WEBVTT - Why the Federal Reserve Has No Control Over the Markets 0:00:00.680 --> 0:00:05.440 Why the Federal Reserve has no control over the markets. Now, 0:00:05.559 --> 0:00:07.640 I know that's a big statement. We're all waiting on 0:00:07.680 --> 0:00:09.880 every word from the Federal Reserve. Are they going to 0:00:09.960 --> 0:00:12.200 lower rates, are they going to increase rates, will they 0:00:12.280 --> 0:00:15.560 stimulate the markets, or where they continue to hike and 0:00:15.640 --> 0:00:19.560 cause the markets to crash. But today's guest says that 0:00:19.600 --> 0:00:22.840 the Federal Reserve has actually no control over the markets. 0:00:23.040 --> 0:00:25.919 It's completely out of their control. And he's not just nobody, 0:00:26.000 --> 0:00:29.000 he's one of the most respected voices when it comes 0:00:29.040 --> 0:00:32.159 to the US dollar and the bigger problem, which is 0:00:32.200 --> 0:00:35.520 the euro dollar. I'm talking about Jeff Snyder from Your 0:00:35.600 --> 0:00:39.120 Euro Dollar University podcast. He's also with Markets Insider pro 0:00:39.240 --> 0:00:43.000 and Portfolio shield dot net. And we talked about why 0:00:43.120 --> 0:00:46.559 he says the Federal Reserve has no control over the markets, 0:00:46.960 --> 0:00:51.720 why the story of Paul Volker under Reagan hiking interest 0:00:51.760 --> 0:00:55.720 rates to tame inflation is a complete myth, how it 0:00:55.760 --> 0:00:57.880 had nothing to do with that. We're gonna talk about 0:00:58.200 --> 0:01:01.800 the reality of inflation and the FED having no control 0:01:01.840 --> 0:01:04.880 to affect that. We're gonna talk about what the end 0:01:04.959 --> 0:01:08.760 game of all this is what he thinks happens. In 0:01:08.880 --> 0:01:12.039 his best guests. Of course, we're gonna talk about sound money, 0:01:12.080 --> 0:01:16.039 We're gonna talk about bitcoin, We're gonna talk about uh 0:01:16.240 --> 0:01:19.880 reasons why it may or may not work, what happened 0:01:19.880 --> 0:01:23.440 throughout history, so many more topics with the absolute legend. 0:01:23.480 --> 0:01:26.280 Jeff Snyder was an amazing interview. Let's go ahead, just 0:01:26.319 --> 0:01:30.480 jump right into it. Jeff, thank you so much for 0:01:30.760 --> 0:01:33.480 your patients, and I appreciate you showing up today. Big 0:01:33.520 --> 0:01:37.840 fan of work. I'm I'm excited again here Mark, thanks 0:01:37.880 --> 0:01:40.440 for having me on. I love the set. It looks 0:01:41.040 --> 0:01:44.520 absolutely terrific. Thanks. Thanks. Yeah, it's my first year, my 0:01:44.560 --> 0:01:47.480 first guest with the new set here. So um uh 0:01:47.920 --> 0:01:50.480 our guess about a month ago we were both speaking 0:01:50.520 --> 0:01:54.360 at a mutual friends conference, George Gammon's conference, Rebel Capitalist Live, 0:01:55.000 --> 0:01:57.080 and you gave a great presentation. I took a lot 0:01:57.080 --> 0:01:59.160 of notes, um, and so I've been excited to talk 0:01:59.160 --> 0:02:01.880 to you ever since. And Um, the thing that you 0:02:01.960 --> 0:02:04.480 were talking about, and I think that you're a little 0:02:04.520 --> 0:02:07.640 bit mad about and they want to scream to the 0:02:07.680 --> 0:02:11.960 whole world about, is that the Federal Reserve has no control. 0:02:13.400 --> 0:02:16.320 Is that right? Yeah? If you want to boil it 0:02:16.360 --> 0:02:20.119 down into a single idea. That's probably the best way 0:02:20.160 --> 0:02:24.000 to describe it. So the Federal Reserve is UH, I 0:02:24.040 --> 0:02:27.080 think at the time of this recording, which by the way, 0:02:27.480 --> 0:02:31.920 is UH July. I think the tomorrow they're expected to 0:02:31.919 --> 0:02:34.720 come up with another rate hike. The markets are betting 0:02:34.760 --> 0:02:37.000 it's going to be point seven five. Some people think 0:02:37.000 --> 0:02:40.280 it would be be one point Probably doesn't really matter 0:02:40.360 --> 0:02:43.960 either way. It seems that since they've announced their rate 0:02:44.040 --> 0:02:47.040 hikes in November of last year, the risk on assets 0:02:47.040 --> 0:02:49.640 sold off first. We saw the NASDAC and bitcoin kind 0:02:49.639 --> 0:02:54.720 of sold off the same day, SMP lagged. Um. It 0:02:54.880 --> 0:02:57.320 seems like their rate hikes have caused a lot of 0:02:57.360 --> 0:02:59.800 problems in the markets, but yet they have no control. 