What Interest Rates Going Down Really Means For The World

Summary

The video script delves into the opaque nature of the modern monetary system, highlighting how authorities have lost track of money supply and demand due to the proliferation of financial products. It underscores the importance of bond yields as a critical signal, offering insights into the monetary system in the absence of direct knowledge. The script emphasizes that the recent powerful rallies in global government bonds, including Chinese bonds, could indicate increased demand for safety and liquidity, potentially signaling underlying risks in the economy and financial system that authorities may be overlooking or unable to fully comprehend.

Takeaways

• 🔑 The bond market is becoming more important as a signal for monitoring monetary conditions, as central banks are unable to accurately measure money supply and demand due to the complexity and evolution of the monetary system.
• 💰 Central banks have lost insight into the monetary system due to the proliferation of financial products, non-bank entities, and the globalization of the dollar system (the 'eurodollar' system), rendering traditional money supply measures obsolete.
• 🚨 The lack of understanding of the modern monetary system by central banks and regulators poses significant risks, as evidenced by the global financial crisis of 2008, which they failed to anticipate or effectively address.
• 📈 Rallies in government bond yields, such as those seen recently in China and globally, can signal increased demand for safety and liquidity, potentially indicating underlying economic or financial risks.
• 🕳️ The monetary system is likened to a 'black hole,' whose impact on the surrounding environment (the economy and financial markets) can be observed, but whose inner workings remain opaque.
• 🔍 In the absence of direct monetary knowledge, market signals like bond yields and other esoteric curves provide the next best approximation of insight into the state of the monetary system.
• 🌐 The evolution of the monetary system is a global phenomenon, with the Chinese system undergoing a similar transformation as Western economies, leading to increased opacity and challenges for their central bank.
• 🏦 Non-bank entities, such as mutual funds and other financial institutions, have played a significant role in reshaping the monetary landscape, further complicating central banks' ability to monitor and manage the system.
• 💼 Regulators and authorities have failed to take substantive action to address the information gap and lack of understanding of the modern monetary system, even after the 2008 crisis.
• 🛡️ The demand for safe and liquid assets, as reflected in bond rallies, raises questions about potential risks in the economy, financial system, and opaque sectors like commercial real estate.

Q & A

What is the main topic discussed in the transcript?

The main topic discussed is the lack of transparency and understanding regarding the monetary system, money supply, and money demand by central banks and regulatory authorities, particularly since the eurodollar evolution in the 1970s and 1980s.

Why are bond yields becoming increasingly important, according to the transcript?

Bond yields are becoming increasingly important because they serve as a proxy or signal for understanding the state of the monetary system and economy, as central banks have lost direct insight into money supply and demand due to the proliferation of financial products and the evolution of the monetary system.

In 1999, the Federal Reserve realized that they had lost track of the monetary system, and the traditional measures like M1, M2, and M3 were no longer accurate proxies for money, as the world had changed and the old equations were no longer working.

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What does the transcript suggest about the global nature of the monetary system issue?

The transcript suggests that the lack of understanding of the monetary system is a global affair, not just limited to the United States. It mentions that the eurodollar system transformed the monetary systems and methodologies worldwide.

What is the significance of the recent powerful bond rally in China, according to the transcript?

The powerful bond rally in China, with 10-year rates falling below the policy rate, is seen as a strong signal that the monetary system participants are indicating concerns about the economy and financial system, similar to the bond market signals in other parts of the world.

Why does the transcript suggest that authorities should have taken a deeper look at understanding the monetary system after the global financial crisis of 2008?

The transcript suggests that authorities should have taken a deeper look at understanding the monetary system after the 2008 financial crisis because it was a monetary crisis that defied central banks' efforts to alleviate the problem, highlighting the lack of understanding of the underlying monetary system.

What is the significance of the rise of non-bank entities and financial products mentioned in the transcript?

The rise of non-bank entities like mutual funds and the proliferation of financial products is highlighted as a major factor contributing to the increasing complexity and opaqueness of the monetary system, making it more difficult for central banks to understand and track money supply and demand.

