Speaker 1: Hello, and welcome to another episode of the All Thoughts Podcast.
Speaker 1: I'm Tracy Alloway and I'm Joe. Wasn't they Joe, You're
Speaker 1: in Vegas, right, I am. I decided to take a
Speaker 1: little break from life and be in the desert for
Speaker 1: a couple of days in the place, so it's pretty
Speaker 1: nice out here. Commun If I sound a little weird,
Speaker 1: it's because I'm not in the studio with you. Do
Speaker 1: you know this is kind of weird? But whenever I
Speaker 1: think of poker nowadays and poker chips, I always think
Speaker 1: this is probably just me, but I always think of
Speaker 1: Sultan posars analogy of how reserves are kind of like
Speaker 1: poker chips. Do you remember that we have lots of
Speaker 1: different kinds of money is in the existing system, and
Speaker 1: they might even have the same name, like dollars, dollars, dollars,
Speaker 1: but a lot of them are sort of like all
Speaker 1: pegged to each other one to one cash money your
Speaker 1: bank account, bank account, money held at the federal reserve.
Speaker 1: Not that the similar from dollar poker chips in the casino, right,
Speaker 1: But this is something that's been coming up in various
Speaker 1: ways on recent episodes of Odd Lots. This idea that
Speaker 1: you do have different types of money, and at any
Speaker 1: one point of time there could be changes in how
Speaker 1: the world thinks of that money or how it uses it.
Speaker 1: And you know, for years and years we've had the
Speaker 1: euro dollar system, basically the synthetic dollars that are sort
Speaker 1: of slashing around in the global financial system. We've had
Speaker 1: reserves courtesy of the central banks and quantitative easing and
Speaker 1: things like that. And now I hesitate to use the
Speaker 1: term inflection point, but once again it feels like a
Speaker 1: central banks begin to tighten as we see this big
Speaker 1: question mark over the role of the dollar. Given the
Speaker 1: sanctions against Russia, it feels like this question of what
Speaker 1: is money, what could a new monetary system actually look like?
Speaker 1: Is coming at into the four Yeah, exactly right. And
Speaker 1: then the other element that's extremely big right now is
Speaker 1: and that the Russian sanctions were part of this. But
Speaker 1: it's clear that, like FX, reserves aren't enough security, especially
Speaker 1: in a world of commodity disruption, supply chain breakdowns, things
Speaker 1: like that. It's great to have money, it's great to
Speaker 1: have foreign currencies, particularly if you're a vulnerable emerging market
Speaker 1: and so forth. But he is Russia is discovered, you
Speaker 1: could lose access to your fex reserves. But more importantly
Speaker 1: and Afghanistan, that's right, but more importantly like even if
Speaker 1: you having for reserves, you also need food. You also
Speaker 1: need wheat, you also need natural gas. If you're in Canada,
Speaker 1: maybe you need a maple stockpile. In the US, of course,
Speaker 1: we just saw the announced release of some of the
Speaker 1: spr oil. These are also very important. So we're also
Speaker 1: in a regime in which physical things really matter again
Speaker 1: big time, right, And there's not necessarily a guarantee that
Speaker 1: you know, the financialized oddities are going to be I
Speaker 1: guess redeemable one for one against the physical commodities. It
Speaker 1: feels like that's what we're learning right now. Well, whenever
Speaker 1: we're talking about big money ideas, there is of course
Speaker 1: one person who we turned to and I already mentioned
Speaker 1: his name, but we are going to be speaking once
Speaker 1: again to re Sultan Posar. He's a strategistic credit Swiss
Speaker 1: multi time odd lots guest at this point, and he's
Speaker 1: been writing about these themes, including an earlier note a
Speaker 1: few weeks ago talking about the threat to the dollar's dominance,
Speaker 1: and he's back to go into further detail about how
Speaker 1: he sees a new monetary system actually evolving. I feel
Speaker 1: like after we did that last episode with him a
Speaker 1: few weeks ago, bam, everyone wanted to like, Okay, the
Speaker 1: dollar system is in trouble, yeah, but what's next? And
Speaker 1: then he published what's next? Talk to us next? But
Speaker 1: we're having a faster because there's so much demand for
Speaker 1: like the next chapter of this story. It's the natural
Speaker 1: cycles Alton right something. And then he comes on All
Speaker 1: Thoughts to talk about it. So Re Sulton, thank you
Speaker 1: so much for for coming back on the show. Very
Speaker 1: nice to be back. Instead of looking forwards, why don't
Speaker 1: we begin by looking backwards, and why don't you give
Speaker 1: us your overview of what the existing monetary system actually
Speaker 1: looks like, because I think that's going to help us
Speaker 1: frame your vision of the future. Yes, so so before
Speaker 1: we before we look at the existing system, let's just
Speaker 1: you know, go all the way back to the Second
Speaker 1: World War and you know what, you know the system
Speaker 1: that grew out of that, and that was the original
Speaker 1: Breton Woods three Breton Woods system. You know, this was
Speaker 1: the unipol or world where the US basically shaped the
Speaker 1: course of things to come. You know, the euro dollar
Speaker 1: was not a dominant currency back then immediately after the
Speaker 1: end of the Second World War, but it became the
Speaker 1: dominant reserve currency and a dominant phenomenon over the forty
Speaker 1: forty fifty UH years. And so you know, Breton Woods
Speaker 1: was about gold. Everything was linked to gold. And then
Speaker 1: Invent one, we took the dollar of gold and then
Speaker 1: we basically said that we will guarantee price stability, and
Speaker 1: that's what became the FEDS mantra and everything in in
Speaker 1: the fiscal and monetary domains was about making sure that
Speaker 1: that price stability is there as an anchor to a
Speaker 1: currency that was only a paper form of money. UH.
Speaker 1: And then the system evolved further within the stable prices
Speaker 1: nominal world that we had. Once we removed the peg
Speaker 1: to gold, we had a crisis in seven or fixed
Speaker 1: exchange rates. Southeast Asia then started to accumulate reserves. As
Speaker 1: a lesson from that. In two thousand, three years later
Speaker 1: China UH joined the w t OH. They started to
Speaker 1: export and manufacture everything for the rest of the world.
Speaker 1: They accumulated a huge amount of f express serves. All
Speaker 1: of these reserves basically were recycled into U S treasuries.
Speaker 1: This is you know Greenspan's conundrum, you know, his hiking rates,
Speaker 1: but the back end of the curve doesn't move. Ben
Speaker 1: Bernankey called it the global savings clot Before Ben Bernankey,
Speaker 1: David Folkers Landau at Deutsche Bank, and Mike Dooley they
Speaker 1: call this breton Woods too. So basically, the shift from
Speaker 1: Breton Woods the breton Woods two is the shift from
Speaker 1: a gold backed dollar to a a dollar governed by
Speaker 1: the idea that the guarantee price stability. And because the
Speaker 1: guarantee price stability, it's okay to accumulate your dollar reserves
Speaker 1: in treasury securities. And you know that system was fine.