0:02:59.840 --> 0:03:01.360 So maybe he kind of frame that up for us 0:03:01.360 --> 0:03:03.960 a little bit. Yeah, And I think that's the issue, 0:03:04.000 --> 0:03:07.440 is what control do they have? Control is probably not 0:03:07.480 --> 0:03:10.000 the right word. It's more of like more like along 0:03:10.040 --> 0:03:13.280 the lines of influence. And so if you look at 0:03:13.280 --> 0:03:16.280 what the FET actually does, let's just let's just get 0:03:16.280 --> 0:03:18.480 it all the way from the beginning. They don't print money. 0:03:18.560 --> 0:03:21.720 There is no money printing. They create balance sheet space, 0:03:21.760 --> 0:03:25.040 they create bank reserves, but many people believe they print 0:03:25.040 --> 0:03:27.280 money and as long as people believe they print money, 0:03:27.320 --> 0:03:29.760 they act as if they have. And one of the 0:03:29.760 --> 0:03:33.679 ways that that manifests is in the financial services industry 0:03:33.720 --> 0:03:37.920 in certain asset markets. For example, in when J. Powell 0:03:37.920 --> 0:03:40.480 got on TV and told you he lied to your 0:03:40.560 --> 0:03:43.160 damn face and said that he printed digital dollars and 0:03:43.160 --> 0:03:45.400 flooded the world with him, that was a message he 0:03:45.440 --> 0:03:48.920 intended to send to asset managers to say, I've got 0:03:48.960 --> 0:03:51.960 your back, don't worry about it, no matter what's going 0:03:52.040 --> 0:03:54.920 on in these dark, dark times of COVID, the Federal 0:03:54.960 --> 0:03:57.280 Reserve has got your back. If it doesn't have your back, 0:03:57.560 --> 0:04:00.080 but if enough people actually believe it, it becomes a 0:04:00.120 --> 0:04:04.360 self fulfilling prophecy. And so risk managers by risky assets 0:04:04.400 --> 0:04:08.200 because they think, well, hell, J. Powell is doing something. 0:04:08.240 --> 0:04:10.240 I don't know what he's doing, but he's doing something. 0:04:10.400 --> 0:04:13.040 So therefore I have I can call my clients and 0:04:13.040 --> 0:04:16.120 tell them we're buying stocks and we're buying risky assets 0:04:16.160 --> 0:04:18.880 because the FED is doing some stuff. And so that's 0:04:18.880 --> 0:04:21.839 what happens the FED. The FED has it a sentimental 0:04:21.839 --> 0:04:25.960 effect or a psychological effect, primarily through the financial services industry, 0:04:26.000 --> 0:04:28.560 but also in other places, and then you get to 0:04:28.800 --> 0:04:32.520 November of one where the FED says we're not going 0:04:32.560 --> 0:04:35.560 to do the same stuff we've been doing before. Suddenly 0:04:35.640 --> 0:04:39.200 financial services managers they don't have that protection, they don't 0:04:39.200 --> 0:04:42.080 believe they have the same protection from J. Paul. So 0:04:42.160 --> 0:04:45.240 you have that sentimental effects start to reverse and it 0:04:45.320 --> 0:04:49.200 becomes self fulfilling and self realizing in the the opposite 0:04:49.200 --> 0:04:51.800 direction and the from the way that it had had 0:04:51.880 --> 0:04:57.600 gone in one. So without the ability to feel like J. 0:04:57.800 --> 0:05:01.200 Powell has got your back because are gonna be hiking 0:05:01.240 --> 0:05:03.880 interest rates and they're gonna be cutting back and scale 0:05:03.920 --> 0:05:05.800 it and running off their balance sheet. There the FED 0:05:05.920 --> 0:05:10.680 isn't isn't my buddy anymore. Suddenly asking assets look a lot, 0:05:10.720 --> 0:05:15.520 a lot more risky than they had before. So this 0:05:15.640 --> 0:05:18.760 is one area where UM, I have a little bit 0:05:18.800 --> 0:05:24.520 of disagreement with UM a lot of economists, UM, because 0:05:24.560 --> 0:05:28.719 I think they can be factually correct, but maybe a 0:05:28.760 --> 0:05:31.200 little intellectually dishonest. I don't know if that's the right 0:05:31.240 --> 0:05:34.960 way to say it. So, UM, you talk about they 0:05:34.960 --> 0:05:38.200 didn't really do anything, but they had a psychological effect, 