Speaker 1: Hello, and welcome to another episode of the Old Thoughts podcast.
Speaker 1: I'm Tracy all the Way and I'm Joe Wish. So, Joe,
Speaker 1: you like to talk about money, right? I love talking
Speaker 1: about money. I think where money comes from, its origin,
Speaker 1: stuff like that, or even just what it is is
Speaker 1: one of those topics that I can never get enough of.
Speaker 1: So what is that we're going to talk about today? Yeah,
Speaker 1: we are, um, but we're going to talk about a
Speaker 1: type of money that doesn't normally get a lot of
Speaker 1: attention outside certain aspects of the financial community. We're going
Speaker 1: to be talking about euro dollars. So euro dollars, you
Speaker 1: know what I have to say, Like, this is one
Speaker 1: of those topics that I know, I'm supposed to know
Speaker 1: a lot more about than I do. I kind of
Speaker 1: vaguely at this idea that people use futures and euro
Speaker 1: dollars to bet on what they think the FED is
Speaker 1: going to do. But then beyond that, like what and
Speaker 1: I guess that, And I kind of have this sense
Speaker 1: that their dollars held outside of banks that aren't in
Speaker 1: the US. But honestly, I know very I know embarrassingly
Speaker 1: little about them and how they actually work and what
Speaker 1: their point is, well, you're being very modest as usual.
Speaker 1: Actually this I'm really not like that. Just I just
Speaker 1: told you the extent to which I know, like I
Speaker 1: don't even really get how it works, Like I don't
Speaker 1: even get how you can hold a dollar at a
Speaker 1: bank outside the US, Like in the first place. That's
Speaker 1: a very strange concept to me, because I have this
Speaker 1: conception of like how banks hold money, and I don't
Speaker 1: really understand how that can happen outside the US. So
Speaker 1: the whole day is very mysterious to me, and I'm
Speaker 1: glad we're finally doing an episode that will hopefully clear
Speaker 1: it up. And sometimes I'm modest, but this time I'm not. Okay, Well,
Speaker 1: mysterious is actually the key word here, So I just
Speaker 1: to boil it down really simply before we start. Euro
Speaker 1: dollar based really refers to US dollar denominated deposits that
Speaker 1: are at foreign banks, and by foreign I mean non
Speaker 1: US or foreign branches of US banks. So that's the
Speaker 1: simplest explanation. But of course there there is a lot
Speaker 1: of sort of mystery and controversy swirling around these. Lots
Speaker 1: of people think this is a sort of form of
Speaker 1: like shadow bank liquidity that's floating around in the system
Speaker 1: outside of the federal reserves control. People talked about it
Speaker 1: a lot during the financial crisis, and we are seeing
Speaker 1: some people talking about it again with the recent market
Speaker 1: sell off, and one of those people is our guest
Speaker 1: for today. Before we get into this, can I just say, uh,
Speaker 1: did anyone do you think anyone else like me first
Speaker 1: when they thought when they heard the word euro dollars,
Speaker 1: just thought that was what the euro was. That like,
Speaker 1: the euro was short for euro dollars. Oh, Joe, I'm
Speaker 1: sure for years when I heard euro dollar, I just
Speaker 1: assumed that the euro was just the nickname for yar
Speaker 1: own dollars. I know that's not the case right now,
Speaker 1: but just to really emphasize how ignorant I am on
Speaker 1: this topic, that really is what I thought for years
Speaker 1: until I realized there's something else. Now, You're absolutely right,
Speaker 1: lots of people think you're a dollar is just the
Speaker 1: exchange rate. So for the avoidance of doubt, we are
Speaker 1: not going to be talking about the euro dollar cross
Speaker 1: exchange rate. That that's not what this is about. This
Speaker 1: is about something much more interesting, about a specific type
Speaker 1: of money that's actually quite important to the way the
Speaker 1: financial system works. So without further ado, let's bring on
Speaker 1: our guest. It is Jeffrey Snyder. He is head of
Speaker 1: Global Research at al Hambra. Jeffrey, thank you so much
Speaker 1: for joining us, good morning, Thanks for having me, Joe
Speaker 1: and Tracy. So, given Joe's lack of expertise in this
Speaker 1: particular topic, maybe we should start really really slow with
Speaker 1: Sorry Joe, that's very patronizing. Please, no, no, no, please,
Speaker 1: but let's start slow. What exactly is a euro dollar? Well,
Speaker 1: you know, I mean, it's a common misperception, and I
Speaker 1: think you guys explained it pretty well. I mean, lots
Speaker 1: of people to hear the term euro doll and they
Speaker 1: think obviously euro because that kind of term and that
Speaker 1: kind of terminology isn't common in usage, and most people
Speaker 1: they've never heard of a euro dollar before anyway, so
Speaker 1: it's not uncommon for this to be a very confusing topic.