Speaker 1: But again, you know, you have Minsky moments and Paul McCulley,
Speaker 1: and you know, stability gets instability and shadow banking. So
Speaker 1: all that system blew up in two thousand and eight,
Speaker 1: and then accumulation of U S treasury securities stopped in
Speaker 1: certain parts of the world, and then the big central
Speaker 1: banks like the SET and the ECB started to buy
Speaker 1: the depth of their own governments, and that, you know,
Speaker 1: led to income inequality and soaring stock prices and some
Speaker 1: of the things that we are kind of dealing with
Speaker 1: at the present. I mean, you know, the last time
Speaker 1: I was on the show, you know, we talked about
Speaker 1: this piece that I wrote about how we need a
Speaker 1: new Vulcar moment and a little bit of volatility and
Speaker 1: risk assets and wealth destructions you can bring people back
Speaker 1: into the labor force and all that stuff. And so
Speaker 1: then then instead of a Vulcar moment, we got a
Speaker 1: Puchin moment, and we basically have war. And out of
Speaker 1: this war something will will also emerge. Um And and
Speaker 1: you know, out of this I think this Breton Woods
Speaker 1: three framework that I um that I started to kind
Speaker 1: of develop and and run with is a is a
Speaker 1: world where we are again going to go back to
Speaker 1: commodity backed money, where gold once again is going to
Speaker 1: play a big role, and not not just gold, but
Speaker 1: I think all forms of commodities, because you know, this
Speaker 1: crisis is about commodities. This is about you know, the
Speaker 1: largest commodity exporter. This is about metals and rains and
Speaker 1: and energy, and so in a way, you're back to
Speaker 1: where you started from after the Second World War, but
Speaker 1: it's going to be a little bit more different and
Speaker 1: a little bit a little bit more complex. Is not
Speaker 1: just gold, but it's commodity, is more broadly, and it's
Speaker 1: not just one currency that's dominance, but there is going
Speaker 1: to be you know, as a reflection of a multiple
Speaker 1: or world, a multitude of currentcies. You know, rubles if
Speaker 1: you want to get Russian oil, um r and B.
Speaker 1: If you want to get stuff out of China, you
Speaker 1: have the dollar, and you know if you trade the
Speaker 1: US and and so it's a fragmented system where commodities
Speaker 1: play much big a role and their price stability is
Speaker 1: a big issue in certain parts of the world. So
Speaker 1: so this is a very complex mosaic that they need
Speaker 1: to navigate here. And you know, um, that's what breton
Speaker 1: Wood is about. That that was fantastic. I wanna you know,
Speaker 1: before we even dive further into what this Breton would
Speaker 1: three looks like. I was reading your latest note and
Speaker 1: it's you cite some ideas from your sometimes co author
Speaker 1: and one time cocus on this podcast of Kerry Maryland,
Speaker 1: which talks about is actually the four prices of money.
Speaker 1: And I don't think many people really think about that.
Speaker 1: I think, okay, maybe the interest rate or the risk
Speaker 1: free rate at a given country is sort of a
Speaker 1: price of money, so to speak. The adjust that but
Speaker 1: if you point out like money is priced in many
Speaker 1: different ways, can you talk a little bit about that?
Speaker 1: Why is that an important idea to understand that any
Speaker 1: given currency has so many different inherent prices? Yes? Yes, Well,
Speaker 1: actually I think the next guest you should have uh
Speaker 1: for me is Perry, because from what I understand, he
Speaker 1: doesn't agree with me. He thinks he doesn't. Yes, so
Speaker 1: that's interesting the dollar rates agreement. And obviously he's going
Speaker 1: to have his beautiful new book, Money and Empire, which
Speaker 1: is well Charlie Kindleberger and the birth of the Dollar system,
Speaker 1: and you know, that's that's about, you know, why the
Speaker 1: dollar is the dominant currents and how it became the
Speaker 1: Dominican And from what I understand, having caught up with
Speaker 1: him in a couple of months, he does not agree
Speaker 1: with Breton Street. So it will be a one of
Speaker 1: the full kind of counter counter pieces. I pretty much
Speaker 1: owe the structure of my understanding of the world to
Speaker 1: to Paris writings and Paris teaching, So so I think
Speaker 1: he has done a tremendous service, I think, to to
Speaker 1: anyone who's trying to understand monitory frameworks and money markets
Speaker 1: and whatnot. So with that So the four prices of Perry.
Speaker 1: So there's four prices which are par interest for an
Speaker 1: ext change and the price level. So what what do
Speaker 1: I What does he mean by this? Par basically means
Speaker 1: that currency and a bank deposit and a bank deposited
Speaker 1: jpmore again and a bank deposited city bank always traight
Speaker 1: at one. Okay, So money fund shares and banking all
Speaker 1: that stuff, right, poor broke in two thousand and eight, right,
Speaker 1: the money fund money funds broke the box. You know,
Speaker 1: bank deposits were not certain, so you need to increase
Speaker 1: the positive insurance all that stuff. Interest is about the
Speaker 1: time value of money, money today versus money tomorrow. You
Speaker 1: know what it costs for me to part with my
Speaker 1: liquidity if I lend it to you for three months
Speaker 1: to go play in a desert in Vegas. I'm good, yes, yes, yes.
Speaker 1: And then so that's the time value. That's the basic idea.
Speaker 1: And then there's obviously different money market. So there's the
Speaker 1: repo market, the epic spot market on secure money, goold
Speaker 1: you know, these all have like you know, the crisis,
Speaker 1: and so there is spreads between oh i s curbs
Speaker 1: and these other other money markets. Interests interests. You think
Speaker 1: about two ways. You either trade it in terms of
Speaker 1: O I s you know how many times the feed
Speaker 1: is going to hike, are gonna hike cavery gonna cut rates?
Speaker 1: Or you trade the basis around O I s you
Speaker 1: know cruss currency basis blows out because it's money fund reform,
Speaker 1: or it goes out because COVID nineteen hits and everybody
Speaker 1: needs to fund credit lines that corporations are taking down.
Speaker 1: You know, this is where you think about the bond
Speaker 1: basis that blew up in early twenty when the pandemic hit.
Speaker 1: So you know this is this is about basis between
Speaker 1: various money market curves and various prices of money. Foreign
Speaker 1: exchange is uh, you know, fixed or floating exchange rates,
Speaker 1: the price of dollar versus the price of other currencies.
