Speaker 1: Well, hello and welcome to another episode of the All
Speaker 1: Thoughts Podcast. I'm Tracy Allaway and I'm so we have
Speaker 1: a very very special episode for two reasons. One, we're
Speaker 1: recording this in front of a live audience, and secondly,
Speaker 1: we're going to be featuring two of our favorite people
Speaker 1: to speak to. Yeah, absolutely right. We're gonna be talking
Speaker 1: about the future of the dollar, which for our entire careers.
Speaker 1: I feel like dollars. Something is going to happen to
Speaker 1: the dollar. It's gonna blow up, people are gonna stop
Speaker 1: using it whatever. I still don't even know what the
Speaker 1: question means. And it's like, what is a post dollar future? What?
Speaker 1: I don't even understand the top of completely. But we
Speaker 1: have people who actually do well. We have a lot
Speaker 1: of time to dig into it. So without further ado,
Speaker 1: I'm going to introduce our guests for this particular debate.
Speaker 1: We have Sultan Posar, strategist at Credit Swiss, and Perry Maryland,
Speaker 1: Boston University professor and also the author of the forthcoming
Speaker 1: book Money and Empire, Charles P. Kindle Burger and the
Speaker 1: Dollar System that's already out in the UK, it's coming
Speaker 1: to the US soon and you can probably guess from
Speaker 1: the title what side of the dollar debate Perry sits on?
Speaker 1: But why don't we jump into Joe kind of go
Speaker 1: zumped me on that question. But like, when we talk
Speaker 1: about the future of the dollar, what exactly are we
Speaker 1: talking about? Both of you have spent your entire careers
Speaker 1: talking about money and specifically different types of money. So
Speaker 1: what is the dollar? What is the dollar? Is the dollar? Well,
Speaker 1: so that's actually a very interesting first question as a
Speaker 1: matter of fact, because there's a lot of different kinds
Speaker 1: of dollars um and the we already know there's the
Speaker 1: dollars that that are printed by the government, their little
Speaker 1: green pieces of paper. Is the dollars of the liability
Speaker 1: of the FAID that over bank reserves. That the dollars
Speaker 1: that are the liability of the banking system which we
Speaker 1: use to make payments to each other. But I would
Speaker 1: particularly put on the table right now there's the whole
Speaker 1: offshore dollar system, the your dollar system UM, where there
Speaker 1: are liabilities of banks that that are not American banks,
Speaker 1: um and the assets of people who are not American
Speaker 1: systems UM. And and that is now the global dollar system,
Speaker 1: which is I think very very important to appreciate and
Speaker 1: that this has grown up basically as the infrastructure of
Speaker 1: the global trading trading system. It's alt I agree with that. UM,
Speaker 1: what is the dollar? I think I would let me
Speaker 1: add some some things to that. There is there's all
Speaker 1: this offshore dollar which is not only in the balance
Speaker 1: sheet of non American banks, but then those balances are
Speaker 1: held by UM countries that are either aligned or not
Speaker 1: aligned with UM a certain view of the world. And
Speaker 1: so that's an extra dimension that I think we have
Speaker 1: learned about when we when we think about the dollar.
Speaker 1: There's also the dollar in in in the context of
Speaker 1: price stability, where you basically have a unipol or world
Speaker 1: where UM there is one Hedgemen and basically the commodity
Speaker 1: trade is UM in the control of that Hedgemen. But
Speaker 1: then there's also a dollar in the world where the
Speaker 1: commodity market is becoming more dura political resource national nationalism
Speaker 1: is creeping into the picture, and and that has an
Speaker 1: impact on the price level, that has an impact on
Speaker 1: on inflation. So so I would say that the dollar
Speaker 1: is a project. Well, let me ask you this. You've
Speaker 1: been writing about this, this Brenton Wood's three idea, the
Speaker 1: shift and course we've been talking about it a lot.
Speaker 1: Like I guess my question is like, what is the
Speaker 1: testable hypothesis of whether you're right? What does something look
Speaker 1: different either now or a few years time. They would say, yes,
Speaker 1: we entered into some sort of new global regime. Yes.
Speaker 1: So the first time we talked about Breton Woods three, Um,
Speaker 1: I think we we said that this is going to
Speaker 1: be a a long term journey, but it has started. Um.
Speaker 1: What are some of the markers since we have first
Speaker 1: talked about Bretonwoods three that that would support the thesis?
Speaker 1: I think I think a number of things. Um, we
Speaker 1: know that the commodity market is no longer exclusively priced
Speaker 1: in U S dollars. We know that certain countries are
Speaker 1: getting heavily discounted UM Russian commodities UM for example China,
Speaker 1: for example India. We know that those countries are paying
Speaker 1: uh remman b and rupees for those commodities. We know that,
Speaker 1: you know, Europe stopped paying certain countries stopped paying euros
Speaker 1: for for gas and they paid rubles. Now there is
Speaker 1: gas flow issues, obviously, but but again I think on
Speaker 1: the margin, it's no longer the case that commodities equal dollars. Okay,
Speaker 1: that's that's um. That's um. That's number one. What is
Speaker 1: also obvious that in the Western world we have inflationary
Speaker 1: impulses that we are dealing with which we haven't really
Speaker 1: had to deal with in in several decades. UM. Whether
Speaker 1: UH this cycle of inflation will be successfully um uh
Speaker 1: halted or not, is I think going to have an
Speaker 1: impact on certain currencies status in reserve portfolio. I'm not
Speaker 1: talking just about the US DADA, but basically G seven currencies,
Speaker 1: the Sterling euros, dollars, UM. I think, UM, I think
Speaker 1: there's a lot of work that needs to be done
Speaker 1: still to basically maintain confidence in UH in these currencies.
Speaker 1: When Paul Walker again he was the last central banker
Speaker 1: that had to deal with a similar episode, and he
Speaker 1: did something very fast and in a very draconian fashion,
Speaker 1: I think we can also say that what we are
Speaker 1: doing today in the West is heading in that direction,
Speaker 1: but not the intensity with which with which we're doing it.
Speaker 1: So to me again, it's it's a working hypothesis. UM.
Speaker 1: I have been writing about aspects of this Breton Woods
Speaker 1: three idea. You know that the war in interest rates PIACE,
Speaker 1: war industrial policy Um, all of these things I think
Speaker 1: are just you know, trying to look at the concept
Speaker 1: from many different angles, stress testing it. So far, I
Speaker 1: think I'm internally consistent. So I'm building up the narrative
Speaker 1: around it. It's a way of kind of stress testing
Speaker 1: whether you makes sense. But again, if if it fits together,
Speaker 1: it fits together, and they'll see. But let me just
Speaker 1: say we are six months into this. I mean, Rome
Speaker 1: wasn't built in one day. God didn't create the world
Speaker 1: in one day either. Um, probably not in that order.
Speaker 1: But I think it's a work in progress. But can
Speaker 1: I just press on? I guess, like, what do you
Speaker 1: look at to judge the dollar's dominance? Is a pure
Speaker 1: exchange rate? Because on that basis the dollar has done
Speaker 1: pretty well over the past six months. Is it? Central
Speaker 1: bank reserves? Those have been diversifying for some time now,
Speaker 1: Trade financing, invoice, bond issuance, Like what are you looking at?
Speaker 1: What am I looking at? Um? So I would say
Speaker 1: two things. The the the the big picture conclusion I
Speaker 1: have arrived at and I think I'm articulating this, uh
Speaker 1: piece by piece in in in my pieces, is that
Speaker 1: when you think about the dollar, And again, let me
Speaker 1: let me just use Peri's work workhorse, which is that
Speaker 1: money has for prices. There's far interest for an exchange
Speaker 1: and the price level. So my working conclusion about all
Speaker 1: this is when you think about the dollar and you
Speaker 1: try to understand the future of the dollar from an
Speaker 1: exchange rate perspective, I mean, it's it's an exchange rate,
Speaker 1: it's a nominal thing, right, But versus the Euro and
Speaker 1: a end, I think the dollar is always going to
Speaker 1: be strong in the present context, right because at least
Speaker 1: the US is energy and commodity self sufficient. Other regions
Speaker 1: of the world are not, and so that has an
Speaker 1: imprint on their on their exchange rates. Uh. What I
Speaker 1: what I think about in terms of dollar weakness is
Speaker 1: basically the dollar getting devalued versus commodities. UM. Because again,
Speaker 1: if you take a step back and look at everything
Speaker 1: that's happening in terms of East and West, you know,
Speaker 1: the G seven versus the Eurasian land mass, resource nationalism,
Speaker 1: all these things. I think what we are learning is
Speaker 1: that um, that the West is exposed to the East.
Speaker 1: In terms of commodities. UM, we have a number of
Speaker 1: issues in the commodity markets which we can which we
Speaker 1: can talk about a decade of no investment. As I said,
Speaker 1: you know, resource nationalism type markets everywhere. So I think
Speaker 1: commodity prices can go much higher from here, and a
Speaker 1: dollar can get devalued in terms of commodities in that sense.
