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Speaker 1: News Joe three hours of euro dollar market history and
Speaker 1: we can't get enough. I'd love to do more. I
Speaker 1: love that.
Speaker 3: I couldn't even believe that was real. Just I'm being
Speaker 3: totally Since we're sitting there in the studio listening to
Speaker 3: Liv and Josh talk about the history of your dollars,
Speaker 3: a career highlight and ironically.
Speaker 1: Definitely a treat I do feel like there's one thing missing,
Speaker 1: which is like we kind of have to put everything
Speaker 1: in modern context. Yes, right, We didn't really bring it
Speaker 1: that up to date. We talked a little bit about
Speaker 1: the euro dollar's role in like the two thousand and
Speaker 1: eight crisis. It was a mention of it. But like,
Speaker 1: let's talk about the current euro dollar market.
Speaker 3: Well, can I say something? Yeah, liv don't listen to
Speaker 3: this whenever we talk financial market plumbing or things of
Speaker 3: that nature. Yes, Oh, this is like really fascinating, Like
Speaker 3: this is really interesting topic. And then I was like,
Speaker 3: how does this matter to anything at all? So I
Speaker 3: would like to know, So I would like to actually
Speaker 3: talk a little bit more for real about like how
Speaker 3: does it actually matter? Because I find it very interesting.
Speaker 3: But I sometimes forget, like when environment?
Speaker 1: Why why did we talk about this for three hours?
Speaker 3: I did a deadlist.
Speaker 1: I'm both the most popular trade and most successful trader
Speaker 1: at Citadel that is going viral, uh barges.
Speaker 3: This is an after school special, except.
Speaker 1: I've decided I'm going to base my entire personality going
Speaker 1: forward on campaigning for a strategic pork reserve in the US.
Speaker 1: Black goals, these are the important questions that robots taking
Speaker 1: over the world.
Speaker 3: No, I think that like in a couple of years,
Speaker 3: the AI will do a really good job of making
Speaker 3: the Odd Lots podcast. One day that person will have
Speaker 3: the mandate of Heaven.
Speaker 1: How do I get more popular and successful?
Speaker 2: We do have the.
Speaker 3: Welcome to lots More, where we catch up with friends
Speaker 3: about what's going.
Speaker 1: On right now, because even when Odd Lots is over,
Speaker 1: there's always lots More.
Speaker 3: And we really do have the perfect guest.
Speaker 1: Well, Lev Menand is here with us, and he's going
Speaker 1: to provide an update on the market. He is, of course,
Speaker 1: an associate professor of law at Columbia School. So Lev,
Speaker 1: thank you, thank you for coming on and talking to
Speaker 1: us even more about euro dollars.
Speaker 2: I also think this is a topic that we could
Speaker 2: just keep doing episodes.
Speaker 1: No, for sure, do an all thoughts spin off on
Speaker 1: your dollars.
Speaker 3: All the good topics are fractal, and that you could
Speaker 3: just go down. This is a cool thing I've realized,
Speaker 3: is that actually the good topics. The only limitation on
Speaker 3: how many episodes you could do is creativity and depth.
Speaker 3: But actually we could just do keep going right.
Speaker 2: Yeah, And if anything, it matters more today than I
Speaker 2: did in nineteen sixty four and nineteen fifty four, which
Speaker 2: was the.
Speaker 3: Periods we were called, right, why does it matter more today?
Speaker 2: Size and centrality in the US dollar monetary system and
Speaker 2: in the global financial system. You know, the Euro dollar
Speaker 2: system right now is probably thirteen thirteen trillion dollars in size,
Speaker 2: which makes it, you know, more than twice as big
Speaker 2: as the uninsured deposits in the domestic system, and almost
Speaker 2: as big as the overall deposits in the domestics system.
Speaker 2: And it's the leading edge of mind. Minitary expansion in
Speaker 2: the US dollar system takes place offshore, not onshore. And
Speaker 2: when we were talking about the development of this in
Speaker 2: the fifties and sixties and seventies, the onshore domestically regulated
Speaker 2: dollar deposit system was a much bigger percentage of the
Speaker 2: overall hull. And now we're in a world that looks
Speaker 2: quite a bit different in terms of the relative importance.
