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Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.

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Speaker 1: I'm Tracy Alloway and I'm Jill Wisenthal Joe dedollarization. There's

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Speaker 1: a lot of annoying stuff in there.

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Speaker 2: Yeah, we're still talking about that.

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Speaker 3: No, it is.

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Speaker 2: It's interesting because, yes, it's like this sort of I

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Speaker 2: don't know, I associated with cranks and stuff. But if

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Speaker 2: you actually take the subject seriously about why the dollar

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Speaker 2: is what it is and where it is, there's many

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Speaker 2: sort of illuminating sub conversations to be had.

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Speaker 1: Yes, so it is a theme that tends to be

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Speaker 1: dominated by a certain type of person. But setting that aside,

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Speaker 1: one thing that's good about it is it actually gives

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Speaker 1: us a peg to go back and look in depth

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Speaker 1: at the financial system and ask, well, why is it

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Speaker 1: designed this way? Why is it built this way? Why

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Speaker 1: did dollars become popular as FX reserves in the first place,

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Speaker 1: And beyond that, why do we seem to have all

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Speaker 1: these different types of dollars. So we have euro dollars,

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Speaker 1: which hopefully everyone has heard of before, we have petro dollars.

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Speaker 1: There are all these different flavors of dollars floating around

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Speaker 1: the financial system.

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Speaker 2: Right, there's two interesting points you made. One is like

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Speaker 2: this conversation allows us to go back and look at

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Speaker 2: things like, well, why are things the way they are?

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Speaker 2: Which is helpful. And you know, a recent episode we

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Speaker 2: did with Karthik Sound Ground was good on that. And

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Speaker 2: then to your point, though, like, there is no single

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Speaker 2: thing the dollar, right, and maybe if someone thinks the dollar,

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Speaker 2: the first thing they think about is a dollar in

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Speaker 2: their digital bank account or a dollar bill, But there

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Speaker 2: is no single thing that's the dollars. A bunch of

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Speaker 2: things that are basically pegged against each other and like

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Speaker 2: are usually roughly stable against each other.

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Speaker 1: That's absolutely right. It's also one of the reasons I

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Speaker 1: tend not to like talking about currencies that much, as

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Speaker 1: everything ends up being relative. But setting that aside, I

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Speaker 1: do enjoy talking about the history of the financial system

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Speaker 1: and the decisions that made it the way it is today.

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Speaker 1: And so I'm very pleased to say that we have

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Speaker 1: one of our favorite All Thoughts guests back with us,

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Speaker 1: someone who is going to be taking us down the

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Speaker 1: historical path of how we ended up with things like

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Speaker 1: euro dollars and petro dollars.

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Speaker 2: I'm very excited about this episode as well. I like

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Speaker 2: history lessons as well. And you know, all of these

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Speaker 2: things and have surprising origins, and they emerge organically, which

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Speaker 2: is part of what makes them hard to you know,

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Speaker 2: when eventually things change. Maybe one day there'll be a

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Speaker 2: you know, a different currency regime in the world. But again,

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Speaker 2: it's helpful to know the origins of these things to

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Speaker 2: sort of anticipate what that what that might look.

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Speaker 1: Like, right, And I think actually there is often an

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Speaker 1: assumption that they do emerge organically when actually there is

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Speaker 1: a very conscious decision, right that went into making them

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Speaker 1: what they are today, and then they sort of evolved

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Speaker 1: from there. But without further ado, I'm very happy to

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Speaker 1: say that we are going to be speaking with Josh Younger,

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Speaker 1: formerly at JP Morgan, now a senior advice at the

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Speaker 1: New York Fed. Josh, welcome back to the show.

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Speaker 3: Thanks, it's great to beat back.

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Speaker 1: So I believe, given your new employer, you have to

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Speaker 1: start with a disclaimer, right, well, I have to.

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Speaker 3: I guess this is literally something I've always wanted to say,

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Speaker 3: which is that these views are my own and do

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Speaker 3: not necessarily reflect those of the Federal Reserve Bank of

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Speaker 3: New York or the Federal Reserve System.

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Speaker 4: This is why.

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Speaker 2: Actually, it's always been fun to speak with you, because

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Speaker 2: in addition to your various employment over time, you're also

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Speaker 2: just a very curious person who discovers new things.

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Speaker 3: I try to Yeah, it's fun to dig down. So

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Speaker 3: I hope this isn't too much of a rabbit hole,

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Speaker 3: but it is a very we.

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Speaker 1: Like rabbit holes. Yeah, all right, Well, why don't we

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Speaker 1: start at the beginning. You know, I sort of alluded

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Speaker 1: to these different flavor of dollars, and I think we're

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Speaker 1: going to be focusing on two of them. They are

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Speaker 1: euro dollars, so US dollar denominated deposits at foreign banks.

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Speaker 1: People sometimes look at them as like a liquidity measure.

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Speaker 1: How many euro dollars are slashing around in the system

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Speaker 1: and what does that actually mean for risk appetite and

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Speaker 1: things like that. And petro dollars, which are just dollars

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Speaker 1: earned from the export of oil, which tends to be

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Speaker 1: denominated in dollars still despite a lot of noises to

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Speaker 1: the contrary. But where do we begin with this? Because

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Speaker 1: I think euro dollars nowadays I kind of think like, well,

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Speaker 1: you know, they've been around for a long time, but

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Speaker 1: they must have come from somewhere.

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Speaker 3: Yeah, Well, there's a spectrum of dollars. So a dollar

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Speaker 3: is a liability, the dollar paper dollars in your pocket

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Speaker 3: are a liability of the Federal Reserve system. The dollars

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Speaker 3: that your bank issues your liability of that bank. And

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Speaker 3: a euro dollar is a dollar denominated liability of a

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Speaker 3: non US bank, so something overseas, and that's been around

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Speaker 3: for a while. So there were dollar denominated deposits in

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Speaker 3: Berlin and Vienna back in the twenties. They're fairly common

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Speaker 3: in correspondent banking since then. So correspondent banking is if

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Speaker 3: somebody needs to use dollars versus Sey Deutsche Bark's in

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Speaker 3: the seventies or the fifties and the forties, they will

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Speaker 3: have a bank account locally that has a bank account

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Speaker 3: in the US, their bank has a bank account, and

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Speaker 3: it's just really a daisy chain back to the US.

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Speaker 3: A euro dollar is unique in the sense that it

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Speaker 3: is a dollar denominated deposit that has an asset side

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Speaker 3: and asset in which it's deployed that is also offshore,

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Speaker 3: so it's all disconnected. It's not fully reserved, or in

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Speaker 3: other words, it's deployed outside the context of the US

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Speaker 3: financial system as well, and in that sense, it's a

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Speaker 3: complementary but distinct financial system from the US.

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Speaker 1: It's like free range US currency.

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Speaker 4: Yeah.

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Speaker 3: It kind of reminds me of the beginning of the Internet.

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Speaker 3: So the Internet, there's two versions of the Internet. There's

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Speaker 3: the Internet and the Cypronet. Everyone talks about how the

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Speaker 3: Internet was originally a Defense Department project, and there was

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Speaker 3: for a long time. I'm not sure if there still

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Speaker 3: is a separate Internet that's an air gap with the

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Speaker 3: actual Internet, which is the Cyparnet, which is the secret Internet.

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Speaker 2: And so I'm going to go on the secret Internet.

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Speaker 3: Yeah, so like UR dollars are not secret, but they

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Speaker 3: are separated from the US financial system and in some

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Speaker 3: sort of air gap type of way.

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Speaker 2: It always seemed like one thing that I have a

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Speaker 2: hard time wrapping my head around is, Okay, like banks

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Speaker 2: in the US, you know, they have a relationship with

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Speaker 2: the Federal Reserve, and if they run into liquidity trouble

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Speaker 2: or other kinds of troubles, you know, there's this lender

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Speaker 2: of last resort. And then when I think of like, okay,

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Speaker 2: here's this other bank maybe somewhere in Europe issuing dollar

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Speaker 2: denominated liabilities like other risks associated or when these were born?

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Speaker 2: Like how does that? How did this sort of like

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Speaker 2: I don't know, I'm struggling to think of the answer,

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Speaker 2: but this is like the question, but there's always like

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Speaker 2: wrapped from my head around is like what kind of

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Speaker 2: risks did these banks issuing dollar denominated deposits in Europe

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Speaker 2: face by being outside of the US bankings?

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Speaker 3: It's like, what gives how can you do this? Yes,

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Speaker 3: you can't just write a dollar.

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Speaker 2: Yeah okay, yes, right and expected to be worth it.

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Speaker 3: They don't have the relationship, and initially that was basically

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Speaker 3: what was done. So the first the definition of the

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Speaker 3: ear a dollar being deployed offshore is fairly specific, and

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Speaker 3: the question is when did that start? And we don't

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Speaker 3: really know. We know roughly in the late forties' declassified

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Speaker 3: CII documents after the war ended, the Russians were moving

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Speaker 3: money around because they were worried about a subsequent land

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Speaker 3: war in Europe and they didn't want their funds to

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Speaker 3: be frozen. Never mind the weirdness of like a Soviet

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Speaker 3: and Vais where they need dollars. I'm not sure why

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Speaker 3: that would be necessary, but they were uncomfortable leaving money

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Speaker 3: in New York, and so there were a handful.

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Speaker 1: Title of this episode should be the Communist origins of

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Speaker 1: euro dollars area.

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Speaker 3: Yeah, and so there were a sanctions which connects somewhat

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Speaker 3: to today, and they moved their money from New York

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Speaker 3: banks to a handful of banks to specifically in France, London,

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Speaker 3: and Belgium, because the local regulations allowed those banks to

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Speaker 3: issue non local currency deposits. Your local regular has to

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Speaker 3: allow this in the first instance. And in Paris in particular,

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Speaker 3: there was a bank called basically the Commercial Bank of

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Speaker 3: Northern Europe. I'm not going to try to pronounce it

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Speaker 3: in French, but it was called BISON. BSM was run

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Speaker 3: by a notorious communist sympathizer who had relationships in Moscow,

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Speaker 3: and so they were comfortable with that particular bank, and

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Speaker 3: they grew its assets from seven million dollars to two

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Speaker 3: hundred million dollars over a few years. The first recorded

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Speaker 3: use of those euro dollars was possibly, although it's hard

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Speaker 3: to say, replacing the salaries of striking French coal miners

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Speaker 3: forty eight. So there's some evidence of that, but that's

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Speaker 3: not really a euro dollar. In the definition that I

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Speaker 3: just described, because it doesn't really have a use because

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Speaker 3: I didn't say anything about the asset side of the equation.

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Speaker 1: So where did the asset side come from? This is

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Speaker 1: just going to be one of those episodes where we

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Speaker 1: ask you, like, how did this happen?

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Speaker 3: So it was tied basically to trade because trade was

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Speaker 3: denominated in dollars, but when it's all Communist dollars, it

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Speaker 3: has to be east west trades. So trade crossing the

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Speaker 3: Iron Curtain, which was small because both the Russians and

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Speaker 3: the Americans were not terribly comfortable with a large volume

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Speaker 3: of trade, and the Russians in particular had a policy

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Speaker 3: of self reliance, so they said, we don't want to

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Speaker 3: need imports from the West to run our economy or

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Speaker 3: a society. We don't know how big that was. It

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Speaker 3: was actually, as of nineteen forty seven illegal to talk

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Speaker 3: about economic data in the Soviet Union. It was a

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Speaker 3: law passed that said this is like punishable by some

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Speaker 3: extreme measure. So we don't actually know the volume of

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Speaker 3: this trade, but there's some evidence that it was there,

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Speaker 3: that it was funded in part by like trade finance

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Speaker 3: was facilitated by b sent to some extent. It's unclear

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Speaker 3: when it started, but it's a very small market. The

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Speaker 3: reason why there's no other applications is because at this

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Speaker 3: time there's really not a foreign exchange market. All foreign

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Speaker 3: exchange rates are pegged and controlled because in the wake

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Speaker 3: of the Second World War, there was no tolerance for volatility.

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Speaker 3: Of course, so the pound, for example, was like a

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Speaker 3: controlled exchange rate, which meant if you were to issue

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Speaker 3: dollar deposits, you just had dollar liabilities and some non

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Speaker 3: dollar asset. You're warehousing this risk that at some point,

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Speaker 3: okag goes away.

