Breaking Down Eurodollars - The Most Important, Least Understood Market in the World

Summary

In this webinar, experts delve into the complexities of the Eurodollar market, a vast, unregulated system overshadowing the US dollar. They discuss its origins, growth, and the inherent instability due to its fractional reserve nature. The conversation underscores the challenges in measuring the market's size and the implications of its dysfunction, like the 2007-2008 financial crisis. The panelists also address the current state of the system, the potential for a dollar value spike, and offer insights for investors, emphasizing the need for transparency and reform.

Takeaways

• 🌐 The Eurodollar market is a global system of US dollars held outside the United States and is considered a significant yet misunderstood part of the global financial system.
• 🏦 The Eurodollar system operates as a shadow banking system with minimal regulation, which allows for the creation of US dollar liabilities outside the direct control of the Federal Reserve.
• 💡 The US dollar's role as a reserve currency is shared with the Eurodollar system, which has practical implications for global finance, often functioning as the true reserve currency.
• 📉 The 2007-2008 Global Financial Crisis was largely a result of a global dollar shortage within the Eurodollar system, highlighting its interconnectedness with the traditional financial system.
• 📈 The size and scale of the Eurodollar market are immense and not well understood, which poses challenges for predicting its impact on global monetary policies and economic stability.
• 🚫 The Federal Reserve's influence over the Eurodollar system is limited due to its extraterritorial nature, leading to a lack of oversight and regulation.
• 💬 There is a contention that the US dollar's value could spike dramatically in the future, contrary to popular predictions of a falling dollar, due to the dynamics within the Eurodollar system.
• 🔍 The discussion suggests that the Eurodollar system's dysfunction could lead to deflation rather than inflation, affecting how investors and institutions should consider positioning their assets.
• 🔑 The key to understanding the Eurodollar system lies in recognizing it as a bottom-up, bank-centered system that contrasts with the top-down approach of the Federal Reserve.
• ⚠️ The potential instability of the Eurodollar system poses a significant risk to the global economy, and there is an ongoing debate about how to address or reform the system to prevent future crises.

Q & A

What is the Eurodollar market and why is it significant?

The Eurodollar market refers to US dollars deposited in banks outside the United States, particularly in Europe. It is significant because it operates as a large, unregulated system that effectively functions as a reserve currency for the global economy, often larger than the US dollar market itself.

How did the Eurodollar market originate?

The Eurodollar market originated in the 1950s post-World War II with the Marshall Plan, where the US financed the rebuilding of Europe, leading to dollars being deposited in European banks. It expanded in the 1960s and 70s, particularly due to financing needs for the Vietnam War and the desire to circumvent gold standard limitations.

Why is the Eurodollar system considered a 'black hole' or 'black space' in finance?

The Eurodollar system is considered a 'black hole' because it operates largely in the shadows, unregulated and with limited oversight. It has been unexplored and not well understood for decades, making it a mysterious and complex part of the global financial system.

What role does the Eurodollar system play in global finance?

The Eurodollar system plays a pivotal role in global finance by providing liquidity and facilitating international transactions. It allows banks to create liabilities predicated on US dollars, effectively acting as a global reserve currency and influencing monetary policies worldwide.

How does the Eurodollar system differ from the traditional US dollar system?

The traditional US dollar system is regulated by the Federal Reserve and is a top-down approach to monetary policy. In contrast, the Eurodollar system is a bottom-up, unregulated system that has grown organically and operates outside the direct control of the US authorities.

What are the implications of the Eurodollar system's size and lack of regulation?

The implications include potential systemic risks due to its large size and the lack of transparency and regulation. This can lead to financial instability, as seen in the 2007-2008 financial crisis, where a global dollar shortage originated from the Eurodollar system.

Why is the Eurodollar system often misunderstood or overlooked?

The Eurodollar system is often misunderstood or overlooked because it operates in complex, international banking networks and lacks clear regulatory oversight. Its effects are not always directly observable, and traditional economic education often does not cover its intricacies.

What was the role of the Eurodollar system in the 2007-2008 financial crisis?

The Eurodollar system played a central role in the 2007-2008 financial crisis by experiencing a significant dollar shortage. This shortage led to a credit crunch and asset liquidations, affecting global financial markets and economies.

How does the Eurodollar system impact the US dollar's value?

The Eurodollar system can impact the US dollar's value by influencing global demand for dollars. A shortage or surplus in the Eurodollar system can lead to fluctuations in the dollar's exchange rate, affecting international trade and capital flows.

What are the potential solutions or reforms discussed for the Eurodollar system?

Potential solutions or reforms discussed for the Eurodollar system include increasing transparency, introducing regulatory oversight, and potentially re-establishing a form of a gold standard to provide a stable anchor for the value of money. These reforms aim to reduce systemic risks and promote financial stability.

Outlines

00:00

🌐 Introduction to the Eurodollar Market Webinar

The video script introduces a webinar focusing on the Eurodollar market, described as one of the world's most important yet least understood financial systems. The host, Michael, welcomes the audience and instructs them on how to participate by unmuting, turning on video, and submitting questions through the Q&A section. The session's moderator, Michael A. Bolito, provides an overview of Black Works Group, an events and media company that sheds light on macro investing issues. The webinar features experts Jess Nidoran and Brent Johnson, who offer brief introductions to their backgrounds in wealth management and macroeconomic analysis, respectively. The discussion aims to cover the basics of the Eurodollar market, its significance as a reserve currency system, and its implications for global finance.

05:01

💵 The Misunderstood Eurodollar System

The speakers delve into the Eurodollar system, correcting the common misconception that it is merely US dollars deposited outside the United States. They explain that the Eurodollar system has evolved into a vast, unregulated network of international banks creating liabilities based on US dollars. Brent Johnson highlights the historical origins of the Eurodollar market, tracing it back to post-World War II financing and the Vietnam War. Jeff Snyder emphasizes the system's complexity, comparing it to a 'monetary black hole' that has been unexplored for decades. The discussion underscores the Eurodollar system's role as a practical reserve currency, overshadowing the US dollar in terms of global financial influence.

10:04

🌪️ The Unregulated Nature of the Eurodollar Market

The conversation explores the lack of regulation in the Eurodollar market, which has grown into a significant yet unsupervised financial system. Brent Johnson points out the market's tangled nature, with US dollars moving across regulated and unregulated spaces globally. Jeff Snyder likens the Eurodollar system to the first digital currency due to its reliance on ledger entries rather than physical currency. The speakers agree that the system's lack of oversight makes it challenging to understand and potentially unstable, especially in times of financial stress. They also discuss the fractional reserve system's vulnerability to credit contractions and the absence of a global regulatory body to address systemic issues.

15:06

📉 The Eurodollar System and the 2008 Financial Crisis

The discussion connects the Eurodollar system to the 2008 global financial crisis, with the speakers suggesting that the crisis was rooted in a global shortage of Eurodollars rather than the subprime mortgage market. They argue that the crisis exposed the system's lack of a central regulatory body capable of addressing a collapse in the unregulated offshore market. The speakers also touch on the geopolitical aspects of the US dollar's role as a global reserve currency and the challenges of managing a currency that serves both domestic and international economies.

20:06

🌉 Historical Context of the Eurodollar System

The speakers provide historical context to the Eurodollar system, discussing the Nixon administration's decision to price oil in dollars, which solidified the US dollar's role as a global reserve currency. They explore the system's development in the 1950s and 1960s, highlighting the US government's initial support for the Eurodollar market as a means to alleviate pressure on US gold reserves. The conversation also touches on the political and economic dynamics that have contributed to the Eurodollar system's growth and the challenges it poses to global financial stability.

25:07

🌐 The Global Impact of the Eurodollar System

The discussion highlights the global impact of the Eurodollar system, emphasizing its role in financing international trade and investment. The speakers note that the system's growth has been driven by the demand for US dollars in global transactions, which has led to the creation of a vast offshore market for dollar-denominated assets. They also discuss the system's potential to exacerbate economic imbalances and the challenges it poses to emerging markets, which have benefited from the influx of dollar liquidity but may also be vulnerable to its volatility.

