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Comment by pezzana | Hacker News Reader

From Bloomberg:

> Bondholders of $19.2 billion in Evergrande dollar notes face deep haircuts as the company overhauls its mammoth balance sheet without a government bailout -- a process that promises to be long, contentious and potentially risky for Asia’s largest economy.

https://www.bloomberg.com/news/articles/2021-12-09/evergrand...

It might seem odd that a Chinese company would have taken out dollar loans, but the practice is common around the world. One reason is that the borrower can get lower interest rates because they assume the exchange rate risk themselves. If that bet goes sour, though, the borrower faces higher costs to service the debt.

Of course the thing about dollar bonds is that even if the national government were to intervene, those dollars can't be printed by Beijing.

The only way to service a dollar debt is to raise dollars. One path to doing that is to sell dollar-denominated assets. US Stocks and bonds in other words. So the pressures in China can spill over into the US economy through forced asset sales of dollar-denominated assets.

This is another angle to the contagion idea. Organizations around the world have taken big short position on the US dollar. As those loans come due, dollar assets are sold. Which drives the dollar higher. Which makes the dollar loans even more unsustainable. And so on.

It has been called the global dollar short squeeze:

https://www.lynalden.com/global-dollar-short-squeeze/

And if you're really adventurous, there's something called the "dollar milkshake theory" which predicts the uncontrollable rise of the dollar as (maybe counterintuitively) a wrecking ball for the world economy:

https://www.youtube.com/watch?v=2qTOWuL7Zco

View on HN

19.2 billion is not that much money in the global banking system. There is no reason why bondholders should be guaranteed a return. Bankruptcy is an option.

The broader risk is an unwinding of Chinese holdings by foreign entities who suddenly realize that the Chinese government will have them foot the bill for bets gone bad, or simply bets that the Chinese government doesn't like. China has capital controls to manage these outflows.

Which all leads to the scenario where foreign investors in China's economy are probably going to get taken for a ride at some point. Arguably some companies like ARM are already in this situation but it's in everyone's interest to pretend they are not.

> Bankruptcy is an option.

Yeah, I thought the same thing in 2008, then the haunting words "too big to fail" were used by both Obama and McCain, so it didn't care who won the presidential election, the banksters would still get a bail out. Fast forward to today, and it still doesn't matter whether a Dem or Rep sits in the oval office, the banksters will always have safety net.

The problem is of course that we're all so caught up in the bankster's nets that their failure is a problem for all of us. When Obama and McCain said "too big too fail" they weren't so much saying "these guys are my friends and I don't want them to fail" (though this may well have been true). They were saying "the chaos that will ensue if these institutions fail will be too deep and wide for us to deal with".

That was, of course, the point of trying to do something to make them NOT too big too fail, an effort that appears to have really gone nowhere.

> is a problem for all of us.

Not for those of us that don't invest our money in banks/stock markets, and don't take out loans. Private businesses meeting the above criteria would have boomed under those conditions, as there competitors were wiped out. The world is addicted to banks, and it really needs to treat the source, not the symptoms.

If you participate in the economic system at all, the failure of over-sized banking institutions will fuck you up whether you have an account or loan with them or not.

Yes, we do indeed to need to deal with the banking system, but until that's done, if large elements within it fail, the pain is going to be felt by a lot of the little people much more than the bankers.

> If you participate in the economic system at all, the failure of over-sized banking institutions will fuck you up whether you have an account or loan with them or not.

The stock market crashed despite the bailout. People lost their jobs and houses despite the bailout. What would have been worse if the banks had not been bailed out?

How do you think banks fund loans? They use customer deposits and operate as a fractional reserve.

If the large banks have liquidity problems, it means they’re no longer able to give people their deposits back as cash. They simply don’t have the money to give to depositors. In this scenario government steps to cover the shortfall, but there’s a limit to how much the government can cover, so many people, in particular business, will simply take involuntary haircuts to their bank balances.

In this situation people start taking their money of banks, because trust has been destroyed, causing a bank run. Which makes the situation even worse, because then any bank that lends will have a liquidity crisis, because they operate as a fractional reserve.

In the end the government ends up effectively bailing out the banks anyway, by covering peoples deposits. Except now most banks have collapsed completely, taking huge amounts of financial infrastructure with them, plus the people needed to administrate and operate financial aspect of the economy, and nobody trusts the banks that managed to survive (assuming any did).

So worst case is bad, really bad. A cascading failure of banks means you wake up one morning and money that isn’t under your mattress has disappeared. You cash accounts, your savings accounts, your investment accounts. In addition you’ll have a line of people demanding you repay any loans you have, your car lease, your mortgage, your credit cards etc.

Banks considered “to-big-to-fail” have that label because their collapse has a significant risk of causing a cascading failure of banks across the entire economy. So bailing them out is much cheaper and safer to do, but allowing them to continue existing is just negligent.

> They use customer deposits and operate as a fractional reserve.