What does the transcript suggest about the lack of data and transparency in international liquidity and repo markets?

The transcript cites a report by the Bank for International Settlements (BIS) acknowledging the complexity of global US dollar funding markets, data gaps, and the opaqueness of transactions occurring between non-banks, particularly those outside the United States, hindering efforts to monitor and manage risks.

Why does the transcript emphasize the importance of understanding the monetary system in relation to the risks faced in 2024?

The transcript emphasizes the importance of understanding the monetary system because it would help better define and map out the risks faced in 2024, such as the commercial real estate problems in the United States, Europe, and China, which have clear and strong potential to harm the economy and create financial volatility.

What is the significance of the bond market signals and other esoteric curves mentioned in the transcript?

In the absence of direct monetary knowledge, the transcript suggests that bond market signals and other esoteric curves serve as the next best thing, providing useful information and insights into the monetary system and the risks faced, as they reflect the trading activity and views of monetary participants themselves.

Outlines

00:00

🌍 The Critical Role of Bond Yields in Financial Insight

Paragraph 1 explores the importance of government bond yields, such as the recent low yields in Chinese government bonds and similar trends in other global bonds, as critical financial indicators in the absence of traditional monetary signals like money supply and demand. This shift, largely attributed to changes in monetary operations since the 1970s and 80s and the Eurodollar evolution, has left traditional monetary policy tools less effective, forcing reliance on bond yields for financial insights. The paragraph references historical perspectives, including Alan Greenspan's 1990s warnings about the Federal Reserve's (Fed) limited insight into monetary conditions, to underscore the current reliance on bond yields for understanding the global financial state.

05:00

🔍 Rethinking Money: The Challenge of Defining Monetary Phenomena

Paragraph 2 delves into the complexities of defining what constitutes money in the modern financial system. Despite inflation being a monetary phenomenon, identifying a consistent measure for money (e.g., M1, M2, M3) has become increasingly challenging due to the evolving nature of financial instruments and the rise of non-bank entities. This evolution has rendered traditional monetary aggregates ineffective, reflecting the Fed's and other central banks' struggles to track and understand money supply and demand, leading to a reliance on policy-driven interest rate adjustments rather than direct monetary interventions.

10:00

🌐 Global Financial Complexity and the Quest for Monetary Clarity

Paragraph 3 addresses the ongoing challenges in comprehending the global monetary system, highlighted by the Bank for International Settlements' (BIS) 2020 report on the opacity of US dollar funding markets and the difficulties in mapping cross-border transactions. The Eurodollar revolution, alongside the proliferation of non-bank financial institutions and innovative financial products, has compounded these challenges. The failure to fully grasp these complex dynamics, especially in critical areas like repo markets and international liquidity, underscores the systemic risks and the need for better data and understanding of monetary flows.

15:03

📉 Bond Markets as Barometers of Economic Sentiment

Paragraph 4 suggests that, in the absence of clear monetary signals, bond markets serve as indirect indicators of economic health and sentiment. This idea is supported by the observation of bond rallies and their implications for market liquidity and safety demand. The discussion includes the specific context of Chinese government bonds and the broader implications of bond yield movements globally. The paragraph argues that, despite the lack of direct monetary transparency, bond markets can offer valuable insights into financial system dynamics and investor sentiment.

20:03

👏 Acknowledging the Audience: The Importance of Engagement

Paragraph 5 concludes the script by expressing gratitude towards the audience, including university members and subscribers. It underscores the importance of community engagement and the shared journey in understanding complex financial and economic concepts.

Keywords

💡Bond yields

Bond yields refer to the return an investor realizes on a bond. In the context of the video, bond yields, particularly government bond yields, are discussed as a crucial signal reflecting the state of the monetary system and the broader economy. Lower bond yields indicate higher demand for safety and liquidity, which can signal potential risks or uncertainties in the financial markets and the economy. The video emphasizes the importance of bond yields as a proxy for understanding monetary conditions due to the lack of direct knowledge about the complexities of the modern monetary system.