Speaker 1: And in fact, the term euro in front of a
Speaker 1: dollar simply means, as you both pointed out, that these
Speaker 1: are dollars offshore somewhere, and it could be anywhere around
Speaker 1: the world. That could be, you know, a bank in
Speaker 1: the Cayman Islands, it could be a bank in Europe,
Speaker 1: as the original term was used. That's where the term
Speaker 1: came from. And in fact, it's not just dollars that
Speaker 1: are offshore. There's an entire currency ecosystem that exists, um
Speaker 1: including something that's called in euro euro. They're offshore euros
Speaker 1: in this euro euro market. That makes it even more
Speaker 1: strange and complex and I guess interesting at some place
Speaker 1: as So. One of the things that I do understand
Speaker 1: to some extent about banking is that it's not like
Speaker 1: there's this fixed pool of money out there that gets
Speaker 1: shifted around. That banks are essentially creators of money, is
Speaker 1: one way to think about it. In banks issue loans,
Speaker 1: and those loans turned into deposits, and then the deposits
Speaker 1: are held at banks and then new money is created.
Speaker 1: So explain what's really happening. You mentioned a bank in
Speaker 1: the Cayman Islands. A customer holds euro dollars there. What
Speaker 1: is where did these dollars come from? How do they
Speaker 1: create them? What is the mechanics in which they come
Speaker 1: into being? Well, yeah, and that's another thing. You know,
Speaker 1: The term euro dollars anachronistic. Originally it referred to actual
Speaker 1: dollars on deposit in the bank somewhere. When we talk
Speaker 1: about a dollar deposit, people think, probably quite correctly, that
Speaker 1: there are stacks of cash in a bank vault in
Speaker 1: the Cayman Islands, right. They think that's a dollar deposit, right,
Speaker 1: because that's traditionally what you're told in school. That's what
Speaker 1: people refer to and in convention. But that's not actually
Speaker 1: what it is. It's eurodollars. In the beginning used to
Speaker 1: be you know, stacks of cash and a vault somewhere,
Speaker 1: but over time they have becomeing and they have evolved
Speaker 1: into simply bank liability. Some bank offshore somewhere has a
Speaker 1: dollar denominating liability. However it came about, um doesn't really matter.
Speaker 1: Once they obtain dollars in any format, they can then
Speaker 1: multiply them in various different other forms of bank liabilities.
Speaker 1: So it's essentially an inter bank international system where it's
Speaker 1: denominated primarily in dollars, and it's always and it's uh
Speaker 1: it's operated offshore or outside the United States. So the
Speaker 1: way in which these dollars come to existence is simply
Speaker 1: one bank somewhere says I want to do something, and
Speaker 1: another bank on the other side says, I want to
Speaker 1: do something. They get together, they exchange liabilities and assets,
Speaker 1: and that's how it's done. As long as the bank
Speaker 1: on the one side has balance sheet capacity to quote
Speaker 1: unquote lend these euro dollars to the other bank, it
Speaker 1: can both banks except the transaction and it takes place.
Speaker 1: So there's no actual physical money, there's no actual physical currency.
Speaker 1: There no no actual physical anything in the system. It's
Speaker 1: simply led your money. It's just one bank on a
Speaker 1: computer screen has a number. The bank on the other
Speaker 1: side has a computer screen. Those two numbers match. Therefore
Speaker 1: money has been created and the transaction takes place. So
Speaker 1: when it comes to money being created, and Jeff, I
Speaker 1: think you just mentioned um multiplying at that point, can
Speaker 1: you give us a specific example, like, let's say I'm
Speaker 1: I don't know, like a rich Arab shake or something
Speaker 1: that was Milton Friedman's famous example. And I have a
Speaker 1: million US dollars and I wanted to deposit it in
Speaker 1: a non US bank. What happens to that million dollars
Speaker 1: and how much extra money or liquidity would be generated
Speaker 1: given that the foreign bank will still have some sort
Speaker 1: of reserve requirement. Well, you know, in Milton Friedman's example
Speaker 1: back in the in the late nineteen sixties early nineteen seventies,
Speaker 1: there were reserve requirements and those were applicable. But still,
Speaker 1: you know, in the way which it happened, there's a
Speaker 1: whole variety of ways in which these dollars become eurodollars.
