1 00:00:00,040 --> 00:00:03,720 Speaker 1: Hey, they're Odd Lots listeners. We have a very special announcement. 2 00:00:04,080 --> 00:00:07,200 Speaker 1: Joe and I are hosting our annual Front Lots Pub 3 00:00:07,320 --> 00:00:11,319 Speaker 1: Quiz on Thursday, February thirteenth in New York City, and 4 00:00:11,440 --> 00:00:15,360 Speaker 1: it's gonna feature some very special guests and prizes. So 5 00:00:15,440 --> 00:00:18,959 Speaker 1: come test your wits in finance, markets and economics for 6 00:00:19,120 --> 00:00:23,159 Speaker 1: a chance to win the ultimate Odd Lots glory and 7 00:00:23,280 --> 00:00:26,360 Speaker 1: hang out with your fellow listeners. Tickets are on sale 8 00:00:26,440 --> 00:00:30,440 Speaker 1: now at events dot Bloomberg Live dot com, slash Oddlots 9 00:00:30,640 --> 00:00:33,600 Speaker 1: Pub Trivia. You can also find links on our Twitter 10 00:00:33,640 --> 00:00:36,199 Speaker 1: feeds or in the newsletter, and you can find the 11 00:00:36,240 --> 00:00:38,680 Speaker 1: link also on our show notes. We hope to see 12 00:00:38,720 --> 00:00:39,080 Speaker 1: you there. 13 00:00:42,320 --> 00:00:46,320 Speaker 2: Bloomberg Audio Studios, Podcasts, Radio. 14 00:00:46,520 --> 00:00:51,239 Speaker 1: News Joe three hours of euro dollar market history and 15 00:00:51,280 --> 00:00:53,120 Speaker 1: we can't get enough. I'd love to do more. I 16 00:00:53,120 --> 00:00:53,400 Speaker 1: love that. 17 00:00:53,440 --> 00:00:56,000 Speaker 3: I couldn't even believe that was real. Just I'm being 18 00:00:56,000 --> 00:00:59,680 Speaker 3: totally Since we're sitting there in the studio listening to 19 00:00:59,760 --> 00:01:02,640 Speaker 3: Liv and Josh talk about the history of your dollars, 20 00:01:02,680 --> 00:01:04,840 Speaker 3: a career highlight and ironically. 21 00:01:04,520 --> 00:01:07,640 Speaker 1: Definitely a treat I do feel like there's one thing missing, 22 00:01:07,840 --> 00:01:09,760 Speaker 1: which is like we kind of have to put everything 23 00:01:09,920 --> 00:01:14,360 Speaker 1: in modern context. Yes, right, We didn't really bring it 24 00:01:14,680 --> 00:01:17,520 Speaker 1: that up to date. We talked a little bit about 25 00:01:17,560 --> 00:01:19,560 Speaker 1: the euro dollar's role in like the two thousand and 26 00:01:19,560 --> 00:01:21,399 Speaker 1: eight crisis. It was a mention of it. But like, 27 00:01:21,840 --> 00:01:24,280 Speaker 1: let's talk about the current euro dollar market. 28 00:01:24,280 --> 00:01:26,760 Speaker 3: Well, can I say something? Yeah, liv don't listen to 29 00:01:26,800 --> 00:01:33,280 Speaker 3: this whenever we talk financial market plumbing or things of 30 00:01:33,280 --> 00:01:36,319 Speaker 3: that nature. Yes, Oh, this is like really fascinating, Like 31 00:01:36,400 --> 00:01:38,640 Speaker 3: this is really interesting topic. And then I was like, 32 00:01:39,000 --> 00:01:41,480 Speaker 3: how does this matter to anything at all? So I 33 00:01:41,480 --> 00:01:43,480 Speaker 3: would like to know, So I would like to actually 34 00:01:43,520 --> 00:01:45,960 Speaker 3: talk a little bit more for real about like how 35 00:01:45,959 --> 00:01:48,400 Speaker 3: does it actually matter? Because I find it very interesting. 36 00:01:48,680 --> 00:01:50,640 Speaker 3: But I sometimes forget, like when environment? 37 00:01:51,120 --> 00:01:55,520 Speaker 1: Why why did we talk about this for three hours? 38 00:01:57,160 --> 00:01:57,960 Speaker 3: I did a deadlist. 39 00:01:58,080 --> 00:02:01,640 Speaker 1: I'm both the most popular trade and most successful trader 40 00:02:01,800 --> 00:02:04,840 Speaker 1: at Citadel that is going viral, uh barges. 41 00:02:04,960 --> 00:02:07,040 Speaker 3: This is an after school special, except. 42 00:02:06,720 --> 00:02:09,239 Speaker 1: I've decided I'm going to base my entire personality going 43 00:02:09,280 --> 00:02:12,520 Speaker 1: forward on campaigning for a strategic pork reserve in the US. 44 00:02:12,760 --> 00:02:16,000 Speaker 1: Black goals, these are the important questions that robots taking 45 00:02:16,040 --> 00:02:16,560 Speaker 1: over the world. 46 00:02:16,680 --> 00:02:19,520 Speaker 3: No, I think that like in a couple of years, 47 00:02:19,680 --> 00:02:21,960 Speaker 3: the AI will do a really good job of making 48 00:02:22,000 --> 00:02:24,960 Speaker 3: the Odd Lots podcast. One day that person will have 49 00:02:25,040 --> 00:02:26,040 Speaker 3: the mandate of Heaven. 50 00:02:26,240 --> 00:02:28,400 Speaker 1: How do I get more popular and successful? 51 00:02:28,760 --> 00:02:29,960 Speaker 2: We do have the. 52 00:02:31,960 --> 00:02:34,160 Speaker 3: Welcome to lots More, where we catch up with friends 53 00:02:34,200 --> 00:02:35,160 Speaker 3: about what's going. 54 00:02:35,000 --> 00:02:37,959 Speaker 1: On right now, because even when Odd Lots is over, 55 00:02:38,320 --> 00:02:39,760 Speaker 1: there's always lots More. 56 00:02:40,360 --> 00:02:42,760 Speaker 3: And we really do have the perfect guest. 57 00:02:45,800 --> 00:02:49,000 Speaker 1: Well, Lev Menand is here with us, and he's going 58 00:02:49,040 --> 00:02:52,360 Speaker 1: to provide an update on the market. He is, of course, 59 00:02:52,440 --> 00:02:55,560 Speaker 1: an associate professor of law at Columbia School. So Lev, 60 00:02:55,760 --> 00:02:57,760 Speaker 1: thank you, thank you for coming on and talking to 61 00:02:57,840 --> 00:02:59,840 Speaker 1: us even more about euro dollars. 62 00:03:00,240 --> 00:03:03,120 Speaker 2: I also think this is a topic that we could 63 00:03:03,120 --> 00:03:04,480 Speaker 2: just keep doing episodes. 64 00:03:04,639 --> 00:03:06,840 Speaker 1: No, for sure, do an all thoughts spin off on 65 00:03:06,919 --> 00:03:07,600 Speaker 1: your dollars. 66 00:03:07,680 --> 00:03:10,440 Speaker 3: All the good topics are fractal, and that you could 67 00:03:10,480 --> 00:03:12,800 Speaker 3: just go down. This is a cool thing I've realized, 68 00:03:12,880 --> 00:03:15,840 Speaker 3: is that actually the good topics. The only limitation on 69 00:03:15,880 --> 00:03:18,480 Speaker 3: how many episodes you could do is creativity and depth. 70 00:03:18,520 --> 00:03:20,760 Speaker 3: But actually we could just do keep going right. 71 00:03:21,200 --> 00:03:23,359 Speaker 2: Yeah, And if anything, it matters more today than I 72 00:03:23,440 --> 00:03:26,120 Speaker 2: did in nineteen sixty four and nineteen fifty four, which 73 00:03:26,160 --> 00:03:26,400 Speaker 2: was the. 74 00:03:26,400 --> 00:03:28,880 Speaker 3: Periods we were called, right, why does it matter more today? 