💡Monetary system

The monetary system refers to the mechanisms and processes that govern the creation, distribution, and circulation of money within an economy. The video highlights the challenges faced by central banks and authorities in understanding and accurately measuring the modern monetary system, which has become increasingly complex and opaque, particularly due to the proliferation of financial products, the rise of non-bank entities, and the globalization of financial markets. The inability to fully grasp and quantify the monetary system has led to a reliance on indirect signals, such as bond yields, to gauge its state and potential risks.

💡Central banks

Central banks are the monetary authorities responsible for managing a country's currency, money supply, and interest rates. The video discusses the Federal Reserve (the central bank of the United States) and its acknowledgment of the difficulties in defining and tracking money supply and demand due to the evolving nature of the monetary system. It also mentions the Bank for International Settlements (BIS), which has recognized the data gaps and opaqueness surrounding global dollar funding markets and cross-border liquidity flows. The video suggests that central banks' lack of comprehensive understanding of the monetary system has led to their reliance on imperfect proxies, such as interest rate targets, rather than direct monetary measures.

💡Monetary policy

Monetary policy refers to the actions and decisions taken by central banks to influence the money supply, interest rates, and overall economic conditions. The video highlights how monetary policy has become increasingly 'non-monetary' due to the challenges in accurately measuring and targeting money supply and demand. As a result, central banks have resorted to using interest rate targets as their primary policy tool, despite the limitations in understanding the full implications of such actions on the monetary system and broader economy.

💡Euro dollar system

The euro dollar system, or the eurodollar system, refers to the parallel, global market for dollar-denominated deposits and lending that emerged outside of the United States in the 1950s and 1960s. The video suggests that the evolution of the euro dollar system transformed the mechanics and dynamics of the monetary system globally, making it increasingly difficult for central banks to track and control money supply and demand. This system facilitated the proliferation of financial products, non-bank entities, and cross-border flows, contributing to the opaqueness and complexity that central banks struggle to comprehend.

💡Money supply

Money supply refers to the total amount of money available in an economy at a given time. The video discusses the challenges central banks face in accurately measuring and forecasting money supply due to the constantly changing forms and channels through which money circulates. The traditional measures of money supply, such as M1, M2, and M3, are no longer considered reliable indicators of the true state of the monetary system, as they fail to capture the complexities introduced by the euro dollar system and the proliferation of financial products.

💡Non-bank entities

Non-bank entities, or non-bank financial institutions, refer to financial entities that operate outside the traditional banking system but still play a crucial role in the monetary system and financial markets. The video highlights the rise of non-bank entities, such as mutual funds and other investment vehicles, as contributing factors to the increasing complexity and opaqueness of the monetary system. These entities have introduced new financial products and channels for money circulation, making it more difficult for central banks to track and regulate monetary flows.

💡Liquidity

Liquidity refers to the availability of cash or easily convertible assets to meet financial obligations or make investments. In the context of the video, liquidity is discussed in relation to the demand for safety and liquidity, as reflected in bond market movements. Lower bond yields often signal increased demand for liquidity and safe-haven assets, which can be an indicator of potential risks or uncertainties in the financial system and the broader economy.

💡Commercial real estate

Commercial real estate refers to properties used for business purposes, such as office buildings, retail spaces, and industrial facilities. The video mentions the existence of commercial real estate problems in the United States, Europe, and China, suggesting that these issues could potentially pose risks to the financial system and the broader economy. Understanding the state of the monetary system and liquidity conditions could provide valuable insights into assessing and managing these commercial real estate risks.

💡Repo markets

Repo markets, or repurchase agreement markets, are a crucial component of the financial system where securities are temporarily exchanged for cash, often serving as a source of short-term funding for financial institutions. The video highlights the importance of repo markets in the context of collateral and liquidity, as well as the acknowledgment by authorities of the data gaps and opaqueness surrounding these markets, particularly for cross-border and non-bank activities. Understanding repo market dynamics is crucial for assessing liquidity conditions and potential risks within the monetary system.

