WBD568 Audio Transcription

How the US Dollar Shortage is Driving Global Instability with Jeff Snider

Release date: Monday 17th October

Note: the following is a transcription of my interview with Jeff Snider. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.

Jeff Snider is co-host of the Eurodollar University podcast and Head of Global Research at Atlas Financial Advisors. In this interview, we discuss the crazy possibility that nobody knows what money is, and as a result, nobody knows how to run or fix the economy. Central banks and governments are essentially engaged in a high-risk game of pretend.

“You have to understand what the Fed says in public is not what it says in private. You look at some of the academic studies, the literature, they know they have no idea what they’re doing. But their job requires them to tell the public that they do.”

— Jeff Snider

Interview Transcription

Peter McCormack: Jeff, welcome back.   

Jeff Snider: Hi, Peter.  How are you doing?

Peter McCormack: Good, man.  Shall we bring this a little bit closer, bring the mic in?

Jeff Snider: Okay.

Peter McCormack: Wow, last interview caused quite a stir, right, Danny?

Danny Knowles: Quite a stir.

Peter McCormack: Quite a stir.

Jeff Snider: That's a good thing.

Peter McCormack: It is a good thing.

Jeff Snider: Very positive.

Peter McCormack: We had other people who wanted to come on the show to agree and disagree with certain things, a bit of pushback.

Jeff Snider: I would expect a lot of pushback.

Peter McCormack: A lot of discussion.

Jeff Snider: That's the good thing, right, you get people talking; that's what I always try to do.

Peter McCormack: I still don't understand the eurodollar, it's like, "What the fuck is this?!"  No, I understand it a little bit more; we got a little bit further, didn't we?

Danny Knowles: We're getting there.

Peter McCormack: We're getting there; we understand it's a big mess, but yeah, a lot of pushback, but it seems like everyone respects your work and likes what you bring to the table, even if they don't agree with you on everything.  The issue that we seem to be facing right now, Dylan LeClair's put out an article on it, I haven't read it yet but I intend to read it, he talks about we're in the unwinding of the biggest financial bubble ever.  Actually, do you want to bring out that thing?

Danny Knowles: Yeah.

Peter McCormack: I saw something from -- do you know Allen Farrington?

Jeff Snider: No, I don't.

Peter McCormack: He's a guy in the Bitcoin space; he put this chart up that seemed to explain everything that's going on right now.  So anyone listening, you have real productivity in a line and then it goes down to financial engineering, and you have six more lines and then a big mess, and then another big mess under these, too much leverage, print the difference, equals the fiat finance stack, and that feels pretty accurate to me.

Jeff Snider: Yeah, I think it is, for the pre-crisis era.  Money should be very simple, money should be something you don't even worry about, something that you don't even talk about because money is a tool to allow commerce to happen.  If you're spending all your time and effort thinking about financial engineering and having to hedge and doing all this stuff, money's not doing what it's supposed to be doing. 

Money's supposed to be very simple, a very easy tool, but we've strayed so far from that, for many different reasons, that that makes a lot of sense, unfortunately it makes too much sense.  But I would say that as far as the expansion of money, the expansion of credit, that was all pre-crisis; and in the post-crisis era, what's happened is it's gotten even more complicated because nobody can understand what's going on, what's actually happening.  Everybody can see that there's a monetary issue, but because of this mess, they don't really know what it is.

Peter McCormack: Yeah, that's funny you should say, "Having to think about money", because you shouldn't have to, but you do.

Jeff Snider: No.

Peter McCormack: But right now, it's one of the things me and Danny most talk about.  For the last, let's say the last five years of doing this podcast, I have to think about money a lot in terms of talking about Bitcoin and making a show, but in terms of my personal money, I didn't have to think too much.  I knew there was a certain small amount of inflation every year, but I didn't really have to think about it too much. 

Right now, I have to think about, "Well, I get paid in dollars, but I also hold pounds, and I hold Bitcoin.  Those dollars I'm holding, should I be transferring them to a pound because we're at the bottom, or do I need to hold the dollars because the pound's going to crash even more because the UK Government has made --"

Jeff Snider: The answer's yes, by the way!

Peter McCormack: Well, I think you might be right because the UK Government has made such a mess of things.  "What's going to happen with my house?  What's going to happen with interest rates?"  Never before have I had to think so much, and it's not even, Jeff, that I want to make a premium on my money, I just don't want to be wiped out, and I know this happens.