Speaker 1: So the way I would say this isn't there in
Speaker 1: the nineteen thirties. You know, central banks when we had
Speaker 1: a we had a commodity based money system, they raised
Speaker 1: the price of money in terms of commodities because they's
Speaker 1: just that when you devalue versus the goal, that's what
Speaker 1: happens UM. Today, I would say we will have a
Speaker 1: version of this in the sense that the geopolitical realities
Speaker 1: of commodities shift away from your control and you basically
Speaker 1: are dealing a bit much higher commodity markets UM and
Speaker 1: the valuation of the daughter in that sense. But everything
Speaker 1: is relative. So Perry obviously want to bring you in
Speaker 1: what do you I mean, like when you think about okay,
Speaker 1: the last two years or anything you're seeing now and
Speaker 1: obviously in the sweep of history, like do you see
Speaker 1: anything fund do you see regime change of sorts, whether
Speaker 1: you'd call it Breton which three or is it? Yeah,
Speaker 1: we have inflation that happens sometimes our commodities are scarce.
Speaker 1: We commodities were expensive in the early two thousand's too,
Speaker 1: Like have we been here before? Um? Well, many people
Speaker 1: are trying to draw analogy between the present situation and
Speaker 1: the immediate poste um when there was inflation in the
Speaker 1: seventies and so forth, and when Nixon basically tried to say,
Speaker 1: you know, we we we don't want to be the
Speaker 1: top dollar anymore because it constrains us too much. UM.
Speaker 1: And I think those analogies are misplaced. UM. And also
Speaker 1: don't draw the right lessons in the seventies. UM. I
Speaker 1: do take a longer historical perspective. UM. And you sort
Speaker 1: of in your introductory remarks you were saying, we've been
Speaker 1: here many times. The dollars you know, going away? Yes, okay,
Speaker 1: And I've just written a book basically about it. So
Speaker 1: about the construction of the dollar system. Um. After the
Speaker 1: death of Sterling, basically you could you could you could say, um,
Speaker 1: And it took a while before we were able to
Speaker 1: reorganize the global trading system around around the dollar. And
Speaker 1: that's sort of what the Breton Woods meeting was there
Speaker 1: to basically acknowledge, like the future is going to be
Speaker 1: a dollar a dollar world, and it was and gradually
Speaker 1: the world grew, the system grew. This is important to
Speaker 1: appreciate and the traumas of the system like seventy one
Speaker 1: turned out in retrospect to be growing pains. That what
Speaker 1: happened after seventy one was not the end of the
Speaker 1: dollar system, but the offshoring of the dollar system UM
Speaker 1: and and then other crises where we added Asia and
Speaker 1: actually after the global financial crisis, if you look at
Speaker 1: what happened in capital markets you mentioned bond markets, this
Speaker 1: is the extension of the global of the dollar system
Speaker 1: to the global South. UM. Really for the first time
Speaker 1: when when UM, the national champions in the Global South
Speaker 1: are able to borrow in dollar capital markets basically because
Speaker 1: interest rates are zero in the in the North UM.
Speaker 1: And so there's a win win here that the pension
Speaker 1: funds want to want to lend the money UM and
Speaker 1: they want to borrow money. And so in that longer
Speaker 1: horizon you see that these financial crises, these periods of trauma,
Speaker 1: you know, like the Global financial crisis, which which people said,
Speaker 1: oh the dollars are gonner. You know, obviously it was
Speaker 1: like it was a crisis of the very core it
Speaker 1: emerged stronger than ever. Um. And uh So that's what
Speaker 1: I think, that's the perspective that we need to take.
Speaker 1: So what is the current crisis? Okay, I maybe take
Speaker 1: a different, different view because I can take a longer view.
Speaker 1: I'm not I'm not I'm not working for credit squeeze. Um.
Speaker 1: And I've a couple of weeks versus a book every
Speaker 1: ten years. Yes, yes, the book every ten years. I
Speaker 1: try to I try to. Uh, I try to write
Speaker 1: them more fast than that, but they do take they
Speaker 1: do take time. Um. The I think the thing that
Speaker 1: I would like to throw into the mix here is
Speaker 1: the pandemic. Okay, not you know, the war in Ukraine
Speaker 1: or tensions in Taiwan or something. But what came before that,
Speaker 1: which is two years of of extremely loose monetary policy
Speaker 1: throughout the entire world, involvement of the state. You know,
Speaker 1: this was war finance, this was wartime, okay. And we're
Speaker 1: switching and then the pandemic is over we don't know,
Speaker 1: maybe okay. And so we're in the process right now
Speaker 1: of switching from war finance to peace finance. Um. And
Speaker 1: that is a rocky road Okay. So that I would
Speaker 1: analogize all of this to like immediately after World War Two,
Speaker 1: you know, when um, the the reigns of the monetary
Speaker 1: system in the United States had been in the treasury,
Speaker 1: the FED. The Fed's job was simply to finance the
Speaker 1: government whatever it took, you know. And if the if
Speaker 1: the government is issuing bonds and no one wants to
Speaker 1: buy them, the FED will buy them. And so that's
Speaker 1: how war finance works. That's how pandemic finance worked, you know.
Speaker 1: And that work not just that way in our country,
Speaker 1: but in every country around around the world. That's how
Speaker 1: it worked. Okay. You may remember that just before the
Speaker 1: pandemic um there was an attempt to begin raining in
Speaker 1: the elasticity from the global financial crisis to the Taper
Speaker 1: tantrum and all that sort of thing. That's where we were,
Speaker 1: that's where we are now. Okay, that's what Powell wants
Speaker 1: to do, and it's the right thing to do. We
Speaker 1: have we were, We've been in a period of elasticity.
Speaker 1: Now we're moving into a period of discipline, and that
Speaker 1: period of discipline will re establish the dollar. Um I
Speaker 1: I believe that's that's what I think is happening. Actually,
Speaker 1: So just on this topic, and I'm kind of hoping
Speaker 1: that you'll you'll channel Kindle Burger here. But what are
Speaker 1: the benefits of a dollar system outside of the US?
Speaker 1: I think everyone is fairly familiar with what the U
Speaker 1: S gots from it, But what are other countries, especially
Speaker 1: at a time when the U S is tightening monetary policy,
Speaker 1: when some economies, notably emerging markets, probably don't necessarily want
Speaker 1: to see a tightening of financial conditions. So I will
Speaker 1: give you Charlie's answer, Um, Charlie kimno Burger's answer. Everyone
Speaker 1: called him Charlie, so I will call him Charlie. I
Speaker 1: call him Charlie throughout the book. And UM, I actually
Speaker 1: did know him as a matter of fact, and and
Speaker 1: and used to visit him. But but everyone called him
Speaker 1: Charlie even if they didn't know him the his What
Speaker 1: I discovered in writing this book is that Charlie's view
Speaker 1: of the world was very much influenced by his teacher
Speaker 1: at Columbia, Henry Parker Willis, who was one of the
Speaker 1: creators of the Federal Reserve system. UM in the United States.
Speaker 1: And what did the Federal Reserve system do united these
Speaker 1: disparate little regions into a par clearing area inside the
Speaker 1: United States. Okay, Um, so that you had a unified
Speaker 1: monetary system in this country that had never had it before,
Speaker 1: never had a central bank before. Historians will correct me
Speaker 1: on that. But the and this is a big achievement.
Speaker 1: What Charlie wants to do starting in graduate school of
Speaker 1: Columbia is do the same thing for the world. The
Speaker 1: logic of why it's a good thing to have one
Speaker 1: currency for for the whole country, okay, and part clearing
Speaker 1: for the whole country. The logic is just the same
Speaker 1: for why it might be a good idea to have
Speaker 1: one currency for the whole world. Um. And that's what
Speaker 1: people get out of it is that it it makes
Speaker 1: it makes it easier to do trade, to do calculations,
Speaker 1: to do to to unite the globe into a unified economy.
Speaker 1: And that's basically what it is. I'm very influenced by
Speaker 1: the writings that come out of the bi s appreciating
Speaker 1: that we really live in a unified world. This notion
Speaker 1: of separate nation states with separate currencies, this is something
Speaker 1: that was that was inherited in our minds from World
Speaker 1: War Two when when that system had all broken down.
Speaker 1: But that's not the world we live in now. It's
Speaker 1: a it's a global dollar system and it has a
Speaker 1: lot of advantages for now. That does mean, which you
Speaker 1: were just coming to at the end, that basically there's
Speaker 1: one monetary policy that matters and and that's and that's
Speaker 1: US dollar monetary policy that that then gets filtered out
Speaker 1: to the whole rest of the world. And that's what's happening. Now.
Speaker 1: We're moving into discipline mode um and we're already seeing
Speaker 1: where the weak points are in the in the global system,
Speaker 1: and those are going to be managed in the next
Speaker 1: couple of years. So do you see, like you know,
Speaker 1: the coordination costs essentially from Okay, it's great, we have
Speaker 1: like one unit of account and then we're gonna have
Speaker 1: multiple ones. Like what are the costs in your view
Speaker 1: from as you said, are already setting some commodities price
Speaker 1: outside of dollars or an increase in the commodities price
Speaker 1: outside of dollars, Like, what are going to be the
Speaker 1: costs to the world economy if your sort of vision
Speaker 1: or your sort of characterization proves out. Yes, Well, perhaps
Speaker 1: before before I answered that question, I mean listening to Perry,
Speaker 1: you know, Charlie Kindleberger grew up in a certain period, right,
Speaker 1: which is you know, post World War. You know, we
Speaker 1: have a unified clearing system in the US. Let's kind
Speaker 1: of replicate that in the world. And you can replicate
Speaker 1: that in a world where where very basically have one hegement. Right,
Speaker 1: that's a unipolar world order and it has a currency
Speaker 1: for it um. But I think everywhere I look today
Speaker 1: we basically have that unipolar world order being challenged. I mean,
Speaker 1: I wrote about this, so so we can we can
Speaker 1: we can talk about some aspects of this. I think,
Speaker 1: you know, if you take a step back and you
Speaker 1: want to kind of distill everything that has been happening
Speaker 1: since February, you basically have several blockades here, right. You
Speaker 1: have a blockade of Europe from an energy perspective, you
Speaker 1: have a blockade of a big pile of fex reserves.