Speaker 2: And we've been in that world for about twenty five
Speaker 2: or thirty years now, and the two thousand and eight
Speaker 2: crisis was a crisis of that world, and twenty twenty
Speaker 2: was in part a crisis of that world. And so
Speaker 2: we're now in a financial system where instability in the
Speaker 2: Euro dollar market that's the main with the addition of
Speaker 2: the repo market. That's the main area of instability and
Speaker 2: concern for our whole system. You know, in the twentieth century,
Speaker 2: we still had a sort of like you know, your
Speaker 2: grandparents banking system, and now it's not.
Speaker 1: But we have the dollar swap lines, right Like, isn't
Speaker 1: that the solution to all of the instability, or at
Speaker 1: least it has been in the past.
Speaker 2: The swap lines are both enabling the problem and mitigating
Speaker 2: the downside consequences. They're enabling the problem because they lead
Speaker 2: to the ability of euro dollar issuers to draw in
Speaker 2: Euro dollar holders. When you think about what a euro
Speaker 2: dollar issuer is doing is they're actually selling a product
Speaker 2: that's their liability. It's a money instrument that people can
Speaker 2: hold who have cash, have demand for cash and cash
Speaker 2: equivalents in large quantities, and they are competing with domestic
Speaker 2: US banks that have a really nice product, the deposit
Speaker 2: that is up to two hundred and fifty thousand dollars
Speaker 2: per account ensured by the FDIC explicitly, and a whole
Speaker 2: bunch of other money like products created by other shadow banks.
Speaker 2: Money market mutual funds create various products, and the swap lines.
Speaker 2: The existence of the swap lines is what gives people
Speaker 2: confidence that, you know, this is a pretty robust money
Speaker 2: type instrument that has backing from the sort of central
Speaker 2: bank which is the creator of dollars that makes these
Speaker 2: money like liabilities money good. And so in order to
Speaker 2: get such a huge thirteen trillion dollars, such a huge market,
Speaker 2: you need the swap lines there in the first place
Speaker 2: to give people confidence to hold large quantities of these
Speaker 2: that they will in fact me money good. But the
Speaker 2: problem you have is that the extent to which the
Speaker 2: US government stands behind this thirteen trillion dollar dollar money supply,
Speaker 2: it's ambiguous, it's not explicit. It is like uninsured depodsits
Speaker 2: in the domestic system. It's worse, though, but it's similar
Speaker 2: to it, and so it's highly run a ball and
Speaker 2: unstable insofar as people aren't the extent to which the
Speaker 2: system will be supported by the Central Bank of the
Speaker 2: United States when it gets into trouble in various bad
Speaker 2: states of the world. So in good times it's fine,
Speaker 2: but in bad times people decide, you know what, that
Speaker 2: competing money instrument created in the domestic US banking system,
Speaker 2: or those t bills are just a much better place
Speaker 2: for us to be. We want out, and I have
Speaker 2: a historical analogy since we've been doing so much history
Speaker 2: on this. Think about the US system in the nineteen twenties,
Speaker 2: going to the nineteen thirties, we created the Federal Reserve
Speaker 2: and the discount window at the Federal Reserve for domestic
Speaker 2: US banks. It's like a swap line for the banks directly.
Speaker 2: It's doing what the swap lines are doing. With the
Speaker 2: addition of the foreign Central Bank. And people thought, oh,
Speaker 2: we're going to fix bank runs. We've got this infrastructure setup,
Speaker 2: we created the central Bank, it's going to accesup all
Speaker 2: these deposits. And we had the worst bank run ever
Speaker 2: in the thirty two to thirty three period. What happened.