Making this show, we've interviewed a bunch of people; I interviewed a guy from Argentina once who talked about his entire net worth being wiped out through inflation.  I've been to Venezuela, I've seen what's happened there, I'm seeing what's happening around the world in places like Turkey and Lebanon; I don't want to say the UK is going to be the same, but I've certainly seen the early stages of the UK doing what some of these other countries are doing, very high inflation, and I don't know what that means for me.  I don't know what to do anymore, I genuinely don't know where to put my money.

Jeff Snider: It's instability, right, we see it everywhere; that's the monetary is supposed to prevent.  We're supposed to have a stable commercial system that again, we don't think much about money.  We didn't think much about money in the pre-crisis era, unfortunately that came back to bite us in the ass, because we should have been thinking about money a little bit more, at least how it worked, but that's really the issue here, it's stability versus instability. 

Notice the other thing, I think this is what gets people involved and interested in the monetary conversation, is they can feel the instability, and they can feel it in a way that, "Wait a minute, Ben Bernanke said QE, nine years ago, ten years ago, that was a supposed to fix all our problems, but yet we keep having more and more problems.  We keep seeing, as you're saying, countries, Sri Lanka, Lebanon, all these monetary financial problems all around, they seem to be proliferating; they're getting worse, not better".  So, we can feel that there's an issue here but we don't know what it is; it's something's wrong but nobody can tell what it is.  So, we know it's money, we know it's finance, we know there's something wrong with the economy, we have no fricking clue what it is.

Peter McCormack: What do you think of Bernanke getting a Nobel Prize?

Jeff Snider: Oh my gosh! 

Peter McCormack: What the fuck is that all about?!

Jeff Snider: We need to burn economics to the ground; we need to start again!  Look, his biggest sin was not saying subprime was contained; his biggest sin was not realising it wasn't subprime to begin with.  What he's got a Nobel Prize for, along with a couple of other people, was essentially saying, "After the fact, years later, oh by the way, this situation was far more complicated than I told you when it was happening", and they rewarded the guy with a Nobel Prize for that!

Peter McCormack: Yeah, it seems like he found a cut and a put a sticking plaster over it and got an award!

Jeff Snider: Yeah, exactly, the highest award that an economist can get.  I think, again, it goes to our conversation, for most of the people in the world who are feeling this instability, it's a slap in the face, because where did that instability at least begin that people can start to feel it?  Under his watch.  And now he's being rewarded for having the worst monetary crisis since the Great Depression!  That's lack of accountability, right, and money's another tool that instils accountability when done right; we have the exact opposite.

Peter McCormack: Oh, man, it's crazy times.  So, just going back to what you said, and we will cover some of the ground we covered last time.  We have new listeners and, if they haven't listened to the previous show, we'll put it in the show notes; go and listen, it was an absolute banger.  But I do want to cover some things again.  Do you still believe we don't know what money is?

Jeff Snider: Yes.

Peter McCormack: Or do you know what it is, but the world isn't using money in the right way, or treating it in the right way?

Jeff Snider: I think the issue is more along the lines of nobody knows what money is, because it's basically an open-ended architecture; we have a bank-centred system, that's what the eurodollar actually means.  There's no physical cash, there's no Federal Reserve notes being circulated around the world in pallets, it's simply how banks talk to each other.  And the way banks talk to each other is different all the time, and it's constantly evolving. 

So, you look at the eurodollar system 20 years ago, it doesn't look anything like it does today, and today, it's almost entirely derivatives, currency swaps.  How do we look at a currency swap in terms of a monetary format?  Well, it works as money but yet it doesn't go on a balance sheet anywhere, well, it does, it goes in the footnotes, but it doesn't get accounted for in the same way as a specific monetary unit would. 

So, we have no idea really what banks are doing because they don't tell us, governments don't force them to tell us, and they can be doing any number of things; they could be engineering all sorts of financial products that we don't know about.  So, actually defining money in the modern system is literally impossible, and that's really, again, instability; where would that come from?  It comes from the fact that we can't even define, let alone measure, let alone monitor and control and regulate, a monetary system nobody really understands. 

Peter McCormack: You know what it's making me think of -- you know that film we watched, Danny, that Matt Walsh one, What is a Woman?

Danny Knowles: What is money?

Peter McCormack: Yeah, have you seen this film?

Jeff Snider: No.

Peter McCormack: Yeah, what is money; ask people, "What is money?" and see what they think it is.