Speaker 1: From a financial perspective, You've had a week long blockade
Speaker 1: on an island in the South China Sea. And we
Speaker 1: are designing a blockade of of China from from a
Speaker 1: chip sufficiency perspective, not even sufficiency, but you know, be
Speaker 1: able to make chips with a SML machines, be able
Speaker 1: to upgrade machines that make memory chips. You know, that's
Speaker 1: the news about UM memory chip manufacturers with facilities in China.
Speaker 1: The latest iteration is and video which makes AI chips,
Speaker 1: as as the experts of the media on chip matters.
Speaker 1: Uh no, So you basically have a very complex kind
Speaker 1: of chess game. I thought you're going to insinuate that
Speaker 1: the chips we're going to replace what I mean, it's
Speaker 1: problem again like but but but but the significance of
Speaker 1: this is that you know, the the E, C, N,
Speaker 1: Y and and everything. You know, China is about AI
Speaker 1: and there's a lot of AI infrastructure being done. It's
Speaker 1: probably the one sovereign that you associate with AI. And
Speaker 1: so you know, the the end video, the video news
Speaker 1: is significant from that perspective. So you have these multiple blockades. Okay,
Speaker 1: So if the physical world, okay, is becoming fragmented, I
Speaker 1: don't think it's no longer appropriate to think about, you know,
Speaker 1: the world as a unified whole, where you basically need
Speaker 1: to replicate the unified clearing system in the US to
Speaker 1: the rest of the world. Um, you know you you
Speaker 1: I didn't mention this before, but but you did ask
Speaker 1: like what markers am I looking for in terms of look,
Speaker 1: as I said, the invoicing of flows in different currencies
Speaker 1: in commodities is one thing. But also when you look
Speaker 1: at the stocks of f X reserves, um. You know,
Speaker 1: the fact that you know, uh, China for example, is
Speaker 1: letting its treasury portfolio run down since the beginning of
Speaker 1: the war is another important little little bit that you
Speaker 1: need to keep an eye on because I think just
Speaker 1: as the real world is getting disentangled, the financial world
Speaker 1: is getting disentangled um um. And so these are all
Speaker 1: you know, little bits of pieces that people follow for
Speaker 1: the next six months, twelve months, five years, and I
Speaker 1: think the world is going to look very different. You know.
Speaker 1: The the I think the historical analog here is I remember,
Speaker 1: I mean I was, you know, trying to get an
Speaker 1: internship in Washington, d C. In the year two thousand.
Speaker 1: I was like writing emails from Hungary to Congressman. You know,
Speaker 1: China just got um admitted to the w t O,
Speaker 1: and like, what the hell does this mean for the world. Well,
Speaker 1: you know, give eight years and you have three trillion
Speaker 1: dollars of treasuries, right, you know what is the next
Speaker 1: five You're going to look like I have no idea.
Speaker 1: But you know, if the weight at average maturity of
Speaker 1: these treasuries in fex reserve portfolios is like five years,
Speaker 1: I mean, the world could look very different, you know,
Speaker 1: five five years from now. So so again it's it's
Speaker 1: it's a it's a glacial progress, but it's it's it's
Speaker 1: a progress, and I think it's it's time to start
Speaker 1: thinking about how the financial landscape is going to evolve
Speaker 1: when we read about the real world getting more and
Speaker 1: more fractured every day. So Perry, just on that reserves point,
Speaker 1: I mean, it is true if you look at FX
Speaker 1: reserves over the past decade or beyond, actually you can
Speaker 1: see central banks diversifying. So renmand B reserves have gone up,
Speaker 1: reserves of I think South Korea and Canada and some
Speaker 1: other places have gone up as well, dollar reserves going down.
Speaker 1: When you see something like that, what do you think
Speaker 1: is happening? Like, what is the rationale for doing that? Um, well,
Speaker 1: diversification but there but this is small potatoes. The numbers
Speaker 1: you're talking about are are are really quite small. Um
Speaker 1: the evidence of dollar of dollar dominance is is still
Speaker 1: pretty overwhelming. I think now Sultan says, wait five years,
Speaker 1: so maybe, but wait five years, other things could happen
Speaker 1: to you know that. Um, it's not it's not obvious
Speaker 1: to me that all of the long that the trend
Speaker 1: is your friend. UM in this, in in this, in
Speaker 1: this regard. Um. Well, remember that wars are hot houses
Speaker 1: in many ways. UM. And I mean now I'm talking
Speaker 1: about the pandemic, um, not not not Ukraine. UM. A
Speaker 1: lot of things have changed in the pandemic. UM. A
Speaker 1: lot of a lot of technology was developed in order
Speaker 1: to enable us to continue on with our life. This
Speaker 1: has changed how we work, this has changed where we live.
Speaker 1: It's changed. There's a lot of dislocation that has happened. Okay,
Speaker 1: and that's what you're seeing in supply chains as. But
Speaker 1: it's also even local inside the United States, you know people. Um,
Speaker 1: And that hasn't yet sort of all settled down by
Speaker 1: any means. Remember what happened in World War Two. There
Speaker 1: were separate spheres, right, and the and the effect was
Speaker 1: that Germany, you know, invented a lot of whole chemical industry,
Speaker 1: you know, and we developed atomic energy and we know
Speaker 1: all there was a lot of stuff developed in World
Speaker 1: War Two that we then rode that wave basically for
Speaker 1: the next thirty years, the thirty glorious years. You know,
Speaker 1: we're building on those developments. So it's not obvious to
Speaker 1: me that we're entering into a gloomy period. Deglobalization. We
Speaker 1: haven't used that word yet here, but Salton uses it
Speaker 1: all the time in his writing, and he is a
Speaker 1: I wouldn't say fan advocate. He sees de globalization. Um,
Speaker 1: I'm not sure. I'm not sure. Um. I I think
Speaker 1: China has its own problems, Russia has its own problems. Um.
Speaker 1: Where he mentions in some of his his I don't
Speaker 1: know where you get this factor wide, but that's sort
Speaker 1: of because of our of the us UH anti immigrant
Speaker 1: two million jobs have left those and the people have left. Okay,
Speaker 1: well they've gone somewhere, you know, and they gained skills
Speaker 1: here and now they're somewhere and they're building firms and
Speaker 1: doing things. But that's going to take a little while. UM.
Speaker 1: So we the whole supply chain stuff was all disrupted
Speaker 1: by the pandemic. Um it's being disrupted even more by
Speaker 1: geostrategic things. But it will get reconstructed. And it's not
Speaker 1: clear to me that this is a pivot point where
Speaker 1: we shift from a market determined system. This is the
Speaker 1: big point that Charlie always makes. The reason we have
Speaker 1: dollar to gemin a okay, is not because the US,
Speaker 1: because it's a uniportly world. In fact, the US doesn't
Speaker 1: really want to do this. You know, this is a
Speaker 1: public good the US is providing the rest of the world.
Speaker 1: So that I wanted to ask about this because you mentioned,
Speaker 1: okay that if you look at past crisis and you
Speaker 1: see after the Great Financial Crisis, after each one of
Speaker 1: these periods of stress, the dollar has gone from strength
Speaker 1: to strength. Is that a burden? I mean people exorbitant privilege,
Speaker 1: Like it's a good thing, but like there's also a
Speaker 1: talk that especially pre pandemic, when a lot of the
Speaker 1: issues were like in sufficient demand, and there was an
Speaker 1: argument of the dollar is too strong, and that's probably
Speaker 1: like is there good for the US that these series
Speaker 1: of crises where the dollar keeps getting stronger? So maybe not?
Speaker 1: Maybe not. You know that it is monetary policy. This
Speaker 1: image we have in the world that every country is
Speaker 1: separate and they can run their independent monetary policies if
Speaker 1: they have flexible exchange rates. I think it's not true
Speaker 1: of any country. It's not true of countries in the periphery.
Speaker 1: It's not true of the country in the center. Because
Speaker 1: US monetary policy is global monetary policy, and so it
Speaker 1: has consequences really, you know, it rebounds on on the
Speaker 1: United States. The reason I titled my book Money and
Speaker 1: Empire is precisely because of this, to to really highlight
Speaker 1: the kind of contradiction between our political reality, which is
Speaker 1: nation states, okay, and our monetary reality, which is global okay.
Speaker 1: And how do you manage that? Um? It's it is
Speaker 1: managed right now by central bank cooperation mainly UM. And
Speaker 1: the backstop of the global system is this intricate system
Speaker 1: of central bank backstops, liquidity swaps and so forth, and
Speaker 1: these new female repo facilities and things that extend it
Speaker 1: further to the global south. UM. But it's but US
Speaker 1: monetary policy is a global monetary policy, and so that's
Speaker 1: what's happening. The US has decided now is the time.