Speaker 1: In a lot of cases, is not just a you know,
Speaker 1: a foreigner who decides he has a dollar balance domestically
Speaker 1: in the United States and wants to put them in
Speaker 1: London because they can obtain a better interest rate. That's
Speaker 1: that's one of the the ways in which the euro
Speaker 1: dollar market first evolved was to take advantage of interest
Speaker 1: rate differentials offshore versus on shore. But once those dollar
Speaker 1: liabilities came into existence, that opened up the whole range
Speaker 1: of possibilities in terms of this multiplier effect where um,
Speaker 1: you know, you mentioned earlier in the introduction, where euro
Speaker 1: dollars apply not just to foreign banks holding dollars, but
Speaker 1: also US domestic banks and their foreign subsidiaries, and so
Speaker 1: there were you know, over time, they're evolved away for
Speaker 1: domestic US banks to transfer dollar liabilities to their foreign subsidiaries,
Speaker 1: often operating out of London. Again, the term euro dollar
Speaker 1: meaning Europe, and so there's any number of ways for
Speaker 1: these dollar liabilities to be created domestic and then get
Speaker 1: transferred overseas. And it's easy just to transfer back and
Speaker 1: forth from the from the domestic US bank to its
Speaker 1: foreign subsidiary. And once those liabilities were created outside the
Speaker 1: United States, once they're transferred to their foreign subsidy on
Speaker 1: the euro dollar market, they can then be multiplied in
Speaker 1: any number of ways and any number of kinds of transactions.
Speaker 1: And over time, the way in which that has happened,
Speaker 1: a way in which that has been banks have been
Speaker 1: able to do that is it's not just quantitative expansion,
Speaker 1: it's qualitative expansions any number any for any number of
Speaker 1: different exotic liabilities that can be created once those dollars
Speaker 1: are offshore. Now that there's a huge robust market for
Speaker 1: these dollars offshore, the sky's the limit, essentially, And that's
Speaker 1: what's been over the last three or four decades. The
Speaker 1: eurodollar market has grown exponentially, or it had up until
Speaker 1: two thousand and seven, simply because it was, you know,
Speaker 1: offshore system. So does that mean that euro dollars are
Speaker 1: basically an extra source of liquidity in the financial system? Like?
Speaker 1: Is that how banks end up using them. That's how
Speaker 1: it started. The intent here was, you know, how do
Speaker 1: we solve the you know, Triffin's paradox. What was left
Speaker 1: over from Breton woods and Bretton woods in the goal
Speaker 1: exchange system was constraining on global trade and globalization, and
Speaker 1: the rising demand for trade globally meant we need some
Speaker 1: form of international money to intermediate between different systems trying
Speaker 1: to do merchandise trade. What the euro dollar did on
Speaker 1: what Milton Freeman showed in nineteen sixty nine, was that
Speaker 1: we could multiply dollars outside the United States that would
Speaker 1: not affect the domestic money supply, thereby solving Triffin's paradox.
Speaker 1: And over time that's exactly what happened in the nineteen
Speaker 1: sixties and early nineteen seventies is the euro dollar took
Speaker 1: over the liquidity adjustment functions of a global reserve currency.
Speaker 1: And so originally the intent was how do we finance globalization,
Speaker 1: how do we finance the growing need for global trade.
Speaker 1: But over time, especially in the late eighties in the
Speaker 1: early ninety nineties, it started to get into other forms
Speaker 1: of financialization and in different functions, and so it became
Speaker 1: instead of just a strictly global trade, currency system, intermediation,
Speaker 1: that kind of thing. It became an entire financial ecosystem
Speaker 1: whereby you know, you go back to two thousand and eight,
Speaker 1: why we're German banks being nationalized over a US housing bubble. Well,
Speaker 1: the reason is because they were financing those US dollar
Speaker 1: assets on the eurodollar markets, and so it became something
Speaker 1: very different over time, and it kind of really towards
Speaker 1: the end got really out of control. But this is
Speaker 1: really interesting, and this is something that I hadn't really
Speaker 1: put together before in my understanding. When we talk about
Speaker 1: the dollar as the reserve currency, and it's by far
Speaker 1: the most stable medium of exchange, and someone in Turkey
Speaker 1: might want to trade with someone in China, but neither
Speaker 1: of them want the other countries currency per se. This
Speaker 1: is sort of the role that the eurodollar market can
Speaker 1: play and essentially this common third currency for parties all
Speaker 1: around the world that can then be exchanged via any
Speaker 1: two banks. Right, And that's you know, there's a lot
Speaker 1: of misconception about what when we talk about a global
Speaker 1: reserve currency, what does that actually mean? And Joe, you
Speaker 1: just described it perfectly. A lot of people think, you know,
Speaker 1: reserve currencies you know oil gets priced in dollars. Well,
Speaker 1: that's part of it. That's a benefit of having a
Speaker 1: global reserve currency. But there is a function, there's a
Speaker 1: there's a mechanical need for a reserve currency to perform
Speaker 1: the role. Just as you said, how do we get
Speaker 1: different systems that want to trade with each other because trade,
Speaker 1: free trade is definitely a good thing. How do we
Speaker 1: get those to be able to do that without having
Speaker 1: everybody around the world have to hold everybody else's currencies
Speaker 1: or be able to process payments and somebody else's currency.