Jeff Snider: Yeah, and what they do is they get a $5 bill and say, "This piece of paper is money".  In any major industrial economy, hand-to-hand currency died out over a century ago.  We've been using virtual currency for over a century; when you write a cheque, what happens?  It goes into the banking system and a bunch of book entries happen.  That's very different than what we conceive of when we think about using hand-to-hand currency. 

In the eurodollar system, it began in the 1950s so that it didn't have to use hand-to-hand currency; it's a reserveless ledger money system, so defining money becomes literally impossible.  And that's really my central contention against Ben Bernanke, was that it was his job, at least the Federal Reserve's job and his predecessor's job, to be on top of this evolution, but they threw up their hands in the 1970s and said, "We don't know how to define this stuff, so we're not going to bother.  We're going to target an interest rate because we cannot define and control the money supply", which means that you're not a central bank, you're just trying to manipulate psychology; it's a very different form of monetary policy.  It's non-money monetary policy, because the original problem is we don't know what money is in the banking system.

Peter McCormack: So, if you were going to do the Jeff Snider School of Money and what it should be, where would you start; if you had to rebuild this whole system, where would you start?

Jeff Snider: I think it's you start with transparency; it has to be a regime -- part of the reason the eurodollar expanded and it grew as much as it did was because it was user-friendly.  Now, user-friendly in that case was the banking system, large corporations, sometimes large financial firms and governments around the world, so it was user-friendly because it allowed each of these participants to do what they needed to do.  That's the real secret of money in the modern economy, is that it unlocks the potential for, again, commerce to do what commerce needs to do.

So, an ideal monetary system would be both transparent and user-friendly, which again gets you into the digital currency space, because that's exactly where everybody's going in that direction for a reason; I think it's innate human nature to want money to be what money's supposed to be, a transparent tool that allows commerce to happen.  It's not wealth, it's not the goal in and of itself, it's a modern tool that we use to help make an efficient, sustainable economic system go.

Peter McCormack: Well, I think the reason why we like Bitcoin, and a lot of bitcoiners like Bitcoin is that it's a rules-based system.

Jeff Snider: Yes.

Peter McCormack: It's a ledger with a rules-based --

Jeff Snider: Transparent, absolutely.

Peter McCormack: It's transparent, a rules-based system whereby nobody can have undue influence over it and nobody can go and create winners and losers.  The winners and losers have to create themselves, because everybody knows the rules; it's a bottom-up approach.  So, I think that's why we like it and that's why we like this transition to Bitcoin; I know you're not there fully.

Jeff Snider: Bitcoin, it's digital, I love the digital potential, I love blockchain, the transparency, the fact you say it's rules-based and we all know what the rules are, and in most instances, nobody can start changing the rules willy-nilly arbitrarily. That's the other thing, is we agree to the terms upfront and then we don't need to continuously monitor or continuously argue about, "What are the terms of money?" all the time, and that's what money should be.

If you're using a classical gold standard where we have gold coins in our pocket, we don't have to haggle over the terms of the gold coin, we just haggle over the price.  And, if we're not haggling over the terms of the gold coin, we don't have to waste our time on the monetary system.  So again, ideal money is transparent; rules-based; everybody knows upfront; we don't need to change our terms all the time to benefit others and some people, not others; it's really money should be really simple.

Peter McCormack: Were you a fan of the gold standard? 

Jeff Snider: In some ways.  I have the same argument against the gold that I would against Bitcoin.

Peter McCormack: Talk to me about that, because a lot of people, especially one of the guys who works on our show, Ben Prentice, he has this website, WTF Happened in 1971?.  He talks about coming off the gold standard and he shows a number of charts; did we get that up in the last show?

Danny Knowles: No, I'll get it up now.

Peter McCormack: Let's show you this website.  This for me was something that indicated that, even though the gold standard wasn't perfect, and I understand it has criticisms, there has been a significant change in a number of things since 1971; here we go.

Danny Knowles: I don't think we got it up in the last show anyway.

Peter McCormack: No.  So, it's a great chart; growth in productivity, growth in compensation, real-world GDP, wages and trade policy.  Everything went skewy from 1971, so even if the gold standard wasn't --

Jeff Snider: It was not 1971 though; that's a little bit of a misleading thing, and it's not because of money printing.

Peter McCormack: Why is it misleading, because the UK came off first?

Jeff Snider: No, the eurodollar replaced Bretton Woods long before 1971.  The eurodollar was undertaking the roles that Bretton Woods was supposed to be doing from the late-1950s forwards.  So there was already a transformation before we ever got to August; August 1971, Nixon closing the gold window was a ceremonial effort, nothing else.  Then all those charts you see, that was the effect of the eurodollar on globalisation, not money printing in the US, especially the wage charts, that was the ability for companies to then unblock untapped labour pools all over the world. 