Close, but not quite. The banks are barred from using customer deposits to fund loans. They also have a 0% reserve ratio currently so it is 100% fractional reserve.

In short the banking system is a scam, always has been. It is the greatest scam ever perpetuated on humanity. If any other industry operated on the level of fraud involved in running a fractional reserve, they would be jailed by midnight.

Nah, it’s just an efficient way to free up capital and do something useful with it. Not sure if the details, but banks should be using customer deposit for loans. They can’t fund loses etc out of them, but they can (and should) use the capital for lending.

If banks didn’t lend the money, how would you expect them to pay internet on your savings or fund the costs associated with just storing your money for you? It costs quite a lot of money to run a bank, even a bank that only handles customer deposits and has no lending activity. Most consumers aren’t in paying the full cost of administrating their budgets, but cost has to be covered somehow.

Additionally if banks didn’t operate as a factional reserve, we would have a permanent credit crisis, because there would be no capital to fund any form of credit, from credit cards to mortgages. Either that or you would have to engage entirely in P2P lending, which removes the ability to aggregate and distribute risk, lowering each individual exposure. Or you would have a P2P system with someone aggregating and selling that risk, but that’s just banks in another name.

See: https://www.investopedia.com/terms/r/requiredreserves.asp

> On March 15, 2020, the Federal Reserve Board announced that reserve requirements ratios would be set to 0%, effective March 26, 2020. Prior to the change effective March 26, 2020, the reserve requirement ratios on net transactions accounts differed based on the amount of net transactions accounts at the institution.

A reserve ratio of 0% means no customer funds are used to pay loans. The fraud is that the money is fractionalized into thin air.

> Additionally if banks didn’t operate as a factional reserve, we would have a permanent credit crisis …

Or there wouldn’t be as much cheap credit floating out there, forcing lenders to charge a more reasonable rate for borrowing. Cheap money creates financial crises.

> A reserve ratio of 0% means no customer funds are used to pay loans. The fraud is that the money is fractionalized into thin air.

No, that means that all customer deposits can be used for loans. There’s zero requirement for banks to hold any deposits in reserve to ensure they’re able to pay out individual depositors on request.

In short, they can lend an amount of money equal to the amount deposited with them. They can’t magic money out of nowhere, only the fed can do that.

> Or there wouldn’t be as much cheap credit floating out there, forcing lenders to charge a more reasonable rate for borrowing. Cheap money creates financial crises.

Also no, poor risk management creates financial crises. Cheap credit itself doesn’t cause anything. It’s irresponsible lending, and failure to properly account for credit risk that creates a problem.

There would be pretty much no risk in lending Jeff Bezos huge amounts of money at 0%, because it would be trivial to securitise it with physical assets and stocks. But lending at similar amount of money to someone with no income or assets would be very risky.

Lenders always want to charge more interest, that’s how they make money, and they need to charge a minimum amount to cover the costs of administering the loans, and the costs of loans that default. The idea that lenders want to lend cheaply is nonsense, it like saying a shop only wants sell everything as cheap as possible. Both shops and lender sell/lend as cheap as is needed to compete, and no more. Anything else would be voluntarily giving up profit margin, find me a bank that wants to do that.

> No, that means that all customer deposits can be used for loans. There’s zero requirement for banks to hold any deposits in reserve to ensure they’re able to pay out individual depositors on request.

If I am mistaken please correct me with citations but respectfully, I believe your understanding is incorrect. In a fractional reserve system banks can and do fractionalize dollars into existence. The mechanism is slightly different than when the FED prints money. Instead of creating money out of nothing, banks can only create loan money out of thin air.

For example, when you are issued a new car loan from a bank, those funds do not come from another depositor. (see my comment above on 0% reserve ratio). Instead the money is literally created by the stroke of a pen when the borrower signs the loan agreement. The funds did not exist anywhere prior to the loan. The numbers were added to the customer's bank account the moment they signed the loan agreement. Money created out of thin air via fractional reserve lending.

If it were not for the free money creation feature of the banks, then banks would have to lend customer funds or their own reserves. The risk and cost of lending these real assets would greatly exceed the ultra-low interest rate environment we currently experience and the cheap credit days would be over.

The fraud involved in fractional reserve lending is that the lender has no cost of funds. They are not risking their own assets and are therefore more willing to lend cheaply. This leads to credit bubbles that perpetuate the business cycle and lead to a series of booms and crashes. Fractional reserve lending is a scam and banks are technically all insolvent.

> If I am mistaken please correct me with citations but respectfully, I believe your understanding is incorrect.

You are mistaken, citation: me working in bank on stuff related to this, and generally needing to be aware of capital requirements etc.

> For example, when you are issued a new car loan from a bank, those funds do not come from another depositor.

Sort of, depends on what level of abstraction your working at. Inside the banks ledger this is entirely true, however this doesn’t create new M1 money [1], only M2 money [2]. Just because the bank can write a number into a database, doesn’t mean they can actually materialise it. That would be money printing, also known as forgery, unless you happen to be a reserve bank with the right to print money [3].

