Who Really Controls the Dollar? | Jeff Snider

Jeff:
[0:00] This idea that the Fed is some ideal technocratic institution is a modern invention. That didn't show up until the 1990s. You go back and read any contemporary accounts of the Federal Reserve from anything before 1984, certainly the 70s and earlier, the Fed was a joke. Nobody knew who the, Paul Volcker, nobody knew who he was. Nobody knew who William Chesney Martin was. The Fed was essentially relegated after the Great Depression to a back office that sort of did this reserve function targeting stuff to make sure that the government could sell treasuries.

Ryan:
[0:31] Welcome to Bankless, where we explore the frontier of internet money, and today we explore the problem with Eurodollars. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. We have the self-taught monetary historian. He's the host of Eurodollar University, Jeff Snyder, on the podcast today. Now, Jeff believes something interesting. We've never covered this on Bankless before. He believes the Fed pretends it's in control of the dollar, but actually isn't. What's actually in control, according to Jeff, the massive offshore euro dollar market. We get into his head in today's episode. A few things we discuss, how the Fed lost control, the birth of euro dollars, stable coins as the new euro dollar, the cause of the silent depression in labor over the last 15 years, And why all this makes Jeff bullish on, you're never going to believe this,

Ryan:
[1:19] treasuries. He's bullish on treasuries.

David:
[1:22] You'll notice when Jeff drops that in the episode, Ryan and I are like, it was a bit of a record scratch moment. You're like, what? I've never heard that before. And so the first part of the episode is kind of us going through Jeff's thesis on like euro dollar drag. He thinks that the rise of the euro dollars has taken $6 trillion off of the growth of domestic GDP here in the United States. That is a new take that I hadn't heard before. So we explore that. And then it all culminates in exactly what Ryan's talking about, how Jeff is bullish bonds. And so we had to just investigate that thesis for a moment. I'm going to be totally honest, Ryan. I didn't totally get it. I have to go listen to this episode to kind of track Jeff's arguments and thoughts. They are very novel to me and very contrarian to the more typical macro commentators that we have had on Banklist that people are familiar with in crypto, the Lynn Aldens, the Luke Grommens. And the contrarian idea or the normal idea is that, you know, the dollar isn't a problem. We can't have high interest rates because we have too much debt. And if we have low interest rates, well, then we just get debasement. We're getting debasement either way. Jeff doesn't believe that. And so this is a take that we have not heard before. It was nonetheless interesting.

Ryan:
[2:30] Jeff Snyder, welcome to Bankless. Good morning.

Jeff:
[2:32] How is everybody?

Ryan:
[2:33] Doing great, man. Doing great. Living the dream.

Jeff:
[2:35] Doing great for a Monday morning.

Ryan:
[2:37] Yeah, not too bad. It's a really interesting time to be recording this. I guess, you know, all times are interesting, but this is maybe a unique period in history. And we want to get your unique take on the world monetary system, because it's sort of different than I think most of our listeners have heard before. You don't put the Fed at the center. You put euro dollars at the center. So maybe we'll start off with this question. Why do you keep saying that the Fed isn't in charge of the dollar?

Jeff:
[3:02] Well, it's not me saying it. You can just ask the Fed. They would actually answer the same thing. If you actually...

Speaker0:
[3:08] If you got Jay Powell in a room or Ben Bernanke.

Jeff:
[3:10] Or you go back to Paul Volcker, if you get them in a room and make them be honest with you, they would tell you the same thing. There's a famous quote and a famous, at least should be famous, famous for Eurodollar University anyway. In 1991, there was a discussion in the FOMC, and there's transcripts of all this stuff available that you can check out, publicly available discussions. Essentially, they were saying, hey, what are we going to do now that we're not in the money business anymore? The Eurodollar had basically moved on without the Federal Reserve. And they realized under Volcker that all they can really do is target the federal funds rate. So they moved to an interest rate targeting regime, targeting federal funds in the 1980s, not by choice, because that's all they had left. And so they spent the 1980s and the 1990s trying to tell you that moving the federal funds rate around a little bit here and there, up and down by a quarter point every time, somehow controls the entire U.S. Economy, when the truth is that the monetary system not just evolved in different forms, different qualitative forms, it actually evolved more so outside the United States so that the encompassing dollar system is really a global system. So we call it the euro dollar. Euro dollar simply means dollars that are outside the United States. So the Federal Reserve itself has admitted if you actually do the research and do the homework and not just accept the idea that they print money, which they want you to believe. The monetary system evolved many, many, many years ago. The Fed, what do we do now? Either they shut the thing down or they start targeting an interest rate.

Jeff:
[4:38] So not only have they been selling this interest rate targeting policy, because that's their policy and that's the only policy lever that they really have, they've been selling. The other part of that is, okay, short-term interest rates must be this massive control lever over the entire economy. Otherwise, all the Fed's doing is a bunch of performative theater. So not only do they have to cover up the fact that they don't actually do money. In fact, when's the last time you heard Jay Powell or the FOMC talk about money? They talk about interest rates. They talk about economic variables. They never talk about money. And this is why. So they've been telling you, hey, we target an interest rate. That's our policy. And then they've had to make interest rates into the most important financial variable that there is, Even though we see repeatedly through history, just in the sense, you know, modern history,

Speaker0:
[5:25] First of all, rate cuts don't work.

Jeff:
[5:26] Rate hikes don't work. Fed's interest rate policy doesn't correspond to many macroeconomic variables at all. So once you realize the Fed doesn't actually control everything that everybody thinks the Fed does, you have to start finding out, OK, what how does this system really work? We have to go back before all this interest rate targeting stuff began. And what is this euro dollar system really about? And where does, you know, how does it operate? So the Fed, like I said, it's you don't have to take my word for it. Just do a little bit of research and homework. And they will say that we don't do money here. We do interest rate target it.

Ryan:
[5:56] It's interesting because they want to maintain some perception of control over something that's important. And you're saying that's interest rate targeting. Maybe they don't explicitly say that's money anymore. Maybe that's kind of the bait and switch. But getting back to the question. So if the Fed doesn't control the dollar, who does? Who actually controls the dollar?

Jeff:
[6:17] Well, that's the thing. There is no control. It's not like somebody is sitting in a room deciding, okay, the dollar is going to do this or that. It's a marketplace. So you have a marketplace. To really understand this Eurodollar system, we have to ask ourselves a couple of other more basic and fundamental questions,

Jeff:
[6:32] which is what is a bank and what is money? When you ask people what is money, people think, well, okay, it's these little pieces of paper that the Federal Reserve prints up, and therefore we have these paper pieces of paper that's currency. Your audience is probably a little bit more astute to this. Yeah, yeah.

Ryan:
[6:45] I'll give you a definition that our audience has heard, like repeated ad nauseum here, like forever, which is a store of value, a medium of exchange, and unit of account. That is money. So crypto people generally, they have sort of that as their definition of money, and it's not just like dollars in a bank account.

Jeff:
[7:03] Yeah, well, I mean, those are the forms of money, but those are the functions of money, but the forms of money actually make a difference too. We're talking about ledger money and the transition to ledger money. In modern industrial society, it's been moving toward ledger money for centuries. In fact, the rise of banking, what distinguished a bank in, say, medieval times from, say, a gold vault or a bailment, a bank is not just a storehouse of valuable items that then engage in fractional reserve lending. A bank actually, what distinguished a bank from a bailment arrangement with just, you know, say, goldsmith or something like that is the ability to financial transformation, but also offer some other more useful payment means, means of selling payment. Essentially making money more mobile and elastic and flexible. So banks arose in order to undertake those functions because the need of the modern industrial society

Jeff:
[7:56] We can't have a store values-based monetary system. I mean, that works in feudal times when nobody's actually really transacting, except for maybe at the highest levels. Once you get into a more mercantile arrangement, what happens is money needs to be more mobile and banks arose to make money more mobile. So it's, we went away from store value types of money toward more mobile forms of money, which is, you know, ledger types of format. And the Eurodile simply took that ledger format and extended it into an international setting. And this is basically the solution to Triffin's paradox or Triffin's dilemma. But the point I'm trying to make here and coming about it in a very long-winded way is that on a ledger form of money, what matters is who keeps the ledgers. And in the Eurodollar system, what you have is a series of interlocking ledgers and integrations. The Eurodollar system isn't really a currency system as maybe most people conceive of it. It's simply a way to reconcile all of these different ledgers. So who controls the dollar? It's

Jeff:
[8:54] the flow between all of these different ledgers from all over the world. So ledger money places emphasis on the bookkeepers. And the bookkeepers happen to be these large banks. It's, you know, all these international banks that have been operating for many, many, many years. They don't necessarily control the dollar, but they maintain it. They do function as intermediaries in the system to keep it running. Dealer banks in particular have a central role.

