The eurodollar as an economic no-man’s land

Izabella Kaminska

| Apr 08 2016

http://ftalphaville.ft.com/2016/04/08/2158883/the-eurodollar-as-an-economic-no-mans-land/

 

Part of the The Billionaire Crisis series

What’s the euro really? The collective currency of sovereigns subscribed to the European monetary system? Or an international bridging platform — a no man’s land if you will — for laissez-faire market experimentation intended to prove a fundamental point about the capacity of free markets to organise the economy without the necessary subjugation of free will?
The euro-zone, we propose, is not what it seems.
And if we see it as something it’s not, it’s mainly because we’ve forgotten the history which made it the thing it is today. That though is the story of the rise and dominance of European-brokered international capital markets from the 1960s onwards, a system itself predicated on the rise of the no-man’s land neutral security:
Eurodollars. Euromoney. Eurocurrency. Eurobonds. Eurosecurities.

But also…
Offshore arrangements.
Through this particular looking glass, offshore doesn’t stand for a safe haven loophole which allows the elite to escape their social duties and obligations. It stands for something entirely different. A honey trap designed to lure capital away from outrageous spending in the consumption markets today, and over to the funding of much riskier development in territories or classes yet to be assimilated to westernised cultural norms.
It also provides a neutral territory or common ground were capital can be ranked pari passu irrespective of where it’s come from, for the good of international agreement, trade and neutrality.
Hence why the likes of James Quarmby, a wealth structuring expert at law firm Stephenson Harwood, argue the offshore system is the essential “grease on the wheels in international trade”.
John Maynard Keynes understood these dynamics perfectly. As he recounted in the Economic Consequences of the Peace in 1919 (our emphasis):

Europe was so organized socially and economically as to secure the maximum accumulation of capital. While there was some continuous improvement in the daily conditions of life of the mass of the population, Society was so framed as to throw a great part of the increased income into the control of the class least likely to consume it. The new rich of the nineteenth century were not brought up to large expenditures, and preferred the power which investment gave them to the pleasures of immediate consumption. In fact, it was precisely the inequality of the distribution of wealth which made possible those vast accumulations of fixed wealth and of capital improvements which distinguished that age from all others. Herein lay, in fact, the main justification of the Capitalist System. If the rich had spent their new wealth on their own enjoyments, the world would long ago have found such a régime intolerable. But like bees they saved and accumulated, not less to the advantage of the whole community because they themselves held narrower ends in prospect.

The joke, in other words, was always on the wealthy who through their greed for power and status were duped into funding capital investment that actually helped to distribute prosperity more widely than ever before, and also to take the risks associated with that capital investment. (Namely the risk that they might not get as much relative power back as what they put in.)
But as Keynes also noted:

The immense accumulations of fixed capital which, to the great benefit of mankind, were built up during the half century before the war, could never have come about in a Society where wealth was divided equitably. The railways of the world, which that age built as a monument to posterity, were, not less than the Pyramids of Egypt, the work of labor which was not free to consume in immediate enjoyment the full equivalent of its efforts.
Thus this remarkable system depended for its growth on a double bluff or deception. On the one hand the laboring classes accepted from ignorance or powerlessness, or were compelled, persuaded, or cajoled by custom, convention, authority, and the well-established order of Society into accepting, a situation in which they could call their own very little of the cake that they and Nature and the capitalists were co-operating to produce. And on the other hand the capitalist classes were allowed to call the best part of the cake theirs and were theoretically free to consume it, on the tacit underlying condition that they consumed very little of it in practice. The duty of “saving” became nine-tenths of virtue and the growth of the cake the object of true religion. There grew round the non-consumption of the cake all those instincts of puritanism which in other ages has withdrawn itself from the world and has neglected the arts of production as well as those of enjoyment. And so the cake increased; but to what end was not clearly contemplated. Individuals would be exhorted not so much to abstain as to defer, and to cultivate the pleasures of security and anticipation. Saving was for old age or for your children; but this was only in theory,—the virtue of the cake was that it was never to be consumed, neither by you nor by your children after you.

For Keynes, then, the hypothetical cake that represented the world’s collective prosperity was really very small in proportion to the appetite for consumption of the global citizenry. As a consequence, if this cake had been shared equally amongst everyone to begin with, then nobody would have been all that much better off.
If the cutting and consumption of the cake could be delayed to allow for the cake’s growth, through ongoing re-investment of the same cake pieces over and over, then perhaps a day could come along when there would at last be enough to go round for everyone.
There were only two pitfalls to this scenario though. One, that the growth of the cake didn’t match population growth. Second, that the cake ended up being prematurely consumed by, for example, war — setting the entire experiment backwards.
Keeping that in mind, we can see how the creation of neutral zones where the capital of the wealthy elite could be lured for the explicit purpose of being redeployed in capital accumulating investment — rather than in wanton and profligate consumption — was potentially economically justified.
In fact, had these zones not been neutral and tax efficient — i.e. free of any sovereign intervention or tax — then the capacity of the financial system to attract excessive and suspect wealth stores for redeployment in the capital system would probably have been compromised. After all, what’s worse for the international system, a drug lord or tyrant who deploys his windfalls on fortifications that help solidify his power base (if not expand it territorially in socially destabilising ways), or one who invests them in an offshore tax haven and de facto ends up funding global development, whilst taking all the risk of non-reciprocal performance directly himself?
It’s only when we understand that trade off can we understand the emergence and institutional acceptance of the eurodollar no-man’s land offshore investing system.
But it’s also then that we understand how a neutral system such as this — unregulated by any formal entity — can itself be corrupted or worse than that replicated by those with less resourceful moral codes and values. But also, we begin to understand the dire consequences if and when these entities finally wake up to the opportunities they missing and the risks they were taking by trusting in that neutral corridor to begin with.
More on how that neutral system eventually became the eurosystem and led to all the fragmentation problems we’re witnessing today, in our next post.
Related links:
Bearer securities and eurosystems – FT Alphaville
So you thought bearer securities weren’t a thing anymore? – FT Alphaville
Towards the limits of covered bond bank funding… – FT Alphaville
All about the eurodollars - FT Alphaville