75 00:03:29,240 --> 00:03:35,000 Speaker 2: Size and centrality in the US dollar monetary system and 76 00:03:35,200 --> 00:03:38,240 Speaker 2: in the global financial system. You know, the Euro dollar 77 00:03:38,800 --> 00:03:44,080 Speaker 2: system right now is probably thirteen thirteen trillion dollars in size, 78 00:03:44,560 --> 00:03:48,720 Speaker 2: which makes it, you know, more than twice as big 79 00:03:48,880 --> 00:03:53,000 Speaker 2: as the uninsured deposits in the domestic system, and almost 80 00:03:53,000 --> 00:03:56,680 Speaker 2: as big as the overall deposits in the domestics system. 81 00:03:56,960 --> 00:04:01,440 Speaker 2: And it's the leading edge of mind. Minitary expansion in 82 00:04:01,480 --> 00:04:07,080 Speaker 2: the US dollar system takes place offshore, not onshore. And 83 00:04:07,600 --> 00:04:10,880 Speaker 2: when we were talking about the development of this in 84 00:04:10,920 --> 00:04:16,480 Speaker 2: the fifties and sixties and seventies, the onshore domestically regulated 85 00:04:16,560 --> 00:04:21,599 Speaker 2: dollar deposit system was a much bigger percentage of the 86 00:04:21,680 --> 00:04:24,960 Speaker 2: overall hull. And now we're in a world that looks 87 00:04:25,040 --> 00:04:28,320 Speaker 2: quite a bit different in terms of the relative importance. 88 00:04:28,440 --> 00:04:31,360 Speaker 2: And we've been in that world for about twenty five 89 00:04:31,440 --> 00:04:33,760 Speaker 2: or thirty years now, and the two thousand and eight 90 00:04:33,760 --> 00:04:36,680 Speaker 2: crisis was a crisis of that world, and twenty twenty 91 00:04:36,800 --> 00:04:39,600 Speaker 2: was in part a crisis of that world. And so 92 00:04:39,800 --> 00:04:44,479 Speaker 2: we're now in a financial system where instability in the 93 00:04:44,560 --> 00:04:48,000 Speaker 2: Euro dollar market that's the main with the addition of 94 00:04:48,000 --> 00:04:50,919 Speaker 2: the repo market. That's the main area of instability and 95 00:04:51,000 --> 00:04:54,720 Speaker 2: concern for our whole system. You know, in the twentieth century, 96 00:04:54,839 --> 00:04:57,240 Speaker 2: we still had a sort of like you know, your 97 00:04:57,279 --> 00:04:59,719 Speaker 2: grandparents banking system, and now it's not. 98 00:05:00,440 --> 00:05:03,000 Speaker 1: But we have the dollar swap lines, right Like, isn't 99 00:05:03,040 --> 00:05:06,680 Speaker 1: that the solution to all of the instability, or at 100 00:05:06,760 --> 00:05:08,520 Speaker 1: least it has been in the past. 101 00:05:09,320 --> 00:05:14,440 Speaker 2: The swap lines are both enabling the problem and mitigating 102 00:05:14,640 --> 00:05:21,919 Speaker 2: the downside consequences. They're enabling the problem because they lead 103 00:05:22,480 --> 00:05:27,320 Speaker 2: to the ability of euro dollar issuers to draw in 104 00:05:27,960 --> 00:05:31,960 Speaker 2: Euro dollar holders. When you think about what a euro 105 00:05:32,040 --> 00:05:34,799 Speaker 2: dollar issuer is doing is they're actually selling a product 106 00:05:34,800 --> 00:05:37,960 Speaker 2: that's their liability. It's a money instrument that people can 107 00:05:38,000 --> 00:05:40,400 Speaker 2: hold who have cash, have demand for cash and cash 108 00:05:40,480 --> 00:05:45,760 Speaker 2: equivalents in large quantities, and they are competing with domestic 109 00:05:46,440 --> 00:05:51,279 Speaker 2: US banks that have a really nice product, the deposit 110 00:05:51,760 --> 00:05:54,039 Speaker 2: that is up to two hundred and fifty thousand dollars 111 00:05:54,040 --> 00:05:58,039 Speaker 2: per account ensured by the FDIC explicitly, and a whole 112 00:05:58,040 --> 00:06:03,159 Speaker 2: bunch of other money like products created by other shadow banks. 113 00:06:03,520 --> 00:06:07,960 Speaker 2: Money market mutual funds create various products, and the swap lines. 114 00:06:07,960 --> 00:06:10,520 Speaker 2: The existence of the swap lines is what gives people 115 00:06:10,560 --> 00:06:14,200 Speaker 2: confidence that, you know, this is a pretty robust money 116 00:06:14,240 --> 00:06:18,120 Speaker 2: type instrument that has backing from the sort of central 117 00:06:18,120 --> 00:06:21,120 Speaker 2: bank which is the creator of dollars that makes these 118 00:06:21,240 --> 00:06:25,600 Speaker 2: money like liabilities money good. And so in order to 119 00:06:25,640 --> 00:06:29,560 Speaker 2: get such a huge thirteen trillion dollars, such a huge market, 120 00:06:29,680 --> 00:06:31,679 Speaker 2: you need the swap lines there in the first place 121 00:06:31,800 --> 00:06:34,360 Speaker 2: to give people confidence to hold large quantities of these 122 00:06:34,360 --> 00:06:36,400 Speaker 2: that they will in fact me money good. But the 123 00:06:36,480 --> 00:06:39,480 Speaker 2: problem you have is that the extent to which the 124 00:06:39,600 --> 00:06:43,720 Speaker 2: US government stands behind this thirteen trillion dollar dollar money supply, 125 00:06:44,120 --> 00:06:49,080 Speaker 2: it's ambiguous, it's not explicit. It is like uninsured depodsits 126 00:06:49,120 --> 00:06:52,440 Speaker 2: in the domestic system. It's worse, though, but it's similar 127 00:06:52,440 --> 00:06:56,560 Speaker 2: to it, and so it's highly run a ball and 128 00:06:56,720 --> 00:07:02,039 Speaker 2: unstable insofar as people aren't the extent to which the 129 00:07:02,080 --> 00:07:05,400 Speaker 2: system will be supported by the Central Bank of the 130 00:07:05,520 --> 00:07:08,640 Speaker 2: United States when it gets into trouble in various bad 131 00:07:08,640 --> 00:07:11,160 Speaker 2: states of the world. So in good times it's fine, 132 00:07:11,320 --> 00:07:14,720 Speaker 2: but in bad times people decide, you know what, that 133 00:07:15,240 --> 00:07:18,600 Speaker 2: competing money instrument created in the domestic US banking system, 134 00:07:18,680 --> 00:07:21,880 Speaker 2: or those t bills are just a much better place 135 00:07:21,960 --> 00:07:26,000 Speaker 2: for us to be. We want out, and I have 136 00:07:26,040 --> 00:07:28,840 Speaker 2: a historical analogy since we've been doing so much history 137 00:07:28,880 --> 00:07:34,040 Speaker 2: on this. Think about the US system in the nineteen twenties, 138 00:07:34,760 --> 00:07:38,520 Speaker 2: going to the nineteen thirties, we created the Federal Reserve 139 00:07:38,600 --> 00:07:41,520 Speaker 2: and the discount window at the Federal Reserve for domestic 140 00:07:41,680 --> 00:07:46,760 Speaker 2: US banks. It's like a swap line for the banks directly. 