0:05:38.240 --> 0:05:41.320 Well that is something, all right. So then then it's 0:05:41.320 --> 0:05:44.719 like you're starting to split hairs. Um. At George's last event, 0:05:44.800 --> 0:05:51.120 he had a professor. Uh uh, I'm drawn up like 0:05:51.320 --> 0:05:56.200 now the German uh economist who does all the talks 0:05:56.240 --> 0:05:59.960 all the central bank stuff. Uh is it Wolf anyway, 0:06:00.000 --> 0:06:01.800 I'm dronna blank. Sorry. But he gave this great talk 0:06:01.800 --> 0:06:04.920 about how all this central bank printing through two thousand 0:06:05.000 --> 0:06:08.600 eight and wasn't inflationary. But I said, but stock indexes 0:06:08.600 --> 0:06:11.080 are up at all time highs and and house prices 0:06:11.120 --> 0:06:15.040 are altimized. Well, that's assets, that's assets, that's not consumer prices. 0:06:15.080 --> 0:06:16.720 And so it's like it's kind of like splitting hairs 0:06:16.720 --> 0:06:19.240 a little bit to me. No, but there is a 0:06:19.279 --> 0:06:22.200 real monetary issue there, and the real monetary issues that 0:06:22.279 --> 0:06:25.960 the credit creation that underpinned or supported the previous housing 0:06:25.960 --> 0:06:28.600 bubble and the credit bubbles of the pre crisis era 0:06:28.880 --> 0:06:33.120 just disappeared. So what happened in asset prices post crisis 0:06:33.480 --> 0:06:35.200 was I mean, you can call it inflation if you want, 0:06:35.200 --> 0:06:37.720 I don't really care. There was definitely an effect there, 0:06:37.720 --> 0:06:40.960 but it was non monetary. Was something else entirely. So 0:06:41.000 --> 0:06:43.560 the real economy has been deprived of credit and money, 0:06:43.880 --> 0:06:47.320 even if asset prices have done really well, certain asset 0:06:47.320 --> 0:06:50.680 classes obviously done better than others, which has only led 0:06:50.720 --> 0:06:53.840 to more problems because you have stocks, for example, at 0:06:53.839 --> 0:06:56.440 all time highs, or they were at all time highs 0:06:56.480 --> 0:06:59.359 not that long ago, while the economy is in the toilet, 0:06:59.360 --> 0:07:01.440 and not just in the US, all across the world, 0:07:01.480 --> 0:07:06.360 the economic growth has fallen off substantially, not coincidentally, ever 0:07:06.480 --> 0:07:09.560 since this credit credit machine broke down more than a 0:07:09.560 --> 0:07:13.000 dozen years ago. So you have the psychological impact where 0:07:13.040 --> 0:07:16.360 there is less friction for psychology to work in certain 0:07:16.400 --> 0:07:20.320 asset classes and asset prices all based on a misconception 0:07:20.360 --> 0:07:22.280 of what it what it is the Federal Reserve does, 0:07:22.360 --> 0:07:26.280 so it's not really spitting splitting hairs. It's a categorical 0:07:26.360 --> 0:07:29.720 difference that explains a lot about explains everything about the 0:07:29.800 --> 0:07:32.040 world that we're actually living at why everybody is so 0:07:32.160 --> 0:07:36.320 damned piste off about everything because you have the rich 0:07:36.400 --> 0:07:39.120 people getting richer and the poor people can't find a job. 0:07:39.680 --> 0:07:43.120 And that's really the issue here, is that without monetary growth, 0:07:43.160 --> 0:07:46.280 without credit growth, the economy stuck. And no matter what 0:07:46.320 --> 0:07:48.560 the Federal Reserve has done over the last twelve years, 0:07:48.600 --> 0:07:50.560 it's not just a fed the ECB, the Bank of 0:07:50.640 --> 0:07:53.000 Japan has been doing it has been failing even longer 0:07:53.040 --> 0:07:56.720 with their psychological manipulation tactics. It hasn't worked there either, 0:07:57.200 --> 0:07:59.960 So you have a divergence between what the real econo 0:08:00.000 --> 0:08:03.640 of he's doing because psychology doesn't work in any any 0:08:03.640 --> 0:08:06.880 real sense. It does work in asset markets like stocks, 0:08:06.920 --> 0:08:10.480 because there's no real fundamental tie to any tangible asset 0:08:10.560 --> 0:08:14.040 or in tangible outcome. So again you have this major 0:08:14.080 --> 0:08:17.320 divergence between where assets went where the real economy went, 0:08:17.360 --> 0:08:21.200 which is nowhere. Good. Well, let's