Speaker 1: You know, foreign exchange is what broke in for example,
Speaker 1: when when South Korea abandoned its sixx sec. And then
Speaker 1: there's the price level, which is basically the price of
Speaker 1: commodities in terms of money. And by that, you know
Speaker 1: we mean basically energy, grains, metals and all the goods
Speaker 1: that get created from the drawn materials and so so,
Speaker 1: once again the par interest foreign exchange and price level
Speaker 1: prices of money, as Perry has taught us, is the
Speaker 1: four prices. And basically this little historical review that I
Speaker 1: gave you tells you that crisis that happened, the big
Speaker 1: crisis that have happened since, which again Southeast Asia two
Speaker 1: thousand and eight and March twenty twenty, these were all
Speaker 1: crises of money. Was about a broken ffex bag. Two
Speaker 1: thousand and eight was a crisis of par and March
Speaker 1: twenty TWANTU when the bond basis blew up, that was
Speaker 1: a crisis of interest, price level type stuff. You know,
Speaker 1: the price of commodities in terms of money hasn't really
Speaker 1: been a big deal since ninete. So we were lucky
Speaker 1: and and we basically had only those types of crises
Speaker 1: where the central bank has to step in because it's
Speaker 1: a nominal exchange rate and it's a nominal bond basis,
Speaker 1: and it's a nominal thing that you know, the reserve
Speaker 1: primary fund cannot pay part back. And so it was
Speaker 1: a dollar problem and a Euro problem. And in the
Speaker 1: case of the sovereign debt crisis, and a central bank
Speaker 1: that deals with a nominal crisis in its own currency
Speaker 1: has it easy because what do you do as a
Speaker 1: central bank? You provide emergency licuity to people that have
Speaker 1: the trouble assets and can't fund, and you also buy
Speaker 1: the trouble assets, which is either some peripheral sovereign at
Speaker 1: or stuff prime mortgages or treasury securities. And in March
Speaker 1: twenty twenty, I mean with South Korea is different because
Speaker 1: it was the I m F that had to step
Speaker 1: in to provide the dollars dollars because they didn't have
Speaker 1: the spot lines. But the bottom line is these are
Speaker 1: all crises where someone has to put balanceet on the
Speaker 1: line by the trouble assets pumping the couidity and problem solved. Today.
Speaker 1: It's different because you know, the price level is where
Speaker 1: real needs nominal You are talking about the price of
Speaker 1: real goods in nominal terms, and central banks can't do
Speaker 1: a bloody thing about commodity shortages. You know, the type
Speaker 1: of environment that we are that we are going through now.
Speaker 1: And I'm sure you'll ask next, you know, so there's
Speaker 1: the four four pillars of commodity trade, and will come
Speaker 1: to that next, but that's basically the four prices. You know,
Speaker 1: you've been running a lot about funding stresses showing up
Speaker 1: as a result of the volatility that we've seen in
Speaker 1: commodities recently. Yes, so, I guess I'm wondering is there
Speaker 1: a tension there between saying that commodities as funding collateral
Speaker 1: can suddenly decline in price and cause a lot of
Speaker 1: problems for people and including commodities as part of the
Speaker 1: sort of monetary framework of the future, Like, how do
Speaker 1: you sort of think about that tension? Yes? So, so,
Speaker 1: first of all, you always like to kind of ask
Speaker 1: me the things that I'm wrong about. But yes, I
Speaker 1: know this is this is very interesting because I was
Speaker 1: very right, but I was very wrong. You know, I
Speaker 1: was right that the commodity derivative complex and the commodity
Speaker 1: trading world is going to have liclarity crisis. We are
Speaker 1: having that liclarity crisis. Where I was wrong is that
Speaker 1: none of this is going to show up in traditional
Speaker 1: measures and fundings. Best and you know, you always learned
Speaker 1: from your mistakes what I have learned. The commodity trading
Speaker 1: world completely funds itself through bank credit lines. They do
Speaker 1: not tap the fx slock market, they do not issue
Speaker 1: cp they don't do anything in the report market because
Speaker 1: they don't have the type of financial assets that the
Speaker 1: repo market would accept as collateral for funding. So you
Speaker 1: then basically had a world where you have, okay, the
Speaker 1: two extremes. You know, you have the commodity treading world
Speaker 1: on left, and then you have one and a half
Speaker 1: brillion of cash in the resverse report facility sitting there.
Speaker 1: And then you have the big banks again the old
Speaker 1: visus JP Morgan as the posted child. You have five
Speaker 1: billion dollars that JP Morgan holds at the Federal Reserve
Speaker 1: Bank of New York. Again, the funding stresses that the
Speaker 1: commodity world is having are being lessened by more and
Speaker 1: more and more lending that the big banks provide two
Speaker 1: commodity traders. But because the big banks are sitting on
Speaker 1: piles of cash, okay, they can just lend that money
Speaker 1: to the commodity treators in need. But they don't need
Speaker 1: to raise that money on the margin. And so because
Speaker 1: they don't have to raise money on the margin, they
Speaker 1: just don't have the repo market or the fex pop
Speaker 1: and you don't have to issue cps. So, you know,
Speaker 1: the traditional kind of stirre domain of spreads is very calm. However,
Speaker 1: that doesn't mean that there is no stresses in the
Speaker 1: commodity treating. And we know that there are stresses because
Speaker 1: Pbody Energy had to pay ten pc interest when they
Speaker 1: took their credit line from Golden sectually being Bloomberg wrote
Speaker 1: an article about this right and and we know that
Speaker 1: you know traffic Gurro was in the news about taking
Speaker 1: credit line from a consortium of four banks, then trying
Speaker 1: to raise activity from black Stone. Then you know, a
Speaker 1: day later, all the commodity creators were basically writing a
Speaker 1: letter to central banks that they need emergency the curity support.
Speaker 1: So the strain is there. The strain has has a
Speaker 1: multitude of sources. Here again back to this idea that
Speaker 1: everything that the commodity traders do is financed by banks.
Speaker 1: And again I think you know, we all we all
Speaker 1: live and learn and learn as we go. You know,
Speaker 1: one thing, for example, I've learned from commodity traitors is
Speaker 1: that you know, when when it comes to these credit
Speaker 1: lines that the traitors used to finance themselves, is you know,
Speaker 1: you get x amount of credit through a credit line
Speaker 1: from a bank, you draw of it to lead the
Speaker 1: ship to fill up the ship with cargo, but you
Speaker 1: don't use a hundred percent of the credit line, because
Speaker 1: while the goods are in transit, you will have to
Speaker 1: pay variation mark right, I mean the prices go up,
Speaker 1: prices go down, depending on the side of the physical
Speaker 1: side of trade you are on. You will either get
Speaker 1: paid money or you will have to pay money. And
Speaker 1: for that too, you will tap a credit line from
Speaker 1: a bank. Um. And so when you have a price shock,
Speaker 1: and when you have all this volatility, you a need
Speaker 1: more money to move the same amount of physical goods around,
Speaker 1: and you also need more credit to be able to
Speaker 1: pay margin on all this cargo as it is in
Speaker 1: as it is in transit. So this is where the
Speaker 1: liquidity strains are coming from. And you know it's a
Speaker 1: mess because you know banks are basically facing credit risks
Speaker 1: when when they are lending into the commodities world. And
Speaker 1: and not only that, but basically you have a shock
Speaker 1: in terms of the nominal amount of money you need
Speaker 1: to land, the nominal amount of balance sheets that you
Speaker 1: permit to this world. And and you know, I guess
Speaker 1: one lesson from this and again conceptually and again in
Speaker 1: extreme terms, just to concentrate the mind and two sparks
Speaker 1: and thinking the value of say five billion dollars of
Speaker 1: reserves at the FED, if you're a large bank, is
Speaker 1: worth a lot more in a world where inflation is
Speaker 1: low and stable, and commodity prices are low and stable,
Speaker 1: where the only thing you have to worry about is
Speaker 1: you know where am I going to lend my next
Speaker 1: ten take the thirty billion dollars to harvest the next
Speaker 1: crost currency basis, So five is worth a lot more
Speaker 1: in the world like that, then in a world where
Speaker 1: basically you need to lend an extra hundred billion dollars
Speaker 1: to all sorts of commodity traders to move around and
Speaker 1: to finance all commodities imagined. So that is happening now,
Speaker 1: which which is another way of saying that this lowest
Speaker 1: comfortable level of reserves that we like to think about
Speaker 1: in terms of how much q T can the FAT
Speaker 1: do and how much reserves can you take out that
Speaker 1: l C l o R again that the minimum level
Speaker 1: of reserves the banks feel comfortable of running with is
Speaker 1: going up as we speak. We don't know how much
Speaker 1: because it's unobservable, but you know, the FAT does this
Speaker 1: periodic surveys about l C l ORE. I think it's
Speaker 1: time to do a survey like that now, because these
Speaker 1: are these are issues, and I don't think that the
Speaker 1: issues and commodity world are are going to fade away
Speaker 1: anytime soon. They're probably gonna get much much worse. There
Speaker 1: is the community strange, they just don't show up as such.