The reason they were able to do that was because now you had a global reserve currency that was available in many places.  So, a company that used to be too expensive, "We don't have enough money.  Chinese yuan?  We can't use Chinese yuan, but we can intermediate through dollars because now we have this global dollar regime which means we can pay for resources, we can pay for labour, we can pay for foreign direct investment all in one big haul".  So, 1971 isn't about the closing of the gold window, it's about when the corporate America and corporations around the world, who had been using the eurodollar system for 15 years by that point, started to really unlock all of these secrets, and really in one respect, I know what that means, it was positive. 

I grew up in the Rust Belt, so I know the downside to globalisation here, I lived it; but for the vast majority of the populations around the world, the eurodollar led to tremendous amounts of prosperity all over the place.  Look at China's transformation, look at Asia's transformation, that would not have been possible without this global currency system.

Peter McCormack: So, it feels like the dollar was a detriment to the manufacturing base in the US and maybe more blue-collar workers, whereas it really raised up the living standards and opportunity in the rest of the world.

Jeff Snider: That was just because we had labour and wages that had gotten so far out of balance with the rest of the world, because you have basically subsistence wage populations all over the place that, if you're running a company, it makes perfect sense why you would do that.

Now, again, we've seen these economic transformations all throughout history; when we transformed from an agrarian society to industrial society, a lot of agrarian workers were thrown out of work, they had no place to go, so they migrated into the factories where new jobs were waiting for them.  The problem with the eurodollar system is that we didn't have the other half of that transformation. 

So, as blue-collar jobs were removed, shipped off to Asia, what was waiting for everybody in those blue-collar states?  Finance; we had a stock market, we had residential real estate.  Those are not jobs that we can replace, blue-collar jobs; you can't transform from an industrial-based society to one based on asset bubbles.  So that was the primary problem, and that's what really, in terms of the labour market, came to a head in the decade of the 2000s, is that we eroded the manufacturing base and basically papered it over with too much finance.

Peter McCormack: Do you think there's a risk of doing the same now with the dollar so strong?

Jeff Snider: Well, yeah, why is the dollar strong though?  The dollar's strong because there's a shortage of dollars around the world, there's a massive shortage of dollars.  There's so much shortage of dollars around the world, to your first point, it's becoming a problem in London.  London used to be the centre of the monetary economic and commercial universe, even in the eurodollar system; the eurodollar was primarily based in the city of London.  So, for the fact that these eurodollar issues, these dollar shortages are coming home to London, there are some alarm bells here going off.

Danny Knowles: I think there'll be people listening that'll know how much money the US has printed over the last the few years and be like, "How the fuck is there a shortage?!"  So, can you explain what that shortage actually means?

Jeff Snider: The Federal Reserve, the federal government don't print money; money printing, money creation is the responsibility of the banks operating this global monetary system.  It's no different than a fractional-reserve system.  Banks create money through credit creation, except they do it in the same ways, because in the eurodollar system, there is no reserve to fraction; it's essentially balance-sheet mechanics.  I don't know how far you want to get into the details there.

Peter McCormack: We want details.

Jeff Snider: It's essentially based on a lot of mathematics modelling, VaR, Vega.  If you're running a bank, how much credit you create is based on risk perceptions, present value calculations; it's all maths, it's all about derivatives, it's all about these kinds of deep financial inputs that allow commercial banks to either expand their balance sheet or force them to contract.

What we've seen since 9 August 2007 is banks have been forced to contract, so they're contracting money and they're contracting credit, and they have been pretty much continuously.  And when I say "contract", let me be specific here, I don't mean shrinking, I mean growing at a different rate.

Peter McCormack: Okay.

Jeff Snider: We live in a non-linear world, which means that if we're growing at, say, 10% per year and all of a sudden you're growing at 5% per year, that's a massive contraction, especially if you spread that out over 15 years; that's a huge, enormous contraction.  So, it's not like we're actually shrinking the pile of banks, although a lot of banks have gotten smaller, but by and large overall, the credit system globally used to grow rapidly and now it's kind of just piddling along.  And, because it's kind of piddling along, we don't have enough money around the rest of the world, what happens?  Governments try to fill in the gap. 

How do governments try to fill in that monetary gap?  Well, they do what they do, which means they knock on the door of the central banker and say, "Hey, isn't this a money issue?" and the central banker says, "We don't do money, but we'll do something because we have to".  So, what have central banks been doing over the last 15 years?  Quantitative easing. 