30:08

💡 Defining the Eurodollar System

The speakers attempt to define the Eurodollar system, acknowledging the complexity and size of the market, which extends beyond simple deposits of US dollars in foreign banks. They describe how the system operates through a network of international banks creating liabilities based on US dollars, leading to a multiplier effect that amplifies the amount of money in the global economy. The conversation emphasizes the need for a clearer understanding of the Eurodollar system and its implications for financial stability.

35:08

📉 The Eurodollar System and Monetary Destruction

The discussion focuses on the concept of monetary destruction within the Eurodollar system, particularly in the context of the 2007-2008 financial crisis. The speakers argue that the crisis was not simply a result of the subprime mortgage market but rather a manifestation of a larger global dollar shortage. They discuss the Federal Reserve's response to the crisis, questioning whether the central bank's actions were effective in addressing the underlying issues of the Eurodollar system. The conversation also touches on the challenges of defining and measuring money in the modern financial system.

40:08

🏦 The Role of Central Banks in the Eurodollar System

The speakers explore the role of central banks in the Eurodollar system, particularly in the context of the 2007-2008 financial crisis. They discuss the Federal Reserve's efforts to provide liquidity to the system through dollar swaps and other measures, questioning the effectiveness of these actions in resolving the underlying issues. The conversation highlights the challenges faced by central banks in managing a global financial system that is both complex and largely unregulated.

45:10

🔍 The Inherent Instability of the Eurodollar System

The discussion concludes with an assessment of the Eurodollar system's inherent instability and the potential consequences of its failure. The speakers express skepticism about the sustainability of the current system and suggest that a significant reformation or even a complete overhaul may be necessary to address its structural flaws. They also offer insights into how investors might navigate the challenges posed by the Eurodollar system and the potential for a future crisis.

Keywords

💡Eurodollar

The term 'Eurodollar' refers to US dollars deposited in banks outside the United States, particularly in Europe. In the context of the video, it is discussed as part of a broader system that has evolved into a significant monetary market operating outside the direct control of the US Federal Reserve. The video emphasizes that the Eurodollar system is a major part of the global financial infrastructure, influencing international trade and lending, and is a key point of discussion among the panelists.

💡Reserve Currency

A 'reserve currency' is a foreign currency that is held in significant quantities by governments and institutions as part of their foreign exchange reserves. The US dollar is a prime example, as highlighted in the video, and serves as the world's primary reserve currency. The discussion points out that while the US dollar is considered a reserve currency, the actual functions of a reserve currency are largely undertaken by the Eurodollar system.

💡Fractional Reserve System

A 'fractional reserve system' is a banking practice where only a fraction of the money deposited is kept as reserves, while the rest is loaned out. This concept is important in the video as it underpins the discussion on how money is created and lends to the inherent instability of the banking system, especially in the context of the Eurodollar market which operates with minimal regulation.

💡Monetary Black Hole

The phrase 'monetary black hole' is used in the video to describe the Eurodollar system as an unregulated and unexplored area of finance that has been growing since the mid-20th century. It suggests a lack of transparency and understanding, which according to the speakers, makes the system potentially unstable and risky.

💡Global Financial Crisis (2007-2008)

The 'Global Financial Crisis' is a reference to the severe economic downturn that began in 2007 and lasted until approximately 2009. In the video, the crisis is linked to the dysfunction within the Eurodollar system, highlighting how a shortage of dollars in this system can have widespread economic repercussions.

💡Quantitative Easing

'Quantitative easing' is a monetary policy used by central banks to increase the money supply by purchasing financial assets. The video discusses how this policy has been used by the Federal Reserve to inject liquidity into the economy, but also raises questions about its effectiveness and the potential for it to mask underlying issues within the Eurodollar system.

💡Deflation

In the video, 'deflation' is discussed as a potential economic outcome, contrasting with common expectations of inflation. Deflation refers to a general decline in prices, often associated with an excess of supply over demand. The speakers suggest that the Eurodollar system could lead to a deflationary spiral due to its inherent instability.

💡Dollar Shortage

A 'dollar shortage' is a situation where there is an insufficient supply of US dollars in the global financial system. The video emphasizes that such shortages can lead to liquidity crises and are a significant concern within the Eurodollar system, affecting global markets and economic stability.

💡Shadow Banking

'Shadow banking' refers to credit intermediation involving entities and activities outside the regular banking system. The video discusses how the Eurodollar system includes significant shadow banking activities, which are not subject to the same regulations and oversight as traditional banking, contributing to its complexity and potential risk.

💡Plausible Deniability

The term 'plausible deniability' is used in the video to describe the approach taken by authorities towards the Eurodollar system, suggesting that they have chosen not to intervene or regulate it closely, perhaps due to a lack of understanding or because it serves some unstated purpose. This hands-off approach is critiqued as part of the reason for the system's instability.

Highlights

The euro dollar market is a crucial yet misunderstood global financial system.

The US dollar operates as a reserve currency, but the euro dollar system functions as a practical reserve currency for the world.

The euro dollar system developed post-World War II and has grown significantly since the 1950s.

The euro dollar is a misnomer, representing a broader banking system rather than just US dollars deposited outside the US.

The system is unregulated and lacks a central authority, making it challenging to oversee and understand.

The euro dollar market is considered a monetary black hole due to its unexplored nature for decades.

The system is a spiderweb of dollars around the world, with some regulated and some not.

The euro dollar system is the actual functional reserve currency, despite the US dollar's reserve currency designation.

The system's lack of regulation and oversight makes it a potential source of financial instability.

The 2008 financial crisis was a manifestation of the euro dollar system's issues, highlighting its global impact.

The euro dollar system's growth is essential for its stability; a contraction could lead to a financial collapse.

The system's complexity and lack of transparency make it difficult to regulate or even understand its true size and impact.

The global financial crisis was a result of a global dollar shortage within the euro dollar system.

The Federal Reserve's actions during crises are often too little too late due to the massive, unseen destruction of money in the shadow system.

The euro dollar system's dysfunction can lead to social and political consequences beyond just economic impacts.

The system may be unsustainable in the long term, with potential for a significant dollar value spike.

The future of the euro dollar system is uncertain, with possibilities ranging from reform to catastrophic collapse.

Investors should consider the euro dollar system's implications, positioning towards a potentially stronger US dollar.