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Speaker 2: So Okay, to Tracey, what or what next? What creates

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Speaker 2: this system in which or I guess, is it the

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Speaker 2: sort of introduction or the tolerance of currency flexibility that

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Speaker 2: starts to create the sort of asset side of it.

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Speaker 3: Yeah, in London specifically, they start to get comfortable with

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Speaker 3: liberalizing the foreign exchange using what years are we talking about,

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Speaker 3: like nineteen fifty one or so. It's like it's a

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Speaker 3: gradual product. There are key moments where regulations change, and

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Speaker 3: that's kind of to the initial point that Tracy was raising,

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Speaker 3: which is like it evolves organically, but there are key

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Speaker 3: decision points that affect the outcome in very important ways.

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Speaker 3: And so the first decision point is the London foreign

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Speaker 3: exchange market is reopened. I think it was December fifty one,

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Speaker 3: but it was roughly around nineteen fifty one, and they

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Speaker 3: kept the spot rate control, but they allowed FX forwards,

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Speaker 3: which you are in agreement to exchange currency at some

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Speaker 3: point in the future. That market was allowed to float,

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Speaker 3: so you could start exchanging dollars for sterling on a

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Speaker 3: forward basis. That's effectively a loan where you collateralize a

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Speaker 3: dollar loan with sterling. We have FX swaps today, and

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Speaker 3: that enabled banks in London to accept dollar deposits and

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Speaker 3: on the asset side they would buy sterling assets, but

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Speaker 3: they would hedge the FX risk, and in that environment,

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Speaker 3: the pricing of those forwards was such that that was

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Speaker 3: an arbitrage opportunity, was free money to do this. It

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Speaker 3: was related to the current account deficit. It was related

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Speaker 3: to just the inefficiencies of starting a market after World

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Speaker 3: War You would imagine they would be there are lots

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Speaker 3: of frictions there, and we don't have computers. It was

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Speaker 3: like Joe, you were talking in an earlier episode, you know,

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Speaker 3: what did you do without computers? And so for a

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Speaker 3: time it was this actually free money for these banks

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Speaker 3: to attract dollar deposits, issue the liability, buy something in

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Speaker 3: sterling and then hedge the foreign exchange risk. Starting in

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Speaker 3: nineteen fifty four, the economist starts occasionally talking about foreign

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Speaker 3: money in London. It sounds kind of nefarious.

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Speaker 2: But it was when you say the economy the magazine,

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Speaker 2: the magazine, not the one economist.

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Speaker 1: So that was the first mention or one of the

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Speaker 1: earlier mentions, of like currency trading as an industry in London.

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Speaker 3: And specifically these dollar deposits. So foreign money in this

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Speaker 3: context meant a dollar deposit in a London bank, and

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Speaker 3: not the US branch, not the London branch of a

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Speaker 3: US bank, r a London based city bank. Midland Bank

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Speaker 3: is the most popular at the time, it's one of

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Speaker 3: the largest. The bank Evlands starts get a little worried.

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Speaker 3: But because in nineteen fifty five this market is doubling

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Speaker 3: every three months, WHOA.

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Speaker 1: So how does the US feel about that? Because just

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Speaker 1: going back to the start of the conversation or one

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Speaker 1: of the points that Joe brought up, like it does

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Speaker 1: feel a little bit weird instinctively when you start to have,

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Speaker 1: you know, one country's currency sort of in control or

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Speaker 1: being controlled by a foreign entity, or them building up

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Speaker 1: like a sizeable bucket of it.

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Speaker 3: Yeah, so they have sort of their view of bolves

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Speaker 3: over time. They're initially a little intrigued. So in nineteen

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Speaker 3: fifty nine is when they kind of get wind of this.

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Speaker 3: It was not obviously known to the broader world that

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Speaker 3: this was happening, and so in nineteen fifty nine, the

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Speaker 3: New York Fed sends a delegation Allen Holmes and Fred

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Speaker 3: Klopstock representing what was then kind of the Market's division

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Speaker 3: and the research division, to basically do a fact finding mission,

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Speaker 3: and they go to London and Continental Europe. It's like

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Speaker 3: the most phenomenal business trip. It's like a month and

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Speaker 3: Continental Europe and you can't go anywhere for a day, right,

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Speaker 3: you have to go for a while. And so they

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Speaker 3: come back and they say, there's this continental dollar market

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Speaker 3: is what they call it, because that's the non London

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Speaker 3: euro dollar market, and it's growing, and they find it

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Speaker 3: intriguing as a way to make the dollar useful off shore,

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Speaker 3: and that's the way to get people off shore to

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Speaker 3: hold dollars to get the dollar proceeds of their trade

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Speaker 3: and then to keep those dollars in financial instruments.

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Speaker 1: Is that desirable though? Why do they want that?

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Speaker 3: It becomes really increasingly desirable because the old Bretonwood system

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Speaker 3: that had been put in place after the war, it's

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Speaker 3: at a dollar, I set a dollars a claim on

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Speaker 3: the FED or a claim on a commercial bank, but

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Speaker 3: in breton Woods it's also claim on gold. So foreign

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Speaker 3: official institutions, not anybody, but foreign official institutions can exchange

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Speaker 3: their dollars for gold at thirty five dollars ounce. It's

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Speaker 3: a specified par rate on the dollar. But there's other

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Speaker 3: need for gold other than just monetary reserves, like the

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Speaker 3: economies growing. People need gold for other purposes, and so

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Speaker 3: gold is trading in London at a little more than

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Speaker 3: thirty five dollars, So there's an incentive to sell goods

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Speaker 3: to the US, get dollars in exchange for those goods,

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Speaker 3: use those dollars to get gold for thirty five dollars ounce,

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Speaker 3: and then sell that gold for more than thirty five

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Speaker 3: dollars in London. That's an arbitrage profit for foreign central banks.

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Speaker 3: It's also a drain on the gold reserves. You know.

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Speaker 1: So if you get everyone to keep in dollars rather

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Speaker 1: than flipping into gold, then that helps preserve your own

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Speaker 1: gold reserve.

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Speaker 4: Yeah.

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Speaker 3: So now there's a place to park your dollars and

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Speaker 3: if it pays a high enough interest rate and your

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Speaker 3: dollar issuers were not constrained by regulations that made it

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Speaker 3: more expensive and harder to pay high interest rates on

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Speaker 3: deposits in the US, So they're unconstrained by regulatory limits

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Speaker 3: on what they can pay. That's red Q, that was

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Speaker 3: reserve requirements, that was insurance premiums, FDIC, insurance premiums, all

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Speaker 3: these things that made it hard for US banks to

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Speaker 3: pay a higher rate of interest in London. They're completely

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Speaker 3: unconstrained by it, and so they can attract those dollars.

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Speaker 3: That means the gold is more likely to stay in

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Speaker 3: the US, and that keeps the whole system functioning. It

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Speaker 3: isn't entirely effective in the beginning. When the Kennedy administration

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Speaker 3: comes in. One of his senior advisors is I think

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Speaker 3: he said scared to death in his memoirs. He was

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Speaker 3: very worried about this gold drain because he likened it

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Speaker 3: to a run on a bank. Basically, you're going back

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Speaker 3: to the bank and asking for the hard currency out

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Speaker 3: of the bank. In this case, the bank is the

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Speaker 3: United States government and the hard currency is the gold.

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Speaker 3: And when you run out of gold, the system doesn't

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Speaker 3: work anymore. You have monetary collapse. And people will later

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Speaker 3: recognize that as one of the precipitate in factors with

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Speaker 3: a great depression. So there's this very strong and acute

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Speaker 3: concern that collapse of the global monetary system could trigger

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Speaker 3: like a great depression type out come.

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Speaker 2: Tracy asked you about the concerns from the US, and

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Speaker 2: you expressed one of them there, But like, what about

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Speaker 2: you mentioned briefly the concerns of the Bank of England

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Speaker 2: that this mar that industry that was doubling every three months,

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Speaker 2: or the size of this market that is doubling every

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Speaker 2: three months. How do these foreign regulators or foreign central

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Speaker 2: banks feel about their domestic banks accumulating liabilities in a

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Speaker 2: currency they don't control, And you know, you imagine you

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Speaker 2: could have a run on those banks, like we can't

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Speaker 2: help you because we can't.

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Speaker 1: Right, there's no fed backstop or anything like that.

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Speaker 3: No, And that's that's the interesting thing is that they

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Speaker 3: can pay a high rate of interest, but they should

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Speaker 3: because there's no liquidity backstop. So if I go to

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Speaker 3: a eurobank they were called, and I say I want dollars,

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Speaker 3: like they might have a bank account in the US

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Speaker 3: where they can fund withdrawals from, but it's not going

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Speaker 3: to be fully reserved, which means I might not get

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Speaker 3: my dollars and then there's nowhere to go. And so

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Speaker 3: the Bank of England and other central banks are initially

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Speaker 3: a little skeptical. They like it because it brings business

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Speaker 3: to London. They don't like it because it devalues the

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Speaker 3: pound in international finance in London specifically, and also it's

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Speaker 3: hard to control. And part of this is just usual

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Speaker 3: fact finding. This is something all central banks do to

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Speaker 3: this day is just try to figureut what's going on,

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Speaker 3: because it's really important to have good intelligence. So you know,

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Speaker 3: they're concerned only in that they didn't see it coming

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Speaker 3: and they don't have detail. Other than that, the record's

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Speaker 3: a little sketchy, but ultimately England is pretty supportive because

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Speaker 3: it makes London a very important financial center and that's

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Speaker 3: very important to them in these sort of post sterling world.

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Speaker 2: I find that interesting Tracy, this idea that what's good

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Speaker 2: for London was not necessarily good for the internationalization of

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Speaker 2: the pound, and that like is at the same time,

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Speaker 2: here's London booming at the cost of the sterling being

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Speaker 2: the global currency. But it's interesting how like there is

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Speaker 2: not some like sort of one to one relationship between

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Speaker 2: the importance of the pound and the importance of the

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Speaker 2: city of London.

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Speaker 4: No.

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Speaker 1: Absolutely, well, okay, so just on this note, I mean,

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Speaker 1: I we are all aware that nowadays you have these

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Speaker 1: things called dollar swap lines. Were those effectively the backstop

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Speaker 1: for this or did someone try to address this question

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Speaker 1: of like the riskiness of these dollars outside the US

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Speaker 1: financial system, so.

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Speaker 3: Like somewhat indirectly, I guess I would say, like the

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Speaker 3: first so the swap lines started, I think it's sixty two,

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Speaker 3: it might be sixty three. But Charlie Coombs, who's the

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Speaker 3: special manager for Foreign Exchange at the Federals their Bank

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Speaker 3: of New York, is tasked with setting up arrangements with

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Speaker 3: foreign central banks. At the time, the focus was defending

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Speaker 3: the dollar. So if the dollar comes into attack, everyone's

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Speaker 3: worried about speculative attack. That's kind of like the original

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Speaker 3: bond vigilant, right, The foreign exchange vigilantes, and they're worried

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Speaker 3: that speculative attack on the dollar would lead to a

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Speaker 3: greater run on this sort of like international banking arrangement

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Speaker 3: that the US was functioning as. And so he goes

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Speaker 3: to England and France and Italy and the Bank for

385
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Speaker 3: the National Settlements in Basel and the Swiss National Bank,

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Speaker 3: and he slowly but surely negotiates a bunch of swap

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Speaker 3: lines which are designed to be able for the US

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Speaker 3: at the time to pull in foreign currency and then

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Speaker 3: buy the dollar with those foreign currencies. So it's kind

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Speaker 3: of the opposite of how they were used in more

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Speaker 3: recent years to lend dollars to the world.

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Speaker 1: Oh interesting, I didn't realize that.