So banks ledger might have more money in it, that ledger is banked by a reserve account at a federal reserve bank (where banks keep their money), and that account doesn't have more money in it. Which is important, because that’s the account the bank will ultimately use to settle payments such as ACH, Debit/Credit card, Fed Express etc.

So while the bank can “create” money in it ledger, it can’t be moved or spent because it can’t create money in its reserve account, so it can’t settle payments. Hence the bank can’t materialise the money it’s “created”.

However this inability to materialise the “created” money isn’t important, as long as they have customer deposits on hand to cover all of the outgoing payments. The “created” money and “real” money all sit in one big pot (the banks ledger), and as long as you don’t try to withdraw an amount larger than the “real” money, you can pretend it’s all “real” money.

The reserve ratio sets the limit on how many $ of “real” money a bank must have for each $ of money it “creates”. That ratio breaks down a little bit a 0%, because it suggests that a bank with no customer deposits can still lend. But the fact that bank with no deposits can legally issue loans doesn’t change the fact it can’t physically issue them. It literally doesn’t have the cash to give out. So they could lend you money, and you could pay interest on loan, but you would never be able to withdraw the money as cash, or spend it using a card, or transfer it elsewhere. So, yes, technically the loan can exist, and technically a bank can lend without customer deposits. But no one in their right mind would ever borrow money that couldn’t be spent or transacted with. Kinda defeats the point of borrowing the money.

We can also show this must be true, because if it wasn’t, it means that every bank in the US issuing loans effectively an unregulated licence to print money. If that was true, why bother lending it? Banks lend money in the hopes of making money. If they can legally print money, then why don’t they just print their own money and profit margin. No need to mess around find people to lend to, then having do credit checks and collections. They could cut the middle man out, and print cash straight into their pockets.

> If it were not for the free money creation feature of the banks, then banks would have to lend customer funds or their own reserves.

They do lend out of their customer deposits.

> The risk and cost of lending these real assets would greatly exceed the ultra-low interest rate environment we currently experience and the cheap credit days would be over.

I think you grossly over estimate the risk of lending money, even at low interest rates. Most of the extremely low interest lending is securitised, so if the borrower goes bust, the bank can claim a physical asset (like a house, or an office or a factory) to recover borrowed money. In these situations the biggest loss a bank suffers is that the loan is paid back quicker, and thus they earn less interest, and selling a factory is a pain in the arse to manage.

For most consumer lending, like credit cards etc, the interest rates are stupidly high, and the products are designed to milk consumers over many years. Keeping them stuck in a cycle of debt they struggle to escape from, and ensuring a steady supply of payments to the bank. Also ask yourself, if lending is risk free to the banks, why isn’t everyone offering 0% interest loans, and why do credit agencies exist?

> The fraud involved in fractional reserve lending is that the lender has no cost of funds. They are not risking their own assets and are therefore more willing to lend cheaply.

Again, if this was true, why would any of the banks bother lending to anyone? They could just issue themselves a trillion dollar loan at 0% to be paid back in 1000 years, the buy a yacht and retire. Why the hell would they voluntarily subject themselves to the of actually lending money to other people, then have to try and chase them down for repayment?

[1]: https://www.investopedia.com/terms/m/m1.asp [2]: https://www.investopedia.com/terms/m/m2.asp [3]: https://www.investopedia.com/ask/answers/082515/who-decides-...

> You are mistaken, citation: me working in bank on stuff related to this, and generally needing to be aware of capital requirements etc.

So your citation is yourself and your claim that you work in the field and therefore we should trust you blindly? I don’t buy it. It seems you have a vested interest in preventing others from learning about the fractional lending scam.

As for your claim that a 0% reserve ratio means banks CAN lend depositor funds, that is either a huge misunderstanding on your part or an outright lie. Show me any documentation anywhere that supports your novel interpretation, and I’ll back down.

> The fraud involved in fractional reserve lending is that the lender has no cost of funds. They are not risking their own assets and are therefore more willing to lend cheaply.

>> Again, if this was true, why would any of the banks bother lending to anyone? They could just issue themselves a trillion dollar loan at 0% to be paid back in 1000 years, the buy a yacht and retire. Why the hell would they voluntarily subject themselves to the of actually lending money to other people, then have to try and chase them down for repayment?

The rules require that a real flesh and blood borrower, signs a loan agreement obligating that they repay the loan with interest. Only a signed loan agreement creates the fractionalized funds in the borrower’s bank account.

This is what prevents a bank from borrowing an unlimited amount. They can create money to issue loans but they cannot create money without a loan agreement with a borrower.

> It seems you have a vested interest in preventing others from learning about the fractional lending scam.

This isn’t a huge conspiracy, I’m no where near important enough to benefit from such a conspiracy even if it did exist.