Speaker 1: And so, you know, it was historically the British pound
Speaker 1: performed that role originally, and then the Breton Wood system
Speaker 1: added the US dollar to the role of global reserve.
Speaker 1: But that created again Triffids paradox, where the fixed the
Speaker 1: dollar supply was fixed by gold, and therefore it was
Speaker 1: not necessarily the best way to allow this intermediation to
Speaker 1: happen under a rapidly globalizing system. And so the euro
Speaker 1: dollar arose at the right time and in the right
Speaker 1: place and then the right way to be able to
Speaker 1: take over that role so that globalization and global trade
Speaker 1: could be unhampered by a constricted supply. Because Essentially, that's
Speaker 1: what we talked about before. Because it's an offshore currency system,
Speaker 1: because it's a bank ledger system, it's interbank system, there
Speaker 1: really isn't as a lot of restrictions on it placed
Speaker 1: on it that constraints the flexibility the liquidity that is
Speaker 1: is necessary to perform these roles. Right. So one of
Speaker 1: the I mean, I don't know if you would call
Speaker 1: it a criticism, but one of the things that people
Speaker 1: point out about your dollars is it's something that the
Speaker 1: Federal Reserve doesn't necessarily have a lot of control over
Speaker 1: um in the same way that they might be able
Speaker 1: to affect the banking system and other kinds of liquidity
Speaker 1: by raising interest rates, are changing reserve requirements. Can you
Speaker 1: explain how exactly that comes about. Well, I would argue
Speaker 1: they have no control and they have actually no very
Speaker 1: little influence at all in the eurodollar market, which is
Speaker 1: why two thousand and eight happened. Um, the Federal Reserve
Speaker 1: did a whole bunch of stuff in two thousand eight,
Speaker 1: nothing worked. The reason is because it was a eurodollar panic,
Speaker 1: not a dollar panic. And that's you know, we talk
Speaker 1: about the eurodollar in the term itself being anachronistic. What
Speaker 1: we really mean is that it's a bank centered system.
Speaker 1: It's a credit based monetary system. Therefore, what matters and
Speaker 1: what's that what's at the center of the system are
Speaker 1: these global banks that are creating and trading all of
Speaker 1: these dollar denominated liabilities, and so the Federal Reserve has
Speaker 1: very little input into that system. Most of them mostly
Speaker 1: it had been just psychological, the idea of a greenspan
Speaker 1: put but it's starting in two thousand seven, banks began
Speaker 1: to realize that the Federal Reserve was really powerless. And this,
Speaker 1: by the way, it was one of the earliest criticisms
Speaker 1: of the euro dollar system. We go back into the
Speaker 1: nineteen seventies and eighties, some of the officials and some
Speaker 1: of the economists that actually studied the Euro dollar system
Speaker 1: kept warning, you know, we have this international supply of
Speaker 1: dollars outside the United States, out of the reach of
Speaker 1: any central bank anywhere, and so that could be a
Speaker 1: problem because there's, first of all, it's nonreservable, so there
Speaker 1: aren't really reserves there. And second of all, there's no
Speaker 1: way to create them because there's no central bank operating
Speaker 1: in any of these places. Because it's offshore from everywhere
Speaker 1: and so um and one. In one sense, it was
Speaker 1: good because it performed the roles that were required for
Speaker 1: globalization and global trade. But in another sense, there was
Speaker 1: nothing to restrain it. There was nothing to make sure
Speaker 1: it was a robust system that could withstand even some
Speaker 1: of the UH some of the things we saw, especially
Speaker 1: with the housing bubble and the massive credit growth in
Speaker 1: the in the last decade. I think this is a
Speaker 1: really key point to helping people understand the system. So
Speaker 1: I want to drill down further, like if I have
Speaker 1: a bunch of money at a US bank, like say
Speaker 1: City Group or JP Morgan, and people perceive that to
Speaker 1: be pretty safe because even in the worst situation, City
Speaker 1: Group or JP Morgan could pledge collateral to the FED
Speaker 1: and get liquidity and get dollars, and you know, my
Speaker 1: deposits is going to be pretty good. If I have
Speaker 1: millions of dollars and UH deposits with some non US
Speaker 1: bank that doesn't have that same relationship with the Federal
Speaker 1: Reserve in a panic, there's no easy way for them
Speaker 1: to get a stable supply of dollars to meet that liability.