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Speaker 3: Yeah, And so that's the initial logic. But Bob mccallay

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Speaker 3: and Catherine Schenk uncovered this second swap line with the

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Speaker 3: BIS set up in nineteen sixty four, which was not

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Speaker 3: for Swiss franc but was for any other European currency,

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Speaker 3: and it was made with the explicit arrangement that the

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Speaker 3: BIS would act as a channel to the Euro dollar

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Speaker 3: market if it would needed liquidity. So there's evidence that

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Speaker 3: the BIS didn't love this swap line. But they say, oh,

401
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Speaker 3: the FED call this and as to draw it, so

402
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Speaker 3: we'll draw on it. It was sort of acting as

403
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Speaker 3: agent for the FED on behalf of the whole system,

404
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Speaker 3: and it was used primarily at the end of the

405
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Speaker 3: year when there were liquidity pressures due to seasonal effects

406
00:19:10,600 --> 00:19:14,040
Speaker 3: or the usual sort of variations in demand for liquidity

407
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Speaker 3: were smoothed over with this swap line. But it was

408
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Speaker 3: also there and got gradually bigger as a backstop to

409
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Speaker 3: the euro dollar market more generally. But it was ultimately

410
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Speaker 3: not a lender of last resort because it required coordination,

411
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Speaker 3: but it was it was a line. It was like

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Speaker 3: a lifeline for the euro dollar market in its early days,

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Speaker 3: and that allows it to grow a lot. So, you know,

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Speaker 3: we were talking about nineteen sixty it's a roughly two

415
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Speaker 3: billion dollar market. By nineteen sixty four, it's roughly ten

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Speaker 3: billion dollar market. By the late sixties, it's you know,

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Speaker 3: sixty seventy billion dollar market. So it keeps growing exponentially,

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Speaker 3: much faster than the money supply.

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Speaker 2: So I mean, you sort of anticipated my next question,

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Speaker 2: But I think back then and for a long time,

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Speaker 2: and many people still take very sort of like quantitative

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Speaker 2: ideas about monetary policy that m two and these various

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Speaker 2: measures of money supply are really important policy tools or

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Speaker 2: things that we should target, etc. How do monetary policy

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Speaker 2: makers feel about something offshore or something that is growing

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Speaker 2: the supply of existing dollars in the world.

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Speaker 3: It's a trade off. So in the mid sixties, this

428
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Speaker 3: goal drain is accelerating, so the US is forced for

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Speaker 3: sort of I don't know if you call that monetary

430
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Speaker 3: policy has to do with the currency, but to maintain

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Speaker 3: the stability the international financial system and close the current

432
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Speaker 3: account deficit, which was large. To basically stop the flow

433
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Speaker 3: of dollars out of the country and bring balance to

434
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Speaker 3: the global monetary system, they had to impose capital controls.

435
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Speaker 3: So that starts with what's called the interest equalization tax,

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Speaker 3: which was basically penalizing the issuance of dollar denominated foreign

437
00:20:45,560 --> 00:20:48,000
Speaker 3: bonds in New York. So you apply it a cert

438
00:20:48,040 --> 00:20:50,480
Speaker 3: tax to that to equalize the exchanger that equalize the

439
00:20:50,520 --> 00:20:54,080
Speaker 3: interest rates. They eventually a voluntary credit restraint, specifically with

440
00:20:54,160 --> 00:20:56,760
Speaker 3: extensions of credit abroad, so like New York banks should

441
00:20:56,800 --> 00:21:00,240
Speaker 3: not loan to foreign entities. The whole point being the

442
00:21:00,240 --> 00:21:03,440
Speaker 3: dollars in the US The only way that works without

443
00:21:03,480 --> 00:21:05,879
Speaker 3: throwing a massive monkey wrench into the global monetary and

444
00:21:05,920 --> 00:21:10,680
Speaker 3: the economic system is if there's an offshore he'd say shadow,

445
00:21:10,720 --> 00:21:13,840
Speaker 3: like an equivalent or an air gap, a segregated dollar

446
00:21:14,480 --> 00:21:17,760
Speaker 3: financial market that can fill the gap as New York

447
00:21:17,800 --> 00:21:21,240
Speaker 3: pulls back. And so they identified pretty quickly euro dollars

448
00:21:21,320 --> 00:21:24,960
Speaker 3: as the euro dollar market, meaning the eurobond market is

449
00:21:24,960 --> 00:21:28,560
Speaker 3: the issuance of dollar based bonds in Europe. The euro

450
00:21:28,600 --> 00:21:30,840
Speaker 3: dollar market is the issuance of dollar based liabilities. There

451
00:21:30,880 --> 00:21:33,320
Speaker 3: is also a loan market, and so there's basically a

452
00:21:33,359 --> 00:21:38,639
Speaker 3: mirror image financial system optimized throughout international activity that's gotten

453
00:21:38,720 --> 00:21:42,440
Speaker 3: large enough to carry the load, especially with this liquidity backstop.

454
00:21:42,480 --> 00:21:45,000
Speaker 3: So they see this as kind of the outlet valve

455
00:21:45,000 --> 00:21:47,600
Speaker 3: for all of that activity that would otherwise drain dollars

456
00:21:48,240 --> 00:21:51,800
Speaker 3: from the US. That helps them try to stabilize this outflow.

457
00:21:52,119 --> 00:21:56,080
Speaker 3: So that's the sort of financial stability argument. The cost

458
00:21:56,119 --> 00:21:57,840
Speaker 3: of that is like your money or your life, right,

459
00:21:57,920 --> 00:22:00,720
Speaker 3: So the other version of that is losing money terry sovereignty.

460
00:22:00,720 --> 00:22:03,320
Speaker 3: There's dollars that are being issued by non US entities

461
00:22:03,880 --> 00:22:06,840
Speaker 3: not regulated by the Federal Reserve or the occ with

462
00:22:07,080 --> 00:22:10,200
Speaker 3: only sort of intermediated access to liquidity. They don't have

463
00:22:10,200 --> 00:22:12,520
Speaker 3: a direct access to the discount window. They have to

464
00:22:12,520 --> 00:22:14,359
Speaker 3: go to their central bank, which goes to the VIS

465
00:22:14,400 --> 00:22:17,359
Speaker 3: which goes to the Fed. So it's a coordination requirement there.

466
00:22:17,680 --> 00:22:19,400
Speaker 3: And so the question is like, which of these two

467
00:22:19,400 --> 00:22:23,000
Speaker 3: things is more important. In the sixties through the early seventies,

468
00:22:23,480 --> 00:22:26,919
Speaker 3: the prevailing view was closing the current account deficit and

469
00:22:27,320 --> 00:22:29,600
Speaker 3: not the current account deficits are the balance of payments

470
00:22:29,680 --> 00:22:32,920
Speaker 3: gap and stabilizing the global monetary system was the more

471
00:22:33,000 --> 00:22:36,959
Speaker 3: important thing. And so these swap line allocations keep growing.

472
00:22:37,320 --> 00:22:40,919
Speaker 3: They keep growing the max size of that facility to

473
00:22:41,040 --> 00:22:43,520
Speaker 3: make sure that if needed, they can stabilize the dollar

474
00:22:43,800 --> 00:22:45,960
Speaker 3: and provide liquidity to the offshore dollar market.

475
00:22:46,400 --> 00:22:50,479
Speaker 1: I still like the organic free range dollars analogy. So

476
00:22:50,760 --> 00:22:53,560
Speaker 1: you know, you've set them out into the world, but

477
00:22:53,600 --> 00:22:55,960
Speaker 1: you take a risk in doing so, Like you know,

478
00:22:56,000 --> 00:22:58,879
Speaker 1: the dollars could get scooped up by a hawk or

479
00:22:58,960 --> 00:22:59,680
Speaker 1: eaten by a weasel.

480
00:23:00,200 --> 00:23:01,040
Speaker 3: It's like an outdoor cat.

481
00:23:01,240 --> 00:23:04,560
Speaker 1: Yeah, yeah, I'm taking this too far. Okay, wait, but Josh,

482
00:23:04,600 --> 00:23:08,280
Speaker 1: you mentioned the nineteen seventies, and when I think about

483
00:23:08,640 --> 00:23:12,320
Speaker 1: dollars in currencies and big financial events in the nineteen seventies.

484
00:23:12,359 --> 00:23:15,960
Speaker 1: I think about Nixon deepegging the dollar, and I take

485
00:23:16,000 --> 00:23:18,600
Speaker 1: the point that euro dollars to some extent were solving

486
00:23:18,760 --> 00:23:22,159
Speaker 1: this gold problem that you described, but that must have

487
00:23:22,280 --> 00:23:24,200
Speaker 1: had some sort of impact on the market.

488
00:23:24,560 --> 00:23:26,679
Speaker 3: It did, so the seventies are where this all starts

489
00:23:26,720 --> 00:23:29,919
Speaker 3: to get a little more worrisome. Basically, lots of things

490
00:23:30,000 --> 00:23:32,320
Speaker 3: got more worries in the seventies. Year dollars start to

491
00:23:32,359 --> 00:23:35,200
Speaker 3: fall out of favor in the late sixties and early seventies,

492
00:23:35,640 --> 00:23:39,160
Speaker 3: and for two reasons. One is there's these speculative attacks

493
00:23:39,160 --> 00:23:41,360
Speaker 3: on various currencies that are blamed on the euro dollar

494
00:23:41,480 --> 00:23:44,239
Speaker 3: market as the vehicle through which the speculative funds are

495
00:23:44,280 --> 00:23:47,320
Speaker 3: flowing around. They call them hot money. So the pound

496
00:23:47,520 --> 00:23:51,560
Speaker 3: crisis of nineteen sixty seven, varying crises and subsequent years

497
00:23:51,840 --> 00:23:53,960
Speaker 3: are kind of blamed on the euro dollar market. That's

498
00:23:53,960 --> 00:23:57,199
Speaker 3: the first thing. The second is it's growing rapidly, and

499
00:23:57,240 --> 00:24:00,800
Speaker 3: that's for a couple of reasons. One is live is invented,

500
00:24:00,880 --> 00:24:02,840
Speaker 3: so now you can manage the interest rate risk in

501
00:24:02,920 --> 00:24:05,600
Speaker 3: a year dollar bank. So liveboard's creative for the purposes

502
00:24:05,640 --> 00:24:08,639
Speaker 3: of year dollar lending, and floating rate loans, and so

503
00:24:08,680 --> 00:24:10,840
Speaker 3: now you don't have this maturity mismatch that would otherwise

504
00:24:10,840 --> 00:24:13,280
Speaker 3: be hard to risk manage. There's a lot of analogies

505
00:24:13,280 --> 00:24:13,840
Speaker 3: to the present day.

506
00:24:13,840 --> 00:24:16,240
Speaker 2: Actually, it's so funny, how like these terms that we

507
00:24:16,440 --> 00:24:20,520
Speaker 2: considered to be so crude euro dollars, London interbank overnight rate,

508
00:24:20,560 --> 00:24:22,760
Speaker 2: are offered rate. It's like we just we just don't

509
00:24:22,760 --> 00:24:24,960
Speaker 2: even question that we have all these European names for

510
00:24:25,040 --> 00:24:25,800
Speaker 2: these crucial things.

511
00:24:25,800 --> 00:24:27,320
Speaker 3: Well, I should have mentioned at the beginning when we

512
00:24:27,320 --> 00:24:30,560
Speaker 3: were talking about, yeah, the Soviet Union, the euro dollar

513
00:24:30,640 --> 00:24:33,400
Speaker 3: does not refer to Europe, refers to the telex address

514
00:24:33,440 --> 00:24:37,639
Speaker 3: of b sent So tec telex address was eurobank dash bsen.

515
00:24:38,000 --> 00:24:42,640
Speaker 1: Oh it's not even this makes so much more sense now, Yeah,

516
00:24:42,640 --> 00:24:45,280
Speaker 1: so year dollars meant dollars for bcent for Eurobank.

517
00:24:45,800 --> 00:24:49,360
Speaker 3: That was like a like a shorthand for payment processing

518
00:24:49,400 --> 00:24:50,480
Speaker 3: agents and things like that.

519
00:24:51,440 --> 00:24:54,040
Speaker 2: This was a this is a totally new one.

520
00:24:54,160 --> 00:24:56,479
Speaker 1: This is like a revelation because everyone thinks euro dollars

521
00:24:56,520 --> 00:24:59,000
Speaker 1: have something to do with the euro or Europe, but

522
00:24:59,119 --> 00:25:04,280
Speaker 1: actually 's own bank in Paris. No one thinks that. Okay,

523
00:25:04,359 --> 00:25:08,400
Speaker 1: So nineteen seventies, this thing is growing, there's some concern

524
00:25:08,480 --> 00:25:11,600
Speaker 1: about it potentially getting out of control. What do people

525
00:25:11,600 --> 00:25:12,200
Speaker 1: do about it?

526
00:25:12,320 --> 00:25:16,520
Speaker 3: So they start to call meetings and commission studies.

527
00:25:16,560 --> 00:25:17,160
Speaker 1: As one does.