Jeff:
[9:19] So we place a lot of emphasis on what dealer banks are doing because they're the ones doing the circulation. In many instances, they're also doing the money creation too. But I don't want to go so far as to say that they're in control of the system because nobody's in control of the system. It's just a marketplace where basically the entire world comes together and tries to resolve all of these competing needs and doing it in a ledger money virtual currency format.

David:
[9:45] You quickly defined Eurodollars already, but I think it's worth double tapping on that. The name Eurodollars implies that it comes specifically from Europe and like historically that's true, but I think that isn't really helpful in actually explaining to listeners what a Eurodollar actually is. I think it's actually kind of a bad name. Maybe you can kind of just kind of run us through the history of the creation of Eurodollars and kind of explain it from first principles so we can really like tackle this topic head on.

Jeff:
[10:09] Well, you know, people are lazy. So they started out with this nickname Eurodollar, which was coined in 1960, just because that's where the center of gravity in the system was, was in Europe, basically London, Germany, Switzerland. Even though back then in the earliest days you had a heavy Canadian influence too, it just, people called it Eurodollar because it seemed to be a European US dollar system. But the Japanese very quickly, they really got themselves involved in the system. I'm very, yeah, so euro dollar is a misleading term, especially nowadays, ever since the introduction of the European common currency, people think it has something to do with the euro. But euro and dollar, you have to separate, it's two separate terms that have been put together. The dollar, obviously, that's the US dollar denomination, but even that's less important than it seems. And the euro simply means offshore. So there's things like- Elsewhere,

David:
[10:56] Just not in the United States.

Jeff:
[10:58] It's not just the United States, it's offshore basically of everywhere. So like if you have a bank that's operating the city of London or the Cayman Islands, for example, you're basically offshore of every regulatory authority. Because yes, there are regulators in the city of London or in the UK, but what they've said is that if you set up an international bank in London, we don't care what you do. So basically it's offshore of everywhere. So the term euro is really just offshore money. So euro dollar is offshore money, unregulated money that's operated in this ledger system by banks. So You can have euro yen, which is offshore yen. You can have euro euros, which are offshore euros. And I agree with you. The term is misleading. It's clunky. It doesn't really describe what really happens. But like I said, we're humans. So we just, that's the term that people have been using for a long time. So there's no real incentive or drive to change it.

David:
[11:47] I don't really know how big the yen dollar, the euro dollar alternatives are. But I'm guessing it's something like the market share is 97% euro dollars and then foreign yens or foreign euros or something that's completely marginal. Is that, that's my intuition. Is that right?

Jeff:
[12:05] Yeah, first of all, we have no idea. That's one of the biggest problems we have is that nobody really knows the size, the scale, what's really going on here. I mean, we make some judgments about what we think is happening but because it's offshore of everywhere, we don't really have a whole lot of insight. Of those people who do try, and there's very few, like the Bank for International Settlements, for example, they'll put out some estimates on, say, for the FX markets. FX markets are incredibly important to the flow of funds through the Eurodollar system. What they find is that the U.S. Dollar is about 90% of the FX markets. So it can be higher, it can be lower, but it's essentially 90%, which means that the U.S. Dollar denomination is basically on the other side of every other FX transaction. So when you sum up all the FX transactions, it sums up to about 200% because, you know, you're getting both sides of it. So the dollar is basically the intermediating currency for every other currency denomination on earth, which by the way, is what a reserve currency is supposed to do. And I think that's another part of this discussion is nobody knows what a reserve currency is. They think it has something to do with oil prices or, you know, China holds a lot of US treasuries. Well, yeah, I mean, that's, those are both offshoots of what the euro dollar reserve currency is. A reserve currency's job is simply to have a, simply to create a fluid and dependable medium so that you have disparate systems from all over the planet that can talk to each other and transact with one another in a common set of protocols and standards in a predictable and flexible fashion.

Jeff:
[13:30] But it takes an incredible amount of resources and effort and just sheer ingenuity to keep all this global system running that it can cover the entire world. So the U.S. dollar denomination is on the other side of every transaction because it is this intermediating reserve currency.

David:
[13:49] Now, I'm sure you're familiar with stable coins, and this is the part of this global financial system that's growing that our listeners are the most familiar with. Maybe you can differentiate the difference between euro dollars and stable coins. Maybe there's less of a difference than people think. When you think about this euro dollar market or this offshore dollar market, how are stable coins part of that world? How are they novel to that world? How are they distinct? Just like, are they considered euro dollars? How do you integrate these things?

Jeff:
[14:16] Well, I would think they would be considered euro dollars because, I mean, it doesn't matter what any government body or what you and I say, it's what the commercial system and the financial system use. If financial participants decide that they want to use stable coins to intermediate all these transactions, then they're part of the system.

Jeff:
[14:32] Whether or not they represent a step away from the euro dollar into something new, that I think is arguable. I'd like to see something like that happen, but I don't know if that's the case just yet. In fact, I mean, the euro dollar system itself, when it first arose back in the 1950s, and I think it goes back into the 1940s, it's essentially the same thing. Nobody really knew that it was happening, but people were transacting dollars in Europe and ledger money dollars, not physical currency, because that was the needs of the commercial system. So you had all these banks and all these commercial participants in the real economy that were using a form of money that was not recognized anywhere by anybody. But it was being used in the real economy in real ways, and so it was therefore it was affecting everybody's life. So the euro dollar essentially grew organically from the bottom up before even regulators and the officials knew that it was happening. So in many ways, the stablecoin revolution is kind of taking the same road, Although it's a little bit more visible in the social media era where it's all over social media. It may not be in discussions among authorities, but we don't care. As long as commercial participants and financial participants are using this medium of exchange, then it becomes part of the system.

Jeff:
[15:39] Whether or not we recognize it officially or not, assuming there is something official. I think that's exactly what's been happening. Because of the limitations in the current euro dollar era and the euro dollar system as it currently exists,

Jeff:
[15:52] There's a door, there's a wide open door for competing mediums of exchange that can undertake the same roles of a reserve currency, the same functions, maybe not to the same extent in the same degree that the euro dollar does, but there is a wide open opportunity to undertake some of those roles and stable coins are filling it. There are more efficient ways in many ways, there are more efficient way of transacting around in a

Jeff:
[16:14] In a global environment than the euro dollars. I mean, like if you want to transfer money on a weekend, you're not going to do it through the banking system, but you can do it through stable coins. So stable coins are filling a couple of different needs. One is the euro dollar system itself has been malfunctioning and misfunctioning for quite some time. And the other thing is in the cryptocurrency space, Bitcoin too volatile. So there's a need for somewhere in the middle, something that can do what the current system does, but also, you know, not as necessarily as unpredictable and unfamiliar as something like Bitcoin. And so what stablecoins have done is quite ingeniously is basically become money market funds with tradable tokens. Money market funds, everybody knows what a money market fund is. It's basically an investment fund that has reserve assets and then equity shares on top of it. Why not have a money market fund where you can transfer your shares in the fund? It becomes a useful medium of exchange that's backed by real assets or what people consider to be real assets. And so you have a reliable, especially as the technology grows and people become more familiar with it, you have a reliable and as the name implies, relatively stable media of exchange that also has a relatively substantial global reach that can then become something of a more substantial.

Jeff:
[17:30] I think in this current stage, it's contributing to the Eurodollar system because most of the reserve assets are traditional US dollar denominated assets It's like a repo, repo lendings and treasury bills and things like that. Like I said, it looks a lot like a money market fund, but there could be, there should, in effect, I hope there should be some, come a time when stable coins go beyond the current system and do.

Jeff:
[17:52] More and more unique things that really lead to another stage in the evolutionary

Jeff:
[17:57] process of ledger money.

