It has been an unbelievably busy week on many fronts. Overshadowed by Chinese leader Xi Jinping and Austrian elections was continued "dollar" deterioration in FX. Further down the line than that, though in many respects related to it, was the UK government announcing the disappearance of half a trillion pounds.
The news didn't make much imprint in America, but it was all over Europe. Given what has gone on in Britain of late, this benchmark data revision to the UK capital account is being tossed into the politics of Brexit.
The numbers appear to be shocking. Last week, the government believed its net international investment position was a robust surplus of £469 billion. This week, reflecting revisions to that nation's balance of payment streams, the net position is actually a £22 billion deficit. The British media is predictably apoplectic, even if they don't really know why:
Global banks and international bond strategists have been left stunned by revised ONS figures showing that Britain is £490bn poorer than had been ¬assumed and no longer has any reserve of net foreign assets, depriving the country of its safety margin as Brexit talks reach a crucial juncture.
Half a trillion pounds is, as is being repeatedly emphasized in these commentaries, about 25% of UK GDP. It's a Brexit nightmare!
Well, no, not necessarily. In fact, it has less to do with Brexit than it does eurodollars. The real issue that is obscured by the political focus is visibility. In other words, in a credit-based global currency regime, there is simply no way to tell with any degree of accuracy what any country's net position might be at any given moment. The whole idea of a "capital account" is anachronistic in a credit-based system.
Let's not forget that the pound did crash in 2016, which at the time was chalked up to speculation and the usual benign suspects. It was far too reminiscent, however, of China's severe "devaluation" in 2015, meaning that if "dollar outflows" were the cause of the latter there were surely some in the former.
Credit-based currency abhors unrewarded risk. Whether related to Brexit ultimately, there was at that time a very dramatic shift in risk of holding UK assets. The downturn in the pound, however, predated the exit vote. It was all part of the "rising dollar" situation that manifested globally in a "dollar" shortage.
That ultimately mattered a whole lot more for China than Britain as a direct economic consequence because Chinese money is built on eurodollars where UK money is not. Still, there are consequences even for Britain.
The larger point relates to the role of money in society, even international society. Money is supposed to perform three basic functions: medium of exchange, store of value, and unit of account. The eurodollar is almost entirely just the first, undertaking very little of the second. In terms of the third, well, it doesn't do that at all, and that is a problem.
We have no real idea what's out there, as demonstrated just recently with the "discovery" (in the official sense, anyway) of trillions in FX off in the global footnotes. It brings up the ideal behind the Fed's discontinuing M3 (in 2006). The US central bank ostensibly deputized on behalf of the US dollar chose ignorance on this matter when just a year later, they were proven very wrong for that choice (not that they realize it even now). They should have instead doubled and tripled all efforts to investigate what was in M3 (repo and eurodollars) in that it would have led them, as it did me, into all the rest of the global financial plumbing.
Without an accurate unit of account, or any unit of account, global currencies float not just in price but in terms of quantities as well as functions. It's like trying to fly an airplane with just an altimeter and one engine indicator light. From just those, you are expected to guess compass direction, terrain dangers, and then still land on time without crashing. That's ultimately what 2008 was, the lack of monetary account leaving not just central banks, but system participants themselves blind to how and where the credit-based eurodollar had spread all over the globe.
The "dollar shortage" isn't really the problem, either, but a symptom of this issue. If you don't know what's going on, really going on, and by how much, that's risk. Prior to 2007, everyone thought they knew enough, and further believed that what they didn't know Alan Greenspan did (and could do something about it). What changed in 2008, really driven home in 2011, was that global authorities didn't know a thing and therefore what could they really do when something went wrong? As we've seen, and as credit-based money dealers have learned, nothing.
Before 2007, the shadows were a net positive (from the system's perspective) because global banks could experiment with all the eurodollar things away from official and non-official scrutiny. After 2007, the shadows are pure risk because, like Frankenstein's monster, sometimes you really don't fully appreciate the dangers of what you create until it gets loose. For Dr. Frankenstein, it was an absence of complete moral scrutiny; for the eurodollar, it was the absence of full account.
Ten years after this inflection, there is yet any determined effort to change that. And so a great many surprises, revisions, and misconceptions still await us. In short, risk.