Speaker 1: And by the way, the moment, some some big name
Speaker 1: can't pay and defaults as a result. And again you
Speaker 1: can use your imagination. It doesn't have to be a
Speaker 1: commodity trader. It can also be a CCP, the default
Speaker 1: fund of a CCP and if someone can't pay margin
Speaker 1: and in a futures exchange, you know, the Ellemys. The
Speaker 1: Ellemy case with Nicole is a interesting case in point.
Speaker 1: But and again the other thing that people like to
Speaker 1: rub in as well, this was not a Leman two
Speaker 1: point so after all, but give me a break, Lehman
Speaker 1: took a year to happen. You know, b MP couldn't
Speaker 1: fund the sub prime you couldn't value the subprime exposure
Speaker 1: and its county funds in August of oh seven, and
Speaker 1: by the time they got to be men, twelve months
Speaker 1: have passed. I think the writing is all over the
Speaker 1: wall that a lot of things are happening. A lot
Speaker 1: of things have happened in thirty days. This is like
Speaker 1: I think, two thousand and eight kind of compressed in time.
Speaker 1: Um and and again things can get first. So I
Speaker 1: think we need to be approaching this with an open mind.
Speaker 1: We need to be thinking about a lot of scenarios,
Speaker 1: and we should not assume that just because we haven't
Speaker 1: had any blow ups today, there won't be any. But
Speaker 1: once those blow ups come, the flavor in the markets
Speaker 1: are going to change, because then counterparty risk is going
Speaker 1: to be something to worry about, which is not something
Speaker 1: we have to worry about. Its two thousand and eight.
Speaker 1: So you know, keep an open mind, and I think
Speaker 1: I think we need to be humble. Uh you know,
Speaker 1: I'm the first thing to recognize keep an open mind
Speaker 1: about the awful things that could be coming in the
Speaker 1: next Yes, yes, and again I'm I'm I'm the first
Speaker 1: person to you know, admit you can be right but
Speaker 1: lose a lot of money because you express your views bongly.
Speaker 1: So yes, you know, for all I s and cross
Speaker 1: currentcies would not have been the right way to express
Speaker 1: any of these things, but they are happening on the
Speaker 1: last and things are not getting that Again, yours I've
Speaker 1: thought of this already to be incredibly helpful and just
Speaker 1: thinking about like, okay, a commodity price level shock, it's
Speaker 1: very different and fundamentally other types of like financial nominal shocks,
Speaker 1: it might be politically unpalatable. It might have been politically
Speaker 1: unpalatable to do TARP or maybe for the euro crisis,
Speaker 1: it might have been politically unpalatable to bail out peripheral spreads.
Speaker 1: But it could be done, and it can kind of
Speaker 1: be done at the push of a button, and it's
Speaker 1: kind of trivially simple if you build up the will
Speaker 1: and the fundamentally, commodity shocks are just not like that.
Speaker 1: They're not in a category where there's a button you
Speaker 1: can press and solve it. And so what do you
Speaker 1: talk about that further, because that's sort of the direction
Speaker 1: of this Britton Woods three vision is the challenge that
Speaker 1: arises in a period of commodity volatility. And you talked
Speaker 1: a little bit about it just now, with what it
Speaker 1: means to liquidity in the system and funding various margin
Speaker 1: positions and so forth. What do you sort of like
Speaker 1: build from there about the sort of implications and the
Speaker 1: different of of a sort of a commodity driven economy. Yes,
Speaker 1: so so yeah, so maybe we should we should just
Speaker 1: start from the four prices of money and then let's
Speaker 1: do that build you know, kind of build out the
Speaker 1: the mirror image of all that in the physical world exactly.
Speaker 1: You know, the fourth prices, the price level, the price
Speaker 1: of commodities in money, and then the commodities. So what,
Speaker 1: what's what's the thing about commodity as well commodities? You know,
Speaker 1: the dirty thing about commodity is the ugly thing about
Speaker 1: commodity is that most of it is coming from the
Speaker 1: developing world, and most of it is being consumed by
Speaker 1: the developed world. Right then Russia and China, OPEC countries,
Speaker 1: you know, you know the deal, right, um. First, second,
Speaker 1: all these commodities, not only that you can't print them
Speaker 1: like money, but you need to move them around. You know,
Speaker 1: you need to ship them. Most of this is cboard.
Speaker 1: You know, you don't fight commodities to ship them, you know,
Speaker 1: wet cargo, dry cargo, much like in the world of money.
Speaker 1: You know, when we think about you know, when when
Speaker 1: we talked about you know, the token system and how
Speaker 1: reserves move around in the money markets. You always need
Speaker 1: balance sheets for some bank to borrow here and land
Speaker 1: there and harvest some funding spread. You know, funding report,
Speaker 1: landingfex wops make a spread. In the world of physical commodities,
Speaker 1: you know that balance sheet is basically a ship to
Speaker 1: load cargo in port A, you bring it to port B.
Speaker 1: You know, the cargo is not money, The cargo is
Speaker 1: a commodity. But you encumber capacity, you know, ship capacity
Speaker 1: to move stuff around. So so there is that. And
Speaker 1: then of course you know there's the par value of
Speaker 1: money equivalent in the physical world, which is protection. Protection,
Speaker 1: because you know, as as I've learned from Paul McCulley,
Speaker 1: you know, money is either a purely public or a
Speaker 1: public private partnership, which in English means banking doesn't work
Speaker 1: unless there is a cential bank, right because nobody can
Speaker 1: take their money out of a bank. All at the
Speaker 1: same time, you need someone who's going to do the
Speaker 1: protection if that happens. Similarly, when you move all these
Speaker 1: all these foreign cargo from the developing world to the
Speaker 1: developed world on ships, which are like balance sheets and
Speaker 1: are like kind of banks in the in the bank
Speaker 1: balance sheets in the real world, equivalence of phenomenal world
Speaker 1: of money protection in the case of commodities is about
Speaker 1: making sure that sea lanes are open, traits are open.
Speaker 1: You know, there's no pirates, you know, no one's blocking
Speaker 1: your the passage of your ships and that type of stuff.
Speaker 1: And that's also something that the state needs to be
Speaker 1: involved in because you know, the high seas have to
Speaker 1: be policsed. I mean, it's it's basic stuff. You know
Speaker 1: what the Navy is to shipping lanes. You know, that's
Speaker 1: exactly the same as the FED is to the promise
Speaker 1: of a par value. But back and you know Breton
Speaker 1: would stu as a concept was born when when China
Speaker 1: started to accumulate the fex reserves, but really it existed
Speaker 1: much earlier, ever since you know the seven to three
Speaker 1: oil price shock, where you know, you ship oil, you
Speaker 1: get dollars and then you be invested those dollars into treasuries.
