WEBVTT - Why Eurodollars Might Be Ground Zero for De-Globalization 0:00:12.119 --> 0:00:15.520 Hello, and welcome to another episode of the Old Thoughts podcast. 0:00:15.600 --> 0:00:19.360 I'm Tracy all the Way and I'm Joe Wish. So, Joe, 0:00:19.480 --> 0:00:22.079 you like to talk about money, right? I love talking 0:00:22.079 --> 0:00:26.520 about money. I think where money comes from, its origin, 0:00:26.880 --> 0:00:29.880 stuff like that, or even just what it is is 0:00:30.160 --> 0:00:33.000 one of those topics that I can never get enough of. 0:00:33.080 --> 0:00:36.200 So what is that we're going to talk about today? Yeah, 0:00:36.240 --> 0:00:38.159 we are, um, but we're going to talk about a 0:00:38.280 --> 0:00:42.040 type of money that doesn't normally get a lot of 0:00:42.040 --> 0:00:46.680 attention outside certain aspects of the financial community. We're going 0:00:46.720 --> 0:00:51.879 to be talking about euro dollars. So euro dollars, you 0:00:51.920 --> 0:00:53.920 know what I have to say, Like, this is one 0:00:53.960 --> 0:00:56.600 of those topics that I know, I'm supposed to know 0:00:56.640 --> 0:00:59.400 a lot more about than I do. I kind of 0:00:59.480 --> 0:01:03.320 vaguely at this idea that people use futures and euro 0:01:03.400 --> 0:01:05.880 dollars to bet on what they think the FED is 0:01:05.920 --> 0:01:08.880 going to do. But then beyond that, like what and 0:01:08.959 --> 0:01:11.200 I guess that, And I kind of have this sense 0:01:11.240 --> 0:01:15.560 that their dollars held outside of banks that aren't in 0:01:15.600 --> 0:01:19.280 the US. But honestly, I know very I know embarrassingly 0:01:19.480 --> 0:01:21.800 little about them and how they actually work and what 0:01:21.880 --> 0:01:25.559 their point is, well, you're being very modest as usual. 0:01:25.840 --> 0:01:28.080 Actually this I'm really not like that. Just I just 0:01:28.120 --> 0:01:29.959 told you the extent to which I know, like I 0:01:29.959 --> 0:01:31.479 don't even really get how it works, Like I don't 0:01:31.520 --> 0:01:33.880 even get how you can hold a dollar at a 0:01:33.880 --> 0:01:36.200 bank outside the US, Like in the first place. That's 0:01:36.200 --> 0:01:38.720 a very strange concept to me, because I have this 0:01:38.760 --> 0:01:41.760 conception of like how banks hold money, and I don't 0:01:41.800 --> 0:01:43.800 really understand how that can happen outside the US. So 0:01:44.680 --> 0:01:46.760 the whole day is very mysterious to me, and I'm 0:01:46.840 --> 0:01:49.760 glad we're finally doing an episode that will hopefully clear 0:01:49.800 --> 0:01:53.600 it up. And sometimes I'm modest, but this time I'm not. Okay, Well, 0:01:53.720 --> 0:01:56.680 mysterious is actually the key word here, So I just 0:01:56.720 --> 0:01:59.360 to boil it down really simply before we start. Euro 0:01:59.440 --> 0:02:03.880 dollar based really refers to US dollar denominated deposits that 0:02:03.920 --> 0:02:07.120 are at foreign banks, and by foreign I mean non 0:02:07.240 --> 0:02:12.400 US or foreign branches of US banks. So that's the 0:02:12.520 --> 0:02:15.760 simplest explanation. But of course there there is a lot 0:02:15.760 --> 0:02:19.160 of sort of mystery and controversy swirling around these. Lots 0:02:19.160 --> 0:02:21.079 of people think this is a sort of form of 0:02:21.120 --> 0:02:26.200 like shadow bank liquidity that's floating around in the system 0:02:26.280 --> 0:02:30.400 outside of the federal reserves control. People talked about it 0:02:30.440 --> 0:02:33.040 a lot during the financial crisis, and we are seeing 0:02:33.080 --> 0:02:36.600 some people talking about it again with the recent market 0:02:36.639 --> 0:02:39.320 sell off, and one of those people is our guest 0:02:39.440 --> 0:02:42.560 for today. Before we get into this, can I just say, uh, 0:02:43.360 --> 0:02:45.760 did anyone do you think anyone else like me first 0:02:45.760 --> 0:02:47.880 when they thought when they heard the word euro dollars, 0:02:47.960 --> 0:02:50.160 just thought that was what the euro was. That like, 0:02:50.240 --> 0:02:53.600 the euro was short for euro dollars. Oh, Joe, I'm 0:02:53.639 --> 0:02:56.160 sure