Speaker 2: What happened was the FED didn't support all the banks
Speaker 2: when push came to shove. The FED allowed a bank
Speaker 2: called the Bank of the United States, a Jewish run
Speaker 2: bank based in New York, to fail, and created a
Speaker 2: lot of uncertainty about the extent of its support for
Speaker 2: state chartered banks that were not members of the Federal
Speaker 2: Reserve system, and runs just went throughout the system, and
Speaker 2: over a third of the banking system ultimately collapsed. Even
Speaker 2: though we had this support system, and what you saw
Speaker 2: in two thousand and eight is a similar problem. People
Speaker 2: just don't know how much the FED will be there
Speaker 2: and to what extent, and that can cause systemic catastrophe.
Speaker 2: And the reason why we got deposit insurance in part
Speaker 2: in nineteen thirty three as the government saying, you know what,
Speaker 2: we just have to be explicit about the fact that
Speaker 2: we're backing these money instruments. We can't have this implicit
Speaker 2: insurance program that is through FED lending. We got to
Speaker 2: just be explicit, and that.
Speaker 1: Worked really, really well.
Speaker 3: This is like that, I mean, this is a principle
Speaker 3: right that like big blanket guarantees are cheaper right from
Speaker 3: a dollar basis than sort of back up things that
Speaker 3: you don't know whether they're gonna come or you try
Speaker 3: to go cheap right because you're gonna let this bank
Speaker 3: fail and you're gonna send the messages.
Speaker 1: To the other band say you're gonna do whatever it
Speaker 1: takes and hope that you don't hope that.
Speaker 2: You don't have to.
Speaker 3: It's like, really, the bazukahs are ultimately would do it.
Speaker 3: And the beauty of Bazukahs is because they're so intimidating.
Speaker 3: You don't have to fire them. Ore deposits in the
Speaker 3: euro dollar market, are the depositors compensated for this ambiguity
Speaker 3: about run ability?
Speaker 2: Of course, so how does that look like?
Speaker 3: How is that?
Speaker 1: What is that?
Speaker 2: So, as a general matter, the way in which shadow
Speaker 2: money and struments, non deposit deposits, deposit alternatives, money instruments,
Speaker 2: cash equivalents that are competing with just sort of like
Speaker 2: your checking account at JP Morgan Chase. They are competing
Speaker 2: on price. They are paying more interest than obviously your
Speaker 2: checking account Jamie Morgan Chase, where often you know Jamie
Speaker 2: Morgan table will just pay you almost zero on that
Speaker 2: checking account in terms of interest. And so the euro
Speaker 2: dollar market all developed, you know, fifties and sixties London
Speaker 2: banks offering more interest on balances than National City Bank
Speaker 2: in New York and drawing depositors to their own banks.
Speaker 2: They could have a deposit account in dollars in London
Speaker 2: that just paid more interest. And that's the same story
Speaker 2: you see with the RepA market and money market funds.
Speaker 2: These are ways to get a little bit more yield
Speaker 2: on your cash instruments. They're competing on price, and the
Speaker 2: main customers historically where the corporate treasurers who had huge
Speaker 2: cash balances, and there are lots of different customers now
Speaker 2: who have cash they want a little bit more yield on.
Speaker 2: The thing that goes wrong in these markets is they
Speaker 2: are sacrificing MONEINSS, you know, safety, They're sacrificing the extent
Speaker 2: to which it's really a liability of the United States
Speaker 2: government for some more yield. And when we get to
Speaker 2: a bad state of the world, that trade off starts
Speaker 2: to look a little bit different, and that's what creates
Speaker 2: the run dynamic. Suddenly we're in a bad state of
Speaker 2: the world. Think August two thousand and eight, and you're
Speaker 2: a reboke counter party of Leman Brothers. You're parking your
Speaker 2: extra cash and Linen Brothers for a little extra yield,
Speaker 2: and you think, you know what, I'm just going to
Speaker 2: move my balance to a regular bank account. I'm going
Speaker 2: to go to JP Morgan and just have a big
Speaker 2: balance there. Yeah, I'm going to be earning a little
Speaker 2: less yield on my cash, but I know that it's
Speaker 2: money good and it's going to be available, and you
Speaker 2: know what, I just don't need to be a rebooke
Speaker 2: counterparty to Liam Brothers anymore, and that was what brought
Speaker 2: down Liam Brothers. It was just an old fashioned bank
Speaker 2: run on its rebo book.