David:
[18:01] What I want to get out of this episode is kind of learning about the rise of the euro dollar market, which is inclusive of stable coins. And connect us back to an original point you made, which is the Fed is losing control, is losing some of the tools in its tool belt because of the rise of this market. It's been a while since we've done a stable coin, a euro dollar episode on Bankless. I think the last one we did was perhaps almost two years ago. And I think the most interesting thing about that was during the rise of the euro dollar market in the first place, it very much looked like the rise of stable coins, where first it was very small and it was so easy to ignore by banks and regulators and the Fed that they just chose to ignore it. And then the next year, it was 10 times bigger. And then the next year after that, it was 10 times bigger. And then the next year after that, it was so incredibly large that, you know, the cat was out of the bag. Pandora's box was opened. And this is something that stablecoins have followed in more or less that same trajectory. These offshore, slightly unregulated, novel ways of having just commerce and money outside of the control of the Federal Reserve. And so, you know, today there are something like $260 billion of stablecoins. Just a few years ago, there were like $30 billion of stablecoins. And a few years before that, there were three.

David:
[19:10] And so we're seeing a pretty rapid growth. And especially to the point where like now the onshore equities markets, you know, onshore investors inside the United States are like finally paying attention to this. I want to connect this back to something that you said in the very beginning of this episode, because I think this is the thing that I want to learn the most of is that you indicated that the rise of these of the euro dollar market

David:
[19:30] and now in an evolution of that, also the stable coin market. The Fed has lost control.

David:
[19:35] I want to unpack that a little bit more. What tool are they? Did they specifically lose? Because now we've said they have to go to federal funds rate targeting.

Speaker0:
[19:44] And they are now targeting interest rates, not money.

David:
[19:47] And I'm a little bit unclear of what targeting money would have looked like and what kind of control that they have lost. And then how does that give you insights about what the future of the global economy looks like? If you could just take that conversation from there.

Jeff:
[20:01] Yeah, the question is, did they ever have control? There is a legitimate question. That's a legitimate question. It goes back to the very beginning of the Federal Reserve. What was the original purpose of the Fed? And it's right in the first paragraph of the Federal Reserve Act. It's to furnish an elastic currency. But how do you furnish an elastic currency? Well, in a paper money system, you supply more paper money when it doesn't circulate the same way. I mean, that's basic monetary economics. But that's not what the Fed ever really did. The Fed really did was discounting bills and notes and things like that, which meant that it created its own form of interbank ledger money called bank reserves. And bank reserves, which we've all heard about under the quantitative easing regime, bank reserves have never really been a useful form of money. It's based on the 1907 panic where clearinghouse associations during the panic issued another form of quasi-money, interbank money called clearinghouse debt certificates. And so the Fed said, we can do the same thing because it seemed to work in 1907. So instead of furnishing an elastic currency, we'll try to furnish an elastic interbank currency. And if we do that, then it'll keep the banking system liquefied enough that banks won't, they won't fail in such a substantial degree that we won't have depressions and things like that. So to furnish an elastic currency, the Fed's job was to create these bank reserves, which was supposed to function as an interbank currency. It will keep banks liquefied so that at least they would have some minimum form of operation and operational security.

Speaker0:
[21:27] That didn't work.

Jeff:
[21:28] I mean, because 1929 was basically a decade and a half after the Fed founded and we had the worst monetary crisis in human history. And the Fed was founded specifically so that something like that wouldn't happen. So there's an argument from the very beginning whether or not the Fed ever had the control. And what I point out to people is that this idea that the Fed is some ideal technocratic institution is a modern invention. That didn't show up until the 1990s. You go back and read any contemporary accounts of the Federal Reserve from anything before 1985 or so, 1984,

Jeff:
[21:59] Certainly the 70s and earlier, the Fed was a joke. Nobody knew who the, Paul Volcker, nobody knew who he was. Nobody knew who William McChesney Martin was. The Fed was essentially a basic, it had been relegated after the Great Depression to a back office that sort of did this reserve function targeting stuff to make sure that the government could sell treasuries. That's basically all the Fed was up until around 1980. And the only reason that in 1984, the Fed gained any kind of currency, pun intended, was because nobody knew why the great inflation ended. And so the Fed invented this idea that Paul Volcker somehow conquered the great inflation by targeting an interest rate. And then the Fed ran with that because they realized they couldn't, they had no ability to impact the monetary system that existed, which is this euro dollar system. First of all, it was offshore, outside their control, just regulatory control. So they said, okay, we'll create this narrative because we don't know if it's true or not, that Paul Volcker conquered inflation by targeting an interest rate and holding interest rates high that somehow led to the end of the great inflation.

Jeff:
[23:02] So the idea here is that the Fed came up with a new set of tools that eventually ended the great inflation and created the great moderation. But because nobody has any other explanation for either of those things, because nobody has any idea the euro dollar exists or the euro dollar system explains all of these things, everybody has since then thought, oh, the Fed made some big institutional changes, these significant changes that led to a period of unparalleled prosperity. Therefore, what was a joke up until that point suddenly became this ideal technocratical institution with these massive powers and these massive levers. And, you know, Ben Bernanke famously in 2002 said we had the printing press, even though he was lying through his teeth. Essentially, their power is psychology. If they get you to believe that this modern Fed is somehow this powerful, skillful, technocratic institution and you buy into that, essentially you become the policy from the Fed. If they can get you to believe that them lowering the federal funds rate by 25 basis points is somehow stimulus to the economy, maybe you'll start acting that way and then you will become the stimulus, which is why none of this actually works, because psychology is certainly not enough in any real meaningful sense. So the idea, I mean, does the Fed have any tools that are essentially what they're supposed to be? The answer is no. What they rely on is this massive gray area where these people.

Jeff:
[24:27] All of these factors are basically unexplored by economists because they don't really have any incentive to explore them. The Federal Reserve is never going to come out and tell you, oh, by the way, we didn't choose interest rate targeting. We were forced into interest rate targeting. Interest rates aren't exactly as important as we make them out to be. And by the way, historically speaking, interest rates are the opposite of what we tell you. When interest rates go down, that's not stimulus. That's a sign that the system is in a very bad way and things are getting worse.

Jeff:
[24:55] We see low interest rates during depressionary conditions. It's not stimulative. You see high interest rates during inflationary conditions. What were interest rates doing in the 70s? They were going up. So the Fed has basically brainwashed and gaslit the world into believing everything that's not true, which is very difficult because when you try to tell people that this is how things work, they think you're absolutely crazy because we've been conditioned to believe the Fed hit upon some magic golden factors and policies that led to this ocean of great prosperity during the Great Moderation. And therefore, it's this all-powerful institution. So if Jay Powell says lowering interest rates and stimulus, we're all supposed to clap like seals and say, wow, this is powerful stimulus, even though you don't see it anywhere. Just look at any recession. Look at 2008, look at 2001, look at 1990, 91. What does the Fed do during the recession, lowers interest rates, does not prevent the recession, does not stop unemployment from rising, doesn't do anything. In fact, it's a reaction to the weakness. So what they're left with doing to try to save this idea of interest rate targeting is to tell you, well, it would have been worse. This recession would have been a lot worse if we hadn't lowered interest rates. That was the job save fallacy of 2008.

Jeff:
[26:10] Well, if we didn't lower interest rates down to zero, it would have been like

Jeff:
[26:13] the 1930s all over again. So I mean, once you actually stop and think about it and look at these things in historical context and actually do some homework and research, you see that basically the Fed has invented itself and invented this legend and myth that it's central to everything through nothing more than targeting an interest rate. And it's not even all interest rates. It's just one single interest rate out of a whole constellation of interest rates. So.

Ryan:
[26:38] That's fascinating, Jeff. Like you have just such a counter idea to everything that's kind of mainstream around this, right? Because, you know, All of traditional finance, they think they watch Jerome Powell. Every move he makes, Fed fund rate is basically the gospel.

Jeff:
[26:51] Even that though, right? I mean, look, when the Fed does a decision, what do they do? They have this press card. And the press card, it takes on the air of a religious ritual for this very reason.

Ryan:
[26:59] Oh, I totally get it. He gets in front of the podium.

Jeff:
[27:02] He's got the flags behind him. He's got all the big media people there. He's the high priest. They're all kissing his ass. He's exactly. And that's to maintain this air of illusion or this illusion of control. I had an artist that worked for me a long time ago who did this, you know, The Wizard of Oz. Jerome Powell is the floating head. He's really the shabby little guy behind the curtain that Toto goes over and pulls the curtain back. And that's all you have to do is read through the transcripts and look and just even think about it just for a couple seconds. And it kind of starts to fall apart without just a little bit of thought.