for years when I heard euro dollar, I just 0:02:56.240 --> 0:03:00.120 assumed that the euro was just the nickname for yar 0:03:00.160 --> 0:03:02.200 own dollars. I know that's not the case right now, 0:03:02.600 --> 0:03:05.320 but just to really emphasize how ignorant I am on 0:03:05.360 --> 0:03:08.000 this topic, that really is what I thought for years 0:03:08.080 --> 0:03:11.000 until I realized there's something else. Now, You're absolutely right, 0:03:11.040 --> 0:03:13.280 lots of people think you're a dollar is just the 0:03:13.320 --> 0:03:16.680 exchange rate. So for the avoidance of doubt, we are 0:03:16.760 --> 0:03:20.720 not going to be talking about the euro dollar cross 0:03:20.800 --> 0:03:23.440 exchange rate. That that's not what this is about. This 0:03:23.480 --> 0:03:27.360 is about something much more interesting, about a specific type 0:03:27.480 --> 0:03:30.480 of money that's actually quite important to the way the 0:03:30.480 --> 0:03:34.800 financial system works. So without further ado, let's bring on 0:03:34.840 --> 0:03:37.880 our guest. It is Jeffrey Snyder. He is head of 0:03:37.880 --> 0:03:41.680 Global Research at al Hambra. Jeffrey, thank you so much 0:03:41.680 --> 0:03:45.320 for joining us, good morning, Thanks for having me, Joe 0:03:45.360 --> 0:03:51.360 and Tracy. So, given Joe's lack of expertise in this 0:03:51.400 --> 0:03:55.440 particular topic, maybe we should start really really slow with 0:03:55.880 --> 0:03:59.160 Sorry Joe, that's very patronizing. Please, no, no, no, please, 0:03:59.400 --> 0:04:05.040 but let's start slow. What exactly is a euro dollar? Well, 0:04:05.080 --> 0:04:07.360 you know, I mean, it's a common misperception, and I 0:04:07.360 --> 0:04:09.680 think you guys explained it pretty well. I mean, lots 0:04:09.720 --> 0:04:11.400 of people to hear the term euro doll and they 0:04:11.400 --> 0:04:15.320 think obviously euro because that kind of term and that 0:04:15.400 --> 0:04:18.719 kind of terminology isn't common in usage, and most people 0:04:19.480 --> 0:04:22.040 they've never heard of a euro dollar before anyway, so 0:04:22.200 --> 0:04:26.200 it's not uncommon for this to be a very confusing topic. 0:04:27.080 --> 0:04:29.520 And in fact, the term euro in front of a 0:04:29.560 --> 0:04:33.560 dollar simply means, as you both pointed out, that these 0:04:33.560 --> 0:04:36.880 are dollars offshore somewhere, and it could be anywhere around 0:04:36.920 --> 0:04:38.320 the world. That could be, you know, a bank in 0:04:38.360 --> 0:04:40.400 the Cayman Islands, it could be a bank in Europe, 0:04:40.880 --> 0:04:44.000 as the original term was used. That's where the term 0:04:44.040 --> 0:04:46.440 came from. And in fact, it's not just dollars that 0:04:46.480 --> 0:04:50.480 are offshore. There's an entire currency ecosystem that exists, um 0:04:50.520 --> 0:04:54.200 including something that's called in euro euro. They're offshore euros 0:04:54.279 --> 0:04:56.640 in this euro euro market. That makes it even more 0:04:56.680 --> 0:04:59.960 strange and complex and I guess interesting at some place 0:05:00.000 --> 0:05:04.560 as So. One of the things that I do understand 0:05:04.880 --> 0:05:07.680 to some extent about banking is that it's not like 0:05:07.720 --> 0:05:10.480 there's this fixed pool of money out there that gets 0:05:10.760 --> 0:05:17.159 shifted around. That banks are essentially creators of money, is 0:05:17.200 --> 0:05:19.800 one way to think about it. In banks issue loans, 0:05:19.800 --> 0:05:22.360 and those loans turned into deposits, and then the deposits 0:05:22.360 --> 0:05:24.880 are held at banks and then new money is created. 