> As for your claim that a 0% reserve ratio means banks CAN lend depositor funds, that is either a huge misunderstanding on your part or an outright lie. Show me any documentation anywhere that supports your novel interpretation, and I’ll back down.

I’m not sure how many I can say this. Unless you’re the fed you can’t magic money out of thin air. If the banks aren’t lending depositor funds, then what are they lending? Where does the money come from?

You seem to be basing your understanding of fractional banking upon an old blog post, which talked about an interest quirk of how banks worked. But that quirk only exists if, and only if, you ignore the abstraction that supports it.

It’s not different to over allocating disk storage using ZFS. I can build a volume that capable proving 10TB quota to 100 people, using only a 1TB drive. When I create those quotas I “make” storage, by writing their available storage into a storage quota journal. But the only works if we ignore the fact that the storage quota journal itself is an abstract, and leaky one at that. If people actually tried to use their 100TB quota, they would quickly discover that writes beyond 1TB just don’t work, because I only have 1TB of actual physical storage.

Same applies to banks and their ledgers. The reserve ratio just determine how much cash the banks has to hold in reserve at a reserve bank, that’s all. That cash is customer deposits. If you want to assert that isn’t the fact, then you need to explain where the money is actually coming from, and why a billionaire hasn’t bought a bank, and lent themselves a few billion more dollars out of thin air.

Now I had a whole thing written out here with sources from the Federal Reserve etc explaining via tiny little steps what a reserve requirement is, then what a reserve requirement ratio is, and how that all links to net-transaction accounts, which basically account the hold depositor funds etc etc

But then I realised I don’t give shit if you remain uneducated and ignorant while wearing a tin foil hat, so whatever. Have good life, goodbye.

It must be difficult to learn that everything you thought you understood about banks and loans and money creation is a lie based on a scam.

Here is an article explaining how banks create money for loans, search for “The money creation process”: http://www2.harpercollege.edu/mhealy/eco212i/lectures/ch13-1...

> banks create money when doing their normal business of accepting deposits and making loans. When banks make loans they create money. remember from chapter 12 that money (M1) is currency (coins and bills) AND checkable deposits. When I got a loan for my boat the bank called me up and said that they deposited the loan in my checking account. This new deposit is NEW MONEY created by the bank. they just turned on their computer, logged into my account, and changed the amount that I had. They created money.

FDIC insures deposits and banks fail. Government tightens the capital reserve requirements for new and surviving banks. That’s what is supposed to happen. Instead Federal Reserve slings cash around to prop up poorly managed banks and the con continues.

More people would have lost their jobs and houses, and whatever recovery was experienced would likely have taken longer and not been as "complete" (not that it was complete anyway, and it took far too long because of spending wimps in Congress). More businesses would have failed, and not restarted.

If I could place wagers and know that someone else would cover my loses… well I might be inclined to make a lot of risky wagers.

If I make money, great, if I lose, it’s someone else’s problem.

When government provides too cozy a safety net it encourages risky lending.

Federal flood insurance is another fun topic related to this.

I'm not arguing the government support for the banking industry is a good thing or the right thing (though there are some arguments to be made in support of it).

I am saying that pulling that support during a banking crisis will generally be a disaster for the rest of us. We need to change the support for the banking industry but in a manner that doesn't screw the rest of us over with side effects.

Maybe so. Not repeating the same mistakes again is more of where I was going.

>If I could place wagers and know that someone else would cover my loses… well I might be inclined to make a lot of risky wagers. If I make money, great, if I lose, it’s someone else’s problem.

You should know, in the fallout of that Recession, LOTS of banks lost. There were plenty of regulations on lending and capital restrictions. This forced small banks to be sold and consolidate into big banks. There were plenty of big banks who wanted to expand but couldn't because they couldn't meet the regulatory pressures. There were plenty of executives who lost their jobs.

Lots of banks lost.

How do you differentiate between "believing that claim because it is objectively true" vs "believing that statement because you've bought into self-interested propaganda from banks"? What evidence strongly favors one over the other?

Compare the "Great Recession" with the Great Depression or the Panic of 1873. That's how much worse it could be.

There's a reason the FDIC was set up as part of the reforms triggered by the Great Depression. Bank failures tend to cascade.

> There's a reason the FDIC was set up as part of the reforms triggered by the Great Depression

But we did have the FDIC, so normal people would not have lost their deposits from a bank failure.

Right, except that the FDIC is only big enough to handle $N in bank failures, and N is not that large.

Also, resolution through the FDIC means that you get your money... eventually. That can still be a problem if you have to pay your bills this week, though. (And then, if you and enough other people can't pay your bills this week, that can be a problem for businesses...)

> Not for those of us that don't invest our money in banks/stock markets, and don't take out loans.

So you are paid in cash, by a company that also does all its business in cash?