Speaker 1: You know, China did the same, but they did goods
Speaker 1: and so that. But that's basically Breton would do. That's
Speaker 1: euro dollars, that's petrol dollars, that's that's all of that.
Speaker 1: And you know, we had a unipolar world where everything
Speaker 1: flows to the US and everything was paid for in
Speaker 1: dollars and all those dollars were recycled back into treasuries,
Speaker 1: and so now there's a break in history. And now
Speaker 1: we are learning that all the commodities, I mean not
Speaker 1: all of them, but a lot of them in the
Speaker 1: case of Russia, come from you know, Russia is the
Speaker 1: single largest commodity exporters experts in the world. Russia and Ukraine,
Speaker 1: you know, beat and all that that comes from that
Speaker 1: is it is a very important look when it comes
Speaker 1: to the supply of physical commodities and things are getting
Speaker 1: gumed up. Commodity doesn't come out of that region as easily.
Speaker 1: If it comes out of that region easily, you know,
Speaker 1: now they don't accept dollars as a form of payment.
Speaker 1: They want googles as a form of payment. If Europe
Speaker 1: doesn't take the raw material you know, crude oil and
Speaker 1: whatnot that comes out of Russia, Russia will have to
Speaker 1: reroute the shipment of those to the East China, which
Speaker 1: is going to buy cheap Russian stuff. But if you
Speaker 1: do that, then you basically have to revamp shipping lanes.
Speaker 1: You basically end up, as I talked about this in
Speaker 1: my piece yesterday, with a severe shortage of vessels capable
Speaker 1: of moving oil cargo on long distances. You know, it's
Speaker 1: a there's a big difference between shuttling Baltic crew from
Speaker 1: Premors to Hamburg then it is to ship it from
Speaker 1: the same port to the somewhere in Shanghai. Okay. So
Speaker 1: so you end up with shipping capacity issues. If China
Speaker 1: is now buying cheap Russian oil, then they're going to
Speaker 1: buy less Middle Eastern oil and then you know, all
Speaker 1: the Middle Eastern oil do now have to go to
Speaker 1: Europe because you know, Europe finds it acceptable to buy
Speaker 1: it from the Middle East. But then all of that
Speaker 1: goes through the Sues Canal. You know, do you have
Speaker 1: the right ship, you know to transport that oil. If
Speaker 1: it's a VLCC Tannker, then that cannot pass through the canal.
Speaker 1: So you know, it's going to take more time to
Speaker 1: ship stuff around. It's going to take more types of
Speaker 1: specific types of ships. There will the ship shortages as
Speaker 1: a direct analog to balance sheet shortages and GESP shortages
Speaker 1: in the financial world. You will have issues of Suez
Speaker 1: Egypt wheat oil. Egypt was a huge importer of wheat
Speaker 1: from Ukraine, for example, and as any country that doesn't
Speaker 1: have a lot of wheat stockpiles are going to have
Speaker 1: to pay up for for wheat on the world markets.
Speaker 1: How do you extract the pand of flesh from somewhere
Speaker 1: else so that you can pay for your wheat. If
Speaker 1: there's a food shortage, you can hike the transit fees
Speaker 1: through the Suez Canal. When just think about the enormity
Speaker 1: and the whole plumbing that underne the physical movement and
Speaker 1: trading of commodities is extremely complex, and in two thousand
Speaker 1: and eight, nobody really understood the plumbing because you didn't
Speaker 1: have to, because it worked fine until it didn't. Okay,
Speaker 1: And I think we are again thirty days into this war,
Speaker 1: and we are thirty days into figuring out how basically
Speaker 1: all these things that we used to do very efficiently
Speaker 1: are going to be in the future. And how the
Speaker 1: rerouting of these ships and you know, boycotting commodities from
Speaker 1: here and giving it to their how that's all going
Speaker 1: to play with with the level of prices. But but basically,
Speaker 1: you know, Bretton Woods Tree is about that, and not
Speaker 1: only about that, but also redrawing the terms in which
Speaker 1: we accept payments. Russia is now selling Googles, the Saudias
Speaker 1: are going to sell consider selling oil to China and
Speaker 1: and invoicing it in in R and B. The big
Speaker 1: point about that is that when we have the petrol
Speaker 1: dollar and the euro dollar is the dominant form of
Speaker 1: international money. You guys know, probably everybody from who listens knows,
Speaker 1: banks make loans and create deposits, right, That's how things
Speaker 1: get done. When Glencore brings commodities from Port A to
Speaker 1: Port B, you know, they go to JP Morgan to
Speaker 1: borrow money to leave the ship then and not or
Speaker 1: pile of money to fill up the ship, then another
Speaker 1: pile of money to pay margin as that cargo is
Speaker 1: in transit and you need to post margin on on futures.
Speaker 1: So when everything is priced in dollars, you know, you
Speaker 1: borrow dollars to move stuff around. The dollar deposits gets created,
Speaker 1: glen Cork gives it to the Saudiast, Saudis give it
Speaker 1: to Sama, and Sama shows up at a treasury auction.
Speaker 1: You have Euro dollars that are created through this whole
Speaker 1: process that will then get recycled into treasury. The US
Speaker 1: didn't really have to think about demand for treasuries for
Speaker 1: the past, I don't know, ever since nineteen seventy three
Speaker 1: because this was the game we played. So now, if
Speaker 1: all of a sudden somebody starts to price things in Google,
Speaker 1: somebody starts to price things in in R and B,
Speaker 1: the creation of euro dollars on the margin is going
Speaker 1: to change. I'm not saying it's going to go down,
Speaker 1: but the pace of it is definitely going to change.
Speaker 1: And again, the US Treasury needs to think about this
Speaker 1: because if you have less creative in the burial dollars,
Speaker 1: you will have to change the way you found your issuance.
Speaker 1: If the petrol dollar recycler is not going to show
Speaker 1: up at auctions, someone will have to the feb otherwise
Speaker 1: you have a failed auction. So I think these are
Speaker 1: all things that you know. This is Breton would feed
Speaker 1: basically right, and so this is not immediate, it's inevitable,
Speaker 1: but it started. You just touched on demand for treasuries there,
Speaker 1: and you touched on quantitative tightening earlier, and the idea
Speaker 1: that given everything that's happening in the world right now,
Speaker 1: you know, shipping is more expensive, commodities are more expensive,
Speaker 1: there's lower risk appetite, you need to conserve balance sheet
Speaker 1: things like that, that there's going to be higher demand
Speaker 1: for bank reserves from the banks. Should the FED be
Speaker 1: doing quantitative tightening at this moment in time? It seems
Speaker 1: it seems like the timing isn't exactly optimal. Yes, well, sure, sure,
Speaker 1: because there's a lot of X has liquidity in the system.
