Panic over possible debt ceiling accident

http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

At least some people think there is a small chance that they won't get paid right away for their expiring T-bills and are selling them at a discount.

When was the last time the 1-month notes were that high?  February 7, 2014. What happened then? A similar debate over raising the national debt limit.  Note that the debt limit was $17,226 billion then, and it is $18,152 billion now.  And soon it will jump a few hundred billion more as soon as Congress caves and approves a new ceiling.

See also: http://www.cnbc.com/2015/10/19/lew-i-worry-there-could-be-a-debt-limit-accident-that-could-be-terrible.html

Treasury Secretary Jack Lew said Monday he worries that waiting until the last minute to raise the nation's borrowing authority could result in an accident "that would be terrible."

Last week, Lew said the U.S. debt ceiling will be exhausted Nov. 3, two days before previously estimated. In a letter to congressional leaders, he added that a remaining cash balance of less than $30 billion would swiftly deplete.

"Our best estimate is November 3rd is when we'll exhaust what we call extraordinary measures; those are things we can do to manage things. I will run out of things that I can manage on November 3rd," Lew told CNBC's "Squawk Box."

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 Only 2 weeks until the system collapses! Unless the evil Republicans can be convinced to raise the debt ceiling. Are there negotiations going on? Nope, the president won't negotiate.

August 9, 2007 - the day the system broke

I started this blog in June 2010 because of a feeling that there was something very wrong in the financial world.  Most of my fears then seem to have been overblown, and I don't post very much anymore.  I would like to say definitely that everything is ok.  But they aren't, which is evidenced by the fact that the Fed has kept its rate at 0% for almost 7 years (it was lowered on Dec. 16, 2008).

It is interesting to note that August 9, 2007 was the day that things started to go wrong.

See http://www.theguardian.com/business/2011/dec/01/credit-crunch-pinpointed-august-2007

The former boss of Northern Rock, Adam Applegarth, pinpointed the start of the first credit crunch as 9 August 2007. It was the "day the world changed," he said. The European Central Bank and the US Federal Reserve injected $90bn (£45bn) into jittery financial markets that day, but it was still not enough to stop banks being frozen out of the markets they relied on for funding.

http://www.alhambrapartners.com/2014/08/11/the-anniversary-no-going-back/
Everything that has occurred in the years since can be traced to those days in August 2007 when money markets broke down for the first time. Even the current, though measured, move away from the US dollar in global trade is as much a downstream event of then as anything else. Careful examination reveals that it was the eurodollar system, linked to trade and financialism, that has wrought such persisting havoc and malaise.

http://www.alhambrapartners.com/2015/08/10/still-no-going-back-eighth-anniversary/ In very general terms, central banks could do no wrong prior, and then “suddenly” have been able to do nothing right since. The titanic shift in August 2007 cannot be overstated. The Fed (and all its central bank network) continued to do as it had done before, starting in September 2007 with its first very orthodox, quite textbook 50 bps cut in the federal funds rate. From then on, no matter what it did, the financial system remained unaffected and so with it the economy.

http://www.theguardian.com/business/2012/aug/07/credit-crunch-boom-bust-timeline
Larry Elliott, economics editor, said: "As far as the financial markets are concerned, August 9 2007 has all the resonance of August 4 1914. It marks the cut-off point between 'an Edwardian summer' of prosperity and tranquillity and the trench warfare of the credit crunch – the failed banks, the petrified markets, the property markets blown to pieces by a shortage of credit"

http://davidstockmanscontracorner.com/mind-the-eurodollar-markets-thats-where-the-exit-ramps-are-closing/
The rift in the global eurodollar exchange system that opened in 2007 is not closing, rather it remains in a state of paradigm shift that can only strain further a liquidity system that has actually lost robustness from even its weakened state just prior to near-collapse.

The weaponization of the Eurodollar

I'm in way over my head on this, but lower oil prices and the collapsing world economy are causing a Eurodollar liquidity crisis.

"Investors may have underestimated the degree to which a rising dollar transmits tighter monetary policy across an already misfiring global economy, especially when it is carrying US$10 trillion (+70% since 2008) in offshore Eurodollar debt. From a Chinese (especially) and EM standpoint in particular, it is becoming increasingly clear that the dollar has been “weaponised.” http://ftalphaville.ft.com/2015/09/24/2140580/all-about-the-eurodollars-redux/

A eurodollar can be defined simply as a dollar that is outside the borders of the United States.  However, I don't think it is that simple.  Obviously, physical cash can circulate outside the borders.  But for electronic dollars, I think there has to be some sort of connection to the US, like an account at a big bank, e.g. JP Morgan, or a correspondent relationship with one of the big banks.

However, even without the connection, two parties could agree on a transaction denominated in dollars, and then settle it based on the prevailing exchange rates.  This is no problem if it settles quickly.  However, if there is a long-term loan or time deposit, the problem arises.

If the dollar strengthens in value (which happens because for some reason everyone trusts it), then paying back the loan or deposit becomes much more costly.  This causes spiraling deflation, which is why oil prices and gold prices keep going down.  Of course the countries would prefer to sell oil and gold at higher prices, but they have loan payments due and have to liquidate assets in order to meet their obligation.

This isn't a problem in the US so we don't see the effects, but there is a $10 trillion elephant sitting on the world economy.  These are dollars not created by the Fed, but they still exist.  (Other entities besides the Fed can create money, I have written previously about that, but I haven't considered international banks creating dollars).  This could cause a global economic collapse.  And maybe the Fed would step in as a lender of last resort, and in exchange for its help, effectively demand oversight over banks that it is lending to.

The Fed does provide "swap lines" to other central banks like the ECB and BOJ, but it doesn't to China.  So this could be considered economic warfare against China, which must liquidate its (mostly treasury bond) assets.  This is a topic to research more.