A systemic bank collapsing means that the companies who use them for paying their employees and suppliers, well, don't. This causes a chain reaction as the companies with a solid business model aren't able to execute it because they can't pay for their inputs (or their B2B customer can't pay for their deliveries) as their liquid cash is frozen until insolvency may return part of it, and they have to suspend operations, which is yet another hit on people (not) receiving salaries and on all the other related companies.

Protection of systemic banks is not about investors and loans, it's about the liquidity/working capital of companies and the people's salaries.

Let's say I'm a small mom and pop grocery store selling produce. I've been very cautious with my money and haven't taken out any loans, so I'm safe. But all the farmers whose produce I'm selling did because that's the only way to effectively run a farm. Now I have no inventory to sell. Am I still going to thrive?

The world is addicted to banks, and more specifically lending because that's how you convert future, uncertain payouts into steady, predictable capital that can be used to buy inventory, pay employees, make repairs, etc. To kick our bank addiction would be ruinous.

Unless you can eat those assets, build cars, computers or houses, all you have is just an alt economy that's indistinguishable from the dollar, except it has a different name.

> Not for those of us that don't invest our money in banks/stock markets, and don't take out loans. Private businesses meeting the above criteria would have boomed under those conditions, as there competitors were wiped out.

These two sentences contradict each other. You see, the competitors that get wiped out have employees who would lose their jobs regardless of how their money was stored.

It's possible to bail out a bank while letting it go bankrupt. In Europe it became standard practice: you bail out the bank, but shareholders and bond holders lose their assets. It becomes nationalized instead.

That is how it should work. Why should the citizens pay for a bank and fail to acquire a bank?

IIRC the USA "too big to fail" bailouts were as loans which by now have all been repaid with appropriate interest, the citizens did not pay for a bank, they lent it some more money and got it back.

You seriously believe that? Appropriate interest? Try 0% interest.

https://projects.propublica.org/bailout/

> We're tracking where taxpayer money has gone in the ongoing bailout of the financial system. Our database accounts for both the broader $700 billion bill and the separate bailout of Fannie Mae and Freddie Mac.

> Altogether, accounting for both the TARP and the Fannie and Freddie bailout, $635B has gone out the door. Money has been coming back in two ways: $390B of principal has been repaid, and the Treasury has collected revenue from its investments of $353B.

> In total, the government has realized a $109B profit as of August 30, 2021.

I'm sure there are a lot of other hidden costs with the bailouts that aren't accounted for here, but it seems the companies that were specifically loaned money generally paid back more than what was given?

If not, what else is missing here?

>$635B has gone out the door [as of 2009]

>$109B profit as of August 30, 2021

That's less than 1.5% average yearly ROI. That's a joke. An index fund, the least risky type of investment, has an average yearly interest rate of 10%. The stock market averages 8%. The irresponsible mortgages that got the banks into this situation had rates between twice and quadruple that. Hell, even inflation outpaces that on average.

Accounting for inflation, that's not even an interest rate of 0%, that's a real interest rate in the negatives.

The taxpayers paid for the bailout. Socialism for the rich, rugged capitalism for the poor.

That's not an appropriate conclusion to make, as most of the money was returned a long time ago, not on 2021.

For a random example, JPMorgan Chase got funding of $25B and returned it only some 8 months later (https://projects.propublica.org/bailout/entities/282-jpmorga... the gov't earned some 1.7B on it which comes out to an annualized interest rate of approximately 10%.

25 Billion out of the nearly 700 Billion from a bank that didn’t need the money proves that “most of the money was returned long ago”? Not very convincing.

JPMorgan was actively buying up assets in 2008 and were one of the banks that was well capitalized.

“JPMorgan Chase did not want or need TARP money, but we recognized that if the healthy banks did not take it, no one else could — out of fear that the market would lose confidence in them.”

https://www.usatoday.com/story/money/economy/2018/09/14/jami...

Taxpayers paid zero. What year exactly were taxes tripled to cover the amount loaned? Never? It didn't happen.

Taxpayers realized significant profits on the loans, since by law Fed profits past a small amount return to Treasury, which offsets taxes.

It’s called deficit spending. No need to raise taxes now; defer it to future generations.

The money did not come from Treasury. It's not called deficit spending, which comes from loans from the Treasury.

And they were loans, as well documented in this thread. Paid back with interest.

Do you know the difference between the Fed and Treasury?

Is that entirely correctly? Don't secured bond holders get their assets back (or at least whatever the bailout ends up being)? Something akin to FDIC?

I forget the details, but that was done to at least one major US-based institution in 2008.

> in 2008, then the haunting words "too big to fail" were used by both Obama and McCain

I don't believe those words were spoken by Obama in 2008, except possibly to criticize the idea.

It does matter, and to think otherwise is willful ignorance.

is it possible, that the state wants to grab this contractor and make it his own?

It's worth considering the relative sizes tho: the Chines government alone holds 11 trillion dollars in treasury bonds[0], the total US debt is about 28T.

