1 00:00:12,119 --> 00:00:15,520 Speaker 1: Hello, and welcome to another episode of the Old Thoughts podcast. 2 00:00:15,600 --> 00:00:19,360 Speaker 1: I'm Tracy all the Way and I'm Joe Wish. So, Joe, 3 00:00:19,480 --> 00:00:22,079 Speaker 1: you like to talk about money, right? I love talking 4 00:00:22,079 --> 00:00:26,520 Speaker 1: about money. I think where money comes from, its origin, 5 00:00:26,880 --> 00:00:29,880 Speaker 1: stuff like that, or even just what it is is 6 00:00:30,160 --> 00:00:33,000 Speaker 1: one of those topics that I can never get enough of. 7 00:00:33,080 --> 00:00:36,200 Speaker 1: So what is that we're going to talk about today? Yeah, 8 00:00:36,240 --> 00:00:38,159 Speaker 1: we are, um, but we're going to talk about a 9 00:00:38,280 --> 00:00:42,040 Speaker 1: type of money that doesn't normally get a lot of 10 00:00:42,040 --> 00:00:46,680 Speaker 1: attention outside certain aspects of the financial community. We're going 11 00:00:46,720 --> 00:00:51,879 Speaker 1: to be talking about euro dollars. So euro dollars, you 12 00:00:51,920 --> 00:00:53,920 Speaker 1: know what I have to say, Like, this is one 13 00:00:53,960 --> 00:00:56,600 Speaker 1: of those topics that I know, I'm supposed to know 14 00:00:56,640 --> 00:00:59,400 Speaker 1: a lot more about than I do. I kind of 15 00:00:59,480 --> 00:01:03,320 Speaker 1: vaguely at this idea that people use futures and euro 16 00:01:03,400 --> 00:01:05,880 Speaker 1: dollars to bet on what they think the FED is 17 00:01:05,920 --> 00:01:08,880 Speaker 1: going to do. But then beyond that, like what and 18 00:01:08,959 --> 00:01:11,200 Speaker 1: I guess that, And I kind of have this sense 19 00:01:11,240 --> 00:01:15,560 Speaker 1: that their dollars held outside of banks that aren't in 20 00:01:15,600 --> 00:01:19,280 Speaker 1: the US. But honestly, I know very I know embarrassingly 21 00:01:19,480 --> 00:01:21,800 Speaker 1: little about them and how they actually work and what 22 00:01:21,880 --> 00:01:25,559 Speaker 1: their point is, well, you're being very modest as usual. 23 00:01:25,840 --> 00:01:28,080 Speaker 1: Actually this I'm really not like that. Just I just 24 00:01:28,120 --> 00:01:29,959 Speaker 1: told you the extent to which I know, like I 25 00:01:29,959 --> 00:01:31,479 Speaker 1: don't even really get how it works, Like I don't 26 00:01:31,520 --> 00:01:33,880 Speaker 1: even get how you can hold a dollar at a 27 00:01:33,880 --> 00:01:36,200 Speaker 1: bank outside the US, Like in the first place. That's 28 00:01:36,200 --> 00:01:38,720 Speaker 1: a very strange concept to me, because I have this 29 00:01:38,760 --> 00:01:41,760 Speaker 1: conception of like how banks hold money, and I don't 30 00:01:41,800 --> 00:01:43,800 Speaker 1: really understand how that can happen outside the US. So 31 00:01:44,680 --> 00:01:46,760 Speaker 1: the whole day is very mysterious to me, and I'm 32 00:01:46,840 --> 00:01:49,760 Speaker 1: glad we're finally doing an episode that will hopefully clear 33 00:01:49,800 --> 00:01:53,600 Speaker 1: it up. And sometimes I'm modest, but this time I'm not. Okay, Well, 34 00:01:53,720 --> 00:01:56,680 Speaker 1: mysterious is actually the key word here, So I just 35 00:01:56,720 --> 00:01:59,360 Speaker 1: to boil it down really simply before we start. Euro 36 00:01:59,440 --> 00:02:03,880 Speaker 1: dollar based really refers to US dollar denominated deposits that 37 00:02:03,920 --> 00:02:07,120 Speaker 1: are at foreign banks, and by foreign I mean non 38 00:02:07,240 --> 00:02:12,400 Speaker 1: US or foreign branches of US banks. So that's the 39 00:02:12,520 --> 00:02:15,760 Speaker 1: simplest explanation. But of course there there is a lot 40 00:02:15,760 --> 00:02:19,160 Speaker 1: of sort of mystery and controversy swirling around these. Lots 41 00:02:19,160 --> 00:02:21,079 Speaker 1: of people think this is a sort of form of 42 00:02:21,120 --> 00:02:26,200 Speaker 1: like shadow bank liquidity that's floating around in the system 43 00:02:26,280 --> 00:02:30,400 Speaker 1: outside of the federal reserves control. People talked about it 44 00:02:30,440 --> 00:02:33,040 Speaker 1: a lot during the financial crisis, and we are seeing 45 00:02:33,080 --> 00:02:36,600 Speaker 1: some people talking about it again with the recent market 46 00:02:36,639 --> 00:02:39,320 Speaker 1: sell off, and one of those people is our guest 47 00:02:39,440 --> 00:02:42,560 Speaker 1: for today. Before we get into this, can I just say, uh, 48 00:02:43,360 --> 00:02:45,760 Speaker 1: did anyone do you think anyone else like me first 49 00:02:45,760 --> 00:02:47,880 Speaker 1: when they thought when they heard the word euro dollars, 50 00:02:47,960 --> 00:02:50,160 Speaker 1: just thought that was what the euro was. That like, 51 00:02:50,240 --> 00:02:53,600 Speaker 1: the euro was short for euro dollars. Oh, Joe, I'm 52 00:02:53,639 --> 00:02:56,160 Speaker 1: sure for years when I heard euro dollar, I just 53 00:02:56,240 --> 00:03:00,120 Speaker 1: assumed that the euro was just the nickname for yar 54 00:03:00,160 --> 00:03:02,200 Speaker 1: own dollars. I know that's not the case right now, 55 00:03:02,600 --> 00:03:05,320 Speaker 1: but just to really emphasize how ignorant I am on 56 00:03:05,360 --> 00:03:08,000 Speaker 1: this topic, that really is what I thought for years 57 00:03:08,080 --> 00:03:11,000 Speaker 1: until I realized there's something else. Now, You're absolutely right, 58 00:03:11,040 --> 00:03:13,280 Speaker 1: lots of people think you're a dollar is just the 59 00:03:13,320 --> 00:03:16,680 Speaker 1: exchange rate. So for the avoidance of doubt, we are 60 00:03:16,760 --> 00:03:20,720 Speaker 1: not going to be talking about the euro dollar cross 61 00:03:20,800 --> 00:03:23,440 Speaker 1: exchange rate. That that's not what this is about. This 62 00:03:23,480 --> 00:03:27,360 Speaker 1: is about something much more interesting, about a specific type 63 00:03:27,480 --> 00:03:30,480 Speaker 1: of money that's actually quite important to the way the 64 00:03:30,480 --> 00:03:34,800 Speaker 1: financial system works. So without further ado, let's bring on 65 00:03:34,840 --> 00:03:37,880 Speaker 1: our guest. It is Jeffrey Snyder. He is head of 66 00:03:37,880 --> 00:03:41,680 Speaker 1: Global Research at al Hambra. Jeffrey, thank you so much 67 00:03:41,680 --> 00:03:45,320 Speaker 1: for joining us, good morning, Thanks for having me, Joe 68 00:03:45,360 --> 00:03:51,360 Speaker 1: and Tracy. So, given Joe's lack of expertise in this 69 00:03:51,400 --> 00:03:55,440 Speaker 1: particular topic, maybe we should start really really slow with 70 00:03:55,880 --> 00:03:59,160 Speaker 1: Sorry Joe, that's very patronizing. Please, no, no, no, please, 71 00:03:59,400 --> 00:04:05,040 Speaker 1: but let's start slow. What exactly is a euro dollar? Well, 72 00:04:05,080 --> 00:04:07,360 Speaker 1: you know, I mean, it's a common misperception, and I 73 00:04:07,360 --> 00:04:09,680 Speaker 1: think you guys explained it pretty well. I mean, lots 74 00:04:09,720 --> 00:04:11,400 Speaker 1: of people to hear the term euro doll and they 75 00:04:11,400 --> 00:04:15,320 Speaker 1: think obviously euro because that kind of term and that 76 00:04:15,400 --> 00:04:18,719 Speaker 1: kind of terminology isn't common in usage, and most people 77 00:04:19,480 --> 00:04:22,040 Speaker 1: they've never heard of a euro dollar before anyway, so 78 00:04:22,200 --> 00:04:26,200 Speaker 1: it's not uncommon for this to be a very confusing topic. 