Where I differ from his assessment is that Powell is not and should not be held responsible for the careless mismanagement of foreign dollar-denominated debt, much of which …
Where I differ from his assessment is that Powell is not and should not be held responsible for the careless mismanagement of foreign dollar-denominated debt, much of which is actually in the dark market of derivatives, which globally is estimated by some to be notionally at least a quadrillion dollars (and there are nowhere near a quadrillion dollars to be had to settle up accounts).
This has always been the problem at the core of the derivatives market (and before that the Eurodollar market). Notionally, these markets, through the issuances of dollar-denominated securities, could create even more dollars than the Fed. However, when the margin calls hit, everyone is gobsmacked to discover they need Fed-created dollars to settle up.
Because US banks and financial entities carry exposure to these dark markets, the Fed beginning in 2008 backstopped them with all the liquidity they might need to resolve margin calls and claims in these markets--and double and tripled down on that in 2020 to ensure "liquidity" for the duration of the government-ordered shutdowns. However, with the US derivatives markets valued at around $200 Trillion, there's still not enough fed created dollars to cover everything at face value if the derivatives markets go south like they did in 2007-2008.
But the prudent response to all of this would have been to begin unwinding derivative positions in 2008, and staying out of derivatives altogether going forward. Suffice it to say, that didn't happen. But Wall Street stupidity should not be foisted onto Jay Powell's shoulders.
Ed Dowd is talking about the liquidity paradox I discussed for paying subscribers a while back.
https://newsletter.allfactsmatter.us/p/powells-paradox-curing-inflation
Where I differ from his assessment is that Powell is not and should not be held responsible for the careless mismanagement of foreign dollar-denominated debt, much of which is actually in the dark market of derivatives, which globally is estimated by some to be notionally at least a quadrillion dollars (and there are nowhere near a quadrillion dollars to be had to settle up accounts).
This has always been the problem at the core of the derivatives market (and before that the Eurodollar market). Notionally, these markets, through the issuances of dollar-denominated securities, could create even more dollars than the Fed. However, when the margin calls hit, everyone is gobsmacked to discover they need Fed-created dollars to settle up.
Because US banks and financial entities carry exposure to these dark markets, the Fed beginning in 2008 backstopped them with all the liquidity they might need to resolve margin calls and claims in these markets--and double and tripled down on that in 2020 to ensure "liquidity" for the duration of the government-ordered shutdowns. However, with the US derivatives markets valued at around $200 Trillion, there's still not enough fed created dollars to cover everything at face value if the derivatives markets go south like they did in 2007-2008.
But the prudent response to all of this would have been to begin unwinding derivative positions in 2008, and staying out of derivatives altogether going forward. Suffice it to say, that didn't happen. But Wall Street stupidity should not be foisted onto Jay Powell's shoulders.
Wow!
Just wow.