TOWARD DOLLARS AND SENSE
EDU DDA Oct. 9, 2025
Summary: Rather than forecasting from here how bad macro and money conditions might become, Argentina is back in the mainstream spotlight because it is caught up squarely in the eurodollar’s crosshairs. But what does that actually mean? Not only will we begin to answer that question, we’ll provide another important one adjacent to it: why doesn’t anyone know about this? What you’ll see is that the answer to the former is more understandable than the one to the latter.
ARGENTINA FALLS…ANOTHER UNFORTUNATE METAPHOR
The dollar is “rallying” and it has caught many-a-peoples the wrong way. Not just the usual lunatics in the media who have no idea why or how the dollar behaves, in addition to that multitude swaths of real money participants. The sad truth of the world is that even professional investors, the so-called smart money, have little idea, either.
Most people still have yet to hear the term eurodollar which means they have yet to get exposed to true monetary mechanics. It’s the same for all those who yell about fiat currency as if the world has used of any that in any significant way for going on two hundred years. This ignorance of monetary ignorance is entirely understandable even if highly disagreeable.
It’s also more than a little dangerous, as we’re starting to “feel” for the second fourth quarter in a row.
To see the whole “sell America” idea gain such wide currency (pun very much intended) was both expected and disappointing at the same time; just look at the euro’s late spring experience. The plain truth is that the dollar, meaning eurodollar, is making waves and there will be consequences.
There already are – big ones – in some places. Argentina’s righteous experiment is facing its greatest challenge. Everyone thought Milie’s chainsaw might be silenced by leftists in opposition, instead it will be the eurodollar holding the executioners ax, same as the pre-pandemic government in Buenos Aires.
Canada’s dollar has breached 1.40 to its downside, the Reserve Bank of India is constantly intervening, desperately trying to hold just above 89, and even the brand-new prime minister in Japan is having to make regular statements in support of a yen intent on revisiting early 2024’s Finance Ministry fiasco.
This is starting to develop into one of the four horsemen of deflation. Dollar up, yields down, spreads drop, and flat Beveridge(s).
Why don’t more people know?
Hardly any of us know how an automobile actually provides locomotion. Sure, we understand fuel goes in it somewhere, combustion provides the required power, forcing the vehicle forward as efficiently as possible on its circle-shaped tires. That’s all we really have, the very basics, a vague notion of a system whose full and complete details aren’t necessary to any one of us starting the thing up and driving away at speed.
But when it sputters and encounters less than ideal performance, we’re at a total loss. And at the mercy of those who have attained the knowledge therefore ability to first diagnose before then – hopefully – fixing every issue.
What if there are no mechanics?
In a letter to his son John, Axel Gustafsson Oxenstierna af Södermöre, one of the first great political reformers of the Enlightenment, encouraged his offspring to have no fear speaking up on important issues even in the most esteemed of crowds. The father wrote, in Latin, “An nescis, mi fili, quantilla prudentia mundus regatur?”
Do you not know, my son, with how very little wisdom the world is governed?
Even if it is apocryphal, as some have claimed, it is more than just some made-up quip. Understanding its point is critical to understanding the world around us because there is a monstrous truth in those words even in our thoroughly modern age.
True in the (previous) Dark Ages, but surely not in the 21st century world brought up in the warm afterglow of the Scientific Revolution? We’re all so information-saturated, brimming with education in the finest modern traditions.
Then the car won’t start.
Oxenstierna’s point was more than a warning about straying too far from practical knowledge. After all, he stood witness to what for centuries had been taken as given – or given by God - for “what we all knew” instead being torn down and overthrown one ideal and ideology after another. It only took time.
It’s not just that those who don’t have answers must end up in the dustbin of history. Where advancement really comes from is figuring out the right questions to ask.
For decades, practically no one has been asking any from Economists. They’ve been busy enough if only within their own realm of statistical modeling. Among their most well-known a fellow by the name of Paul Krugman who for past several decades was more often little more than a political pundit.
Occasionally, however, he detoured back to his former profession if only to enlighten us with how little useful wisdom gets passed around within its unrighteous corridors. When the dollar was soaring back in ‘23, Dr. Krugman, the Nobel Laureate, confessed he couldn’t reckon the thing. It’s become sensational, he wrote, which is incompatible if not categorically incongruent with how the currency has been understood for ages.
The aura around the power of the dollar revolves around why it remains dominant even though the US economy isn’t. The more puzzling aspect is why fluctuations in the dollar have such strong global effects.
He’s correct. The dollar’s influence has almost nothing to do with the US economy (in isolation), but there is no mystery here.
A small step forward, hooray, Krugman and his ilk had finally realized that when the dollar goes up it spells trouble for everyone rather representing some sort of positive strength as had been believed right up until recently. From India into China then Hungary and even that ancient (by American standards) domain of Sweden, the exchange value isn’t the problem, rather what the exchange value truly represents.