79 00:04:27,080 --> 00:04:29,520 Speaker 1: And in fact, the term euro in front of a 80 00:04:29,560 --> 00:04:33,560 Speaker 1: dollar simply means, as you both pointed out, that these 81 00:04:33,560 --> 00:04:36,880 Speaker 1: are dollars offshore somewhere, and it could be anywhere around 82 00:04:36,920 --> 00:04:38,320 Speaker 1: the world. That could be, you know, a bank in 83 00:04:38,360 --> 00:04:40,400 Speaker 1: the Cayman Islands, it could be a bank in Europe, 84 00:04:40,880 --> 00:04:44,000 Speaker 1: as the original term was used. That's where the term 85 00:04:44,040 --> 00:04:46,440 Speaker 1: came from. And in fact, it's not just dollars that 86 00:04:46,480 --> 00:04:50,480 Speaker 1: are offshore. There's an entire currency ecosystem that exists, um 87 00:04:50,520 --> 00:04:54,200 Speaker 1: including something that's called in euro euro. They're offshore euros 88 00:04:54,279 --> 00:04:56,640 Speaker 1: in this euro euro market. That makes it even more 89 00:04:56,680 --> 00:04:59,960 Speaker 1: strange and complex and I guess interesting at some place 90 00:05:00,000 --> 00:05:04,560 Speaker 1: as So. One of the things that I do understand 91 00:05:04,880 --> 00:05:07,680 Speaker 1: to some extent about banking is that it's not like 92 00:05:07,720 --> 00:05:10,480 Speaker 1: there's this fixed pool of money out there that gets 93 00:05:10,760 --> 00:05:17,159 Speaker 1: shifted around. That banks are essentially creators of money, is 94 00:05:17,200 --> 00:05:19,800 Speaker 1: one way to think about it. In banks issue loans, 95 00:05:19,800 --> 00:05:22,360 Speaker 1: and those loans turned into deposits, and then the deposits 96 00:05:22,360 --> 00:05:24,880 Speaker 1: are held at banks and then new money is created. 97 00:05:25,560 --> 00:05:29,240 Speaker 1: So explain what's really happening. You mentioned a bank in 98 00:05:29,480 --> 00:05:33,080 Speaker 1: the Cayman Islands. A customer holds euro dollars there. What 99 00:05:33,240 --> 00:05:35,280 Speaker 1: is where did these dollars come from? How do they 100 00:05:35,279 --> 00:05:37,240 Speaker 1: create them? What is the mechanics in which they come 101 00:05:37,240 --> 00:05:39,599 Speaker 1: into being? Well, yeah, and that's another thing. You know, 102 00:05:39,640 --> 00:05:44,560 Speaker 1: The term euro dollars anachronistic. Originally it referred to actual 103 00:05:44,680 --> 00:05:47,480 Speaker 1: dollars on deposit in the bank somewhere. When we talk 104 00:05:47,520 --> 00:05:52,560 Speaker 1: about a dollar deposit, people think, probably quite correctly, that 105 00:05:52,680 --> 00:05:54,880 Speaker 1: there are stacks of cash in a bank vault in 106 00:05:54,920 --> 00:05:57,680 Speaker 1: the Cayman Islands, right. They think that's a dollar deposit, right, 107 00:05:57,760 --> 00:06:00,279 Speaker 1: because that's traditionally what you're told in school. That's what 108 00:06:00,320 --> 00:06:04,400 Speaker 1: people refer to and in convention. But that's not actually 109 00:06:04,400 --> 00:06:07,880 Speaker 1: what it is. It's eurodollars. In the beginning used to 110 00:06:07,960 --> 00:06:10,200 Speaker 1: be you know, stacks of cash and a vault somewhere, 111 00:06:10,240 --> 00:06:13,360 Speaker 1: but over time they have becomeing and they have evolved 112 00:06:13,400 --> 00:06:18,159 Speaker 1: into simply bank liability. Some bank offshore somewhere has a 113 00:06:18,240 --> 00:06:23,200 Speaker 1: dollar denominating liability. However it came about, um doesn't really matter. 114 00:06:23,720 --> 00:06:26,880 Speaker 1: Once they obtain dollars in any format, they can then 115 00:06:26,960 --> 00:06:30,600 Speaker 1: multiply them in various different other forms of bank liabilities. 116 00:06:31,160 --> 00:06:35,760 Speaker 1: So it's essentially an inter bank international system where it's 117 00:06:35,800 --> 00:06:39,200 Speaker 1: denominated primarily in dollars, and it's always and it's uh 118 00:06:39,200 --> 00:06:42,680 Speaker 1: it's operated offshore or outside the United States. So the 119 00:06:42,720 --> 00:06:45,240 Speaker 1: way in which these dollars come to existence is simply 120 00:06:45,760 --> 00:06:48,839 Speaker 1: one bank somewhere says I want to do something, and 121 00:06:48,920 --> 00:06:50,800 Speaker 1: another bank on the other side says, I want to 122 00:06:50,839 --> 00:06:54,160 Speaker 1: do something. They get together, they exchange liabilities and assets, 123 00:06:54,160 --> 00:06:56,599 Speaker 1: and that's how it's done. As long as the bank 124 00:06:56,680 --> 00:07:00,240 Speaker 1: on the one side has balance sheet capacity to quote 125 00:07:00,279 --> 00:07:03,360 Speaker 1: unquote lend these euro dollars to the other bank, it 126 00:07:03,480 --> 00:07:07,240 Speaker 1: can both banks except the transaction and it takes place. 127 00:07:07,720 --> 00:07:10,600 Speaker 1: So there's no actual physical money, there's no actual physical currency. 128 00:07:10,640 --> 00:07:13,920 Speaker 1: There no no actual physical anything in the system. It's 129 00:07:13,960 --> 00:07:16,360 Speaker 1: simply led your money. It's just one bank on a 130 00:07:16,400 --> 00:07:18,880 Speaker 1: computer screen has a number. The bank on the other 131 00:07:18,920 --> 00:07:21,760 Speaker 1: side has a computer screen. Those two numbers match. Therefore 132 00:07:22,320 --> 00:07:25,600 Speaker 1: money has been created and the transaction takes place. So 133 00:07:25,720 --> 00:07:28,520 Speaker 1: when it comes to money being created, and Jeff, I 134 00:07:28,520 --> 00:07:32,520 Speaker 1: think you just mentioned um multiplying at that point, can 135 00:07:32,520 --> 00:07:35,720 Speaker 1: you give us a specific example, like, let's say I'm 136 00:07:35,760 --> 00:07:38,880 Speaker 1: I don't know, like a rich Arab shake or something 137 00:07:38,960 --> 00:07:42,480 Speaker 1: that was Milton Friedman's famous example. And I have a 138 00:07:42,560 --> 00:07:45,480 Speaker 1: million US dollars and I wanted to deposit it in 139 00:07:45,560 --> 00:07:49,480 Speaker 1: a non US bank. What happens to that million dollars 140 00:07:49,920 --> 00:07:54,520 Speaker 1: and how much extra money or liquidity would be generated 141 00:07:54,920 --> 00:07:57,960 Speaker 1: given that the foreign bank will still have some sort 142 00:07:58,000 --> 00:08:02,400 Speaker 1: of reserve requirement. Well, you know, in Milton Friedman's example 143 00:08:02,640 --> 00:08:05,600 Speaker 1: back in the in the late nineteen sixties early nineteen seventies, 144 00:08:05,640 --> 00:08:08,960 Speaker 1: there were reserve requirements and those were applicable. But still, 145 00:08:09,000 --> 00:08:10,480 Speaker 1: you know, in the way which it happened, there's a 146 00:08:10,480 --> 00:08:14,320 Speaker 1: whole variety of ways in which these dollars become eurodollars. 