WEBVTT - Here Are the Biggest Problems Facing the Fed Right Now 0:00:11.080 --> 0:00:14.240 Hello, and welcome to another episode of the Odd Thoughts podcast. 0:00:14.320 --> 0:00:18.360 I'm Tracy Alloway. My co host Joe Wisenthal is away, 0:00:18.640 --> 0:00:20.680 and if I could just begin the show with a 0:00:20.720 --> 0:00:24.400 small disclaimer, which is that apparently I have broken my 0:00:24.440 --> 0:00:27.159 foot in three different places. So if I sound a 0:00:27.160 --> 0:00:31.000 little bit distracted today, that is why. Um Now, speaking 0:00:31.080 --> 0:00:34.920 of difficult situations, you all know are all Thoughts listeners 0:00:35.000 --> 0:00:39.280 are aware that the debt ceiling drama continues in the States. 0:00:39.920 --> 0:00:42.960 Joe and I just recorded an episode on the Mint 0:00:43.040 --> 0:00:45.760 the coin debate, which is one idea of how to 0:00:45.960 --> 0:00:49.280 bypass the debt limit on a temporary basis at least. 0:00:49.720 --> 0:00:53.160 But I think it's fair to say that there are 0:00:53.280 --> 0:00:56.760 a lot of challenges out there at the moment, especially 0:00:57.120 --> 0:01:00.800 for the Federal Reserve the Central Bank. So not only 0:01:00.840 --> 0:01:05.040 are they still trying to navigate an unprecedented economic cycle 0:01:05.240 --> 0:01:09.240 in the wake of the global pandemic, but they're also 0:01:09.360 --> 0:01:13.160 now having to deal with higher inflation to decide whether 0:01:13.240 --> 0:01:16.400 or not it is indeed transitory. And meanwhile they are 0:01:16.440 --> 0:01:20.960 also facing the fallout from what's going on in d C. 0:01:21.280 --> 0:01:24.959 So every time there is the sort of debt ceiling brinkmanship, 0:01:25.400 --> 0:01:29.559 we generally see some feed through into the treasury market, 0:01:29.680 --> 0:01:33.000 you know, money market funds stop buying up short term 0:01:33.120 --> 0:01:36.600 bills around the date, the so called drop dead date 0:01:37.040 --> 0:01:39.520 that the US is actually supposed to run out of money, 0:01:39.520 --> 0:01:41.560 and the FED has to figure out all these different 0:01:41.600 --> 0:01:44.720 ways to try to keep things going along with the 0:01:44.760 --> 0:01:48.320 treasury while the politicians do get out. Um, so there 0:01:48.360 --> 0:01:50.280 was a lot going on in the FED. I haven't 0:01:50.320 --> 0:01:53.559 even mentioned the insider trading scandal, but that of course 0:01:53.640 --> 0:01:55.960 is an issue as well. Suffice it to say, the 0:01:56.000 --> 0:01:59.760 Central Bank faces many, many challenges, and today I am 0:02:00.120 --> 0:02:01.840 very happy to say we are going to be speaking 0:02:01.880 --> 0:02:05.640 with the perfect person to discuss some of those issues. 0:02:05.720 --> 0:02:08.360 It's someone who actually used to work at the FED 0:02:08.480 --> 0:02:11.959 as a trader, and he runs a blog right now 0:02:12.160 --> 0:02:15.400 called fed Guy, and it's one of my favorite reads. 0:02:15.440 --> 0:02:17.520 I highly suggest you check it out if you haven't 0:02:17.560 --> 0:02:22.200 been reading it already. Joseph Wang, Welcome to the show. Hi, Tracy, 0:02:22.360 --> 0:02:23.840 thanks so much for in biding me. I'm through it 0:02:23.919 --> 0:02:26.560 to be here. Oh, thank you so much for coming on. Um, 0:02:26.639 --> 0:02:28.399 Joe and I have wanted to get you on for 0:02:28.440 --> 0:02:30.919 a long time, so I'm happy you could make it 0:02:31.840 --> 0:02:36.080 maybe just to begin with, could you describe your background 0:02:36.160 --> 0:02:39.120 at the FED? What exactly where are you doing there? Sure, 0:02:39.160 --> 0:02:41.240 I worked on the Open Markets desk at the New 0:02:41.280 --> 0:02:44.399 York FED, and so what the open market that's does. 0:02:44.440 --> 0:02:48.480 It's basically the FEDS trading desks, so we conduct operations UM. 0:02:48.600 --> 0:02:50.919 So all the QUI O, the REPO operations are done 0:02:50.960 --> 0:02:53.960 by the desk. I focus on money markets, so I 0:02:54.040 --> 0:02:57.120 run the repo operations, and I studied the banking system. 