Speaker 1: And of course I guess this is why the FED
Speaker 1: had to engage in dollars swap lines with other central
Speaker 1: banks around the world during the crisis, so that those
Speaker 1: regional central banks could then supply dollar liquidity to their
Speaker 1: banks or attempt to supply attempt. Yeah, and you know
Speaker 1: that was one of the misunderstood aspects of the crisis
Speaker 1: was where, what, what why do we need all of
Speaker 1: these dollar swaps. And at one point it was, you know,
Speaker 1: six billion, the massive amount of dollars that the FED
Speaker 1: was trying to put out there into the market. But
Speaker 1: it wasn't. It wasn't the right kind of liquidity. It
Speaker 1: was you know, bureaucratic, it was rigid, it wasn't it
Speaker 1: wasn't a good enough replacement for malfunctioning euro dollar system.
Speaker 1: But your point being is exactly right. I mean, we
Speaker 1: have this international money system, and again, because it's largely
Speaker 1: an inter bank system, the issue isn't so much for
Speaker 1: a US based a positive who has money out in
Speaker 1: dollars outside. It's really what happens to a bank in
Speaker 1: the Caymans that says it has a dollar liability and
Speaker 1: has been trading off dollar liabilities when all of a
Speaker 1: sudden funding those kinds of of of transactions becomes difficult
Speaker 1: because the market starts to break down. Who do you
Speaker 1: turn to. Well, if normally you turn to any number
Speaker 1: of banks operating in the market, and all of a sudden,
Speaker 1: all of them are very kiddish and nervous and don't
Speaker 1: offer you any good terms to fund your liability structure.
Speaker 1: You have no recourse to anything. And so that's why,
Speaker 1: you know, two thousand and eight was mostly a bank
Speaker 1: panic among banks. It was an inter bank panic more
Speaker 1: than it was you know, something like the nineteen thirties
Speaker 1: where you saw people lined up trying to convert to
Speaker 1: cash outside of you know, the local country bank anywhere
Speaker 1: in the United States. It was an inter bank panic
Speaker 1: because this monetary system is itself an international inter bank
Speaker 1: money system. Okay, so in two thousand eight you have
Speaker 1: basically an interbank funding crunch that manifests itself in the
Speaker 1: euro dollar market as well as some other markets uh
Speaker 1: repo I guess being the one other famous example. The
Speaker 1: Fed comes in provides extra dollar liquidity and um that
Speaker 1: solves the problem at least for a little while. Can
Speaker 1: we fast forward to today, Jeff, because you have some
Speaker 1: interesting um theories that you've been writing down on your
Speaker 1: blog talking about how the recent market sell off might
Speaker 1: have its origins in a sort of similar collateral crunch
Speaker 1: that's taking place in the eurodollar market. Yeah, well, we
Speaker 1: look at the euro dollar system. You know, there's because
Speaker 1: it's been somewhat of a mystery for so long and
Speaker 1: because officially, you know, it doesn't exist. Central banks do
Speaker 1: not admit that there's this offshore money market because how
Speaker 1: could they, because there's a whole lot of information about it.
Speaker 1: We don't have a lot of good statistics, but you know,
Speaker 1: what we've seen anecdotally, what we've seen in prices, and
Speaker 1: what we've seen in the statistics we do have is
Speaker 1: that the system broke down on August nine, two thousand
Speaker 1: and seven, and then it never It was never restored,
Speaker 1: it never got back to operations. So there's been for
Speaker 1: the last eleven years ongoing intermittent euro dollar squeeze, as
Speaker 1: I call it, where we have these episodes. This would
Speaker 1: be the fourth one if if that's exactly what's taking
Speaker 1: place right now. There's these episodes where the system goes
Speaker 1: from you know, partial recovery back to nervousness, and then
Speaker 1: then the system contracts and we get into these globe
Speaker 1: downturns um financial markets go back into turmoil, and then
Speaker 1: it'll it'll get to a point where it can go
Speaker 1: into a reflation period where things seem to be getting
Speaker 1: better and things loosen up a little bit, and then
Speaker 1: all of a sudden, it will turn back into another downturn.
Speaker 1: And again, we've seen this three times before, and I
Speaker 1: think we're seeing it again for a fourth time. And
Speaker 1: the reason is because the system has never been able
Speaker 1: to go back to before August ninth, two thousand seven
Speaker 1: and operate in the way that it did before. And
Speaker 1: the reason is because people realize that the risks involved here.