Highlights

Chinese government bond yields are at multi-decade lows after a recent, powerful Bond rally.

There's at least a mini rally developing in treasuries and other government bonds around the world, after an equally powerful rally at the end of last year.

Bond yields have always been useful, but pure money signals have been taken away from us, leaving us without critical insight into monetary conditions and the state of the world.

Allan Greenspan tried to tell people in the 1990s that the Fed was 'Flying Blind' because it couldn't keep up with the evolving monetary system and lost crucial information on money supply and demand.

The proliferation of financial products like mutual funds and money market funds in the 60s, 70s, and 80s made it difficult for the Fed to forecast money demand and define what constitutes 'money'.

Greenspan admitted in 1999 that money was 'hiding itself very well' and the Fed was struggling to find a proxy that accurately captures what money is.

The monetary signals we have, like bank reserves and interest rate targets, are just reflections of policymakers' opinions and not true measures of money in the economy.

After the global monetary crisis of 2007-2009, regulators and authorities still failed to rectify the blindspot and lack of understanding of the monetary system.

In 2020, the BIS acknowledged the complexity of the global US dollar funding markets and data gaps that prevent an accurate and complete map of monetary activity.

The BIS suggested that more complete data collection could help reduce vulnerability, but identified regulatory and structural policy options as potential solutions.

With the lack of direct monetary knowledge, bond markets and yield curves have become crucial signals as they reflect the actions of monetary participants themselves.

Bill Poole hypothesized in 2007 that bond market participants have proprietary inside information that leads them to believe the overall economy has a soft tone not captured in official data.

The recent powerful rally in Chinese government bonds could be a signal from monetary participants reflecting concerns about the economy or financial system.

The Chinese curve has inverted, with the 10-year rate below the policy rate, sending a strong message about monetary conditions.

In the absence of direct monetary knowledge, indicators like bond yields, yield curves, and gold prices provide crucial insights into the monetary system's impact on the economy and financial markets.