Transcripts

in down Eurodollars

the most important least understood

market in the world this event is part

of our institutional access webinar

series I'd like to invite our speakers

to unmute their lines and turn on their

videos during the webinar please submit

your questions through the Q&A section

at the bottom of your screen

we'll save some time at the end of the

discussion to answer these the session

will be available on demand all of our

districts will receive an email once the

recording is live I'd now like to turn

the event over to Michael a bolito

co-founder of black works group Mike

please go ahead doing.and Hey hello

everyone thank you so much for joining

us today we've got a really special

episode of institutional and access I'm

very lucky to be joined by Jess Nidoran

Brent Johnson will introduce in just a

minute but first just a quick 20-second

overview on block works group though bwg

we are in events in media company that

shines a light on some of the most

interesting and relevant issues from a

macro investing standpoint today in

happier non-coated times we host a

series of live events and we also

produce a series of podcasts and

webinars which is what you're watching

right now so today's episode of

institutional access is all about the

euro dollar market or the euro dollar

system as our friend Jeff would say so

like I said before I'm very lucky to be

joined by some of the I say the world's

most leading experts on this particular

space so without much further ado I'd

like to introduce our two guests that

Jeff and Brent gentlemen if you wouldn't

mind just giving a quick 30 second

introduction for yourselves for the

audience okay sure I'll start my name is

Brent Johnson I have a wealth management

firm in San Francisco called Santiago

capital and I do a lot of work in the

macro space and the the dollar and the

euro dollar has been a focus of mine for

you know the last two or three years so

happy to be here and talk about it

I'm Jeff Snyder and with alhambra

investments a registered investment

advisor in Florida my job my role here

is to try to letter inform our portfolio

managers of what's going on that's just

in a macro context but of the financial

monetary context and I've spent a couple

of decades now researching following

down this rabbit hole of what we call

the euro dollar system which is really a

monetary black hole or black space

that's been unexplored for 40 50 years

for reasons I hope we get a chance to

get into but essentially it's it's a

sense it's a shadow money system that is

literally in the shadows excellent

thanks Jeff and that black hole day it's

it's a black hole so this is actually

going to be a 20 hour webinar as we were

joking of course I hope everyone's ready

for that no it's it's a really

interesting topic and we're going to do

our best to just condense some of the

most relevant points into the one hour

that we have today so thanks gentlemen

again for being here and without much

further ado let's dive in so there's

really a lot to cover here in the euro

dollar system I'd like to begin with

just a basic sort of glossary terms and

and one of the contentions that I think

both of you has made which is just

starting with the US dollar as a reserve

currency I think that's kind of the

general understanding but as both of you

have mentioned before the the US dollar

is kind of a reserve currency in name

alone and there's actually another

system which is the euro dollar system

that practically functions as a reserve

currency for the rest of the world so

there's a lot to break down there and

but I'd love to just start with

examining that contention that actually

the the US dollar is just one part of

the central reserve currency system and

there's a much more important and larger

euro dollar system so whichever one of

you starts wants to start to go with

that that'd be that'd be great

well first of all I mean the term euro

dollar itself is somewhat of a misnomer

it has a it has a traditional historical

use which was you know currency now US

dollars that were on deposit outside of

the United States and so it represented

with Jack what you're talking about

which was the US dollar as the reserve

currency but this euro dollar system

which is a more comprehensive bank

centred system that developed over the

decades since around 1955 or so that's

more encompassing and it's really it's

it's the system itself actually

undertakes the roles of the reserve

currency even though the US

is preserved as the overall denomination

so we call it the US dollar but this is

the actual functions of that reserve

currency the monetary functions of that

reserve currency are provided by this

overall system which is you know far

more than u.s. dollars on deposits and

banks around the world yeah and I think

I would add that in you know the origins

of the the euro dollar market are a

little bit as you know maybe not quite

as murky as the market itself but it's

similar you know it's started back in

the 50s post-world War two with the you

know the Marshall Plan you know the

United States financing the rebuilding

of Europe and you know getting dollars

into Europe and so then you had dollars

in Europe and and that's kind of where

the name euro dollar came from it

continued through the 60s and 70s and

you know in the 60s and 70s you know

Nixon wanted to finance the Vietnam War

but he didn't want to do it through

French banks so we started opening up

American banks and in Asia to help

finance the Vietnam War and so that kind

of contributed to it as well and it

really you know I think sometimes people

here euro dollar and they confuse it

with euros which which should not be the

case again the thing that makes it such

a mess in my opinion and I'm not sure if

Jeff agrees with this or not but you

know it's it is two systems but they're

interwined and there's some fingers that

kind of stretch across and in both

systems it is US dollars and only

there's only one or there's only two

entities the the Federal Reserve and the

Treasury that can supply dollars but

half of this market or more than half of

this market or the euro dollar market

the euro dollar half of the overall

dollar market has no regulation it has

no entity out there who you know

oversees it so to speak so it's really

kind of becomes a spiderweb of dollars

around the world some of which are

regulated and some of which are not and

it's a it becomes incredibly hard to

decipher all of it just because there is

no regulation anyway all the I'll leave

it at that for now well Brad I think

that's a really good point especially

you know people are taught and we're

told to conceive it hey it's the

Treasury Department the Federal Reserve

that's the only place that US dollars

can come from and there

we know what are we talking about I used

to exactly look you the Fed can print

Federal Reserve notes the physical paper

that have numbers and all the symbols on

and whatever but as a bank and as your

if you're a bank and I'm a bank we can

create as many IOUs that say that we

have dollars as we want and so it's it's

a step removed from any actual currency

system in many ways it's a quasi

currency system of one that's entirely

ledger money in fact it's one of the

reason we talk about the origin story

then one of the reasons the euro dollar

market took off and specially the 1960s

was because it was freed from the the

the need to ship gold bullion around all

parts of the world it was then free from

the need to ship actual physical

currency around it was simply you know

with the revolution of technology the

immediacy of transactions as long as our

my computer screen the numbers on my

screen match the numbers on your screen

we've got money we've got dollars we've

got some something's going on here this

monetary in nature and financial in

nature so in many ways it basically got

added from the physical supply of

currency and becomes a David you could

argue it was the first digital currency

the first global digital currency

because it's used all over the world

yeah exactly

there's nothing new I mean I mean it

really was and it still is probably

other than the you know Bitcoin and the

digital asset market right now I would

argue that the euro dollar market is is

was and still is sort of the wild wild

west because there's sort of rules

around it but there's no agency that can

actually enforce it so it's just kind of

a a mess lack of a better word yeah and

I you know that's that's a great point

too because you know we're all taught to

believe that the rules are always given

top down like central bank regulators

central bank's whatever they give the

rules to top down and the euro dollar

system its exact opposite the rule there

are no but they're bottom up it's how

banks construct their balance sheets in

individual cases that governs what those

balance sheets do in the aggregate so

it's not a central bank dictating to all

the banks it's all the individuals

individual

the banks within the system operating

within the system that use their own set

of rules to dictate how they participate

in it which makes for as you pointed out

a far Messier situation especially when

you can't really get a handle on what's

going wrong or if something's going

wrong what is it you know when you have

a bunch of individuals working yeah and

I think we're gonna get into this later

so I won't go into super detail right

now but the reason it's a problem in my

opinion is because of the design of the

monetary system itself the design of the

monetary system is a fractional reserve

system which means money gets loaned

into existence and that's fine as long

as expansion continues and the extension

of credit which creates more money

continues the problem is that in the

fractional reserve system when it starts

to go the other way and you get a

contraction you have a very high

likelihood of contagion and where one

loan kind of collapses on to another

loan and you go back the other way and

in that environment in a fractional

reserve system you need a central bank

or a lender of last resort to kind of

come in and rikka lateral eyes the

system but because there is no entity

outside the United States that can

create dollars for lack of a better word

or new collateral there is no regulator

or no entity to help stem the problem

from a collapse if and when it comes now

you there there's been a number of you

know little patches here and there but

there is no systemic way to actually

solve the problem or there's no current

way there's no current function there's

no current mechanism by which they can

solve this problem but this actually

happened I mean that you basically I

just described 2008 it's exactly what

happened in 2000 it's why we had a

global financial crisis in the firt and

that's why it was a global financial

crisis yes because we're talking about a

global currency therefore as it is it

fell back in on itself you know with no

nothing to stop that process from taking

place contagion was ever even sprayed

all over the world it didn't know parts

of the world were unaffected by what

happened in 2008 because it's very

little to do with subprime mortgages it

was about a global

shortage in the Eurodollar system which

the Federal Reserve the u.s. trade

whatever they're just not connected to

it and therefore you know even if they

wanted to they believe their you know

their their mandate ends at the border

of the United States and therefore

whatever happens in dollar terms outside

the United States is somebody else's

problem you know but that's the point

you know there's this this this

unofficial black space where nobody even

knows who's responsible for it let alone

what goes on in it right yeah where we

get too deep into the problems I just

want to make sure that everyone's on a

level we're talking about here so it

seems like what we're describing is two

distinct monetary systems right there's

the traditional kind of top-down

monetary system where the US dollar is

the federal reserve currency and it's

regulated by central banks right which

is the one that we all kind of know and

think about existing but it seems like

you're both describing is another

unregulated almost emergent monetary

system right which is this euro dollar

system which is actually created by

international banks right that are fun

accreting funding sources in u.s.