Speaker 1: I'm sure this was in in collaboration and discussion with
Speaker 1: other major central banks. They knew that this was not
Speaker 1: a surprise, and so they're coming along, you know, they're
Speaker 1: they're ratcheting up in their own time. UM. And that's
Speaker 1: that's what is that's how the politics are working. That
Speaker 1: it's cooperation between the central banks in the different countries.
Speaker 1: Will that hold We don't know geo strategic stuff says
Speaker 1: maybe not. Yes, I mean I would say that you
Speaker 1: know that the data being the the issuer custodian of
Speaker 1: the reserve currency, I guess it comes with responsibilities and
Speaker 1: you know, backagenes to if you will, But let me
Speaker 1: let me just have a comment about you know, the
Speaker 1: dollar bouncing back every stronger again like my formative years were,
Speaker 1: I don't know, and onward right, that's when I took
Speaker 1: my first macro class and so yes, the Asian financial
Speaker 1: crisis was was a formative period um for me at least.
Speaker 1: And then that was the first financial crisis that I
Speaker 1: followed as a as a as a student, first year
Speaker 1: macro student. And so yes, that was a crisis where
Speaker 1: it was an offshore dollar crisis, uh, and a certain
Speaker 1: part of the world got weaker, um and then the
Speaker 1: Washington Consensus came in and kind of cleaned things up.
Speaker 1: And so that was one episode. You know, oh eight
Speaker 1: was a domestic crisis. That's when we get into the
Speaker 1: QE habits. Uh. Then you know we've been having um,
Speaker 1: you know, smaller crisis since then. I mean, we we
Speaker 1: we'll be discussed. You know, the treasury cash futures crisis,
Speaker 1: the report crisis, what do we do about that? Um?
Speaker 1: You know, the pandemic itself. It happened, but again, the
Speaker 1: position that the financial system was in at that point
Speaker 1: in time was that you were woefully a liquid to
Speaker 1: be able to provide all those credit lines to all
Speaker 1: this corporation. If something like that would happen, today would
Speaker 1: be a lot more liquid to deal with that. But
Speaker 1: you know, that was another crisis. And then again today,
Speaker 1: this crisis of the price level that we have, um
Speaker 1: is a crisis that we haven't had since the nineteen seventies.
Speaker 1: So I think there are UM, I don't know. It
Speaker 1: feels to me like that the dollar crisis are coming
Speaker 1: closer and closer to home. UM. And basically I think
Speaker 1: the period that we are living through at the moment
Speaker 1: is we have trust in an institution, the Federal Reserve,
Speaker 1: which is tasked with delivering price stability. And and I
Speaker 1: think and I think that we are learning that you know,
Speaker 1: can the Fed uh deliver price stability just by hiking
Speaker 1: interest rates? Or are there kind of forces in the
Speaker 1: real world, whether it's uh, you know, a shortage of
Speaker 1: cheap goods, cheap energy, labor, all these things, you know,
Speaker 1: is it is it? Is it as easy as raising
Speaker 1: interest rates from zero to five percent to slow inflation down?
Speaker 1: Is it as easy as as drinking um the balance
Speaker 1: ship to display intation? Let me let me just offer
Speaker 1: one one observation, which is that, you know, everybody likes
Speaker 1: to talk about the fact that, well, maybe we are
Speaker 1: in the bond bear market and we have you know,
Speaker 1: lall Street is so young. Nobody has seen rising interest rates,
Speaker 1: so we don't know how to trade it. A version
Speaker 1: of that, a version of that is that we haven't
Speaker 1: seen an inflation episode, so we don't know how to
Speaker 1: think about inflation. Um, we have seen something like what
Speaker 1: happened in the seventies, but we haven't seen anything that
Speaker 1: you know, happened a hundred years ago, nineteen fourteen, nineteen
Speaker 1: forty and all these things. So my impression talking to
Speaker 1: clients is everybody thinks about the spike in inflation charts
Speaker 1: as if it's another basis. Okay, you know, we are
Speaker 1: used to be thinking about crisis because we had crisis
Speaker 1: of basis, you know, a pack de x rate and
Speaker 1: a market rate across currency basis a library OI as
Speaker 1: a cash treasury future basis um triple a c d
Speaker 1: os versus triple A treasuries. There's a basis that creeps
Speaker 1: in always, and it's always as simple as somebody throws
Speaker 1: balance sheet at it and the basis closes. This, this
Speaker 1: crisis of the price level, this inflation crisis, is a
Speaker 1: very different ball game. It's not as simple as raising
Speaker 1: grades because the world doesn't work like that. It's not
Speaker 1: as simple as doing QT because the world doesn't work
Speaker 1: like that. UM, so I think this is a real test,
Speaker 1: and so and so I think this is a this
Speaker 1: is a very particular moment in time. You know this,
Speaker 1: This notion that you know the fat can deliver two
Speaker 1: percent price stability is probably the reason why FX reserve managers,
Speaker 1: over long periods of time started to diversify away from
Speaker 1: bills to two year treasuries, five year treasuries. Ten. Your
Speaker 1: treasure is because it's a good store of value and
Speaker 1: it's an idea. And we will see if that's indeed
Speaker 1: the case, or whether we are going to settle in
Speaker 1: a period where two is not attainable. Um and maybe
Speaker 1: four at some point is the new target, or maybe
Speaker 1: if you're just going to be bouncing around between five
Speaker 1: and ten, I don't know. I have a point of clarification,
Speaker 1: so when we're talking about that, breton Wood's three. So
Speaker 1: part of the dollar decline idea is geopolitical people are
Speaker 1: worried that their reserves are going to be seized by
Speaker 1: the US. We've seen that happen with Russia and Afghanistan.
Speaker 1: And then part of it has to do with commodities.
Speaker 1: But if you look at the US from a pure
Speaker 1: commodities perspective, it's not in a bad place right where
Speaker 1: exporting oil and gas. I mean, I have coal in
Speaker 1: my basement. It came with the house, like it's a
Speaker 1: resource rich nation. So how how does that aspect of
Speaker 1: it fit in with the dollar demise idea? Let's think
Speaker 1: about this step by step. Okay, so peakuro dollar yes
Speaker 1: or no? Inflection point? Yes or no? I mean that's
Speaker 1: how it starts. My sense would be yes, speak your dollar,
Speaker 1: because if if um on the margin, the commodity market
Speaker 1: is starting to invoice things in currencies other than the
Speaker 1: US dollar, I think that's something. And again, you know
Speaker 1: the perspective from which I'm trying to understand this is Okay, Um,
Speaker 1: I work as a strategist, you know, I have I
Speaker 1: have a job which is to talk to investors and
Speaker 1: try to figure out the future. This is going to
Speaker 1: have an implication on commodity prices. This will have an
Speaker 1: implication on inflation, This will have an implication for the
Speaker 1: level of interest rates, And this is going to have
Speaker 1: an implication on swap spreads. You know, cash treasuries versus
Speaker 1: OI s. What's the demand And as I said on
Speaker 1: this on on on on the podcast before, um and
Speaker 1: let's just take two countries. Okay, let's take let's take
Speaker 1: Russia and let's take China. Okay, what is the incentive
Speaker 1: of Russia, for example, to recycle revenues from commodity sales
Speaker 1: in G seven uh into G seven assets zero? Right,
Speaker 1: I mean you're invoicing things in different currencies. Take note,
Speaker 1: because that was a five hundred billion dollars stash of
Speaker 1: liquidity that went into the FIC swap market, that went
Speaker 1: at some point into US treasuries. Uh. And again you know,
Speaker 1: look at look at China. I mean, you know, they
Speaker 1: accumulated treasuries and then it's flatlined and now it's falling.
Speaker 1: So on the margin, these things matter, um. And I
Speaker 1: think this is this is how it starts, how it's
Speaker 1: going to you know, don't think about this as you know,
Speaker 1: next summer it's going to be like this, and it's
Speaker 1: going to be like that. It doesn't work like that.
Speaker 1: But I think on the margin, things have changed, and
Speaker 1: this is going to change things. Um uh. This is
Speaker 1: going to change flows on the margin, and we are
Speaker 1: going to be treading and kind of living with those
Speaker 1: um um uh every day as you guys write about it,
Speaker 1: as I write about it, as as as others in
Speaker 1: the audience. Um traded. So yes, the US is commodity
Speaker 1: is self sufficient. Other parts of the world are not. Um.
Speaker 1: But again, as I said, I think the thing that
Speaker 1: we need to factor in is basically what this means
Speaker 1: for for the price of commodities, which are priced in
Speaker 1: US dollars. So you can have a devaluation of the
Speaker 1: of the of the global euro dollar in terms of commodities,
Speaker 1: and then you know what that means in terms of
Speaker 1: euro yen uh euro dollar dollar yen exchange rates um
Speaker 1: weaker verry um. You know, obviously Russia and China continuing
Speaker 1: to trade more for obvious reasons, perhaps some invoicing of
Speaker 1: commodities not in dollars. Maybe that's picking up. Like intuitively,
Speaker 1: it seems like the Redman b should become a bigger deal.
Speaker 1: And China is a big trading partner, and apparently it
Speaker 1: seems likely that there are going to be some countries
Speaker 1: for whom it's a partnership gets even stronger. Like it's
Speaker 1: that makes sense to me, Like, what the why wouldn't
Speaker 1: the Redman be become a much more significant global currency
Speaker 1: just because China is a big country and a big
Speaker 1: trading partner. Um, well, they're a big country and they
Speaker 1: produce a lot of stuff and that's right. Um, And
Speaker 1: I think, and and they buy a lot of stuff.
