DE-LEVERAGING THE EURODOLLAR SYSTEM IN FAVOR OF BITCOIN

 


The eurodollar has been an instrument that allowed for massive global credit and leverage. Bitcoin will benefit from the de-leveraging of that failing system.


Kane McGukin has 13 years of wealth management experience spanning brokerage and institutional equity sales. He is an independent registered investment advisor.


As the calendar neared September 2021, the money printer had slowed and individuals were beginning to tire from the toils of trading a basket of work-from-home stocks. At this point, COVID-19 was over, the crash was old news and lockdowns were nearing two years old. Most were looking to shift their focus to something new. Something like getting back to what used to be their real day jobs.


YOU CAN ONLY KEEP AN ANIMAL CAGED FOR SO LONG

That’s the tough reality of the corner the Federal Reserve has boxed itself into.


For decades, the Maestro had conducted a seemingly beautiful orchestra, but you can only keep people and financial instruments locked up for so long. Eventually, there’s a breaking point — a point where you can no longer massage the data or print enough money to satisfy human greed. Greed, that internal emotion that leads one to believe if they just get more money, they’ll find happiness.


At some point, animal spirits begin to stir. In times of economic stress, these spirits have a voice of their own. One that cannot be tamed or controlled by a board of 12 members, headed by a chair.


For many years, and more specifically in 2021 and 2022, I’ve watched the rotations of the major financial asset classes. Recently, to my surprise, only three asset classes have had positive returns over the last seven months. Those are commodities, gold and the dollar (though when accounting for [tru]inflation, 11.8% now with a peak of 12.74%, the dollar’s return is actually negative as of time of this writing).


Note: actual real estate has been up and quite bubbly in many places in the U.S., though the public market ETF shows negative returns. Likely because public markets are all down and it’s a publicly traded instrument.


WHEN MONEY IS FREE, LEVERAGE BUILDS IN THE SYSTEM

The eurodollar market is a bit obscure in that its size is relatively unknown (about $14T in 2016), and it was responsible for roughly 90% of international loans in 1997. So, one can assume that eurodollars are the center of most global financial activity when it comes to lending. This is abundantly clear when viewing the eurodollar futures chart below.


Background: The eurodollar market started in 1957 when non-U.S. banks began holding dollars on behalf of entities or nations potentially being blocked from holding actual dollars directly with U.S. banks. For doing so, these intermediary banks received higher interest on the dollars they lent out and also paid a higher level of interest to the rightful, but not actual, owner/holder of the dollars. Given the additional linkages, which lead to more layers of risk, it makes sense that higher interest rates are expected by investors.


These dollars, more or less, became a second derivative of the U.S. dollar.


When you break it down, is it not really just an international bank holding dollars and re-lending them outside of the purview of the legal jurisdiction of the Fed?


Effectively, these non-U.S. banks create money without having the same powers as the U.S. Fed. Remember, the global perception is that the Fed is the only one who can lend dollars. However, due to the global spread of fractional reserve banking and financial engineering, we can see that through eurodollars many other banking institutions have been playing “Fed” with their own re-lending of dollars throughout the global financial system.

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