0:02:57.560 --> 0:02:59.160 A lot of my work has to do with setting 0:02:59.200 --> 0:03:02.560 how the financial system works, money market funds, just the 0:03:02.560 --> 0:03:05.840 plumbing of the system basically. So when we have something 0:03:05.880 --> 0:03:09.880 like a debt ceiling crisis, do you start getting flashbacks 0:03:09.880 --> 0:03:13.359 to previous episodes. Well, I think one of the main 0:03:13.400 --> 0:03:15.959 mechanisms of the dead ceiling does impact the markets is 0:03:16.000 --> 0:03:19.240 through the money markets. So yes, that's probably the direct 0:03:19.240 --> 0:03:21.920 way that the death ceiling impacts UM. And you can 0:03:21.960 --> 0:03:23.720 see it right now. Actually, if you look at the 0:03:23.800 --> 0:03:26.239 short term builder, if you can already see bills that 0:03:26.360 --> 0:03:29.720 mature around the job dead date are selling off quite 0:03:29.720 --> 0:03:32.600 a bit. So usually you see market impacts first the 0:03:32.639 --> 0:03:34.840 money market sector when it comes to the debt ceiling. 0:03:35.760 --> 0:03:38.680 So how do you think money markets and I guess 0:03:38.720 --> 0:03:43.320 the wider treasury market should feel about debt ceilings and 0:03:43.400 --> 0:03:47.080 this kind of political brinkmanship. And the reason I asked 0:03:47.120 --> 0:03:49.440 that is because you know, we we do tend to 0:03:49.480 --> 0:03:53.360 see these bouts of debt ceiling drama every once in 0:03:53.400 --> 0:03:55.680 a while, or at least you know, in recent years, 0:03:55.720 --> 0:03:58.640 we've seen them every once in a while. But on 0:03:58.680 --> 0:04:01.040 the other hand, you know, when it gets really bad, 0:04:01.120 --> 0:04:04.640 we tend to see treasuries rally because people go into 0:04:05.040 --> 0:04:07.960 safe haven assets, and treasuries are still considered that even 0:04:08.000 --> 0:04:11.120 if the cause of market turmoil is because of the 0:04:11.200 --> 0:04:14.080 US itself, which is kind of ironic, But how do 0:04:14.120 --> 0:04:17.599 you think treasuries feel about these sorts of issues and 0:04:17.760 --> 0:04:22.880 has it evolved in recent years? So you're exactly right, 0:04:23.200 --> 0:04:25.720 And I think that the way that I would think 0:04:25.760 --> 0:04:28.120 about this is that I think overall, of course, the 0:04:28.160 --> 0:04:31.760 investment community understands that this is a passing thing. The U. S. 0:04:31.800 --> 0:04:33.919 Treasury has a printing press, right, so they can always 0:04:34.000 --> 0:04:37.479 make their obligations. But on a more nuts on both sides, 0:04:37.680 --> 0:04:40.520 there are classes of investors that are not able or 0:04:40.640 --> 0:04:44.120 constrained in their holdings of things that are defaulted, most 0:04:44.160 --> 0:04:46.559 notably the four point five true and dollar money market 0:04:46.600 --> 0:04:50.640 fund complex. So under the regulations, they are highly constrained 0:04:50.720 --> 0:04:53.840 in holding defaulted securities, and they also don't want they 0:04:54.320 --> 0:04:55.640 don't want to be able to They want to be 0:04:55.680 --> 0:04:58.200 able to tell their clients when they clients read about 0:04:58.200 --> 0:05:01.000 the dead selling on the US that you know, we're 0:05:01.040 --> 0:05:03.320 not exposed to this at all. So even though I 0:05:03.320 --> 0:05:06.080 think the investment community understands that this is the passing thing, 0:05:06.400 --> 0:05:08.760 there are mandate constraints that come into play, and that's 0:05:08.760 --> 0:05:11.000 why you still actually see sell offs in the in 0:05:11.040 --> 0:05:15.040 the short term turchy markets. Addition, I think that we've 0:05:15.080 --> 0:05:16.960 been through the death seeing a few times over the 0:05:17.000 --> 0:05:20.040 past decade, and what we can learn from a lot 0:05:20.080 --> 0:05:23.400 of public documents that were either disclosed by the FED 0:05:23.560 --> 0:05:26.720 or through subpoenas that the official sector actually has a 0:05:27.080 --> 0:05:29.640 lot of plans just just to avoid and you fall 0:05:29.680 --> 0:05:32.800 out in the trojan market. So it would be I 0:05:32.839 --> 0:05:35.440 