This is the “thing” Economists cannot make make sense, the great mystery to the entire establishment. Having gone through these rising dollar episodes repeatedly since around March 2008, only now are the correlations finally generating awareness.
Recall how this is one hundred eighty degrees opposite from how it was said more than a decade ago. In late 2010, the rest of the world was up in arms over the dollar’s imminent crash. The bastard “money printers” at the Fed were unleashing a “currency war”, as Brazil’s Finance Minister, the hapless Guido Mantega, had once claimed just after Ben Bernanke unofficially confirmed QE2.
LOL.
Nowadays, after all this time of only going the other way, the EM cohort of officialdom complains wildly about the dollar having already gone way too high and their own currencies suffering the lows for it! Revealing thickness in such irony.
Referencing (again) India, the RBI’s characterization not long ago should be well more than enough to start putting two together with two: “EMEs are facing a rapid tightening of external financial conditions, capital outflows, currency depreciations and reserve losses simultaneously.”
Here we are once again, and still the Fed is believed to hold dominion over all dollar money.
Oxenstierna was right: Semper idem.
A day late for the eurodollar short
Among the earliest participants in the eurodollar system were Canadians. Though these dollars were floating around Europe, primarily, Canadian banks stood ready to borrow in bulk as needed. Not for their own purposes, the trade contributions therefore financing needs of firms within the country were relatively small. Instead, our friendly banker neighbors to the north were gracious enough to relend to American securities firms in New York money markets.
Dealer banks of this variety are nothing more than redistributors. This is the necessary secret that makes all of it go, but how?
Before it was even called the eurodollar it had been named the Continental dollar centered around the cities of London and Paris. The former made perfect sense because of its position within the British Empire – the mercantile empire where capital from throughout the world might flow in and out of its physical capital.
The capital of France emerged as a key recipient of American money in one form or another. And it was there where the Canadians did so much of their business, at least the first half.
As they did so, that business brought them into competition with other uses for this intranational currency. While it might at first seem weird that US brokers would need this external supply of, well, US dollars from Europe via Canada, the Great Depression and its regulations still loomed large over all within the United States.
Much of what the Continental dollar did up to that early time, the fifties, was finance trade throughout the Continent. Exigencies from World War II still applied over much over there. Thus, it became easier to do business on dollar terms “offshore” than in many local currencies and jurisdictions.
European money markets had previously developed a high degree of sophistication which they brought with them into this new brand of circulation. Among these, swaps and forward markets – introducing the necessity of time value. We might think of these as “modern” inventions far more at home in the eighties or maybe the nineties’ quant revolution, both were crucial to development of eurodollars in the fifties.
Intermediating banks, including Canadian, would take in deposits of all number of European (or Asian, such as yen) currencies then immediately swap them into dollars; not actual dollars, no physical stacks of US currency, rather creating a book entry when that foreign currency was put up as collateral borrowing dollars from a supplier who made the same yet opposing entry on its books (to the dollar borrower, the one who just made the swap, it was an unconditional liability; to the provider, a claim or loan asset).
To minimize any exchange risk, the dollar borrower might then sell forward the same dollars timed to match the duration for when the original currency swap would unwind.
Firms from all around Europe then the rest of the world (expanding first with Japan) could intermediate fluidly through what truly was a reserve system (outside the boundaries of Bretton Woods, too).
Here's an example written up from early observations made on behalf of FRBNY way back in November 1960 (when it was still referred to as the Continental dollar, the term eurodollar having first emerged only a short time earlier):
For instance, an Italian bank might have a customer who wished to borrow sterling to finance an import from the United Kingdom. The bank might then take advantage of the facilities of the Continental dollar market to arrange to receive a deposit, say, from a British bank, of a corresponding amount of dollars. It would then seek out an opportunity to reduce its borrowing costs by making a profitable swap—i.e., if the forward dollar were at a discount against the guilder, it would sell spot dollars, say, to a Swiss bank, and buy them back (at a lesser cost in guilders) forward. It would then lend guilders to the customer and in turn, for the customer’s account and risk, convert the guilders into sterling.
Nothing primitive about late fifties dollar trade. Again, though, the importance of the forward market in it meant it was vital for the money dealers to remain fully engaged, often both suppliers of these “dollars” as well as, at times, borrowers.
One potential drawback is that forward time. Not all transactions can be immediately matched to the corresponding unwinding future leg. Banks providing (selling) dollars might look ahead with a touch less optimism. Suddenly, “forward dollars” become expensive, maybe unmanageable.
If in the example above the Italian bank had already taken the deposit from its counterpart in the UK and had sold spot dollars to the Swiss, but had not yet arranged the forward dollar buyback, it was functionally “short” the dollar on unconditional terms, an obligation to return the dollars to the UK bank at the known maturity.