dollars just to get on a level to make

sure that everyone in the audience is on

the same page I'd like to start with the

traditional system that people think

about existing today

right which is top-down and governed by

the Fed so could we just start with a

brief description of what that monetary

system looks like why we have a global

reserve currency in the first place and

I think by outlining it that then we can

get to this euro dollar system and how

it's different well I you know I don't

think there's actually two different

system I think there's an intellectual

framework that we're all taught in

college and gets reinforced from the

media that never actually exists it I

think it was a it was oversimplified to

begin with you know what we're all

taught is you know back before

quantitative easing the top-down

approach was the Federal Reserve would

move the federal funds rate up and down

and that would signal to the banking

system to either create more credit or

to create less credit right if if alan

greenspan raised the federal funds rate

what that was supposed to mean was that

it made it more expensive for maturity

transformation which was banks borrowing

in the short run lending in the long run

so if alan greenspan raised the federal

funds rate what that did was that

supposedly it constrained banks because

it was more expensive for them to borrow

i

it was ever actually the case I think

that's just a myth that was perpetuated

to try to explain why and seem like Alan

Greenspan had all this power and

authority the banking system was far

more complicated and as I mentioned

before it's it contains its own subset

of constraints that often super see

whatever the Federal Reserve is doing so

you know I hate not to derail the

conversation and digress too far but I'm

not really sure that you know the the

intellectual framework that we've been

given for you know for a very long time

was ever really appropriate to begin

with I certainly think it was

oversimplified as a public narrative to

try to give a public a sense of what

monetary policy was supposed to

accomplish but I don't think that was

anyway realistic especially when you

think about this Eurodollar system

didn't show up in 2008 it's been going

on since the 1950s and it really took

off in the 1960s so while all the stuff

was gone you know while Alan Greenspan

was playing around with the federal

funds rate in the background you had

this global monetary systems of global

dollar system which had really taken

over things long before anybody Rutten

long ago long before anybody heard of

subprime mortgages yeah and I think the

other thing that's important to

understand and all this and this

probably is that this is more big

picture and it brings in the politics

side of it a little bit is that you know

if we're talking about a global reserve

currency we're talking about kind of a a

currency that is used worldwide for

general trade and it just typically

happens that it there is one country

whose domestic currency ends up being

the global reserve currency and part of

the reason that it ends up that way is

that it's enforced by that country and

it is provided by that country and it

just also so happens that it's usually

the global superpower that has the the

global reserve currency and you know if

you look back into the 70s you know part

of this whole transformation of the euro

dollar market really is when you know

Nixon struck the deal with Saudi Arabia

to price all the oil in dollars and then

you know they would they would sell in

dollars and they would use the dollars

to buy US Treasury notes and again and

then you know with oil being priced in

dollars and the whole world needing

dollars

and in other countries needed dollars to

buy oil and so then they would say their

reserves in dollars and again this is

all kind of you know it wasn't

necessarily mandated by the US but it

was strongly suggested right and we

built army bases all over Saudi Arabia

and provided you know defense for the

the family of Saud from Saudi Arabia and

you know again it's not only that but

it's part of that because as a global

reserve currency you have the power to

print money and you have the power to

print global money and you can kind of

over time you can debase your money you

can get away with murder quote-unquote

better than a country who doesn't have

the global reserve currency because you

have so much in demand for your currency

and what I mean by that is you think

about all the money that has been

generated or printed or however you want

to define that the whole money printer

Gober mean kind of drives me crazy but I

guess it's it is accurate you know if

you think about all the the new capital

has been injected into the system over

the last 12 or 13 years and yet the same

time or that same time period the dollar

has risen versus other fiat currencies

it's because there's great demand for

the dollar if a if a frontier country

printed that much currency you would see

dramatic amounts of inflation and in

fact you have seen it in places like

Venezuela and Argentina because there's

not external demand for their currency

and so you know it is a great advantage

to have the global current reserve

currency but you know you can get to a

point where it becomes a curse and we

may be kind of entering that time period

and there's this famous I guess theory

for lack of a better word called

Triffids dilemma which says you know if

you have a country whose domestic

currency is used as the global reserve

currency you will eventually get to a

point where the needs of the domestic

economy come into conflict with the

needs of the global economy and we are

kind of right in the heart of Triffids

dilemma right now this is how I see it

now again Jeff maybe disagree with this

but you know we you know when when Trump

came in and you with his make America

great policies and he's

trying to run a trade surplus rather

than a trade deficit that just doesn't

really work with a fractional-reserve

global reserve currency where the

domestic market has to provide plenty of

currency for the rest of the world and

so we're in this battle of what is good

for the US economy versus what is good

for the global economy and it's led to a

number of problems and I think it's kind

of led to the knowledge or at least the

awareness of this whole euro dollar

system I came or pragmatic view of

things especially the development of the

euro system which happened long before

Nixon went off the gold standard

the euro dollar had replaced the the the

certainly the British Pound his Co

reserve currency as well as took over

the monetary functions of the global

reserve in the 1950s and 1960s and by

the way I mean the US authorities in the

Johnson administration we're okay with

that because as you pointed out Robert

riffin said in 1960 look if you have a

national currency become a global

reserve currency there's always going to

be a natural tension and under the

Bretton Woods standard that meant that

tension was in terms of cold which was

the US only had so much gold but it

needed to supply currency to the rest of

the world why did it need to supply

currency to the rest of the world

because that's what a global reserve

currency is it's a mitigating factor

it's a mediating factor between often

very different systems that they can

talk to each other and not just trade

with each other and merchandise goods

but also financial flows if if you're

somebody in Sweden you want to invest in

Japan it are the Swedish banks have a

lot of yen lying around no it's much

easier if everybody has a common

currency that they can appeal to

directly so they can you know a Swedish

investor can invest in Japanese firms or

whatever you know because Jeff Japan and

Sweden both need dollars they have

dollars readily available but that's

what tripping was saying is that in a

national currency to have dollars

available all over the world that can

create a lot of tensions and I think

what happened in the 60s especially was

nobody really knew how to go off the

gold standard how does how do we keep

this globalization effort going but how

do we also resolve the problem that this

is you know the you there's not enough

gold in the United States for all these

dollars all over the world dollar

liabilities all over the world it's only

took the view of what was excuse me what

was called benign neglect

which was

we'll let these banks create all these

US euro dollars out there and we won't

do anything about it because we don't

know what else to do essentially and I'm

you know I'm oversimplifying but that's

really what happened in the 60s was that

okay this there's this this this

offshore money market developing and US

banks are starting to participate it

very heavily and there's all sorts of

money creation out there in the in this

global marketplace this offshore euro

dollar system but it's taking the

pressure off of us and our gold reserves

therefore we'll take a hands-off

approach and we'll just let this thing

go and there were a lot of people in

this in the 1970s in particularly said

wait a minute exactly the stuff you're

talking about Brent earlier on you know

there's nobody out there's no regulatory

agency out there there's no central bank

out there what if this thing starts to

go right what if there's a bankruptcy

god forbid I remember there was a

transcript at FOMC transcript from 1969

where Charlie Coons who was the open

market desk operator at the time said

what happens if a German Bank goes

bankrupt in you in the euro dollar

market what's gonna happen then well it

took you know almost 40 years for us to

find out but that we found out that it

wasn't out right you know it's it really

it's a pragmatic thing because there's

really nothing else how do we how do we

do how do we how does a global economy

actually work it needs money money is a

tool for the free all of these systems

to work together and really the only way

to answer it is this you know this

eurodocsis Bank centered system because

nothing else has worked so far yeah I

kind of want to summarize what both of

you're saying that's always locally

dangerous when Jeff is on the call here

I'm probably going to get corrected but

I'll give it my best shot so basically

what it seems like is the the reason why

we have a global reserve currency used

to finance trade right there's sort of a

natural monopoly that needs to happen

around a currency whereas just for it to

function as an effective medium of

exchange we want everyone using the same

currency there was a bit of a problem

when Bretton what the Bretton Woods

system was rolled out in that there was