141 00:07:47,480 --> 00:07:49,560 Speaker 2: It's doing what the swap lines are doing. With the 142 00:07:49,640 --> 00:07:53,960 Speaker 2: addition of the foreign Central Bank. And people thought, oh, 143 00:07:54,000 --> 00:07:57,920 Speaker 2: we're going to fix bank runs. We've got this infrastructure setup, 144 00:07:57,920 --> 00:08:00,520 Speaker 2: we created the central Bank, it's going to accesup all 145 00:08:00,520 --> 00:08:04,200 Speaker 2: these deposits. And we had the worst bank run ever 146 00:08:04,760 --> 00:08:08,680 Speaker 2: in the thirty two to thirty three period. What happened. 147 00:08:08,880 --> 00:08:12,200 Speaker 2: What happened was the FED didn't support all the banks 148 00:08:12,520 --> 00:08:15,720 Speaker 2: when push came to shove. The FED allowed a bank 149 00:08:15,760 --> 00:08:18,520 Speaker 2: called the Bank of the United States, a Jewish run 150 00:08:18,560 --> 00:08:23,080 Speaker 2: bank based in New York, to fail, and created a 151 00:08:23,080 --> 00:08:25,600 Speaker 2: lot of uncertainty about the extent of its support for 152 00:08:26,160 --> 00:08:28,720 Speaker 2: state chartered banks that were not members of the Federal 153 00:08:28,720 --> 00:08:33,319 Speaker 2: Reserve system, and runs just went throughout the system, and 154 00:08:33,760 --> 00:08:37,280 Speaker 2: over a third of the banking system ultimately collapsed. Even 155 00:08:37,360 --> 00:08:41,360 Speaker 2: though we had this support system, and what you saw 156 00:08:41,400 --> 00:08:45,480 Speaker 2: in two thousand and eight is a similar problem. People 157 00:08:45,559 --> 00:08:48,840 Speaker 2: just don't know how much the FED will be there 158 00:08:48,880 --> 00:08:54,600 Speaker 2: and to what extent, and that can cause systemic catastrophe. 159 00:08:55,280 --> 00:08:58,480 Speaker 2: And the reason why we got deposit insurance in part 160 00:08:58,559 --> 00:09:02,400 Speaker 2: in nineteen thirty three as the government saying, you know what, 161 00:09:02,440 --> 00:09:06,160 Speaker 2: we just have to be explicit about the fact that 162 00:09:06,160 --> 00:09:09,679 Speaker 2: we're backing these money instruments. We can't have this implicit 163 00:09:09,760 --> 00:09:13,800 Speaker 2: insurance program that is through FED lending. We got to 164 00:09:13,840 --> 00:09:16,240 Speaker 2: just be explicit, and that. 165 00:09:16,280 --> 00:09:17,360 Speaker 1: Worked really, really well. 166 00:09:17,400 --> 00:09:19,280 Speaker 3: This is like that, I mean, this is a principle 167 00:09:19,360 --> 00:09:22,640 Speaker 3: right that like big blanket guarantees are cheaper right from 168 00:09:22,679 --> 00:09:25,880 Speaker 3: a dollar basis than sort of back up things that 169 00:09:25,960 --> 00:09:28,040 Speaker 3: you don't know whether they're gonna come or you try 170 00:09:28,080 --> 00:09:30,120 Speaker 3: to go cheap right because you're gonna let this bank 171 00:09:30,160 --> 00:09:32,439 Speaker 3: fail and you're gonna send the messages. 172 00:09:32,040 --> 00:09:34,480 Speaker 1: To the other band say you're gonna do whatever it 173 00:09:34,520 --> 00:09:36,320 Speaker 1: takes and hope that you don't hope that. 174 00:09:36,320 --> 00:09:36,920 Speaker 2: You don't have to. 175 00:09:37,080 --> 00:09:40,240 Speaker 3: It's like, really, the bazukahs are ultimately would do it. 176 00:09:40,280 --> 00:09:42,840 Speaker 3: And the beauty of Bazukahs is because they're so intimidating. 177 00:09:43,080 --> 00:09:45,720 Speaker 3: You don't have to fire them. Ore deposits in the 178 00:09:45,760 --> 00:09:50,200 Speaker 3: euro dollar market, are the depositors compensated for this ambiguity 179 00:09:50,280 --> 00:09:51,360 Speaker 3: about run ability? 180 00:09:51,760 --> 00:09:53,560 Speaker 2: Of course, so how does that look like? 181 00:09:53,559 --> 00:09:54,120 Speaker 3: How is that? 182 00:09:54,160 --> 00:09:54,600 Speaker 1: What is that? 183 00:09:55,120 --> 00:09:59,440 Speaker 2: So, as a general matter, the way in which shadow 184 00:09:59,520 --> 00:10:04,200 Speaker 2: money and struments, non deposit deposits, deposit alternatives, money instruments, 185 00:10:04,240 --> 00:10:06,600 Speaker 2: cash equivalents that are competing with just sort of like 186 00:10:06,679 --> 00:10:11,280 Speaker 2: your checking account at JP Morgan Chase. They are competing 187 00:10:11,360 --> 00:10:17,040 Speaker 2: on price. They are paying more interest than obviously your 188 00:10:17,120 --> 00:10:19,480 Speaker 2: checking account Jamie Morgan Chase, where often you know Jamie 189 00:10:19,480 --> 00:10:21,880 Speaker 2: Morgan table will just pay you almost zero on that 190 00:10:22,000 --> 00:10:26,199 Speaker 2: checking account in terms of interest. And so the euro 191 00:10:26,280 --> 00:10:30,840 Speaker 2: dollar market all developed, you know, fifties and sixties London 192 00:10:30,880 --> 00:10:38,079 Speaker 2: banks offering more interest on balances than National City Bank 193 00:10:38,200 --> 00:10:42,839 Speaker 2: in New York and drawing depositors to their own banks. 194 00:10:42,840 --> 00:10:45,320 Speaker 2: They could have a deposit account in dollars in London 195 00:10:45,320 --> 00:10:49,920 Speaker 2: that just paid more interest. And that's the same story 196 00:10:49,960 --> 00:10:54,320 Speaker 2: you see with the RepA market and money market funds. 197 00:10:54,320 --> 00:10:55,839 Speaker 2: These are ways to get a little bit more yield 198 00:10:55,880 --> 00:10:58,400 Speaker 2: on your cash instruments. They're competing on price, and the 199 00:10:58,440 --> 00:11:03,040 Speaker 2: main customers historically where the corporate treasurers who had huge 200 00:11:03,080 --> 00:11:06,520 Speaker 2: cash balances, and there are lots of different customers now 201 00:11:06,559 --> 00:11:09,200 Speaker 2: who have cash they want a little bit more yield on. 202 00:11:09,320 --> 00:11:12,120 Speaker 2: The thing that goes wrong in these markets is they 203 00:11:12,120 --> 00:11:17,240 Speaker 2: are sacrificing MONEINSS, you know, safety, They're sacrificing the extent 204 00:11:17,280 --> 00:11:19,400 Speaker 2: to which it's really a liability of the United States 205 00:11:19,480 --> 00:11:22,880 Speaker 2: government for some more yield. And when we get to 206 00:11:22,920 --> 00:11:25,760 Speaker 2: a bad state of the world, that trade off starts 207 00:11:25,800 --> 00:11:27,680 Speaker 2: to look a little bit different, and that's what creates 208 00:11:27,679 --> 00:11:30,800 Speaker 2: the run dynamic. Suddenly we're in a bad state of 209 00:11:30,840 --> 00:11:34,559 Speaker 2: the world. Think August two thousand and eight, and you're 210 00:11:34,600 --> 00:11:38,360 Speaker 2: a reboke counter party of Leman Brothers. You're parking your 211 00:11:38,400 --> 00:11:40,960 Speaker 2: extra cash and Linen Brothers for a little extra yield, 212 00:11:41,720 --> 00:11:43,679 Speaker 2: and you think, you know what, I'm just going to 