think reasonable to not for the trogury market to not 0:05:35.520 --> 0:05:37.760 be too much afraid of the dead sailing um. But 0:05:37.880 --> 0:05:41.760 a lot of these backup plans do have economic impacts, 0:05:41.880 --> 0:05:43.760 and so it's not in reasonable for the troges to 0:05:43.760 --> 0:05:47.000 actually rally in that context. Well, so one of the 0:05:47.080 --> 0:05:50.359 things I want to ask you is how much the 0:05:50.560 --> 0:05:53.680 r r P, the reverse repot program might make a 0:05:53.720 --> 0:05:56.880 difference this time around. So you know, we know that 0:05:56.960 --> 0:06:00.320 the Fed has been running this UM. Recently, they they 0:06:00.480 --> 0:06:03.839 upped the amount that they could take. I can't remember 0:06:03.880 --> 0:06:08.000 what it was. What the cap is now, do you remember? Yeah, 0:06:08.000 --> 0:06:11.080 it's a hun sixty billion per counterparty. So earlier in 0:06:11.120 --> 0:06:12.760 the year it was thirty billion, and then was up 0:06:12.760 --> 0:06:15.239 to eighty and now it's too un sixty But in practice, though, 0:06:15.400 --> 0:06:17.920 I would just think a bit as a full lotment facility, 0:06:17.960 --> 0:06:21.039 So there really is no limit. So one of the 0:06:21.080 --> 0:06:25.960 reasons they've raised it is in preparation, presumably for money 0:06:25.960 --> 0:06:28.600 market funds having to move into this thing because they 0:06:28.640 --> 0:06:31.640 have to avoid bills or they're unable to buy bills 0:06:31.680 --> 0:06:34.680 because Treasury can't issue them. UM. So how much does 0:06:34.720 --> 0:06:37.520 that help in a scenario like this? I think it 0:06:37.560 --> 0:06:41.400 helps tremendously in terms of rate control. So heading into 0:06:41.400 --> 0:06:43.120 the debt seling, one of the ways that the US 0:06:43.160 --> 0:06:47.080 Treasure prepares is by paying down bills. The way they 0:06:47.120 --> 0:06:49.680 manage your debt is they have they manage under a 0:06:49.760 --> 0:06:53.040 regular and predictable issue and schedule, and in practice that 0:06:53.080 --> 0:06:57.039 means maintaining coupon issuants as much as they can and 0:06:57.120 --> 0:06:59.920 meeting short term cash flows through bill issuants. If you 0:07:00.120 --> 0:07:02.880 think back last March when we suddenly had a lot 0:07:02.960 --> 0:07:06.240 of emergency COVID expenditures, what happened is that they met 0:07:06.240 --> 0:07:10.880 those expenditures issuing two trillion dollars in bills. Now in 0:07:10.920 --> 0:07:13.240 the same way as we're heading into dead selling and 0:07:13.280 --> 0:07:15.880 they're trying to maintain space on the dead selling, what 0:07:15.920 --> 0:07:18.160 they're doing is the reducing the amount of bill issuance 0:07:18.280 --> 0:07:21.520 to reduce the amount of dead outstanding. The main investors 0:07:21.600 --> 0:07:24.400 in the bill markets are the money market funds, and 0:07:24.480 --> 0:07:27.280 now that money market funds don't have as many bills 0:07:27.280 --> 0:07:29.560 to invest in, there's a buffer there where they can 0:07:29.640 --> 0:07:34.080 invest in the overnight reverse reple operation that helps us 0:07:34.080 --> 0:07:38.120 that maintain rates even as the amount investments available in 0:07:38.120 --> 0:07:41.760 the money market space decreases. Without the overnight report facility, 0:07:42.240 --> 0:07:45.400 I think short term rates would definitely be below zero. 0:07:46.360 --> 0:07:48.920 How much does it matter that the Fed now pays 0:07:49.040 --> 0:07:51.760 interest on our rps, because I remember that was a 0:07:51.800 --> 0:07:54.680 big deal in the summer when they started to do that, 0:07:54.720 --> 0:07:58.360 I think it was an extra five basis points UM 0:07:58.480 --> 0:08:01.600 something like that. Five base points, whereas previously they had 0:08:01.640 --> 0:08:04.960 been paying almost nothing. But why the need to do 0:08:05.000 --> 0:08:08.400 that and how much UM? Did that sort of change 0:08:08.440 --> 0:08:12.080 things for money market funds? So the reverse report facility 0:08:12.160 --> 0:08:14.280 is one of the fed's key tools for short