reminiscent of twenty eleven in several respects, starting with the economy. As the european economy falls deeper into recession, that places enormous pressure on these european parents, which then hinders, slows down and even interrupt your other flow and redistribution all over the world. And we're talking about cash as well as collateral.
Al, with economic problems at home in europe, european and parent banks are forced to charge more or they could take a second look at japanese or maybe chinese borrowers and decide against relending to those, and all of which could lead to china or japan having to sell a lot of the reserve asset. us. Treasury, to help offset that reduced flow and availability, which is also what I brought up on the live stream video, what we're talking about us, how globally synching zed isn't just some slogan or throw away term.
Europe's recession or we recession is a problem for europe's, sure, but it's also a major issue for everyone else globally synchronized. And this is how IT becomes. So you a dollar as a reserve currency means that IT is subject to factors in various places around the world, starting with europe.
So let's start there with europe and the recent ugly economic data that came from there according to S N P global P M S that came out on friday, manufacturing fell further toward toward the middle forties, again, retrying smit in the manufacturing sector, the big surprise to some was that services fell below fifty. There's or more contraction and services that the worst number from ssp global since january, the composite for the entire european economy fell a forty eight point one from fifty in the of october. That's the lowest in january.
And remember, europe was supposed to be recovering at this point, not retrenching and not retrenching. In a way that leaves little doubt about the direction of everything. Maybe most concerning of all, while germany continues to be incredibly weak, in fact, the german can posit fell to forty seven point three from forty point six.
But france, europe's second largest economy, the the composite PMI from france, fell all the way to forty four point eight from forty eight point one. So the economic that at least as far as us to be global, backed up by a whole bunch of other data, suggest that not only is europe not recovering in the second half of twenty and twenty four, IT is indeed already in recession, looking like it's going to be a worst recession. That's why the markets continue to trade in the way in which they do german markets.
As far as bonds go, major divergence with treasuries. But this is why the the german market tends to the gaps between treasuries in germany tends to close and of germany because the weakness in one place spreads to other places through cash, cattle, everything else in the euro lar system. You riber futures, I talked about that and video not too long ago, december twenty, twenty five eyed er futures at ninety eight twenty, which is very near the most recent highs in terms of Price, which means european markets for rate markets projecting lower and lower future interest strates due in twenty twenty five contract.
Ninety eleven. That's a new high, suggesting that where is there's been a shift in U. S. Dollar markets, at least temporarily, suggesting that rates maybe not going down as far and as fast as thought a couple months ago in europe, that's not even a thing.
European markets are thinking today that, yes, interest strates are going down as fast as and as far as they thought a couple months ago. And the reason is because everything that we're going to talk about in this video, starting with the ugly and increasingly uglier european economy and the effects that has and european banks. Before we get to that, we need to we need to understand some background here.
first. Again, as I said in the introduction, the key in any monetary context is a circulation, not supply. I always focus on supply when whenever the topic of money comes up, but it's really about circulation.
And this is why we spend so much time on what dealers are up to because dealers are that circulation engine. They are the key to the entire thing. So it's about moving money from where IT is to where IT needs to go, and that's what the dealers have been doing for a very long time.
And the year dollar evolutionary step was in taking that process of intermediation in money and taking IT on into an international setting and international level, becoming a true reserve currency in every real meaning of the term. This is the mechanism for redistribution of funds from one place to the next to the next to the next. Before IT.
Ultimately, he gets to where IT needs to go. So a bank IT might have a deposit of cash, and doesn't matter what the domination is in switzerland. And through the year, o dollar network transformations and transactions all through IT, IT ends up on the other side of the world doing something completely useful, which is exactly what a reserve currency should do.
But IT requires these banks sitting in the middle to intimate from one place to the next, all these various steps, the interbank relationships, the networks of dollars, and really to communications that go through all of these, your dollar channels. In fact, I want to point out this is president general forwards one hundred and seventy five economic report to congress, which contained a supplemental section on what had been at least judge at that time, a beneficial connection that the Eudora system was able to overcome the oil embargo. This flip to the so called Peter dol, this is actually shows why there is no petro dollar, that the petrol dollar is simply a subset of this redistribution of the year deal system.
Here's what force economic team rope to congress. Nineteen seventy five, almost fifty years ago, the discussion of the international financial aspects of the energy crisis brought into public focus for only a brief time. The euro dollar market is an important channel for moving funds, in this case, from the oil expLoring countries to borrowers, the recycling of coral court petrol dollars has been merely one of the many functions performed by the eo dollar market over the years of its existence.
The year dollar market as such, has no specific location. Its physical dimension is a network of international telephonically media, which linked financial centers around the world and through the which the eudald transactions are conducted. This is what's important moving forward.
