Credit indicators flash as world runs out of dollars

"The Libor rate is one of few instruments left that still moves freely and is priced by market forces. It is effectively telling us that that the Fed is already two hikes behind the curve," said Steen Jakobsen from Saxo Bank. "This is highly significant and is our number one concern. Our allocation model is now 100pc in cash. This is a warning signal for the market and it happens extremely rarely," he said.

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Credit analysts are becoming nervous about the spread between Libor and the overnight index swap, the so-called Libor-OIS spread that is used to gauge problems in the plumbing of the credit system. It has widened to 38 basis points, near levels seen in the eurozone debt crisis and past bouts of stress.

... "Something more fundamental is at work. The cost of global capital is going up, full stop," Mr Jakobsen said. Long-term bond yields are also soaring as the markets question the logic of a $70 trillion debt edifice priced on assumptions of a deflationary liquidity trap lasting deep into the 21st Century.

... Marc Ostwald from ADM said the global dollar shortage is now palpable. "There is no depth to the market. The transmission mechanism is still broken and there is a poor level of liquidity as a result of regulations. Eventually things are going to explode," he said.

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What is clear is that conditions are tightening in the US. The Fed is already draining money through "reverse repos". Even blue-chip firms in the US are stretching payments to contractors in order to disguise weakness and beat cash flow "expectations".

Jonathan Tepper from Variant Perception said: "Some companies are delaying paying suppliers and increasing accounts payable, which flatters operating cash flow. It is a low quality ‘beat'." This creates headaches for suppliers at the bottom of the food chain.