let's and let me 0:08:21.280 --> 0:08:23.000 talk about one other things. You said that they don't 0:08:23.000 --> 0:08:26.640 actually print money, which is true. So the Federal Reserve 0:08:26.920 --> 0:08:30.160 gives banks reserves and they set the interest rate, but 0:08:30.240 --> 0:08:32.280 the bank charges their interest rate on top of that 0:08:32.360 --> 0:08:33.920 whatever they want, and they can decide whether they want 0:08:33.920 --> 0:08:35.760 to loan money on or not. Right, So I think 0:08:35.760 --> 0:08:39.320 that's kind of your point. Right. However, um, through the 0:08:39.360 --> 0:08:42.920 bank's reserves and through their MBS policies and stuff, they 0:08:43.000 --> 0:08:47.319 take toxic debt off the books and then replaced No. No, 0:08:47.559 --> 0:08:51.439 see that's the thing. That's another misconception. That was not buying. 0:08:51.440 --> 0:08:53.960 I mean, the FED buys us treasuries and nbs, and 0:08:53.960 --> 0:08:57.320 then they're not buying subprime mortgages. They're not buying subprime 0:08:57.320 --> 0:09:00.000 mortgage bonds or leverage loans or some other financial products, 0:09:00.000 --> 0:09:02.720 certainly not buying clos like they've made people believed either 0:09:03.040 --> 0:09:07.040 in March, the FED is buying assets the market already wants. 0:09:07.080 --> 0:09:08.839 In fact, the FED knows this. They talk about it 0:09:08.920 --> 0:09:12.080 all the time. The fact that you know famous quote 0:09:12.080 --> 0:09:13.840 from Richard Fisher in two thousand eleven, and why are 0:09:13.880 --> 0:09:16.520 we buying assets that the market is fleeing toward? Central 0:09:16.520 --> 0:09:19.320 banks are supposed to be buying, like you said, they're 0:09:19.360 --> 0:09:21.920 supposed to be buying toxic assets that people don't want. 0:09:21.920 --> 0:09:24.560 But that's not what quantitative easing has been. It's not 0:09:24.600 --> 0:09:27.640 what quantitative easing has ever been, which is one reason 0:09:27.679 --> 0:09:30.320 why it doesn't ever work. And really, you know, we 0:09:30.360 --> 0:09:32.680 stop and think about what QUEWI is supposed to bes 0:09:32.800 --> 0:09:36.440 and as opposed to what it actually is. Everybody looks 0:09:36.480 --> 0:09:38.560 at it from the perspective of the federal reserve. What 0:09:38.679 --> 0:09:40.800 is the FED doing when you need to look at it, 0:09:40.840 --> 0:09:43.000 as you just said, Mark, from the perspective of the 0:09:43.040 --> 0:09:46.000 commercial bank. You can create all the reserves in the 0:09:46.040 --> 0:09:48.040 world that you want. But if banks aren't going to 0:09:48.080 --> 0:09:51.400 be lending, it doesn't matter. That's just an accounting fiction 0:09:51.480 --> 0:09:55.280 that's created by monetary policy. Think about it this way. Before, 0:09:55.640 --> 0:09:58.320 before Lehman Brothers in two thousand and eight, there were 0:09:58.320 --> 0:10:00.960 hardly any bank reserves in the in the entire global 0:10:01.000 --> 0:10:04.000 system that spans trillions upon trillions of dollars, there were 0:10:04.000 --> 0:10:07.200 no bank reserves. Yet credit was created. We had asset 0:10:07.240 --> 0:10:09.760 bubbles through the roof. You had all sorts of money 0:10:09.800 --> 0:10:13.080 everywhere around the world with no bank reserves. Suddenly we 0:10:13.120 --> 0:10:15.240 get to the other side of the crisis. There are 0:10:15.320 --> 0:10:18.800 trillions and bank reserves, but no credit girls, no expansion, 0:10:18.920 --> 0:10:22.400 no money. How is that possible? Because the FED isn't 0:10:22.440 --> 0:10:26.800 creating usable money. It's responding to breakdowns in the actual 0:10:26.840 --> 0:10:30.600 monetary system through this psychological tactics, through the through the 0:10:30.640 --> 0:10:34.600 act of buying bonds that the market already wants anyway. 