term 0:08:14.320 --> 0:08:17.360 rate control. One of the Fed's goals or any center 0:08:17.440 --> 0:08:20.040 being skills, is to control rates. In the US, we 0:08:20.200 --> 0:08:24.640 choose the overnight rate. Before the crisis, it was primarily 0:08:24.680 --> 0:08:28.520 controlled by adjusting reserve balances within the banking system. After 0:08:28.560 --> 0:08:30.880 the crisis, now that we have so many more reserves, 0:08:30.960 --> 0:08:33.760 that's just not a feasible way. So in practice, the 0:08:33.800 --> 0:08:38.120 FED controls overnight rates by paying interest on the reverse 0:08:38.160 --> 0:08:42.920 report facility as basically boundary lower bound rate. That means 0:08:42.960 --> 0:08:45.280 that if you're an investor with sir M funds and 0:08:45.360 --> 0:08:47.920 you can always invest in the FED risk free at 0:08:47.920 --> 0:08:50.800 the RP rate, that puts a lower boundary of what's 0:08:50.800 --> 0:08:53.480 you're willing to accept in other investments. So if you 0:08:53.480 --> 0:08:56.000 can invest in the FED at five basis points, there's 0:08:56.040 --> 0:08:58.360 never a reason for you to buy to invest in 0:08:58.360 --> 0:09:01.400 any lower rates. And that's how that's basically a crucial 0:09:01.400 --> 0:09:05.960 tool to FED now uses to control interest rates. So 0:09:06.160 --> 0:09:08.400 let's say we get to I mean, I think the 0:09:08.400 --> 0:09:12.120 consensus right now is that the US um Treasury could 0:09:12.160 --> 0:09:15.920 run out of money sometime around mid October. I think 0:09:15.920 --> 0:09:19.120 the one day I've seen consistently come up as October eighteen. 0:09:19.800 --> 0:09:21.760 I should just say that we are recording this on 0:09:22.000 --> 0:09:25.520 October five. So maybe something changes between now and then. 0:09:25.640 --> 0:09:30.000 But if we get to October eighteenth and treasury runs 0:09:30.000 --> 0:09:33.320 out of money, the debt limit isn't raised, what would 0:09:33.360 --> 0:09:37.200 you expect to actually happen in the treasury market, in 0:09:37.320 --> 0:09:41.920 money markets, and how would the FED respond? So this 0:09:42.040 --> 0:09:45.280 scenario has happened quite a few times in the past decade, 0:09:45.640 --> 0:09:48.880 and from public documents have been disclosed, you can kind 0:09:48.880 --> 0:09:51.360 of see that the FED and Treasury have basically been 0:09:51.400 --> 0:09:54.440 wargaming this for for the past ten years. So the 0:09:54.480 --> 0:10:00.559 path forward is basically prioritization. But before before they actually 0:10:00.640 --> 0:10:05.040 drop that date, there's this is basically a political political process, 0:10:05.160 --> 0:10:08.360 right It's in negotiation within Congress, So the FED doesn't 0:10:08.360 --> 0:10:11.160 really want to step in or say anything, and administration 0:10:11.240 --> 0:10:15.679 has an incentive to maximize I guess fear to encourage 0:10:15.679 --> 0:10:19.160 a compromise, but when the drop dad it actually happens. 0:10:19.800 --> 0:10:23.680 What was discussed during was that the FED and what 0:10:23.760 --> 0:10:27.120 that was that the treasure would actually prioritize principal interest 0:10:27.160 --> 0:10:30.280 payments to U S tursury holders as well as Social Security. 0:10:30.840 --> 0:10:33.800 The thing is, when the trishy runs out of space 0:10:33.880 --> 0:10:36.000 under the debt limit, it still has a lot of 0:10:36.000 --> 0:10:39.240 cash receipts. If you look at data from the past 0:10:39.280 --> 0:10:42.520 five years, the US Treasure usually has cash receipts so 0:10:42.559 --> 0:10:45.800 about let's say eight hundred to nine hundred billion during 0:10:45.840 --> 0:10:49.280 the fourth quarter, so that's pretty steady. So they have 0:10:49.320 --> 0:10:51.600 a lot of money coming in, but they don't have 0:10:52.320 --> 0:10:55.800 enough money to pay everything that that's that's due. But 0:10:55.880 --> 0:10:58.959 if they only focus on paying principle and interest, that's 0:10:58.960 --> 0:11:02.280 about two in over a quarter four If they only 0:11:02.320 --> 0:11:05.880 paid social Security, that's probably three