528
00:25:17,240 --> 00:25:20,040
Speaker 3: Yeah, So, like the problem is the US is maintaining

529
00:25:20,040 --> 00:25:24,080
Speaker 3: a low interest rate policy. It's attracting dollars overseas, and

530
00:25:24,119 --> 00:25:26,359
Speaker 3: so the eur dollar market is absorbing outflows in the

531
00:25:26,440 --> 00:25:29,120
Speaker 3: US where interest rates are low relative to euro dollar

532
00:25:29,160 --> 00:25:31,600
Speaker 3: rates in European rates. And so it's a monetary policy

533
00:25:31,680 --> 00:25:35,520
Speaker 3: dynamic and that's causing some consternation because at the same time,

534
00:25:35,520 --> 00:25:38,320
Speaker 3: Milton Freedom it is becoming very popular, the monitorist movement

535
00:25:38,359 --> 00:25:40,920
Speaker 3: is growing, and so lack of control over the money

536
00:25:40,960 --> 00:25:44,040
Speaker 3: supply is much more concerning when you're focused on the

537
00:25:44,040 --> 00:25:47,320
Speaker 3: money supply for monetary policy purposes. And so in nineteen

538
00:25:47,440 --> 00:25:50,639
Speaker 3: seventy one, the BIS calls the Standing Committee on the

539
00:25:50,640 --> 00:25:51,680
Speaker 3: Euro Currency Market.

540
00:25:51,720 --> 00:25:53,560
Speaker 4: It's a very ugust sounding body.

541
00:25:53,440 --> 00:25:55,400
Speaker 3: And they meet and they decide to have a standstill

542
00:25:55,400 --> 00:25:58,920
Speaker 3: agreement where central banks will no longer deposit their own

543
00:25:58,920 --> 00:26:00,840
Speaker 3: funds in the euro dollar mark because there was some

544
00:26:00,880 --> 00:26:04,080
Speaker 3: concern that when the Bank of Italy puts dollars into

545
00:26:04,119 --> 00:26:06,600
Speaker 3: the euro dollars then those get relent and redeposited and

546
00:26:06,600 --> 00:26:10,080
Speaker 3: relent and redeposited, And so you have two problems associated

547
00:26:10,080 --> 00:26:12,560
Speaker 3: with that. One is just multiplier effects and the other

548
00:26:12,640 --> 00:26:15,160
Speaker 3: is the sort of official moniker of like, oh, central banks

549
00:26:15,160 --> 00:26:17,520
Speaker 3: are using this market, that means I can use this market.

550
00:26:17,800 --> 00:26:21,919
Speaker 3: And so they all agree to stop putting new money

551
00:26:22,080 --> 00:26:24,440
Speaker 3: into the eurodollar market. The problem is there's not much

552
00:26:24,440 --> 00:26:26,080
Speaker 3: else to do with your money, and so after three

553
00:26:26,119 --> 00:26:28,600
Speaker 3: months they kind of abandon that agreement. So it literally

554
00:26:28,720 --> 00:26:31,159
Speaker 3: lasts until the first renewal date and then they all

555
00:26:31,240 --> 00:26:32,200
Speaker 3: kind of go their separate ways.

556
00:26:32,200 --> 00:26:35,840
Speaker 1: Wait, so there's a three month standstill on the eurodollar

557
00:26:35,960 --> 00:26:37,400
Speaker 1: market in the nineteen seventy.

558
00:26:37,080 --> 00:26:39,720
Speaker 3: On central bank placements into the euro dollar market. So

559
00:26:40,280 --> 00:26:42,840
Speaker 3: the governors of the major central banks get together the

560
00:26:42,840 --> 00:26:44,600
Speaker 3: G ten, and they say, we're not going to put

561
00:26:44,640 --> 00:26:46,119
Speaker 3: any more money into this market.

562
00:26:46,240 --> 00:26:48,560
Speaker 2: I know, this is like one of the things every

563
00:26:48,560 --> 00:26:51,480
Speaker 2: time we have these conversations. It's like nothing new under

564
00:26:51,520 --> 00:26:54,119
Speaker 2: the sun. You think about some of the lessons here

565
00:26:54,119 --> 00:26:55,760
Speaker 2: in terms of people are always going to chase the

566
00:26:55,800 --> 00:26:58,600
Speaker 2: higher rate, So you create a new money that offers

567
00:26:58,600 --> 00:27:01,000
Speaker 2: a higher rate, and the money gets sucked there. The

568
00:27:01,080 --> 00:27:04,000
Speaker 2: lack of alternatives to existing market. I mean, so many

569
00:27:04,000 --> 00:27:06,840
Speaker 2: conversations about alternatives to treasuries, et cetera. It's like often

570
00:27:06,880 --> 00:27:10,280
Speaker 2: there's just not another thing that you can put it in.

571
00:27:10,520 --> 00:27:12,360
Speaker 3: Yeah, No, I mean it's it's sort of like more

572
00:27:12,400 --> 00:27:14,760
Speaker 3: money for the same perceived risk. Now that we can

573
00:27:14,760 --> 00:27:17,400
Speaker 3: debate whether or not it's the same risk. But from

574
00:27:17,400 --> 00:27:21,040
Speaker 3: the investor cash and vexer's perspective, I can get three

575
00:27:21,080 --> 00:27:23,439
Speaker 3: percent here, five percent here and looks the same. I'll

576
00:27:23,480 --> 00:27:25,880
Speaker 3: take five. Hopefully it was a little more nuanced than that.

577
00:27:26,000 --> 00:27:28,639
Speaker 3: But I think that is kind of the logic. And

578
00:27:28,680 --> 00:27:31,000
Speaker 3: so there's a lot of like hand ringing at the

579
00:27:31,000 --> 00:27:34,600
Speaker 3: BIS in these regular meetings, at the FMC minutes Federal

580
00:27:34,600 --> 00:27:37,679
Speaker 3: Open Market Committee Meeting minutes, they start getting a regular

581
00:27:37,760 --> 00:27:39,920
Speaker 3: rundown of like what happened at Basil this month, And

582
00:27:39,960 --> 00:27:42,960
Speaker 3: it's kind of a new development because it's no that's

583
00:27:42,960 --> 00:27:45,760
Speaker 3: the point where it becomes really important. And so Governor

584
00:27:45,840 --> 00:27:48,160
Speaker 3: Dane and some hit Charlie Combs or the various people

585
00:27:48,160 --> 00:27:50,840
Speaker 3: who attend these meetings going back and forth to Europe

586
00:27:50,840 --> 00:27:53,560
Speaker 3: in nineteen seventy one seems like a pretty like aggressive

587
00:27:53,600 --> 00:27:55,359
Speaker 3: thing to do every month. But I guess the planes

588
00:27:55,359 --> 00:27:58,240
Speaker 3: were nicer and they serve better meals, but they get

589
00:27:58,240 --> 00:28:01,479
Speaker 3: a run down. And basically the message is we're going

590
00:28:01,560 --> 00:28:04,800
Speaker 3: to commission a really like thorough study and we're really

591
00:28:04,800 --> 00:28:06,480
Speaker 3: going to think about this, and we have agreed that

592
00:28:06,520 --> 00:28:08,760
Speaker 3: this is an important problem that's worthy of attention, but

593
00:28:09,080 --> 00:28:12,280
Speaker 3: there's very little actually done in the financial press. People

594
00:28:12,359 --> 00:28:14,639
Speaker 3: kind of get to the point where they believe the

595
00:28:14,680 --> 00:28:16,760
Speaker 3: screws are coming, the crew is going to get stuck

596
00:28:16,800 --> 00:28:18,760
Speaker 3: in and tightened, the hammer's coming down. Like there's an

597
00:28:18,840 --> 00:28:21,280
Speaker 3: article in the Economost called who killed the euro dollar Market?

598
00:28:21,720 --> 00:28:24,240
Speaker 3: I think that was seventy two, So there's this sense

599
00:28:24,240 --> 00:28:27,199
Speaker 3: that it's kind of like getting to the point where

600
00:28:27,240 --> 00:28:30,400
Speaker 3: someone's got to do something. At some point in this process,

601
00:28:30,800 --> 00:28:34,120
Speaker 3: there's a company that starts selling euro dollar branded chewing gum.

602
00:28:34,200 --> 00:28:36,320
Speaker 3: So that's when you know a trend has like pressed

603
00:28:36,920 --> 00:28:38,560
Speaker 3: now we pull up eBay, Oh.

604
00:28:38,560 --> 00:28:42,720
Speaker 1: Yeah, I must have this chewing gum. Honestly, that's amazing.

605
00:28:42,960 --> 00:28:45,040
Speaker 3: So it's kind of got like a pop thing going on,

606
00:28:45,160 --> 00:28:48,040
Speaker 3: and so the view is at some point this is

607
00:28:48,080 --> 00:28:51,520
Speaker 3: going to get constract contained, and by nineteen seventy three

608
00:28:51,560 --> 00:28:54,000
Speaker 3: there's like a relatively broad consensus that this is sort

609
00:28:54,040 --> 00:28:58,000
Speaker 3: of necessary. And then in September there's the Young k

610
00:28:58,120 --> 00:28:59,520
Speaker 3: Poor War and the oil embargo.

611
00:29:00,320 --> 00:29:14,720
Speaker 4: Everything changes.

612
00:29:17,560 --> 00:29:20,520
Speaker 1: So this is this is our que for at two

613
00:29:20,840 --> 00:29:24,080
Speaker 1: of the Josh Younger rabbit hole, or the second rabbit hole,

614
00:29:24,120 --> 00:29:25,479
Speaker 1: which is petro dollars.

615
00:29:26,000 --> 00:29:28,920
Speaker 3: Yeah, so petro dollars are sort of broad term for

616
00:29:29,000 --> 00:29:31,800
Speaker 3: the dollar based revenue from the sale of oil. Petro

617
00:29:31,880 --> 00:29:33,680
Speaker 3: dollars have been around for a while. Actually, the oil

618
00:29:33,720 --> 00:29:36,280
Speaker 3: producing countries were involved in the euro dollar market since

619
00:29:36,320 --> 00:29:39,040
Speaker 3: the sixties. The thing that happens in nineteen seventy three

620
00:29:39,760 --> 00:29:42,560
Speaker 3: is as a consequence of US involvement or support for

621
00:29:42,720 --> 00:29:45,400
Speaker 3: the Israelis in the Yunkapor War, there's an embargo of

622
00:29:45,400 --> 00:29:49,160
Speaker 3: oil shipments to the US. The price quadruples, and oil

623
00:29:49,200 --> 00:29:51,720
Speaker 3: revenues go from one or two percent of global GDP

624
00:29:51,840 --> 00:29:53,720
Speaker 3: to five percent of GDP. So we're talking about one

625
00:29:53,760 --> 00:29:56,080
Speaker 3: hundred billion dollars a year in nineteen.

626
00:29:55,800 --> 00:30:00,000
Speaker 1: Seventy right, So this huge sudden influx of wealth, presumably

627
00:30:00,080 --> 00:30:03,480
Speaker 1: going mostly to the oil producing nations in the Middle East.