0:10:34.640 --> 0:10:36.920 So the way that you were explained to me, though, 0:10:36.960 --> 0:10:40.839 it sounds like there's direct and indirect influence the FED 0:10:40.960 --> 0:10:43.160 has so a lot of times I think maybe you're 0:10:43.200 --> 0:10:45.960 saying that. So, look, they didn't do anything. They said 0:10:45.960 --> 0:10:47.520 they're gonna do something but they didn't do anything, so 0:10:47.559 --> 0:10:50.040 there was no result. But at the same time, just 0:10:50.120 --> 0:10:52.080 them saying it, or sometimes we might call it job 0:10:52.080 --> 0:10:54.719 owning actually does do something. Would we agree on that 0:10:56.080 --> 0:10:59.160 they kent? Yes, And most of those psychological impacts are 0:10:59.160 --> 0:11:02.000 sentimental impact acts are short term in nature. They don't 0:11:02.000 --> 0:11:05.320 have a lasting impact certainly in any real sense. Asset 0:11:05.320 --> 0:11:09.000 prices a different thing. Uh, certain asset markets is a 0:11:09.040 --> 0:11:11.960 different story. But in terms of the real economy, there's 0:11:12.000 --> 0:11:17.480 really not much impact whatsoever. Okay, Now, Um, another thing 0:11:17.520 --> 0:11:19.520 that you had talked about at this at this event 0:11:19.559 --> 0:11:22.440 to the Rebel Capitalist Live, you talked about the Vulcan myth, 0:11:22.640 --> 0:11:26.760 and so everyone is wondering, now if the Fed can, 0:11:27.040 --> 0:11:29.920 if they'll have the stomach to tame inflation, will they 0:11:30.000 --> 0:11:33.080 raise rates high enough to stomach, you know, to to 0:11:33.080 --> 0:11:35.480 to finally put an end to this high inflation that 0:11:35.520 --> 0:11:38.120 we have. Um, like Vulker did in the eighties where 0:11:38.160 --> 0:11:41.560 he went from ten um and you had a whole 0:11:41.800 --> 0:11:44.240 piece saying that that was a complete myth, which continues 0:11:44.280 --> 0:11:46.000 to back up what you're saying and why the Federal 0:11:46.120 --> 0:11:48.280 Reserve really has no controls. So let's talk about that 0:11:48.400 --> 0:11:50.920 Vulcan myth and why you think that actually isn't true. 0:11:51.320 --> 0:11:54.199 He isn't the one that stopped inflation. If if I'm 0:11:54.240 --> 0:11:56.920 saying that right, if I'm not putting words in your mouth. Yeah, 0:11:57.080 --> 0:11:59.720 that's where the Volker myth actually comes from, the idea 0:11:59.760 --> 0:12:03.400 that it was Paul Wolker who skyrocketed interest rates in 0:12:03.520 --> 0:12:06.480 seventeen starting in nineteen seventy nine, and that's the reason 0:12:06.480 --> 0:12:09.719 why the great inflation suddenly stopped. And the funny thing is, 0:12:09.760 --> 0:12:11.800 if you had if your time travel back to nineteen 0:12:11.800 --> 0:12:13.920 seventy nine, he would be shocked. And by he, I 0:12:13.960 --> 0:12:16.000 mean Paul Woker. They had no idea what they were 0:12:16.040 --> 0:12:18.120 doing in seventy nine. And this is not something you 0:12:18.160 --> 0:12:19.480 have to take my word for it. I gotta do 0:12:19.520 --> 0:12:22.000 is read the transcript from the FOMC meetings at the time. 0:12:22.400 --> 0:12:24.880 These people had no clue what they were doing. And 0:12:24.920 --> 0:12:27.280 the idea that Faull Volker raising rates, that's not what 0:12:27.320 --> 0:12:29.800 he did either. But the idea, the idea of the 0:12:29.840 --> 0:12:33.640 myth that he raised rates and tame Great inflation UHS 0:12:34.000 --> 0:12:37.160 was something that was invented afterwards to try and explain 0:12:37.760 --> 0:12:40.280 what happened in late from the late seventies into the 0:12:40.280 --> 0:12:42.640 middle nineteen eighties, it was sort of like, we have 0:12:42.720 --> 0:12:45.800 no idea what really happened. So maybe it was this 0:12:45.840 --> 0:12:48.520 thing that Vocer did that created this the end of 0:12:48.520 --> 0:12:50.839 the Great Inflation, And that's been the myth that we've 0:12:50.880 --> 0:12:54.160 been told that was reinforced through the quote unquote great 0:12:54.200 --> 0:12:57.280 moderation by Alan Greenspan, the Maestro, all that stuff in 0:12:57.280 --> 0:13:00.240 the nineties and into the two thousand's. But if you 0:13:00.240 --> 0:13:01.880 actually go back and look at what happened in the 0:13:01.960 --> 0:13:05.280 late seventies and early nineteen eighties, it was a whole 0:13:05.360 --> 0:13:08.080 bunch of clueless bureaucrats just throwing ship at the wall 0:13:08.160 --> 0:13:13.360 hoping something stuck. So why did he raise rates so high? 0:13:13.400 --> 0:13:16.200 Because I didn't