billion. So they have 0:11:06.120 --> 0:11:08.839 enough money to pay some bills but not everything. And 0:11:09.160 --> 0:11:12.880 was discussed in the past was just prioritization, So the 0:11:12.920 --> 0:11:16.120 trophy market will actually be fine. There will not be 0:11:16.160 --> 0:11:18.800 a default. And what would happen, I think is that 0:11:18.880 --> 0:11:21.800 once they hit the dead scene, sitting the absolute drop 0:11:21.840 --> 0:11:24.760 dead date in order to calm the markets. They will 0:11:24.800 --> 0:11:28.480 announce their plan to prioritize surgery payments and others, more 0:11:28.559 --> 0:11:33.680 humanitarian payments, social security, veterans benefits, food stamps, and so forth, 0:11:34.559 --> 0:11:37.880 and that should actually immediately calm the trgury market down 0:11:38.360 --> 0:11:40.280 because they know that to fault us off the table 0:11:40.559 --> 0:11:43.400 heading into it. You can already see the disruptions. Some 0:11:43.440 --> 0:11:46.160 short term bills are selling off. But I think once 0:11:46.200 --> 0:11:49.640 we red reach the drop dead date oddly enough, I 0:11:49.679 --> 0:11:53.920 think that prioritization announcement will solve everything. Of course, there 0:11:53.920 --> 0:11:57.600 would be some economic impact from this, because trojury does 0:11:57.640 --> 0:12:00.280 a lot of things. They also have pay it's to 0:12:00.520 --> 0:12:04.600 let's say, doctors, hospitals, farm studo comple companies, defense companies, 0:12:04.600 --> 0:12:08.440 and those companies will have some liquidity problems. But the 0:12:08.480 --> 0:12:11.640 trugy market I think will be fine, and maybe they 0:12:11.840 --> 0:12:16.320 rally as you mentioned before, understanding that when there's a 0:12:16.360 --> 0:12:19.480 liquidity crisis in the non financial sector, maybe if they're 0:12:19.480 --> 0:12:22.080 liquidity to get squeezed a bit, that affects the economy. 0:12:22.320 --> 0:12:25.120 Even if Turgury doesn't prioritize or they decide not to. 0:12:25.320 --> 0:12:29.120 Ultimately it's a political decision by by the Treasury and 0:12:29.200 --> 0:12:31.160 it's the one that makes a lot of sense. The 0:12:31.200 --> 0:12:33.480 FED also has a plan just to step in in 0:12:33.480 --> 0:12:36.640 case anything bad happens, just just as I mentioned a 0:12:36.720 --> 0:12:40.240 bit earlier. So a lot of investors have mandate restrictions 0:12:40.240 --> 0:12:43.960 where they can't hold treasures that defaulted. The biggest investor 0:12:44.120 --> 0:12:46.680 that has these meant these mended restrictions, these are legal, 0:12:46.720 --> 0:12:50.120 are the money market fund industry. So if by any 0:12:50.200 --> 0:12:53.280 chance there was like a technical default, a lot of 0:12:53.320 --> 0:12:55.680 the money market fund industries will not be able to 0:12:55.679 --> 0:12:59.640 hold treasuries. And that's a huge problem because they don't 0:12:59.679 --> 0:13:03.040 just church of those, but they are also enormous investors 0:13:03.080 --> 0:13:06.360 in the report market. The report market is a multi 0:13:06.400 --> 0:13:10.840 trillion dollar market for basically overnight secured loans, and a 0:13:10.880 --> 0:13:14.280 lot of those loans are in treasuries with tregary crap Claro. 0:13:14.440 --> 0:13:17.959 So if you're a money market fund based on sec data, 0:13:18.679 --> 0:13:22.800 probably investing a trillion dollars in turgy backed repot every 0:13:22.880 --> 0:13:27.000 day to the private sector, excluding FED, and because of 0:13:27.040 --> 0:13:30.880 your mandates, you're not able to accept or unwilling to 0:13:30.920 --> 0:13:34.920 accept without a waiver from your board of directors, default 0:13:34.960 --> 0:13:38.280 to Claro. So a lot of people who are getting 0:13:38.280 --> 0:13:41.439 funding in the report market using treasuries may lose access 0:13:41.440 --> 0:13:45.120 to that funding. And you know, that's classic bank one 0:13:45.160 --> 0:13:48.680 lefe scenario because if you're buying turguries on leverage using 0:13:48.720 --> 0:13:51.600 overnight money and suddenly you lose access to that financing, 