Thread by @abinder1

I’ve been asked on here about the link between #Eurodollar creation and current (US) #inflation and the power of the #Fed to fight it. Since I get this question often, I thought I do a quick thread about it. (1/10)

In ch. 2 of “Offshore Finance and State Power” I explain how banks outside the US can create US$ by issuing debt. These #Eurodollar look like US$, but are different b/c a different legal code is attached to them (mostly English law) tinyurl.com/yhefwrxh (2/10)

The obvious follow up questions are: 1) Can these #Eurodollar cycle back into the US economy? 2) Can they create #inflation there? 3) Given they are created outside the US, does the #Fed have the power to fight inflation? (3/10)

1-Yes, #Eurodollar can cycle back into the US economy. They look like USD & don’t come with an identification of source. However, they usually don’t cycle back that much as the @BIS_org shows here bis.org/publ/qtrpdf/r_… (4/10)

Why is that? Because #Eurodollar are mostly interbank financing. #Eurodollar creation & destruction happens mostly #offshore, i.e. between banks in OFCs (5/10)

2-No, Eurodollar cannot create US #inflation, b/c it is not what we measure with headline inflation stats. Headline inflation = real economy, Eurodollar = far from real economy. BUT Eurodollar drives asset price inflation & financial instability in US & globally. (6/10)

3-Yes and no. Although Eurodollars do not drive current inflation, the reverse causality is true: rate hikes affect #Eurodollar markets. As banks’ refinancing becomes more difficult, Eurodollar debt gets out of control =>

Fed must pick up the pieces via CB #swaps (see Crédit Swiss/SNB), BUT it’s also the world’s only actor who can pick up the pieces, so power analysis ambivalent. (8/10)

However, current inflation is driven by opening up econ post COV19, energy & corporate profits (see @ecb). Appropriate tools are sectoral price caps, windfall taxes etc. not (further) rate hikes (see @IsabellaMWeber @DanielaGabor @BJMbraun). (9/10)

Unless you want to slow the economy by tanking the banking system, that is. Fed's role is with shrinking Eurodollar system via #regulation (10/10).

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