0:05:25.560 --> 0:05:29.240 So explain what's really happening. You mentioned a bank in 0:05:29.480 --> 0:05:33.080 the Cayman Islands. A customer holds euro dollars there. What 0:05:33.240 --> 0:05:35.280 is where did these dollars come from? How do they 0:05:35.279 --> 0:05:37.240 create them? What is the mechanics in which they come 0:05:37.240 --> 0:05:39.599 into being? Well, yeah, and that's another thing. You know, 0:05:39.640 --> 0:05:44.560 The term euro dollars anachronistic. Originally it referred to actual 0:05:44.680 --> 0:05:47.480 dollars on deposit in the bank somewhere. When we talk 0:05:47.520 --> 0:05:52.560 about a dollar deposit, people think, probably quite correctly, that 0:05:52.680 --> 0:05:54.880 there are stacks of cash in a bank vault in 0:05:54.920 --> 0:05:57.680 the Cayman Islands, right. They think that's a dollar deposit, right, 0:05:57.760 --> 0:06:00.279 because that's traditionally what you're told in school. That's what 0:06:00.320 --> 0:06:04.400 people refer to and in convention. But that's not actually 0:06:04.400 --> 0:06:07.880 what it is. It's eurodollars. In the beginning used to 0:06:07.960 --> 0:06:10.200 be you know, stacks of cash and a vault somewhere, 0:06:10.240 --> 0:06:13.360 but over time they have becomeing and they have evolved 0:06:13.400 --> 0:06:18.159 into simply bank liability. Some bank offshore somewhere has a 0:06:18.240 --> 0:06:23.200 dollar denominating liability. However it came about, um doesn't really matter. 0:06:23.720 --> 0:06:26.880 Once they obtain dollars in any format, they can then 0:06:26.960 --> 0:06:30.600 multiply them in various different other forms of bank liabilities. 0:06:31.160 --> 0:06:35.760 So it's essentially an inter bank international system where it's 0:06:35.800 --> 0:06:39.200 denominated primarily in dollars, and it's always and it's uh 0:06:39.200 --> 0:06:42.680 it's operated offshore or outside the United States. So the 0:06:42.720 --> 0:06:45.240 way in which these dollars come to existence is simply 0:06:45.760 --> 0:06:48.839 one bank somewhere says I want to do something, and 0:06:48.920 --> 0:06:50.800 another bank on the other side says, I want to 0:06:50.839 --> 0:06:54.160 do something. They get together, they exchange liabilities and assets, 0:06:54.160 --> 0:06:56.599 and that's how it's done. As long as the bank 0:06:56.680 --> 0:07:00.240 on the one side has balance sheet capacity to quote 0:07:00.279 --> 0:07:03.360 unquote lend these euro dollars to the other bank, it 0:07:03.480 --> 0:07:07.240 can both banks except the transaction and it takes place. 0:07:07.720 --> 0:07:10.600 So there's no actual physical money, there's no actual physical currency. 0:07:10.640 --> 0:07:13.920 There no no actual physical anything in the system. It's 0:07:13.960 --> 0:07:16.360 simply led your money. It's just one bank on a 0:07:16.400 --> 0:07:18.880 computer screen has a number. The bank on the other 0:07:18.920 --> 0:07:21.760 side has a computer screen. Those two numbers match. Therefore 0:07:22.320 --> 0:07:25.600 money has been created and the transaction takes place. So 0:07:25.720 --> 0:07:28.520 when it comes to money being created, and Jeff, I 0:07:28.520 --> 0:07:32.520 think you just mentioned um multiplying at that point, can 0:07:32.520 --> 0:07:35.720 you give us a specific example, like, let's say I'm 0:07:35.760 --> 0:07:38.880 I don't know, like a rich Arab shake or something 0:07:38.960 --> 0:07:42.480 that was Milton Friedman's famous example. And I have a 0:07:42.560 --> 0:07:45.480 million US dollars and I wanted to deposit it in 0:07:45.560 --> 0:07:49.480 a non US bank. What happens to that million dollars 0:07:49.920 --> 0:07:54.520 and how much extra money or liquidity would be generated 0:07:54.920 --> 0:07:57.960 given that the foreign bank will still have some sort 0:07:58.000 --> 0:08:02.400 of reserve requirement. Well, you know, in Milton Friedman's example 0:08:02.640 --> 0:08:05.600 back in the in the late nineteen sixties early nineteen seventies, 0:08:05.640 --> 0:08:08.960 there were reserve requirements and those were applicable. But still, 0:08:09.000 --> 0:08:10.480 you know, in the way which it happened, there's a 0:08:10.480 --> 0:08:14.320 whole variety of ways in which these dollars become eurodollars. 