Speaker 1: But that's not what makes for a global currency. Um.
Speaker 1: I think what we're the notion that inflation is some
Speaker 1: sign that people are are are revulsed by the dollar.
Speaker 1: You know that this is about depreciation of the dollar there,
Speaker 1: that that's sort of in the air here. Um, I
Speaker 1: think that's just not right. That's not what's driving inflation.
Speaker 1: What's driving inflation are these wartime dislocations. Um, we had
Speaker 1: a pandemic in which we all shifted to two goods,
Speaker 1: and then the pandemic is over, we shifted back to
Speaker 1: services and the people to produce those services that all
Speaker 1: moved out of New York, and so wages are pressured.
Speaker 1: So there's a lot of dislocation that in a market
Speaker 1: economy shows up as price movements. So we were talking
Speaker 1: about this in the green room a little bit before.
Speaker 1: I think what we might be seeing here is a
Speaker 1: shift to a higher price level. Okay, but whether this
Speaker 1: is the beginning of a kind of inflationary period, I
Speaker 1: still remain in team transitory, okay. Um, And I as
Speaker 1: was let me let me, let me, let me say
Speaker 1: a more inflammatory thing than that, Okay, which is that Powell?
Speaker 1: Remember he wanted to tighten before the pandemic, Okay, when
Speaker 1: there was no inflation, right, it was just time to
Speaker 1: to put some discipline into the system. He wanted to
Speaker 1: to to tighten as soon as he could after the pandemic.
Speaker 1: He didn't think there was going to be inflation. He
Speaker 1: wanted to tighten anyway. Inflation has made it much easier
Speaker 1: for Powell to do what he wants to do because
Speaker 1: now everyone is scared about inflation. So it's this and
Speaker 1: what does that mean. That means that's positive for the dollar.
Speaker 1: That's strengthening the dollar. So I think that the politics
Speaker 1: are working in favor of of a stronger dollar in
Speaker 1: the future, not not the other way around. Um. And
Speaker 1: as long as the the anchoring of the of the
Speaker 1: of the of the new price level, UM happens and
Speaker 1: it doesn't get uh, it doesn't get un anchored. But
Speaker 1: I don't see any particular particular sign that that's happened yet.
Speaker 1: So so this is very interesting because I send some
Speaker 1: talking past each other. So the dollar can be weak
Speaker 1: and strong at the same time. This is like cubits,
Speaker 1: you know, like zero and one. You know, the dollar
Speaker 1: can be very very strong versus other g seven currencies
Speaker 1: which we see right. But again I think I think
Speaker 1: the next five years is a story of whether the
Speaker 1: dollar is going to stay strong versus commodities or commodity
Speaker 1: prices go through the roof and then we are going
Speaker 1: to be dealing with, you know, ring rounds of inflation.
Speaker 1: So let me let me again just just emphasize. I mean,
Speaker 1: there's two views in the market that this is a
Speaker 1: massive reopening and that we over the fiscal and monetary stimulus,
Speaker 1: and that's a view. I'm sure that is part of
Speaker 1: the picture. But I guess I have been trying to
Speaker 1: articulate and highlight and put on the table is that
Speaker 1: I think the economic war aspect of all this is underappreciated.
Speaker 1: And if the economic war is indeed the theme that
Speaker 1: is going to be with us for the next five years. Um,
Speaker 1: the way we should think about inflation is not that,
Speaker 1: you know, there's all this bad stuff that happened over
Speaker 1: the past twelve months. It pushed the price level higher,
Speaker 1: and the base effects are going to take care of,
Speaker 1: you know, the rate of inflation over time. I think
Speaker 1: we also need to be mindful of all the potential
Speaker 1: bad things that can happen over the next twelve months
Speaker 1: to five years. And again when you read the news,
Speaker 1: and I started to read the news, where like I
Speaker 1: just pick up the paper and I look at commodities,
Speaker 1: I look at the war, I look at text stuff,
Speaker 1: you know, Chris Miller, Chip War, that type of stuff,
Speaker 1: and and I just try to understand the way Russia
Speaker 1: and Europe is evolving as a relationship, and the way
Speaker 1: China and the US are evolving as a relationship, and
Speaker 1: things are not getting better, you know, So do I
Speaker 1: think that Do I think that bad stuff can happen
Speaker 1: in in the in the future that are going to
Speaker 1: mess up supply chains even more? Yes? Do I see
Speaker 1: risks in all the demand construction policies that Europe is
Speaker 1: doing in the phase of rising gas and electricity prices, Yes,
Speaker 1: it's fanning shortages. Um. Do I see risks in in
Speaker 1: the fact that you know, I mean OPEC is effectively
Speaker 1: telling us that they want to see a hundred dollar
Speaker 1: floor under oil. That's about where it's right. We know
Speaker 1: that the drift down in oil prices game partly because
Speaker 1: we have released a lot of oil from the spr
Speaker 1: and we know that as every infantry that's finite. And
Speaker 1: then we also know that the physical market where oil
Speaker 1: gets produced is super tight. You know, you can't tramp
Speaker 1: stuff up. There is still a view in the market
Speaker 1: which I believe that that commodity prices, especially for you know,
Speaker 1: oil gas. I mean it can go vertical. Gas prices
Speaker 1: and electricity prices in Europe are going vertical. Can it
Speaker 1: happen in the oil market too, Yes, I mean we
Speaker 1: basically had you know, I think you're upset about that,
Speaker 1: but but you know, so I think I think this
Speaker 1: is basically the world that you live in, UM. And
Speaker 1: so this level shifts up in the price level I
Speaker 1: think can happen, you know, every six months. There's reasons
Speaker 1: to believe that that there's there's risks like that, and
Speaker 1: so from that perspective, I don't think that inflation is
Speaker 1: is transitor is. Certainly the reopening bit might be like
Speaker 1: a one time thing, but but I think the geopolitical
Speaker 1: aspects are just getting more complicated and more ski area.
Speaker 1: I would say so result just on the price level
Speaker 1: crisis idea, And this is something that came out from
Speaker 1: our last conversation with you, and I think we wrote
Speaker 1: it up in a post, this idea of problems that
Speaker 1: money can't solve, so physical commodities, supply chains, that sort
Speaker 1: of thing. In that world, What is the role of
Speaker 1: a central bank Because on the one hand, yes, raise
Speaker 1: interest rates to fight inflation because you don't have enough
Speaker 1: of the real stuff to go around. But on the
Speaker 1: other hand, if what's required to solve that problem is
Speaker 1: more investment, maybe you don't necessarily want rates going up
Speaker 1: that much. Yes, Um, I think I think a central
Speaker 1: banks job at the moment and I think that job
Speaker 1: is going to evolve over time. At the moment, the
Speaker 1: way I think about the fed's role, for example, is,
Speaker 1: you know, you've gone from being a central bank that
Speaker 1: is generating wealth via QUEI portfolio balanced gennel um to
Speaker 1: push the demand kurd outward because there's all this cheap
Speaker 1: stuff that's coming and what we are afraid of is deflation. Okay,
Speaker 1: so we've had fifteen years of that and then all
Speaker 1: of a sudden the supply curves have recotiate back in
Speaker 1: you know, commodities, labor, cheap goods. Inflation is coming in
Speaker 1: large part from that. So to deal with that inflationary
Speaker 1: impulse and to kind of take it off a bit,
Speaker 1: I think you need to generate a massive level shift
Speaker 1: down in demand such that things are more in linuage supply,
Speaker 1: And I think J. Powell kind of articulated something similar
Speaker 1: to that that we've been um. You know, we are
Speaker 1: going to need a period of below trend growth. So
Speaker 1: think about this as nominal GDP targeting and reverse. Whereas
Speaker 1: you know, we wanted to catch up with the pre
Speaker 1: pre pre GFC trend, now we need to kind of
Speaker 1: catch down to where where the realities of supplied. Its
Speaker 1: second um again like the underlying environment in which we
Speaker 1: will be I think will be inflationary. So the job
Speaker 1: of a central bank is to make sure that at
Speaker 1: least real interest rates are not falling, not going more negative,
Speaker 1: but they are kind of heading heading in a in
Speaker 1: a positive territory. Then two things come from this um,
Speaker 1: you know, as I said in my most recent piece,
Speaker 1: where I think, you know, we will have to spend
Speaker 1: a lot of money. It's kind of like war finance. Again,
Speaker 1: it's just to kind of rebuild the world order or something. Um.
Speaker 1: You know, So before the virus, now we're going to
Speaker 1: you know, find you know, supply chains falling apart or
Speaker 1: something like that. You know, so the whole rearmed, reshore, restock,
Speaker 1: continue on with energy transition. That's going to require a
Speaker 1: lot of capital. Uh, that's going to require some reasonable
Speaker 1: rates at which we can fund them. And so I
Speaker 1: think yield curve control is in the picture in the
Speaker 1: context of that um. But it's a very different yield
Speaker 1: curve control. It's it's it's it's not yield curve control
Speaker 1: to keep rates at one percent so that you use
Speaker 1: asset prices up. It's basically to make sure that yields
Speaker 1: don't go through the roof. But there is a backstop
Speaker 1: to that's so like what we did in the Second
Speaker 1: World War, where you had a price for short term money,
Speaker 1: you had a price for long term money, and you
Speaker 1: basically had a yield curve and then go and win
Speaker 1: the war. Um. You know, if this is you know,
Speaker 1: if you have World War three, that's what people do.
