It bears repeating and re-emphasizing, but had the guts of the actual global financial system been fully appreciated in a timely manner the current state of the global “dollar” would be cause for celebration. It would matter not that the eurodollar is in full and often violent retreat because that is the exact method by which a real recovery would be born; if only there were a reasonable market for money (actual, not ephemeral and pliable) and money dealing in place to absorb the transition. The happenstance of the current state of the “dollar” owes itself to the rededicated financialism of every central bank as if 2008 never happened. Rather than look for an actual solution, views of cyclicality ruled where the panic was judged nothing more than a temporary disruption.

It is that general outline that accounts for the recovery, lack of. Market forces practically begged for a total re-alignment, especially since the status quo only survived through the greater oligarchy in money of TBTF. The larger banks have only gotten larger and now they have very little competition since there are practically no new banks anymore. Wholesale continues to dominate, amazingly even more so now than pre-crisis which more than suggests the rotten nature of the very antics proclaimed as monetary heroism.

Except that the wholesale banks themselves no longer want the job of supporting that system. Before 2008, prop trading and spreads were not just favorable but undoubtedly so as any number of unrelated firms suddenly became FICC centric. GE Capital became a leading provider of mortgage warehousing as well as “investing” while formerly uninteresting insurance companies like AIG transformed into both securities dealers and prime purveyors of dark leverage, especially CDS. It was all, of course, artificially inflated by the nature of that time, the Great “Moderation” because the whole system long ago departed basic and operational sense.

Behind it all was the eurodollar. As I wrote at the outset above, sometimely appreciation for it might have saved a whole lot of acute trouble and maybe would have pushed for some real reform (and then a real recovery to follow). What is really frustrating, maybe criminally so, however, is that monetary officials were debating eurodollars not in 2006 but rather 1979. At that early stage, the Fed along with other central banks couldn’t quite make out what it was, how it got there or where it was all going. They were even debating at that time whether a eurodollar was actually “money” at all:

It has long been recognized that a shift of deposits from a domestic banking system to the corresponding Euromarket (say from the United States to the Euro-dollar market) usually results in a net increase in bank liabilities worldwide. This occurs because reserves held against domestic bank liabilities are not diminished by such a transaction, and there are no reserve requirements on Eurodeposits. Hence, existing reserves support the same amount of domestic liabilities as before the transaction. However, new Euromarket liabilities have been created, and world credit availability has been expanded.

To some critics this observation is true but irrelevant, so long as the monetary authorities seek to reach their ultimate economic objectives by influencing the money supply that best represents money used in transactions (usually M1). On this reasoning, Euromarket expansion does not create money, because all Eurocurrency liabilities are time deposits although frequently of very short maturity. Thus, they must be treated exclusively as investments. They can serve the store of value function of money but cannot act as a medium of exchange.