0:08:14.760 --> 0:08:16.600 In a lot of cases, is not just a you know, 0:08:16.640 --> 0:08:19.800 a foreigner who decides he has a dollar balance domestically 0:08:19.800 --> 0:08:22.080 in the United States and wants to put them in 0:08:22.200 --> 0:08:24.600 London because they can obtain a better interest rate. That's 0:08:24.680 --> 0:08:27.040 that's one of the the ways in which the euro 0:08:27.120 --> 0:08:30.920 dollar market first evolved was to take advantage of interest 0:08:31.000 --> 0:08:34.760 rate differentials offshore versus on shore. But once those dollar 0:08:34.840 --> 0:08:39.280 liabilities came into existence, that opened up the whole range 0:08:39.320 --> 0:08:43.320 of possibilities in terms of this multiplier effect where um, 0:08:43.360 --> 0:08:46.520 you know, you mentioned earlier in the introduction, where euro 0:08:46.600 --> 0:08:49.400 dollars apply not just to foreign banks holding dollars, but 0:08:49.480 --> 0:08:53.040 also US domestic banks and their foreign subsidiaries, and so 0:08:53.080 --> 0:08:55.560 there were you know, over time, they're evolved away for 0:08:56.200 --> 0:09:01.520 domestic US banks to transfer dollar liabilities to their foreign subsidiaries, 0:09:01.559 --> 0:09:05.440 often operating out of London. Again, the term euro dollar 0:09:05.559 --> 0:09:09.000 meaning Europe, and so there's any number of ways for 0:09:09.040 --> 0:09:12.520 these dollar liabilities to be created domestic and then get 0:09:12.520 --> 0:09:16.600 transferred overseas. And it's easy just to transfer back and 0:09:16.640 --> 0:09:19.000 forth from the from the domestic US bank to its 0:09:19.040 --> 0:09:22.839 foreign subsidiary. And once those liabilities were created outside the 0:09:22.920 --> 0:09:25.520 United States, once they're transferred to their foreign subsidy on 0:09:25.559 --> 0:09:28.000 the euro dollar market, they can then be multiplied in 0:09:28.040 --> 0:09:31.280 any number of ways and any number of kinds of transactions. 0:09:31.320 --> 0:09:34.040 And over time, the way in which that has happened, 0:09:34.080 --> 0:09:36.080 a way in which that has been banks have been 0:09:36.120 --> 0:09:39.360 able to do that is it's not just quantitative expansion, 0:09:39.400 --> 0:09:43.600 it's qualitative expansions any number any for any number of 0:09:43.640 --> 0:09:47.640 different exotic liabilities that can be created once those dollars 0:09:47.640 --> 0:09:51.320 are offshore. Now that there's a huge robust market for 0:09:52.320 --> 0:09:55.840 these dollars offshore, the sky's the limit, essentially, And that's 0:09:55.840 --> 0:09:58.440 what's been over the last three or four decades. The 0:09:58.480 --> 0:10:01.560 eurodollar market has grown exponentially, or it had up until 0:10:01.600 --> 0:10:04.920 two thousand and seven, simply because it was, you know, 0:10:05.000 --> 0:10:08.640 offshore system. So does that mean that euro dollars are 0:10:08.720 --> 0:10:13.680 basically an extra source of liquidity in the financial system? Like? 0:10:13.800 --> 0:10:17.319 Is that how banks end up using them. That's how 0:10:17.360 --> 0:10:20.719 it started. The intent here was, you know, how do 0:10:20.800 --> 0:10:23.600 we solve the you know, Triffin's paradox. What was left 0:10:23.600 --> 0:10:25.640 over from Breton woods and Bretton woods in the goal 0:10:25.679 --> 0:10:30.440 exchange system was constraining on global trade and globalization, and 0:10:30.480 --> 0:10:33.400 the rising demand for trade globally meant we need some 0:10:33.559 --> 0:10:38.240 form of international money to intermediate between different systems trying 0:10:38.280 --> 0:10:41.360 to do merchandise trade. What the euro dollar did on 0:10:41.400 --> 0:10:43.800 what Milton Freeman showed in nineteen sixty nine, was that 0:10:43.840 --> 0:10:47.000 we could multiply dollars outside the United States that would 0:10:47.040 --> 0:10:51.280 not affect the domestic money supply, thereby solving Triffin's paradox. 0:10:51.679 --> 0:10:53.800 And over time that's exactly what happened in the nineteen 0:10:53.840 --> 0:10:56.520 sixties and early nineteen seventies is the euro dollar took 0:10:56.559 --> 0:11:01.120 over the liquidity adjustment functions of a global reserve currency. 0:11:01.160 --> 0:11:04.800 And so originally the intent was how do we finance globalization, 0:11:04.880 --> 0:11:07.120 how do we finance the growing need for global trade. 