Speaker 1: And and just to be clear, the knee jerk response is, yes,
Speaker 1: we need higher rates, we need to hike uh and
Speaker 1: we need to shrink the balanty, which makes sense because
Speaker 1: you know, we blew up the balance sheet for the
Speaker 1: past decade and a half because inflation was persistently too
Speaker 1: low and we try to reflate, right, so now the
Speaker 1: inflation is hearing, it's deeflate. Fine. And also, you know,
Speaker 1: before the war, I mean I wrote a lot about
Speaker 1: so how is this QUT gonna play out? There's gonna
Speaker 1: be beautiful QUT and I'll be qut active cut or
Speaker 1: sus passive duty. And now you just need to do
Speaker 1: a warrant peace edition. Um. You know. Bretton Woods three
Speaker 1: messages this up for two reasons. Number one, as we
Speaker 1: mentioned before, the lowest level of the lowest comfortable level
Speaker 1: of reserve is going up, so banks need more reserves
Speaker 1: all else equal, which means that when you think about
Speaker 1: the marginal buyer of treasuries as qute progresses, I would
Speaker 1: say that in this quote unquote new world order that
Speaker 1: we are in, banks will have less appetite to buy
Speaker 1: treasuries for their portfolios trade reserves for treasuries than before
Speaker 1: the war, because credit needs from the commodity treating world,
Speaker 1: you know, and from everybody else ultimately, right, because everybody
Speaker 1: will have to pay more for for goods and trade
Speaker 1: tenents and and and all that is going up. So
Speaker 1: if they will buy less than you know, all this
Speaker 1: money that's in the reverse report facility is going to
Speaker 1: be more important, much earlier on in the QT process
Speaker 1: than before. And so there we have one and a
Speaker 1: half Chilli and others orself and so fine. But then again,
Speaker 1: the other thing about Breton Woods three is that, you know,
Speaker 1: we're just talking about the creation of less euro dollars
Speaker 1: on the margin, and who creates money in the system,
Speaker 1: the central bank and private banks, and the standoff between
Speaker 1: you know, the feed shrinks the balance, she takes money
Speaker 1: out of the system. That always needs to be understood
Speaker 1: in the context of how much lending and money creation
Speaker 1: is in the system, because that can take out money.
Speaker 1: But if there's more private deposits and more private money
Speaker 1: getting created through the banking system, you know, the two
Speaker 1: things can offset each other. But now we are saying,
Speaker 1: is the fet is gonna take pipitity out. The creation
Speaker 1: of euro dollars is going to slow on the margin,
Speaker 1: So the OPEC countries and whoever used to recycle eurodators
Speaker 1: and petrol daughters is not gonna do as much of that,
Speaker 1: And so that's an issue. Then another issue, this whole
Speaker 1: whole idea of Okay, well, you know you just froze
Speaker 1: half a trillion dollars of G seven inside money. So
Speaker 1: maybe it's time to diversify away from our existing holdings
Speaker 1: of US treasuries. So maybe some reserve management not only
Speaker 1: not going to buy and recycle less eurodators, but they
Speaker 1: are going to trim their exposure to US treasuries. And
Speaker 1: so you know, I I say all this because you know,
Speaker 1: if the banks don't buy and the FED doesn't buy,
Speaker 1: and there is less petrol dollar recycling, and there is
Speaker 1: diversification from existing holdings of FEX reserves, it inevitably means
Speaker 1: that those balances in the overnight reverse report facility will
Speaker 1: be soaked up pretty quickly through poor quality demands, but
Speaker 1: demand nonetheless, the guys that fund in the report market
Speaker 1: are basically dealers that are getting backed up with treasury
Speaker 1: inventory and the RV funds which are in it for
Speaker 1: a basis. I mean, it's all a level position along
Speaker 1: the bond short the future funding repo. That type of
Speaker 1: stuff not a pretty form of demand, but a form
Speaker 1: of demand nonetheless. But again, you know, you go from steady, sleepy,
Speaker 1: reliable buyers in the Middle East and China two fast
Speaker 1: money stuff that is levered. But it's going to be
Speaker 1: fine because we have the standing report facility. So even
Speaker 1: if you end up with the report deficit, you know,
Speaker 1: thank god the spending people to say that things there
Speaker 1: so you can just kind of seed is that. You know.
Speaker 1: Another legacy of reaten with speed will be that all
Speaker 1: this is going to be less international and it's gonna
Speaker 1: be more domestic. It's gonna be some domestic people funded
Speaker 1: antity that's going to fund this, not the rest of
Speaker 1: the world. Let's talk about the other currencies in the
Speaker 1: roles that they'll play. And so, as you mentioned, okay,
Speaker 1: Russia is going to be selling its commodity exports and
Speaker 1: oil and gas, or maybe uh Saudi Arabia starts selling
Speaker 1: invoicing in R and B for sales to China, and
Speaker 1: so then the question naturally emerges like, well, how significant
Speaker 1: is this? There's a lot of arguments against the role
Speaker 1: of these currencies, playing big rule of law questions and
Speaker 1: market depths and the degree to which the Chinese will
Speaker 1: ever open up it's capital account. So where do you
Speaker 1: see these going? Like, because this is what these headlines
Speaker 1: get everyone excited about. Cost oil might be sold in
Speaker 1: R and B, what does it mean? But there are
Speaker 1: some difficulties for these currencies to overcome to have any
Speaker 1: more significant. Sure, people are not born who they become, right,
Speaker 1: So you're born as a baby and then you know,
Speaker 1: you learn to walk and talk, and then we all
Speaker 1: end up doing something with alliance. Right, So again back
Speaker 1: to back to where we started from. After the Second
Speaker 1: World War, the U. S. Dollar was not what it
Speaker 1: is today. It became that no currency is born a
Speaker 1: reserve currency, it becomes it. Sterling was what it was,
Speaker 1: and then the dollar came, and then dollars became euro dollars.
Speaker 1: The R and B is what it is, and then
Speaker 1: it will become something else. All these were It's kind
Speaker 1: of funny and it makes more sense in the present.
Speaker 1: But you know, we allll obsessed about, you know, the
Speaker 1: internationalization of the R and B and a correspondent banking
Speaker 1: stuff and all the Hong Kong on shore on shore
Speaker 1: and the offshore and the volumes are not that big.
Speaker 1: All that stuff was the baby is born, the baby
Speaker 1: is learning to walk, the baby is walking. That's the plumbing,
Speaker 1: that's the basic stuff. And then there's a catalyst like
Speaker 1: the war that we're looking at now and the whole
Speaker 1: conversation we are having now, and then things will change.
Speaker 1: But then you basically have an infrastructure to build up
Speaker 1: and then things can go very fast. I also get
Speaker 1: it that China has a closed capital account and people
Speaker 1: like to have open capital accounts, But for Christ's sakes,
Speaker 1: what's the difference between an open capital account that exposed
Speaker 1: can be shots the case with the CBR, versus an
Speaker 1: accently closed capital account that you know that over time
Speaker 1: is going to open up. People also tend to forget
Speaker 1: when China became a part of the World Trading Organization
Speaker 1: and you know, it started to accumulate surpluses. I mean
Speaker 1: I was the surpluses were first accumulative bank opposits, and
Speaker 1: then the Chinese started to buy bills, and then they
Speaker 1: started to buy two year, five year tenure trunches. Then
Speaker 1: they board mortgages, then they funded C I C, and
Speaker 1: then they started to do private equities. Right big stick
Speaker 1: in in black Stone, I think right in two thousand
Speaker 1: and eight they bought. The point is surpluses accumulate, and
Speaker 1: it's more and more accumulates, you change the way you
Speaker 1: do things. If the dollar became the dollar to lend lease,
Speaker 1: you know, we lend you money and then you lease
Speaker 1: stuff from us. You know, maybe the Chinese are now
Speaker 1: going to lend you money, and then maybe you buy
Speaker 1: our our corn and wheat reserves or something like that.