147 00:08:14,760 --> 00:08:16,600 Speaker 1: In a lot of cases, is not just a you know, 148 00:08:16,640 --> 00:08:19,800 Speaker 1: a foreigner who decides he has a dollar balance domestically 149 00:08:19,800 --> 00:08:22,080 Speaker 1: in the United States and wants to put them in 150 00:08:22,200 --> 00:08:24,600 Speaker 1: London because they can obtain a better interest rate. That's 151 00:08:24,680 --> 00:08:27,040 Speaker 1: that's one of the the ways in which the euro 152 00:08:27,120 --> 00:08:30,920 Speaker 1: dollar market first evolved was to take advantage of interest 153 00:08:31,000 --> 00:08:34,760 Speaker 1: rate differentials offshore versus on shore. But once those dollar 154 00:08:34,840 --> 00:08:39,280 Speaker 1: liabilities came into existence, that opened up the whole range 155 00:08:39,320 --> 00:08:43,320 Speaker 1: of possibilities in terms of this multiplier effect where um, 156 00:08:43,360 --> 00:08:46,520 Speaker 1: you know, you mentioned earlier in the introduction, where euro 157 00:08:46,600 --> 00:08:49,400 Speaker 1: dollars apply not just to foreign banks holding dollars, but 158 00:08:49,480 --> 00:08:53,040 Speaker 1: also US domestic banks and their foreign subsidiaries, and so 159 00:08:53,080 --> 00:08:55,560 Speaker 1: there were you know, over time, they're evolved away for 160 00:08:56,200 --> 00:09:01,520 Speaker 1: domestic US banks to transfer dollar liabilities to their foreign subsidiaries, 161 00:09:01,559 --> 00:09:05,440 Speaker 1: often operating out of London. Again, the term euro dollar 162 00:09:05,559 --> 00:09:09,000 Speaker 1: meaning Europe, and so there's any number of ways for 163 00:09:09,040 --> 00:09:12,520 Speaker 1: these dollar liabilities to be created domestic and then get 164 00:09:12,520 --> 00:09:16,600 Speaker 1: transferred overseas. And it's easy just to transfer back and 165 00:09:16,640 --> 00:09:19,000 Speaker 1: forth from the from the domestic US bank to its 166 00:09:19,040 --> 00:09:22,839 Speaker 1: foreign subsidiary. And once those liabilities were created outside the 167 00:09:22,920 --> 00:09:25,520 Speaker 1: United States, once they're transferred to their foreign subsidy on 168 00:09:25,559 --> 00:09:28,000 Speaker 1: the euro dollar market, they can then be multiplied in 169 00:09:28,040 --> 00:09:31,280 Speaker 1: any number of ways and any number of kinds of transactions. 170 00:09:31,320 --> 00:09:34,040 Speaker 1: And over time, the way in which that has happened, 171 00:09:34,080 --> 00:09:36,080 Speaker 1: a way in which that has been banks have been 172 00:09:36,120 --> 00:09:39,360 Speaker 1: able to do that is it's not just quantitative expansion, 173 00:09:39,400 --> 00:09:43,600 Speaker 1: it's qualitative expansions any number any for any number of 174 00:09:43,640 --> 00:09:47,640 Speaker 1: different exotic liabilities that can be created once those dollars 175 00:09:47,640 --> 00:09:51,320 Speaker 1: are offshore. Now that there's a huge robust market for 176 00:09:52,320 --> 00:09:55,840 Speaker 1: these dollars offshore, the sky's the limit, essentially, And that's 177 00:09:55,840 --> 00:09:58,440 Speaker 1: what's been over the last three or four decades. The 178 00:09:58,480 --> 00:10:01,560 Speaker 1: eurodollar market has grown exponentially, or it had up until 179 00:10:01,600 --> 00:10:04,920 Speaker 1: two thousand and seven, simply because it was, you know, 180 00:10:05,000 --> 00:10:08,640 Speaker 1: offshore system. So does that mean that euro dollars are 181 00:10:08,720 --> 00:10:13,680 Speaker 1: basically an extra source of liquidity in the financial system? Like? 182 00:10:13,800 --> 00:10:17,319 Speaker 1: Is that how banks end up using them. That's how 183 00:10:17,360 --> 00:10:20,719 Speaker 1: it started. The intent here was, you know, how do 184 00:10:20,800 --> 00:10:23,600 Speaker 1: we solve the you know, Triffin's paradox. What was left 185 00:10:23,600 --> 00:10:25,640 Speaker 1: over from Breton woods and Bretton woods in the goal 186 00:10:25,679 --> 00:10:30,440 Speaker 1: exchange system was constraining on global trade and globalization, and 187 00:10:30,480 --> 00:10:33,400 Speaker 1: the rising demand for trade globally meant we need some 188 00:10:33,559 --> 00:10:38,240 Speaker 1: form of international money to intermediate between different systems trying 189 00:10:38,280 --> 00:10:41,360 Speaker 1: to do merchandise trade. What the euro dollar did on 190 00:10:41,400 --> 00:10:43,800 Speaker 1: what Milton Freeman showed in nineteen sixty nine, was that 191 00:10:43,840 --> 00:10:47,000 Speaker 1: we could multiply dollars outside the United States that would 192 00:10:47,040 --> 00:10:51,280 Speaker 1: not affect the domestic money supply, thereby solving Triffin's paradox. 193 00:10:51,679 --> 00:10:53,800 Speaker 1: And over time that's exactly what happened in the nineteen 194 00:10:53,840 --> 00:10:56,520 Speaker 1: sixties and early nineteen seventies is the euro dollar took 195 00:10:56,559 --> 00:11:01,120 Speaker 1: over the liquidity adjustment functions of a global reserve currency. 196 00:11:01,160 --> 00:11:04,800 Speaker 1: And so originally the intent was how do we finance globalization, 197 00:11:04,880 --> 00:11:07,120 Speaker 1: how do we finance the growing need for global trade. 198 00:11:07,640 --> 00:11:09,640 Speaker 1: But over time, especially in the late eighties in the 199 00:11:09,640 --> 00:11:12,440 Speaker 1: early ninety nineties, it started to get into other forms 200 00:11:12,520 --> 00:11:16,760 Speaker 1: of financialization and in different functions, and so it became 201 00:11:16,880 --> 00:11:21,000 Speaker 1: instead of just a strictly global trade, currency system, intermediation, 202 00:11:21,000 --> 00:11:24,679 Speaker 1: that kind of thing. It became an entire financial ecosystem 203 00:11:24,720 --> 00:11:27,560 Speaker 1: whereby you know, you go back to two thousand and eight, 204 00:11:28,200 --> 00:11:32,120 Speaker 1: why we're German banks being nationalized over a US housing bubble. Well, 205 00:11:32,120 --> 00:11:34,960 Speaker 1: the reason is because they were financing those US dollar 206 00:11:35,040 --> 00:11:37,520 Speaker 1: assets on the eurodollar markets, and so it became something 207 00:11:37,640 --> 00:11:40,480 Speaker 1: very different over time, and it kind of really towards 208 00:11:40,520 --> 00:11:43,079 Speaker 1: the end got really out of control. But this is 209 00:11:43,120 --> 00:11:45,200 Speaker 1: really interesting, and this is something that I hadn't really 210 00:11:45,240 --> 00:11:49,080 Speaker 1: put together before in my understanding. When we talk about 211 00:11:49,120 --> 00:11:52,880 Speaker 1: the dollar as the reserve currency, and it's by far 212 00:11:53,080 --> 00:11:57,720 Speaker 1: the most stable medium of exchange, and someone in Turkey 213 00:11:57,920 --> 00:12:00,480 Speaker 1: might want to trade with someone in China, but neither 214 00:12:00,520 --> 00:12:04,840 Speaker 1: of them want the other countries currency per se. This 215 00:12:04,960 --> 00:12:08,640 Speaker 1: is sort of the role that the eurodollar market can 216 00:12:08,679 --> 00:12:13,320 Speaker 1: play and essentially this common third currency for parties all 217 00:12:13,360 --> 00:12:17,560 Speaker 1: around the world that can then be exchanged via any 218 00:12:17,600 --> 00:12:20,600 Speaker 1: two banks. Right, And that's you know, there's a lot 219 00:12:20,640 --> 00:12:23,000 Speaker 1: of misconception about what when we talk about a global 220 00:12:23,040 --> 00:12:25,480 Speaker 1: reserve currency, what does that actually mean? And Joe, you 221 00:12:25,520 --> 00:12:28,400 Speaker 1: just described it perfectly. A lot of people think, you know, 222 00:12:28,640 --> 00:12:31,680 Speaker 1: reserve currencies you know oil gets priced in dollars. Well, 223 00:12:31,720 --> 00:12:33,960 Speaker 1: that's part of it. That's a benefit of having a 224 00:12:34,040 --> 00:12:37,000 Speaker 1: global reserve currency. But there is a function, there's a 225 00:12:37,120 --> 00:12:40,640 Speaker 1: there's a mechanical need for a reserve currency to perform 226 00:12:40,679 --> 00:12:43,600 Speaker 1: the role. Just as you said, how do we get 227 00:12:43,679 --> 00:12:47,160 Speaker 1: different systems that want to trade with each other because trade, 228 00:12:47,240 --> 00:12:50,040 Speaker 1: free trade is definitely a good thing. How do we 229 00:12:50,040 --> 00:12:52,559 Speaker 1: get those to be able to do that without having 230 00:12:52,600 --> 00:12:55,440 Speaker 1: everybody around the world have to hold everybody else's currencies 231 00:12:55,520 --> 00:12:58,760 Speaker 1: or be able to process payments and somebody else's currency. 