Speaker 1: Whereas you know, before two thousand and eight, two thousand
Speaker 1: and seven, the belief was common that there was no
Speaker 1: risk that you could just grow and expand and take
Speaker 1: on any form of liability, any form of assets that
Speaker 1: you wanted to do, and as long as you were growing,
Speaker 1: everything would be fine. And it come along two thousand
Speaker 1: seventy two, they finally the system finally realized and began
Speaker 1: to doubt itself. Hey, there's a whole lot of risk here,
Speaker 1: and we're not being compensated for that risk. And so
Speaker 1: banks have been pulling back from their money dealing activities
Speaker 1: in these Euro dollar spaces for eleven years, but they
Speaker 1: don't do it all at once. They do it again
Speaker 1: in these intermittent episodes, and I think that's what we're
Speaker 1: seeing right now, all right? What is the data that
Speaker 1: you look at to assert that a we've never really
Speaker 1: gotten back to the pre crisis sort of behavior of
Speaker 1: this market. And then when you talk about this is
Speaker 1: the third or fourth of these episodic um stresses within
Speaker 1: the euro dollar market, what are you looking at or
Speaker 1: what are you seeing specifically that tells you that that's
Speaker 1: the sort of the key thing to understand about these markets?
Speaker 1: Sellofs well, there's uh. Some of the data is just
Speaker 1: priced data. For example, you look at the repo rate
Speaker 1: general collateral U S Treasury repo rate. In a system
Speaker 1: that worked before August nine, two seven, the repo rate
Speaker 1: should be less than the unsecured you know, federal funds
Speaker 1: LIBE or whatever it be, because you know a collateralized
Speaker 1: transaction is less risk. But what we've seen since a
Speaker 1: special the end of two thousand eight in the Institution
Speaker 1: observed the report rate is no longer tied to the
Speaker 1: unsecured rate. There's a breakdown and hierarchy. In other words,
Speaker 1: there should be a repro rate negative spread to something
Speaker 1: like federal funds. But there are these very specific periods
Speaker 1: where the report rate will just go crazy, and in
Speaker 1: in this case and in each of the four cases
Speaker 1: UH subsequent cases, the report rate will go way above
Speaker 1: federal funds, which makes no sense. I mean, a hierarchical
Speaker 1: structure of predictable money market function, we should see the
Speaker 1: repo rate be less than federal funds. But yet in
Speaker 1: these very specific periods where we see all this financial
Speaker 1: distraction and we see global economic concerns, UM, the report
Speaker 1: rate will be well above federal funds. And that happened
Speaker 1: earlier this year. UH. The repot rate got to be
Speaker 1: almost fifty basis points above and maybe even more fifty.
Speaker 1: I'm going off a memory here, but it got to
Speaker 1: be a substantial amount more than the reverse repot floor
Speaker 1: that the Fed sets for UM. It's money market corridor.
Speaker 1: So that's one way to look at it. There are others.
Speaker 1: Just the exchange value of the dollar. For example, you know,
Speaker 1: in the middle two thousand's, up until two thousan dollar
Speaker 1: was falling consistent with rising eurodollar supply on these markets
Speaker 1: since then, the dollar has been rising and people trying
Speaker 1: to figure out why, how could that be um and
Speaker 1: what it is is it's simply this this eurodollars squeeze.
Speaker 1: When there are periods where euro dollars are hard to
Speaker 1: come by, that the value of the dollar goes up
Speaker 1: because these people on the other side of these transactions,
Speaker 1: banks and foreign locations who are short synthetically these U
Speaker 1: S dollars because it's of their internet interbank liabilities. When
Speaker 1: it becomes difficult for them to fund in U S
Speaker 1: dollars as they have to do, the price of the
Speaker 1: dollar goes up. So it's almost like a short squeeze.
Speaker 1: But in terms of actual data, physical debt and I
Speaker 1: want to say physical data, but actual concrete data. We
Speaker 1: can use things like the Treasury departments take data. Most
Speaker 1: people think of tick as you know, how much are
Speaker 1: foreigners buying and selling US treasuries and in a given month,
Speaker 1: But there's a whole bunch of other data that the
Speaker 1: Treasury Department collects, including the cross border US dollar activities
Speaker 1: of US banks. What you see there again is the
Speaker 1: same thing. Up until two thousand and seven, you have
Speaker 1: a parabolic rise in these cross border dollar transactions, and
Speaker 1: since then you have these intermittent periods of ups and downs.
Speaker 1: Were over the last eleven years that the cross border
Speaker 1: dollar activities between US banks and foreign banks has stagnated,
Speaker 1: It stopped. There's no more growth in that kind of
Speaker 1: business anymore. And you can see it justin if you
Speaker 1: follow the balance sheets of the total asset structure of
Speaker 1: of these global banks. You know, look at JP Morgan.
Speaker 1: JP Morgan's balance sheet was growing exponentially until two thousand
Speaker 1: and eight. Now it's it's essentially flat over the last decade.
Speaker 1: Banks don't grow anymore. So, Jeff, if you're right, if
Speaker 1: if we are seeing another bout of stress in the
Speaker 1: euro dollar market and it is manifesting itself in a
Speaker 1: stronger dollar as people look for alternatives to euro dollars,
Speaker 1: how does that or how do you think that's going
Speaker 1: to play out in the market. So we get the
Speaker 1: dollar strengthening, and presumably that might cause tighter financial conditions,
Speaker 1: which maybe means that we see some risk assets sell off.