Speaker 1: Hopefully this is just going to be an economic war
Speaker 1: where we have to retool and and and finance that
Speaker 1: whole process. But I definitely see the central bank kind
Speaker 1: of be engaged in the bond market and provide a
Speaker 1: yield curve cap but with much higher interest rates. And
Speaker 1: then in the case of you know, Japan, Europe, the UK, um,
Speaker 1: I mean you have a currency crisis in those places. Um.
Speaker 1: And and again this is back back to Perry's earlier
Speaker 1: uh point about the dollar. And there's one monetary policy,
Speaker 1: which is the Fed's monetary policy, and everybody has to
Speaker 1: kind of go in that direction otherwise recurrency is going
Speaker 1: to suffer. I think in Europe and all the commodity
Speaker 1: not self sufficient parts of the world, monetary policy is
Speaker 1: going to be relegated to making sure that the level
Speaker 1: of exchange rate is within the bounds of normalcy, and
Speaker 1: you know where you can basically afford to import your
Speaker 1: your basic commodities. So I think we can go to
Speaker 1: the questions in part because we just got a question
Speaker 1: that was going to be kind of my last question.
Speaker 1: So it seems like a good seg but well one
Speaker 1: we had both of you on in March, so like
Speaker 1: right at the beginning of the pandemic, but a few
Speaker 1: months before that we had spoken to you because that's
Speaker 1: when there was all the questions about like running out
Speaker 1: of reserves or insufficient. So we just got a question
Speaker 1: about this, which is like, you know, obviously you just
Speaker 1: mentioned quantitative tightening. This is kind of a simple question.
Speaker 1: Almost seems like it almost seems old fashioned. But how
Speaker 1: much space do you think they have? And is it
Speaker 1: gonna be another thing where they have to cut it
Speaker 1: short early because of the amount of reserves demanded in
Speaker 1: the system. Is a question from me about you, But
Speaker 1: I'll start with you. Are we saying who the questions
Speaker 1: are from? I don't know. Yeah, this is ok. You
Speaker 1: can if you send it, If you send a message
Speaker 1: and you don't want your name from Cameron dire I
Speaker 1: sort of stole okay questions. Qut. I don't think that
Speaker 1: there's a lot of room I don't think that there's
Speaker 1: a lot of room to do QUT. First, I think
Speaker 1: this is going to be ultimately a question about demand
Speaker 1: for treasuries, not not the systems a bit into the
Speaker 1: fund those treasuries, right, because there's a lot of money
Speaker 1: in the RRP facility. But it feels like everybody just
Speaker 1: wants to be in the front end, right because the
Speaker 1: front end you get the benefit of rates are going up,
Speaker 1: you get higher rates every two every three months. Um.
Speaker 1: I think we are also going from a period where
Speaker 1: the market was a big believer in this idea that
Speaker 1: we are at peak inflation, peak hawkishness, and so whatever
Speaker 1: three months of QTV we had so far, First of all,
Speaker 1: that the amounts were not that big on the sixty
Speaker 1: billion dollars per month, um. You know, the market just
Speaker 1: absorbed assuming that we are at peak hawkishness. So all
Speaker 1: you're gonna do is raelly from here. I mean, that's
Speaker 1: the whole let's go along bonds and let's go along
Speaker 1: duration view. If we are going to go into a
Speaker 1: world where inflation hasn't peaked if you have further um,
Speaker 1: you know, I mean Europe is in a very different
Speaker 1: uh position. Again, I think this energy crisis that Europe
Speaker 1: is having now is not only going to have a
Speaker 1: liquidity event around it, but also it's going to impact
Speaker 1: industry supply chains. You know, what does it mean for
Speaker 1: for inflation elsewhere? So again, if if you don't think
Speaker 1: that the FED is at peak hawkishness and that there
Speaker 1: is a risk of you know, the peak of the
Speaker 1: hiking cycle not being three and a half but rather
Speaker 1: say five percent, Again, Powell didn't say anything that should
Speaker 1: make us think that that's not possible. You know, inflation
Speaker 1: is the target. He'd did not mentioned stocks and as
Speaker 1: surprises once in that speech, and that omission is very important.
Speaker 1: I mean, when you write these speeches at that venue,
Speaker 1: I mean, you think about what you're gonna say, So
Speaker 1: what you don't say has just as much meaning as
Speaker 1: what you say. But you know, it doesn't seem to
Speaker 1: care too much about the growth impact of hikes. He
Speaker 1: does not mention as surprises one bit. It's inflation singular mission,
Speaker 1: that's what we're going to do. So if we are
Speaker 1: going to go in a in a in a in
Speaker 1: a market period where um, we're going to hike the
Speaker 1: five or six percent, you know, demand for treasuries is
Speaker 1: not going to be as good over the next three
Speaker 1: to six months as it was during the first three
Speaker 1: months of QT. My new QT at the moment is accelerating.
Speaker 1: So that's another that that's that's another issue. And and
Speaker 1: again UM, I think, um, just as we were talking
Speaker 1: about this, you know, financial blockades of of FX reserves,
Speaker 1: financial energy blockade of Europe, a blockade of Taiwan, a
Speaker 1: blockade of chips, um China, can you know, make things
Speaker 1: more dynamic as we do QT. Because the only the
Speaker 1: weird thing to me about QTS that everybody thinks about it, Well,
Speaker 1: this is what the FED is going to do. Well, okay, fine,
Speaker 1: but that's the parable and minimum because others are also
Speaker 1: in a position where you can also start selling treasures
Speaker 1: and not show up at auctions. At a hundred billion
Speaker 1: a month that the private sector will have to absorb
Speaker 1: instead of the FED is just a minimum, right because
Speaker 1: other central banks can can step away from the market.
Speaker 1: So basically this means that you know, cash treasuries can
Speaker 1: cheapen quite a bit relative to our I has swap
Speaker 1: spreads can tighten. There's a certain appetites um uh that
Speaker 1: that the FET is going to have to tolerate that.
Speaker 1: But if if that becomes an issue, I think I
Speaker 1: think the days of QT are numbered. So what is QT? Okay?
Speaker 1: Let us understand what the balance of the FED looks like. Okay,
Speaker 1: the balance of the FED is money market funding of
Speaker 1: capital market limiting. The FIT is a show a bank.
Speaker 1: So QT involves taking those positions and moving them into
Speaker 1: the private sector. Basically, that's what it is. You're shrinking
Speaker 1: the balance sheet of the FED and you're expanding a
Speaker 1: balance sheet somewhere else. So it has to become profitable
Speaker 1: to do money market funding of capital market lending. Okay, Um,
Speaker 1: otherwise no one will do it. That's what That's what
Speaker 1: would make quantitative tapering QT um uh possible. Um. Remember
Speaker 1: why how quantity of easing was just the opposite, you know,
Speaker 1: where these collapsing positions on private balance sheets were just
Speaker 1: dropped onto the public balance sheet, and so we're just
Speaker 1: moving in the opposite direction. Um. And I think that So,
Speaker 1: so mostly that's about prices, right, That's that's about is
Speaker 1: it is it profitable to to do this? Zoltan was
Speaker 1: sort of saying that with these business spreads, and he
Speaker 1: has all these fancy words, but in the in the
Speaker 1: big picture, you're shifting the shadow bank from the public
Speaker 1: sector to the to the private sector. Is what you're
Speaker 1: is what you're trying to do, um and I do
Speaker 1: think it's possible for interest rates to go um considerably higher.
Speaker 1: What I would add to this, and maybe we have
Speaker 1: a little dispute about this, What matters a lot in
Speaker 1: the world is nominal rates. There's a lot of a
Speaker 1: lot of push saying, oh, we still have negative real
Speaker 1: rates and you're never going to get control of inflation. Well,
Speaker 1: I already raise some questions about whether your measure of inflation,
Speaker 1: whether this really is inflation or something. Higher nomin rates
Speaker 1: mean that buyers have to pay more money, okay, and
Speaker 1: that that is a clearing that's a settlement constraint, you know.
Speaker 1: So it will put if you raise interest rates by
Speaker 1: by a couple of percentage points, the outstanding debt is
Speaker 1: going to get re repriced and and the borrowers are
Speaker 1: going to be under a lot more pressure and they're
Speaker 1: gonna have to do something about that. They're going to
Speaker 1: have to pay their their debt instead of doing something else.
Speaker 1: So there will be a there will and that's not
Speaker 1: just in the United States. That's that's globally, and the
Speaker 1: vulnerable borrowers are going to go to the wall. And
Speaker 1: this is this is the period that we're in, Okay,
Speaker 1: so that the quantities will shrink there too because there
Speaker 1: will be defaults. Um. What happened to crypto is just
Speaker 1: the first. I'm actually really surprised we haven't had a
Speaker 1: crypto question. I was just throwing that red meat for you.
Speaker 1: Let me let me add something to cute I think.
Speaker 1: I think it's very important, UM. And it just remind
Speaker 1: everyone since the year two thousand, UM, there has always
Speaker 1: been a big central bank on the margin buying a
Speaker 1: lot of treasuries. Okay. From two thousand to two thousand
Speaker 1: and eight it was the PBOC and then they flatlined. Okay,
Speaker 1: from O eight onwards it was the FED. When the
Speaker 1: Fed stopped, UM, the e c B and the b
Speaker 1: O J started to do QUI. But then all the
Speaker 1: yen and euros they produced on an effex the you know,
Speaker 1: the pension funds in those jurisdictions. UM swapped those euros
Speaker 1: and yen for dollars to buy UH treasury securities. UM.