a limiting factor which was gold which

we essentially got rid of and now we

have the Fiat dollar system that exists

but even without the limitations of gold

it was difficult or not really pragmatic

for the United States to print enough

dollars to fund the amount of global

trade that wanted to have

so what we saw is this emergence system

which is the Eurodollar system which

kind of exists to plug in the holes

right and to finance decree financing

between countries when there's a

shortage of US dollars now I think this

is usable deniability right that we can

do that's not our fault we're not doing

it's the banking systems I'm sorry

you're not doing it it's just these

dollars are out there in the world it's

not ours there's one there's one other

little part to that I yeah we don't need

to go down this rabbit hole but but you

know there is also like the Eastern Bloc

nations and the 60 70 s and the height

of the Cold War they they had dollars

they were afraid that if they kept them

in US banks they could be confiscated or

you know you know regulations on or

whatever and so they wanted to get they

wanted to hold dollars because there's a

global reserve currency they didn't want

to hold them within the United States

jurisdiction so I think they moved him

to Canada and then they moved into

Europe and so anyway I just I always

like to just reinforce that while while

Jeff is completely correct on all the

the economic side of it there there is a

political variable in here as well hey

there's also the central bank variable

too as part of benign neglect one of the

reasons the euro dollar system

flourished was the all these overseas

central banks especially the 1960s were

the biggest participants in it you know

for example the Bank of Switzerland

which would get you know because they

had a peg that they had to manage their

currency pegged to gold whenever they

had too many dollars flowing into

Switzerland they were obliged to convert

them into u.s. gold what they realized

in conjunction with US authorities was

they could circumvent the Bretton Woods

system by swapping swapping those

dollars into the euro dollar market

thereby allowing the Americans to keep

their gold letting those dollars go into

the euro dollar market not as physical

currency but as a liability to the

central bank and the whole thing just

worked when everybody just kind of

turned a blind eye to it in a lot of

ways they didn't understand what they

were doing but really it was you know

really benign neglect we don't really

care what's going on because it seems to

be working and so long as it seems to be

working we'll just kind of take a very

hands-off approach to it well it's a

very good point because it happens on a

smaller level in every everyday lives

like as long as people are making money

little problems oh don't

it's not worry about it right you know

making money solves a lot of problems

like it's like when you're on a sports

team when you're winning

everybody's happy but when you start to

lose or when things start to go wrong

then every little thing starts to become

a problem

but when you're winning it's all good

and so I think that translates you know

to Jeff's point as long as things were

working credit was being expanded

you know economies were growing you know

turn the blind eye or the plausible

deniability and you know let's just let

this thing let this thing rise yeah you

know one of the things I think you

talked a lot about Brent is emerging

markets you know why would a merging

markets especially China go along with

this system well it's just what you said

right I mean that you the Eurodollar

system and the globalization wave that

started after World War two turned all

of these emerging market economies

upside down they were agrarian very

primitive very simple all of a sudden

they're modern super power type

economies so now why wouldn't they go

along with it because it was making them

wealthy and rich and so long as that was

going on you know they might have seen

it may have been aware of some of the

downside some of the imbalances you know

the bubble tendencies why are so many

foreign banks interested in my economy

that kind of stuff they didn't care

about that because at the time it was

working really really well and so it was

hard to say we have you know we object

to this kind of a system because you

know we see that there's problems with

it it's always down the road well we'll

deal with it at some point down the road

and then once you get down the road it's

too late yeah taking the cab so to speak

policy decision so I really want to put

as much as possible almost a ring fence

around this definition of what the

Eurodollar system is so if you look it

up on a simplistic definition which is

just you know if I might take $100 you

know hundred dollar US dollar bill go

over to France and deposit it in a bank

there then that will become a euro

dollar I think that's a very narrow

definition of what we're talking about

and I think what we're talking about is

a system that is much more large and

more impactful so I know it's a tall

task but I put the question to either of

you could you define what we are talking

about when we're talking about the euro

dollar system well it's what happens

when that dollar goes what happens to it

from there so you've deposited a dollar

in France

what is the bank was that Bank in France

do with it well usually nothing it sits

in a vault but then it can create all

sorts of liabilities predicated on that

dollar because it says I have a dollar

so in a fractional reserve system is

Milton Friedman showed in 1969 there's a

reserve there's a multiplier effect for

all of these foreign dollars and they

don't even have to be physical dollars

they could just be any kind of US dollar

liability or asset in the case of the

bank that that holds it so it's what

happens once those dollars are offshore

what happened a long time ago when those

are all shorts that we can't they began

to expand so you have all sorts of

liabilities piled on top of what used to

be your single dollar bill that is on

the in in the vault for this bank in

France and that it doesn't stay in just

one place it B gets multiplied through

all these ledger transactions between

banks that are operating all over the

world so your one dollar that goes to

France could end up as multiple dollars

in Asia South America Africa any all the

way all the way around the world so

that's what I was taught I'll give you a

really simple analogy so I grew up in a

little town in western Nebraska about an

hour from the Colorado border and when I

was in junior high in high school the

laws around alkyl buying alcohol were

different in Colorado than they were in

Nebraska so you could imagine people

that were eighteen and Nebraska couldn't

buy beer but if you went to Colorado you

could so you would get in your car you

drive an hour to Colorado and all of a

sudden you're still the same person so

it's like you're still the dollar but

now you're in a land that has different

rules and then you buy your beer and now

you've got a young irresponsible person

who's drunk now that's the Eurodollar

you know you're still a dollar you just

don't have the rules are different

there's nobody trying to catch you and

you're irresponsible and so you know

that'd be my way to explain the

Eurodollar system the drunk dollars

algae we can all relate to it's just the

same thing with different rules it's the

same commodity with different rules and

when and when when rules are relaxed

people will take them you know as far as

they can

absolutely so what are the implications

of this system existing you know I think

in in other and also if you could try to

you know order I know it's difficult to

measure what the size of this market is

but both of you have indicated that the

size of the Eurodollar market is

actually much larger than the size of

the market for just US dollars so what

are the implications on a system a large

and very impactful system like this

existing outside of the reach or the

direct reach of US regulators well again

that's a very good point because we

actually have no idea how big the system

is I mean we don't really have any good

idea I mean there there have been a few

efforts especially in the wake of 2008

to try to figure out what's out there

but you know we have a bunch of probably

have we have blends we have blending of

dirt of geography in jurisdictions we

have blending between what's credit

what's money and so you really have to

go into what are you know Bank footnotes

to try to figure out what are all these

banks doing in each other and then

there's double-counting there's also a

mean because this euro dollar system

grew up under benign neglect the

plausible deniability all of these

things

nobody has ever undertaken a real

determined effort to study what goes on

out there that includes not just quality

or quantitative measures but also

qualitative measures what actually is a

euro dollar in terms of money what kind

of transactions would qualify you know

Alan Greenspan said in 2000 that the

proliferation of financial products made

it impossible to even define money in

the modern sense so we're already

starting from you know again literal

shadow money we don't even know how to

define it we can't quantify it and so

we're kind of trying to study and to

understand a system that is not easily

understandable that is not you can't

observe it you can't feel you can't

touch it so you know to understand the

implications to get a sense of it it's

it's really a very difficult and

esoteric process yeah I think what I

would say is I you know I'm not gonna

sit here and pretend that I know exactly

how it big it is because there's people

you know like Jeff and maybe there's

another 50 people in the world who

understand it as well as Jeff and you

know they probably all disagree right

and I don't think they have an idea of

how big the market is this is what I

know for sure what I know for sure is

that is a huge market very few people

understand it there's no regulators and

that the people who do sort of have

quasi regulation over it our PhDs who

have never acted in the real world and

so it's it's you know Jeff I got a plug

Jeff here for a second

I don't always agree with everything

Jeff said but he put out a report a week

or so ago and it was titled these idiots

and I just I just started like I just

saw that headlight and I started

laughing because it's true you've got

these you've got these PhDs who are very

smart people but I just think they're

completely misguided they're completely

their hubris is off the charts they