232 00:12:58,920 --> 00:13:01,400 Speaker 1: And so, you know, it was historically the British pound 233 00:13:01,400 --> 00:13:04,520 Speaker 1: performed that role originally, and then the Breton Wood system 234 00:13:04,520 --> 00:13:07,760 Speaker 1: added the US dollar to the role of global reserve. 235 00:13:08,200 --> 00:13:12,000 Speaker 1: But that created again Triffids paradox, where the fixed the 236 00:13:12,080 --> 00:13:14,760 Speaker 1: dollar supply was fixed by gold, and therefore it was 237 00:13:14,840 --> 00:13:18,959 Speaker 1: not necessarily the best way to allow this intermediation to 238 00:13:19,080 --> 00:13:22,720 Speaker 1: happen under a rapidly globalizing system. And so the euro 239 00:13:22,800 --> 00:13:25,320 Speaker 1: dollar arose at the right time and in the right 240 00:13:25,320 --> 00:13:27,200 Speaker 1: place and then the right way to be able to 241 00:13:27,240 --> 00:13:30,600 Speaker 1: take over that role so that globalization and global trade 242 00:13:30,640 --> 00:13:34,800 Speaker 1: could be unhampered by a constricted supply. Because Essentially, that's 243 00:13:34,840 --> 00:13:38,840 Speaker 1: what we talked about before. Because it's an offshore currency system, 244 00:13:38,840 --> 00:13:42,120 Speaker 1: because it's a bank ledger system, it's interbank system, there 245 00:13:42,120 --> 00:13:44,600 Speaker 1: really isn't as a lot of restrictions on it placed 246 00:13:44,640 --> 00:13:49,160 Speaker 1: on it that constraints the flexibility the liquidity that is 247 00:13:49,440 --> 00:13:53,080 Speaker 1: is necessary to perform these roles. Right. So one of 248 00:13:53,120 --> 00:13:54,920 Speaker 1: the I mean, I don't know if you would call 249 00:13:54,960 --> 00:13:56,959 Speaker 1: it a criticism, but one of the things that people 250 00:13:57,000 --> 00:13:59,880 Speaker 1: point out about your dollars is it's something that the 251 00:14:00,000 --> 00:14:03,960 Speaker 1: Federal Reserve doesn't necessarily have a lot of control over 252 00:14:04,320 --> 00:14:06,480 Speaker 1: um in the same way that they might be able 253 00:14:06,520 --> 00:14:11,040 Speaker 1: to affect the banking system and other kinds of liquidity 254 00:14:11,160 --> 00:14:14,840 Speaker 1: by raising interest rates, are changing reserve requirements. Can you 255 00:14:14,880 --> 00:14:19,000 Speaker 1: explain how exactly that comes about. Well, I would argue 256 00:14:19,000 --> 00:14:21,040 Speaker 1: they have no control and they have actually no very 257 00:14:21,080 --> 00:14:23,280 Speaker 1: little influence at all in the eurodollar market, which is 258 00:14:23,280 --> 00:14:25,760 Speaker 1: why two thousand and eight happened. Um, the Federal Reserve 259 00:14:25,800 --> 00:14:27,640 Speaker 1: did a whole bunch of stuff in two thousand eight, 260 00:14:27,640 --> 00:14:30,800 Speaker 1: nothing worked. The reason is because it was a eurodollar panic, 261 00:14:30,840 --> 00:14:34,160 Speaker 1: not a dollar panic. And that's you know, we talk 262 00:14:34,240 --> 00:14:37,480 Speaker 1: about the eurodollar in the term itself being anachronistic. What 263 00:14:37,520 --> 00:14:40,080 Speaker 1: we really mean is that it's a bank centered system. 264 00:14:40,080 --> 00:14:43,320 Speaker 1: It's a credit based monetary system. Therefore, what matters and 265 00:14:43,400 --> 00:14:46,160 Speaker 1: what's that what's at the center of the system are 266 00:14:46,200 --> 00:14:49,200 Speaker 1: these global banks that are creating and trading all of 267 00:14:49,240 --> 00:14:52,680 Speaker 1: these dollar denominated liabilities, and so the Federal Reserve has 268 00:14:52,800 --> 00:14:56,680 Speaker 1: very little input into that system. Most of them mostly 269 00:14:56,720 --> 00:14:59,160 Speaker 1: it had been just psychological, the idea of a greenspan 270 00:14:59,280 --> 00:15:02,680 Speaker 1: put but it's starting in two thousand seven, banks began 271 00:15:02,760 --> 00:15:05,640 Speaker 1: to realize that the Federal Reserve was really powerless. And this, 272 00:15:05,720 --> 00:15:07,920 Speaker 1: by the way, it was one of the earliest criticisms 273 00:15:07,920 --> 00:15:09,440 Speaker 1: of the euro dollar system. We go back into the 274 00:15:09,480 --> 00:15:12,880 Speaker 1: nineteen seventies and eighties, some of the officials and some 275 00:15:12,960 --> 00:15:15,600 Speaker 1: of the economists that actually studied the Euro dollar system 276 00:15:15,680 --> 00:15:19,080 Speaker 1: kept warning, you know, we have this international supply of 277 00:15:19,120 --> 00:15:21,600 Speaker 1: dollars outside the United States, out of the reach of 278 00:15:21,640 --> 00:15:24,560 Speaker 1: any central bank anywhere, and so that could be a 279 00:15:24,600 --> 00:15:27,400 Speaker 1: problem because there's, first of all, it's nonreservable, so there 280 00:15:27,400 --> 00:15:29,480 Speaker 1: aren't really reserves there. And second of all, there's no 281 00:15:29,480 --> 00:15:32,520 Speaker 1: way to create them because there's no central bank operating 282 00:15:32,560 --> 00:15:35,560 Speaker 1: in any of these places. Because it's offshore from everywhere 283 00:15:36,320 --> 00:15:39,320 Speaker 1: and so um and one. In one sense, it was 284 00:15:39,360 --> 00:15:43,120 Speaker 1: good because it performed the roles that were required for 285 00:15:43,120 --> 00:15:46,280 Speaker 1: globalization and global trade. But in another sense, there was 286 00:15:46,360 --> 00:15:49,600 Speaker 1: nothing to restrain it. There was nothing to make sure 287 00:15:49,600 --> 00:15:52,800 Speaker 1: it was a robust system that could withstand even some 288 00:15:52,880 --> 00:15:55,320 Speaker 1: of the UH some of the things we saw, especially 289 00:15:55,400 --> 00:15:58,520 Speaker 1: with the housing bubble and the massive credit growth in 290 00:15:58,560 --> 00:16:01,760 Speaker 1: the in the last decade. I think this is a 291 00:16:01,840 --> 00:16:04,840 Speaker 1: really key point to helping people understand the system. So 292 00:16:04,880 --> 00:16:07,080 Speaker 1: I want to drill down further, like if I have 293 00:16:07,880 --> 00:16:10,360 Speaker 1: a bunch of money at a US bank, like say 294 00:16:10,520 --> 00:16:15,720 Speaker 1: City Group or JP Morgan, and people perceive that to 295 00:16:15,760 --> 00:16:19,560 Speaker 1: be pretty safe because even in the worst situation, City 296 00:16:19,560 --> 00:16:23,160 Speaker 1: Group or JP Morgan could pledge collateral to the FED 297 00:16:23,320 --> 00:16:26,520 Speaker 1: and get liquidity and get dollars, and you know, my 298 00:16:26,600 --> 00:16:28,920 Speaker 1: deposits is going to be pretty good. If I have 299 00:16:29,040 --> 00:16:33,200 Speaker 1: millions of dollars and UH deposits with some non US 300 00:16:33,280 --> 00:16:37,000 Speaker 1: bank that doesn't have that same relationship with the Federal 301 00:16:37,040 --> 00:16:41,800 Speaker 1: Reserve in a panic, there's no easy way for them 302 00:16:41,960 --> 00:16:46,239 Speaker 1: to get a stable supply of dollars to meet that liability. 