213 00:11:43,760 --> 00:11:47,840 Speaker 2: move my balance to a regular bank account. I'm going 214 00:11:47,880 --> 00:11:50,240 Speaker 2: to go to JP Morgan and just have a big 215 00:11:50,280 --> 00:11:53,120 Speaker 2: balance there. Yeah, I'm going to be earning a little 216 00:11:53,160 --> 00:11:55,360 Speaker 2: less yield on my cash, but I know that it's 217 00:11:55,440 --> 00:11:58,320 Speaker 2: money good and it's going to be available, and you 218 00:11:58,320 --> 00:11:59,960 Speaker 2: know what, I just don't need to be a rebooke 219 00:12:00,080 --> 00:12:03,320 Speaker 2: counterparty to Liam Brothers anymore, and that was what brought 220 00:12:03,320 --> 00:12:06,000 Speaker 2: down Liam Brothers. It was just an old fashioned bank 221 00:12:06,040 --> 00:12:07,240 Speaker 2: run on its rebo book. 222 00:12:07,400 --> 00:12:10,640 Speaker 1: Yeah, collateral crunch. So one thing that stands out in 223 00:12:10,679 --> 00:12:14,880 Speaker 1: the series is there are these brief windows where regulators 224 00:12:14,920 --> 00:12:19,680 Speaker 1: basically consider actually regulating euro dollars. But then what happens 225 00:12:19,720 --> 00:12:22,840 Speaker 1: is like there's a crisis in energy markets or there's 226 00:12:22,840 --> 00:12:26,280 Speaker 1: a banking crisis, and so everyone decides now is not 227 00:12:26,440 --> 00:12:29,120 Speaker 1: the time to start fiddling around with Yes. 228 00:12:29,000 --> 00:12:31,040 Speaker 2: It's never a good time to regulate. 229 00:12:31,600 --> 00:12:33,800 Speaker 1: This is my question, like what would be a good 230 00:12:33,840 --> 00:12:36,720 Speaker 1: time and what would that regulation actually look like. 231 00:12:36,920 --> 00:12:41,400 Speaker 2: It's a really deep and difficult question because you guys 232 00:12:41,559 --> 00:12:46,240 Speaker 2: may have been following the Basel end game capital Requirements 233 00:12:46,400 --> 00:12:49,400 Speaker 2: project of the last several years of the US banking 234 00:12:49,480 --> 00:12:52,480 Speaker 2: regulators and Michael Barr, the Rice chair of the FED 235 00:12:52,880 --> 00:12:56,760 Speaker 2: for Supervision, who's been leading that project, who has recently 236 00:12:56,800 --> 00:12:59,840 Speaker 2: announced he's going to step down as vice chair for Supervision, 237 00:13:00,080 --> 00:13:02,680 Speaker 2: and part of it is just that it seems unlikely 238 00:13:02,760 --> 00:13:04,520 Speaker 2: that he's going to be able to get that project 239 00:13:04,559 --> 00:13:06,920 Speaker 2: over the finish line. And the reason I bring this 240 00:13:07,000 --> 00:13:10,000 Speaker 2: up is you might think when the banking system is 241 00:13:10,040 --> 00:13:14,480 Speaker 2: making record profits, and the economy is humming along nicely. 242 00:13:15,120 --> 00:13:19,800 Speaker 2: Would be a great time to strengthen the regulatory regime. 243 00:13:20,520 --> 00:13:24,640 Speaker 2: And the Biden administration and its bank regulators have tried 244 00:13:24,679 --> 00:13:28,160 Speaker 2: to strengthen the domestic you know onshore deposit you know, 245 00:13:28,240 --> 00:13:32,040 Speaker 2: regulatory regime of domestic deposits, and they've been completely stymied. 246 00:13:32,840 --> 00:13:36,000 Speaker 2: And so plainly, when things are good, that's not actually 247 00:13:36,040 --> 00:13:41,079 Speaker 2: a good time because nobody wants to nobody. Everybody's just work. 248 00:13:41,400 --> 00:13:44,120 Speaker 2: It's everyone's like, everything is fine. We don't need to 249 00:13:44,160 --> 00:13:49,280 Speaker 2: make any changes right now, and so the inertia prevents changes, 250 00:13:49,400 --> 00:13:54,280 Speaker 2: and so actually practically it is during crisis. It happened 251 00:13:54,320 --> 00:13:56,680 Speaker 2: to be the case that the seventy four crisis that 252 00:13:56,720 --> 00:14:02,120 Speaker 2: we talked about, they felt like things were too too 253 00:14:02,160 --> 00:14:07,000 Speaker 2: fragile to do anything. Similarly, in the aftermath of two 254 00:14:07,040 --> 00:14:09,360 Speaker 2: thousand and eight there was a similar mindset. You might 255 00:14:09,440 --> 00:14:15,600 Speaker 2: recall there were more significant reforms discussed and at least 256 00:14:15,760 --> 00:14:21,720 Speaker 2: mooted privately, including with respect to repo and euro dollar liabilities. 257 00:14:22,600 --> 00:14:27,560 Speaker 2: And the thought was, we're in a bad recession right now. 258 00:14:28,040 --> 00:14:30,640 Speaker 2: We should try to get out of that recession, and 259 00:14:30,840 --> 00:14:36,120 Speaker 2: let's not upset the apple Cart and so clearly a 260 00:14:36,160 --> 00:14:38,480 Speaker 2: certain type of crisis is not enough either. If you 261 00:14:38,600 --> 00:14:41,960 Speaker 2: just look to history, one thing you do see is 262 00:14:41,960 --> 00:14:45,120 Speaker 2: if the crisis is really bad, not like seventy four 263 00:14:45,240 --> 00:14:48,520 Speaker 2: or oh heait, but like nineteen thirty three, then you 264 00:14:48,600 --> 00:14:54,120 Speaker 2: get fundamental structural reform. And so if the euro dollar 265 00:14:54,280 --> 00:15:00,840 Speaker 2: market were to lead to economic fallout on that, I 266 00:15:00,880 --> 00:15:04,479 Speaker 2: feel very comfortable predicting that it would be fundamentally reformed. 267 00:15:04,640 --> 00:15:06,400 Speaker 3: What would it look like? And I mean part of 268 00:15:06,440 --> 00:15:09,320 Speaker 3: the question, and I guess Tracy is but I get, like, Okay, 269 00:15:09,360 --> 00:15:11,120 Speaker 3: the timing one thing, but what would it look like? 270 00:15:11,160 --> 00:15:14,120 Speaker 3: And also what's to stuff be ever from being a 271 00:15:14,160 --> 00:15:18,160 Speaker 3: bank and offshore and offering something that I call a dollar. 272 00:15:18,960 --> 00:15:22,680 Speaker 2: Yeah, two great questions. So of course it could look 273 00:15:22,800 --> 00:15:28,240 Speaker 2: like a bunch of different things. There's not one answer. 274 00:15:29,120 --> 00:15:36,160 Speaker 2: There is the cleanest answer, which is an international agreement 275 00:15:36,480 --> 00:15:41,600 Speaker 2: like Basil, call it Bazel four. That is quite simple. 276 00:15:41,680 --> 00:15:49,440 Speaker 2: It says each jurisdiction shall ensure that the financial institutions 277 00:15:49,480 --> 00:15:54,120 Speaker 2: in that jurisdiction only issue short term money like liabilities 278 00:15:54,120 --> 00:15:58,160 Speaker 2: in their own currency. And so if you're a London 279 00:15:58,200 --> 00:16:04,360 Speaker 2: based bank regulated by UK financial regulators, you cannot issue 280 00:16:04,760 --> 00:16:10,520 Speaker 2: a dollar demand deposit type liability unless it's fully reserved 281 00:16:11,040 --> 00:16:14,280 Speaker 2: on the asset side of the bank with a dollar instrument, 282 00:16:14,720 --> 00:16:19,400 Speaker 2: either a dollar at a US bank like a correspondent bank, 283 00:16:19,560 --> 00:16:21,480 Speaker 2: and that's going to actually tie into the second question, 284 00:16:21,680 --> 00:16:24,120 Speaker 2: or like a T bill of a very short maturity. 