Speaker 1: So what is the moral of this is that it's
Speaker 1: either the PBOC doing a lot of liquidity injection buy
Speaker 1: treasuries or the FED is doing liquidity injection by buying
Speaker 1: treasuries or other central banks for buying their own bonds.
Speaker 1: That creates a lot of liquidity in euro and yen
Speaker 1: which gets swapped for dollars and then you buy treasuries
Speaker 1: with it. A big central bank liquidity impulse is always
Speaker 1: there to be a marginal buyer. So now okay we
Speaker 1: talk about this. You know, China is not buying anymore,
Speaker 1: had you cause your way to byme and the curve
Speaker 1: is flat, so it doesn't pay anymore to to to
Speaker 1: buy anything on an f FX heach basis anymore. The
Speaker 1: end is close to one fifty. I mean, we are
Speaker 1: now at levels at which you can expect either FEX
Speaker 1: interventions out of Japan, which is going to involve you know,
Speaker 1: selling treasury securities on the margin, or you are going
Speaker 1: to adjust the guilty curve pact to basically adjust UM.
Speaker 1: If that happens, that doesn't mean anything good for UH
Speaker 1: for for duration. And then basically when we think about
Speaker 1: the FED doing QT are basically saying that against this
Speaker 1: twenty year history of who buys treasuries on the margin,
Speaker 1: the FX help buyer can step away. Uh, you know,
Speaker 1: China can step away, and the fat can step away
Speaker 1: and it's all going to be okay. We're basically expecting
Speaker 1: the private sector to step in instead of the public
Speaker 1: sector in a period where inflation is as uncertain as
Speaker 1: it has ever been. We have no idea if it's
Speaker 1: going to go from ten to five, ten to five,
Speaker 1: ten to fifteen, or if it's going to cost at
Speaker 1: ten what. I'm quite certain obviously it's not going to
Speaker 1: crash back down to two pc. But basically we are
Speaker 1: asking the private sector to take down all these treasuries
Speaker 1: that we are going to push back into the system
Speaker 1: without a glitch and without a massive premier. M Um,
Speaker 1: I have a good question from Alex Howett. He asks
Speaker 1: this is for Perry specifically. Um, you know, we all
Speaker 1: understand that it is possible for an international monetary system
Speaker 1: to be served. We saw that before things like sterling.
Speaker 1: What would it take to convince you that the dollar
Speaker 1: was on its way out? What would have to change
Speaker 1: in the world? Um, Well, the that's a good question,
Speaker 1: maybe when I haven't put a lot of energy into
Speaker 1: because that's it seems pretty far from that. But so
Speaker 1: let me go back to what what was it that
Speaker 1: undermined sterling? Okay? Um? And it was there was two things. Okay,
Speaker 1: There was that the Bank of England UM could did
Speaker 1: not have the capacity to run the global system on
Speaker 1: its own, and it couldn't get the US to help.
Speaker 1: Both of those things happened, Um it can happen that
Speaker 1: there would be a crisis and the FED is is
Speaker 1: a little overwhelmed. If everyone refused to help the FED, Okay,
Speaker 1: this would be a problem, but it would be a
Speaker 1: problem for everybody. It was a problem for the United
Speaker 1: States that the United States did not help the Bank
Speaker 1: of England UM. As a matter of fact, we had
Speaker 1: a global depression if you if you notice, and and
Speaker 1: some people thought that was mainly a U S thing,
Speaker 1: you know, but it was. It was actually very very
Speaker 1: damaging to the United States. So I think that the
Speaker 1: cooperation of policy, co operation of the major central banks
Speaker 1: in the global north um is is vital and if
Speaker 1: that breaks down, all bets are off. Can I question?
Speaker 1: So I don't know the answer to this. But but
Speaker 1: I wonder, um, but your take is on this? I
Speaker 1: get this question a lot. I don't know what to
Speaker 1: answer to it. So first, fiat money as a project
Speaker 1: is fairly young. It's let post Nixon, from what I understand.
Speaker 1: So what do you think about that? Number one? And
Speaker 1: I think that's not right, okay, And and and number two. Um,
Speaker 1: if the fundamental building block of fiat money is an
Speaker 1: ability to deliver price stability, and if for for that
Speaker 1: reason there's some risk to that notion, what happens to
Speaker 1: fiat money? Well, I you may have noticed I never
Speaker 1: used the word fiat money, Okay. Um. When I think
Speaker 1: about the Sterling standard, I call it the Sterling standard,
Speaker 1: not the international gold standard. Everyone was using sterling as
Speaker 1: the international money. And yes, sterling was notionally redeemable in gold,
Speaker 1: but nobody ever did it, and all of the all
Speaker 1: of the actual transactions were in sterling. Same with the
Speaker 1: dollar system. You know, so that when you go off gold,
Speaker 1: it I don't know, freak people out. But in a
Speaker 1: certain sense, we never were on gold. We were on
Speaker 1: a dollar standard, and that was there for historical reasons
Speaker 1: or or what ever. Um. And when we got rid
Speaker 1: of it didn't have that. It didn't have that much
Speaker 1: when we when we got rid of that sort of rule. Um,
Speaker 1: we're now fine. So when you say fiat, okay, what
Speaker 1: you're what And I would say this to anybody, you know,
Speaker 1: you're thinking that these are green pieces of paper that
Speaker 1: are printed on a printing press, and that's not correct.
Speaker 1: These are liabilities of of a of a bank somewhere, okay,
Speaker 1: And there's assets that are on the other side of
Speaker 1: the balance sheet. To UM, credit is not a bug.
Speaker 1: It's a feature. Credit is not a bug. It's a
Speaker 1: feature outside money, which is like inventories of gold or
Speaker 1: something like that. Um is never going to be a
Speaker 1: good money. Inside money is the money that you that
Speaker 1: that makes the world go around. It's credit money, okay,
Speaker 1: And so you need credit, okay in order to make
Speaker 1: that go Um credit worthiness and the best credit is money.
Speaker 1: So I have a question. It's sort of a push
Speaker 1: back to Sultan's push back on that topic just now.
Speaker 1: But um, it's from John Farley. If bretton Wood's three
Speaker 1: comes to pass, how does pegging of currencies to commodities
Speaker 1: other than gold actually tame commodity volatility? If the underlying
Speaker 1: issue of resource shortages and things like that remain. Okay,
Speaker 1: which is which is very important question. I don't think
Speaker 1: I ever said in any of my pieces that we
Speaker 1: are going to go to a world where things are
Speaker 1: packed to commodities or they are pegged to gold. What
Speaker 1: I said was this what you think of as reserves
Speaker 1: at the level of a nation state is evolving, right
Speaker 1: as as used as as we talked about this before.
Speaker 1: You know, you can't print oil to heat or meat
Speaker 1: to eat, right, you know there are problems that central
Speaker 1: banks cannot solve. We have grown up. I have grown
Speaker 1: up in a world right where Southeast Asia got into
Speaker 1: try ball because they didn't have dollar liquidity. The binding
Speaker 1: constraint was that as a country, you didn't have the
Speaker 1: dollars to import the stuff you needed. What came out
Speaker 1: of that was was a particular kind of solution medicine,
Speaker 1: which is that we need to have a lot of
Speaker 1: fex reserves and as a prudent country, we need to
Speaker 1: cover two years worth of chronic and deficits with the results.
Speaker 1: This is all pre dollars spotline stuff. Okay. So the
Speaker 1: emphasis was on, you know, we need to build a
Speaker 1: big pile of reserves because that's you know, like as individuals,
Speaker 1: we have a pile of savings, and that's how it's
Speaker 1: prudent to live. We are now basically, as as I
Speaker 1: said in my pieces, if you go back you read
Speaker 1: it carefully. What I said, not what you know was interpreted,
Speaker 1: was that at a nation's level, Okay, I'm sitting on
Speaker 1: all these reserves. It's dollar liquidity, great, but I need gas,
Speaker 1: I need electricity, I need read I need whatever stuff
Speaker 1: for my you know, I need to build chip foundries
Speaker 1: and all these things. Right, So, so basically, what is
Speaker 1: a reserve? The notion of it is changing. Okay, maybe
Speaker 1: some countries have way too many dollar liquidity and not enough,
Speaker 1: not enough commodity reserves. So I think over the next
Speaker 1: five years, as these countries are sitting there looking at
Speaker 1: their at their pile of of of of treasuries. You know,
Speaker 1: in a context of rising commodity prices, maybe you are
Speaker 1: going to reevaluate what it means to have a comfortable
Speaker 1: and prudent amount of reserves. What should that consist of?
Speaker 1: Should it only be treasury securities which you can repot
Speaker 1: and liquid it and sell to raise dollars to buy what? Okay,
Speaker 1: Should it be treasury securities when you know inflation is
Speaker 1: running structurally at eight percent and treasury coupons pay I
Speaker 1: don't know, four or five percent if in real terms
Speaker 1: those treasuries five year tenure treasuries are buying less. Should
Speaker 1: I be only in treasuries? Should I have a structurally
Speaker 1: bigger allocation to gold? Should I, as a sovereign sell
Speaker 1: some of my treasuries get dollar liquidity and cut the
Speaker 1: two hundred billion dollar check and establish a commodity resource
Speaker 1: company at the sovereign level, Go out and buy commodities
Speaker 1: when it's cheap before we end up into an even
Speaker 1: deeper economic war where where need resource national nationalism is
Speaker 1: a bigger issue. Can it happen that reserve management practices
Speaker 1: and countries thinking about what is reserves changes in that direction? Yes?