Speaker 1: Yeah, collateral crunch. So one thing that stands out in
Speaker 1: the series is there are these brief windows where regulators
Speaker 1: basically consider actually regulating euro dollars. But then what happens
Speaker 1: is like there's a crisis in energy markets or there's
Speaker 1: a banking crisis, and so everyone decides now is not
Speaker 1: the time to start fiddling around with Yes.
Speaker 2: It's never a good time to regulate.
Speaker 1: This is my question, like what would be a good
Speaker 1: time and what would that regulation actually look like.
Speaker 2: It's a really deep and difficult question because you guys
Speaker 2: may have been following the Basel end game capital Requirements
Speaker 2: project of the last several years of the US banking
Speaker 2: regulators and Michael Barr, the Rice chair of the FED
Speaker 2: for Supervision, who's been leading that project, who has recently
Speaker 2: announced he's going to step down as vice chair for Supervision,
Speaker 2: and part of it is just that it seems unlikely
Speaker 2: that he's going to be able to get that project
Speaker 2: over the finish line. And the reason I bring this
Speaker 2: up is you might think when the banking system is
Speaker 2: making record profits, and the economy is humming along nicely.
Speaker 2: Would be a great time to strengthen the regulatory regime.
Speaker 2: And the Biden administration and its bank regulators have tried
Speaker 2: to strengthen the domestic you know onshore deposit you know,
Speaker 2: regulatory regime of domestic deposits, and they've been completely stymied.
Speaker 2: And so plainly, when things are good, that's not actually
Speaker 2: a good time because nobody wants to nobody. Everybody's just work.
Speaker 2: It's everyone's like, everything is fine. We don't need to
Speaker 2: make any changes right now, and so the inertia prevents changes,
Speaker 2: and so actually practically it is during crisis. It happened
Speaker 2: to be the case that the seventy four crisis that
Speaker 2: we talked about, they felt like things were too too
Speaker 2: fragile to do anything. Similarly, in the aftermath of two
Speaker 2: thousand and eight there was a similar mindset. You might
Speaker 2: recall there were more significant reforms discussed and at least
Speaker 2: mooted privately, including with respect to repo and euro dollar liabilities.
Speaker 2: And the thought was, we're in a bad recession right now.
Speaker 2: We should try to get out of that recession, and
Speaker 2: let's not upset the apple Cart and so clearly a
Speaker 2: certain type of crisis is not enough either. If you
Speaker 2: just look to history, one thing you do see is
Speaker 2: if the crisis is really bad, not like seventy four
Speaker 2: or oh heait, but like nineteen thirty three, then you
Speaker 2: get fundamental structural reform. And so if the euro dollar
Speaker 2: market were to lead to economic fallout on that, I
Speaker 2: feel very comfortable predicting that it would be fundamentally reformed.
Speaker 3: What would it look like? And I mean part of
Speaker 3: the question, and I guess Tracy is but I get, like, Okay,
Speaker 3: the timing one thing, but what would it look like?
Speaker 3: And also what's to stuff be ever from being a
Speaker 3: bank and offshore and offering something that I call a dollar.
Speaker 2: Yeah, two great questions. So of course it could look
Speaker 2: like a bunch of different things. There's not one answer.
Speaker 2: There is the cleanest answer, which is an international agreement
Speaker 2: like Basil, call it Bazel four. That is quite simple.
Speaker 2: It says each jurisdiction shall ensure that the financial institutions
Speaker 2: in that jurisdiction only issue short term money like liabilities
Speaker 2: in their own currency. And so if you're a London
Speaker 2: based bank regulated by UK financial regulators, you cannot issue
Speaker 2: a dollar demand deposit type liability unless it's fully reserved
Speaker 2: on the asset side of the bank with a dollar instrument,
Speaker 2: either a dollar at a US bank like a correspondent bank,
Speaker 2: and that's going to actually tie into the second question,
Speaker 2: or like a T bill of a very short maturity.