285 00:16:24,760 --> 00:16:27,960 Speaker 2: And so you know, you could still have lots of 286 00:16:28,080 --> 00:16:32,240 Speaker 2: dollar based banking globally. You wouldn't be getting rid of 287 00:16:32,520 --> 00:16:36,120 Speaker 2: global dollar. You would be stabilizing the global dollar by 288 00:16:36,160 --> 00:16:40,000 Speaker 2: going to full reserve banking for the global dollar. There 289 00:16:40,040 --> 00:16:44,000 Speaker 2: would be no money creation outside of the US. The 290 00:16:44,080 --> 00:16:47,160 Speaker 2: expansion of the dollar money supply would happen by US 291 00:16:47,200 --> 00:16:51,120 Speaker 2: domestic banks, but dollars could be held by say, Japanese banks, 292 00:16:51,520 --> 00:16:53,520 Speaker 2: as long as it was on a one to one basis. 293 00:16:53,920 --> 00:16:57,240 Speaker 2: And I think that would be the optimal answer, and 294 00:16:57,280 --> 00:16:59,560 Speaker 2: we could talk about why, but you don't have to 295 00:16:59,560 --> 00:17:03,680 Speaker 2: go all the way to that. You could allow some 296 00:17:04,080 --> 00:17:08,840 Speaker 2: dollar money creation outside of the US, but subjected to 297 00:17:08,880 --> 00:17:12,880 Speaker 2: some type of US based oversight and regulation to have 298 00:17:13,000 --> 00:17:18,359 Speaker 2: congruence between the domestic dollar money creation regulatory scheme and 299 00:17:18,400 --> 00:17:23,000 Speaker 2: the overseas dollar money creation regulatory scheme. What makes the 300 00:17:23,040 --> 00:17:27,920 Speaker 2: current system so unstable and difficult to govern is there 301 00:17:27,960 --> 00:17:30,639 Speaker 2: is no congruence, and in fact there can be racis 302 00:17:30,720 --> 00:17:35,040 Speaker 2: to the bottom dynamics and even worse right now, there's 303 00:17:35,119 --> 00:17:38,399 Speaker 2: so much opacity. You know, I said thirteen trillion dollars, 304 00:17:38,400 --> 00:17:40,439 Speaker 2: but we don't really know the figure because there's no 305 00:17:40,560 --> 00:17:45,520 Speaker 2: systematized reporting in the US. All of the banks file 306 00:17:45,800 --> 00:17:49,640 Speaker 2: reports quarterly with their balance sheet information, and we can 307 00:17:49,720 --> 00:17:54,920 Speaker 2: track the amount of dollar deposits. We actually cannot track 308 00:17:55,040 --> 00:17:59,479 Speaker 2: the amount of deposit like liabilities being created offshore because 309 00:17:59,520 --> 00:18:02,360 Speaker 2: there is there is no international agreement by which that 310 00:18:02,400 --> 00:18:07,120 Speaker 2: information is reported to US authorities, and that would seem 311 00:18:07,160 --> 00:18:09,880 Speaker 2: to me to be like low hanging fruit. You don't 312 00:18:09,920 --> 00:18:13,439 Speaker 2: have to get rid of the ability of banks in 313 00:18:13,520 --> 00:18:18,399 Speaker 2: Japan and Europe to create dollars. Why don't we just 314 00:18:18,840 --> 00:18:21,679 Speaker 2: make them tell us how many they're creating, and just 315 00:18:21,680 --> 00:18:24,320 Speaker 2: some information about the assets on the other side of 316 00:18:24,359 --> 00:18:37,040 Speaker 2: those balance sheets. 317 00:18:38,960 --> 00:18:41,600 Speaker 1: One of the really interesting things here is, as you 318 00:18:41,680 --> 00:18:45,960 Speaker 1: just mentioned, euro dollars basically mean that banks outside of 319 00:18:46,040 --> 00:18:49,000 Speaker 1: the US can create dollars, which you would think would 320 00:18:49,080 --> 00:18:54,679 Speaker 1: impinge on US monetary sovereignty. I mean it does, but 321 00:18:55,200 --> 00:18:58,920 Speaker 1: at the same time, the existence of euro dollars combined 322 00:18:59,160 --> 00:19:02,480 Speaker 1: with the dollar swaps, which you know, basically make them, 323 00:19:02,520 --> 00:19:06,000 Speaker 1: as you were saying, a more attractive product to people 324 00:19:06,040 --> 00:19:11,040 Speaker 1: to use, has solidified the dollar's role in the global 325 00:19:11,160 --> 00:19:14,960 Speaker 1: financial system, like it has helped the dollar achieve and 326 00:19:15,080 --> 00:19:19,640 Speaker 1: maintain reserve status. So, oh, you're shaking your head. 327 00:19:19,640 --> 00:19:22,480 Speaker 2: Okay, yeah, I think it's not it's it's definitely that's 328 00:19:22,520 --> 00:19:23,399 Speaker 2: conventional wisdom. 329 00:19:23,560 --> 00:19:26,400 Speaker 1: Okay, all right, So there's nothing wrong with the I'm 330 00:19:26,480 --> 00:19:28,600 Speaker 1: just to be conventional. But the question I was going 331 00:19:28,640 --> 00:19:32,680 Speaker 1: to ask is if you had additional oversight of the market, 332 00:19:33,400 --> 00:19:36,280 Speaker 1: would that start to dent the dollar's role given that 333 00:19:36,359 --> 00:19:39,600 Speaker 1: there are concerns over you know, the US going too 334 00:19:39,640 --> 00:19:41,840 Speaker 1: far on sanctions and things like that. 335 00:19:42,200 --> 00:19:46,679 Speaker 2: I think you're asking a very important question, and I 336 00:19:46,720 --> 00:19:49,920 Speaker 2: want to try to unpack it a little bit because 337 00:19:50,520 --> 00:19:55,040 Speaker 2: when I was calling conventional wisdom, I think jumbles up 338 00:19:55,640 --> 00:19:58,320 Speaker 2: a lot of issues and it's understandable that they got 339 00:19:58,359 --> 00:20:02,840 Speaker 2: jumbled up. But really to explain what the stakes are 340 00:20:02,960 --> 00:20:05,680 Speaker 2: of the basil four type of response I was just describing, 341 00:20:05,720 --> 00:20:08,760 Speaker 2: we really have to unjumple them. So those first, there's 342 00:20:08,760 --> 00:20:12,639 Speaker 2: the role of the dollar as a reserve currency. This 343 00:20:12,800 --> 00:20:16,320 Speaker 2: is really quite distinct from euro dollars, which are the 344 00:20:16,400 --> 00:20:22,200 Speaker 2: creation of US dollar money offshore by offshore financial situtions. 345 00:20:22,320 --> 00:20:24,080 Speaker 2: We're going to connect it back a little bit, but 346 00:20:24,880 --> 00:20:28,040 Speaker 2: the dollar's roles of reserve currency. What that's directly about 347 00:20:28,280 --> 00:20:33,560 Speaker 2: is the fact that foreign central banks hold treasury securities 348 00:20:33,880 --> 00:20:38,760 Speaker 2: as their reserve assets. It's not about using the dollar 349 00:20:38,840 --> 00:20:43,840 Speaker 2: to transact or to finance trade, although those are also related. 