We all know, or we think we do, what happens when central banks print money. There are any number of historical images from which we can refresh our collective memory. Weimar Germany usually comes to mind, as does Venezuela or Zimbabwe in recent times. But what about the opposite?
It sounds absurd. No government officials in their right mind would ever stop the printing presses. If that situation ever happened to arise there must be something seriously wrong, right?
I really don’t think people appreciate just what the eurodollar system means in detail. Even these eurodollar events we keep having don’t really do justice in describing the various ways they really hurt. Robert Triffin was correct in one sense when he described his famous paradox six decades ago. The dollar carries huge responsibilities that are often unsuitable for competing forces which arise more often than we might expect.
It didn’t seem that way for a long time, though. The prior so-called Great “Moderation” wasn’t blind dumb luck so much as Economists James Stock and Mark Watson were at loss to find the monetary center of gravity really behind it (or Bernanke, he of “global savings glut” lunacy). Before August 2007, there was no downside to letting the Trojan Horse of contagion through your national gate.
Domestic monetary systems that were therefore built upon eurodollar supply can only suffer from the lack of it. This is contrary to the narrative that every central bank is, well, central. They aren’t, though they often do everything in their power to appear that way. Some central bankers actually still believe it, and you can tell which ones by how quickly they fail.
There might remain some ambiguity in your mind when we review each month the PBOC’s fortunes and foibles. After all, bank reserves and deposits are as often financial considerations and therefore potentially subject to internal factors unrelated to the dollar.