Speaker 2: And so you know, you could still have lots of
Speaker 2: dollar based banking globally. You wouldn't be getting rid of
Speaker 2: global dollar. You would be stabilizing the global dollar by
Speaker 2: going to full reserve banking for the global dollar. There
Speaker 2: would be no money creation outside of the US. The
Speaker 2: expansion of the dollar money supply would happen by US
Speaker 2: domestic banks, but dollars could be held by say, Japanese banks,
Speaker 2: as long as it was on a one to one basis.
Speaker 2: And I think that would be the optimal answer, and
Speaker 2: we could talk about why, but you don't have to
Speaker 2: go all the way to that. You could allow some
Speaker 2: dollar money creation outside of the US, but subjected to
Speaker 2: some type of US based oversight and regulation to have
Speaker 2: congruence between the domestic dollar money creation regulatory scheme and
Speaker 2: the overseas dollar money creation regulatory scheme. What makes the
Speaker 2: current system so unstable and difficult to govern is there
Speaker 2: is no congruence, and in fact there can be racis
Speaker 2: to the bottom dynamics and even worse right now, there's
Speaker 2: so much opacity. You know, I said thirteen trillion dollars,
Speaker 2: but we don't really know the figure because there's no
Speaker 2: systematized reporting in the US. All of the banks file
Speaker 2: reports quarterly with their balance sheet information, and we can
Speaker 2: track the amount of dollar deposits. We actually cannot track
Speaker 2: the amount of deposit like liabilities being created offshore because
Speaker 2: there is there is no international agreement by which that
Speaker 2: information is reported to US authorities, and that would seem
Speaker 2: to me to be like low hanging fruit. You don't
Speaker 2: have to get rid of the ability of banks in
Speaker 2: Japan and Europe to create dollars. Why don't we just
Speaker 2: make them tell us how many they're creating, and just
Speaker 2: some information about the assets on the other side of
Speaker 2: those balance sheets.
Speaker 1: One of the really interesting things here is, as you
Speaker 1: just mentioned, euro dollars basically mean that banks outside of
Speaker 1: the US can create dollars, which you would think would
Speaker 1: impinge on US monetary sovereignty. I mean it does, but
Speaker 1: at the same time, the existence of euro dollars combined
Speaker 1: with the dollar swaps, which you know, basically make them,
Speaker 1: as you were saying, a more attractive product to people
Speaker 1: to use, has solidified the dollar's role in the global
Speaker 1: financial system, like it has helped the dollar achieve and
Speaker 1: maintain reserve status. So, oh, you're shaking your head.
Speaker 2: Okay, yeah, I think it's not it's it's definitely that's
Speaker 2: conventional wisdom.
Speaker 1: Okay, all right, So there's nothing wrong with the I'm
Speaker 1: just to be conventional. But the question I was going
Speaker 1: to ask is if you had additional oversight of the market,
Speaker 1: would that start to dent the dollar's role given that
Speaker 1: there are concerns over you know, the US going too
Speaker 1: far on sanctions and things like that.
Speaker 2: I think you're asking a very important question, and I
Speaker 2: want to try to unpack it a little bit because
Speaker 2: when I was calling conventional wisdom, I think jumbles up
Speaker 2: a lot of issues and it's understandable that they got
Speaker 2: jumbled up. But really to explain what the stakes are
Speaker 2: of the basil four type of response I was just describing,
Speaker 2: we really have to unjumple them. So those first, there's
Speaker 2: the role of the dollar as a reserve currency. This
Speaker 2: is really quite distinct from euro dollars, which are the
Speaker 2: creation of US dollar money offshore by offshore financial situtions.
Speaker 2: We're going to connect it back a little bit, but
Speaker 2: the dollar's roles of reserve currency. What that's directly about
Speaker 2: is the fact that foreign central banks hold treasury securities
Speaker 2: as their reserve assets. It's not about using the dollar
Speaker 2: to transact or to finance trade, although those are also related.