628
00:30:03,280 --> 00:30:04,680
Speaker 3: And it's kind of come from nowhere, right, It's just

629
00:30:04,720 --> 00:30:06,720
Speaker 3: the price of this commodity has gone up. It's not

630
00:30:06,760 --> 00:30:09,640
Speaker 3: like people issued one hundred billion new dollars with which

631
00:30:09,680 --> 00:30:11,920
Speaker 3: to buy it, and so they have to figure out

632
00:30:11,920 --> 00:30:13,800
Speaker 3: a way in a sense to issue one hundred billion

633
00:30:13,920 --> 00:30:17,880
Speaker 3: new dollars a year to facilitate this flow. So most

634
00:30:17,920 --> 00:30:21,200
Speaker 3: people are focused on the oil revenues needing a place

635
00:30:21,240 --> 00:30:24,280
Speaker 3: to go, but you also need dollar loans to the

636
00:30:24,280 --> 00:30:27,000
Speaker 3: oil importers to buy that oil in the first instance,

637
00:30:27,000 --> 00:30:29,560
Speaker 3: So you need both sides of the equation, and the

638
00:30:29,640 --> 00:30:31,640
Speaker 3: year dollar market for all the reasons we talked about

639
00:30:31,680 --> 00:30:34,720
Speaker 3: was reasonably well developed at the time. So in their

640
00:30:34,760 --> 00:30:37,479
Speaker 3: search for a distribution mechanism, which is again to like

641
00:30:37,880 --> 00:30:40,479
Speaker 3: take the oil Saudi Arabia sells one hundred dollars worth

642
00:30:40,520 --> 00:30:43,480
Speaker 3: of oil, they take those that money, they put it

643
00:30:43,520 --> 00:30:45,800
Speaker 3: into something that has to somehow get to the next

644
00:30:45,800 --> 00:30:48,320
Speaker 3: country that has to buy one hundred dollars worth of oil,

645
00:30:48,440 --> 00:30:49,960
Speaker 3: and it goes back to Saudi and it kind of

646
00:30:49,960 --> 00:30:51,560
Speaker 3: goes around in a circle. That's why it's called petro

647
00:30:51,600 --> 00:30:56,600
Speaker 3: dollar recycling. And so those petro dollars need an intermediary

648
00:30:56,960 --> 00:31:01,000
Speaker 3: that has elasticity. Elasticity means they can grow substantially to

649
00:31:01,040 --> 00:31:04,840
Speaker 3: meet this like massive increase in demand and euro dollars,

650
00:31:04,960 --> 00:31:07,600
Speaker 3: the US in particular Bill Simon, who's the Treasury secretary

651
00:31:07,600 --> 00:31:11,720
Speaker 3: in nineteen seventy four for Nixon, he like is very

652
00:31:11,720 --> 00:31:15,600
Speaker 3: focused on using that channel, specifically private market intermediation, not

653
00:31:15,680 --> 00:31:18,120
Speaker 3: going through the IMF, not going through the BIS, but

654
00:31:18,160 --> 00:31:23,040
Speaker 3: specifically private market intermediaries serving as that distribution system.

655
00:31:23,320 --> 00:31:26,400
Speaker 2: So sorry, you know, because again I think, as you said,

656
00:31:26,480 --> 00:31:28,280
Speaker 2: people use the word petro dollars and they sort of

657
00:31:28,280 --> 00:31:30,520
Speaker 2: mean all different kinds of things, but this is bait

658
00:31:30,640 --> 00:31:32,680
Speaker 2: like to use it in a way that's actually useful.

659
00:31:32,720 --> 00:31:36,800
Speaker 2: What we're talking about is the system of private banks

660
00:31:36,840 --> 00:31:41,120
Speaker 2: that issued dollar denominated liabilities that handled the flow of

661
00:31:41,240 --> 00:31:41,840
Speaker 2: oil revenue.

662
00:31:41,880 --> 00:31:44,280
Speaker 3: Yeah, and they shooed assets, right, So they had loans

663
00:31:44,320 --> 00:31:49,440
Speaker 3: to oil importing countries and liabilities to deposits from oil

664
00:31:49,600 --> 00:31:53,760
Speaker 3: exporting countries, and so they're the bridge because the financial

665
00:31:53,760 --> 00:31:55,720
Speaker 3: system doesn't track oil imports.

666
00:31:56,160 --> 00:31:59,160
Speaker 2: Who are these like there specific banks that played a

667
00:31:59,200 --> 00:32:00,080
Speaker 2: prominent role or.

668
00:32:00,840 --> 00:32:03,400
Speaker 3: It's just like all the usual massive banks, like they

669
00:32:03,400 --> 00:32:05,560
Speaker 3: were all involved in this. There's old pamphlets. When I

670
00:32:05,600 --> 00:32:07,320
Speaker 3: was JPM Warrion went down to the archives, they had

671
00:32:07,320 --> 00:32:10,160
Speaker 3: these old like pamphlets like like the eur dollar market

672
00:32:10,200 --> 00:32:11,960
Speaker 3: a great opportunity for this, that or the other thing,

673
00:32:12,000 --> 00:32:14,760
Speaker 3: and so it's like it's just seen as like a

674
00:32:14,880 --> 00:32:20,800
Speaker 3: very lucrative, very like high growth business area. The concern

675
00:32:21,040 --> 00:32:24,160
Speaker 3: is that these loans are relatively long dated, and these

676
00:32:24,160 --> 00:32:27,800
Speaker 3: deposits are relatively hot and flighty, and so you know,

677
00:32:27,840 --> 00:32:29,520
Speaker 3: there's a lot of analogies to today. Right, So you

678
00:32:29,600 --> 00:32:31,920
Speaker 3: issue a short data deposit, you're not sure how long

679
00:32:31,920 --> 00:32:33,600
Speaker 3: it's going to stick around. You think it's going to

680
00:32:33,600 --> 00:32:36,240
Speaker 3: stick around for a long time. But if the Saudis

681
00:32:36,280 --> 00:32:39,720
Speaker 3: decide that they don't like this bank, they like that bank,

682
00:32:39,720 --> 00:32:42,120
Speaker 3: they'll move their money, or they're paying incrementally higher rate

683
00:32:42,240 --> 00:32:44,400
Speaker 3: or that sort of thing. So how sticky ero dollar

684
00:32:44,440 --> 00:32:47,920
Speaker 3: deposits are is an open question. But the loans are

685
00:32:47,960 --> 00:32:51,680
Speaker 3: long dated because countries have ongoing need to import oil.

686
00:32:52,320 --> 00:32:56,360
Speaker 3: So the eur dollar market grows like exponentially, but it

687
00:32:56,400 --> 00:33:00,280
Speaker 3: incurs a much larger liquidity mismatch or maturity missmat just

688
00:33:00,320 --> 00:33:03,040
Speaker 3: doing more and more and more and more liquidity transformation,

689
00:33:03,720 --> 00:33:08,080
Speaker 3: long term loans, short term liabilities, and there's this increasing

690
00:33:08,120 --> 00:33:11,680
Speaker 3: concern by the spring of nineteen seventy four that the

691
00:33:11,760 --> 00:33:14,880
Speaker 3: system is creaking under the weight of this demand and

692
00:33:14,960 --> 00:33:18,000
Speaker 3: like something might break does something break.

693
00:33:17,760 --> 00:33:19,240
Speaker 1: I'm going to take that. I'm going to take the bait.

694
00:33:19,280 --> 00:33:21,480
Speaker 1: And also, since we're talking about you know, like historical

695
00:33:21,520 --> 00:33:24,040
Speaker 1: analogies to today, I have to ask, did something break?

696
00:33:24,120 --> 00:33:26,680
Speaker 3: Yes, it's something breaks, not what you'd expect. I think

697
00:33:26,680 --> 00:33:28,840
Speaker 3: they're the thirty fourth largest bank in Germany. But this

698
00:33:29,320 --> 00:33:32,400
Speaker 3: bankos Hrschtot, and people talk about Hrschtot risk now, but

699
00:33:32,440 --> 00:33:35,960
Speaker 3: Bankoushrschtott is very involved in speculating in currencies. And I

700
00:33:35,960 --> 00:33:38,800
Speaker 3: didn't talk about the Nixon shock and the deepegging of

701
00:33:38,840 --> 00:33:41,680
Speaker 3: the dollar. That's a whole story in of itself. But

702
00:33:41,760 --> 00:33:43,719
Speaker 3: what it does is it generates a lot of volatility

703
00:33:43,720 --> 00:33:46,240
Speaker 3: in foreign exchange rates, which had previously been very sticky.

704
00:33:46,320 --> 00:33:48,600
Speaker 3: And so some people see this as a risk. Some

705
00:33:48,640 --> 00:33:52,880
Speaker 3: people see this as an opportunity. And Ivanhrschtott runs bankoffs Hrschtott.

706
00:33:52,880 --> 00:33:55,200
Speaker 3: It's a private bank, privately owned bank, and he's like,

707
00:33:55,240 --> 00:33:56,959
Speaker 3: this is my I think he called it his big hour, right,

708
00:33:57,000 --> 00:33:59,760
Speaker 3: this is my moment to make my mark. They take

709
00:33:59,760 --> 00:34:04,160
Speaker 3: a ass of long dollar position, goes bad and they fail,

710
00:34:04,480 --> 00:34:07,720
Speaker 3: like the bank fails. Hirstott never takes responsibility for this.

711
00:34:07,760 --> 00:34:10,160
Speaker 3: By the way, he writes an autobiography later called how

712
00:34:10,200 --> 00:34:13,720
Speaker 3: My life Savings was Stolen for Me or My life's

713
00:34:13,719 --> 00:34:16,720
Speaker 3: work was stolen for me? In Germans, I'll check with

714
00:34:16,719 --> 00:34:20,960
Speaker 3: with somebody. Yeah, but but but the bank fails. It's

715
00:34:20,960 --> 00:34:24,719
Speaker 3: seized by German regulators in the German afternoon, which makes sense.

716
00:34:24,760 --> 00:34:26,719
Speaker 3: The problem is they had a bunch of outstanding dollar

717
00:34:26,760 --> 00:34:30,640
Speaker 3: transactions in New York slated for New York afternoon. So

718
00:34:31,000 --> 00:34:35,319
Speaker 3: the European transaction, the European payments go through on these.

719
00:34:35,880 --> 00:34:38,640
Speaker 3: For an exchange transaction, I give you Deutsche marks, you

720
00:34:38,640 --> 00:34:42,200
Speaker 3: give me dollars, right, or you give me Deutsche marks,

721
00:34:42,200 --> 00:34:43,839
Speaker 3: I give you dollars in this case, and so they

722
00:34:43,840 --> 00:34:46,680
Speaker 3: got their Deutsche marks, but they never sent out the dollar.

723
00:34:46,800 --> 00:34:50,640
Speaker 1: So this is classic settlement risk. I mean, so Hairstott

724
00:34:50,719 --> 00:34:54,200
Speaker 1: risk became basically a synonym for this type of risk.

725
00:34:54,280 --> 00:34:56,040
Speaker 3: Only a synonym. It's the reason we have Basil bank

726
00:34:56,080 --> 00:34:58,640
Speaker 3: regulations in the first instance. So the Basil Committee is

727
00:34:58,680 --> 00:35:01,600
Speaker 3: convened to like address this issue, and it ultimately evolves

728
00:35:01,600 --> 00:35:06,520
Speaker 3: into a much more elaborate international standard and standard setting mechanism.

729
00:35:06,600 --> 00:35:09,399
Speaker 3: But like the idea of having international coordination of bank

730
00:35:09,440 --> 00:35:12,680
Speaker 3: regulations comes out of this episode. So that's also I

731
00:35:12,680 --> 00:35:15,480
Speaker 3: guess another episode, but from a we.

732
00:35:15,520 --> 00:35:18,680
Speaker 1: Just need to get the Josh Younger lecture, I think.

733
00:35:19,440 --> 00:35:22,719
Speaker 3: So in New York, the payments don't go through. It's

734
00:35:22,760 --> 00:35:24,760
Speaker 3: a significant amount of money. There's a lot of banks

735
00:35:24,840 --> 00:35:29,040
Speaker 3: holding the bag, and the payment system essentially breaks down,

736
00:35:29,120 --> 00:35:32,000
Speaker 3: Like no one's willing to do cross border payments because

737
00:35:32,000 --> 00:35:33,479
Speaker 3: they're not sure if this is going to happen again,

738
00:35:33,520 --> 00:35:35,400
Speaker 3: Like who's next, what's the next shoe to draw? Right?

739
00:35:35,560 --> 00:35:39,600
Speaker 3: Always the same, Yeah, And so the Clearinghouse Association starts

740
00:35:39,640 --> 00:35:42,160
Speaker 3: allowing for clawbacks of payments until the next day afternoon

741
00:35:42,160 --> 00:35:44,279
Speaker 3: to try to facilitate this, and like kind of works

742
00:35:44,280 --> 00:35:46,839
Speaker 3: for the spot market, but doesn't really work for the

743
00:35:47,000 --> 00:35:49,760
Speaker 3: foreign exchange derivatives market. And so you get a tiering

744
00:35:50,480 --> 00:35:54,359
Speaker 3: of intermediaries of counterparties where the largest, best capitalized, most

745
00:35:54,400 --> 00:35:56,960
Speaker 3: well known banks can trade freely, but the small and

746
00:35:57,000 --> 00:35:59,280
Speaker 3: medium sized banks are essentially shut out of the market.

747
00:35:59,640 --> 00:36:00,920
Speaker 1: Sounds a little bit familiar.