Evergrande's USD-denominated debt is 20 billion, even if they wanted to cash it all out rather than just refinance it I doubt it would be such a huge wave.

Panicing investors fleeing to the USD safe haven seems more likely to cause trouble.

[0] https://www.thebalance.com/how-much-u-s-debt-does-china-own-... [1] https://www.ft.com/content/7ac2d661-5a63-4768-91a1-182f02b2a...

The article says $1.1 trillion, not $11 trillion.

The proximity of that number to the cost of the recent infrastructure package has me thinking. Normally we consider printing money to be deflationary to the US economy. But in a global situation like this, if the US prints a dollar for every one that China owns, does that devalue China’s dollar holdings? How does that impact their leverage in negotiating with the US for payback of its (dollar-denominated) debt?

That's called exporting inflation, and it's one of the huge advantages of the dollar hegemony.

Also, China can't negotiate the treasury bonds because those bonds are fixed income securities. They can't suddenly demand early payment.

"Devalue" compared to what? If both China and the USA are printing money, then they could come out about even, or one could come out ahead of the other. Right now, the USA is printing more money than China, so the exchange rate is 6.38 RMB/USD, which is pretty strong by historic standards.

yes, missed a "." , sorry

let's go to horse's mouth..

https://ticdata.treasury.gov/Publish/mfh.txt

> One path to doing that is to sell dollar-denominated assets. US Stocks and bonds in other words.

A big part of the world economy is literally or effectively dollar-denominated, so a sale of dollar-denominated assets does not imply a sale of US stocks and bonds. You can sell just about anything for dollars.

Including almost all currencies...

This still would drive up the value of USD, it just allows for the depreciation associated with the sale currency to be spread out to a degree.

But the issue with this is that there are only a few currencies backed by economies large enough, relative to the US economy, to be able to trade for sufficient quantities of USD without really impacting the exchange rate.

If the impact is large enough, the only good solution is for the fed to agree to a currency swap.

> The only way to service a dollar debt is to raise dollars. One path to doing that is to sell dollar-denominated assets. US Stocks and bonds in other words. So the pressures in China can spill over into the US economy through forced asset sales of dollar-denominated assets.

During height of the 2008 financial crisis the Federal Resevere opened an currency swap facility with the Swiss National Bank and the ECB ultimately capped at $620 billion, with the express purpose of allowing the other central banks to bail out banks domiciled in their jurisdictions.

So with the cooperation of the Fed, it is possible for them to print dollars.

There's zero chance this sort of emergency currency swap would happen with China though. Politically it would be the kiss of death to anyone involved and financially the Fed isn't going to pile up a bunch of largely useless yuan.

yeah, those currencies are freely tradable though, CNY is not, it's pegged. No political way Fed will do that.

Worth noting that this "dollar short squeeze" is the exact opposite of the most common conspiracy theory about the dollar: that the Fed is printing them like its going out of style (through quantitative easing and whatnot) and destroying their value.

Conspiracy theory?[0]

[0]https://fred.stlouisfed.org/series/M2SL

I'm not sure what exactly you are trying to point out? The jump in 2020? The exponential curve? The exponential curve is inflation in action. That is, 1.03^x is an exponential function that represents the 3% inflation target. I think the jump wouldn't even be noticed by laymen. But, my two cents, is that I think modern monetary theory (a contested theory) would say that printing money to control unemployment does not necessarily lead to inflation. This is kind of what we're seeing?

The nearly vertical line over the past two years, yes. I don't think you can call simple supply and demand a conspiracy theory. If MMT theorists said that wouldn't cause inflation, I'd call that a conspiracy theory soundly disproven[0].

[0]https://www.pbs.org/newshour/economy/u-s-consumer-prices-spi...

It’s an exponential, it’s going to look vertical for any sufficiently long time scale, but if you look at it over the last 20 years instead of 60 it’s not vertical anymore.

That’s what inflation does over the long term, nothing nefarious there.

Yea, years of low inflation and somehow 6.2% is "inflation" during a multi-year pandemic. Up until the 90's, that was considered normal. When my parents went to the bank to buy their first house, the interest rate was double digits. 6.2% is noteworthy but pretty minor given the disruption we experienced and still are experiencing.

I've said this theory here before and I used to get responses that said "Where the evidence for the inflation, CPI is 2.5%!" now I get "6.2% isn't really inflation!" soon I'll be getting "Inflation is a good thing!" if history is any guide.

This take is the equivalent of taking a snowball into the halls of congress to refute climate change. We're in the midst of a global pandemic that's had dramatic impacts on international supply chains. Of course prices are volatile.

To use this as evidence of the general "LOL PRINTER GO BRRR, SO INFLATION" argument—that, frankly, is a conspiracy theory popular today because of everyone's sudden infatuation with Austrian economics via Bitcoin obsession—is kinda myopic and missing the point.