350 00:20:44,320 --> 00:20:48,320 Speaker 2: It's about the fact that the Chinese, for example, have 351 00:20:48,480 --> 00:20:53,479 Speaker 2: huge reserves and they have to invest those reserves, and 352 00:20:53,560 --> 00:20:56,280 Speaker 2: they have chosen to invest a very large percentage of 353 00:20:56,280 --> 00:21:01,280 Speaker 2: them in treasuries. So dollar as reserve currency means foreign 354 00:21:01,320 --> 00:21:08,760 Speaker 2: central banks hold reserves in treasuries, and they have chosen 355 00:21:08,880 --> 00:21:12,720 Speaker 2: treasuries for lots of reasons, having very little to do 356 00:21:12,840 --> 00:21:18,040 Speaker 2: with certainly whether they're their domestic financial institutions have the 357 00:21:18,080 --> 00:21:22,000 Speaker 2: ability to create dollar deposit liabilities versus have to hold 358 00:21:22,000 --> 00:21:25,720 Speaker 2: one to one balances with US banks. But also even 359 00:21:25,920 --> 00:21:28,320 Speaker 2: that has little to do with whether dollars are being 360 00:21:28,400 --> 00:21:34,000 Speaker 2: used to finance trade or settle international transactions. If you 361 00:21:34,240 --> 00:21:38,200 Speaker 2: are a central bank and you have a very very 362 00:21:38,280 --> 00:21:41,280 Speaker 2: large amount of reserves, let's say a couple trillion dollars, 363 00:21:41,520 --> 00:21:44,280 Speaker 2: what assets are you going to put it in? And 364 00:21:44,520 --> 00:21:50,000 Speaker 2: the choice to invest in treasuries has a lot more 365 00:21:50,160 --> 00:21:58,440 Speaker 2: to do with US economic hegemony and the sheer, enormous 366 00:21:58,520 --> 00:22:02,480 Speaker 2: quantity of US treasureies, then it has to do with 367 00:22:03,320 --> 00:22:07,160 Speaker 2: what currency is being used to globally trade. So China, 368 00:22:07,240 --> 00:22:12,119 Speaker 2: for example, has you know, historically held lots of US treasuries. 369 00:22:12,119 --> 00:22:13,760 Speaker 2: It's really hard to think that it has anything to 370 00:22:13,760 --> 00:22:15,800 Speaker 2: do with the euro dollar market, which is really not 371 00:22:15,920 --> 00:22:20,120 Speaker 2: something that is benefiting in any meaningful sense the Chinese. 372 00:22:20,440 --> 00:22:24,960 Speaker 2: What does relate to this sort of dollar as a 373 00:22:25,280 --> 00:22:29,080 Speaker 2: you know, reserve currency for foreign central banks is the 374 00:22:29,200 --> 00:22:33,240 Speaker 2: liquidity of treasury markets, of course, and one reason why 375 00:22:33,640 --> 00:22:36,240 Speaker 2: you know, Saudi's or the Chinese would want to hold 376 00:22:36,240 --> 00:22:40,760 Speaker 2: their reserves in treasuries is that they can bind sell 377 00:22:40,920 --> 00:22:43,639 Speaker 2: very very easily with very low cost. That is a 378 00:22:43,640 --> 00:22:47,520 Speaker 2: shadow banking story in part about the creation of the 379 00:22:47,600 --> 00:22:50,800 Speaker 2: repo market and treasury repo which is a way to 380 00:22:50,840 --> 00:22:55,400 Speaker 2: subsidize liquidity and treasury markets. But that's not a euro 381 00:22:55,480 --> 00:22:59,080 Speaker 2: dollar shadow banking story. That the repo shadow banking story. Okay, 382 00:22:59,240 --> 00:23:03,240 Speaker 2: So the first point is if you change the rules 383 00:23:03,480 --> 00:23:07,960 Speaker 2: on how banks in Japan and London hold dollar balances 384 00:23:08,000 --> 00:23:10,480 Speaker 2: and you make them fully reserved. Is China going to 385 00:23:10,520 --> 00:23:14,280 Speaker 2: decide they want to hold euros instead of treasuries. That's 386 00:23:14,320 --> 00:23:17,879 Speaker 2: I find really really sort of hard to substantially. It 387 00:23:17,920 --> 00:23:20,760 Speaker 2: just doesn't really connect. So does that mean it has 388 00:23:20,840 --> 00:23:25,480 Speaker 2: nothing to do with it? No, So the global dollar 389 00:23:25,600 --> 00:23:30,920 Speaker 2: is more than just a reserve currency. It's also a 390 00:23:30,960 --> 00:23:35,840 Speaker 2: currency of international trade and international finance. And so there's 391 00:23:35,920 --> 00:23:39,600 Speaker 2: lots of trade between third countries that doesn't involve the 392 00:23:39,680 --> 00:23:44,199 Speaker 2: United States where they use dollars to transact. That's the 393 00:23:44,600 --> 00:23:48,520 Speaker 2: means of exchange. And because that's the means of exchange, 394 00:23:49,000 --> 00:23:55,359 Speaker 2: it's also the lending currency associated with financing that exchange. 395 00:23:55,920 --> 00:24:00,440 Speaker 2: And so we have this dollar financial system that's quite 396 00:24:00,440 --> 00:24:04,040 Speaker 2: a bit distinct from dollars reserve currency. You know, Chinese 397 00:24:04,040 --> 00:24:05,960 Speaker 2: Central Bank wants to hold treasuries, has a bunch of 398 00:24:05,960 --> 00:24:11,159 Speaker 2: reasons for that, totally different calculus for why Indian conglomerate 399 00:24:11,640 --> 00:24:17,479 Speaker 2: wants to sell its products to South American country in dollars. 400 00:24:17,840 --> 00:24:22,680 Speaker 2: Different calculus. And with that second calculus, the euro dollars 401 00:24:23,160 --> 00:24:26,720 Speaker 2: fit in a bit more, a bit more, because what's 402 00:24:26,720 --> 00:24:31,840 Speaker 2: going on there is the Indian company has a bank, 403 00:24:32,400 --> 00:24:35,040 Speaker 2: and the South American company has a bank, and in 404 00:24:35,080 --> 00:24:39,520 Speaker 2: all likelihood their primary banks are not US based, and 405 00:24:39,760 --> 00:24:44,480 Speaker 2: those banks would like to be able to create dollars, 406 00:24:44,920 --> 00:24:47,399 Speaker 2: lend them in dollars, and not have to look to 407 00:24:47,560 --> 00:24:50,520 Speaker 2: US banks for that liquidity. And so what the urinal 408 00:24:50,600 --> 00:24:55,000 Speaker 2: system is really doing is cutting foreign financial institutions into 409 00:24:55,520 --> 00:24:59,920 Speaker 2: the profits of dollars seniorage. They're giving them a piece 410 00:24:59,920 --> 00:25:02,639 Speaker 2: of the action, and they're giving them a reason to 411 00:25:02,720 --> 00:25:04,760 Speaker 2: want to be in the dollar business. And the way 412 00:25:04,800 --> 00:25:08,199 Speaker 2: the whole thing got going initially was a lot of 413 00:25:08,200 --> 00:25:10,639 Speaker 2: London banks wanted to get into the dollar business and 414 00:25:10,680 --> 00:25:16,080 Speaker 2: we let them in basically, and that makes