303 00:16:46,400 --> 00:16:49,040 Speaker 1: And of course I guess this is why the FED 304 00:16:49,160 --> 00:16:53,440 Speaker 1: had to engage in dollars swap lines with other central 305 00:16:53,440 --> 00:16:56,160 Speaker 1: banks around the world during the crisis, so that those 306 00:16:56,240 --> 00:17:01,880 Speaker 1: regional central banks could then supply dollar liquidity to their 307 00:17:01,920 --> 00:17:06,320 Speaker 1: banks or attempt to supply attempt. Yeah, and you know 308 00:17:06,440 --> 00:17:09,240 Speaker 1: that was one of the misunderstood aspects of the crisis 309 00:17:09,280 --> 00:17:11,040 Speaker 1: was where, what, what why do we need all of 310 00:17:11,080 --> 00:17:12,800 Speaker 1: these dollar swaps. And at one point it was, you know, 311 00:17:12,840 --> 00:17:16,000 Speaker 1: six billion, the massive amount of dollars that the FED 312 00:17:16,119 --> 00:17:18,600 Speaker 1: was trying to put out there into the market. But 313 00:17:18,680 --> 00:17:20,879 Speaker 1: it wasn't. It wasn't the right kind of liquidity. It 314 00:17:20,960 --> 00:17:23,199 Speaker 1: was you know, bureaucratic, it was rigid, it wasn't it 315 00:17:23,320 --> 00:17:27,080 Speaker 1: wasn't a good enough replacement for malfunctioning euro dollar system. 316 00:17:27,119 --> 00:17:29,840 Speaker 1: But your point being is exactly right. I mean, we 317 00:17:29,920 --> 00:17:32,800 Speaker 1: have this international money system, and again, because it's largely 318 00:17:32,840 --> 00:17:35,560 Speaker 1: an inter bank system, the issue isn't so much for 319 00:17:35,600 --> 00:17:38,199 Speaker 1: a US based a positive who has money out in 320 00:17:38,280 --> 00:17:41,560 Speaker 1: dollars outside. It's really what happens to a bank in 321 00:17:41,560 --> 00:17:44,440 Speaker 1: the Caymans that says it has a dollar liability and 322 00:17:44,520 --> 00:17:46,560 Speaker 1: has been trading off dollar liabilities when all of a 323 00:17:46,600 --> 00:17:51,000 Speaker 1: sudden funding those kinds of of of transactions becomes difficult 324 00:17:51,320 --> 00:17:53,399 Speaker 1: because the market starts to break down. Who do you 325 00:17:53,480 --> 00:17:57,000 Speaker 1: turn to. Well, if normally you turn to any number 326 00:17:57,040 --> 00:17:59,080 Speaker 1: of banks operating in the market, and all of a sudden, 327 00:17:59,119 --> 00:18:01,880 Speaker 1: all of them are very kiddish and nervous and don't 328 00:18:01,880 --> 00:18:04,720 Speaker 1: offer you any good terms to fund your liability structure. 329 00:18:05,280 --> 00:18:07,960 Speaker 1: You have no recourse to anything. And so that's why, 330 00:18:08,040 --> 00:18:10,120 Speaker 1: you know, two thousand and eight was mostly a bank 331 00:18:10,200 --> 00:18:13,120 Speaker 1: panic among banks. It was an inter bank panic more 332 00:18:13,119 --> 00:18:15,400 Speaker 1: than it was you know, something like the nineteen thirties 333 00:18:15,800 --> 00:18:18,119 Speaker 1: where you saw people lined up trying to convert to 334 00:18:18,200 --> 00:18:22,240 Speaker 1: cash outside of you know, the local country bank anywhere 335 00:18:22,240 --> 00:18:24,879 Speaker 1: in the United States. It was an inter bank panic 336 00:18:24,920 --> 00:18:28,920 Speaker 1: because this monetary system is itself an international inter bank 337 00:18:29,000 --> 00:18:32,399 Speaker 1: money system. Okay, so in two thousand eight you have 338 00:18:32,520 --> 00:18:36,280 Speaker 1: basically an interbank funding crunch that manifests itself in the 339 00:18:36,320 --> 00:18:39,480 Speaker 1: euro dollar market as well as some other markets uh 340 00:18:39,760 --> 00:18:43,359 Speaker 1: repo I guess being the one other famous example. The 341 00:18:43,359 --> 00:18:47,440 Speaker 1: Fed comes in provides extra dollar liquidity and um that 342 00:18:47,600 --> 00:18:51,160 Speaker 1: solves the problem at least for a little while. Can 343 00:18:51,200 --> 00:18:54,880 Speaker 1: we fast forward to today, Jeff, because you have some 344 00:18:55,000 --> 00:18:58,479 Speaker 1: interesting um theories that you've been writing down on your 345 00:18:58,520 --> 00:19:02,520 Speaker 1: blog talking about how the recent market sell off might 346 00:19:02,720 --> 00:19:06,920 Speaker 1: have its origins in a sort of similar collateral crunch 347 00:19:07,040 --> 00:19:10,399 Speaker 1: that's taking place in the eurodollar market. Yeah, well, we 348 00:19:10,440 --> 00:19:13,240 Speaker 1: look at the euro dollar system. You know, there's because 349 00:19:13,280 --> 00:19:15,480 Speaker 1: it's been somewhat of a mystery for so long and 350 00:19:15,480 --> 00:19:18,359 Speaker 1: because officially, you know, it doesn't exist. Central banks do 351 00:19:18,400 --> 00:19:21,000 Speaker 1: not admit that there's this offshore money market because how 352 00:19:21,040 --> 00:19:24,000 Speaker 1: could they, because there's a whole lot of information about it. 353 00:19:24,040 --> 00:19:25,800 Speaker 1: We don't have a lot of good statistics, but you know, 354 00:19:25,960 --> 00:19:28,159 Speaker 1: what we've seen anecdotally, what we've seen in prices, and 355 00:19:28,200 --> 00:19:31,320 Speaker 1: what we've seen in the statistics we do have is 356 00:19:31,359 --> 00:19:33,960 Speaker 1: that the system broke down on August nine, two thousand 357 00:19:33,960 --> 00:19:36,720 Speaker 1: and seven, and then it never It was never restored, 358 00:19:36,720 --> 00:19:39,879 Speaker 1: it never got back to operations. So there's been for 359 00:19:39,920 --> 00:19:44,959 Speaker 1: the last eleven years ongoing intermittent euro dollar squeeze, as 360 00:19:45,000 --> 00:19:47,600 Speaker 1: I call it, where we have these episodes. This would 361 00:19:47,640 --> 00:19:49,720 Speaker 1: be the fourth one if if that's exactly what's taking 362 00:19:49,760 --> 00:19:53,800 Speaker 1: place right now. There's these episodes where the system goes 363 00:19:53,960 --> 00:19:57,520 Speaker 1: from you know, partial recovery back to nervousness, and then 364 00:19:57,680 --> 00:20:00,000 Speaker 1: then the system contracts and we get into these globe 365 00:20:00,200 --> 00:20:04,359 Speaker 1: downturns um financial markets go back into turmoil, and then 366 00:20:04,480 --> 00:20:06,719 Speaker 1: it'll it'll get to a point where it can go 367 00:20:06,760 --> 00:20:09,639 Speaker 1: into a reflation period where things seem to be getting 368 00:20:09,680 --> 00:20:12,040 Speaker 1: better and things loosen up a little bit, and then 369 00:20:12,040 --> 00:20:14,200 Speaker 1: all of a sudden, it will turn back into another downturn. 370 00:20:14,800 --> 00:20:16,960 Speaker 1: And again, we've seen this three times before, and I 371 00:20:16,960 --> 00:20:19,359 Speaker 1: think we're seeing it again for a fourth time. And 372 00:20:19,400 --> 00:20:21,920 Speaker 1: the reason is because the system has never been able 373 00:20:21,960 --> 00:20:25,040 Speaker 1: to go back to before August ninth, two thousand seven 374 00:20:25,080 --> 00:20:27,840 Speaker 1: and operate in the way that it did before. And 375 00:20:27,840 --> 00:20:31,120 Speaker 1: the reason is because people realize that the risks involved here. 376 00:20:31,520 --> 00:20:34,040 Speaker 1: Whereas you know, before two thousand and eight, two thousand 377 00:20:34,080 --> 00:20:38,199 Speaker 1: and seven, the belief was common that there was no 378 00:20:38,359 --> 00:20:40,640 Speaker 1: risk that you could just grow and expand and take 379 00:20:40,640 --> 00:20:42,919 Speaker 1: on any form of liability, any form of assets that 380 00:20:42,960 --> 00:20:45,600 Speaker 1: you wanted to do, and as long as you were growing, 381 00:20:45,640 --> 00:20:48,480 Speaker 1: everything would be fine. And it come along two thousand 382 00:20:48,480 --> 00:20:51,560 Speaker 1: seventy two, they finally the system finally realized and began 383 00:20:51,640 --> 00:20:54,800 Speaker 1: to doubt itself. Hey, there's a whole lot of risk here, 384 00:20:55,359 --> 