Sticking with purely financial expression of the eurodollar standard it is easy at times to forget such monetary influence has very real consequences. That is true in the US in particular, as even though the recovery is both deficient and waning it isn’t the disaster it is in other, connected places. It was, after all, the rise of the eurodollar standard as a wholesale system starting in the middle 1990′s that more tightly stitched the global economy, an open system architecture that eludes, still, the grasp of monetary policymakers. As such, they have a great tendency to miss and misapprehend what is really happening and because of that they will simply make it all worse without much hope for an upside.
The most evident example of the rise and fall of the eurodollar standard is China, but Brazil is no less compelling in that respect. Ever since the middle of 2013, when Ben Bernanke scared himself about bubbles and hoping the economy would finally act as it was supposed to, the ‘dollar’ system has attained this broad, global withdrawal. The system was fatally wounded in 2007, that further emphasized in 2011, but it wasn’t until the middle of 2013 that a critical threshold of upheaval was seemingly passed – a sort of economic point of no return.
The initial response from Brazil’s perspective, as the real sank from about 2.00 to the dollar to 2.40 to the dollar, was as the textbook orders (the Brazilian version of the orthodox textbook, anyway). The nation’s central bank, Banco do Brasil, launched what were called currency swaps but were really something else – long story short, it was the means (cupom cambial) by which to influence local banks to import more ‘dollars’, the practical effect of which was to incentivize Brazilian banks to increase their ‘dollar short’ at a time when the short was the problem.
This post was published at David Stockmans Contra Corner by Jeffrey P. Snider ‘ July 31, 2015.