think that they can control this massive

monster that's been created that nobody

understands and so my point with all of

this is we have a system that is

inherently unstable fractional reserve

banking is a system through which it has

to continue to grow or else it crashes

and if it doesn't continue to grow then

you have bad things and the fact that we

have a huge system that nobody

understands that nobody regulates and

that nobody has their arms around or

even the mechanism by which to solve it

if they did understand it I think really

bad thing is going to happen and so I'm

prove I'm preparing for that really bad

thing to happen now and the people who

tell me that the central banks have this

all under control I just I fundamentally

disagree well you know again what

Michael was saying about the

implications of the system even though

we can't observe we have no idea how big

it is we know it's substantial we know

it's significant because of how it

impacts everything I usually use the

analogy of corks you know corks every

physicist in the world every physicist

around the world will agree that corks

exist or a fundamental property of

nature yet nobody's ever observed it

they know it's there because of how it

interacts with others things around it

so that's what we're really doing we're

studying the Eurodollar system we can't

observe the Eurodollar system directly

but we understand that it disturbs

markets it disturbs economies it

disturbs all in any number of things

that we can see and so we're seeing the

implications of monetary dysfunction

especially santino as we've talked about

before what was 2008 it was a very big

disturbance in the shadow money system

that you know as Brent you pointed out

the phd's at the Fed had no idea was

there they had no idea they should be

paying attention to

and of course they didn't actually solve

the problem they just hoped that it

would go away and that they could then

take credit for that going away saying

oh we saved a bunch of jobs it didn't

get worse so you know the implications

are for the global economy for the

global marketplace and therefore we have

to pay attention to the I first of all

understand that we can't really observe

and we're behind the we're behind the

eight ball because we don't have any

good data we don't have any good direct

observations of the system but we know

it sets the agenda it sets the direction

for the entire global marketplace the

global economy financial systems

everything I just want to point out for

everyone who missed we've got two

analogies here so far Brian was talking

about drinking when he was a kid and

Geoff just brought up means oh not me

people I knew people you never started

sorry people you me okay great so we've

got about 10 more minutes here before

audience questions and and I really want

to dig a little bit more into these

implications and I want to look into the

past and an example which both of you

just referenced so far but the great

financial crisis and oh seven and oh

eight and I want to look to the

implications for understanding the

current situation that we're in because

I know one distinction that is important

to both of you is when that money

printer Goldberg you know Brent that you

were referring to before they're not

actually creating new there's a

difference between creating money and

just creating new money so I want to

start with oh seven and oh eight because

it's a pretty big contention when people

think about the GFC they think about the

subprime mortgage crisis but I think

both of you would say that was actually

part of a larger story which is tension

in in this euro dollar system so do you

want to describe how this this emergent

large system is actually a large cause

of the the GFC put it simply the global

financial crisis in 2007-2008 was a

global dollar shortage that's really all

it was and so it manifested in very

different ways which ended up being in

terms of liquidations across markets

which is what people pay attention to

when the stock market crash that was

really tied to these liquidations so

it's a global dollar shortage but I

think the larger issue here especially

moving forward under quantitative easing

in these types of regimes is the issue

of bank reserve

and and really people see that you know

the Fed creates these bank reserves

we're told that's base money it goes

into the base M 1 M 0 statistics and

therefore it looks like oh my god this

has to be inflationary because look at

all this money printing the Federal

Reserve is doing and that's

understandable because you look at the

Fed's balance sheet was this and now

it's this x 2 so it looks like the Fed

is engaged in money printing you know

and by the way the Fed wants you to

believe that because they want you to

think inflationary and therefore act

inflationary but in reality that's not

the entire story in fact I would argue

it's not even the most interesting part

of the story what happens we talk about

a global dollar shortage what we really

mean is monetary destruction taking

place in these places you can't see so

in the sea offshore euro dollar system

however much money there was you know

out there that we can't really define

but however much money there was come

2007 it started to go it started to go

the wrong direction it started to shrink

so what the Fed was trying to do was to

create an asset that could be used in

place of all that money we never saw

disappear and so we have to at least

start with the concept of net liquidity

and net money and when the Fed by the

time the Fed actually acted in any

significant way in October 2008

obviously it was already too late

because the amount of monetary

destruction that we never saw was

enormous and so the Fed was already

starting from way way behind even if you

assume that bank reserves are base money

which I don't agree that they are I

think there's something else but you

know that's a separate conversation but

you know the point is that you know

people see the Fed's balance sheet go

way up and they think that has to be

money but that's adding new money to the

system that's adding a you know

trillions of new money to the system

what they don't see in what they don't

appreciate is the money that's been

destroyed in the shadow system so I'm

really glad you brought this up Jeff

because I this is a point that I've been

trying to make all year is that the

first thing you know you again you've

got to look at this from the central

bank's point of view and from you know

then on our side of it so there's two

different sides the the central bank

side of it to Jeff's point as they are

printing reserves they're telling you

it's money

in the hopes that you will believe them

and then go out and extend more credit

because in the monetary system most of

the credit most of the money is actually

created by commercial banks extending

loans or shadow banks extending loans

the central bank's print the reserves

they forward guide that we're going to

do more of it in the hopes that it will

change behavior but if the central bank

but if the commercial banks don't lend

and if the extension of credit is not

continued it doesn't work and so they

can print all the reserves they want if

it doesn't get into the real economy it

doesn't really matter so that's the

first thing the second thing is that

central banks are reactionary agencies

they're not proactive agencies if the

central bank people always tell me the

Fed is going to print 20 trillion

dollars and it's going to be massively

inflationary and I always say if the Fed

is printing 20 trillion dollars it's

because the global markets are melting

down and they're trying to fill a bucket

that's leaking yeah they are not filling

a bucket that's already they're not

pouring water into a bucket that's full

and has no holes they're pouring water

into a bucket that is leaking like crazy

and they're trying to keep a level and

they're trying to convince everybody to

go extend more credit and it's just you

know and it will it works I mean look at

the last two or three months they have

they have they have printed a lot of

reserves and people have believed them

and look what the markets have done now

can that go on for a while yeah I mean

that many people thought in 2008 the

whole thing was coming down here we are

12 years later and the same you know

kind of stuff is still you know

on there's also two different market

views right we're talking about stocks

versus bonds

oh yes not you're right the stock market

has bought a hook line & sinker that

there's right there money a good point

where the bond market is saying we've

seen or we know this game there's no

money here and we look at inflation

expectation inflation expectations are

absolute low levels so yeah I think but

it gets back to the point you and I were

making at the beginning which is it's

not a top-down system it's a bottom-up

system so the Fed is trying to force

these bank reserves onto the banking

system and the individual banks are

saying we've got our own problems man we

can't do it even if we wanted to and I

you know we talked about it before you

know the

negative interest rates in Europe and

Japan why they don't work now negative

interest rates are essentially a

punished trying to punish banks into

doing it like hey you're gonna create

money or I'm gonna penalize the hell out

of you

that's what a NERP is and what banks

have done in Europe is you're paying to

say well you're just gonna hurt us

because we're not going to do we're not

gonna lend we're not gonna create new

money because they don't we have our own

problems we have our own balance sheet

problems that override any inputs that

you try to put on top of us you know

negative interest rates quantitative

easing bank reserves whatever it is

we're just not going to lend because we

have these constraints in our system

which are tied to this euro dollar

liquidity the stuff that we've been

talking about so yeah it just goes it

just goes back to the Fed and their

models and what works on a model doesn't

necessarily work in the real world it's

just you know again so that there's

there's two different systems right

there a system the world it's the system

that works in the central bank's minds

and the system that works in reality and

they're not the same historical

component to that too because you know

alan greenspan in the 1990s used to

lament all the time that they could no

longer define money and he worried that

that might be a problem in fact his most

famous speech the 1996 irrational

exuberance speech everybody thought that

was about the stock market it wasn't