0:13:52.000 --> 0:13:55.280 and that could be very disruptive um effectively, I think 0:13:55.559 --> 0:13:58.920 in practice of default and technical default would probably buy 0:13:59.000 --> 0:14:01.440 furycate the turgy mark between those that are at risk 0:14:01.640 --> 0:14:05.360 of not receiving principle and interest in the coming months 0:14:05.400 --> 0:14:08.320 and those that are safe let's say they're interest due 0:14:08.360 --> 0:14:10.760 dates are next year. If you do the math, the 0:14:10.800 --> 0:14:14.720 amount of treasuries outstanding that have principal and interest payments 0:14:14.760 --> 0:14:17.760 during the this quarter about a bit over a trillion. 0:14:18.200 --> 0:14:21.920 So there's potential for enormous disruption when let's say investors 0:14:21.960 --> 0:14:24.840 have to shuffle out of at risk treasuries into treasuries 0:14:24.880 --> 0:14:28.320 that are not at risk because this has never happened before. 0:14:28.680 --> 0:14:31.920 Oh in addition to that, once there's a technical to thought, 0:14:31.920 --> 0:14:34.400 I imagine the ratings agencies would have to follow up 0:14:34.840 --> 0:14:37.400 and to downgrade the US. And in addition to the 0:14:37.400 --> 0:14:40.760 money market events, there are also many classes of investors 0:14:40.800 --> 0:14:44.160 that have trouble holding securities that are not let's say 0:14:44.240 --> 0:14:47.360 rated triple A by two or more end agencies that 0:14:47.680 --> 0:14:50.120 maybe they have trouble holding U S reasuries. There's some 0:14:50.160 --> 0:14:53.200 discretion there depending on how their mandates are written. Um, 0:14:53.360 --> 0:14:55.800 so it could be a very destructive event. And that 0:14:56.040 --> 0:14:58.880 is something that has never happened before, and no one 0:14:58.920 --> 0:15:01.240 really knows how it will happen, but which is kind 0:15:01.240 --> 0:15:03.800 of why no one will allow it to happen. You 0:15:03.840 --> 0:15:07.560 have the Treasury prioritizing and if for whatever political reason, 0:15:07.600 --> 0:15:11.000 they don't prioritize P and I payments, The FED has 0:15:11.040 --> 0:15:15.080 discussed in October of what their game palent plan would be, 0:15:15.440 --> 0:15:19.040 and it's uh, they have the tools and the motivation 0:15:19.240 --> 0:15:22.080 to be able to fix everything. So but they would 0:15:22.080 --> 0:15:24.880 do is they would still accept the defaulted Collardo in 0:15:24.880 --> 0:15:27.160 their repo market operations, so they would be able to 0:15:27.160 --> 0:15:30.080 provide liquidity against that, even if the money market funds 0:15:30.160 --> 0:15:32.920 cannot or do not want to. They would be able 0:15:32.960 --> 0:15:36.600 to accept defaulted Collardo and their securities lending operations. So 0:15:36.960 --> 0:15:39.560 if you had let's say ann at risk treasury, you 0:15:39.600 --> 0:15:42.080 could stop it out with the FED. Or, of course, 0:15:42.160 --> 0:15:44.680 if that's not enough, they could just do outright purchase 0:15:45.320 --> 0:15:48.760 QWI style to purchase at risk Collardo. So you have 0:15:48.920 --> 0:15:51.200 these two tiers of plants from the triedurgy and from 0:15:51.200 --> 0:15:53.920 the FED to make sure basically the trigy market will 0:15:53.960 --> 0:15:58.320 be protected. And so going forward to Dassling, I don't 0:15:58.320 --> 0:16:01.480 really worry about anything because there's just this is something 0:16:01.520 --> 0:16:03.880 that happens so many times. And if you're in the market, 0:16:03.880 --> 0:16:06.720 you know that something that people wanticipate, risk that people 0:16:06.760 --> 0:16:09.520 anticipate usually don't materialize because they prepare for them. And 0:16:09.680 --> 0:16:27.440 I think this is one of those cases. So I 0:16:27.480 --> 0:16:29.440 mean I get the point that the FED is sort 0:16:29.480 --> 0:16:33.040 of prepared to step in as lender of last resort um, 0:16:33.080 --> 0:16:35.200 you know, if it really has to. And I get 0:16:35.240 --> 0:16:39.440 that it also attempts to be politically neutral, um, you 0:16:39.440 --> 0:16:42.680 know when these types of situations