0:11:07.640 --> 0:11:09.640 But over time, especially in the late eighties in the 0:11:09.640 --> 0:11:12.440 early ninety nineties, it started to get into other forms 0:11:12.520 --> 0:11:16.760 of financialization and in different functions, and so it became 0:11:16.880 --> 0:11:21.000 instead of just a strictly global trade, currency system, intermediation, 0:11:21.000 --> 0:11:24.679 that kind of thing. It became an entire financial ecosystem 0:11:24.720 --> 0:11:27.560 whereby you know, you go back to two thousand and eight, 0:11:28.200 --> 0:11:32.120 why we're German banks being nationalized over a US housing bubble. Well, 0:11:32.120 --> 0:11:34.960 the reason is because they were financing those US dollar 0:11:35.040 --> 0:11:37.520 assets on the eurodollar markets, and so it became something 0:11:37.640 --> 0:11:40.480 very different over time, and it kind of really towards 0:11:40.520 --> 0:11:43.079 the end got really out of control. But this is 0:11:43.120 --> 0:11:45.200 really interesting, and this is something that I hadn't really 0:11:45.240 --> 0:11:49.080 put together before in my understanding. When we talk about 0:11:49.120 --> 0:11:52.880 the dollar as the reserve currency, and it's by far 0:11:53.080 --> 0:11:57.720 the most stable medium of exchange, and someone in Turkey 0:11:57.920 --> 0:12:00.480 might want to trade with someone in China, but neither 0:12:00.520 --> 0:12:04.840 of them want the other countries currency per se. This 0:12:04.960 --> 0:12:08.640 is sort of the role that the eurodollar market can 0:12:08.679 --> 0:12:13.320 play and essentially this common third currency for parties all 0:12:13.360 --> 0:12:17.560 around the world that can then be exchanged via any 0:12:17.600 --> 0:12:20.600 two banks. Right, And that's you know, there's a lot 0:12:20.640 --> 0:12:23.000 of misconception about what when we talk about a global 0:12:23.040 --> 0:12:25.480 reserve currency, what does that actually mean? And Joe, you 0:12:25.520 --> 0:12:28.400 just described it perfectly. A lot of people think, you know, 0:12:28.640 --> 0:12:31.680 reserve currencies you know oil gets priced in dollars. Well, 0:12:31.720 --> 0:12:33.960 that's part of it. That's a benefit of having a 0:12:34.040 --> 0:12:37.000 global reserve currency. But there is a function, there's a 0:12:37.120 --> 0:12:40.640 there's a mechanical need for a reserve currency to perform 0:12:40.679 --> 0:12:43.600 the role. Just as you said, how do we get 0:12:43.679 --> 0:12:47.160 different systems that want to trade with each other because trade, 0:12:47.240 --> 0:12:50.040 free trade is definitely a good thing. How do we 0:12:50.040 --> 0:12:52.559 get those to be able to do that without having 0:12:52.600 --> 0:12:55.440 everybody around the world have to hold everybody else's currencies 0:12:55.520 --> 0:12:58.760 or be able to process payments and somebody else's currency. 0:12:58.920 --> 0:13:01.400 And so, you know, it was historically the British pound 0:13:01.400 --> 0:13:04.520 performed that role originally, and then the Breton Wood system 0:13:04.520 --> 0:13:07.760 added the US dollar to the role of global reserve. 0:13:08.200 --> 0:13:12.000 But that created again Triffids paradox, where the fixed the 0:13:12.080 --> 0:13:14.760 dollar supply was fixed by gold, and therefore it was 0:13:14.840 --> 0:13:18.959 not necessarily the best way to allow this intermediation to 0:13:19.080 --> 0:13:22.720 happen under a rapidly globalizing system. And so the euro 0:13:22.800 --> 0:13:25.320 dollar arose at the right time and in the right 0:13:25.320 --> 0:13:27.200 place and then the right way to be able to 0:13:27.240 --> 0:13:30.600 take over that role so that globalization and global trade 0:13:30.640 --> 0:13:34.800 could be unhampered by a constricted supply. Because Essentially, that's 0:13:34.840 --> 0:13:38.840 what we talked about before. Because it's an offshore currency system, 0:13:38.840 --> 0:13:42.120 because it's a bank ledger system, it's interbank system, there 0:13:42.120 --> 0:13:44.600 really isn't as a lot of restrictions on it placed 0:13:44.640 --> 0:13:49.160 on it that constraints the flexibility the liquidity that is 0:13:49.440 --> 0:13:53.080 is necessary to perform these roles. Right. So one of 0:13:53.120 --> 0:13:54.920 the I mean, I don't know if you would call 0:13:54.960 --> 0:13:56.959 it a