what he was actually saying is because

we can't define money anymore how would

we even know if the stock market's

behaving rationally or irrationally

that's what he was really saying now put

that into a monetary policy context when

you're confronted with something like

2007-2008 you can no longer define money

you haven't really tried in in 30 years

what do you do then you know it becomes

a you know not to not to not to portray

central bankers is sympathetic but

really they had took they've taken their

eyes off the monetary ball for so long

when they were confronted with a

monetary event they really had no idea

what to do so you're right you know

Bradley these PhDs are incredibly

intelligent they can create the most

elegant breathtaking mathematical models

but they aren't worth a nickel in the

real world because they don't take into

account anything that you know they're

not realistic and take into account what

actually has happened in them especially

the monetary system well and again in in

many ways they come up with a hundred

different ways to do the same

trick and the trick is the extension of

credit or continuing the flow or the

extension of the dollar of the

Eurodollar system hey guys I almost hate

to cut you off here but what we're

coming towards the end of our interview

portion we have a ton of audience

questions that I want to get to as many

as possible but I would just end with

this and this actually is a question

that we got from the audience how do you

see this all playing out right we're

talking about a system that seems very

large and impactful and it's not

regulated it seems like there are some

some downsides I mean how do you see the

interaction how do you see this all

playing a hard question here I'm putting

you on this yeah yeah I mean how do you

see this all playing out is this

sustainable long term so I'll take it

first I mean a long story short is the

long story I know I will all be fairly

brief the long story short it is not a

sustainable system and I've said this a

hundred times but a fractional reserve

system is a system that must grow and if

it doesn't grow it crashes and so maybe

it will continue ad or I don't know how

long it will continue to grow but I know

it's an inherently unstable system and

I'm convinced it will crash and when it

crashes because we are now on a dollar

standard and not a gold standard I feel

like the underlying collateral which is

the dollar is going to have a super

spike and that is going to just kind of

wreck the global economy so that that's

my base that's my base case yeah I think

that that puts it pretty good I mean

look the system you're right absolutely

right it has to grow or it doesn't it

doesn't work right I mean that's that's

really the issue and in fact is it

stopped growing in August of 2007 so

we're now in year 13 going approaching

year 14 of a system that's not really

working and so you know how does it play

out well it's it's impossible to predict

except that we know that something is

going to happen we don't know when I you

know I agree with it on that on that

account Brent that we have no idea when

it stops working but it has at least

kept things reasonably working for the

last 13 years you know as I say it keeps

the lights on at the very bare minimum

but we haven't had any extras of actual

economic growth in the United States or

anywhere else for that matter and we're

dealing with the consequences beyond

economies and markets in terms of social

consequences political consequences

divisions

d globalization so we're already into

the phase where we're dealing with you

know beyond the monetary system the

financial system and even the economy so

how much longer can it go before

something happens and I actually look

you know it could go one of two ways

they could go like Brent says that we're

I think you know the the fiery end of

the euro dollar system is not where the

dollar plunges to zero value I think it

goes the other way he goes up to

infinity it becomes solar it's such

short supply that it's essentially you

know it's it's a it's value is

impossible to calculate now that's the

worst-case scenario and I hope to god we

avoid that kind of a scenario and I have

to believe in faith in some faith in

humanity but before we get to that that

far we might have a situation where god

forbid maybe a central bank here

somewhere you know the B is something

somebody stops and says hey there's a

problem here that we need to fix before

we go too far maybe that leads to a

Bretton Woods part too maybe we have

some smart people get together and

design a system that's actually works

maybe even replicate some of the best

features of the gold standard some

limiting factors some rules some

transparency behind this the system and

that that is the you know that would be

a hugely positive result where I think

if that that scenario plays out the

implications are massive economic growth

worldwide and and all the good things

that go along with it and not just

massive economic growth over the short

run but sustainable stuff like we saw in

the in the 1950s so I think you know

there's two ways that we can this thing

can go and you know I have to hope that

I have to really hope that that we get

it fixed before it gets to its

limitation because I agree with Brent

this this thing is it's on a ticking

clock and we don't know when that clock

reaches zero

yeah I'd say I agree with Jeff I you

know that would be a nice scenario would

I think what Jeff just described I think

a good way to describe what Jeff just

described is would be to say it's a

pleasant fiction it's no fiction at this

point really thank you so much for that

that was a really enlightening talking

and for those of you who might have had

to leave early we will have this

on-demand for anyone who wants to

we've got about 35 audience questions

and we've got 13 minutes so Brent I

would ask you to yes Jeff will be happy

to answer all of them we'll do a rapid

fire here so just starting with

disappeared I'd love to hear Brent and

Jess thoughts on the dollar presently it

seems everyone is forecasting an

inflation and falling dollar yet it

sounds like they're saying the system is

at risk and there's a dollar shortage

thoughts I think between now and the

election all bets are off if you could

go ten percent either way wouldn't shock

me at all there's a huge treasury

balance at the Fed I mean at the the

Treasury has a huge balance in their

checking account at the Fed I'm not

exactly sure what they're going to do

with that that is the wild card for me

but as we get further you know a year

two years from now I expect the dollar

to be dramatically higher than it is

today

yeah we've heard about the dollar

destruction and inflation for the last

13 years and it never happens because

nobody ever factors the euro dollar

system into their analysis they're just

looking at the Fed's balance sheet and

extrapolating from there without

thinking about net in terms of net

liquidity or even what bank reserves

actually are so you know the idea that

this is gonna be inflationary again look

at the bond market the bond market is

already telling you it's not so no I

don't think I think the issue with the

dollar is it doesn't go up in a straight

line it's very lumpy ego it goes through

bursts where extremes higher like we saw

in March like I expect that would happen

as the dollar shortage becomes acute

again probably over the interval you

know the next less the last half of this

year maybe the next year I would expect

that there would be another dollar

episode where it jumps next question

here what's the word what's the risk

that with feds or foreign central banks

won't sell their Treasuries for gold

displacing the US dollar as a reserve

currency and collapsing euro dollar

markets and foreign shadow banking

systems close to zero what foreign

central banks are already selling the

Treasuries and they have done they've

been doing that heavily since 2014 and

the reason they're doing it is because

they're confronted with this dollar

short selling Treasuries is a BEC is a

byproduct or a bypass of the dollar

system it's

way of trying to fulfill that dollar

demand by mobilizing what are

essentially reserves so when you see

foreign central banks and foreign

governments selling Treasuries that's

not because they hate the dollar or they

think it's inflationary they're selling

them because they're telling you their

their experience their local banking

system is experiencing the dollar

shortage so if you see foreign sales of

some of the US Treasuries in particular

or any US dollar assets that's a dead-on

accurate signal of this shadow

dysfunction this shortage it's an

indication of demand not an indication

of anything else exactly okay guys this

is kind of a combination of several

different questions but you both talked

about the rules for US dollars in Euro

dollars being different what are some of

the most key are the most important

differences in between these two forms

of dollars well one is regulated and one

is not one is measurable and one is not

one has a solution to fix it and one

doesn't that's my opinion

yeah I think he just comes back to what

we said before the the regulated

domestic system is a top-down system

where there's all sorts of regulation

that sometimes owners regulations

there's a central bank that sort of a

central bank standing behind it the euro

dollar system is a bottom-up system

often ad hoc networks appear disappear

it it's it you know I I think Brent you

said we call it the Wild West that's

probably a really good analogy because

it's it's really it's an individualistic

system where it's defined by these

bottom-up characteristics rather than

the attempt what we all understand it's

a top-down approach

here's another question why does the Fed

not care about the euro dollar shortage

it causes US stock market crashes which

the Fed can't afford to let happen for

many reasons tax pension Treasury

credibility etc so and I guess I would

just add on to that are they truly aware

of what's going on in the euro dollar

market and what if anything are they

doing they're aware that there is a

dollar market but it's outside of their

jurisdiction number one in fact you go

back to 2007 when the first dollars

foreign showed up they had lots of

different discussions about what they

what should they do about it a lot of

them were centered around should they do

anything about it because a lot of the

euro dollar problem in the early global

financial crisis in 2007 centred on

banks

in London and so their discussions were

revolved around is that a Bank of