Speaker 1: It doesn't matter. The more trade the rest of the
Speaker 1: world is invoicing the Chinese R and B, the rest
Speaker 1: of the world is going to accumulate R and B surpluses.
Speaker 1: Those surpluses initially will inevitably accumulate on Chinese banks balance sheets,
Speaker 1: and then the Chinese banks get to a point that
Speaker 1: we just don't want to have all these surplus and
Speaker 1: our balance sheet because it's using too much capacities. State,
Speaker 1: please take it off our books. The state will start
Speaker 1: issuing debt to take all that liquity surplus off the
Speaker 1: balance sheet to the Chinese banks. And then as the
Speaker 1: rest of the world accumulates more, you know, and it's
Speaker 1: going to start with central bank bills again held by foreigners,
Speaker 1: and then you know, the foreigners they accumulate more, they
Speaker 1: would have more and more long term and so that's
Speaker 1: going to be the birth and the development of the
Speaker 1: of the debt securities market in China. I mean, all
Speaker 1: this stuff is a step by step process. Again, just
Speaker 1: as a child is born and learns to walk and
Speaker 1: talk and does other things in in life. So I
Speaker 1: think this is going to be a path. This is
Speaker 1: I think inevitable. I think it started already. The infrastructure
Speaker 1: for it has already been built, and I think this
Speaker 1: is going to pick up from here going forward. On
Speaker 1: the topic of alternate currencies, this is something that came
Speaker 1: up in one of your previous research items where you
Speaker 1: were talking about the possibility of people holding reserves in
Speaker 1: something other than dollars, and you mentioned bitcoin, but it
Speaker 1: had this big caveat around it, which was you put
Speaker 1: in parentheses if bitcoins still exists by then, what do
Speaker 1: you see as bitcoin's um utility here? If any? Joe
Speaker 1: sparked the kind of bilateral conversation on that too via email,
Speaker 1: which which was which was interesting. And by the way, Joe,
Speaker 1: my capslock got stuck. So whatever you said in your
Speaker 1: article is capitalized. It was not intentional. I thought you
Speaker 1: were very excited. No, no, no, I don't know. I
Speaker 1: was like, oh, there is extremely excited. It is beautiful.
Speaker 1: It's a sovereign has to be involved with the question
Speaker 1: of money, and bitcoin is basically short the sovereign. You know,
Speaker 1: bitcoin to short the sovereign, which is precisely which is
Speaker 1: precisely why you can't have bitcoin in China, because you
Speaker 1: can't be short the sovereign. In China. There's no outlet
Speaker 1: for political frustrations. It's one party. Not not to be
Speaker 1: facetious or anything here, but I mean, if we are
Speaker 1: talking about commodity shortages and energy shortages, and if it
Speaker 1: takes a tremendous amount of energy to mind the marginal bitcoin,
Speaker 1: I mean that just makes no sense. You mean energy
Speaker 1: is any your energy, energy is going to be wasted
Speaker 1: on mining something that. Yeah, so the question is why
Speaker 1: would governments who are already facing commodity shortages continue to
Speaker 1: allow for the energy intensive mining of the thing the
Speaker 1: short the sovereign. Yes, I mean if you are releasing
Speaker 1: record amends from strategic patrollum reserve and like, I don't know,
Speaker 1: we need you see what I mean? So it's like
Speaker 1: if all the strategic patrolum reserves are empty, well, and
Speaker 1: then you know people are using corn to make ethanol
Speaker 1: and then people are hungry, and like you're burning ethanol
Speaker 1: to mind bitcoin or something that makes no sense. But
Speaker 1: that's one and the other thing, the whole central bank
Speaker 1: digital currency. How does that fit into this? I think
Speaker 1: Breton Woodstreet is not about that, because we are talking
Speaker 1: about rethinking reserve assets. This is fex reserves, which is
Speaker 1: a nominal pile of wealth versus commodity reserves, real versus nominal.
Speaker 1: The center bank digital currency is a liability side question
Speaker 1: for central banks, like what technology do I use to
Speaker 1: distribute my liability? This is like landlines versus cell phones,
Speaker 1: or you stream your movies, or you slept to a
Speaker 1: video store and get a v statement, stick it into
Speaker 1: a machine to watch it. That's that Breton Woods three
Speaker 1: is about how do you invoice stuff? How do you
Speaker 1: get stuff from a poort A to word B. Once
Speaker 1: you get paid, what do you choose as your optimal reserve?
Speaker 1: Is it a real asset? Is that a nominal asset
Speaker 1: that type of stuff. You know, listening to this conversation,
Speaker 1: it does not necessarily strike me as a negative environment
Speaker 1: for the US, especially vius of the other rich countries,
Speaker 1: because okay, maybe the dollar doesn't have the same status.
Speaker 1: On the other hand, unlike other rich countries, tremendous ability,
Speaker 1: at least in theory, to produce oil, tons of natural gas,
Speaker 1: tons of open space for wheat, corn, and soy metals,
Speaker 1: if we want to mind them. We have rare Earth's here. Uh,
Speaker 1: you know, some of the more advanced tech. It's sort
Speaker 1: of a political choice when we're going. It doesn't necessarily
Speaker 1: seem like in a world in which and of course
Speaker 1: our military and so that to the degree that the
Speaker 1: military is the price of shipping or the price of
Speaker 1: protection for a lot of shipping lines. Obviously, the US
Speaker 1: far and away still the strongest military in the world.
Speaker 1: It seems like even in a new regime, the US
Speaker 1: has tremendous Milton advantages and stores of wealth. So yes,
Speaker 1: when you think about let's say three regions, you know, US, Europe, Asia, China, Eurasia.
Speaker 1: Again conceptually very high level. The country that's buying stuff
Speaker 1: on sale cheaply stocking up is going to be China,
Speaker 1: right because that's where all the Russian commodities you're going
Speaker 1: to go. That's just the country that can fill some
Speaker 1: of the you know, you can freck your way out
Speaker 1: of this or throw your wheat out of this. US
Speaker 1: is fine. I think Europe is in a very delicate
Speaker 1: position because this is basically you know, between Russia and Europe,
Speaker 1: and you know, the German reliance in Russian fossil fuels
Speaker 1: and and so yes, you know, I think this is
Speaker 1: you know Bretton Woods three. I think is is also
Speaker 1: a world where the East certainly has some i don't know,
Speaker 1: quote unquote renaissance and it has it better and inflation
Speaker 1: is less of a problem there. The West has quote
Speaker 1: unquote some relative decline. It's not going to go down
Speaker 1: the tubes. But you know, this is a multipolar world,
Speaker 1: which is not meant to be you know, status quo.
Speaker 1: But you know, someone rises, someone declines, but still too dominant.
Speaker 1: Inflation is probably more of a problem in the West,
Speaker 1: and then I think Europe is very much in the middle.