Speaker 1: Or does the sell off necessarily come through the fact
Speaker 1: that liquidity in the form of euro dollars is evaporating.
Speaker 1: I think it's a little bit of both. I mean,
Speaker 1: and there's also sentiment to consider too, because we have
Speaker 1: to think about this in economic terms. What's established all
Speaker 1: these ups and downs is that the global economy, especially
Speaker 1: global trade because then the euro dollar and it's hard
Speaker 1: it's supposed to be about intermediate global trade. If there's
Speaker 1: a problem in the euro dollar market, there's a problem
Speaker 1: in the global trade system and therefore the global economy.
Speaker 1: And therefore, you know, a sentiment turns on the lack
Speaker 1: of opportunity in the economic risk of all of these
Speaker 1: things too, So you have you have a bunch of
Speaker 1: different feedback if X that all feed into the same direction,
Speaker 1: which is rising nervousness and eventually fear, which which permeates
Speaker 1: into you know, all sorts of liquidation events. You think
Speaker 1: about China. Recently, Chinese stocks have been liquidated since they're
Speaker 1: reopened from a golden week that has its its its
Speaker 1: origination in this dollar problem. U S stocks are probably
Speaker 1: more about sentiment than actual liquidity. But still, you know,
Speaker 1: it all feeds back into the same thing, and over time,
Speaker 1: if it goes far enough and it continues in this direction,
Speaker 1: it becomes self reinforcing. Like we saw in two thousand fifteen,
Speaker 1: for example, or two thousand eleven and two thousand and twelves,
Speaker 1: where the economy starts to fall off or roll over,
Speaker 1: which feeds into more uncertainty and fear in these dollar system,
Speaker 1: which causes the dollar system constrain even more, which causes
Speaker 1: the economy to get even even more precarious, and so
Speaker 1: on and so on. Is there a plus side in
Speaker 1: the fact that we have these episodic stresses, that we're
Speaker 1: not building up to something big and catastrophic like we
Speaker 1: saw in two thousand seven and two thousand and eight,
Speaker 1: and instead we just sort of have these, you know,
Speaker 1: many many blow ups, but that sort of relieve pressure
Speaker 1: from the system overall. Well, I would argue this is
Speaker 1: actually the worst case. I'd rather have a crash at
Speaker 1: this point. Really, I know that's counterintuitive in a way,
Speaker 1: but you know, the global economy has never recovered from
Speaker 1: two thousand eight, and time as a big factor in that,
Speaker 1: and so the cost of the system malfunctioning the way
Speaker 1: it has, in my opinion, aren't strictly economic anymore. We
Speaker 1: took we suffered the economic consequence. As you look at
Speaker 1: places like Italy, for example, the Italian economy is slow,
Speaker 1: is smaller today than it was in two thousand and
Speaker 1: it has never recovered. The European economy has never recovered.
Speaker 1: The U S economy has never recovered. I know people
Speaker 1: are talking about how it's booming right now, but the
Speaker 1: US fell off trend ten years ago and it's getting
Speaker 1: further and further behind that trend. And so to me,
Speaker 1: these periodic episodes are the reason that the economy hasn't recovered,
Speaker 1: and therefore they're taking us further or further away from
Speaker 1: a stable position. I think that's why you've seen the
Speaker 1: rise of populism, the rise of distrust in establishment, or
Speaker 1: wherever you want to call it. It's because economic opportunity
Speaker 1: has largely disappeared because of the malfunctioning the international reserve currency.
Speaker 1: So how do we fix that? And I don't think
Speaker 1: you could fix it, but I just keep doing allowing
Speaker 1: it to go the way it is. We need to
Speaker 1: get to a stable currency system so we can get
Speaker 1: to stable an actual real economic growth again. And the
Speaker 1: way you do that is to get people to to
Speaker 1: pay attention to this euro dollar system that doesn't work. So, okay,
Speaker 1: this doesn't work. What should be done? In your view
Speaker 1: if this sort of basic system of international finance is
Speaker 1: inherently flawed. You mean, how do we replace the euro
Speaker 1: dollar problem with something that isn't so susceptible to Yeah,
Speaker 1: like it ultimately, like the problem with the gold standard
Speaker 1: was sort of manifest saw in two thousand and eight
Speaker 1: that there's the euro dollar wasn't a perfect solution either
Speaker 1: in your view, is there a solution to this dilemma?