England's problem even though they were

true these banks in London were trading

in US dollars they were banks in London

and so the Fed was taking the approach

of you know maybe this isn't our issue

it's it's it's it's an English issue

it's a British issue it's not it's not a

Federal Reserve issue so that's number

one

the feds mandate ends at the US border

but however they were forced to realize

that the implications of allowing the

system to go as it as it may including

is in terms of you know how it was in

reverse and crashing in 2007-2008 causes

backlash inside the US to that's where

dollar swaps came from that's where all

of these foreign facing US dollar

activities from the Federal Reserve

showed up from it's the idea that okay

there's this dollar system beyond our

control but we got to do something so

we'll swap dollars with foreign central

banks and allow those foreign central

banks to take care of their own dollar

problems so you just I mean there's

there's more to it than that but just

intellectually and ideologically

the Federal Reserve takes a hands-off of

a hands-off approach to the euro dollar

system because statutorily their

authority ends at the u.s. boundary yeah

I'll just go with that answer well I

mean there's more to it than that I mean

intellectually different you know to

talk about the monetary framework to but

you know the easiest answer is to say

the Fed says there's a you there's a

foreign dollar system out there but it's

for and it's not our problem all right

this is a great question because it's

actually something that we didn't get to

but we talked about before this this

webinar and this crisis how effective

are the feds the new dollar swap lines

in vivo facility with global central

banks and addressing issues with the

euro dollar system in the global dollar

shortage so let me just address it from

the very big picture and then I will let

Jeff go into some details if he has any

interest in doing that but in the very

short term it can provide some help and

I think you just looked at the last

couple months and it has helped provide

liquidity to the markets but what it

doesn't do is it does not solve anything

the only thing is it does is it makes

the problem bigger by perpetuating the

current system it's just a further

extension of credit it's it's a way to

get some quick

collateral dollar collateral into the

euro dollar market which can then

hopefully spur further dollar kuroh

dollar credit extension but further

dollar credit extension actually

increases the demand for dollars so it

does not solve the problem it makes it

bigger and while it can kick it down the

road we will eventually come up on it

again yeah the only thing I'll say about

is it I don't think it I don't even

think it's that good I think it's it's

more window dressing designed along with

quantitative easing to make people think

that it's effective as long as you don't

ask any questions about what really

happens with these dollar swaps which is

really all these policies are designed

to to essentially fool people into

believing these something substantial is

taking place but if you actually the

dollar swaps in particular if you

actually look at the data especially the

the tick data treasure international

capital what you find is as these dollar

swaps the Fed swaps tiles with foreign

central banks then banks in those those

overseas jurisdictions transact with the

central bank's but who are the banks

that are actually transacting with these

foreign central banks well it turns out

it's US banks it's their foreign

subsidiaries are borrowing dollars from

foreign central banks that are swapped

to them to the Fed and then those

foreign subsidiaries of US banks

transfer those dollars back onshore so

these are overseas Tolliver's swaps they

go over to a foreign central bank our

bid by a foreign subsidiary of a US bank

and then transferred back into the

United States

so how does that help a global talk like

Jordans it doesn't it's just it's all

window-dressing it's all of it's all a

shell game designed to make you think

something positive has happened it's

really ridiculous all right I've got

another hard one for you here so you're

given carte blanche to fix the euro

dollar system how do you go about doing

it blows I think I would agree on that I

want to you grant but I think we agree

on the the system doesn't work we need

to start over I know you know start over

is probably too much I mean there are

some good elements to the euro dollars

it's a modern system it's a virtual

currency system there there are positive

aspects of it and I think what needs to

it needs to be reformed substantially

that there's some structure to it and

more than anything there has to be some

transparency to it we have to know what

goes on everybody who operates in it has

to know what everybody else is doing in

what terms and so that you know that was

what the beauty of the gold standard was

the under the gold stone knew what the

rules were it was you had gold in your

pocket we knew what it was and so there

was no there was no need for you know an

entire cottage industry surrounding you

know lobbying and laws and rules and

regulations and how do banks operate and

what levels of compliance interval you

know all of these all these things that

served to push the system further and

further away from the public and so you

know maybe there are some elements of

the Eurodollar system that are worth

preserving you know I don't know but we

need to it needs to be substantially

reformed so that the product on the

other side of it probably doesn't look

too much like it does now yeah I mean I

think I think one thing to keep in mind

with all of this is this is the thing I

always come back to is I can wish for

something all I want you know and

there's certain things that I would like

the monetary system to be but you know

the reality is is that the politicians

and the monetary authorities don't want

it the way I want it to be and they have

a lot more power than I do so it's it's

important to kind of figure out what you

know it's fine to understand what you

would like to see happen but I think

it's more important to understand what's

actually going to happen and you know I

don't think that we're going to go back

to a gold standard anytime soon I don't

think the monetary authorities are going

to go for that now if they did I would

that's fine with me I think that would

be a fantastic system but I don't think

it's going to happen I think what's

going to happen is that the monetary

authorities will continue to try to

build you know on top of this

Frankenstein that they've already built

and it eventually it will have such a

climactic disaster that they will have

to start over

yeah I think that's really the issue

really the point is at what point do we

do we do we force their hand into acting

and I would hope that it's before stiff

there's a really bad ending that they

can you know we can get them to wake up

before then so that they can act in just

in time to save the system and a real

sigh that's probably to pollyannish but

that's a fiction of something extra for

right I mean otherwise we were really

talking about some bad stuff

yeah great sorry

one last question just to end on maybe a

pragmatic notes I think we've discussed

a lot of great information here some of

our investors in the audience are

wondering how some of this information

can be translated into actionable advice

so anything that you're comfortable

sharing just in terms of an asset that

you like or trade that you think would

be particularly interesting we've got

two minutes left here you know I'll just

reiterate what I've been saying for a

couple years I think this is going to

end in a fantastic spike in the dollar

the asymmetry lies with the dollar

getting stronger not getting weaker

easily you look at prices around the

world you look at posit rate positioning

you look at you know forecasts by global

financial institutions everybody thinks

the dollar is going down over the next

two or three years all the positioning

says the dollar is going down over the

next two or three years but the position

'try lies and they say that because it

just the dollar has to go down for the

system to work and so that's why it's

all forecast that way but the asymmetry

lies with it not working out the way

everybody says it needs to work out and

so I can't give advice on individuals of

how they should trade this but I'm

telling you the asymmetry lies to the

upside on the dollar yeah I would just

add the same thing it's deflationary

just what however you want to invest how

are you going to structure investments

just understand what these market

signals are telling you what the system

is telling you is that India's Brett

said the risks are asymmetric toward

deflationary circumstances which is

dollar positive so you have a rising

dollar deflation not inflation excellent

all right gentlemen well thank you both

so much for your time here this has been

a bit of a just such an interesting

conversation and we really appreciate it

and if if anyone would like to find you

where where can the people on the

webinar find you they'd like to just

learn more well I you can go to my

website it's just ww santiago capital

comm you can email me Brent at santiago

capital com

you know I'm very active on Twitter I do

a number of interviews here and there so

I'm happy to you know I always say this

that you can feel free to send me a

message I'll do my best to get back to

you I get a lot of them but I do like

interacting with people so feel free to

reach out thanks a lot yeah I met

hambert partners calm I published a lot

of articles blog post research reports

and on the Eurodollar system

implications of it I'm also working on a

website of a related website called

Eurodollar University where myself along

with a couple other people are looking

to really get people's attention and

then try to explain some of these things

that go on in the system so that they

can interpret the world around them

because economics and in traditional

education has done such a poor job of

really explaining how things actually

work that it's fallen to somebody like

me to try to bridge that divide to fill

in the shadows so to speak you know to

to shine a light on what's really going

on so look for that - alhambra partners

calm and then Eurodollar university calm

excellent thanks very much Jeff and Bren

for those of you who enjoyed this

webinar standby for incoming information

about future episodes that we've got

planned but for now gentlemen thanks

very much again and to the audience

thank you for joining us today