know what else to do. Paul Voker, 0:13:16.240 --> 0:13:18.559 you gotta give the guy at least some credit. Unlike 0:13:18.559 --> 0:13:22.080 his predecessor, Arthur Burns, Voker at least knew that the 0:13:22.080 --> 0:13:24.920 Great Inflation was tied to the money supply. Burns with 0:13:24.960 --> 0:13:28.319 thought it was fiscal deficits. He convinced governments. He went 0:13:28.360 --> 0:13:31.240 off into a neo Kenzie and Funk, And so you know, 0:13:31.280 --> 0:13:33.400 the Federal Reserve was looking in the wrong place. For 0:13:33.440 --> 0:13:36.439 the reason why inflation was so out of control, as 0:13:36.440 --> 0:13:40.920 Milton Friedman said, As Milton Friedman showed conclusively inflation is always, 0:13:40.960 --> 0:13:44.120 at everywhere a monetary phenomenon, so at least Volker Volker 0:13:44.240 --> 0:13:47.480 at least knew that much. However, his plan to stop 0:13:47.520 --> 0:13:50.240 inflation was sort of a we don't know what else 0:13:50.280 --> 0:13:52.680 to do because the federal reserve. All we have in 0:13:52.679 --> 0:13:56.560 our toolkit are these bank reserves, and bank reserves have 0:13:56.600 --> 0:13:59.600 a very narrow limited use, which is you have a 0:13:59.640 --> 0:14:04.200 reserve requirement that's imposed upon the banking system by governments. 0:14:04.280 --> 0:14:07.280 And so what happened. What the theory was was that 0:14:07.320 --> 0:14:10.520 if the Federal Reserve undervoc or made bank reserves scarce, 0:14:10.920 --> 0:14:14.000 he would make bank reserves expensive and the bank the 0:14:14.040 --> 0:14:18.240 bank reserves became expensive. That would make depository money expensive. 0:14:18.559 --> 0:14:21.240 Because if you're a commercial bank and you create a 0:14:21.240 --> 0:14:25.400 loan in a a corresponding deposit money liability against it, 0:14:25.800 --> 0:14:28.680 that creates a reserve requirement that you must meet, and 0:14:28.720 --> 0:14:30.520 you have to you can meet it through vault cash, 0:14:30.600 --> 0:14:32.680 or you can meet it through bank reserves held it 0:14:32.760 --> 0:14:35.560 the Fed. So the idea was, if we make bank 0:14:35.600 --> 0:14:37.920 reserves scarce, that will make that will increase the cost. 0:14:37.960 --> 0:14:40.040 The rate will go up, as it did, the federal 0:14:40.040 --> 0:14:42.280 funds rate will go up, and that will that will 0:14:42.320 --> 0:14:46.400 then make banks reconsider their creation of loans and depository money, 0:14:46.640 --> 0:14:50.680 therefore restrict economic activity, and that's the end of the inflation. 0:14:51.360 --> 0:14:53.440 That's not how it worked. First of all, the Federal 0:14:53.520 --> 0:14:57.440 Reserve panicked as soon as they started this, this restricting 0:14:57.520 --> 0:15:01.720 reserve regime in nineteen seventy nine. Immediately the federal funds 0:15:01.760 --> 0:15:05.840 rate skyrocketed to more than which nowadays people think, well, yeah, 0:15:05.880 --> 0:15:08.080 that was the point, But no, at the time they panicked. 0:15:08.280 --> 0:15:11.600 They actually did a repot programs starting in October of 0:15:11.680 --> 0:15:15.040 nineteen nine to put reserves back into the system because 0:15:15.040 --> 0:15:17.760 they thought they had gone too far. But either way 0:15:17.880 --> 0:15:20.560 it didn't matter, because no matter what the Federal Reserve 0:15:20.640 --> 0:15:23.720 did in terms of depriving the system or not depriving 0:15:23.720 --> 0:15:27.239 the system of bank reserves, it had no impact whatsoever 0:15:27.320 --> 0:15:30.400 on depository money, had no impact on M three, had 0:15:30.440 --> 0:15:33.000 no impact on the real money, which is the shadow 0:15:33.040 --> 0:15:36.440 money across the Euro dollar system. That's not what happened. 0:15:36.920 --> 0:15:40.400 So after it became clear that restricting bank reserves was 0:15:40.440 --> 0:15:45.160 having no effect on either monetary aggregates, or the real 0:15:45.200 --> 0:15:48.800 economic outcomes. They sort of invented another kind of myth, 0:15:48.840 --> 0:15:52.760 which was that, Okay, maybe restricting bank reserves didn't cause 0:15:52.760 --> 0:15:55.080 the end of the end of the Great Reflation. Maybe 0:15:55.080 --> 0:15:59.000 it was the collateral consequence of having interest rate rise, 0:15:59.080 --> 0:16:02.080 the federal funds rate rise, that had some kind of 0:16:02.120 --> 0:16:04.160 impact that we can't explain because it didn't have any 0:16:04.240 --> 0:16:07.520 kind of monetary impact. It didn't impact the monetary system whatsoever. 