Speaker 1: Or will we always be stuck with the problem that
Speaker 1: if we want to stable global trading currency, there's going
Speaker 1: to be the challenge that the supply of it will
Speaker 1: inherently be limited. Well, yeah, and I think you're right, Joe,
Speaker 1: because you know, the pendulum has swung too far in
Speaker 1: the other direction. You know, the goal exchange system under
Speaker 1: Breton Woods was too constraining. The euro dollar system was
Speaker 1: way in the other direction. It was far too free
Speaker 1: and unconstrained. So the answer may be somewhere in the middle.
Speaker 1: But how do you actually design a system that replicates
Speaker 1: the good features of the euro dollar system, which there
Speaker 1: are many. Uh, it's not perfect and it got way
Speaker 1: too far in the wrong direction, but there are some
Speaker 1: good elements the euro dollar system, including the ability to
Speaker 1: flexibly supply money to where it's demanded, So how do
Speaker 1: we get how do we keep those characteristics but also
Speaker 1: put some kind of constraints on it so that doesn't
Speaker 1: get out of hand again. And that's that's It's a
Speaker 1: incredibly complex question, especially when you get into the really
Speaker 1: into the shadow spaces of what actually takes place in
Speaker 1: these kinds of interbank transactions internationally, because they are incredibly
Speaker 1: complex and exotic and they don't lend themselves to easy analysis.
Speaker 1: So this might not be surprised. Sounds like, sounds like
Speaker 1: a whole separate episode. Yeah, maybe, all right, Well, um,
Speaker 1: I guess we'll have to leave it there in that case.
Speaker 1: Jeffrey Snyder, head of Global Research at al Hambra. Jeff
Speaker 1: also has uh something called the euro Dollar University if
Speaker 1: you want to check that out and actually get more
Speaker 1: than just a half hour primer on euro dollars. So
Speaker 1: that's on YouTube as well as the macro Voices podcast. Jeff,
Speaker 1: thanks so much, Thanks Jeff, Thank you, Joe, Thanks Tracy,
Speaker 1: so Joe, I'm so glad we finally got to devote
Speaker 1: an entire episode to the euro dollar, and I thought
Speaker 1: that was a really great primer as well as a
Speaker 1: really interesting theory about what might be driving the recent
Speaker 1: market sell off. Yeah, I mean, I definitely would disagree
Speaker 1: on this sort of big picture that we haven't had
Speaker 1: a global recovery and so forth. But it's certainly true
Speaker 1: that the recovery has been disappointing around the world since
Speaker 1: the crisis, and looking at the financial roots of that
Speaker 1: may be one important aspect. But that aside, I do
Speaker 1: think this idea of the mechanics of money creation, and
Speaker 1: I hadn't is really important, and I hadn't really thought
Speaker 1: before about the inherent challenge of what it means when
Speaker 1: everyone wants to trade in a stable currency, but not
Speaker 1: everyone has the same equal access to that currency, and
Speaker 1: so the opportunityy or you know what, the euro dollar
Speaker 1: the problem that the euro dollar market solved, but also
Speaker 1: the inherent risks of that. Yeah, and also Jeff's point
Speaker 1: about how euro dollars have essentially grown in tandem with
Speaker 1: globalization was really interesting. And you know, I wonder about
Speaker 1: the link between what we've currently been saying in terms
Speaker 1: of trade tensions and the recent eurodollar stress, like that
Speaker 1: seems like a natural connection to potentially make right. And
Speaker 1: I do think this is going to be one of
Speaker 1: the biggest stories. And we've talked about it for a
Speaker 1: long time, but just sort of like deglobalization as a whole,
Speaker 1: and we talk about it a lot from the trade
Speaker 1: perspective all the time. We don't talk about it as
Speaker 1: much from the financial system perspective. But it feels like
Speaker 1: we have a financial system very much designed for an
Speaker 1: ear of expanding globalization and an economic system and political
Speaker 1: system where the gears seem to be turning the other way.
Speaker 1: So I think you're absolutely right that it's going to
Speaker 1: be really interesting to see the interplayer. Right. No one
Speaker 1: ever thinks about the euro dollar as ground zero for
Speaker 1: de globalization. People think about you know, apple supply chains
Speaker 1: and stuff like, right, right, exactly right, all right, Well,
Speaker 1: this has been another episode of the Odd Thoughts podcast.
Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at
Speaker 1: Tracy Alloway. You can also follow Jeff Snyder. He is
Speaker 1: at Jeff Snyder Underscore. A I P and a shout
Speaker 1: out as well to one of our listeners at goub
Speaker 1: Mint Cheese for suggesting Jeff in the first place. And
Speaker 1: I'm Joe Wisenthal. You can follow me on Twitter at
Speaker 1: the Stalwarts, and you should follow our producer to for
Speaker 1: for Foreheads on Twitter. He's at foreheads t as well
Speaker 1: as the bloomberg head of podcast, Francesco Leavy at Francesca Today.
Speaker 1: Thanks for listening year to