00:20:57,600 Speaker 1: and we're not being compensated for that risk. And so 385 00:20:57,800 --> 00:21:01,880 Speaker 1: banks have been pulling back from their money dealing activities 386 00:21:01,920 --> 00:21:04,679 Speaker 1: in these Euro dollar spaces for eleven years, but they 387 00:21:04,680 --> 00:21:06,280 Speaker 1: don't do it all at once. They do it again 388 00:21:06,280 --> 00:21:08,680 Speaker 1: in these intermittent episodes, and I think that's what we're 389 00:21:08,680 --> 00:21:12,520 Speaker 1: seeing right now, all right? What is the data that 390 00:21:12,560 --> 00:21:16,119 Speaker 1: you look at to assert that a we've never really 391 00:21:16,160 --> 00:21:20,640 Speaker 1: gotten back to the pre crisis sort of behavior of 392 00:21:20,680 --> 00:21:23,320 Speaker 1: this market. And then when you talk about this is 393 00:21:23,359 --> 00:21:27,320 Speaker 1: the third or fourth of these episodic um stresses within 394 00:21:27,359 --> 00:21:29,879 Speaker 1: the euro dollar market, what are you looking at or 395 00:21:29,920 --> 00:21:32,840 Speaker 1: what are you seeing specifically that tells you that that's 396 00:21:32,920 --> 00:21:36,480 Speaker 1: the sort of the key thing to understand about these markets? 397 00:21:36,480 --> 00:21:39,720 Speaker 1: Sellofs well, there's uh. Some of the data is just 398 00:21:39,800 --> 00:21:42,480 Speaker 1: priced data. For example, you look at the repo rate 399 00:21:43,119 --> 00:21:46,520 Speaker 1: general collateral U S Treasury repo rate. In a system 400 00:21:46,520 --> 00:21:49,720 Speaker 1: that worked before August nine, two seven, the repo rate 401 00:21:49,760 --> 00:21:53,600 Speaker 1: should be less than the unsecured you know, federal funds 402 00:21:53,640 --> 00:21:56,400 Speaker 1: LIBE or whatever it be, because you know a collateralized 403 00:21:56,440 --> 00:21:59,480 Speaker 1: transaction is less risk. But what we've seen since a 404 00:21:59,560 --> 00:22:02,400 Speaker 1: special the end of two thousand eight in the Institution 405 00:22:02,440 --> 00:22:06,080 Speaker 1: observed the report rate is no longer tied to the 406 00:22:06,119 --> 00:22:09,280 Speaker 1: unsecured rate. There's a breakdown and hierarchy. In other words, 407 00:22:09,400 --> 00:22:12,760 Speaker 1: there should be a repro rate negative spread to something 408 00:22:12,800 --> 00:22:17,160 Speaker 1: like federal funds. But there are these very specific periods 409 00:22:17,200 --> 00:22:19,320 Speaker 1: where the report rate will just go crazy, and in 410 00:22:19,520 --> 00:22:22,200 Speaker 1: in this case and in each of the four cases 411 00:22:22,840 --> 00:22:26,920 Speaker 1: UH subsequent cases, the report rate will go way above 412 00:22:27,359 --> 00:22:30,360 Speaker 1: federal funds, which makes no sense. I mean, a hierarchical 413 00:22:30,400 --> 00:22:34,240 Speaker 1: structure of predictable money market function, we should see the 414 00:22:34,280 --> 00:22:37,000 Speaker 1: repo rate be less than federal funds. But yet in 415 00:22:37,040 --> 00:22:39,760 Speaker 1: these very specific periods where we see all this financial 416 00:22:39,800 --> 00:22:43,760 Speaker 1: distraction and we see global economic concerns, UM, the report 417 00:22:43,840 --> 00:22:46,600 Speaker 1: rate will be well above federal funds. And that happened 418 00:22:46,640 --> 00:22:49,679 Speaker 1: earlier this year. UH. The repot rate got to be 419 00:22:49,760 --> 00:22:52,399 Speaker 1: almost fifty basis points above and maybe even more fifty. 420 00:22:52,400 --> 00:22:54,760 Speaker 1: I'm going off a memory here, but it got to 421 00:22:54,760 --> 00:22:58,200 Speaker 1: be a substantial amount more than the reverse repot floor 422 00:22:58,240 --> 00:23:01,800 Speaker 1: that the Fed sets for UM. It's money market corridor. 423 00:23:02,080 --> 00:23:04,560 Speaker 1: So that's one way to look at it. There are others. 424 00:23:04,880 --> 00:23:07,479 Speaker 1: Just the exchange value of the dollar. For example, you know, 425 00:23:07,720 --> 00:23:11,119 Speaker 1: in the middle two thousand's, up until two thousan dollar 426 00:23:11,280 --> 00:23:15,280 Speaker 1: was falling consistent with rising eurodollar supply on these markets 427 00:23:15,359 --> 00:23:18,480 Speaker 1: since then, the dollar has been rising and people trying 428 00:23:18,480 --> 00:23:20,679 Speaker 1: to figure out why, how could that be um and 429 00:23:20,760 --> 00:23:23,840 Speaker 1: what it is is it's simply this this eurodollars squeeze. 430 00:23:23,840 --> 00:23:26,240 Speaker 1: When there are periods where euro dollars are hard to 431 00:23:26,280 --> 00:23:29,040 Speaker 1: come by, that the value of the dollar goes up 432 00:23:29,080 --> 00:23:32,360 Speaker 1: because these people on the other side of these transactions, 433 00:23:32,359 --> 00:23:36,199 Speaker 1: banks and foreign locations who are short synthetically these U 434 00:23:36,280 --> 00:23:40,680 Speaker 1: S dollars because it's of their internet interbank liabilities. When 435 00:23:40,720 --> 00:23:43,440 Speaker 1: it becomes difficult for them to fund in U S 436 00:23:43,480 --> 00:23:45,960 Speaker 1: dollars as they have to do, the price of the 437 00:23:46,000 --> 00:23:49,000 Speaker 1: dollar goes up. So it's almost like a short squeeze. 438 00:23:49,720 --> 00:23:52,359 Speaker 1: But in terms of actual data, physical debt and I 439 00:23:52,400 --> 00:23:55,280 Speaker 1: want to say physical data, but actual concrete data. We 440 00:23:55,280 --> 00:23:59,200 Speaker 1: can use things like the Treasury departments take data. Most 441 00:23:59,240 --> 00:24:01,760 Speaker 1: people think of tick as you know, how much are 442 00:24:01,920 --> 00:24:05,240 Speaker 1: foreigners buying and selling US treasuries and in a given month, 443 00:24:05,840 --> 00:24:07,639 Speaker 1: But there's a whole bunch of other data that the 444 00:24:07,680 --> 00:24:11,439 Speaker 1: Treasury Department collects, including the cross border US dollar activities 445 00:24:11,480 --> 00:24:14,320 Speaker 1: of US banks. What you see there again is the 446 00:24:14,359 --> 00:24:17,560 Speaker 1: same thing. Up until two thousand and seven, you have 447 00:24:17,640 --> 00:24:21,560 Speaker 1: a parabolic rise in these cross border dollar transactions, and 448 00:24:21,640 --> 00:24:24,560 Speaker 1: since then you have these intermittent periods of ups and downs. 449 00:24:24,560 --> 00:24:27,560 Speaker 1: Were over the last eleven years that the cross border 450 00:24:27,560 --> 00:24:32,040 Speaker 1: dollar activities between US banks and foreign banks has stagnated, 451 00:24:32,119 --> 00:24:34,080 Speaker 1: It stopped. There's no more growth in that kind of 452 00:24:34,119 --> 00:24:37,119 Speaker 1: business anymore. And you can see it justin if you 453 00:24:37,160 --> 00:24:40,280 Speaker 1: follow the balance sheets of the total asset structure of 454 00:24:40,280 --> 00:24:42,359 Speaker 1: of these global banks. You know, look at JP Morgan. 455 00:24:42,960 --> 00:24:46,119 Speaker 1: JP Morgan's balance sheet was growing exponentially until two thousand 456 00:24:46,119 --> 00:24:49,520 Speaker 1: and eight. Now it's it's essentially flat over the last decade. 