come up. But I'm wondering, like, 0:16:43.800 --> 0:16:46.920 what do people at the Central Bank actually think when 0:16:47.680 --> 0:16:50.160 politicians are arguing with each other And we sort of 0:16:50.280 --> 0:16:52.840 get to this point like you know, again, you were 0:16:52.880 --> 0:16:55.320 on the open markets desk, you were a trade or 0:16:55.440 --> 0:16:57.840 does everyone they're kind of like roll their eyes and 0:16:57.880 --> 0:17:00.040 go like, oh no, now we have to work on 0:17:00.040 --> 0:17:03.080 on a and plan B and how is this going 0:17:03.120 --> 0:17:05.000 to affect the market and do we have to factor 0:17:05.040 --> 0:17:08.880 this into our economic predictions and things like that, Like 0:17:09.640 --> 0:17:13.919 I guess, how do people actually think about it? So 0:17:14.000 --> 0:17:17.919 the Central Bank is a very conservative and organization. It's 0:17:17.960 --> 0:17:20.400 I think even more as a utility, so it wants 0:17:20.400 --> 0:17:22.560 to make sure the basic plumbing of the system works, 0:17:22.560 --> 0:17:25.159 and that includes the trojan market. Trades are basically a 0:17:25.200 --> 0:17:27.520 full of money or financial system. If you look at 0:17:27.560 --> 0:17:32.160 class de classified documents, this scenario of payment prioritization. There 0:17:32.160 --> 0:17:36.760 were simulations of this run in eleven and again, and 0:17:36.840 --> 0:17:39.920 I'm not I'm absolutely sure that it's being run right now. 0:17:40.440 --> 0:17:43.879 So people there, I think don't think they worry about 0:17:44.600 --> 0:17:46.920 the market impact, but it does create an enormous amount 0:17:46.920 --> 0:17:48.680 of work for them and so they don't like that. 0:17:49.400 --> 0:17:52.000 And I think that they understand that this is part 0:17:52.000 --> 0:17:56.760 of the political process. Though another declassified memo that features 0:17:57.040 --> 0:18:00.520 let's say someone speaking with chir Paul basically inside the 0:18:00.520 --> 0:18:03.080 fact that they understand that part of this is the 0:18:03.080 --> 0:18:06.640 political process, and it's also partly trying to put pressure 0:18:06.680 --> 0:18:09.720 on Congress to do something. So even though this probably 0:18:09.760 --> 0:18:13.040 won't happen, having this in the news. Talking about very 0:18:13.040 --> 0:18:18.520 bad scenarios is something that serves a purpose. So let's 0:18:18.600 --> 0:18:22.400 let's shift gears um slightly and talk about some other 0:18:23.000 --> 0:18:26.080 challenges that the Central Bank faces at the moment. And 0:18:26.160 --> 0:18:30.120 you know, there isn't a shortage of new things, new 0:18:30.119 --> 0:18:34.040 developments to actually wrap their heads around and address. But 0:18:34.280 --> 0:18:37.479 one of the interesting things that you brought up in 0:18:37.520 --> 0:18:40.959 a recent post on your blog was this notion of 0:18:41.280 --> 0:18:45.240 um wealth effects and maybe wealth effects that haven't necessarily 0:18:45.280 --> 0:18:48.560 been understood or taken into account by the Fed. Could 0:18:48.600 --> 0:18:52.080 you walk us through your thesis there. And you know, 0:18:52.119 --> 0:18:55.359 a lot of people tend to complain, well, some people 0:18:55.400 --> 0:19:01.679 complain about the fed's emergency liquidity feeding into risk assets 0:19:01.760 --> 0:19:05.200 like or financial assets like stocks and bonds, and making 0:19:05.359 --> 0:19:08.720 people who are already wealthy even richer. But you point 0:19:08.720 --> 0:19:12.040 out that not only is that happening, but there's also 0:19:12.080 --> 0:19:16.480 a sort of unaccounted for wealth effect through cryptocurrency. So 0:19:16.560 --> 0:19:20.840 could you maybe describe that? Sure? So, so, I think 0:19:20.880 --> 0:19:24.360 the labor market is a very confusing market to analyze 0:19:24.440 --> 0:19:27.280 right now, because you have lots of indications of tight 0:19:27.359 --> 0:19:30.760 labor market with you have help wanted signs everywhere. We're 0:19:30.840 --> 0:19:33.840 just going higher, and at the same time, the unemployment 0:19:33.920 --> 0:19:36.919 