748
00:36:01,080 --> 00:36:04,040
Speaker 3: So now you're eur dollar issuers can't hedge, they can't

749
00:36:04,040 --> 00:36:07,000
Speaker 3: hedge their foreign exchange risks, and now they're long dollars

750
00:36:07,120 --> 00:36:10,239
Speaker 3: or they're short dollars from their deposits and they don't

751
00:36:10,239 --> 00:36:12,799
Speaker 3: have any hedge for the other side. So unless they

752
00:36:12,800 --> 00:36:15,000
Speaker 3: have a match with the assets, which they didn't always have,

753
00:36:16,000 --> 00:36:17,120
Speaker 3: they have a problem.

754
00:36:17,360 --> 00:36:20,560
Speaker 2: So how did they solve this inability to hedge?

755
00:36:20,640 --> 00:36:22,360
Speaker 3: It's so then the question is what do you do

756
00:36:22,400 --> 00:36:25,279
Speaker 3: if there's another run, Like how do you backstop the

757
00:36:25,320 --> 00:36:27,960
Speaker 3: ear dollar market in a more concrete way, who is

758
00:36:27,960 --> 00:36:29,879
Speaker 3: the lender of last resort to the euro dollar market?

759
00:36:29,920 --> 00:36:31,640
Speaker 2: Which is kind of like my first like the first

760
00:36:31,719 --> 00:36:33,280
Speaker 2: question I had, like at the very beginning.

761
00:36:33,360 --> 00:36:36,440
Speaker 3: Finally, twenty years later they start really contemplating this in detail,

762
00:36:36,640 --> 00:36:38,640
Speaker 3: and because the first instance is fifty four, then in

763
00:36:38,680 --> 00:36:40,160
Speaker 3: nineteen seventy four they go, you know what, we really

764
00:36:40,200 --> 00:36:42,920
Speaker 3: need a plan for this, and so they start convening

765
00:36:42,920 --> 00:36:45,439
Speaker 3: meetings and the usual things. In July of seventy four,

766
00:36:45,480 --> 00:36:48,919
Speaker 3: there's like a tacit agreement to do something, but it's

767
00:36:48,920 --> 00:36:52,319
Speaker 3: not concrete. It's unclear how it's going to be like executed.

768
00:36:52,400 --> 00:36:55,759
Speaker 3: And basically the market goes do better and you have

769
00:36:55,880 --> 00:36:59,120
Speaker 3: this like massive shift where on the one hand, the

770
00:36:59,160 --> 00:37:01,080
Speaker 3: euro dollar market was from out of favor to very

771
00:37:01,160 --> 00:37:03,080
Speaker 3: much in favor. This is an important mechanism. We need

772
00:37:03,120 --> 00:37:06,440
Speaker 3: to maintain the flow of oil to facilitate economic growth.

773
00:37:06,719 --> 00:37:08,120
Speaker 3: We need a stable.

774
00:37:07,920 --> 00:37:08,680
Speaker 4: Urin dollar market.

775
00:37:08,880 --> 00:37:09,080
Speaker 2: Oh.

776
00:37:09,239 --> 00:37:13,960
Speaker 3: Interesting, the regulatory impulse reverses completely, and it's in September.

777
00:37:14,120 --> 00:37:16,680
Speaker 3: The G ten central bank governors go so far as

778
00:37:16,680 --> 00:37:18,680
Speaker 3: to put it a public communicate where they say we're

779
00:37:18,680 --> 00:37:20,640
Speaker 3: going to do it is necessary, this is whatever it

780
00:37:20,680 --> 00:37:23,400
Speaker 3: takes the first time. So this is just like what

781
00:37:23,440 --> 00:37:25,640
Speaker 3: happened in Europe around the sovereign deck crisis. But it's

782
00:37:25,640 --> 00:37:27,840
Speaker 3: in seventy four with relation to the euro dollar market

783
00:37:28,200 --> 00:37:29,960
Speaker 3: and they say we're going to do whatever it takes.

784
00:37:30,120 --> 00:37:33,239
Speaker 3: I don't remember the exact words, to facilitate liquidity in

785
00:37:33,280 --> 00:37:35,160
Speaker 3: the euro dollar market and make sure it's stable.

786
00:37:35,239 --> 00:37:37,239
Speaker 2: Sorry, real quick, at who said this or who is

787
00:37:37,239 --> 00:37:37,879
Speaker 2: in the.

788
00:37:37,840 --> 00:37:40,040
Speaker 3: G ten central bank governor to put out a communicate,

789
00:37:40,239 --> 00:37:42,920
Speaker 3: So it's a collective agreement, collective They leave out some

790
00:37:43,000 --> 00:37:45,560
Speaker 3: details like what do you literally mean? But because they

791
00:37:45,560 --> 00:37:47,560
Speaker 3: put it in a communicay, this is all about central

792
00:37:47,600 --> 00:37:49,680
Speaker 3: bank communication. Yeah, so like we're putting it on paper,

793
00:37:49,680 --> 00:37:51,880
Speaker 3: we're putting it in the newspaper. They send it to

794
00:37:51,880 --> 00:37:53,279
Speaker 3: the Wall Street Journal because that's what you had to

795
00:37:53,280 --> 00:37:55,120
Speaker 3: do back then. Right, there's there's no computers and so

796
00:37:55,320 --> 00:37:58,480
Speaker 3: like you please print this, and so they print it fat.

797
00:37:58,360 --> 00:38:01,239
Speaker 1: To the Wall Street fast facts is in the seventies.

798
00:38:01,600 --> 00:38:05,200
Speaker 3: Maybe it's a tele accident question. But they put out

799
00:38:05,200 --> 00:38:07,919
Speaker 3: a public communication that this is the case. The goal

800
00:38:08,000 --> 00:38:12,520
Speaker 3: being to like stop the contagion, so to specifically to

801
00:38:12,560 --> 00:38:14,880
Speaker 3: facilitate the quid in the eur dollar market. And the

802
00:38:14,920 --> 00:38:19,240
Speaker 3: implication is we need this thing to avoid a global

803
00:38:19,320 --> 00:38:22,480
Speaker 3: monetary contraction. There's a lot of like handwringing in the press,

804
00:38:22,520 --> 00:38:25,760
Speaker 3: like if they don't do something, we could have global

805
00:38:26,160 --> 00:38:29,040
Speaker 3: monetary based destruction through the collapse of the eurillar system.

806
00:38:29,320 --> 00:38:32,040
Speaker 3: That's what happened in nineteen twenty nine to nineteen thirty three.

807
00:38:32,320 --> 00:38:34,520
Speaker 3: It could happen again. We're looking at another great depression.

808
00:38:34,600 --> 00:38:35,520
Speaker 3: Somebody do something.

809
00:38:36,000 --> 00:38:39,440
Speaker 1: So they don't announce the exact mechanism, but they just

810
00:38:39,480 --> 00:38:41,680
Speaker 1: announce that they will do whatever it takes.

811
00:38:41,719 --> 00:38:44,880
Speaker 3: Yeah, so very clear about their commitment in a public

812
00:38:44,920 --> 00:38:47,280
Speaker 3: form as opposed to having you behind the scenes conversation

813
00:38:47,360 --> 00:38:48,200
Speaker 3: that gets leaked out.

814
00:38:48,719 --> 00:38:51,920
Speaker 2: Apparently the facts machine was invented in the early eighteen hundreds,

815
00:38:52,719 --> 00:38:55,799
Speaker 2: but the actual modern facts in nineteen sixty four. It's

816
00:38:55,800 --> 00:38:59,040
Speaker 2: just amazing. Yeah, so maybe it was a fact.

817
00:38:59,040 --> 00:39:00,799
Speaker 3: I'm sure the year dollar had it. I'm not sure

818
00:39:00,800 --> 00:39:01,680
Speaker 3: the central banks had it.

819
00:39:01,719 --> 00:39:05,040
Speaker 2: Yet, just on petro dollars. You know, this word like

820
00:39:05,120 --> 00:39:07,480
Speaker 2: even more than euro dollars, like conjures up all kinds

821
00:39:07,480 --> 00:39:10,400
Speaker 2: of conspiracy theories about how we forced, you know, the

822
00:39:10,560 --> 00:39:13,239
Speaker 2: force the oil exporters to use our currency. And this

823
00:39:13,320 --> 00:39:16,680
Speaker 2: is really crucial, like is there an element like of

824
00:39:16,800 --> 00:39:19,600
Speaker 2: truth to that story where like the US made a

825
00:39:19,640 --> 00:39:23,600
Speaker 2: concerted effort to figure out how the oil exporting nations

826
00:39:23,640 --> 00:39:25,480
Speaker 2: in the Middle East were going to you know, the

827
00:39:25,520 --> 00:39:27,040
Speaker 2: currency that they were going to sell their oil in.

828
00:39:27,200 --> 00:39:29,640
Speaker 3: Yeah, so it wasn't always petro dollars. It was originally

829
00:39:29,920 --> 00:39:32,759
Speaker 3: seventy five percent dollars twenty five percent Stirling, So it

830
00:39:32,800 --> 00:39:35,399
Speaker 3: was a mix. I don't know where that ratio came from,

831
00:39:35,440 --> 00:39:37,720
Speaker 3: but that was sort of like the agreed upon rough

832
00:39:38,160 --> 00:39:41,560
Speaker 3: breakout of oil revenues in like nineteen seventy three. And

833
00:39:41,600 --> 00:39:44,399
Speaker 3: the question is like, why was it all dollars after then?

834
00:39:44,600 --> 00:39:46,960
Speaker 3: And I wouldn't say conspiracy theory, but there was a

835
00:39:47,000 --> 00:39:49,719
Speaker 3: policy decision at the Treasury that we do want them

836
00:39:49,800 --> 00:39:52,680
Speaker 3: using dollars, and we specifically want them buying treasuries, which

837
00:39:52,680 --> 00:39:55,280
Speaker 3: makes sense. So like other than the euro dollar market,

838
00:39:55,280 --> 00:39:58,440
Speaker 3: you can have governments provide this redistribution mechanism as opposed

839
00:39:58,480 --> 00:40:01,239
Speaker 3: to intermediating the extension of credit. It can go through

840
00:40:01,239 --> 00:40:03,440
Speaker 3: government spending, and the US is looking at a widening

841
00:40:03,440 --> 00:40:04,080
Speaker 3: budget deficit.

842
00:40:04,239 --> 00:40:06,160
Speaker 1: Wait, so the idea there was just well, if we're

843
00:40:06,160 --> 00:40:08,799
Speaker 1: going to spend enormous amounts on oil, we might as

844
00:40:08,840 --> 00:40:10,680
Speaker 1: well get something back.

845
00:40:11,320 --> 00:40:14,319
Speaker 3: I guess I can't validate that specifically, but like that

846
00:40:14,520 --> 00:40:17,160
Speaker 3: seems plausible. All we know is that they decided that

847
00:40:17,480 --> 00:40:19,399
Speaker 3: this was a good way to sell treasury bum which

848
00:40:19,440 --> 00:40:21,960
Speaker 3: makes sense. There's a lot of excess dollar based savings abroad.

849
00:40:22,360 --> 00:40:26,000
Speaker 3: But that requires one that the oil importing the oil

850
00:40:26,000 --> 00:40:29,560
Speaker 3: exporting countries be comfortable buying treasuries, which is like, got

851
00:40:29,560 --> 00:40:31,520
Speaker 3: a bunch of things around that, and two that it's

852
00:40:31,520 --> 00:40:34,239
Speaker 3: stay in dollars. Those two things are connected. So in

853
00:40:34,239 --> 00:40:36,920
Speaker 3: the spring of seventy four, Kissinger convenes this like council

854
00:40:37,040 --> 00:40:40,840
Speaker 3: that Saudi Araba specifically to think about US Saudi economic coordination.

855
00:40:41,120 --> 00:40:42,719
Speaker 3: We don't have a lot of records from that that

856
00:40:42,800 --> 00:40:45,040
Speaker 3: at least I have easy access to. But David Spiro

857
00:40:45,080 --> 00:40:46,799
Speaker 3: wrote a book about this a while ago, and his

858
00:40:46,920 --> 00:40:50,680
Speaker 3: view was those meetings in part revolved around trying to

859
00:40:50,719 --> 00:40:54,160
Speaker 3: convince them to use only dollars for their oil revenues.

860
00:40:54,200 --> 00:40:56,839
Speaker 3: So like that was one line of debate at these

861
00:40:56,880 --> 00:40:59,960
Speaker 3: council meetings. The other is the treasury side of it.