Ryan:
[27:32] I think most people in crypto are completely open to the idea that much and maybe most of what the Fed does is basically psychology and it's kind of games and it's all about narrative, I'm still having a hard time wrapping my mind around the idea that nothing the Fed does, does anything. Maybe they're kind of pushing on a string, but there is some force applied. But maybe you can reinforce another side of this because you were making the point earlier in the episode that the Fed's not in control. And I asked the question, well, who is in control? And you said no one, right? And you said no one, but I also think you mean there is a force at work here. Maybe that force at work is flows. Maybe that force at work is the market. You mentioned things like the Triffin dilemma. This gets to the question of like, okay, let's talk about not in terms of who's controlling euro dollars, which you're saying euro dollars actually are the world reserve currency. It's not money in US banks, which is a novel concept in and of itself. Let's talk about this market force that is pushing these euro dollars forward? Because I'm not sure we completely understand that. Like, why is there demand for euro dollars and what force is pushing that forward?

Jeff:
[28:45] Yeah, let me clarify one thing first before we get to that. The position is not an extreme that the Fed has no influence and has no role and does nothing. It's not that far. It's just the Federal Reserve's ability to influence, first of all, financial characteristics as well as economic circumstances is far more limited and far less potent than it's made out to be. The Fed doesn't do nothing. The Fed isn't completely powerless. It does have some levers of influence and control. And the federal funds target is one of those because the Federal Reserve offers a competing alternative, a competing investment alternative for short-term funds. That's what the reverse repo floor is supposed to be. That's what IOR is and has become. And there's a whole different discussion about why that is. But the Fed does have some ability to influence. The problem is its influence is over something that's less important than people believe. And its influence doesn't extend as far into the financial system as we're led to believe. So it does have some ability to influence some things, but the questions are about what does that really matter? So let's make sure we clear that up. So as far as what, you know, I get where you're coming from, where you're going with this question about what controls the Eurodollar system. It's not who controls it, like you're implying with your question. It's what controls it. Exactly.

Speaker0:
[30:01] There's various reasons.

Jeff:
[30:02] I mean, just demand for dollars, as you were saying, comes from which arises just from the needs of a reserve currency. And reserve currency is, OK, you're someone over here. I always use the example of someone in Japan that wants to import some goods from Sweden. They want to buy a bunch of IKEA furniture and bring them into Japan. Well, how do you do that? Well, reserve currency is you get these two systems that are very different to meet each other in the middle. So that means that if you're a Sweden, if you're IKEA and you're trying to sell your furniture in Japan, you either have to accept yen as payment, which that's not going to be very good because they pay you in yen. What are you going to do with it in Sweden?

Jeff:
[30:38] Really has a limited use in Sweden. Or the Japanese firm is going to have to accept, going to have to find Swedish kroner somewhere in Tokyo and then send it to Sweden, which they're not going to be able to do that either. What they can do is if there is a common currency that's useful in both places, then they don't need their own currencies, which have their own problems and their own limitations. So, for example, U.S. dollars, the U.S. dollar denomination is both available in Japan for the Japanese importer to send his payment. And it's also useful in Sweden because the Swedes can use it once they get paid in dollars. They can use dollars to go buy other things like raw materials or whatever else they need. So if you have a common currency that's in between them, suddenly this transaction that, you know, it's not impossible, but this commercial transaction that would otherwise be very costly and inefficient becomes far less costly and very, very efficient such that global trade can absolutely flourish under this common medium. So just the fact that there is this common reserve currency medium gives rise to demand for that currency. So it's tied very closely, and I hope you can see this very closely,

Jeff:
[31:44] to the commercial needs of the system. So if you have a period where commerce is expanding, the global economy is really flourishing, there's going to be demand, just commercial demand for U.S. Dollars to make sure that lots of trade and therefore demand for dollars to intermediate all those transactions.

Speaker0:
[32:01] There's also a ton.

Jeff:
[32:03] It also works the same way in financial transactions too. In many ways, the financial transactions have kind of overtaken the commercial side of things. At least they did in the late euro dollar period.

Jeff:
[32:13] So you have, okay, you've got Japanese that have yen. They don't want to invest in Japan, but they would love to invest relatively low risk at higher yielding rates outside. So they can borrow in U.S. Dollars by putting up yen as collateral and then take those U.S. Dollars and invest in China, emerging markets, U.S. Treasuries or anything. out. So the US dollar or the euro dollar actually becomes the global reserve intermediating currency for financial flows too, which means that financial characteristics around the world also impact the demand for US dollars as well as the flow from US dollars.

Jeff:
[32:45] Because in the middle between all of this, that's regulating all of these various commercials and financial flows are these dealer banks. The dealer banks, as I said, are the central component to it because they're the ones that are matching all of these various needs. So how does IKEA in Sweden end up with U.S. Dollars that arise from a commercial transaction in Japan? Well, there's usually several steps to the euro dollar system where the Japanese firm contacts a Japanese bank that then borrows U.S. Dollars on the euro dollar system. And then the U.S. dollars are transferred to some couple of banks in between that end up on the account of a bank in Sweden and then get repurposed from Sweden. So you have essentially this dealer bank system whose job it is to, first of all, maintain the flow and the operation of this intermediating currency, which means that the dealer banks and their perceptions also become a very important variable on the operation of this entire system as well. So if dealer banks become, say, risk averse because they see something they don't like and their customers are starting to hedge, for example, they're starting to be more cautious.

Jeff:
[33:53] Well, they're going to see that information and probably use that information for their own operations. If all my customers are suddenly more cautious because they think the business environment has turned, I might become a little bit more risk averse, which means as a dealer bank, I might pull back on some of my balance sheet activities. And therefore, the flow of funds and flow of euro dollars through the system might actually become more and more restricted because we're reacting to fundamental perceptions of either economic factors or financial factors or something else. So what governs the flow of dollars to the system, euro dollars to the system is really perceptions of commercial conditions or whether it be financial conditions. And oftentimes, the two are one in the same. You see risk aversion that arises because people fear the economy slowing down. That becomes then a restriction on monetary flow, which leads to actually the reality of the commercial system slowing down and it becomes a feedback loop. So it's not really a control over the system. It's really a reflection of what people's perceptions are of these very fundamental properties.

Ryan:
[34:54] That makes perfect sense. And it does make sense that euro dollars would take off from a supply perspective in the midst of 1950s on globalization of the world, right? Because then you have this common unit of account, medium of exchange that you can use for all world commercial transactions between companies. It also makes sense that it would be financialized. One thing I still don't understand, again, we're in the world of, as you defined what money is, it's this ledger technology and who are the high priests of ledger technology? These are the banks, they maintain the ledgers, they sort of create these instruments and they somewhat create the euro dollar. I feel like I understand the extent that one can understand how a US dollar in say something like M2 is created, right? the US system, fractional reserve, like banking, we get M2. I also understand how stablecoins are created, at least the more quasi-regulated stablecoins, the stablecoins that are going to be regulated under the Genius Bill, they're basically backed by treasuries.

Ryan:
[35:58] So treasury supply has to go up, Secretary Besant has to sell more treasuries, and then every dollar in stable coins is basically backed one-to-one with US treasuries. So we can see that and we can see that on chain. I still don't understand fully what backs a euro dollar or how a euro dollar is actually made. And it's flabbergasting to me that you said earlier in the conversation, we don't even know how many of these things exist because we know what M2 is in the US banking system. And we even know what stable coins are and the total supply of them. David had quoted it earlier, $250 billion. We can see it on chain right now. How is it that we have no idea how many euro dollars are out there and what are these instruments anyway? What are they backed by?

Jeff:
[36:47] Yeah, that's the thing. They're not backed by anything. In a pure medium of exchange, it doesn't need to be backed. It just needs to be accepted by those using it. The problem arises because all of this money is on the balance sheets of these large banks. And it's not just a large bank. The large banks extend into all the smaller banks that operate in the system. The simplest example is something like you have a bank in Switzerland that has a dollar claim on a bank in London, say a big bank. And it's really, the big banks are very important because they're essentially like the referees. They're the ledger, they're the ledger keepers of all the ledger keepers.