0:16:07.920 --> 0:16:10.680 So maybe the fact that interest rates short term federal 0:16:10.680 --> 0:16:14.160 fund ray in particular one up. That's the reason why 0:16:14.280 --> 0:16:17.800 the economic outcomes that we all wanted ended up happening. 0:16:18.200 --> 0:16:23.000 It's simply looking at correlation and implying causation that isn't 0:16:23.040 --> 0:16:26.680 actually there. Because again, the FED at the time realized 0:16:27.120 --> 0:16:30.120 they couldn't even define, let alone measure, let alone control 0:16:30.160 --> 0:16:37.520 the monetary system. Now, uh, let's jump I want to 0:16:37.560 --> 0:16:39.800 talk about where we're at today. But before we jump 0:16:39.880 --> 0:16:42.920 to there, um and I guess the part of the 0:16:42.920 --> 0:16:45.080 reason why you say they can't really control the monetary 0:16:45.080 --> 0:16:48.080 system is that the FED only can control basically the 0:16:48.160 --> 0:16:52.360 dollars bank reserves. That's it. That's that's the one tool 0:16:52.440 --> 0:16:55.440 that they have. And in the nineteen seventeen. Before the 0:16:55.520 --> 0:17:00.320 nineteen seventies, banks invented ways to circumvent the reserver fronments 0:17:00.440 --> 0:17:04.359 invented new ways of doing monetary transactions, things like repo, 0:17:04.560 --> 0:17:07.960 things like eurodollars, things like currency swaps, that they could 0:17:08.000 --> 0:17:11.040 just manipulate both the asset and liabilities side, regardless of 0:17:11.040 --> 0:17:13.359 whatever constraints that FED tried to impose on them. And 0:17:13.359 --> 0:17:15.040 in fact, that's one of the things that happened in 0:17:15.119 --> 0:17:20.080 ninety The FED tried to make these reserves expensive, therefore 0:17:20.119 --> 0:17:23.920 making depository money expensive, and so banks just encourage their 0:17:23.920 --> 0:17:27.440 customers to shift their assets from their deposit accounts into 0:17:27.480 --> 0:17:31.040 money market funds. Money market funds don't have a reserve requirements, 0:17:31.040 --> 0:17:33.760 and so they went into so as the customer deposits 0:17:33.800 --> 0:17:37.200 moved from the commercial bank that created this reserve requirement, 0:17:37.440 --> 0:17:39.440 they moved to a money market fund. The bank was 0:17:39.560 --> 0:17:42.040 done just borrow the funds back from the money market fund. 0:17:42.400 --> 0:17:46.080 In wholesale markets. Banks had created all sorts of ways 0:17:46.160 --> 0:17:48.880 to be able to manipulate their assets and liability these 0:17:48.920 --> 0:17:55.760 monetary forms that just rendered the federal reserves tools completely obsolete, 0:17:56.920 --> 0:17:59.520 except for if they don't believe the Fed's going to 0:17:59.600 --> 0:18:02.680 be find them supporting them, then they'll get into they'll 0:18:02.720 --> 0:18:04.840 get out of those risky assets, which is where we're 0:18:04.840 --> 0:18:08.240 at today, which is a completely different animal. It's a 0:18:08.240 --> 0:18:11.399 different animal. So the tools that they're FED is using 0:18:11.480 --> 0:18:15.480 don't really do much. But the support that the psychological 0:18:15.480 --> 0:18:18.200 effect of the support, either having it or not having it, 0:18:18.280 --> 0:18:22.480 does have an effect in yeah, in certain markets. It 0:18:22.480 --> 0:18:25.199 certainly doesn't have any impact in anything that has a 0:18:25.320 --> 0:18:28.600 fundamental link to the real economy. So fixed income you 0:18:28.600 --> 0:18:31.520 don't see any real psychological impact from the FED whatsoever. 0:18:31.920 --> 0:18:34.080 It's really about manipulating the short end of the yield 0:18:34.080 --> 0:18:36.639 curve and hoping the rest of the curve goes along. 