criticism, but one of the things that people 0:13:57.000 --> 0:13:59.880 point out about your dollars is it's something that the 0:14:00.000 --> 0:14:03.960 Federal Reserve doesn't necessarily have a lot of control over 0:14:04.320 --> 0:14:06.480 um in the same way that they might be able 0:14:06.520 --> 0:14:11.040 to affect the banking system and other kinds of liquidity 0:14:11.160 --> 0:14:14.840 by raising interest rates, are changing reserve requirements. Can you 0:14:14.880 --> 0:14:19.000 explain how exactly that comes about. Well, I would argue 0:14:19.000 --> 0:14:21.040 they have no control and they have actually no very 0:14:21.080 --> 0:14:23.280 little influence at all in the eurodollar market, which is 0:14:23.280 --> 0:14:25.760 why two thousand and eight happened. Um, the Federal Reserve 0:14:25.800 --> 0:14:27.640 did a whole bunch of stuff in two thousand eight, 0:14:27.640 --> 0:14:30.800 nothing worked. The reason is because it was a eurodollar panic, 0:14:30.840 --> 0:14:34.160 not a dollar panic. And that's you know, we talk 0:14:34.240 --> 0:14:37.480 about the eurodollar in the term itself being anachronistic. What 0:14:37.520 --> 0:14:40.080 we really mean is that it's a bank centered system. 0:14:40.080 --> 0:14:43.320 It's a credit based monetary system. Therefore, what matters and 0:14:43.400 --> 0:14:46.160 what's that what's at the center of the system are 0:14:46.200 --> 0:14:49.200 these global banks that are creating and trading all of 0:14:49.240 --> 0:14:52.680 these dollar denominated liabilities, and so the Federal Reserve has 0:14:52.800 --> 0:14:56.680 very little input into that system. Most of them mostly 0:14:56.720 --> 0:14:59.160 it had been just psychological, the idea of a greenspan 0:14:59.280 --> 0:15:02.680 put but it's starting in two thousand seven, banks began 0:15:02.760 --> 0:15:05.640 to realize that the Federal Reserve was really powerless. And this, 0:15:05.720 --> 0:15:07.920 by the way, it was one of the earliest criticisms 0:15:07.920 --> 0:15:09.440 of the euro dollar system. We go back into the 0:15:09.480 --> 0:15:12.880 nineteen seventies and eighties, some of the officials and some 0:15:12.960 --> 0:15:15.600 of the economists that actually studied the Euro dollar system 0:15:15.680 --> 0:15:19.080 kept warning, you know, we have this international supply of 0:15:19.120 --> 0:15:21.600 dollars outside the United States, out of the reach of 0:15:21.640 --> 0:15:24.560 any central bank anywhere, and so that could be a 0:15:24.600 --> 0:15:27.400 problem because there's, first of all, it's nonreservable, so there 0:15:27.400 --> 0:15:29.480 aren't really reserves there. And second of all, there's no 0:15:29.480 --> 0:15:32.520 way to create them because there's no central bank operating 0:15:32.560 --> 0:15:35.560 in any of these places. Because it's offshore from everywhere 0:15:36.320 --> 0:15:39.320 and so um and one. In one sense, it was 0:15:39.360 --> 0:15:43.120 good because it performed the roles that were required for 0:15:43.120 --> 0:15:46.280 globalization and global trade. But in another sense, there was 0:15:46.360 --> 0:15:49.600 nothing to restrain it. There was nothing to make sure 0:15:49.600 --> 0:15:52.800 it was a robust system that could withstand even some 0:15:52.880 --> 0:15:55.320 of the UH some of the things we saw, especially 0:15:55.400 --> 0:15:58.520 with the housing bubble and the massive credit growth in 0:15:58.560 --> 0:16:01.760 the in the last decade. I think this is a 0:16:01.840 --> 0:16:04.840 really key point to helping people understand the system. So 0:16:04.880 --> 0:16:07.080 I want to drill down further, like if I have 0:16:07.880 --> 0:16:10.360 a bunch of money at a US bank, like say 0:16:10.520 --> 0:16:15.720 City Group or JP Morgan, and people perceive that to 0:16:15.760 --> 0:16:19.560 be pretty safe because even in the worst situation, City 0:16:19.560 --> 0:16:23.160 Group or JP Morgan could pledge collateral to the FED 0:16:23.320 --> 0:16:26.520 and get liquidity and get dollars, and you know, my 0:16:26.600 --> 0:16:28.920 deposits is going to be pretty good. If I have 0:16:29.040 --> 0:16:33.200 millions of dollars and UH deposits with some non US 0:16:33.280 --> 0:16:37.000 bank that doesn't have that same relationship with the Federal 0:16:37.040 --> 0:16:41.800 Reserve in a panic, there's no easy way for them 0:16:41.960 --> 0:16:46.239 to get a stable supply of dollars to meet that liability. 