Ryan:
[37:15] They're the super ledgers.

Jeff:
[37:17] Exactly. So if, if this bank in Switzerland has a dollar balance with, you know, say Chase Manhattan or some, you know, JP Morgan nowadays, I use Chase Manhattan because that's the, one of the original Eurodollar providers. But essentially,

Jeff:
[37:30] Essentially, you have a credit. You have a credit with J.P. Morgan in London, let's say, the London subsidiary. And one of your customers says, I need to make a payment to a bank in France. Well, rather than having to go into somewhere and find U.S. Dollars, instead, what you can do is say, hey, I need to credit this bank in France U.S. dollars because my customer needs to make a transaction. And J.P. Morgan says, well, I can do that for you. We don't need to transfer any funds out of your account. You can just borrow funds from me. So essentially, I will create funds for you on my balance sheet that the bank in France can then access as U.S. dollars in the system. So essentially, J.P. Morgan has created U.S. dollars that then gets transferred to France that can be used as dollars in the system. And J.P. Morgan, of course, is not doing that out of the goodness of its heart. He's doing it because it expects to pocket a spread or in this case, an interest rate. So essentially, renting out balance sheet capacity to create additional dollars so that this bank in Switzerland and the customers tied to it can undergo real economy, you know, can undertake transactions in the real economy, whether they're commercial or financial, doesn't really matter. So essentially, JP Morgan says, I'm going to rent out balance sheet, my balance sheet for you to do this. You don't have to do anything other than pay me an interest every once in a while. And suddenly I just, I put, I have an accounting item that goes, a line item that goes onto my books.

Jeff:
[38:48] And it works as long as everybody agrees that that's what we use as a medium of exchange. So the bank in France has no idea where these dollars come from. They don't actually care. All they know is they have a credit on J.P. Morgan's books in London that allow them to do anything that they would have done otherwise.

Ryan:
[39:07] Okay, but doesn't this imply that the ledger is like we can see the amount of euro dollars out there? We just have to look at all the big bank balance sheets. And ultimately, J.P. Morgan, it's a U.S. bank, right? So that's somewhat controlled by the Fed, let's say. So, I mean, is it useful to look at Eurodollars as some sort of, you know, M above M2, you know, like an M4, M5 or something like that? But like we can kind of route trace it down to the U.S. banking system, can we not?

Jeff:
[39:34] No, because it doesn't have to be U.S. banks. The example I just gave you could be Mitsubishi UFJ. It could be a bank in Singapore. Depends upon the hierarchy of the Eurodollars. And there's various reasons for that. For example, CHIPS is a big real-time gross settlement system that the euro dollar uses for much of the biggest monetary flows. The CHIPS system, you have sponsoring banks, which are the largest banks that sponsor hundreds of other banks that can operate through the system. But essentially, the sponsoring banks of CHIPS are not U.S. banks. In fact, they're primarily overseas banks. And they could be in the UAE. They could be Chinese. They could be basically anywhere. One of the reasons the euro dollar system arose wasn't just it was filling the need of Triffin's paradox. It was a way to have secrecy. Offshore really means not just outside of the regulatory monitoring. It means that we can do things that governments are never going to find out. Let me give you an example of this. There was a study... Collateral is a huge part of the Eurodollar system, financial collateral, because on a system like this, this world spanning, you're going to be transacting with people who you never know.

Jeff:
[40:36] I mean, the example we use, I mean, the Ikea, the bank in Sweden that's transacting with the bank in Japan, they probably never had any transactions before. So there's really no way for banks that have no idea of each other's profile other than doing some incredibly cumbersome and inefficient due diligence. The only easy way for them to transact easily is for one to put up financial collateral for the other then i don't need to know anything about you i just know that you have financial collateral so financial collateral is one of the key ingredients the euro dollar flows and we have zero idea how the how collateral flows to the system and it's a lot more complicated than you think when you get into securities lending and hypothecation rehypothecation and a whole bunch of other things so the point i'm trying to make here is that regulators regulatory authorities have come to realize, hey, collateral is pretty important and it flows and tons of it flow in the U.S. Treasuries primarily outside the United States in these offshore regimes. So the Office of Financial Research, which is part of the Treasury Department, went to all of the U.S. Primary dealers because those are the ones that have coverage over, regulatory authority over and said, hey, we would like to get a look at your books offshore, your repo books, not because we want to, you know, we're not going to try to create any enforcement actions. We're not going to try to get you guys and say, oh, we're going to, you know, you're doing this wrong and we're going to get you in trouble. They just wanted information. The Office of Financial Research wanted to put together a more comprehensive view of offshore repo.

Jeff:
[41:56] And so they contacted all the primary dealer banks and basically they were given the middle finger from most of them. It was only about, I'm going off the top of my head, I think it was six or eight that said, okay, we'll let you see our offshore repo operations. And even those banks that allowed them to do it said, you can look at our offshore repo operations on three days. It wasn't even like you can monitor our books for a month. It wasn't like you can monitor our books for a week. It's like, we'll give you three specific days and we want your asses out of here. That's why we don't have any information because there's zero incentives for these offshore banks to let the world know what they're doing. And there's zero ability from regulators to say, we need to see what's going on. And by the way, the regulators don't really want to know either. I mean, there's regulatory capture that goes on in there. But The idea that we have no idea, that we have very little idea or certainly not enough idea what's going on in the offshore system isn't as far-fetched as it actually sounds. Because unless all of these various banks open up their books and say, we will let you see what we're doing in real time all the time, we really don't really have a good enough idea.

David:
[43:02] I'd like to transition us to the point in the conversation that's, I'll call it the so what part of the conversation.

David:
[43:08] Because like I'm looking at the markets right now, Bitcoin's at $122,000. That's great for crypto. The stock market, SPX, is at all-time highs. I don't really feel like there's a problem here. What is the problem? What is the punchline here about the consequences of all of this? Yeah, okay, so Federal Reserve has less control than we originally thought. It turns out things are much more psychology-based than raw numbers on an Excel sheet. But so what? World's still chugging along. I don't really see like anything breaking here. Maybe I'm naive. What would you say is like the big takeaway or the big punchline that we might need to like understand in the future?

Jeff:
[43:51] Well, it's not the future. And what you just said is exactly it. Is the world just chugging along? That's really the question. I think for most people, they think that's the case, but it's actually not the case. So, I mean, yeah, you make the same argument when the Eurodollar arose in the 1950s and into the 1960s, you had a period of massive prosperity. So people, okay, who cares? The Eurodollar system arose. It solved Triffin's dilemma. Bretton Woods had already broken down. So this is great. This is fantastic. That's fine. Then you got into the great inflation, which nobody could explain, even though it was coming from offshore, there's offshore centers. But suddenly you could get that. You got the sense that something wasn't right. There's all this inflation. Authorities have no idea where it's coming from. We can't see it in, even though some of the people who do watch the monetary statistics, the domestic monetary statistics, can't seem to figure out where this inflation is coming from. And Stephen Goldfeld, his famous 1976 paper, The Case of the Missing Money, all of that stuff. So we had the euro dollar rose, everything seemed to be fine. And then suddenly it wasn't fine. That's kind of where we are. And I don't mean in inflationary circumstances. The euro dollar broke down on August 9th of 2007. And the world hasn't been the same ever since then. You say it's been chugging along, but it actually hasn't been chugging along. And you can see this in the economic statistics of everywhere around the world. Whatever, what you see is that from 2008 forward, growth rates around the entire world fell off and they fell off in a uniform fashion to varying degrees. But there was an inflection point in the 2008 crisis and things have not been the same ever since then.

Jeff:
[45:21] Now, the problem that you have getting people to understand why that's important is because you look at, for example, GDP. You look at US GDP and you think, well, there's the chart goes up and it continues to go up like this. And so what's the big deal? GDP is expanding. Even if it's not as much as it was before, who really cares? As you said, maybe we're just chugging along and the economy's fine.

Jeff:
[45:42] But instead, when you look at GDP and you put and compare it to any kind of baseline, it fell off a lot in 2008 and never came back. So that by the time you get to 2019, before we get to the pandemic, by 2019, GDP is somewhere around $6 trillion off of trend. $6 trillion, that's not chugging along. And so there are very real consequences of that being $6 trillion behind trend.

