The word contagion is easy enough to understand. Whether the spread of disease or disaster, sometimes it is difficult if not impossible to contain. In financial terms, contagion is often thought of along the lines of 2011; Greece started it and it spread throughout the rest of Southern Europe. The euro was coming apart, and what “it” was didn’t seem to matter.

The eurodollar system is not a single, monolithic whole. It features many different pieces that sometimes don’t fit together at all. There is always something wrong somewhere, even during the best of times. It is eerie in hindsight, but there was a huge outbreak of repo fails, for example, in 2001 following September 11th. It kept up for months on end, until the middle of 2002. Outside of dot-com stocks, the system didn’t crash.

Quite the contrary, while the repo market was awash in trouble the recession which had begun months before ended. Economic recovery, though tepid and shameful, emerged out of those difficulties which were at times quite severe (there were more than $1 trillion in fails the week of February 13, 2002). The dollar, in fact, would start to fall and keep on falling consistent with rapid, massive eurodollar system growth and inflation.

Contagion is where funding issues in one part of the system spillover into another; and then another. Rather than operate like a seamless global money system, the parts break down and not always one by one. Parabolic contagion, which is what September 2008 really was, can be lurking.

The effects are not always financial and economic. Two examples from this weekend remind us of this fact.


Both the parties in German Chancellor Angela Merkel’s governing coalition have suffered heavy losses in a regional election, early results show.

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