them evangelists 415 00:25:16,480 --> 00:25:21,239 Speaker 2: for dollar based finance, as opposed to constantly trying to 416 00:25:21,280 --> 00:25:24,119 Speaker 2: say to their clients, you know what, let's do this 417 00:25:24,160 --> 00:25:26,399 Speaker 2: deal in pounds, because we create pounds, and if we 418 00:25:26,440 --> 00:25:29,040 Speaker 2: had to do this deal in dollars, then we're gonna 419 00:25:29,040 --> 00:25:31,840 Speaker 2: have to go borrow from City Group the dollars that 420 00:25:31,880 --> 00:25:33,960 Speaker 2: we need because we can't just create them ourselves. And 421 00:25:33,960 --> 00:25:35,960 Speaker 2: there's not this whole euro dollar market for us. We 422 00:25:36,000 --> 00:25:38,840 Speaker 2: got to go to the domestic US dollar market, and 423 00:25:38,920 --> 00:25:42,800 Speaker 2: so we would have all these foreign financial institutions trying 424 00:25:42,800 --> 00:25:47,440 Speaker 2: to suggest other currencies for international trade and financing and 425 00:25:47,520 --> 00:25:50,359 Speaker 2: not being as gung ho about the dollar, which is 426 00:25:50,400 --> 00:25:54,600 Speaker 2: not to say that they would necessarily succeed in convincing 427 00:25:54,760 --> 00:25:58,280 Speaker 2: the vast majority of their clients to change currencies. There's 428 00:25:58,280 --> 00:26:02,760 Speaker 2: a lot of reasons why you would just you know, 429 00:26:03,280 --> 00:26:05,720 Speaker 2: open up a bank account with a US based bank 430 00:26:05,920 --> 00:26:09,480 Speaker 2: shift your business there. At the same time, the US 431 00:26:09,520 --> 00:26:14,520 Speaker 2: has gotten very far in embedding and entrenching the dollar 432 00:26:15,240 --> 00:26:19,520 Speaker 2: by building this coalition of global financial institutions that all 433 00:26:19,640 --> 00:26:23,119 Speaker 2: are able to profit and benefit off of being in 434 00:26:23,160 --> 00:26:25,840 Speaker 2: the dollar, as opposed to trying to keep all of 435 00:26:26,200 --> 00:26:29,959 Speaker 2: those benefits onshore for US based banks. 436 00:26:30,440 --> 00:26:35,040 Speaker 1: So, just to further understand this point with a concrete example, 437 00:26:35,119 --> 00:26:38,480 Speaker 1: one thing that's gotten attention recently is China building out 438 00:26:38,600 --> 00:26:41,920 Speaker 1: a swap network, and I have seen that couched. As 439 00:26:42,080 --> 00:26:46,240 Speaker 1: you know, China takes on the US dollar and that 440 00:26:46,359 --> 00:26:48,720 Speaker 1: sort of thing. What do you think they're trying to 441 00:26:48,800 --> 00:26:50,359 Speaker 1: do in that context? 442 00:26:50,520 --> 00:26:55,119 Speaker 2: So, as it turns out, China swap lines are just 443 00:26:55,280 --> 00:26:59,280 Speaker 2: totally different from the FED swap lines, and so the 444 00:26:59,440 --> 00:27:06,880 Speaker 2: Chinese are interested in spreading use of the RMB. They 445 00:27:07,040 --> 00:27:13,600 Speaker 2: want other countries to use the RMB in trade, especially 446 00:27:13,640 --> 00:27:16,560 Speaker 2: with China. They would be thrilled if the Indian company 447 00:27:16,560 --> 00:27:19,199 Speaker 2: wanted to sell to the South American company and denominated 448 00:27:19,240 --> 00:27:23,320 Speaker 2: an RMB. It's swap lines, though, are not trying to 449 00:27:23,359 --> 00:27:26,560 Speaker 2: achieve that in anything like the way that the FED 450 00:27:26,640 --> 00:27:31,159 Speaker 2: swap lines are facilitating dollar money creation. The Chinese swap 451 00:27:31,240 --> 00:27:36,119 Speaker 2: lines are basically a central bank lending program for indebted 452 00:27:36,160 --> 00:27:40,800 Speaker 2: foreign governments, and so it's like World Bank or IMF loans, 453 00:27:41,400 --> 00:27:44,480 Speaker 2: and so like a major borrower is Pakistan. Pakistan has 454 00:27:44,480 --> 00:27:46,800 Speaker 2: had a swapline with the People's Bank of China. 455 00:27:47,119 --> 00:27:49,160 Speaker 1: Sounds like an outcrop of Belton Road. 456 00:27:49,320 --> 00:27:52,000 Speaker 2: It is an outcrop of Belton Road. It's exactly an 457 00:27:52,040 --> 00:27:56,080 Speaker 2: outcrop of Belton Road. And in the US we would 458 00:27:56,080 --> 00:27:59,840 Speaker 2: just never do that type of lending through our central bank. 459 00:28:00,440 --> 00:28:02,840 Speaker 2: We did do something like that for Mexico in nineteen 460 00:28:02,920 --> 00:28:06,359 Speaker 2: ninety five twenty billion dollar loan that came from the 461 00:28:06,359 --> 00:28:10,560 Speaker 2: Treasury Department. That's like what the PBOC is doing, and 462 00:28:11,320 --> 00:28:14,000 Speaker 2: they might have some sort of regulatory reasons. One thing 463 00:28:14,040 --> 00:28:16,000 Speaker 2: that happens if you do it through your central bank 464 00:28:16,400 --> 00:28:20,119 Speaker 2: is don't you don't report it? As sovereign lending to 465 00:28:20,280 --> 00:28:22,679 Speaker 2: like the World Bank. So it's it's much harder for 466 00:28:22,760 --> 00:28:28,280 Speaker 2: international observers to keep track of how much Pakistan and 467 00:28:28,640 --> 00:28:33,040 Speaker 2: Mongolia and these various recipients of PBOC swap line lending, 468 00:28:33,359 --> 00:28:36,760 Speaker 2: how much they are actually occurring. It's less reported than 469 00:28:36,760 --> 00:28:39,360 Speaker 2: maybe if the Chinese did it in a more official channel. 470 00:28:39,480 --> 00:28:42,080 Speaker 2: But it's nothing like what the FED swap lines are. 471 00:28:42,160 --> 00:28:47,040 Speaker 2: There's over thirty billion dollars right now of PBOC swap 472 00:28:47,080 --> 00:28:50,400 Speaker 2: line outstanding. There's like basically zero of the FED swap lines. 473 00:28:50,440 --> 00:28:54,320 Speaker 2: It's you know, the PBOC is like an ongoing lending program. 474 00:28:53,960 --> 00:28:55,000 Speaker 1: Got it. 475 00:28:55,000 --> 00:28:57,200 Speaker 2: It's structured to look like it's not, but it is. 476 00:28:57,280 --> 00:28:57,960 Speaker 2: That's what it is. 477 00:29:11,760 --> 00:29:14,400 Speaker 1: So the other thing I wanted to ask is you 478 00:29:14,440 --> 00:29:16,920 Speaker 1: compare the size of the euro dollar market to tether 479 00:29:17,200 --> 00:29:21,360 Speaker 1: basically throughout the podcast to describe how it's growing. Are 480 00:29:21,440 --> 00:29:25,160 Speaker 1: stable coins the new euro dollar? I mean they kind 481 00:29:25,160 --> 00:29:27,760 Speaker 1: of serve they seem to serve a similar purpose, and 482 00:29:28,080 --> 00:29:30,719 Speaker 1: they seem to be similar things in the sense that 483 00:29:30,720 --> 00:29:33,280 Speaker 1: their dollar denominated liabilities. 