Your dollars report says a dollar and many claims on commercial banks located outside the nine states, largely but not exclusively in europe. That's why the convention euro dollar comes from they are dollar funds placed with foreign banks by either us or foreign residents in main tain on the books of these banks as dollar genomic liability to depositors. And that has shifted over the years too.
It's no longer strictly dollar deposits with banks outside unites its its all different forms of us dollar dominated and and other currency dominated liabilities, including, as we're seeing just a moment, derivatives like currency swap. Those are every bit dest useful forms of money as a transmitting physical pieces of paper or the more traditional aspects of telemundo ating funds and transfers and book countries around this virtual currency ledger money system. Of course, the big problem is the year dala system broke down many, many years ago, and we're stuck with IT as there is nothing currently available to replace IT.
And on december eleven, i'm going to be conducting a web and are where we're going to stop looking back ward at the euro della system and what the monetary system is there was we're going to look ahead at what the monetary system could be, or maybe even should be. And during that weapon, our wednesday, december joining me will be mr. Jim records.
And now we have some different ideas about what all that might entail. So IT should be a very interesting time expLoring the possibilities together, including how we might actually get there, which is just as important to think about. So you're just to join us on december eleven. There's a link in the description to sign up for the web or hope to see you there. The point that we're trying to drive home here again, why we spend so much time on examining what we can of money dealer capacity and in their activities and what they're inclining to do is because it's all about circulation, not supply.
How does money get from atb? The euro dollar was really good when IT worked about moving funds all throughout the world in doing so in these very complicated, multifaceted steps and stages that required banks all over the place to be able to talk to each other and interact with each other before, ultimately, that money got from a to b. In a to b doesn't necessarily mean just physical movement of physical dimension also meant between various classes of participants.
Those who had cash, which might be wealthy individuals or IT, might be, in the modern sense, money market funds transferring and getting that cash for where IT is to other types of investors and other types of users, borrowers is why the europe dollar system started out mainly in london, switzerland, germany, around europe. IT had been mainly european centers up until around two thousand and and two thousand and eleven, really two thousand and eleven. That crisis was the big shift where more and more its started starts to move the gravity, the center of IT move toward asia, the japanese gotten fall, redistributing funds toward china.
Because in the early aftermath of the great, not recession, there was just thought that the chinese and emerging markets were decouple from the rest of the world, and therefore there would be opportunity to use the europe ali system in order to continue that trend. More than asian type flavor of the year a dollar. And that lasted for a couple years before he became widely recognized that china was gone to fall into the silent depression as well.
That was your dollar. Number three, the big contribution there. The jeep tee started to get cold feet the whole thing. And through the last half of the twenty tens, the year dollar was sort of in limbo.
But then around twenty twenty one and twenty twenty two, according to various sources, IT the year a dollar went back home, so to speak, go back to its roots. European banks began to get more heavily involved in a way that they had been ces twenty love. And in monetary redistribution, in the way in which they did IT was to use their U.
S. Based subsidiaries in with terms of broker dealers, or their U. S. Based branches in terms of depositories, to borrow funds inside the united states, transfer them to europe, their parents there, and then relending m from the european parents to lot of investment funds, non bags around the rest of the world.
And we do have some information and some confirmation of this from very sources, including the ecb in its november financial stability report that contained a section on well, what the E, C, B thinks might be more vulnerabilities of european banks as they get back further and further, bigger and bigger in this eudald distribution business. So when its financial stability review for this month, they started up by writing this, U. S.
dollar. Funding of euro area banks may be a contingent source of vulnerability. Twenty three percent of euro area banks funding is dominated in foreign renny, with the U.
S. Dollar providing the largest contribution, about seventeen percent. It's a massive amount. And the book of the U. S.
Dollar funding is obtain via wholesale markets, no surprise, with unsecured funding from financial via commercial paper in repose thirty five percent, accounting for almost three quarters of the total. So commercial paper in repos, commercial paper is an unsecured liability where A U. S.
Bank brands issues piece of paper and promises to repay the loan at a specific more period in time, usually short run a couple months. There's no security, no collateral. Those ripple, obviously, there is continue with eb.
The short term wholesale nature of U. S. Dollar funding can expose banks to liquidity stress, as this funding has often dried up in times of heightened market volatility. Don't we know that only too well here around your real university because that's what those eo dollars cycles are number one, two, three, four and now up to five, although this might be five b, that's what exactly we're talking about.
Europe, euro, dollar funding, dollar funding sources dry up, causing eo dollar cycles that we see largely from the perspective of dealer banks who have to retail their activities and circulation. And the dealers and this this network is all about that circulation. U.
S, W, liquidity coverage is usually lower than total liquidity coverage, which suggests that miss matches may contribute to liquidity rist. That's absolutely the case. There's why variation across banks and the most internationally active financial institutions rely on dollar and instruments for up to a third of their funding.