Transcripts

Chinese government bond yields are at

multi-decade lows after a recent

powerful Bond rally there's at least a

mini rally developing in treasuries and

other government bonds around the world

after an equally powerful rally at the

end of last year and these signals are

incredibly important they're more

important than they have ever been in

the past but why is that the case well

bond yields have always been useful but

what has happened is that pure money

signals have been taken away from us

leaving us without that critical insight

and it's Insight not just about money

supply monetary conditions would tell us

a lot of Highly useful and crucial

information as to the state of the

entire world but we don't have that and

we haven't had it for a very long time

and Allan Greenspan throughout the 1990s

tried to tell people that we don't have

that insight and so Not only was the FED

Flying Blind so was everyone else

because everyone else came to lean on

the FED exclusively which made him a

little bit uncom uncomfortable as he

said in

1997 increasingly since 1982 we have

been setting the funds rate directly in

response to a wide variety of factors

and forecast we recognize that in fixing

the short-term rate we lose much of the

information on the balance of money

supply and demand that changing Market

rates afford but for the moment we see

no alternative in the current state of

our knowledge money demand has become

too difficult to predict and it's again

it's money demand money supply that

information isn't just about the

monetary system or strictly monetary

conditions it's about the whole state of

the world and in maybe the purest sense

of all of these economic and financial

factors coming into one convenient place

but since the euro dollar evolution in

the 70s and 80s as Greenspan was saying

the fthe head had to change its entire

operations because it couldn't keep keep

up with the monetary system not only do

that leave monetary policy as more and

more non-monetary policy it leaves us

with fewer direct signals on this

critical space in lie of all that we

start to depend upon bond yields and

that's what makes bond yields these days

more and more important but

understanding why that is we have to

understand how we got to this point and

so we'll go back to greenpan again but

this isn't in 199

9 in February 1999 the fomc was

discussing this very phenomena about how

they were losing track of the monetary

system and how important that was at the

time the Federal Reserve was still

obligated to maintain money supply

forast because even Congress after the

experience of the great inflation

realized this money business is

incredibly important not just about

inflation but especially inflation of

the 1970s and so they told the FED every

year you have to come up to Congress and

tell us all about the money supply

targets that you're going to maintain

and try to M try to keep up with that's

really where the Humphrey Hawkins

testimonies came from it's about the

politicians in Congress understanding

that monetary fundamentals are

incredibly important for the wider

economic system not to mention financial

markets too and so the Fed was obligated

to maintain money supply targets that by

the 1990s knew were impossible and in

1999 against once again debating the

money supply targets for that year they

came to another realization that look we

just have no information no Insight the

M's are all corrupted we'll start out

with Don con who said I think that by

1991 we were beginning to get some sense

of what was going on specifically that

Banks were getting into the mutual fund

business mutual funds in particular were

much Moree freely available to

households and households were

diversifying their portfolios out of

deposits again the proliferation of

financial products it began in the 60s

and 70s even before then but the really

the 60s and 70s and the 80s especially

money market funds the rise of non-banks

such as mutual funds and we'll come back

to this in just a moment continuing Mr

con if you go if you look back at our

forecast in 1990 1991 that development

caught us somewhat by surprise it caught

him completely by surprise but toward

the end of 1991 and in 1992 we were

doing a better job of forecasting and

green Span buted in saying yeah but you

were putting in ad factors fudge factors

and con said yes because we knew that

the world had changed so the old equ old

equations weren't working and they never

really got them working even with their

fudge factors as Greenspan would say in

2000 the proliferation of product was

just too extraordinary as he admitted in

February

1999 I must say that I have not changed

my view that inflation is fundamentally

a monetary phenomenon because it is but

I'm becoming far more skeptical that we

can define a proxy that actually capture

what money is either in terms of

transaction balances or those elements

in the economic decision-making process

which represent money we are struggling

here I think we have to be careful not

to assume by definition that M1 M2 or M3

is or anything is money they are all

proxies for the underlying conceptual

variable that we all employ in our

generic evaluation of the impact of

money on the economy now what this

suggests to me is that money is hiding

itself very well and that has enormous

implications especially as I said for an

economic and financial system that grew

up in the 80s and 90s in the shadow of

the euro dollar system without really

realizing it told repeatedly to depend

upon these folks at the Federal reserve

for all of the monetary conditions and

maintaining them and information about

them when in private and occasionally in

public monetary authorities were saying

we have no clue here money is hiding

itself we don't really know what's going

on instead we're going to move an

interest rate interest rate target

around the FED funds rate target in hope

that it all just works out but from an

informational perspective what are you

actually looking at when you look at

short-term interest rates you're looking

at nothing more than what the Federal

Reserve is doing in the same way as you

look at the fed's bank reserve balance