Speaker 2: It's about the fact that the Chinese, for example, have
Speaker 2: huge reserves and they have to invest those reserves, and
Speaker 2: they have chosen to invest a very large percentage of
Speaker 2: them in treasuries. So dollar as reserve currency means foreign
Speaker 2: central banks hold reserves in treasuries, and they have chosen
Speaker 2: treasuries for lots of reasons, having very little to do
Speaker 2: with certainly whether they're their domestic financial institutions have the
Speaker 2: ability to create dollar deposit liabilities versus have to hold
Speaker 2: one to one balances with US banks. But also even
Speaker 2: that has little to do with whether dollars are being
Speaker 2: used to finance trade or settle international transactions. If you
Speaker 2: are a central bank and you have a very very
Speaker 2: large amount of reserves, let's say a couple trillion dollars,
Speaker 2: what assets are you going to put it in? And
Speaker 2: the choice to invest in treasuries has a lot more
Speaker 2: to do with US economic hegemony and the sheer, enormous
Speaker 2: quantity of US treasureies, then it has to do with
Speaker 2: what currency is being used to globally trade. So China,
Speaker 2: for example, has you know, historically held lots of US treasuries.
Speaker 2: It's really hard to think that it has anything to
Speaker 2: do with the euro dollar market, which is really not
Speaker 2: something that is benefiting in any meaningful sense the Chinese.
Speaker 2: What does relate to this sort of dollar as a
Speaker 2: you know, reserve currency for foreign central banks is the
Speaker 2: liquidity of treasury markets, of course, and one reason why
Speaker 2: you know, Saudi's or the Chinese would want to hold
Speaker 2: their reserves in treasuries is that they can bind sell
Speaker 2: very very easily with very low cost. That is a
Speaker 2: shadow banking story in part about the creation of the
Speaker 2: repo market and treasury repo which is a way to
Speaker 2: subsidize liquidity and treasury markets. But that's not a euro
Speaker 2: dollar shadow banking story. That the repo shadow banking story. Okay,
Speaker 2: So the first point is if you change the rules
Speaker 2: on how banks in Japan and London hold dollar balances
Speaker 2: and you make them fully reserved. Is China going to
Speaker 2: decide they want to hold euros instead of treasuries. That's
Speaker 2: I find really really sort of hard to substantially. It
Speaker 2: just doesn't really connect. So does that mean it has
Speaker 2: nothing to do with it? No, So the global dollar
Speaker 2: is more than just a reserve currency. It's also a
Speaker 2: currency of international trade and international finance. And so there's
Speaker 2: lots of trade between third countries that doesn't involve the
Speaker 2: United States where they use dollars to transact. That's the
Speaker 2: means of exchange. And because that's the means of exchange,
Speaker 2: it's also the lending currency associated with financing that exchange.
Speaker 2: And so we have this dollar financial system that's quite
Speaker 2: a bit distinct from dollars reserve currency. You know, Chinese
Speaker 2: Central Bank wants to hold treasuries, has a bunch of
Speaker 2: reasons for that, totally different calculus for why Indian conglomerate
Speaker 2: wants to sell its products to South American country in dollars.