So it's actually the averages are secured by domestic european banks that stick mostly domestic, I mean, averages here. So those banks that are your dollar banks, we classify your dollar banks are heavily involved in this international offshore arrangement. They're talking about a third of their funding coming from us dollar wholesale markets and the boko, this is not centrally cleared.
Talk about real part of IT, implying a higher counterparty risk is the case for centrally clear turn action necessary? Agree with that. The point that the really the important point about that is that we're talking about gc repo, which has a lot different terms.
And you see, for example, and try party gc report, you'll find zero haircuts. There's a lot more leverage in gc ripple, which is why a lot of counterparties like to use IT. So it's not surprising, for example, that european banks would be accessing that part of the real market because that's where they're gone to get the best terms.
But that leads to, as the E C B reported, suggesting potential downside vulnerabilities, all of the types of usual negative behaviors that we associate with these year dog cycles. So your area banks play a key role in international usta liquidity. That goes without saying, but it's worth saying anyway.
Then they do so by receiving cash largely from their us affiliated ated security broker dealers, learning the dollars to non banks, the majority of which are offshore and investment funds. And as the cash baring exceeds cash lining, according the ecb estimates, euro area banks have access us dollars at the disposal, which they can and do sell in the F, X. Swap market.
So they're borrowing in us dollars locally, domestically, in from the U. S. Perspective, foreign from the european perspective, the U. S. Affiliate, whether they would be subsidies in terms of broker deals or in some cases, the branches when they're depositors that they borrow in domestic U. S.
Markets because apparently there's an excess of cash here what he wants to do much as far as lending in the united states. So the borrow us. Dollars, transfer them to the european parents and.
The european parents then do the europe dollar magic and redistribute those dollars. Struck the rest of the world, whether be lending to other banks around the world, japan, in china, when the conditions are right. But a lot, a lot, a lot of ways.
More recently, lending to non banks because non banks are the only risk taking aspects of the financial system left. There are the so called cleanness baLances sheet that are willing to do some of the things that backs themselves used to do before two thousand eight. So it's a way for long banks to sort of try to bring the gap in the eudosia systems, lack of capacity.
But IT still depends upon because non banks can make money themselves like banks can. IT still depends upon dealers in wholesale markets to transfer money from where IT is money market funds, in this case in united states, outside the us, to european parents, and then ultimately to somewhere else around the world where these virtual dollars, the europe dollars, might actually be used. But with the european bank stepping back into the center of this, that means that the entire eurodollar system, especially at the margins, is suspect table to european problems.
So just to review one more time, european banks have been accessing cash in the us. Using domestic branches or deal of subsidiaries, using the U. S. Treasures that they have to essentially borrowing repo. Then they trace for that cash using the telecomm unica network capacity of the system to european european parents and lens offshore to a lot of cases, investment funds. And then after all of that, whatever is left over and a lot of IT is purple, purple fully leftover is therefore made available in the effects market.
Where do you think the japanese currency trades are getting their effects sources of funds after they are the ones being run out of reao for collator shortage is so european banks have extra left for effects markets because there's in times like that, there's a premiums to be made in lending dollars in the effective system. But as pressures on the european parents from the bad economy in europe and the rest of the world can constrain that circulation of cash and also called always got to keep that in mind too, especially in non centura clear ripple. The bad economy in europe causes problems for the european and parents, which then leads to potential issues around the rest of the world, because the european parent has to be more risk averse and take less risk, do less activities, more baLance sheet constrained because a european recession is interrupting what would otherwise be a boor.
Free flow of cash, galada credit and everything else through the euro o system, all of these various channels up to and including the effects market. So as that strain and european banks increases, the circulation or flow becomes more expensive because eupeptic ks have to charge a higher premium to make IT worth the effort. They also might look at other counterparties around the rest of the year of the system, say i'd rather red, not because of the constraints are facing at home.
And so we're starting to piece together why the us. Dollars value might be rising. And what IT has to do would say that came in islands, as I talk about on the life strangers a couple days ago.
It's all globally synchrony. It's all globally centered. We have a it's not just the european recession, it's not just european and banks. It's european banks who are, especially in their dealer capacity, essential to the circulation of money and credit throughout the entire global system.
The worst that might get for europe in the economy, the more that interrupts the potential flow of money credit through european banks who have become an enormous part of the eurodollar redistribution system all over again. So european recession isn't strictly about europe. It's also about europe dollar.
What to see a replay of that live stream? We talked about japan and china selling record amounts of us treasure that came in as huge depressive treasury's there. The videos link below is always thank you very much for joining me.
huge. Thank you. You are the university members and subscribers, and until next time, take care.