484 00:29:34,000 --> 00:29:37,920 Speaker 2: Stable coins definitely have the potential to be the new 485 00:29:38,000 --> 00:29:42,080 Speaker 2: euro dollar. Tether in particular, has a lot of Euro 486 00:29:42,240 --> 00:29:46,920 Speaker 2: dollar flavor to it, but there are really important differences. 487 00:29:48,520 --> 00:29:55,720 Speaker 2: One is that tether is not being used to finance 488 00:29:55,960 --> 00:30:01,600 Speaker 2: or settle international trade. The Indian company are not selling 489 00:30:02,080 --> 00:30:07,880 Speaker 2: to South American buyers or vice versa using tether. That's 490 00:30:07,880 --> 00:30:10,320 Speaker 2: a Euro dollar system is tied to the real economy 491 00:30:10,320 --> 00:30:14,760 Speaker 2: and real economic activity, and up until this point, the 492 00:30:14,800 --> 00:30:19,320 Speaker 2: cryptocurrency space is very much looking at itself, and so 493 00:30:19,440 --> 00:30:24,760 Speaker 2: tethers are used primarily to buy cryptocurrency, not to facilitate 494 00:30:24,840 --> 00:30:31,240 Speaker 2: real economic activity, or they're used to conduct illicit transactions 495 00:30:31,240 --> 00:30:35,800 Speaker 2: that are difficult to conduct in the FIAT regulated system. 496 00:30:35,840 --> 00:30:38,840 Speaker 2: I did air quotes, but that doesn't come across in 497 00:30:38,920 --> 00:30:46,840 Speaker 2: this media. That said, tether has gotten huge and it 498 00:30:47,120 --> 00:30:50,960 Speaker 2: is exploiting the same sort of regulatory loophole if the 499 00:30:51,040 --> 00:30:55,600 Speaker 2: year dollar system is exploiting. The tether balances have a 500 00:30:55,760 --> 00:31:01,400 Speaker 2: very similar economic status to the Euro dollar balances. And 501 00:31:02,000 --> 00:31:08,080 Speaker 2: one could imagine, insofar as tether is legitimated in some 502 00:31:08,200 --> 00:31:14,320 Speaker 2: sense and it takes on greater scale, that it could 503 00:31:14,520 --> 00:31:20,040 Speaker 2: expand its role and sort of jump over. You get 504 00:31:20,040 --> 00:31:22,400 Speaker 2: out of just the crypto ecosystem and get into the 505 00:31:22,520 --> 00:31:27,000 Speaker 2: real economic activity and be a real competitor with other 506 00:31:27,320 --> 00:31:30,440 Speaker 2: dollar money forms. It certainly is a dollar money form, 507 00:31:30,960 --> 00:31:32,920 Speaker 2: and it could be a it could be a competitor 508 00:31:32,920 --> 00:31:34,960 Speaker 2: in certain transactions for certain purposes. 509 00:31:35,800 --> 00:31:39,080 Speaker 1: So there is a sense of multilateralism at play with 510 00:31:39,160 --> 00:31:42,080 Speaker 1: the entire year, the development of the eurodollar market, certainly 511 00:31:42,200 --> 00:31:44,960 Speaker 1: and the swap lines. And I guess I'm wondering, with 512 00:31:45,200 --> 00:31:49,200 Speaker 1: the new Trump administration coming in, is there any sense 513 00:31:49,280 --> 00:31:53,000 Speaker 1: that those swap lines could could be maybe not as 514 00:31:53,040 --> 00:31:56,240 Speaker 1: reliable as they were under previous administrations. 515 00:31:56,760 --> 00:31:59,080 Speaker 2: Absolutely, and I think this is something that's probably not 516 00:31:59,120 --> 00:32:03,840 Speaker 2: getting talked about. The whole swap line based euro dollar 517 00:32:04,000 --> 00:32:10,320 Speaker 2: system is very much a product of a particular geopolitical 518 00:32:11,520 --> 00:32:16,560 Speaker 2: diplomatic arrangement between the United States and a variety of 519 00:32:16,600 --> 00:32:21,720 Speaker 2: allies and partners that involves a certain orientation to those 520 00:32:21,760 --> 00:32:26,080 Speaker 2: allies and partners, where the US is basically making an 521 00:32:26,160 --> 00:32:30,640 Speaker 2: ongoing commitment over a long period of time that it 522 00:32:30,680 --> 00:32:34,320 Speaker 2: will be there to provide in essence, discount window like 523 00:32:34,400 --> 00:32:39,480 Speaker 2: backing to the extent that the US is incapable of 524 00:32:39,520 --> 00:32:42,400 Speaker 2: making those types of long term commitments or everything is 525 00:32:42,440 --> 00:32:45,480 Speaker 2: going to be hashed out on a case by case basis. 526 00:32:45,480 --> 00:32:50,600 Speaker 2: And that's the new sort of international multilateral paradigm that's 527 00:32:50,640 --> 00:32:54,080 Speaker 2: deeply destabilizing for the year dollar market, and to the 528 00:32:54,200 --> 00:32:58,960 Speaker 2: extent questions would be raised about whether certain countries would 529 00:32:59,000 --> 00:33:02,040 Speaker 2: be able to actually draw on their swap lines that 530 00:33:02,080 --> 00:33:05,800 Speaker 2: could lead to runs and panics, just in the way 531 00:33:05,920 --> 00:33:08,960 Speaker 2: that in nineteen thirty two and nineteen thirty three there 532 00:33:09,000 --> 00:33:11,880 Speaker 2: were runs and panics throughout the US banking system, in 533 00:33:11,920 --> 00:33:14,400 Speaker 2: part because he wasn't clear the extent to which the 534 00:33:14,400 --> 00:33:17,440 Speaker 2: Federal Reserve was actually going to be there with discount 535 00:33:17,440 --> 00:33:19,840 Speaker 2: window lending to backstop those entities. 536 00:33:20,800 --> 00:33:22,880 Speaker 1: I think we've learned a lot more about the euro 537 00:33:22,960 --> 00:33:26,280 Speaker 1: dollar market, including why it is not the euro dollar 538 00:33:26,360 --> 00:33:28,440 Speaker 1: exchange rate. Do you feel like, no that I get 539 00:33:28,480 --> 00:33:30,200 Speaker 1: that that's been hammered into your ear? 540 00:33:30,280 --> 00:33:31,200 Speaker 2: Ye know that, I know. 541 00:33:31,720 --> 00:33:32,920 Speaker 3: I knew that before that. 542 00:33:33,080 --> 00:33:36,000 Speaker 1: I do you have admitted to not knowing that at 543 00:33:36,040 --> 00:33:43,000 Speaker 1: one point I didn't know that? Yeah, Okay. Lots More 544 00:33:43,080 --> 00:33:45,880 Speaker 1: is produced by Carmen Rodriguez and Dashell Bennett, with help 545 00:33:45,920 --> 00:33:47,920 Speaker 1: from Moses onom and Cal Brooks. 546 00:33:48,280 --> 00:33:51,320 Speaker 3: Our sound engineer is Blake Maples. Sage Bouman is the 547 00:33:51,320 --> 00:33:52,720 Speaker 3: head of Bloomberg Podcasts. 548 00:33:52,920 --> 00:33:56,040 Speaker 1: Please rate, review, and subscribe to Odd Lots and lots 549 00:33:56,080 --> 00:33:59,040 Speaker 1: more on your favorite podcast platforms. 550 00:33:58,840 --> 00:34:01,440 Speaker 3: And remember the Bloombergs Subscribers can listen to all of 551 00:34:01,440 --> 00:34:05,360 Speaker 3: our podcasts add free by connecting through Apple Podcasts. Thanks 552 00:34:05,400 --> 00:34:05,880 Speaker 3: for listening.