Eurodollars And The Other Existential Banking Crisis

By Daniel R. Amerman, CFA

There are multiple threats to the financial system that are currently in play, and one of the biggest is the risk of a Eurodollar crisis or collapse. The world had two close calls with systemic bank failures in 2008, one was derivatives and the other was Eurodollars.

The Federal Reserve contained the Eurodollar crisis by opening up dollar swap lines with foreign central banks. At the peak, the Fed pumped about $600 billion in newly created U.S. dollars out to the world (primarily to save Europe), even as it was creating new dollars to enable about $800 billion in emergency lending to banks, which also had a heavily European component. On a combined basis, it was a $1.4 trillion rescue, most of which went to Europe.

It's 2023 and here we go again. The Federal Reserve is setting up multiple swap lines, possibly getting ready to create hundreds of billions of new real U.S. dollars that it may send around the world to replace hundreds of billions of (mostly) fake dollars in the Eurodollar market, to try to keep the global banking system from crashing.

Explaining those risks in advance was a key part of my October workshop, and in this analysis, I'm including my detailed presentation notes that explain what Eurodollars really are, the inherent risks for that market, and how the Fed may again attempt to rescue the unsecured debts of an overleveraged world. (Credit Suisse was an example in the presentation of what could trigger the crisis).

Eurodollar Presentation Notes (from October 2022 Workshop)

Below are my presentation notes, which were also handouts for workshop attendees. For those who attended, these are from Section 2D of the "Detailed Topic Outline", pages 67-79. Please note that these are not the presentation itself, but are merely the framework for the presentation, with greater detail in the oral presentation as well as the frequent questions from and discussions with the group.

(The rest of the 2D section of the presentation revolved around Basel III, bail-ins, how the new regulations have changed everything since 2008, what Bernanke got his Nobel for (it wasn't QE), the relationship with inflation, the extraordinary interrelationships between Eurodollars and bail-ins for the non-Western world, how risks are now shifted from European banks to the rest of the world in the event of systemic crisis, how BRICS+ changes things, and much more. Also please note that the presentation notes for 2D were particularly thorough, more so than most of the rest of the presentation.)

Five months later, as I look at my presentation notes, I will try another summary, with an eye on what is happening today.

Currently, all dollars are debts. But not all debts are dollars - even if they are denominated in dollar terms. The Federal Reserve and U.S. Treasury have a crystal clear definition of what is a United States dollar, and what is not. The M2 money supply definition is that dollars are deposits of U.S. commercial banks, deposits of regulated other U.S. depository institutions, and physical currency in circulation. Anything that doesn't meet that definition - isn't a dollar. Yes, there are further levels beyond M2, but they have to come back to the center to become actual bank deposits or reserves at the Fed.

What is a deposit? This wraps back around to my previous analysis (link here) of Silicon Valley Bank, insured deposits, uninsured deposits and bail-ins. A deposit is not an asset, not really, but rather it is an unsecured debt of the bank or other depository institution, that may or may not be insured. Similarly, Federal Reserve Notes themselves are the debts of the Federal Reserve. It's all debts, all the way down - but only the particular debts that are under the regulation of the U.S. banking system.

Beneath M2 is the core reality of money in its current form in the United States - and this goes to the heart of monetary economics (but not finance). The monetary base is two very specific types of liabilities of the Federal Reserve - physical currency in circulation, and the reserves of depository institutions held at the Fed. The monetary base is expanded upwards in a multiplier process via bank lending (fractional reserve banking), leading to another very specific type of liability, which is deposits at depository institutions. That's it. Anything beyond that is not dollars.

One simply can't understand money in its current form without understanding the balance sheet of the central bank, the banking system balance sheets, and the relationships between them. I know, it sounds terribly geeky, very bad for memes, but reality is what it is. That's why we start each workshop with a review of key changes in the balance sheets of the Federal Reserve and the commercial banking system. That's why in my book "The Stealthy Raid On Our Bank Accounts" (link here) I use a series of graphs of key balance sheet items for the Fed and the banks to show how the Fed used a key legal change in 2008 to reach into our deposits at our banks to bail out Wall Street, then to fund the Quantitative Easings that transformed the investment markets, and then to take our money from our own accounts to pay for the stimulus checks that were sent to us (in redistributed form). If one wants to know where the money is coming from to pay for the current $2 trillion potential bank lending program or any potential pivot - that would be us. To see what is happening - and the potential crisis-inducing limits - we have to see the specifics of how the money is borrowed into existence (not printed) and from whom.

Once this is understood, then my apologies, but it is time for a little side trip down the rabbit hole. The U.S. is implicitly now guaranteeing all $17 trillion in banking deposits. Where does the Fed get the money to do that? It's the same $17 trillion in banking deposits - or more accurately, quite a bit less, since the whole $17 trillion can't be accessed without crashing the system. Much like the stimulus checks, this is really a redistribution, as the "good deposits" from the rest of us are taken and used to cash out the "bad deposits". That is exactly what is happening with Silicon Valley Bank. Each time this same "trick" is used, the margin remaining before the "crackup" point is reached is reduced - this is not "infinite printing" by any means.