Jeff:
[46:03] Number one is fewer people have jobs. So the participation rate in the economy fell precipitously after 2008. And it leveled off a little bit, but it leveled off at really low levels that people don't have as many jobs. We don't have as much income. That wasn't baby boomer retirements. That wasn't lazy Americans or all the excuses that economists have put up to try to explain why participation has gotten so low. It's not accident and random coincidence that labor participation peaked in, or not peaked, but shifted in October of 2008. Because there was a very clear event that happened in October 2008 that would start to explain all this stuff. And the point I'm making is that in one economy after another, after another, you see exactly the same thing. 2008 was an inflection point where the world that we thought we had, which was a period of legitimate prosperity that spread more places around the world than we could ever have imagined, suddenly stopped. So from 2008 forward, while economies are growing and output is expanding, it's not expanding nearly enough to maintain a level of minimum capacity that allows for things like actual full employment.

Jeff:
[47:14] And the 2020s have actually made it a lot worse. So as bad as things were in the 2010s, in the 2020s, they have gotten enormously worse because now we have the element of the phase shift in prices, which everybody calls inflation. It was really just a supply shock that basically took the 2010s and added an element of high degree of impoverishment on top of it because we lost all this purchasing power when prices zoomed ahead in 2021 and 2022. too. So not only do we have enough, we don't have enough jobs, we don't have enough output. Everybody was impoverished by the supply shock. And what's supposed to happen during after a supply shock is that incomes are supposed to come back to claw back all that purchasing power that was lost in the phase shift. But with the conditions that we have in the 2020s on top of the 2010s, the labor market, employment around the world are nowhere near sufficient enough to ever get back the impoverishment or get back the lost purchasing power in the economy. me.

Jeff:
[48:08] So the idea that we're just chugging along and everything's fine, if that was true, I would agree that all this euro dollar stuff would be kind of neat little history. It would be academic, it would be something that, you know, economists might want to study and maybe central bankers, if they ever get off their lazy asses and decide that they need to look at this stuff. But it's not just trivia. It's actually important because it explains why we're in this condition since 2008, where things get worse and worse and worse because the global economy gets further and further and further behind. And the consequences of that are not strictly economics. You see it in any number of social ways and political breakdown, deglobalization, lack of cooperation. These are all the telltale signs of deglobalizing monetary difficulties that we've seen throughout history whenever you do get to these situations. So the problem is,

Speaker0:
[49:00] We're not chugging along.

Jeff:
[49:01] We're not doing just fine. It's just, the issue is, in not doing just fine, it's tough to get people to see how, first of all, how that is happening and how that is really impacting everything that they're doing.

David:
[49:13] Well, what's the mechanism behind the first part of this conversation where we focus on euro dollars, the loss of Fed control over the world's financial system? What's the mechanism connecting that to the loss of $6 trillion and the growth of GDP. I'm missing that bridge in my mind.

Jeff:
[49:28] So what happened is in the immediate aftermath of the 2008 crisis, you had relatively, I mean, you had some of the biggest businesses in the country, biggest businesses in the world. They were healthy companies that had to experience essentially a liquidity event. We had some of these biggest businesses that were unable to tap commercial paper because the monetary system broke down so much that the commercial paper that they used to fund their working capital was no longer functioning. So businesses had to finally take account for the first time of these monetary difficulties, which meant that when we started to get to a recovery, they were still risk averse. They were so risk averse that there wasn't actually much of a recovery in the labor market. Because that's one of the biggest things, biggest costs that you can incur. And the biggest needs for liquidity is if you have a bunch of employees. And in any recovery period, most of the time you're bringing in employees before the business shows up. So there's a heavy need to access financing in order to bring on capacity to meet the recovery that you expect to happen. So if you have a monetary event where people are more concerned about their liquidity profile than their recovery profile, what are they doing?

Jeff:
[50:37] Well, instead of hiring people as I normally would that would create the recovery, anticipating recovery, I'm going to not hire anybody and just wait to see how this goes, because I'm more concerned about these commercial paper markets that might break down again because I'm still seeing signs of illiquidity and difficulties even though it's now 2009 and 2010 and 2011. I'm seeing all of these breakdowns in the monetary system that are continuing to break down even though the Fed has done two QEs and they're talking about maybe doing a third. There's this 1.6 trillion in bank reserves, which don't matter to me.

Jeff:
[51:08] Essentially, I become hyper-focused on controlling costs and controlling liquidity and I don't take the risks that I need to take in order for a systemic recovery to take place. So you essentially had the liquidity monetary event short circuit the recovery instincts of businesses that led to knock-on consequences. Now, there's other consequences too. What we saw in the Great Depression, the bigger picture terms,

Speaker0:
[51:31] You have a breakdown in the banking system.

Jeff:
[51:34] This is what made the Great Depression great. You had a monetary event in the early 1930s that led to a wipeout of the banking sector. Not only did it wipe out all of these individual banks all over the country, it wiped out the capacity of the banking system to intermediate credit in the economy, which meant that, like we see today, the banking sector was only interested in lending to the safest, most liquid names. So U.S. treasuries, U.S. treasury rates fell during the 1930s. This is why we say low interest rates during depressionary circumstances because of the degree of demand for safety goes way up and it stays way up. So banks will only intermediate to the firms and the governments who don't really need credit. What we need, what intermediation needs to do in a healthy economy is take funds from people who have it that would otherwise not use it and give it to basically smaller and medium-sized businesses, which is where a lot of legitimate economic growth comes from. But in a risk-averse environment where the banking sector is more worried about survival and breakdowns in liquidity than they are taking risks and lending to mom and pop, you have an economic drag that becomes overwhelming because

Jeff:
[52:37] Credit becomes rationed essentially through an economy, which is the death knell for that economy. We saw the same exact thing happen in 2008 with the capacity of dealer banks in the banking sector overall. And you can see this in any of the statistics. Just look at the H8 numbers from the Federal Reserve. And that's just domestically. You see the trend go like this and then sideways to slightly higher afterward. That is exactly what I'm talking about. The banking sector said after 2008, I'm too afraid of liquidity setbacks that might lead to me being nationalized or me becoming the next Bear Stearns. So I'm going to change the way I behave, which means I'm going to preference safety and liquidity.

Jeff:
[53:15] I'm going to lend to the U.S. government. No matter what the U.S. Government does, they can flood the world with treasuries. I'm going to buy every last dollar of it. I'm going to buy agency debt. If I do lend in mortgages, it's only going to be through the GSEs. I'm not going to buy any private label stuff anymore. Mom and pop loans, forget it. I don't even want to look at the next individual and borrower to come through the door. So you essentially have a rationing of credit through the economy that becomes essentially a permanent impairment on the function of intermediation in that economy, which is, again, a huge, huge underappreciated, unappreciated drag on economic growth and circumstances. And there's a whole bunch of more second and third order effects that go from there.

Jeff:
[53:55] So first of all, you had the recovery that was short circuited in the period where we should have seen a recovery in not just the U.S. but around the world. And you can see this in all the data from the U.S. You look at the Jolt's hiring rate. The Jolt's hiring rate collapsed in 2008, and then it stayed low all the way to 2014, which meant that businesses were just not taking risks that they needed to in order to create a recovery. The banking sector, look at any of the banking statistics. Look at any of the market rates and market curves and market prices. I'm talking like things like interest rate swaps, the yield curve, forward rate curves. They all reflected risk aversion from the banking sector, which meant that they were not intermediating in the economy. me. They were rationing credit. Like I said, they lend to the U.S. government any amount of credit the U.S. Government wants. I'll buy every last treasury that the treasury issues, but credit to smaller, medium-sized businesses, just not happening. So that's what happened in 2008 in the aftermath that led to this complete change in global and local growth profiles.

Ryan:
[54:57] I think a lot of people, this is such a fascinating explanation for what's happened over the last 15 to 17 years. And I think a lot of people felt like post 2008, the world was somewhat different and they couldn't quite put their finger on it. I think whether you feel like the world is chugging along or whether it's been sort of a silent depression, I think that that's a term that you use often, Jeff, from 2008 onward, depends very much on whether you have capital assets or not. If you're labor, I completely understand that perspective. It's been shitty.

