The Eurodollar market has a history dating back to the 1950s and plays a pivotal role in the shadow banking system and US Treasuries.
The Fed's control over the Eurodollar market has been limited, and recent actions indicate an effort to keep it in the shadows.
Bitcoin, viewed as a commodity by the Fed, has the potential to stabilize and collateralize markets like the Eurodollar system, but its regulatory future remains uncertain.
The Fed aims to reduce leverage within the Eurodollar system to maintain control over monetary policy and protect the stability of the banking system.
Deep dives
The Eurodollar market and its history
The Eurodollar market, which involves the creation and transaction of US dollars outside the US and its regulatory oversight, has a history dating back to the 1950s. It originated as a solution to Russian oil exporters receiving dollars during the Cold War. British banks stepped in to provide non-sterling accounts and started the Eurodollar market. Over time, this market expanded significantly, particularly with the rise of the securities markets. The offshore banks and Eurodollar system grew, and US Treasuries became a pivotal part of the shadow banking system. The market size exploded during the 2008 financial crisis, leading the Fed to take on the liabilities of the Eurodollar system. The Fed's balance sheet expanded drastically, but the unwinding of quantitative easing, despite being announced, was never fully realized.
The Fed's control and policies
The Fed shifted its target from the quantity of money to the price of money in 1983, giving Wall Street more control. This change, combined with the rise of the securities markets, facilitated the expansion of the Eurodollar system. However, the Fed's control over the Eurodollar market has been limited. The recent denial of the Custodia Bank's application and the anti-crypto stance of the Biden administration indicate a push to keep the Eurodollar market in the shadows. The Fed's motives remain unclear, but it is evident that the control and stability of the Eurodollar market are important factors for the financial system.
Bitcoin and its role in the financial landscape
Bitcoin, as a cryptocurrency, is viewed as a commodity by the Fed. It has gained attention and value, despite skeptics claiming it has no backing. Bitcoin operates on a premise of subjective value, driven by opportunity cost and immutability of math. While the Fed is hesitant about embracing Bitcoin fully, its recognition as a financial asset has the potential to stabilize and collateralize markets like the Eurodollar system. However, current regulatory actions, like the crackdown on stablecoins, indicate a push to regulate and control the crypto industry. The ultimate direction and integration of Bitcoin into the financial landscape remain uncertain.
The Fed's stance on leverage and the banking system
The Fed is concerned about excessive leverage within the Eurodollar system and its impact on the stability of the banking system. They aim to avoid a situation where the Fed loses control of monetary policy due to the large amount of leverage in circulation. The recent actions and policies of the Fed, such as denying Custodia Bank's application and the crackdown on stablecoins, suggest a focus on reducing leverage within the financial system. The Fed's goal is to protect the banking system and maintain control over money supply and monetary policy.
The Challenges Faced by the Banking System
The podcast discusses the challenges faced by the banking system, particularly in relation to treasury bond exposures and potential default cycles. It highlights the importance of bringing money back to the United States and the need for political level investment. The dangers of the mother of all debt bomb and credit deflation are emphasized, along with the risks of hyperinflation and hyperdeflation. The speaker suggests that the Fed is attempting to navigate these risks but may face opposition from within the Biden administration and other sources.
The Shift in the Market and Dollar Reserve Standard
The podcast explores the shift in the market and the end of the dollar reserve standard in 2008. It highlights the coordinated central bank policy standard that emerged in 2011. The role of the Bank of Japan and the European Central Bank (ECB) in maintaining credit spreads and playing the Euro game is discussed. The impact of OPEC and energy costs on inflation and deflation is examined. The potential concerns around the Bank of Japan giving up yield curve control are also raised.
The Role of Crypto and the Future of the Fed
The podcast delves into the future of the Federal Reserve (Fed) and the concept of surveillance coins. It suggests that FedNow may increase surveillance but highlights the importance of keeping crypto within the regulatory perimeter. The potential risks of closing off the United States and the benefits of creating incentives for people to use lit markets are discussed. The speakers emphasize the need for compliance with anti-money laundering and counter-terrorism financing laws and the potential paths out of the current challenges.
Long-time Bitcoin advocate and Wall St. vetern Caitlin Long joins me for one of my favorite conversations in the history of this podcast. We try to come to grips with contradictory behavior from the Federal Reserve and the reasons why these moments are so critical to the future of not just money but humanity itself.