Those are just the real dollars. Once we get away from real dollars, we do have two vast and highly leveraged but poorly regulated financial ecosystems that are denominated in dollars, but are not dollars. One is the shadow banking system, where financial institutions and corporations that are not banks (such as hedge funds) enter into multiple layers of what can be highly leveraged lending - but that do not appear on the balance sheets of the central bank or depository institutions. An example of shadow banking risks is the repo market that nearly crashed in 2019 (analysis link here), before it was rescued by Federal Reserve intervention. If the Fed had not successfully intervened we would have likely had the Global Financial Crisis of 2019. It could also be argued that the derivatives crisis of 2008 was a form of shadow banking, with participants taking hundreds of trillions of dollars in highly leveraged off balance sheet risks, that were not under the control of financial regulators.

Outside of the United States, you can and do have many trillions of dollars of debts that are denominated in U.S. dollar terms - but they are not actual dollars. Most Eurodollars have no existence in the U.S. financial system, they do not exist on the balance sheets of the Federal Reserve or U.S. depository institutions. They must find a way to become real dollars, if they are to be spent in the United States - or if a Eurodollar counterparty demands payment in actual dollars into their (or their correspondent banks') account at the Fed. That is where the Fed swaps in a Eurodollar rescue come in, new real U.S. dollars are created to replace the fake dollars, so that they can be deposited into the U.S. financial system, thereby avoiding cascading counterparty failures.

Strange and awkward as it may sound, this is how much of international trade works, how payments are made for goods and services between different nations and companies. Eurodollars also have a history of coming within days of potentially crashing the global financial system, in 2008.

The United States not only tolerates this situation, but actively encourages it. World trade occurring in dollars is a critical reason for why the U.S. dollar is the global reserve currency. During times of crisis, the demand for real dollars leads to rapid appreciation versus other currencies, and this creates lower rates of inflation in the United States while increasing the rates of inflation in other nations. Trade occurring in dollars also gives the United States extraordinary international power because it enables the ability to interfere in international trade between other nations around the globe, which is currently being used in the attempt to destroy the Russian economy.

There is a major price when the dollar is being used for highly leveraged and highly profitable risk taking not just by U.S. commercial banks, but also the shadow banking systems around the world and in the Eurodollar market, and that is knowledge and control. It's not just that banking regulators don't control these huge markets, but the Federal Reserve and Treasury don't even know what risks have been taken. Nobody knows. 

Vast sums of money are made because of this setup, with the politically connected wealthy insiders benefiting the most. So, it never gets fixed, and here we are again, with the financial safety of the vast majority of the U.S. population covering the risks from shadow banking, Silicon Valley venture capital, and Eurodollars around the world - but without participating in the lucrative profits that are the result of those risks. The current international financial world doesn't just have moral hazards, the world is arguably based on those hazards.


I'm considering putting on a workshop in the Indianapolis area on one of three weekends: April 29-30, May 6-7, or May 13-14. If you are interested, please let me know, including weekends that do work for you and weekends that do not. The actual weekend selected would depend on participant requests - with the requests of regular attendees having particular importance - as well as venue availability.

During 2008, I gave four workshops. Three were before the crisis, and a lot of value was delivered. One was the week after the Federal Reserve rescued the system by initiating Quantitative Easing - and that workshop was particularly good. For those who were there, I explained how the Federal Reserve had just fundamentally changed the nature of the U.S. dollar the previous week, the rules that govern how money works, and that remains true 15 years later even if most people are still not aware. I'm still hoping 2023 will end up being "no major crisis", but there is a great deal to be concerned about, and that will be true either before or immediately after any potential crisis.

This would be a two day workshop, with the first day being entirely devoted to understanding what is then currently happening in the economic and financial world, as well as the related threat analysis (numerous threats analysis might be better wording). We will start with money and the Federal Reserve balance sheet - because that is how we can see what the Fed is actually doing, and is what determines the limits of what the Fed can do. As we will explore, even in these past two weeks the Federal Reserve has undertaken an emergency rescue every bit as large (on a weekly basis) as it did in the fall of 2008, but in a different form at this time, with different risks. 

The second day would be entirely devoted to solutions, and this type of situation is why I developed the Red/Black Matrix (shown below) and the "Investment Strategies For Crisis & The Containment Of Crisis" educational videos. We are in a crisis - and global central banks are attempting to contain the crisis. If the crisis "wins" then everything changes for stocks, bonds, real estate and precious metals, as well as potentially cash itself when it comes to the reserve currencies. If the containment of crisis "wins", then the tools used by the governments to contain crisis are likely to profoundly impact and change investment markets from 2023 forward. 

Indeed, there is a strong case to be made that there were not any "normal" markets between 2008 and 2023, as the central banking containment of crisis interventions with quantitative easing, very low interest rates, and the assumption of a "Fed Put" have fundamentally distorted investment prices and returns, while creating a "rational bubble" of elevated asset prices that is now in jeopardy. In my opinion, there is simply no way to understand the risks and opportunities without understanding how the attempts to contain crisis - and the limitations on those attempts - will distort the investment markets.

We will use the Red/Black matrix to take a broad look at what is happening with all the major asset categories, including wargaming how both crisis and the attempts to contain crisis may be not only creating major risks, but are also creating potentially exceptional opportunities. We will also take close looks at real estate asset/liability management strategies in 2023, as well as the use of hedge/ratio strategies for gold and stocks.