Ryan:
[55:27] Growing up, being unable to afford a home, jobs don't pay what maybe they should be paying, all of these things. However, if you were an investor and had capital assets, you did experience basically a capital asset price boom. And you might feel like, I don't see the problem. I had a home. I had stocks. I had S&P 500. I had some NASDAQ. Maybe We had some cryptocurrency and everything's been just like up and it feels fine. And so you have like a different explanation for this, I suppose, in that like it seems to be sort of a K shape, right? Where there's people who held capital, they're doing okay. The people who did not, they're not doing so well. I'm not sure that we can solve all of those problems in this episode,

Ryan:
[56:11] but you've certainly indicated what the cause might be. And it's monetary, not so much monetary policy, but part of this whole monetary system that we have, including euro dollars. I guess as we start to close this conversation down, because I know you have some things to do here shortly, Jeff, I want to ask the question maybe for the investors in the audience, that kind of class of people, of which I think many are bankless listeners or many bankless listeners are more on the investment side than the labor side, which is like, what should an investor do in 2025? I feel like part of the crypto answer is basically just like don't hold bonds whatever you do don't hold bonds and

Ryan:
[56:51] Hold US dollar denominated things, make sure you have cryptocurrency, of course, you know, capital assets generally perform well, other types of commodities like gold, that sort of investment profile. Is that net your advice at Eurodollar University? Is basically just like don't hold bonds and the portfolio, kind of the crypto friendly portfolio is the way to go? Or what do you say?

Jeff:
[57:14] What advice do you give? Yeah, it's the opposite.

Ryan:
[57:17] It's the opposite. Interesting. Okay.

Jeff:
[57:18] No, no, I mean, I love crypto. I think cryptocurrency is the future. And I think stable coins are the bridge to that future. I don't think there's any doubt about it. I think you've seen tremendous absolute growth in the space, not just in terms of quantitatively that, you know, there's more and more of it, but the function in the capacities of the space. I think cryptocurrency and stable coins, like I said, I'd like to see them go further than that. But I mean, it can't happen overnight. So cryptocurrencies, I have no problem with that. I think people should be, they should become more and more used to using cryptocurrencies because they are the future, however you do that. But as far as the financial assets, you're going to want to be long duration. You're going to want to be long bonds. That's what the market has been saying. Okay. Which is contrary to what you hear in the mainstream media. I have not once heard that ever.

Ryan:
[58:01] Yeah, yeah. This is so counter. Tell me, give me the case. Why long bonds?

Jeff:
[58:05] Because that's what the market is preparing for, low interest rates. There's a problem with separating the narrative from the actual, what the system is doing, what it's preparing for. The easiest way to see this is through something called interest rate swaps. And interest rate swaps and interest rate swap market is maybe the most important

Jeff:
[58:24] part of the euro dollar system. There's not a part of it it doesn't touch and it basically covers every part of the planet, commercial as well as financial. Even some public institutions are involved in it. The interest rate swap market is the biggest market that humans have ever conceived of. And it's the most sophisticated players doing the most important things in it. We don't have enough time to really go through the mechanics of it and what it really is. But take my word for the interest rate swap market is about as essential as there is for any monetary or financial capacity in the entire system as we have it. And the interest rate swap market has been saying more and more strenuously, confidently, emphatically that interest rates worldwide are going to go low, going to go a lot lower and going to stay there a lot longer. That's been the market's shift since swap spreads never really got that high in 2021 on the upside, which is sort of reflationary. A higher swap spread is the market saying maybe interest rates have a possibility of going higher in the future. There's less of a chance they stay zero forever.

Jeff:
[59:25] Ever since the middle of 2022, and really started late 2021, but since the middle of 2022, none of the swap market nailed what's happening in consumer prices. It was never inflation. Consumer prices have softened ever since then, consumer price rates. We're never going to go back. Prices are never going to go lower again. But the swap market said it's not out of control inflation. Secondly, as high as central banks think that they're going to go in interest rates, they're going to end up stopping. And then they're going to end up lowering rates aggressively at some point in the future. We are now at that point. If you look at just the Federal Reserve, you think, what am I, you know, the Fed lower by a hundred basis points and they're gonna stick

Jeff:
[1:00:00] You look at all the central banks around the world. You've got Sweden that's already at zero again. You've got the ECBs at 2%. The Swedish central banks at 2%. Both of those are going to be below 2% in probably the next meeting for each one of those. And so if you look at the chart for central bank rates and just central bank rates, and these are sort of the last lagging indicators. They go with, just like the swap market said, they're on their way back lower. And so why are they back lower? Why is the swap market saying interest rates are lower? What are we talking about in 2025? I mean, everybody's talking about tariffs, But we're really talking about global recession. We're talking about an economy that's at least slowing down. Why is everybody on Jay Powell to lower interest rates? Because they're worried about, you know, they're worried about labor market conditions. We've actually seen evidence that the labor market is buckling. Unemployment is rising. So what the swap market has said in an increasing emphatic fashion is that however this happens, and the swap market is agnostic on how or when, it says that the long run future is that interest rates are very low and

Speaker0:
[1:00:57] They stay there.

Jeff:
[1:00:58] A very long time. Now, we have to figure out what that means. But everything that's happened over the last year or so is very much in line with the world that looks like that. We've got central bankers lowering rates. We've got economic questions that get louder and louder. We've got more economic data around the world. I mean, Japan's entering re-recession. UK is entering recession again. I mean, there's a couple other. Australia is now talking about cutting rates when, you know, Australia is the miracle economy. They never talk about a downturn. China is China. And so you can go on down the list.

Ryan:
[1:01:27] But Jeff, here's the big question, though. But here's the big question. So you like totally understand, appreciate that interest rates are going lower and there could be recessions. These types of fears may loom large, may larger in the future. Who knows? Does this, but here's kind of the crypto narrative or like the traditional narrative that we basically support and have heard, which is basically like none of that counteracts debasement, the amount of debasement that's going on and either quote unquote kind of the money printing that the U.S. Is going to do. Or another framing of this is the dollar is going to lose some of its world reserve currency type status, euro dollars or otherwise, through just fiscal policy, money printing that the U.S. Has to do to get out of its current debt situation. And so that debasement is going to counteract all of the low inflation rates that you're talking about.

Jeff:
[1:02:15] Respond to that. So the market is saying you're wrong. There's no debasement. It's that simple. You're assuming that there's debasement. You're assuming that the government is printing money when we just went through our entire discussion with or not. If banks are not expanding their balance sheets, then it doesn't matter what the government does. That means that there's monetary restrictions.

Ryan:
[1:02:35] One thing we didn't talk about is fiscal, though. Right. So on the fiscal policy side, is this not also money printing? So-

Speaker0:
[1:02:42] Okay, why not? That's just money redistribution.

Jeff:
[1:02:44] It's taking money from one place and putting it to another place. So you don't actually have balance sheet expansion through the system, which means that you don't have the type of monetary growth that you're talking about. So again, that's what I'm saying. The market is telling you, your idea of debasement is wrong. And so interest rates are going lower because depression economics, like in the 1930s, Japan in the 1990s, the entire world in the 2010s, there was no debasement. There was no inflationary currency. The U.S. dollar exchange value, where's the U.S. dollar exchange value? It's not falling. It's falling against the euro. It's actually almost at a record high. We look at any other trade-weighted index, especially those against emerging markets, it's almost at its record high. Right now, the current trade-weighted emerging market index of the U.S. Dollar exchange value is as high as it was in 2022. So there's all of these ideas, these narratives that just don't stand up to evidence.

Ryan:
[1:03:36] What's your explanation for why asset prices are going up? because, you know, part of the debasement narrative is that's part of the reason why.

Jeff:
[1:03:44] So if you and everybody else believes that the dollar is being debased and you all buy assets based on that premise, what happens? The price of those assets go up. That doesn't necessarily mean that that's happening. This is the idea. I mean, what is the stock market? The stock market is the beauty contest. Stocks rise because people buy stocks. And it becomes even, you know, when you get into Keynes' second and third order effects of that, you believe that, and I'm not saying you specifically, But people believe that debasement is happening. Therefore, we got to buy assets that will protect ourselves from debasement. And then I don't believe in debasement, but I know that's what you're going to do. So you're going to buy assets based on debasement. So I'm going to buy assets before you do, because I know that you believe that. And if I believe that you believe and everybody else believes it, what happens to the prices of those assets? They go up because they're not tethered to any fundamental property. Stocks have no fundamental basis whatsoever. They're perpetual instruments that we can just make up anything in our mind and say, That's what stocks are worth. Many cryptocurrencies are the same thing. Prices of Bitcoin go up because everybody can make up in their mind that Michael Saylor's right. Bitcoin will be worth $2 million. And so I'm going to buy it today. And then I'm going to invent a narrative for why I'm buying it. Oh, the dollar is going to zero. So we need to protect ourselves.