Speaker 2: Different calculus. And with that second calculus, the euro dollars
Speaker 2: fit in a bit more, a bit more, because what's
Speaker 2: going on there is the Indian company has a bank,
Speaker 2: and the South American company has a bank, and in
Speaker 2: all likelihood their primary banks are not US based, and
Speaker 2: those banks would like to be able to create dollars,
Speaker 2: lend them in dollars, and not have to look to
Speaker 2: US banks for that liquidity. And so what the urinal
Speaker 2: system is really doing is cutting foreign financial institutions into
Speaker 2: the profits of dollars seniorage. They're giving them a piece
Speaker 2: of the action, and they're giving them a reason to
Speaker 2: want to be in the dollar business. And the way
Speaker 2: the whole thing got going initially was a lot of
Speaker 2: London banks wanted to get into the dollar business and
Speaker 2: we let them in basically, and that makes them evangelists
Speaker 2: for dollar based finance, as opposed to constantly trying to
Speaker 2: say to their clients, you know what, let's do this
Speaker 2: deal in pounds, because we create pounds, and if we
Speaker 2: had to do this deal in dollars, then we're gonna
Speaker 2: have to go borrow from City Group the dollars that
Speaker 2: we need because we can't just create them ourselves. And
Speaker 2: there's not this whole euro dollar market for us. We
Speaker 2: got to go to the domestic US dollar market, and
Speaker 2: so we would have all these foreign financial institutions trying
Speaker 2: to suggest other currencies for international trade and financing and
Speaker 2: not being as gung ho about the dollar, which is
Speaker 2: not to say that they would necessarily succeed in convincing
Speaker 2: the vast majority of their clients to change currencies. There's
Speaker 2: a lot of reasons why you would just you know,
Speaker 2: open up a bank account with a US based bank
Speaker 2: shift your business there. At the same time, the US
Speaker 2: has gotten very far in embedding and entrenching the dollar
Speaker 2: by building this coalition of global financial institutions that all
Speaker 2: are able to profit and benefit off of being in
Speaker 2: the dollar, as opposed to trying to keep all of
Speaker 2: those benefits onshore for US based banks.
Speaker 1: So, just to further understand this point with a concrete example,
Speaker 1: one thing that's gotten attention recently is China building out
Speaker 1: a swap network, and I have seen that couched. As
Speaker 1: you know, China takes on the US dollar and that
Speaker 1: sort of thing. What do you think they're trying to
Speaker 1: do in that context?
Speaker 2: So, as it turns out, China swap lines are just
Speaker 2: totally different from the FED swap lines, and so the
Speaker 2: Chinese are interested in spreading use of the RMB. They
Speaker 2: want other countries to use the RMB in trade, especially
Speaker 2: with China. They would be thrilled if the Indian company
Speaker 2: wanted to sell to the South American company and denominated
Speaker 2: an RMB. It's swap lines, though, are not trying to
Speaker 2: achieve that in anything like the way that the FED
Speaker 2: swap lines are facilitating dollar money creation. The Chinese swap
Speaker 2: lines are basically a central bank lending program for indebted
Speaker 2: foreign governments, and so it's like World Bank or IMF loans,
Speaker 2: and so like a major borrower is Pakistan. Pakistan has
Speaker 2: had a swapline with the People's Bank of China.
Speaker 1: Sounds like an outcrop of Belton Road.
Speaker 2: It is an outcrop of Belton Road. It's exactly an
Speaker 2: outcrop of Belton Road. And in the US we would
Speaker 2: just never do that type of lending through our central bank.
Speaker 2: We did do something like that for Mexico in nineteen
Speaker 2: ninety five twenty billion dollar loan that came from the
Speaker 2: Treasury Department. That's like what the PBOC is doing, and
Speaker 2: they might have some sort of regulatory reasons. One thing
Speaker 2: that happens if you do it through your central bank
Speaker 2: is don't you don't report it? As sovereign lending to
Speaker 2: like the World Bank. So it's it's much harder for
Speaker 2: international observers to keep track of how much Pakistan and
Speaker 2: Mongolia and these various recipients of PBOC swap line lending,
Speaker 2: how much they are actually occurring. It's less reported than
Speaker 2: maybe if the Chinese did it in a more official channel.
Speaker 2: But it's nothing like what the FED swap lines are.
Speaker 2: There's over thirty billion dollars right now of PBOC swap
Speaker 2: line outstanding. There's like basically zero of the FED swap lines.
Speaker 2: It's you know, the PBOC is like an ongoing lending program.
Speaker 1: Got it.
Speaker 2: It's structured to look like it's not, but it is.
Speaker 2: That's what it is.
Speaker 1: So the other thing I wanted to ask is you
Speaker 1: compare the size of the euro dollar market to tether
Speaker 1: basically throughout the podcast to describe how it's growing. Are
Speaker 1: stable coins the new euro dollar? I mean they kind
Speaker 1: of serve they seem to serve a similar purpose, and
Speaker 1: they seem to be similar things in the sense that
Speaker 1: their dollar denominated liabilities.
