Breaking Down Eurodollars - The Most Important, Least Understood Market in the World
Summary
TLDRIn 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
🌐 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.
💵 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.
🌪️ 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.
📉 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.
🌉 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.
🌐 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.
💡 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.
📉 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.
🏦 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.
🔍 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.
Mindmap
Keywords
💡Eurodollar
💡Reserve Currency
💡Fractional Reserve System
💡Monetary Black Hole
💡Global Financial Crisis (2007-2008)
💡Quantitative Easing
💡Deflation
💡Dollar Shortage
💡Shadow Banking
💡Plausible Deniability
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
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