457 00:24:49,920 --> 00:24:53,920 Speaker 1: Banks don't grow anymore. So, Jeff, if you're right, if 458 00:24:54,040 --> 00:24:57,159 Speaker 1: if we are seeing another bout of stress in the 459 00:24:57,200 --> 00:25:00,919 Speaker 1: euro dollar market and it is manifesting itself in a 460 00:25:00,960 --> 00:25:04,920 Speaker 1: stronger dollar as people look for alternatives to euro dollars, 461 00:25:05,680 --> 00:25:08,000 Speaker 1: how does that or how do you think that's going 462 00:25:08,040 --> 00:25:10,679 Speaker 1: to play out in the market. So we get the 463 00:25:10,680 --> 00:25:16,040 Speaker 1: dollar strengthening, and presumably that might cause tighter financial conditions, 464 00:25:16,080 --> 00:25:19,280 Speaker 1: which maybe means that we see some risk assets sell off. 465 00:25:19,880 --> 00:25:23,800 Speaker 1: Or does the sell off necessarily come through the fact 466 00:25:23,840 --> 00:25:26,800 Speaker 1: that liquidity in the form of euro dollars is evaporating. 467 00:25:28,480 --> 00:25:29,920 Speaker 1: I think it's a little bit of both. I mean, 468 00:25:29,920 --> 00:25:32,240 Speaker 1: and there's also sentiment to consider too, because we have 469 00:25:32,280 --> 00:25:35,719 Speaker 1: to think about this in economic terms. What's established all 470 00:25:35,720 --> 00:25:38,720 Speaker 1: these ups and downs is that the global economy, especially 471 00:25:38,720 --> 00:25:41,200 Speaker 1: global trade because then the euro dollar and it's hard 472 00:25:41,200 --> 00:25:44,640 Speaker 1: it's supposed to be about intermediate global trade. If there's 473 00:25:44,640 --> 00:25:46,600 Speaker 1: a problem in the euro dollar market, there's a problem 474 00:25:47,080 --> 00:25:49,960 Speaker 1: in the global trade system and therefore the global economy. 475 00:25:50,040 --> 00:25:52,800 Speaker 1: And therefore, you know, a sentiment turns on the lack 476 00:25:52,840 --> 00:25:55,880 Speaker 1: of opportunity in the economic risk of all of these 477 00:25:55,880 --> 00:25:58,560 Speaker 1: things too, So you have you have a bunch of 478 00:25:58,560 --> 00:26:01,920 Speaker 1: different feedback if X that all feed into the same direction, 479 00:26:01,960 --> 00:26:06,680 Speaker 1: which is rising nervousness and eventually fear, which which permeates 480 00:26:06,720 --> 00:26:10,000 Speaker 1: into you know, all sorts of liquidation events. You think 481 00:26:10,040 --> 00:26:13,880 Speaker 1: about China. Recently, Chinese stocks have been liquidated since they're 482 00:26:13,880 --> 00:26:16,520 Speaker 1: reopened from a golden week that has its its its 483 00:26:16,520 --> 00:26:19,959 Speaker 1: origination in this dollar problem. U S stocks are probably 484 00:26:19,960 --> 00:26:23,399 Speaker 1: more about sentiment than actual liquidity. But still, you know, 485 00:26:23,440 --> 00:26:26,679 Speaker 1: it all feeds back into the same thing, and over time, 486 00:26:26,800 --> 00:26:30,119 Speaker 1: if it goes far enough and it continues in this direction, 487 00:26:30,640 --> 00:26:33,720 Speaker 1: it becomes self reinforcing. Like we saw in two thousand fifteen, 488 00:26:33,720 --> 00:26:36,280 Speaker 1: for example, or two thousand eleven and two thousand and twelves, 489 00:26:37,080 --> 00:26:39,600 Speaker 1: where the economy starts to fall off or roll over, 490 00:26:40,080 --> 00:26:44,119 Speaker 1: which feeds into more uncertainty and fear in these dollar system, 491 00:26:44,119 --> 00:26:47,359 Speaker 1: which causes the dollar system constrain even more, which causes 492 00:26:47,400 --> 00:26:50,400 Speaker 1: the economy to get even even more precarious, and so 493 00:26:50,440 --> 00:26:53,240 Speaker 1: on and so on. Is there a plus side in 494 00:26:53,280 --> 00:26:56,840 Speaker 1: the fact that we have these episodic stresses, that we're 495 00:26:56,880 --> 00:27:01,159 Speaker 1: not building up to something big and catastrophic like we 496 00:27:01,240 --> 00:27:04,000 Speaker 1: saw in two thousand seven and two thousand and eight, 497 00:27:04,160 --> 00:27:06,879 Speaker 1: and instead we just sort of have these, you know, 498 00:27:06,960 --> 00:27:11,000 Speaker 1: many many blow ups, but that sort of relieve pressure 499 00:27:11,080 --> 00:27:14,520 Speaker 1: from the system overall. Well, I would argue this is 500 00:27:14,520 --> 00:27:16,719 Speaker 1: actually the worst case. I'd rather have a crash at 501 00:27:16,760 --> 00:27:20,440 Speaker 1: this point. Really, I know that's counterintuitive in a way, 502 00:27:20,440 --> 00:27:23,840 Speaker 1: but you know, the global economy has never recovered from 503 00:27:23,840 --> 00:27:26,720 Speaker 1: two thousand eight, and time as a big factor in that, 504 00:27:27,200 --> 00:27:29,600 Speaker 1: and so the cost of the system malfunctioning the way 505 00:27:29,600 --> 00:27:32,720 Speaker 1: it has, in my opinion, aren't strictly economic anymore. We 506 00:27:32,760 --> 00:27:34,959 Speaker 1: took we suffered the economic consequence. As you look at 507 00:27:35,000 --> 00:27:38,600 Speaker 1: places like Italy, for example, the Italian economy is slow, 508 00:27:38,720 --> 00:27:40,560 Speaker 1: is smaller today than it was in two thousand and 509 00:27:40,720 --> 00:27:44,720 Speaker 1: it has never recovered. The European economy has never recovered. 510 00:27:44,720 --> 00:27:46,920 Speaker 1: The U S economy has never recovered. I know people 511 00:27:46,960 --> 00:27:49,960 Speaker 1: are talking about how it's booming right now, but the 512 00:27:50,080 --> 00:27:52,879 Speaker 1: US fell off trend ten years ago and it's getting 513 00:27:52,920 --> 00:27:56,480 Speaker 1: further and further behind that trend. And so to me, 514 00:27:57,640 --> 00:28:03,000 Speaker 1: these periodic episodes are the reason that the economy hasn't recovered, 515 00:28:03,320 --> 00:28:06,200 Speaker 1: and therefore they're taking us further or further away from 516 00:28:06,359 --> 00:28:08,639 Speaker 1: a stable position. I think that's why you've seen the 517 00:28:08,760 --> 00:28:12,840 Speaker 1: rise of populism, the rise of distrust in establishment, or 518 00:28:12,880 --> 00:28:16,360 Speaker 1: wherever you want to call it. It's because economic opportunity 519 00:28:16,400 --> 00:28:20,280 Speaker 1: has largely disappeared because of the malfunctioning the international reserve currency. 520 00:28:20,960 --> 00:28:23,360 Speaker 1: So how do we fix that? And I don't think 521 00:28:23,400 --> 00:28:25,560 Speaker 1: you could fix it, but I just keep doing allowing 522 00:28:25,560 --> 00:28:27,119 Speaker 1: it to go the way it is. We need to 523 00:28:27,160 --> 00:28:29,400 Speaker 1: get to a stable currency system so we can get 524 00:28:29,400 --> 00:28:33,560 Speaker 1: to stable an actual real economic growth again. And the 525 00:28:33,600 --> 00:28:35,919 Speaker 1: way you do that is to get people to to 526 00:28:35,960 --> 00:28:40,600 Speaker 1: pay attention to this euro dollar system that doesn't work. So, okay, 527 00:28:40,640 --> 00:28:44,280 Speaker 1: this doesn't work. What should be done? In your view 528 00:28:44,520 --> 00:28:48,120 Speaker 1: if this sort of basic system of international finance is 529 00:28:48,120 --> 00:28:51,200 Speaker 1: inherently flawed. You mean, how do we replace the euro 530 00:28:51,240 --> 00:28:54,400 Speaker 1: dollar problem with something that isn't so susceptible to Yeah, 531 00:28:54,440 --> 00:28:57,640 Speaker 1: like it ultimately, like the problem with the gold standard 532 00:28:57,960 --> 00:29:01,280 Speaker 1: was sort of manifest saw in two thousand and eight 533 00:29:01,360 --> 00:29:04,440 Speaker 1: that there's the euro dollar wasn't a perfect solution either 534 00:29:04,560 --> 00:29:07,600 Speaker 1: in your view, is there a solution to this dilemma? 