My thesis is simple and has remained unchanged since early 2020 when the printing began. Creation of additional currency without the creation of additional demand reduces its value relative to other goods. To your point, a global economic shutdown would to my mind reduce demand for currency, therefore the creation of money in the past few years will cause inflation particularly as velocity picks back up[0].

I could be wrong, but that's a conspiracy theory? Like bigfoot or the moon landing? Come on. Your ideas can't be that fragile to have to resort to name calling like that.

[0]https://fred.stlouisfed.org/series/M2V

18880 to 21200 this year is a 12.78% increase. Last year 2020, it said M2 grew 25%.

It’s notable that the calculation for M2 changed.

“Before May 2020, M2 consists of M1 plus (1) savings deposits (including money market deposit accounts); (2) small-denomination time deposits (time deposits in amounts of less than $100,000)”

“Beginning May 2020, M2 consists of M1 plus (1) small-denomination time deposits (time deposits in amounts of less than $100,000)”

Does that mean savings accounts and money market accounts are no longer included in M2?

From https://www.federalreserve.gov/feeds/h6.html

>> Consequently, [February 23 2021]'s H.6 statistical release combines release items "Savings deposits" and "Other checkable deposits" retroactively back to May 2020 and includes the resulting sum, reported as "Other liquid deposits," in the M1 monetary aggregate. This action increases the M1 monetary aggregate significantly while leaving the M2 monetary aggregate unchanged.

Okay so they were moved to M1 —- which is included in M2 so M2 aggregate is unchanged.

"Worth noting that this "dollar short squeeze" is the exact opposite of the most common conspiracy theory about the dollar:"

No, it's not an "exact opposite". If one accepts the premise that players in the economy do not always yell out all their motivations and fears on the most public channels they can find, which when examined directly seems obvious but people seem to forget about it a few seconds later and resume acting as if the news is in fact full of everyone's private motivations and fears, then one can easily harmonize these two theories into one by wondering if the reason the Fed is printing money like crazy is that they fear horrifying deflation brought on by a dollar squeeze, so they're trying to get ahead of it. Certainly once it starts happening it's too late to react.

It's not my personal first guess as to the Fed's primary motivation, but neither is it an idea too crazy to take seriously, and I could easily accept it as a secondary motivation.

I think that was exactly the motivation in 2008. $4 trillion evaporated in the crash; the Fed created $4 trillion to prevent a collapse.

More recently? I'm less clear on that.

(Wow, 2008 was 13 years ago? And we haven't had catastrophe in that much time? That was... unexpected.)

Anyone thinking that dollars are going to go up in value is seriously loony. Dollars only go down in value. We keep printing more of them. At the same time, we aren't printing as much land and productive assets to keep pace...

The entire US economy has become dependent upon asset prices going up. The easiest way to achieve that is to make dollars go down. Conveniently, there is a branch of the government (The Fed) - who answers to no one - and who has the power to print dollars.

Sure, some American companies actually do things. But a startling amount of wealth in this country is tied up in R/E and derivatives. If dollars go up and asset prices go down - this explodes spectacularly.

The Fed chairmen are all relatively wealthy. IIRC, Ben Bernanke was - by far - the poorest Chairmen ever. At the time he was elected, he had a net worth of $2.5M - inflation adjusted would be >$5M.

That's still similar to the type of wealth you read about in Jane Austen books...

FYI: The Fed is NOT a government branch, nor is it part of the government. It is an independent entity.

How can one participate in making profits during a "dollar short squeeze"?

GME was easy. Hold the stock, sell it to the shorts. How do you do that with US dollars?

Secondly, as crazy as this sounds, would it be one reason for the Fed to preemptively drive inflation? (I suppose a low constant multiple in devaluation wouldn't blunt a short squeeze peak entirely, but might make it less sharp?)

>How can one participate in making profits during a "dollar short squeeze"?

If you believe OP, borrow as much foreign currency as you can and exchange it for USD. Back in 2007-2008, many Canadians emptied out their savings to buy USD at incredibly favorable exchange rates. Within a year or two they made over 30% as the CAD fell and the USD recovered.

Thats an interesting narrative about the CAD/USD exchange rate. Conventional wisdom would have said that it was that the high prices of oil raised the canadian dollar compared to the us dollar. If at the time you thought the price of oil would come back down then it would be an opportune time to sell canadian dollars and hold USD.

In your comment it seems that you are suggesting there was some kind of squeeze from retail holders that caused the price rise in CAD to USD... I find that tough to believe but have not considered it.

It was the 2007/2008 Financial meltdown where US Real Estate and Leman brothers collapse. Oil went crazy (Tar Sands) and Canada was able to weather virtually unscathed (due to strict mortgage and banking rules. The CAD went from trading at like .81 USD to 1.18 USD withing a year (if memory serves me correctly).

Yes, you can find a new Afghan Afghani, Indian Rupee, Turkish Lyra, or Chinese Yuan to borrow and buy USD with.