0:16:46.400 --> 0:16:49.040 And of course I guess this is why the FED 0:16:49.160 --> 0:16:53.440 had to engage in dollars swap lines with other central 0:16:53.440 --> 0:16:56.160 banks around the world during the crisis, so that those 0:16:56.240 --> 0:17:01.880 regional central banks could then supply dollar liquidity to their 0:17:01.920 --> 0:17:06.320 banks or attempt to supply attempt. Yeah, and you know 0:17:06.440 --> 0:17:09.240 that was one of the misunderstood aspects of the crisis 0:17:09.280 --> 0:17:11.040 was where, what, what why do we need all of 0:17:11.080 --> 0:17:12.800 these dollar swaps. And at one point it was, you know, 0:17:12.840 --> 0:17:16.000 six billion, the massive amount of dollars that the FED 0:17:16.119 --> 0:17:18.600 was trying to put out there into the market. But 0:17:18.680 --> 0:17:20.879 it wasn't. It wasn't the right kind of liquidity. It 0:17:20.960 --> 0:17:23.199 was you know, bureaucratic, it was rigid, it wasn't it 0:17:23.320 --> 0:17:27.080 wasn't a good enough replacement for malfunctioning euro dollar system. 0:17:27.119 --> 0:17:29.840 But your point being is exactly right. I mean, we 0:17:29.920 --> 0:17:32.800 have this international money system, and again, because it's largely 0:17:32.840 --> 0:17:35.560 an inter bank system, the issue isn't so much for 0:17:35.600 --> 0:17:38.199 a US based a positive who has money out in 0:17:38.280 --> 0:17:41.560 dollars outside. It's really what happens to a bank in 0:17:41.560 --> 0:17:44.440 the Caymans that says it has a dollar liability and 0:17:44.520 --> 0:17:46.560 has been trading off dollar liabilities when all of a 0:17:46.600 --> 0:17:51.000 sudden funding those kinds of of of transactions becomes difficult 0:17:51.320 --> 0:17:53.399 because the market starts to break down. Who do you 0:17:53.480 --> 0:17:57.000 turn to. Well, if normally you turn to any number 0:17:57.040 --> 0:17:59.080 of banks operating in the market, and all of a sudden, 0:17:59.119 --> 0:18:01.880 all of them are very kiddish and nervous and don't 0:18:01.880 --> 0:18:04.720 offer you any good terms to fund your liability structure. 0:18:05.280 --> 0:18:07.960 You have no recourse to anything. And so that's why, 0:18:08.040 --> 0:18:10.120 you know, two thousand and eight was mostly a bank 0:18:10.200 --> 0:18:13.120 panic among banks. It was an inter bank panic more 0:18:13.119 --> 0:18:15.400 than it was you know, something like the nineteen thirties 0:18:15.800 --> 0:18:18.119 where you saw people lined up trying to convert to 0:18:18.200 --> 0:18:22.240 cash outside of you know, the local country bank anywhere 0:18:22.240 --> 0:18:24.879 in the United States. It was an inter bank panic 0:18:24.920 --> 0:18:28.920 because this monetary system is itself an international inter bank 0:18:29.000 --> 0:18:32.399 money system. Okay, so in two thousand eight you have 0:18:32.520 --> 0:18:36.280 basically an interbank funding crunch that manifests itself in the 0:18:36.320 --> 0:18:39.480 euro dollar market as well as some other markets uh 0:18:39.760 --> 0:18:43.359 repo I guess being the one other famous example. The 0:18:43.359 --> 0:18:47.440 Fed comes in provides extra dollar liquidity and um that 0:18:47.600 --> 0:18:51.160 solves the problem at least for a little while. Can 0:18:51.200 --> 0:18:54.880 we fast forward to today, Jeff, because you have some 0:18:55.000 --> 0:18:58.479 interesting um theories that you've been writing down on your 0:18:58.520 --> 0:19:02.520 blog talking about how the recent market sell off might 0:19:02.720 --> 0:19:06.920 have its origins in a sort of similar collateral crunch 0:19:07.040 --> 0:19:10.399 that's taking place in the eurodollar market. Yeah, well, we 0:19:10.440 --> 0:19:13.240 look at the euro dollar system. You know, there's because 0:19:13.280 --> 0:19:15.480 it's been somewhat of a mystery for so long and 0:19:15.480 --> 0:19:18.359 because officially, you