535 00:29:07,720 --> 00:29:10,640 Speaker 1: Or will we always be stuck with the problem that 536 00:29:10,840 --> 00:29:14,920 Speaker 1: if we want to stable global trading currency, there's going 537 00:29:15,000 --> 00:29:17,440 Speaker 1: to be the challenge that the supply of it will 538 00:29:17,440 --> 00:29:20,280 Speaker 1: inherently be limited. Well, yeah, and I think you're right, Joe, 539 00:29:20,320 --> 00:29:22,800 Speaker 1: because you know, the pendulum has swung too far in 540 00:29:22,840 --> 00:29:25,720 Speaker 1: the other direction. You know, the goal exchange system under 541 00:29:25,760 --> 00:29:28,760 Speaker 1: Breton Woods was too constraining. The euro dollar system was 542 00:29:29,080 --> 00:29:31,080 Speaker 1: way in the other direction. It was far too free 543 00:29:31,080 --> 00:29:34,640 Speaker 1: and unconstrained. So the answer may be somewhere in the middle. 544 00:29:34,680 --> 00:29:37,440 Speaker 1: But how do you actually design a system that replicates 545 00:29:37,480 --> 00:29:40,000 Speaker 1: the good features of the euro dollar system, which there 546 00:29:40,000 --> 00:29:42,680 Speaker 1: are many. Uh, it's not perfect and it got way 547 00:29:42,680 --> 00:29:45,200 Speaker 1: too far in the wrong direction, but there are some 548 00:29:45,240 --> 00:29:48,280 Speaker 1: good elements the euro dollar system, including the ability to 549 00:29:48,400 --> 00:29:52,760 Speaker 1: flexibly supply money to where it's demanded, So how do 550 00:29:52,840 --> 00:29:55,800 Speaker 1: we get how do we keep those characteristics but also 551 00:29:56,400 --> 00:29:58,560 Speaker 1: put some kind of constraints on it so that doesn't 552 00:29:58,560 --> 00:30:01,040 Speaker 1: get out of hand again. And that's that's It's a 553 00:30:01,080 --> 00:30:06,120 Speaker 1: incredibly complex question, especially when you get into the really 554 00:30:06,160 --> 00:30:09,040 Speaker 1: into the shadow spaces of what actually takes place in 555 00:30:09,080 --> 00:30:13,560 Speaker 1: these kinds of interbank transactions internationally, because they are incredibly 556 00:30:13,600 --> 00:30:17,600 Speaker 1: complex and exotic and they don't lend themselves to easy analysis. 557 00:30:18,040 --> 00:30:21,440 Speaker 1: So this might not be surprised. Sounds like, sounds like 558 00:30:21,440 --> 00:30:25,800 Speaker 1: a whole separate episode. Yeah, maybe, all right, Well, um, 559 00:30:26,120 --> 00:30:27,960 Speaker 1: I guess we'll have to leave it there in that case. 560 00:30:28,400 --> 00:30:32,840 Speaker 1: Jeffrey Snyder, head of Global Research at al Hambra. Jeff 561 00:30:32,960 --> 00:30:37,080 Speaker 1: also has uh something called the euro Dollar University if 562 00:30:37,080 --> 00:30:39,640 Speaker 1: you want to check that out and actually get more 563 00:30:39,760 --> 00:30:42,880 Speaker 1: than just a half hour primer on euro dollars. So 564 00:30:42,960 --> 00:30:48,040 Speaker 1: that's on YouTube as well as the macro Voices podcast. Jeff, 565 00:30:48,080 --> 00:31:03,600 Speaker 1: thanks so much, Thanks Jeff, Thank you, Joe, Thanks Tracy, 566 00:31:06,360 --> 00:31:08,880 Speaker 1: so Joe, I'm so glad we finally got to devote 567 00:31:08,920 --> 00:31:12,240 Speaker 1: an entire episode to the euro dollar, and I thought 568 00:31:12,240 --> 00:31:14,920 Speaker 1: that was a really great primer as well as a 569 00:31:14,960 --> 00:31:18,120 Speaker 1: really interesting theory about what might be driving the recent 570 00:31:18,160 --> 00:31:22,600 Speaker 1: market sell off. Yeah, I mean, I definitely would disagree 571 00:31:22,920 --> 00:31:25,479 Speaker 1: on this sort of big picture that we haven't had 572 00:31:25,520 --> 00:31:28,760 Speaker 1: a global recovery and so forth. But it's certainly true 573 00:31:28,800 --> 00:31:31,920 Speaker 1: that the recovery has been disappointing around the world since 574 00:31:32,040 --> 00:31:34,920 Speaker 1: the crisis, and looking at the financial roots of that 575 00:31:35,000 --> 00:31:39,080 Speaker 1: may be one important aspect. But that aside, I do 576 00:31:39,200 --> 00:31:43,240 Speaker 1: think this idea of the mechanics of money creation, and 577 00:31:43,800 --> 00:31:47,360 Speaker 1: I hadn't is really important, and I hadn't really thought 578 00:31:47,400 --> 00:31:50,240 Speaker 1: before about the inherent challenge of what it means when 579 00:31:50,960 --> 00:31:53,880 Speaker 1: everyone wants to trade in a stable currency, but not 580 00:31:54,040 --> 00:31:58,880 Speaker 1: everyone has the same equal access to that currency, and 581 00:31:58,960 --> 00:32:01,760 Speaker 1: so the opportunityy or you know what, the euro dollar 582 00:32:01,960 --> 00:32:04,800 Speaker 1: the problem that the euro dollar market solved, but also 583 00:32:04,920 --> 00:32:07,880 Speaker 1: the inherent risks of that. Yeah, and also Jeff's point 584 00:32:07,920 --> 00:32:11,000 Speaker 1: about how euro dollars have essentially grown in tandem with 585 00:32:11,080 --> 00:32:16,160 Speaker 1: globalization was really interesting. And you know, I wonder about 586 00:32:16,200 --> 00:32:18,960 Speaker 1: the link between what we've currently been saying in terms 587 00:32:19,000 --> 00:32:22,320 Speaker 1: of trade tensions and the recent eurodollar stress, like that 588 00:32:22,360 --> 00:32:26,959 Speaker 1: seems like a natural connection to potentially make right. And 589 00:32:27,080 --> 00:32:28,600 Speaker 1: I do think this is going to be one of 590 00:32:28,640 --> 00:32:31,640 Speaker 1: the biggest stories. And we've talked about it for a 591 00:32:31,680 --> 00:32:35,680 Speaker 1: long time, but just sort of like deglobalization as a whole, 592 00:32:35,720 --> 00:32:37,880 Speaker 1: and we talk about it a lot from the trade 593 00:32:38,000 --> 00:32:41,160 Speaker 1: perspective all the time. We don't talk about it as 594 00:32:41,280 --> 00:32:44,920 Speaker 1: much from the financial system perspective. But it feels like 595 00:32:44,960 --> 00:32:48,200 Speaker 1: we have a financial system very much designed for an 596 00:32:48,200 --> 00:32:52,400 Speaker 1: ear of expanding globalization and an economic system and political 597 00:32:52,440 --> 00:32:54,920 Speaker 1: system where the gears seem to be turning the other way. 598 00:32:55,160 --> 00:32:57,800 Speaker 1: So I think you're absolutely right that it's going to 599 00:32:57,880 --> 00:33:01,360 Speaker 1: be really interesting to see the interplayer. Right. No one 600 00:33:01,400 --> 00:33:04,160 Speaker 1: ever thinks about the euro dollar as ground zero for 601 00:33:04,280 --> 00:33:07,960 Speaker 1: de globalization. People think about you know, apple supply chains 602 00:33:08,000 --> 00:33:11,520 Speaker 1: and stuff like, right, right, exactly right, all right, Well, 603 00:33:11,720 --> 00:33:14,880 Speaker 1: this has been another episode of the Odd Thoughts podcast. 604 00:33:14,960 --> 00:33:17,560 Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at 605 00:33:17,560 --> 00:33:21,560 Speaker 1: Tracy Alloway. You can also follow Jeff Snyder. He is 606 00:33:21,760 --> 00:33:27,080 Speaker 1: at Jeff Snyder Underscore. A I P and a shout 607 00:33:27,120 --> 00:33:30,040 Speaker 1: out as well to one of our listeners at goub 608 00:33:30,200 --> 00:33:33,720 Speaker 1: Mint Cheese for suggesting Jeff in the first place. And 609 00:33:33,760 --> 00:33:36,720 Speaker 1: I'm Joe Wisenthal. You can follow me on Twitter at 610 00:33:36,760 --> 00:33:39,840 Speaker 1: the Stalwarts, and you should follow our producer to for 611 00:33:39,920 --> 00:33:43,920 Speaker 1: for Foreheads on Twitter. He's at foreheads t as well 612 00:33:43,960 --> 00:33:48,800 Speaker 1: as the bloomberg head of podcast, Francesco Leavy at Francesca Today. 613 00:33:48,800 --> 00:34:04,520 Speaker 1: Thanks for listening year to