is nothing more it's not the amount of

money in the economy it's nothing more

than reflection of what policy makers

are doing so we the monetary signals

that we have whether in the form of Bank

Reserves or federal funds targets and

other forms of interest rate targets

around the rest of the world they're

just po they're just reflections of

policy makers opinions nothing more

useful F than that they certainly aren't

monetary especially since policy makers

as we continue to see in 2024 use

macroaggregates as their inputs and

evaluation standards for all of their

non-money policies that's what the fomc

does and it leaves us to either fully

depend upon policy makers or go looking

in other places for useful information

in case you do realize how flawed the

analysis is at these central banks how

little they understand the monetary

system and how important that all really

is you would think though that after

everything that has happened over the

last 25 years since this conversation

took

place authorities and regulators and

interested parties politicians

governments around the world would have

rectified this blind spot especially in

the wake of the monetary crisis is the

global monetary crisis that struck in

August 2007 and 2008 and into 2009 that

defied Central bank's best monetary

efforts to alleviate the problem and to

really get the system back on track to

act this the traditional Central Bank as

lender of Last Resort that didn't happen

one reason why they call it a financial

crisis and not correctly a monetary

crisis so you would think that at the

very least in the close aftermath of

that Absol disaster that cost the global

economy enormously a bill to which we're

still paying for today somebody would

have said okay let's take a look at this

money business yes we know M1 M2 M3

those are all garbage they don't reflect

the they don't accurately reflect the

monetary system as it as it is we don't

really know how to forecast money demand

because those PE that the money that

people use is constantly changing

sometimes it's this sometimes it's that

sometimes it's something that the fed or

Central Bankers have no idea what it

actually is that's what they were really

saying we can't forecast money demand

because the money that the actual

economic participants use is constantly

changing the proliferation of financial

products that stuff in the early 1990s

which sounds just regular stuff today

that was that was groundbreaking well

the system hasn't stopped it continues

to evolve but you would think again

somebody somewhere would have said let's

take a deeper look and every time they

do they keep coming back to the same

thing we don't know we have no idea in

June of 2020 the bis which is one of the

few outlets around the world that

actually has taken interest not just in

the US monetary system what the FED

didn't say in the 1990s was that this

was a global Affair there was a global

revolution in money this is the euro

dollar system that transformed systems

that transformed methodologies mechanics

money supply demand all of it

transformed it all over the world and so

in June of 2020

basically admitting to the lack of

progress in understanding the monetary

system the bis wrote this the complexity

of the global US dollar funding markets

as well as certain data gaps prevent the

construction of an accurate and complete

map of activity International banking

data provide a view into the activities

of internationally active Banks but they

often lack information on maturity and

counterparty type data for transactions

occurring between non-banks Financial or

non-financial in particular those

transactions occurring outside the

United States are among the most opaque

so the euro dollar Revolution that was

causing all sorts of problems in the

1990s and obviously caused a big problem

in

2008 still don't have any good idea this

is

2020 and by by the way 2024 nothing much

has changed they even acknowledge all of

the various parts and complexities and

then say I don't know oh what do we do

here for example although repo markets

are more transparent now than before the

GFC it's not an F it's an M data gaps

believe them relatively opaque this is

particularly true for activity among non

us entities that takes place outside the

United States and activity outside the

tri party repo Market in the United

States the repo Market which is a

backbone is as much about collateral as

it is about currency or cash or whatever

form of cash is is being used at that

particular moment of time and so the

very fundamental basis of this monetary

system however for however the formats

are going transacted inside of it

authorities still don't know what to

make of them and this is not a small

oversight back to the bis one more time

moreover crossborder and cross- sector

linkages complicate efforts to Monitor

and manage the risk of a retrenchment in

crossborder liquidity the report

suggests that more complete data

collection could help reduce

vulnerability so why don't you do it the

report also identifies Regulatory and

structural policy options that could

further reduce certain vulnerabilities

but

basically yeah Banks were a big problem

before the g g not FC and actually were

the very big reason for the G not FC but

in the shadow as the banking sector has

been has been hobbled by the Lessons

Learned belatedly in that affair has

given rise to non-banks more

proliferations of more products have

more to say about these non-bank

entities as we go forward because they

are incredibly important to understand

too but for now thinking about all of

the potential factors that could harm

the economy create Financial volatility

and authorities don't really know how it

all fits together especially things like

International liquidity repo markets

collateral all the important information

you would want to know know if you are

in a situation facing very clear and

very strong risks as we are facing in

2024 we've been talking about this for

quite a long period of time which for

most people for maybe a lot of people

they think well nothing bad has happened

nothing bad could happen that sort of

recency bias dominated in the middle

2000s too and again we're not saying