Should the forward price of dollars suddenly change from discount to large premium, losses can pile up too quickly. Just ask Herstatt.
Thus, the true binding condition for banks not just in this one situation rather the entirety of the system comes about from thinking ahead for what dollar providers might charge for future dollars that aren’t actual dollars to begin with. There is no fiat here. And that depends upon a variety of factors derived from perceptions about conditions down the road, putting a true premium on perceived future volatility – colloquially known as either risk aversion or taking.
Now think about the same in the context of our Canadian friends who have relent these Continental dollars into New York money markets to faceless borrowers who tended to be riskier securities brokers rather than insured depositories on behalf of renowned mercantile companies. I don’t want to make too much of those risks as they were in the late fifties or even into the sixties beyond, but at some point there might come a time when it could finally happen in reality.
This was, of course, August 9, 2007.
The King is back
The shock is all over a mainstream financial media which had been utterly convinced by a single currency in little more than a two-month window that somehow it finally proved once and for all the dollar was doomed. Let’s be honest here, most of “sell America” was anti-Trump politics, the unfortunate flipside from when Biden was issuing sanctions on everyone even remotely familiar with Russia. Back then all the Rs said the Ds had wrecked the greenback’s future, and now their places are switched.
You know none of it is true by the absence of that one single word: eurodollar.
In the wake of more troubling developments from the First Brands bankruptcy (I’ll cover this at a later date) related to collateral, weirdly similar to the allegations from Tricolor, the entire financial system is on double alert – macro problems combined with unexpected financial warnings equals risk aversion.
Woe to those short dollars: “short” as in what is described above; any speculators who bought sell America are on their own.
Argentina finds itself on the short end of the “short” once again. I covered this in more detail on YT several weeks back and the proximate cause behind it. However, it isn’t really about Argentina since what has changes is the nature of the eurodollar matrix.
In response, Milie went to the IMF then directly to the Treasury Department to secure a “fiat” swap line from the Secretary. The mere announcement of his trip was enough to temporarily halt the peso’s devastating slide.
While initially refusing to admit the US government was going to put ledger eurodollar money on the line for Argentina, today the feds in DC acknowledged they are swapping for pesos as well as buying some outright, having put up so far roughly $2 billion. The reason is simple: the peso’s short-lived rally has come up against these worsening general eurodollar conditions.
From earlier today:
The US rushed to stabilize Argentina’s economy on Thursday, offering $20 billion in financing and carrying out a rare intervention in currency markets to prop up the peso after weeks of sharp declines.
Washington has finalized a $20 billion currency swap framework with Argentina’s central bank, Treasury Secretary Scott Bessent said in a social media post. The US also directly purchased pesos, he said, a move that follows unsuccessful efforts by Argentine authorities to stabilize the exchange rate on their own.
And we’ve seen this before as almost an exact carbon copy of 2018. Then, ARS was falling aggressively, Mauricio Macri’s government cozied up to Christine Lagarde’s IMF and won the biggest bailout in the latter’s history. The fun times lasted not even three months before worsening general eurodollar conditions completely obliterated the $50 billion from Lagarde and then the $7 billion added later on.
The whole thing was an abject failure demonstrating once again our main point – this is the eurodollar’s world, we’re only trying to live in it.
Argentina’s 2018 bailout was supposed to be the springboard to Lagarde’s further career ascent but instead is rarely spoken of for obvious reasons. She, of course, failed upward anyway because that’s how it works among those Oxenstierna was speaking about all those centuries ago.
The more the peso plunges like 2018, the worse we know it is getting to be not necessarily in Argentina but among eurodollar shorts. I mentioned the rupee and others like Canada’s dollar, all of them globally synchronizing to the downside of the Eurodollar King’s growing wrath.
I promised last Friday to look forward this week trying to gain a sense of how bad everything might get with so many angles to examine these days . I had intended to do so today (I’ll be traveling tomorrow, so apologies in advance for not being able to deliver a Friday DDA) before Argentina provided a highly useful real-world example and reason to go over the dollar background behind everything so we can all better appreciate how it might (already is?) apply (applying) to that forward analysis.
On top of that, our peeking ahead might be vastly improved if there is more relevant information to be gained from the developments with Tricolor and First Brands, so waiting into next week before launching some forecasting seems prudent.
With the angry eurodollar, last year it alerted us to substantial deflationary conditions that paved the way ultimately for the April backlash. This year, the macro side is in far worse shape at the same time shadow banks are increasingly being exposed for quite so many wrong reasons. You can see where I’m going with this, though I want to be very careful in saying a complete meltdown is not the base case.
It is, however, a growing possibility with every “shocking”, “surprising”, “unbelievable” tick higher from the eurodollar. Somewhere Paul Krugman is tweeting his next confession about not having a clue about dollars and sense.
