The purpose of this exercise of examination of global funding mechanisms is to put together means for inference about the state of dollar funding as it relates to the systemic short. There is no direct path for observation; that is why nobody can figure out how big it is or how it has really changed since 2007. All we know for certain is that it has, and that the paradigm shift is still under way.
This last piece pulls in the dollar itself, though even this view is suspect given this rather crude construction. There simply is no such thing as a monolithic, universally representative ‘price of the dollar.’ The reason for that is obvious in this context, as there is no conclusive or even widespread understanding of what a ‘dollar’ actually is, let alone the supply of them. The closest we can get to something like that is when the weight of ‘action’ moves the relative price against so many other currencies in the same direction at the same time as to preclude the intrusion of minor factors.
A good example is, I think, what occurred in 2008. I don’t find it coincidental that the dollar (represented here by the trade-weighted index which overstates some currencies, and understates others, but, again, there is no perfect measure of price) stopped its downward trend right at the moment Bear Stearns failed. That tells me that dollar liquidity which had been strained to that point entered a new phase of heightened problems. And that was confirmed by the steady erosion of TIC flows up until Bear.
This post was published at GoldSilverWorlds on September 26, 2014.