rate is still pretty elevated. So I think one of 0:19:36.920 --> 0:19:40.320 the reasons just thinking about this has to do with 0:19:40.359 --> 0:19:43.520 the wealth effect, and there are actually academic papers finding 0:19:43.560 --> 0:19:46.399 something similar and common sense, and I think you should 0:19:46.480 --> 0:19:49.480 understand that the more money you have, the less you 0:19:49.520 --> 0:19:52.119 need to work, the less you're motivated to search that 0:19:52.200 --> 0:19:55.040 you won't you're less willing to set uluer wages. And 0:19:55.119 --> 0:19:56.920 one of the things that has happened over these two 0:19:56.960 --> 0:20:00.440 years is that the wealth effect, basically the wealth people 0:20:00.520 --> 0:20:03.480 hold it has been supercharged. If you just look at 0:20:03.480 --> 0:20:07.119 residential real estate, it's up over the past two years, 0:20:07.280 --> 0:20:10.400 and a little bit over six of the Americans own 0:20:10.400 --> 0:20:13.200 a home, and that's your largest asset, so a lot 0:20:13.240 --> 0:20:15.600 of people have a lot more equity in their in 0:20:15.640 --> 0:20:18.920 their homes. If you own stocks, um, you know that's 0:20:18.960 --> 0:20:23.000 uh SMP is up over the past two years. When 0:20:23.000 --> 0:20:25.359 you look at FED data and you break it down, 0:20:25.960 --> 0:20:27.760 one of the things you notice is that you know 0:20:27.800 --> 0:20:30.600 what everyone says, it's true, it's really the rich people 0:20:30.640 --> 0:20:34.800 getting much much richer. However, because the wealth effect, the 0:20:35.080 --> 0:20:37.760 growth and asset value is so extreme this time around, 0:20:38.160 --> 0:20:41.120 if you were actually just top halfen wealth. You saw 0:20:41.280 --> 0:20:45.200 significant gains in your in your paper wealth, So that 0:20:45.280 --> 0:20:47.440 has to have an effect on whether or not you're 0:20:47.440 --> 0:20:49.760 willing to work and what wages you're willing to accept. 0:20:50.000 --> 0:20:52.480 And that's just what's what you see in official data. 0:20:53.040 --> 0:20:56.520 There is also an enormous wealth boom that you don't see, 0:20:56.680 --> 0:20:59.040 and that's in the cryptocurrency. Is you alluded to the 0:20:59.200 --> 0:21:03.240 cryptocurrency that they are, they exist on decentralized letters, so 0:21:03.280 --> 0:21:06.199 they don't show up anywhere in official data. But we 0:21:06.800 --> 0:21:10.320 see just from public data sources of where cryptocurrencies are 0:21:10.359 --> 0:21:14.000 treating and no. Cryptocurrencies have gone from basically nothing that 0:21:14.080 --> 0:21:16.560 a couple of years ago to two trillion dollars in 0:21:16.800 --> 0:21:21.880 total assets size. And we know Bitcoin and Ethereum are 0:21:22.119 --> 0:21:24.199 the most well known ones, but just behind them there 0:21:24.240 --> 0:21:27.440 are hundreds of these all coins that have also grown 0:21:27.440 --> 0:21:30.680 to billion dollar market caps, and none of this shows 0:21:30.720 --> 0:21:34.160 up an official data, but it's it's being held by 0:21:34.200 --> 0:21:38.879 by the general public, likely younger people. Enthusiasm for cryptocurrencies 0:21:39.000 --> 0:21:41.960 is palpable. If you look at coin based user data, 0:21:42.000 --> 0:21:44.879 it's just surging, and so that has to have an 0:21:44.920 --> 0:21:48.240 impact on the motivation of young people to work as well. 0:21:48.280 --> 0:21:51.080 If you can just stay at home and trade cryptocurrencies, 0:21:51.160 --> 0:21:53.240 or if you held a little bit of crypto um, 0:21:53.280 --> 0:21:56.200 then you you are a bit bothier than you were before. 0:21:56.280 --> 0:21:59.119 Maybe you're not as desperate for a job. Just anecdotally, 0:22:00.119 --> 0:22:02.399 I remember that I took a cab from l a 0:22:02.400 --> 0:22:05.120 airport from lax in my uper driver at the time. 0:22:05.160 --> 0:22:08.600 He was driving a ten year old camera and he 0:22:08.840 --> 0:22:13.560 was telling me that he put thirty dollars into bitcoin 0:22:13.880 --> 0:22:16.760 because bitcoin only goes off, and you know, he did 0:22:16.800 --> 0:22:20.240