862
00:41:00,320 --> 00:41:03,960
Speaker 3: And so Bill Simon's idea is yere dollars of the

863
00:41:04,000 --> 00:41:07,000
Speaker 3: primary recycling mechanism. But like, while we're at it, maybe

864
00:41:07,040 --> 00:41:09,200
Speaker 3: we'll get some revenue for the government. And so he

865
00:41:09,280 --> 00:41:13,319
Speaker 3: flies to Riod in July. He actually gets scooped by

866
00:41:13,560 --> 00:41:17,280
Speaker 3: Fannie May, who wants to sell more deventures to fund mortgage.

867
00:41:17,520 --> 00:41:20,319
Speaker 1: Oh, they get their first and they're like and there's like.

868
00:41:20,280 --> 00:41:22,200
Speaker 3: This hole back and forth in the State department about

869
00:41:22,239 --> 00:41:24,239
Speaker 3: like who approved this, and like why is this guy here?

870
00:41:24,280 --> 00:41:26,239
Speaker 3: First no one told me, but there's a little bit

871
00:41:26,239 --> 00:41:28,640
Speaker 3: of a gold rush dynamic. But he shows up and

872
00:41:28,640 --> 00:41:31,719
Speaker 3: he says, Okay, here's what we can offer. You buy

873
00:41:31,719 --> 00:41:34,799
Speaker 3: treasury bonds. They will be after the auction. You can

874
00:41:34,840 --> 00:41:36,399
Speaker 3: look at the price and decide if you want more.

875
00:41:36,640 --> 00:41:38,680
Speaker 3: We will do him on an add on basis, which

876
00:41:38,719 --> 00:41:40,759
Speaker 3: means you're not an active participant in the auction, you

877
00:41:40,840 --> 00:41:43,279
Speaker 3: get like a second look and you can decide if

878
00:41:43,280 --> 00:41:45,600
Speaker 3: you want them at that price. Your name will not

879
00:41:45,640 --> 00:41:48,040
Speaker 3: appear on the ticket. So like the Federals are from

880
00:41:48,040 --> 00:41:50,320
Speaker 3: New York, is going to be the custodian, and so

881
00:41:50,360 --> 00:41:52,800
Speaker 3: they're going to transact on your behalf. You have confidentiality

882
00:41:53,480 --> 00:41:58,560
Speaker 3: and the implication is in espicially saudis in July and

883
00:41:58,640 --> 00:42:01,600
Speaker 3: it's like reasonably well received and they start dabbling in

884
00:42:01,600 --> 00:42:04,839
Speaker 3: the treasury market in September. The problem is that the

885
00:42:04,880 --> 00:42:09,160
Speaker 3: governor who did this deal dies in October rand it

886
00:42:09,239 --> 00:42:11,279
Speaker 3: like suddenly he has a heart attack in DC while

887
00:42:11,320 --> 00:42:14,520
Speaker 3: he's on a set of meetings, and so takes them

888
00:42:14,560 --> 00:42:16,120
Speaker 3: a little while to find a successor. But the whole

889
00:42:16,120 --> 00:42:18,080
Speaker 3: thing gets put on ice for a little while, and

890
00:42:18,080 --> 00:42:20,759
Speaker 3: then when they find a successor, he's identified. He's not

891
00:42:20,800 --> 00:42:22,799
Speaker 3: on anyone's list. There's a bunch of State Department cables

892
00:42:22,800 --> 00:42:25,279
Speaker 3: for basically who is this guy, because nobody thought he

893
00:42:25,320 --> 00:42:27,440
Speaker 3: would be one of them. But he's a technocrat, he

894
00:42:27,520 --> 00:42:30,399
Speaker 3: was educated in the US. He's viewed as quote very

895
00:42:30,520 --> 00:42:33,239
Speaker 3: pro American, was the evaluation of the State Department had

896
00:42:33,680 --> 00:42:37,759
Speaker 3: and he's viewed as like the harbinger of a technocratic administration.

897
00:42:37,800 --> 00:42:39,879
Speaker 3: That's going to be much more US friendly. So it's

898
00:42:39,880 --> 00:42:42,880
Speaker 3: like a big signal from the Saudi government that at

899
00:42:42,960 --> 00:42:46,000
Speaker 3: least taken to be that we're willing to sort of

900
00:42:46,040 --> 00:42:51,320
Speaker 3: work with you guys on stuff. When he's appointed, literally

901
00:42:51,360 --> 00:42:55,520
Speaker 3: his first meeting is with Treasury to restart deal negotiations

902
00:42:56,120 --> 00:42:59,560
Speaker 3: on Treasury by IT purchases and that's his first meet,

903
00:42:59,640 --> 00:43:01,319
Speaker 3: like three before he takes office. He goes, I want

904
00:43:01,360 --> 00:43:03,760
Speaker 3: that to be my first meeting. So they have the meeting.

905
00:43:04,520 --> 00:43:07,480
Speaker 3: I think it was November, and in December there's a

906
00:43:07,520 --> 00:43:11,520
Speaker 3: surprise announcement from the Saudi oil cut from the Saudi

907
00:43:11,560 --> 00:43:14,520
Speaker 3: oil producing companies that they will no longer except Stirling

908
00:43:14,840 --> 00:43:17,840
Speaker 3: in exchange for whale so all rolaive revenue in dollars.

909
00:43:18,440 --> 00:43:20,880
Speaker 3: Very awkward because the British Chancellor of the Exchequer is

910
00:43:20,920 --> 00:43:24,760
Speaker 3: in Saudi Arabia, yes, leaks out. So and when esper.

911
00:43:24,600 --> 00:43:27,200
Speaker 1: Conon the British had really close ties with Saudi Aramco

912
00:43:27,320 --> 00:43:28,080
Speaker 1: from what I remember.

913
00:43:28,280 --> 00:43:31,480
Speaker 3: Yeah, And basically the response of the administration Satura Abia

914
00:43:31,560 --> 00:43:33,799
Speaker 3: is like no comment to the State Department. So they

915
00:43:33,800 --> 00:43:36,040
Speaker 3: said it's very unfortunate that this happened. So I don't

916
00:43:36,080 --> 00:43:37,840
Speaker 3: know what you take from that other than maybe this

917
00:43:37,960 --> 00:43:40,759
Speaker 3: was like an unintended release of information. But like it

918
00:43:40,800 --> 00:43:42,920
Speaker 3: happens on the thirteenth of December. On the fourteenth of

919
00:43:42,920 --> 00:43:45,799
Speaker 3: December that there's an agreement on the Treasury deal. So

920
00:43:45,800 --> 00:43:49,120
Speaker 3: there's a lot of alignment between these two decisions. There's

921
00:43:49,120 --> 00:43:51,360
Speaker 3: no evidence that they were coordinated in any respect, but

922
00:43:51,400 --> 00:43:55,240
Speaker 3: they certainly go like the same direction. And some people

923
00:43:55,280 --> 00:43:58,120
Speaker 3: speculate that there was like a quid pro quo there

924
00:43:58,400 --> 00:44:02,000
Speaker 3: there's no direct evidence of that in the in the record,

925
00:44:02,080 --> 00:44:04,240
Speaker 3: but you know, people put two and two together.

926
00:44:05,000 --> 00:44:07,359
Speaker 1: So can I just ask the Saudis agree to all

927
00:44:07,440 --> 00:44:10,280
Speaker 1: of this to petro dollars sort of as a concept

928
00:44:10,320 --> 00:44:13,680
Speaker 1: because they get to buy US treasuries in a semi

929
00:44:13,920 --> 00:44:14,959
Speaker 1: advantaged way.

930
00:44:15,719 --> 00:44:18,040
Speaker 3: It's not clear that's the only reason, but like those

931
00:44:18,040 --> 00:44:21,000
Speaker 3: two things are connected in time to understand some people

932
00:44:21,000 --> 00:44:24,520
Speaker 3: have put together that story. There's later comments and Treasury

933
00:44:24,520 --> 00:44:26,640
Speaker 3: officials that are like the Saudis are holding the line

934
00:44:26,760 --> 00:44:28,480
Speaker 3: on the dollar even though people want them to use

935
00:44:28,520 --> 00:44:31,840
Speaker 3: other things, and so like that's where the records a

936
00:44:31,880 --> 00:44:35,799
Speaker 3: little sketchy. But the timing and the nature of these

937
00:44:35,840 --> 00:44:38,560
Speaker 3: agreements has led some people to speculate that they were connected.

938
00:44:38,640 --> 00:44:41,239
Speaker 2: But also but to your point, like, if you have

939
00:44:41,280 --> 00:44:43,840
Speaker 2: a surplus of dollars and that's like a problem you

940
00:44:43,920 --> 00:44:46,960
Speaker 2: have to solve regardless, Right, So maybe you don't necessarily

941
00:44:46,960 --> 00:44:49,760
Speaker 2: go directly to the treasury market because of some advantage,

942
00:44:49,760 --> 00:44:51,960
Speaker 2: but at some level, like you got to put them somewhere,

943
00:44:51,960 --> 00:44:54,319
Speaker 2: and so there was some effort made to like, here's

944
00:44:54,360 --> 00:44:55,560
Speaker 2: an easy way to solve your problem.

945
00:44:55,640 --> 00:44:57,239
Speaker 3: Yeah, and it's not like they're getting a better price,

946
00:44:57,280 --> 00:44:59,480
Speaker 3: they're just getting somewhat better treatment in the sense that

947
00:44:59,520 --> 00:45:01,360
Speaker 3: they can go through they can look at the auction

948
00:45:01,520 --> 00:45:03,279
Speaker 3: decide if they like how it went, if they liked

949
00:45:03,280 --> 00:45:04,200
Speaker 3: the price, they can buy them.

950
00:45:04,239 --> 00:45:04,439
Speaker 4: Yeah.

951
00:45:04,840 --> 00:45:07,480
Speaker 1: Imagine if SoftBank had got their first and all the

952
00:45:07,520 --> 00:45:09,920
Speaker 1: Saudis would put their money in soft Bank stock. So

953
00:45:10,200 --> 00:45:12,279
Speaker 1: this is it. This is the moment when pet your

954
00:45:12,360 --> 00:45:15,080
Speaker 1: dollars become a thing, and euro dollars have already become

955
00:45:15,080 --> 00:45:18,120
Speaker 1: a thing, and the dollar is sort of firmly embedded

956
00:45:18,239 --> 00:45:20,560
Speaker 1: in the tissue of global financial markets.

957
00:45:20,640 --> 00:45:22,759
Speaker 3: Yeah, and so it doesn't happen all at once, like

958
00:45:22,760 --> 00:45:26,000
Speaker 3: Saudi is not all oil supply, but something like Bank

959
00:45:26,040 --> 00:45:28,040
Speaker 3: eventualy put out an estimate a few years later, by

960
00:45:28,200 --> 00:45:31,160
Speaker 3: seventy five, dollars are like eighty percent of oil revenue,

961
00:45:31,160 --> 00:45:33,120
Speaker 3: and then by seventy six or like ninety four percent

962
00:45:33,160 --> 00:45:36,719
Speaker 3: of oil revenue. So like it happens pretty quickly. But

963
00:45:37,120 --> 00:45:39,600
Speaker 3: you know, at that point, the dollars is already the

964
00:45:39,719 --> 00:45:42,000
Speaker 3: medium of global trade for the most part, it's already

965
00:45:42,000 --> 00:45:46,160
Speaker 3: the primary reserve currency. But because oil revenues are the

966
00:45:46,200 --> 00:45:51,040
Speaker 3: primary thing happening in global finance and global monetary system,

967
00:45:51,120 --> 00:45:54,520
Speaker 3: like this cements in some sense that status. So all

968
00:45:54,560 --> 00:45:57,920
Speaker 3: of this building up of the eurodollar market is kind

969
00:45:57,960 --> 00:46:00,360
Speaker 3: of like put to work in a sense through the

970
00:46:00,400 --> 00:46:02,480
Speaker 3: oil shock of nineteen seventy three in the rise of

971
00:46:02,480 --> 00:46:05,080
Speaker 3: the petro dollar system. It's important to say that petro

972
00:46:05,120 --> 00:46:07,160
Speaker 3: dollars don't create the ear dollar market has to be

973
00:46:07,239 --> 00:46:11,480
Speaker 3: in place, elastic and flexible and already that has the

974
00:46:11,480 --> 00:46:14,560
Speaker 3: network effects that allow it to function as a distribution mechanism.