0:18:36.680 --> 0:18:39.120 So we've seen the FED hike rates over the last 0:18:39.160 --> 0:18:41.200 few months. The short end of the yield curve goes out, 0:18:41.240 --> 0:18:43.320 because of course it would if you're owning a two 0:18:43.400 --> 0:18:46.200 year US tragedy for example, if the FED is hiking 0:18:46.600 --> 0:18:49.560 you know these reverse repo rate, you have an alternative 0:18:49.640 --> 0:18:51.639 rate that you can get a return on. So the 0:18:51.720 --> 0:18:53.560 FED is able to influence the short end of the 0:18:53.600 --> 0:18:56.960 yeel curve, but even that is somewhat illusory because over 0:18:57.040 --> 0:19:00.840 time they lose control. Really really quickly too. And that's 0:19:00.880 --> 0:19:02.880 that's assuming that the long end of the Yolk curve 0:19:02.960 --> 0:19:05.880 actually falls in line, which as we see now that's 0:19:05.920 --> 0:19:08.280 not the case either. That's why the curves are inverted 0:19:08.640 --> 0:19:10.679 because the long end of the yeld curve is fighting 0:19:10.720 --> 0:19:16.960 against the Feds, right heikes at the short end. H Yeah, Now, um, 0:19:17.080 --> 0:19:19.920 the the yield curve is gotten pretty screwed up. I mean, 0:19:19.920 --> 0:19:21.720 a lot of this, I would imagine has to do 0:19:21.800 --> 0:19:25.240 with the continued manipulation they have with printing more currency 0:19:25.280 --> 0:19:28.240 and manipulating the their FED funds rate. At some point, 0:19:28.320 --> 0:19:33.560 because it's been accurate predicting recessions, which I guess for 0:19:33.720 --> 0:19:35.760 the for the White House, we're not in a recession 0:19:35.800 --> 0:19:42.600 anymore technically they've changed, true, but the recession is still coming. Okay, 0:19:43.320 --> 0:19:46.320 So the yield curve is predicting that there's a recession coming, 0:19:46.640 --> 0:19:48.199 and it's been predicting that for a while. Right there. 0:19:48.280 --> 0:19:51.680 Yield curve was predicting that since two thousand nineteen. Well, 0:19:51.720 --> 0:19:54.199 the yo curve predicted the recession that probably would have 0:19:54.240 --> 0:19:56.800 happened in two thousand twenty had it not been for COVID. 0:19:57.160 --> 0:19:59.720 So the yel curve had inverted in twenty nineteen. In fact, 0:19:59.720 --> 0:20:02.680 parts of it inverted as early as eighteen. Your Dollar 0:20:02.720 --> 0:20:05.960 futures curve inverted in June, which was a bet that 0:20:06.040 --> 0:20:08.159 the Fed was going to end up cutting rates before 0:20:08.200 --> 0:20:11.399 they continued hiking rates, which is actually proven to be true. 0:20:11.880 --> 0:20:15.840 These markets have been have proven in general terms, incredibly 0:20:15.880 --> 0:20:19.359 accurate over each of these particular cycles. And so the 0:20:19.400 --> 0:20:22.560 your Dollar futures curve inverted back in December of last year, 0:20:22.920 --> 0:20:25.359 which was a bet despite the feds ultra hawk is 0:20:25.480 --> 0:20:28.600 stance and growing ultra hal care stance that eventually the 0:20:28.640 --> 0:20:30.720 FED was going to have to stop hiking rates and 0:20:30.800 --> 0:20:34.000 maybe start is turn around and start cutting them before 0:20:34.040 --> 0:20:37.520 the FED realized it it. Ever, since December, the inversion 0:20:37.520 --> 0:20:39.960 of your at All the futures has grown to two 0:20:40.000 --> 0:20:44.720 thousand eight proportions. Uh. It is comcredibly inverted at the 0:20:44.880 --> 0:20:47.760 as we speak right now, which is the market betting 0:20:47.760 --> 0:20:50.080 that the FED only has a couple maybe more rate 0:20:50.160 --> 0:20:53.840 hikes left this year before something happens. We don't know 0:20:53.920 --> 0:20:57.120 what we can guess before something happens, and the FED 0:20:57.200 --> 0:20:59.560 has to turn around, stop hiking rates, and turn around 0:20:59.600 --> 0:21:03.680 and start cutting them aggressively. Maybe as soon as this year, 0:21:04.200 --> 0:21:07.120 probably next early next year at the latest, and then 0:21:07.119 --> 0:21:11.000 the Yeal curve is essentially agreeing with the premise behind 0:21:11.000 --> 0:21:14.280 the rod dollar futures inversion, which is that there's probably 0:21:14.359 --> 0:21:18.359 something like like recession, if not nasty recession, still in 0:21:18.440 --> 0:21:20.800