Speaker 2: Stable coins definitely have the potential to be the new
Speaker 2: euro dollar. Tether in particular, has a lot of Euro
Speaker 2: dollar flavor to it, but there are really important differences.
Speaker 2: One is that tether is not being used to finance
Speaker 2: or settle international trade. The Indian company are not selling
Speaker 2: to South American buyers or vice versa using tether. That's
Speaker 2: a Euro dollar system is tied to the real economy
Speaker 2: and real economic activity, and up until this point, the
Speaker 2: cryptocurrency space is very much looking at itself, and so
Speaker 2: tethers are used primarily to buy cryptocurrency, not to facilitate
Speaker 2: real economic activity, or they're used to conduct illicit transactions
Speaker 2: that are difficult to conduct in the FIAT regulated system.
Speaker 2: I did air quotes, but that doesn't come across in
Speaker 2: this media. That said, tether has gotten huge and it
Speaker 2: is exploiting the same sort of regulatory loophole if the
Speaker 2: year dollar system is exploiting. The tether balances have a
Speaker 2: very similar economic status to the Euro dollar balances. And
Speaker 2: one could imagine, insofar as tether is legitimated in some
Speaker 2: sense and it takes on greater scale, that it could
Speaker 2: expand its role and sort of jump over. You get
Speaker 2: out of just the crypto ecosystem and get into the
Speaker 2: real economic activity and be a real competitor with other
Speaker 2: dollar money forms. It certainly is a dollar money form,
Speaker 2: and it could be a it could be a competitor
Speaker 2: in certain transactions for certain purposes.
Speaker 1: So there is a sense of multilateralism at play with
Speaker 1: the entire year, the development of the eurodollar market, certainly
Speaker 1: and the swap lines. And I guess I'm wondering, with
Speaker 1: the new Trump administration coming in, is there any sense
Speaker 1: that those swap lines could could be maybe not as
Speaker 1: reliable as they were under previous administrations.
Speaker 2: Absolutely, and I think this is something that's probably not
Speaker 2: getting talked about. The whole swap line based euro dollar
Speaker 2: system is very much a product of a particular geopolitical
Speaker 2: diplomatic arrangement between the United States and a variety of
Speaker 2: allies and partners that involves a certain orientation to those
Speaker 2: allies and partners, where the US is basically making an
Speaker 2: ongoing commitment over a long period of time that it
Speaker 2: will be there to provide in essence, discount window like
Speaker 2: backing to the extent that the US is incapable of
Speaker 2: making those types of long term commitments or everything is
Speaker 2: going to be hashed out on a case by case basis.
Speaker 2: And that's the new sort of international multilateral paradigm that's
Speaker 2: deeply destabilizing for the year dollar market, and to the
Speaker 2: extent questions would be raised about whether certain countries would
Speaker 2: be able to actually draw on their swap lines that
Speaker 2: could lead to runs and panics, just in the way
Speaker 2: that in nineteen thirty two and nineteen thirty three there
Speaker 2: were runs and panics throughout the US banking system, in
Speaker 2: part because he wasn't clear the extent to which the
Speaker 2: Federal Reserve was actually going to be there with discount
Speaker 2: window lending to backstop those entities.
Speaker 1: I think we've learned a lot more about the euro
Speaker 1: dollar market, including why it is not the euro dollar
Speaker 1: exchange rate. Do you feel like, no that I get
Speaker 1: that that's been hammered into your ear?
Speaker 2: Ye know that, I know.
Speaker 3: I knew that before that.
Speaker 1: I do you have admitted to not knowing that at
Speaker 1: one point I didn't know that? Yeah, Okay. Lots More
Speaker 1: is produced by Carmen Rodriguez and Dashell Bennett, with help
Speaker 1: from Moses onom and Cal Brooks.
Speaker 3: Our sound engineer is Blake Maples. Sage Bouman is the
Speaker 3: head of Bloomberg Podcasts.
Speaker 1: Please rate, review, and subscribe to Odd Lots and lots
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