This is true, but I don't know to what extent Chinese businesses can purchase USD assets? My assumption is it's probably harder (you need Chinese government permission) to do so? Certainly chinese retail investors can't do it at the moment.

Goldman Sachs also estimated that Evergrande had about $300B of debt-to-equity that will be due in less than two years or so. Given the current market condition, I really don't see how Evergrande can ever recover.

> because they assume the exchange rate risk themselves. If that bet goes sour, though, the borrower faces higher costs to service the debt.

Man that seems like “doubling down” (I’m thinking of the gambling term) on a business bet…

I suspect and hope many of these borrowers issuing dollar-denominated debt are also entering into foreign exchange futures contracts. The reason they'd want to expose themselves to US dollar FX risk and then hedge that risk is to make their debt appeal to a wider range of international buyers.

This post shouldn't be construed as financial advice in any form.

Valid point, they could be taking steps to offset that risk too. Hopefully.

The world economy is in trouble, the US has leadership issues and China has declining growth. Inflation will soon strip away any gains in growth. Hold onto your seat.

Yes, except this type of event is massively DEflationary.

Creation of more debt is creation of more money, increasing supply, and is inflationary.

Conversely, destruction of debt destroys money, and is deflationary, in this case, deflationary to the dollar.

Also, selling of dollar-denominated assets also decreases the dollar-value of those assets and so increases the value of the dollar.

But it is inflationary for the Chinese currency.

This is why with the Fed's QE programs since the 2008 crash everyon ehas been yelling "Inflation!!" for over a decade, yet there was none-negative until this year, and even that is arguably transient. So much money was destroyed in that crisis that they have been ever since then trying to fill in the (deflationary) hole.

To the extent that that debt is denominated in dollars and is about to be destroyed, it will be dollar-deflationary, not inflationary.

To add to this, inflation is manageable. The USA isn't experiencing anything close to worrisome levels of inflation, it's more like normal levels of inflation after a long period of below normal levels.

Deflation, even in small amounts, can be devastating. It's a contagion that can cause a deathspiral, that if left unchecked. When businesses and people lose income, they can't keep up with debt payments, causing their assets to be liquidated, which causes the assets of others to suffer further depreciation, causing more losses and bankruptcies.

I have seen this opinion presented multiple times without any supporting facts. When did deflation in history lead to collapse of society? Japan is in deflation for a long time and the life goes on. On the other hand, the inflation in Germany lead to WW2, inflation was also at least partly responsible for the hunderd year war in Europe and the fall of the Roman Empire.

As another poster pointed out the Great Depression is a good example of deflation, and it is generally recognized that this was only cured by the massive expenditures of WWII.

Also Inflation vs Hyper-Inflationyper is a key distinction.

Ordinary inflation is relatively harmless, and the NET returns available tend to equalize at the actual growth rate of the economy. E.g., if inflation is 5%/yr the stock market is likely growing at 7.5%/year, yielding the same returns as if it were growing at 2.5%/year in a 0-inflation environment.

Hyper-Inflation is the killer - when inflation gets out of control, people lose confidence in the currency, which leads to the vicious cycle of needing to print more, which leads to lower confidence, etc.. Obviously, this is to be avoided nearly as strongly as deflation. It's why Volker raised the Fed Funds Rate to up to 18%, to killed the '70s inflation that threatened to run away. But even in the following decade it was typically 3-4%, as low as 1.1% and as high as 6.1%. Yet we're now seeing 3-4%, likely transient, and people are squawking like it's the end of the world.

Great depression when relying on gold. E.g. when the value of your money will always be worth more the longer you wait, everyone tends to wait at the same time and everyone loses.

Yup, inflation can be annoying and a popular complaint topic for whiners, but it tends to net out with management — rates rise and fall with it so net ability to earn returns still exists, and as usual, you need to work for those returns.

Inflation only becomes a problem when the money-printing (incl. debt creation) is so prolific that people lose confidence in the currency — that's when you get hyperinflation, which absorbs almost everyone's full attention. It's pretty wild to see live in person, but it is still survivable.

But you're right - DEflation is really dangerous, which is why the Fed, ECB, and other central banks are working so hard to avoid it.

Inflation was kept in check with consistent Chinese growth over the last +-50 years. Destruction of debt in Zimbabwe was not deflationary at all? I appreciate the debate but disagree with what you say.

How does China keeping inflation in check for the last 25 years (a quick look at a historical chart showed 25%/yr inflation around 1990) with consistent growth say anything about the topic other than that the supply of money in China roughly tracked the growth? Keeping money supply fixed would be highly deflationary with fast growth.

I don't know how much debt vs assets were destroyed in Zimbabwe, but it seems that most of the inflation was due to the govt printing insane quantities of money to finance it's involvement in wars in neighboring countries -- when they are printing and distributing individual notes in denominations of 100 trillion Zimbabwe dollars, when that currency started above par with the USD, it doesn't seem like debt has much to do with it; do you have some details I'm missing?

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