know, it doesn't exist. Central banks do 0:19:18.400 --> 0:19:21.000 not admit that there's this offshore money market because how 0:19:21.040 --> 0:19:24.000 could they, because there's a whole lot of information about it. 0:19:24.040 --> 0:19:25.800 We don't have a lot of good statistics, but you know, 0:19:25.960 --> 0:19:28.159 what we've seen anecdotally, what we've seen in prices, and 0:19:28.200 --> 0:19:31.320 what we've seen in the statistics we do have is 0:19:31.359 --> 0:19:33.960 that the system broke down on August nine, two thousand 0:19:33.960 --> 0:19:36.720 and seven, and then it never It was never restored, 0:19:36.720 --> 0:19:39.879 it never got back to operations. So there's been for 0:19:39.920 --> 0:19:44.959 the last eleven years ongoing intermittent euro dollar squeeze, as 0:19:45.000 --> 0:19:47.600 I call it, where we have these episodes. This would 0:19:47.640 --> 0:19:49.720 be the fourth one if if that's exactly what's taking 0:19:49.760 --> 0:19:53.800 place right now. There's these episodes where the system goes 0:19:53.960 --> 0:19:57.520 from you know, partial recovery back to nervousness, and then 0:19:57.680 --> 0:20:00.000 then the system contracts and we get into these globe 0:20:00.200 --> 0:20:04.359 downturns um financial markets go back into turmoil, and then 0:20:04.480 --> 0:20:06.719 it'll it'll get to a point where it can go 0:20:06.760 --> 0:20:09.639 into a reflation period where things seem to be getting 0:20:09.680 --> 0:20:12.040 better and things loosen up a little bit, and then 0:20:12.040 --> 0:20:14.200 all of a sudden, it will turn back into another downturn. 0:20:14.800 --> 0:20:16.960 And again, we've seen this three times before, and I 0:20:16.960 --> 0:20:19.359 think we're seeing it again for a fourth time. And 0:20:19.400 --> 0:20:21.920 the reason is because the system has never been able 0:20:21.960 --> 0:20:25.040 to go back to before August ninth, two thousand seven 0:20:25.080 --> 0:20:27.840 and operate in the way that it did before. And 0:20:27.840 --> 0:20:31.120 the reason is because people realize that the risks involved here. 0:20:31.520 --> 0:20:34.040 Whereas you know, before two thousand and eight, two thousand 0:20:34.080 --> 0:20:38.199 and seven, the belief was common that there was no 0:20:38.359 --> 0:20:40.640 risk that you could just grow and expand and take 0:20:40.640 --> 0:20:42.919 on any form of liability, any form of assets that 0:20:42.960 --> 0:20:45.600 you wanted to do, and as long as you were growing, 0:20:45.640 --> 0:20:48.480 everything would be fine. And it come along two thousand 0:20:48.480 --> 0:20:51.560 seventy two, they finally the system finally realized and began 0:20:51.640 --> 0:20:54.800 to doubt itself. Hey, there's a whole lot of risk here, 0:20:55.359 --> 0:20:57.600 and we're not being compensated for that risk. And so 0:20:57.800 --> 0:21:01.880 banks have been pulling back from their money dealing activities 0:21:01.920 --> 0:21:04.679 in these Euro dollar spaces for eleven years, but they 0:21:04.680 --> 0:21:06.280 don't do it all at once. They do it again 0:21:06.280 --> 0:21:08.680 in these intermittent episodes, and I think that's what we're 0:21:08.680 --> 0:21:12.520 seeing right now, all right? What is the data that 0:21:12.560 --> 0:21:16.119 you look at to assert that a we've never really 0:21:16.160 --> 0:21:20.640 gotten back to the pre crisis sort of behavior of 0:21:20.680 --> 0:21:23.320 this market. And then when you talk about this is 0:21:23.359 --> 0:21:27.320 the third or fourth of these episodic um stresses within 0:21:27.359 --> 0:21:29.879 the euro dollar market, what are you looking at or 0:21:29.920 --> 0:21:32.840 what are you seeing specifically that tells you that that's 0:21:32.920 --> 0:21:36.480 the sort of the key thing to understand about these markets? 0:21:36.480 --> 0:21:39.720 Sellofs well, there's uh. Some of the data is just 0:21:39.800 --> 0:21:42.480 priced data. For example, you look at the repo rate 0:21:43.119 --> 0:21:46.520 general collateral U S Treasury repo rate. In a system 0:21:46.520 --> 0:21:49.720 that worked before August nine, two seven, the repo rate 0:21:49.760 --> 0:21:53.600