that the world is going to end that this

is going to lead to an absolute utter

crash what we're saying is it would be

really nice if we had more useful

information about whether or not we can

say for sir that is absolutely the case

this is where the information Gap really

comes in being able to better Define the

risk that we obviously know that we are

facing we have a commercial real estate

problem in the United States we have a

commercial real estate problem in uh

Europe we have a massive real estate

problem in China wouldn't it be nice to

have a real Direct insight into monetary

conditions Supply demand circulation all

of it because that would H allow us to

then at least better map out those risks

that we are facing but in lie of all

that what we're left with is something

like Bond markets and bond curves and

other esoteric curves that we talk about

here at euro dollar University and

Shameless plug here in very great detail

at euro dollar University in our

memberships and subscription this is

what we focus on and why we do so but

given the the risk that we're facing in

2024 when Bond markets start sending VAR

clear and Powerful signals it's

something you want to pay attention to

now the bond market is far from perfect

we get that out of the way and it's

complicated it's not as pure of a signal

like direct monetary knowledge would be

yet it's useful and the reason it's

useful well in the words of billp back

in 2007 it has inside information that

we could never even dream of the bond

market is the monetary participants

themselves trading in another medium

it's not a monetary medium necessarily

but it's a it's a monetary adjacent

medium that gives us if not a pure

signal a useful signal nonetheless as P

said I'll offer a hypothesis which is

that a number of people who are players

in this market like my contact at a

large Bank are looking at news and

saying that the proprietary inside

information they have on what's going on

leads them to believe that the overall

economy has a soft tone to it that is

not showing up in the data that we

follow and it doesn't have to be about

the economy it could be risks inside say

the opaque commercial real estate market

if we start to see a big rally in bonds

it could be that hedging demand has gone

way up now the bond signal is just where

we start we want to corroborate that

with other these esoteric curves inside

information from directly from the

monetary system itself if not directly

in the form of money supply domain and

circulation it is maybe as close as we

could hope to in lie of regulators and

authorities doing their damn job which

they refus to do after all these years

later so we depend upon bond market

signals as the next best thing as I

mentioned at the opening Chinese bonds

Chinese government bonds have made a big

move over the last couple months which

the Chinese system is actually as opaque

or nearly as opaque as the euro dollar

system is because the Chinese have over

the last 15 years undergone a radical

revolution too and there's many reasons

for it we don't have time to get into

here one reason why as I mentioned in a

recent video China's Central Bank has

become like its Western counterparts

being questions questioned over its

transmission mechanism and that's what

the real transmission mechanism is about

is that we don't know how the monetary

system works so basically central banks

are just throwing darts and wondering if

they can maybe influence some Behavior

well as far as Behavior goes in China

the big rally in its Government Bond

Market is the same thing as the big

rally in Government Bond markets around

the rest of the world it's the monetary

system and financial participants and

economic participants looking at their

own slice of information and saying we

don't like what's going on here because

lower bond yields increase demand for

safety and liquidity and when increased

demand for safety and liquidity is

evident in lower bond yields it raises

all sorts of uncomfortable questions

about what must be happening in the

economy in the financial system and in

the shadows of money wouldn't it be nice

to have that information huge rally in

Chinese Bond another rally that seems to

be forming in global government bonds

treasuries European debt German all

those types of things which tells us

that that's not a good set of

circumstances but where monetary direct

monetary knowledge would be useful is in

more more detailed understanding of what

that actually means so pay attention to

bond yields because we don't have any

real idea about the monetary system

except as as I use in the the black hole

analogy how that black hole the monetary

system we can't see impacts everything

around it that's what yield curves are

telling us even in China

they're not directly related to the

monetary system but they're close enough

to it that you can get a sense of the

overall picture and the overall picture

right now is one where bonds are

rallying even in the face of massive

amounts of Government Bond Supply not

just in treasuries but believe it or not

the Chinese government too and yet

demand for these instruments continues

to be Broad and deep is that that was

the term we used the other day how

powerful is this Chinese Bond rally well

the 10year rate is now below the onee

policy rate so you could say now the

Chinese curve is inverted too that's a

pretty strong message in China but again

it's not just China it's all over the

place in lie of direct monetary

knowledge this is what we have to depend

upon especially in light of how positive

all the official sources and all the

official proclamations are whether it be

in China how the economy supposedly

turned a corner or in the United States

and Europe which is supposed to be

heading toward a soft Landing what does

the monetary system think about it well

we don't know for sure but we do have

some

idea government bonds all about safety

and liquidity well gold is about at

least just safety and gold has had a

record run here too check out that's all

about at the video link below as always

I thank you very much for joining me

huge thank you yal University members

and subscribers and until next time take

care