Jeff:
[1:04:55] What I'm saying is the fundamental markets are not just arguing a little bit about this debasement idea. They're saying outright specifically that is not happening and that interest rates are going to go lower because that is not happening. In fact, the opposite is happening. We see monetary conditions that are tightening around the world, not loosening. There is no debasement. There is instead deflationary conditions like we saw in April. Let me just one final point here. The swap markets, swap spreads were really low to begin with. Then we had the event in April. They crashed. They literally crashed to some of the most record low rates. I mean, lower than 2020, lower than 2008, 2009. Since April, you would think, well, the stock market roaring back to record highs. Bitcoin's up there and Bitcoin's nothing more than a proxy for the NASDAQ. So we've got all this re-risking in these financial markets. Swaps must have come off their lows. No, they almost hit a record low just this last week. They haven't budged. They went lower in April and then stayed there. What that says is that the market saw more confirmation in the fragility of the monetary system based on what happened in April that convinced more people in the swap market that they were right to hedge for lower interest rates. When that gets into a whole bunch of other discussions like shadow banks, what really happened in April, the blowout in credit spreads, repo markets, lack of collateral. There's any number of monetary reasons why the swap market would take these positions.

David:
[1:06:18] So does this mean that you also just necessarily believe that the DXY will just be higher in the future?

Jeff:
[1:06:24] Yeah, I mean, DXY goes higher. I mean, it gets volatile because of the euro. I mean, the DXY is nothing more than a reflection of the euro. And the euro is pretty volatile. But if you zoom out and look at any longer run chart on the euro, what's it been doing? It's been going down. Everything is going down against the U.S. Dollar because of these reasons. It's a reflection of the overall deflationary environment since 2007. An overall deflationary environment doesn't mean that everything goes in a straight line. There's always this back and forth. There's reflationary periods and deflationary periods. We kind of alternate between the two every couple of years. So the market is saying that we had our reflationary period in 2020 and 2021. And ever since then, we've been moving slowly but inexorably into the next deflationary period.

David:
[1:07:08] So, Jeff, everything that you just said feels antagonistic to my Bitcoin all-time high portfolio and my equities all-time high portfolio. It's not. No. Because that's not how I understand it. I see a higher, according to the narratives that I believe that I've understood, when DXY goes down, I'm like, nice, Bitcoin's going up, you know, coin stock going up. But it's also not counter. So, you think that the dollar can be strong. Bitcoin can stay high. It has good. and my equity portfolio is going to be just fine.

Jeff:
[1:07:39] Look at the decade of the 2010s. You had economic circumstances that got worse and worse and worse and more places around the world and yet what did stocks do? They kept going up and up and up. What did cryptocurrencies do? They kept going up and up and up. People invented narratives about why that was, but it was really just, hey, something ain't right here. I don't know what it is. I'm just going to look for solutions to make sure that I'm not going to be on the wrong side. As Ryan said, if your only asset, which for the vast majority of people on the planet, their only asset is their labor. If that's your only asset, you've been fucked. You've been totally fucked. And the sad thing is, pardon my language, but the sad thing is that's way too many people. You talk about the K-shaped recovery. K-shaped recovery happens in every economic circumstance. What distinguishes the worst circumstances is how many people are in the lower part of the K. I forget what that's called. But that lower K, we want to minimize the number of people in that part because that leads to social disruption and chaos and everything else in the political realm. So what has happened is that the people in the lower part of the K continues to expand.

Jeff:
[1:08:40] Meanwhile, financial assets continue to rise. What happens, what the problem is, is that we have in our mind, and we've been taught this from day one, and the message is reinforced in the financial media, is that somehow the stock market is a reflection of economic circumstances. It's not, and it's easily disproved. The stock market is simply, again, what Keane said in the beauty contest. It's everybody's buying stocks because everybody's buying stocks and stocks prices go up and we spend all of our time trying to figure out reasons and come up with reasons why. But stocks have no fundamental basis whatsoever. So in your portfolio that's based on stocks and cryptocurrencies, that is not necessarily the deflationary circumstance that we're talking about doesn't necessarily lead to problems in those portfolios. In fact, for quite a lot of it, you might want to hold on to both them. It's only the more extreme circumstances like we saw in April where the stock market or cryptocurrencies end up experiencing any downside. That's something you want to pay attention to and keep in mind. But if we're just experiencing more of the 2010 style, I don't want to call it mild deflation because it's really not, but the type of deflationary circumstances that are not necessarily immediately violently disruptive, stocks are going to continue to do well because that's where everybody puts their money.

Jeff:
[1:09:57] Ever since the 1980s, you put your retirement savings in the stock market. So there's a perpetual underlying bid for stocks regardless. And they only really respond in like these short run periods anyway. So the two things are not necessarily even in the same league or same ballpark.

Ryan:
[1:10:13] So if both are going to do well, both stocks and bonds, like what is the answer to your question to that earlier question? What is in the Jeff Snyder portfolio? What do you recommend?

Jeff:
[1:10:22] Treasury bills, treasury bonds, gold, things like that.

Jeff:
[1:10:25] But it's not because of the dollar debasement. Gold is a terrible inflation hedge. What gold is a hedge against is systemic errors and systemic changes, which is kind of what we've been going through. When did gold really start rising? It was 2005. It started to go up earlier in that couple of years. But 2005, suddenly you see a almost parabolic move in gold, which was the market saying, holy shit, things are really going to start to fall apart here from here on. And that's been absolutely correct. There was a little bit of a lag in the middle of 2010s, but then it picked up in the late 2010s for the same exact reasons. So gold is not saying inflation or debasement or anything else. And that's one last thing I do want to point out. The idea that the dollar is going to zero because it's being replaced or that people are moving to alternative currencies is, it's just, again, it's what does a reserve currency have to do in order to replace the dollar? Again, you're not replacing the dollar, you're replacing the euro dollar, which means you have to have a currency that's able to be widely available and widely acceptable and operate on a relatively frictionless basis. There is nothing, absolutely nothing that's even close to doing what the euro dollar is. So we're kind of stuck with it, which means the dollar isn't being replaced whatsoever.

Jeff:
[1:11:36] The BRICS currency, the Chinese currency, I mean, I've lost track of how many years and how many time the Chinese are going to replace the dollar. Even though you ask anybody in Beijing, like, what the hell are you talking about? There is no BRICS currency. There will never be a BRICS currency. The BRICS arrangement is simply a political organization to propel political or project political power from among the non-traditional powers of the world. We can just go on and on and on. All of these narratives that have gained currency, largely because we don't have any real answers and idea of how the monetary system is structured and it really works. And so it's understandable where people have come up with these alternative explanations to try to explain what they think is happening in reality when it's basically not. It's basically a whole lot of different stuff.

Ryan:
[1:12:21] I find your conclusion so fascinating on this, Jeff, and very, very, very well reasoned. Usually we don't have guests who are making the case for Treasury. So, you know, that that is rare.

Jeff:
[1:12:31] That alone should ring some alarm.

Ryan:
[1:12:33] You've caused us some consideration here. So thank you so much for joining us. Where can folks find your fantastic work?

Jeff:
[1:12:39] I'm at Eurodollar University. I've got a YouTube channel, put out daily videos there. Also a website, Eurodollar.university. Tons of subscriptions and information. You really want to know what the Eurodollar is. You want to know what swap spreads are and why they're so important. You got subscriptions at eurodollar.university.

Ryan:
[1:12:54] I got to go find the video to find out why exactly Jeff Snyder is bullish on treasuries in a bit more detail because I'm still working to wrap my head around that. But Jeff, thank you so much for joining us today.

Jeff:
[1:13:03] My pleasure.

Ryan:
[1:13:04] Guys, I got to let you know, of course, none of this has been financial advice. Crypto is risky. So are treasuries. So are the euro dollars. You could lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the bankless journey. Thanks a lot.