975
00:46:15,040 --> 00:46:15,200
Speaker 4: Right.

976
00:46:15,239 --> 00:46:18,359
Speaker 2: That's the thing I like really never realized before that

977
00:46:18,400 --> 00:46:22,400
Speaker 2: there's sort of like it almost sounds like petro dollars

978
00:46:22,440 --> 00:46:26,040
Speaker 2: are like another skin of the eurodollar market. Then it's

979
00:46:26,080 --> 00:46:27,000
Speaker 2: like a slice.

980
00:46:26,640 --> 00:46:28,520
Speaker 3: Of it, Yeah, and they're the thing that makes it

981
00:46:28,520 --> 00:46:31,480
Speaker 3: grow the most. But all of the basics have to

982
00:46:31,520 --> 00:46:33,560
Speaker 3: be in place for that to actually work.

983
00:46:34,200 --> 00:46:38,319
Speaker 1: So is the implication that, you know, we do have

984
00:46:38,560 --> 00:46:41,920
Speaker 1: dollar dominance nowadays in the global financial system, but in

985
00:46:42,000 --> 00:46:45,000
Speaker 1: order to get there, the US had to give up

986
00:46:45,200 --> 00:46:47,560
Speaker 1: a little bit of monetary sovereignty.

987
00:46:48,440 --> 00:46:51,200
Speaker 3: I think the lesson is at least just the experience

988
00:46:51,200 --> 00:46:54,080
Speaker 3: of the US in that period, and the US in

989
00:46:54,120 --> 00:46:56,239
Speaker 3: some sense, when dollar dominance is coming into place, you

990
00:46:56,239 --> 00:46:58,319
Speaker 3: have the disruption of the Second World War, so you

991
00:46:58,320 --> 00:47:00,799
Speaker 3: have a massive disruption of the global monetary system. The

992
00:47:00,880 --> 00:47:03,640
Speaker 3: US is essentially the only economy left standing. And so

993
00:47:03,760 --> 00:47:06,560
Speaker 3: like the fundamental arguments about global reserve currencies like very

994
00:47:06,640 --> 00:47:10,200
Speaker 3: much apply to that period. Even so, there were lots

995
00:47:10,200 --> 00:47:12,120
Speaker 3: of policy decisions that had to get made. This was

996
00:47:12,200 --> 00:47:15,600
Speaker 3: not a foregun conclusion. There were key decision points where

997
00:47:16,320 --> 00:47:20,360
Speaker 3: certain key policies were put in place, or backstops provided,

998
00:47:20,800 --> 00:47:24,480
Speaker 3: or you know, agreements offered, and so like, the story

999
00:47:24,480 --> 00:47:26,880
Speaker 3: of global dollar dominance like is an interesting one. I

1000
00:47:26,880 --> 00:47:28,760
Speaker 3: guess it's kind of the conclusion. Like, it's an interesting

1001
00:47:28,800 --> 00:47:32,120
Speaker 3: one with characters and actors and like decisions and near misses,

1002
00:47:32,320 --> 00:47:34,440
Speaker 3: and we usually think of it as just kind of

1003
00:47:34,440 --> 00:47:36,440
Speaker 3: like a boulder rolling down a hill and it's like

1004
00:47:36,560 --> 00:47:39,200
Speaker 3: kind of unstoppable, and that may yet have been so.

1005
00:47:39,520 --> 00:47:42,640
Speaker 3: But the real story is a very like rich one.

1006
00:47:42,719 --> 00:47:44,480
Speaker 2: Well as Tracy point it. You know, in the beginning,

1007
00:47:44,480 --> 00:47:46,319
Speaker 2: I was like a sort of emergent in Tracy's like, well,

1008
00:47:46,360 --> 00:47:48,279
Speaker 2: actually maybe the story is not And I think that

1009
00:47:48,480 --> 00:47:51,160
Speaker 2: to your point, Like, no, like things happened, meetings happened,

1010
00:47:51,239 --> 00:47:53,560
Speaker 2: flights happened, troops to Europe happened, like all these things.

1011
00:47:53,640 --> 00:47:54,960
Speaker 3: Yeah, Like I don't think if there's a movie in it,

1012
00:47:55,040 --> 00:47:56,480
Speaker 3: but like there's a book in it, you know, that

1013
00:47:56,600 --> 00:47:57,160
Speaker 3: kind of thing.

1014
00:47:57,320 --> 00:48:00,560
Speaker 1: Someone makes euro dollar gum, there's a TV series, there's

1015
00:48:00,560 --> 00:48:03,440
Speaker 1: a TV series for sure. Well, Josh, we're gonna have

1016
00:48:03,440 --> 00:48:05,239
Speaker 1: to leave it there. But it was wonderful having you

1017
00:48:05,320 --> 00:48:07,719
Speaker 1: on the show. And you know, as much as some

1018
00:48:07,800 --> 00:48:11,960
Speaker 1: of the dedollarization discourse annoys me, I'm very grateful that

1019
00:48:12,000 --> 00:48:15,080
Speaker 1: it gives us a chance to revisit financial history with you.

1020
00:48:15,200 --> 00:48:15,920
Speaker 1: So thank you so much.

1021
00:48:15,960 --> 00:48:17,759
Speaker 4: No, it's great to be back. Thanks for having me.

1022
00:48:30,960 --> 00:48:33,200
Speaker 1: So, Joe. I don't know if anyone listening heard me

1023
00:48:33,320 --> 00:48:36,879
Speaker 1: frantically typing at the euro dollar gum mentioned, but I haven't.

1024
00:48:37,520 --> 00:48:40,319
Speaker 2: We both pulled up emay and stuff like I need

1025
00:48:40,360 --> 00:48:40,799
Speaker 2: to find this.

1026
00:48:40,920 --> 00:48:42,759
Speaker 1: I haven't been able to find an image, but there's

1027
00:48:42,920 --> 00:48:45,680
Speaker 1: a nineteen seventy four article from the New York Times.

1028
00:48:45,800 --> 00:48:48,239
Speaker 1: The headline is the euro dollar bubble, and it has

1029
00:48:48,280 --> 00:48:51,479
Speaker 1: a description where it talks about the inflow of euro

1030
00:48:51,560 --> 00:48:55,120
Speaker 1: dollars takes the form of bubble gum package in gold

1031
00:48:55,200 --> 00:48:57,160
Speaker 1: foil to resemble coins.

1032
00:48:57,360 --> 00:48:58,400
Speaker 2: We gotta find that gum.

1033
00:48:58,480 --> 00:49:00,759
Speaker 1: Isn't that amazing? There's so much pick out of there,

1034
00:49:00,960 --> 00:49:03,920
Speaker 1: like so many things I hadn't realized, including where the

1035
00:49:03,960 --> 00:49:07,200
Speaker 1: euro in euro dollar actually came from. But I guess

1036
00:49:07,200 --> 00:49:10,040
Speaker 1: two things stand out so one the theme that Josh

1037
00:49:10,120 --> 00:49:12,799
Speaker 1: hit on at the very end, this idea that we

1038
00:49:12,880 --> 00:49:16,440
Speaker 1: think of the dollar dominance theme as largely a sort

1039
00:49:16,480 --> 00:49:20,120
Speaker 1: of network organic effect that emerged over time, when actually, yes,

1040
00:49:20,280 --> 00:49:23,120
Speaker 1: there were some conscious decisions that might have gone into

1041
00:49:23,360 --> 00:49:26,319
Speaker 1: at least making it more probable. And then secondly, the

1042
00:49:26,360 --> 00:49:30,960
Speaker 1: asset liability point. That's something that Karthik mentioned in his

1043
00:49:31,120 --> 00:49:32,960
Speaker 1: episode as well, where he was talking about like, well,

1044
00:49:33,000 --> 00:49:35,680
Speaker 1: you're not going to get a lot of un Chinese

1045
00:49:35,680 --> 00:49:40,000
Speaker 1: renman b dominance until you actually see liabilities denominated in

1046
00:49:40,120 --> 00:49:43,600
Speaker 1: this and that's kind of what happened with euro dollars, right.

1047
00:49:43,719 --> 00:49:46,640
Speaker 2: Yeah, no, so much I learned from that, and you know,

1048
00:49:46,719 --> 00:49:48,839
Speaker 2: to the point not to make everything like what does

1049
00:49:48,880 --> 00:49:51,279
Speaker 2: it mean for today? But then it sort of gives

1050
00:49:51,320 --> 00:49:54,040
Speaker 2: you a further appreciation of how much work another currency

1051
00:49:54,080 --> 00:49:56,279
Speaker 2: would have to do to ever even like entertain the

1052
00:49:56,320 --> 00:49:59,160
Speaker 2: idea of like a replacement for this, like not just

1053
00:49:59,760 --> 00:50:01,560
Speaker 2: it's not just going to be emergent. It's going to

1054
00:50:01,640 --> 00:50:04,120
Speaker 2: be the result of diplomacy and back and forth and

1055
00:50:04,200 --> 00:50:06,120
Speaker 2: all these other things. You know, I was thinking about.

1056
00:50:06,160 --> 00:50:08,480
Speaker 2: We recently recorded an episode with Jim Grant and he

1057
00:50:08,840 --> 00:50:11,319
Speaker 2: made that point. He's like, you know, in technology, they

1058
00:50:11,320 --> 00:50:14,240
Speaker 2: sort of like build on the shoulders of giants. In finance,

1059
00:50:14,280 --> 00:50:16,319
Speaker 2: you just sort of repeat the same stories over and

1060
00:50:16,320 --> 00:50:16,759
Speaker 2: over again.

1061
00:50:16,800 --> 00:50:18,760
Speaker 1: And do you build on the communicats of Basil?

1062
00:50:18,960 --> 00:50:20,600
Speaker 2: Yeah, and you just sort of do it and again.

1063
00:50:20,680 --> 00:50:22,799
Speaker 2: It's like every time we talk to Josh, it's like, man,

1064
00:50:22,840 --> 00:50:25,960
Speaker 2: nothing really changes. Just the risk is slightly different. There's

1065
00:50:25,960 --> 00:50:27,480
Speaker 2: a new name for it, but it's the same sort

1066
00:50:27,480 --> 00:50:29,080
Speaker 2: of puzzles in different time periods.

1067
00:50:29,200 --> 00:50:32,080
Speaker 1: Yeah, no new risk under the sun. Well, on that note,

1068
00:50:32,080 --> 00:50:32,799
Speaker 1: shall we leave it there.

1069
00:50:32,840 --> 00:50:33,560
Speaker 2: Let's leave it there.

1070
00:50:33,719 --> 00:50:36,640
Speaker 1: This has been another episode of the Audlots podcast. I'm

1071
00:50:36,680 --> 00:50:39,320
Speaker 1: Tracy Alloway. You can follow me on Twitter at Tracy

1072
00:50:39,360 --> 00:50:40,120
Speaker 1: Alloway and.

1073
00:50:40,040 --> 00:50:42,799
Speaker 2: I'm Joe Wisenthal. You can follow me on Twitter at

1074
00:50:42,800 --> 00:50:46,640
Speaker 2: the Stalwart. Follow our producers on Twitter Carmen Rodriguez at

1075
00:50:46,680 --> 00:50:50,319
Speaker 2: Carman Arman and Dashel Bennett at dashbot. And check out

1076
00:50:50,320 --> 00:50:53,680
Speaker 2: all of the Bloomberg podcasts under the handle at podcasts

1077
00:50:53,840 --> 00:50:56,919
Speaker 2: and for more oddlogs content, go to Bloomberg dot com

1078
00:50:56,920 --> 00:51:00,520
Speaker 2: slash odd lots, where we have transcripts a blog newsletter

1079
00:51:00,560 --> 00:51:03,080
Speaker 2: comes out of your Friday. And check out the discord

1080
00:51:03,080 --> 00:51:05,200
Speaker 2: where you can chat and hang out with listeners twenty

1081
00:51:05,280 --> 00:51:08,959
Speaker 2: four to seven discord dot gg slash odd lives really

1082
00:51:08,960 --> 00:51:09,759
Speaker 2: fun place to go.

1083
00:51:09,800 --> 00:51:10,200
Speaker 3: There a lot.

1084
00:51:10,320 --> 00:51:11,080
Speaker 2: Thanks for listening.