Dollar / Euro Short Squeeze Race

[Bodhii]

Dollar / Euro Short Squeeze Race

Much speculation lately focuses not so much on what the stock market will do (the answer to that should be self-evident, especially once shorting stocks again becomes a practical reality), but what the impact of recent economic policies will be not just on inflation (regional or global), but also on that most sacrosanct piece of paper, the U.S. dollar.

In order to approach this question from a different angle than the conventional theoretical wisdom of Quantitative Easing being the end all be all explanation for the mid- and long-term fate of the U.S. currency, an approach that has much more practical credence is that presented by David Roche of Independent Strategy, which demonstrates overall liquidity, defined as claims on goods, services and assets, as an inverted pyramid

At the bottom of this pyramid is the power money of reserve cash - liquidity created on the balance sheet of central banks. As noted, it accounts for a mere 1% of global liquidity, and thus the impact that the Fed and other world central banks will have with existing policies that address merely this aspect of liquidity will be, at best, massively muted. Above this is the liquidity bank loans liquidity, created through the conventional credit multiplier mechanism of commercial banks. Above that still is the liquidity created by securitization of debt. This experiment, gone horribly wrong, allowed claims on illiquid assets to grow further relative to the reserve money in the system. This is precisely the layer that the Fed and Treasury are trying to revive with the various TALF iterations, so far unsuccessfully. And at the very top of the pyramid is the layer of interest rate and credit derivatives: a means whereby institutions were able to maximize claims on physical and financial assets, by insuring against losses, without increasing precautionary reserves either of capital or reserve money.

In order to fully understand currency and price movements, one has to realize that the securitization of debt, and creation of derivatives amounted to a huge virtual printing press, primarily fueled by a massive increase in risk appetite which allowed for a huge expansion in the value of claims on financial assets and goods and services. It is worth pointing out, that the Fed has little to no control over this "printing press" at this point, which at last count was responsible for over 90% of the liquidity in the system.

Show me the money

In a fiat currency system, as previously pointed out, money is nothing more than a claim on assets, goods and services, and, most dangerously, money created at the top of the pyramid, in electronic form or otherwise, is just as real as the coins and physical dollars held at the basement of the Federal Reserve. The propagation of money higher in the liquidity pyramid explains why all traditional measures of money supply are not only inadequate but likely flawed: orthodox measure of money supply only include the first two pyramid tiers and completely ignore the major ones at the top. This is a major problem as analysts and economists who rely on these traditional "money metrics" only get a glimpse of 7% of the global liquidity in circulation. As for the the balance? The effect of creating an overabundant supply of money (that was not figuring into any monetarist policies) was that the price of money fell relative to assets, commodities and goods, services and labor. Therefore not only did generalized price inflation accelerate, but so did the increase in asset prices as well as the 6 year commodity bull run over the past 6 years.

Now hide the money

The liquidity pyramid's expansion was left unchecked for many years, as a result of loose regulation, low interest rates and a variety of other factors. At the core was the pro-cyclical risk appetite increase accompanying economic booms. Now that we are either in a recession or depression, this appetite has vanished (absent a few pockets of precisely orchestrated equity follow-on cluster bombs). Risk pooling and credit insurance, central to easy money creation, have essentially ceased (accentuated by the Lehman bankruptcy): one need only look at the total CDS notional in circulation which has collapsed from over $60 trillion at the end of 2007 to less than $30 trillion currently (according to DTCC). In short, 2008 was characterized by a massive destruction of money, and this process will likely continue well into 2009 and 2010.

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Dollar / Euro Short Squeeze Race -- Seeking Alpha

[harrison]

A companies' millions in reserves will go further in todays situation.Any Co. showing growth at this time should do reasonably well in the not too distant future. This is the situation in the U.S. right now.If you want to get into exchange values of currencies,money can be saved there too.An Outstanding bill in Euros from a bill months old can be paid for less and less the stronger the Dollar is in Comparo.My Australian freinds ACCIDENTALLY made some nice profits when sending Euros back to Aussie from Germany. Seems foreign tradeing could be lucrative and dangerous! What will become of the Dollar??? I told Germany the wall was going to come down and they didn't believe. Now we agree anything is possible. Maybe the U.S. could be persuaded to join the Euro money system as well. The world is getting smaller. We all breath the same air,drink the same water ...Why not share the wealth?? And protect it too."I have a dream"