Speaker 1: So now when we think about this medium term, what
Speaker 1: it means for commodities and inflation and who wins who loses.
Speaker 1: Some of the themes that come out of this is
Speaker 1: Learry think is right. For rather, it's probably more informed
Speaker 1: than all of us on this forum. I do agree
Speaker 1: that globalization as we know it is probably over. So
Speaker 1: what are some of the things that are coming out
Speaker 1: of that? And and some of this conversation resource nationalism
Speaker 1: is a part of Breton Woods three. More military spending,
Speaker 1: you know Europe for sure, in the US least sea lanes,
Speaker 1: but not is definitely coming out of this. Stockpiling of
Speaker 1: commodities definitely coming out of this. Rethinking supply chains is
Speaker 1: definitely coming out of this. Breton Woods two was about
Speaker 1: a singular supply chain, Fox com making everything and breton
Speaker 1: Woods three. If all that world orders torn up and
Speaker 1: we have to duplicate production facilities and supply chains and
Speaker 1: always that, we need to provide a lot of investment
Speaker 1: and capital into that. So you know, not to mention
Speaker 1: all the E S G and cutting, uh, you know,
Speaker 1: the investments related to that. I think the investment needs
Speaker 1: for for the world that threatened what's three reflect is
Speaker 1: going to need more commodities, It's going to need more capital.
Speaker 1: And so you know, the West I think has things
Speaker 1: to worry about because you know, we are basically talking
Speaker 1: about opping investment in the West at the expense of consumption,
Speaker 1: which is exactly a mirror image of the problem China has,
Speaker 1: which is they had too much investment and too little consumption.
Speaker 1: Like even kicking it even higher in the higher get
Speaker 1: the whole conversation. I think China needs a stronger exchange
Speaker 1: rate and the US needs to reaper exchange rate kind
Speaker 1: of more consumption, less investment there, more investment, less consumption.
Speaker 1: Here the types of investment that we are talking about,
Speaker 1: our investments that are going to be driven by the
Speaker 1: States and by corporations as they any things there exist. Sultan,
Speaker 1: I feel like we could talk about this for hours.
Speaker 1: Big so much for coming back on Fantastic. Yeah, that
Speaker 1: was really good. Thank you very much. Guys. It's always
Speaker 1: great having Sultan on the show. And one of the
Speaker 1: things that came out of that is, I mean, I
Speaker 1: really think the sort of summary of all of it
Speaker 1: is that if you're interested in interest rates and the economy,
Speaker 1: you know, say you're a short term interest rate strategist
Speaker 1: or sturred trader or whatever, you're gonna have to start
Speaker 1: paying attention to shipping and commodities and all the micro
Speaker 1: in order to do the macro. You know what, I
Speaker 1: thought that was one of the best conversations ever to think.
Speaker 1: You know, people always talk about turning points, right, Oh,
Speaker 1: it's a deflection points, the turning point post dollar. It's
Speaker 1: you know, we've been talking about for years. I thought
Speaker 1: that was one of the best conversations I've ever heard
Speaker 1: that actually put some like meat on the bone, so
Speaker 1: to speak of what that looks like. Thinking about what
Speaker 1: are the price equivalents when it comes to commodities, storage protection, uh,
Speaker 1: the equivalent of maintaining par and then what are the
Speaker 1: institutions that have to build up around that to sort
Speaker 1: of recreate a more commodity centric world economy is like
Speaker 1: extremely extremely interesting, right, and then just underscoring in what
Speaker 1: a poor position a lot of the central banks are
Speaker 1: in order to do this, because under Sultan's framework, you know,
Speaker 1: this idea of you have the sort of nominal monetary stuff,
Speaker 1: things like price levels, and par and interests or the
Speaker 1: future value of money, stuff like that. But the problem
Speaker 1: is emanating from the real which, of course central banks
Speaker 1: don't really have any control over. Right. We can hope, okay,
Speaker 1: if we slow things down a little bit, tap the brakes,
Speaker 1: maybe things are okay and we get some easing in
Speaker 1: the price of world. But everybody knows it. I mean,
Speaker 1: everybody knows that the issues that are arising right now,
Speaker 1: at least some of them, like particularly on the food
Speaker 1: and energy side, are pretty far from like something that
Speaker 1: the FED, any central bank, let alone even the FED
Speaker 1: can handle. Yeah, and all. The other point he made
Speaker 1: is that the last time the FED really had to
Speaker 1: fight inflation um, which would have been with vulcer in
Speaker 1: the sort of late seven days early nineteen eighties, that
Speaker 1: it was such a different world than and a lot
Speaker 1: of the problems were sort of emanating from a space
Speaker 1: where the central bank could have an impact, and it
Speaker 1: was doing it in a sort of maybe not totally
Speaker 1: unilateral world, but a more cohesive West certainly, and people
Speaker 1: could sort of follow on follow suit, And now that
Speaker 1: might not be as possible. And I'm just trying. I
Speaker 1: love this the analogy. So it's like what is the
Speaker 1: commodity equivalent of balance sheet space? And you talked about
Speaker 1: like space on ship shipping. It's so interesting, like try
Speaker 1: It's like, I find it to be a very useful
Speaker 1: exercise to think about these different things like interest rates
Speaker 1: and obviously curves or that's the equivalent of the old
Speaker 1: curve and obviously like a commodities futures curve. Things like that.
Speaker 1: It's a very useful thought exercise to think about how
Speaker 1: strange might emerge and how government policies might have to
Speaker 1: be different in this in this new world. And poker
Speaker 1: chips as poker chip tokens synthetic dollars still peg one
Speaker 1: to one against the dollar at this point. Excellent, All right,
Speaker 1: shall we leave it there? Let's leave it there. This
Speaker 1: has been another episode of the All Thoughts podcast. I'm
Speaker 1: Tracy Alloway. You can follow me on Twitter at Tracy
Speaker 1: Alloway and I'm Joe Why Isn't Though? You can follow
Speaker 1: me on Twitter at the Stalwart Big Thanks to our
Speaker 1: producers Magnus Hendrickson and Colin Tipton. Followed the Bloomberg head
Speaker 1: of podcast Francesca. Leave at Francesca Today and check out
Speaker 1: all of our podcasts under the handle at podcasts. Thanks
Speaker 1: for listening. Hey, there are all thoughts listeners. We are
Speaker 1: very happy to let you know that we've been nominated
Speaker 1: for a Webby Award. Yeah I'm not you know, Tracy,
Speaker 1: I'm not normally like a big awards person, but now
Speaker 1: it were nominated for one. I'm really excited. You really
Speaker 1: wanted Yeah, I kind of really want to win. Okay, Well,
Speaker 1: on that note, we would very much appreciate if you
Speaker 1: can take two minutes of your time and head over
Speaker 1: to vote dot Webby Awards dot com and vote for us.
Speaker 1: You'll find us nominated in the business podcast category. Yeah,
Speaker 1: very competitive business podcast category. Were one of five nominees,
Speaker 1: So if you so choose, if you like, if you're
Speaker 1: a fan of onlocks, if you want to help us
Speaker 1: raise our profile a little bit, please go check out
Speaker 1: the Webby nominees in book. Thanks very much,