Think of the monetary system like a game of Musical Chairs. USD Base Money (Reserves at the Fed + Physical Cash & Coins) are the Chairs. All other USD monetary aggregates (M2, M3, Securitized Debts/Loans, USD credit extended, etc) are the people circling the chairs.
While these are often times considered Supply, these monetary aggregates are also DEMAND. Bc when the music stops (USDs stop circulating/credit stops being extended) all these Aggregates (people) are ultimately claims on the Base Money (chairs).
The Supply can be increased by extending more credit (people) as the music plays, but this ALSO increases Demand as extending credit does NOT increase the Base Money (chairs). So as credit (people) grows the sytem becomes more & more leveraged.
When the music stops, the people (demand) scramble fo the chairs (supply). But just as in the game, there is not enough chairs for all the people, there is also not enough Base Money for all the Aggregates. As a result, the value of each chair (Base Money) rises dramatically.
If music doesn't turn back on again quickly, than Fed (or US Treasury) needs to come to rescue and start providing more chairs (Base Money) otherwise the value (price) of the Base Money (USD) spikes as all people (demand) starting fighting each other & sending the Vix higher.
It's important to understand that there are only 2 entities in whole world who can create and provide new chairs. As noted above, this is the US Fed and the US Treasury. The reason this is so important because what we have so far described above is the US Monetary system.
But there is another (parallel) system that operates outside the US Monetary System but is also denominated in USD. This is the Eurodollar System. It dwarfs the US system in size but is subject to the same Supply/Demand dynamics noted above with one very notable exception.
That notable exception is the fact (as also noted above) there is NO entity outside US Fed or US Treasury that can create Base Money when the music stops playing. The only Base Money that exists in the entire world is the Base Money found (and measured) in the US Monetary System.
Since there are no additional chairs (Base Money) in Eurodollar market, & since there is no one in Eurodollar market that can create & provide new chairs (Base Money) this means that Eudollar market is not only highly leveraged, its means that the Eurodollar market "IS" leverage.
So if music stops playing in Eurodollar market, even if still playing in US market, the people (demand) in the Eurodollar market will still start scrambling for Chairs (Base Money) in US market. This pushes up value (price) of Chairs & makes it harder for music to play in the US.
Where this REALLY becomes a problem is when the music stops playing in the Eurodollar market AND the US fed is not only NOT supplying new chairs, but are actually REMOVING chairs (Base Money) due to tighter monetary policy. This makes the leveraged system EVEN MORE LEVERAGED.
This also explains why when Fed starts tightening monetary policy by removing chairs in US, its also a problem for the Rest of the World operating in the Eurodollar market. And it explains why the Fed determines monetary policy, either directly or indirectly, for the whole world.
And...it explains why...when the whole world starts scrambling for the Chairs (Base Money)...they will have to come to the US to get it. It's the Periphery vs the Core. When allocating your assets for the storms ahead...choose wisely. ✌️
