Usually we select shorter articles to highlight or illustrate a point that’s new and relevant for investors. But occasionally we select a much longer article that does a deep dive into some fundamental market phenomena critical to unlocking the future. This is one of those.

The writer, Jeff Snider, is widely regarded as one of the most astute monetary economists around. In this article, Jeff discusses the recent slow-motion collapse of Chinese equities. But in his usual style, he puts that in context by pivoting to a larger issue.

China is “short” U.S. dollars. The Chinese may have $1.4 trillion of U.S. Treasury securities in its reserve position, but they need those assets possibly to bail out their banking system or defend the yuan. Meanwhile, the Chinese banking sector, which in many ways is an extension of the state, owes $318 billion in U.S. dollar-denominated deposits of commercial paper.

From a bank’s perspective, borrowing in dollars is going short dollars because you need dollar assets to back up those liabilities if the original lenders want their money back. For the most part, the banks don’t have those assets because they converted the dollar to yuan to prop up local real estate Ponzis and local corporations.

China is now borrowing eurodollars at the official level to have dollars to back up the banks. This is all part of a global “dollar shortage” attributable to Fed tightening, both in the forms of higher rates but also a reduction in base money (M0).

A dollar shortage seems implausible in a world where the Fed printed $4.4 trillion. But while the Fed was printing, the world borrowed over $70 trillion (on top of prior loans) so the dollar shortage is real. Check out this article for the full story.

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