Speaker 1: For me, that is what Breton wood Street is about.
Speaker 1: It's not establishing a link to gold, It's not establishing
Speaker 1: a link to a basket of commodities. It's not too
Speaker 1: unseats the dollar and kind of elevate you know, something
Speaker 1: else on a pedestal. These things, I think over the
Speaker 1: next five years are going to happen on the margin again,
Speaker 1: as I said like to understand this and too and
Speaker 1: to kind of again like nursing a baby. You know
Speaker 1: that baby is changing all the time, but you know
Speaker 1: it's going to become something else over time. And I
Speaker 1: think and I think that the best approach to look
Speaker 1: at Breton Wood Street is to just kind of look
Speaker 1: at these things and whether they are happening. Again, Like
Speaker 1: I can, I can list you a number of headlines.
Speaker 1: You know, India instructing its states to cover three years
Speaker 1: worth of residential and industrial Uh call needs to basically
Speaker 1: head itself for the winter whatever. Uh you know, Uh,
Speaker 1: I mean, you know the news like this are are
Speaker 1: are all over the place. But I think that this
Speaker 1: team is happening and and and it's going to grow
Speaker 1: in size and over the next five years. When we
Speaker 1: look at fex reserves and central bank balance sheets and
Speaker 1: what states balance sheets look like, commodities and gold are
Speaker 1: going to play a bigger role. I think treasuries are
Speaker 1: going to play a smaller role. And the commodity market
Speaker 1: is going to be a market where it's not just
Speaker 1: exclusively dollars that we evoice things in, but also other currencies.
Speaker 1: And if that happens to half a trillion and or
Speaker 1: a trillion dollar scale. I think that's going to be
Speaker 1: meaningful enough that they are going to have implications in
Speaker 1: rates markets, at the level of the price level of commodities,
Speaker 1: and faction and all these things. And to me, that's
Speaker 1: what Breton Bostree is. Maybe it's a bad term and
Speaker 1: it kind of sends you off. I mean, Adam two
Speaker 1: said that it's a bad term. So maybe it's a
Speaker 1: bad term, but because it pushes you down to think
Speaker 1: about things a certain way. But I think these are
Speaker 1: the practical implications of everything that you're talking about. So
Speaker 1: I I think it's probably right that we have learned
Speaker 1: that our supply chains are way too fragile and that
Speaker 1: they need to have more redundancy in them, more inventories
Speaker 1: along the way. UM that, for geopolitical reasons, maybe be
Speaker 1: a good idea to be a little more independent, you know,
Speaker 1: have your energy, energy security and so forth. All of
Speaker 1: those things seemed to me right. I just don't think
Speaker 1: they have any implications for the future of the dollar.
Speaker 1: Um that there. I think that people will be accumulating,
Speaker 1: you know, more more reserves of commodity reason and and
Speaker 1: worrying about safe food safety and all that sort of thing.
Speaker 1: I don't see that that's about converting your treasury bills
Speaker 1: into grain stores or something. Um. I think you're still
Speaker 1: gonna have treasure. So there it's it's not either, it's
Speaker 1: not it's not as substitute, okay, um, And I don't
Speaker 1: I don't see any of that as any threat to
Speaker 1: the dollar. Well, here's a question, and it's very closely
Speaker 1: fits with this from Janic's Blue Line futures uh one store.
Speaker 1: One project that's been in the work since even before
Speaker 1: the pandemic, but which has become much more acute is
Speaker 1: the attempt by the US to become a natural gas
Speaker 1: export powerhouse. And we see the creation of these terminals,
Speaker 1: and we know that you know, Europe would take all
Speaker 1: the gas it could possibly get right now, is Henry
Speaker 1: Hub that price? And you know, we know that there's
Speaker 1: no global price for gas right now, But is there
Speaker 1: a possibility that Henry Hub at some point in this
Speaker 1: evolution becomes the MOBAL benchmark if everyone wants US gas,
Speaker 1: and does that then have a cementing role in terms
Speaker 1: of the dollars status as once again back to invoicing
Speaker 1: the dollar US, that's the price etcetera. Yeah, I mean
Speaker 1: I would say, sure, why not. I mean, we're heading
Speaker 1: in that direction, right, um um, guests from here, guests
Speaker 1: guests from there. Um. I guess I don't know what
Speaker 1: the answer there is. Maybe I asked Perry up, I
Speaker 1: passed the hot potato onto you. But I mean, in
Speaker 1: my mind, like the US became the daughter became the
Speaker 1: reserve currency in large part because of the petrol Dotter trade.
Speaker 1: But that was basically a situation where the US had
Speaker 1: to important pay others with US dollars with yeah, yeah,
Speaker 1: but but but I guess if you start to export
Speaker 1: commodities yourself and then so so you're no longer you're
Speaker 1: you're running at it from a from a cronic and
Speaker 1: surplus perspective, not a cronic and deficit perspective. What does
Speaker 1: that mean for the amount of dollars out there? You're
Speaker 1: not broadcasting those dollars to the rest of the world.
Speaker 1: You're basically absorbing those dollars because someone is paying from
Speaker 1: the rest of the world to you for your command.
Speaker 1: I don't know what Henry Hubby is Henry Hubby is.
Speaker 1: It is a natural guess I should answer this benchmark
Speaker 1: in Louisiana. No, no, but but but but I guess
Speaker 1: the question is if the US is a net commodity
Speaker 1: exporter oiling as instead of a net commodity importer. Right,
Speaker 1: So the whole petrol dollar idea was they don't have
Speaker 1: the they don't have the oil, but we have the dollars,
Speaker 1: so we pay for the oil the dollars, and then
Speaker 1: others recycled those dollars in treasury. No, I don't think
Speaker 1: if it's a curne on surplus question. Now, the petrol
Speaker 1: dollar was was really about the US banking system recycling
Speaker 1: the surpluses that were being accumulated by the oil exporters
Speaker 1: um into lending to the to the oil importers, not
Speaker 1: just the United States, but everyone else in the world too.
Speaker 1: And that is part of the offshoring of the U.
Speaker 1: S dollar. That that was the that that was that
Speaker 1: part that I talked about the off shoing of the
Speaker 1: US dollar as a after after the collapse of Breton
Speaker 1: Woods in seventy one. That mechanism was quite important for
Speaker 1: getting those balances really up, really fast, um. And it
Speaker 1: was definitely pushed by the US government. They were trying
Speaker 1: to solve a problem big imbalances, you know, global This
Speaker 1: isn't the first time we're having today, w we have
Speaker 1: global imbalances. There were those big imbalances there, um, and
Speaker 1: if there had been better cooperation, you know, but in
Speaker 1: the global North, probably it wouldn't have happened. If if,
Speaker 1: if the European countries had helped each other use their
Speaker 1: use their gas reserves. You know, they could have fought off, okay,
Speaker 1: but they did not. They were each each one was
Speaker 1: was running for themselves. And so this is what this
Speaker 1: is what happened, Um that it was solved by the
Speaker 1: private market. I think through this is there's a more
Speaker 1: general lesson here, um, which is when the central bank
Speaker 1: is doing a lot okay, it's bad sign you you
Speaker 1: really you know, the industrial policy, which is what you're
Speaker 1: pushing with your rearm restock, rewire, re sure okay, industrial policy, Um,
Speaker 1: that doesn't necessarily involve the simple bank and doing much
Speaker 1: of anything. You know. This is this, this is a
Speaker 1: this is a job for the for for the treasuring,
Speaker 1: for for the fiscal side of of the government and
Speaker 1: all the all the Fed has to do is you know,
Speaker 1: make sure that there's a market for their bonds or
Speaker 1: something like that, but it's not quee. You know, they're
Speaker 1: not They're not having they're not trying to stimulate the economy.
Speaker 1: I think one thing we learned is that, you know,
Speaker 1: Killey as a as a way of stimulate the economy
Speaker 1: doesn't really work very well. As a way of catching
Speaker 1: the falling NiFe. It works great well, Joe. I really
Speaker 1: hate to ask this question, um, but we've gone on
Speaker 1: for you know, an hour and twenty minutes. Shall we
Speaker 1: leave it there? Let's leave it there. We could go
Speaker 1: on for another hour and a half, but I think
Speaker 1: we gotta wrap. So big thank you to our guests.
Speaker 1: We really could have got. Follow Peri Merrily on Twitter
Speaker 1: at pre Meryling and check out his book if you're
Speaker 1: in the UK. It's not for sale here. Charles Pekin
Speaker 1: Burger in the dollar system, Salton, I don't know if
Speaker 1: you lurk secretly on Twitter, but I guess if you
Speaker 1: want to follow him, maybe become a become a credit
Speaker 1: sweet client. That's probably a big thanks to our producer
Speaker 1: Kerman Rodriguez and Dash Bennett helping you uys put it together.
Speaker 1: And I guess that's it. We'll leave it there. Thanks
Speaker 1: for listening. Thanks for coming to Heret