So, people think central banks have been filling the gap with bank reserves when bank reserves don't really have much of a role in the eurodollar system.  So, you have this persistent dollar shortage that nobody knows about, and the persistent need for central banks and governments to do something about it, which everybody does; it leads to this confusion where we have disinflation or deflationary money globally but everybody thinks the monetary system has exploded.

Peter McCormack: How does a dollar shortage show up?  When you say there's a dollar shortage globally, I'm like, "If I need dollars, I can get dollars"; what do you means in terms of the mechanics of the economic system?

Jeff Snider: It's the same as anything else; the price of dollars goes up, it's much more inflexible.

Peter McCormack: No, I mean like when you say there's a shortage, what are the situations where people need dollars and they can't get it?

Jeff Snider: You can still get them, but you have to pay a much higher premium for them. 

Peter McCormack: Is that companies needing it for trade because the dollar is the global currency and, if they want to make certain trade, they need those dollars?

Jeff Snider: Absolutely; that's the thing, that's what a global reserve currency is.

Peter McCormack: So, where do they traditionally get those dollars from, and why is there a shortage now?

Jeff Snider: So, traditionally what happens is you have local companies transact with local banks.  The local banks will act in the eurodollar markets to secure dollars, usually in short-term funding arrangements.  So, what happens is you have a maturity mismatch between the local bank, borrowing in short-term money markets in the eurodollar system, but lending in longer-term credit to corporations who have to do things.

So for China, for example, you're a Chinese company, you're importing a lot of raw materials and you're exporting a lot of finished goods, so you would think that the Chinese have tons of dollars because they export more than they import, which should be the case, but there are all sorts of stuff that happens in between where the exporters are not the importers. 

Anyway, so you're an importer in China, you want to bring raw materials from, say, Brazil or whatever, you have to have dollars to do that, because the Brazilians don't want yuan and there's no other reserve currency that's flexible in both places.  So, the Chinese company has to borrow dollars from somewhere; they get them for a local Chinese bank, which is usually one of the big four behemoths, the commercial banks in China.  And the commercial banks in China, where do they get their dollars from?  From the eurodollar system. 

So, they're constantly borrowing largely from banks in Tokyo who also borrow dollars from banks all over the rest of the world.  So, you have this constant recycling and redistribution of money through the banking system that eventually finds its way into some corporate hands.

Peter McCormack: If they're doing into the eurodollar system to get dollars, and they're borrowing from the banks, do the banks have to have those dollars; this comes down to the rules of how much they can make up --

Jeff Snider: Well, let's say we have two different companies in China; one is a big company that everybody knows, one's a little bit smaller that nobody does.  It's the old argument between the big company and the small mom-and-pop.  So, in this instance, what we have is the big company can get all the credit it wants because it's a big company, and in times of risk aversion where you're a eurodollar bank that usually redistributes or lends eurodollars freely, if you're risk-averse, the mathematics, the volatility, all the stuff that goes into your balance sheet says you need to pull back a little bit, who are going to lend to?  You're going to lend to the big Chinese firm, or the big Chinese bank who will lend to the lend to the big Chinese firm, on much more favourable terms than you will the smaller bank or the smaller firm.

So what happens is, for the big bank or the big company, they can borrow as much as they need to.  The smaller- and medium-term businesses don't fit the risk profiles of these large banks and the eurodollar businesses, so they're the ones that get deprived of credit.  Now, they can still obtain credit, they can still obtain dollar lending, but it's on much more onerous terms which means it becomes a drag on commercial activity, which is the exact thing that we don't want to have happen for a global reserve.

We're being very stylised here, but essentially that's what happens, which is why you hear governments and central banks around the world constantly complain about credit resource allocation to SMEs, small- and medium-sized enterprises; they're the ones who can't get credit because we have a global monetary and credit shortage.

Peter McCormack: So as the global economy expands, and if it expands rapidly, does that mean there's a need for the dollar to expand rapidly?

Jeff Snider: There needs to be a dynamic match between supply and demand, and that's really where traditionally, the gold standard goes off the rails.  Under a constrained system, what happens is human beings, human ingenuity will find other ways around that monetary restraint which usually leads to all sorts of quasi money that becomes bubbly, gets overdone, and you lead to this boom/bust cycle.

Peter McCormack: Okay.  So, in the current scenario, there is a shortage of dollars and that is because the banks outside of the US, they don't have enough dollars to lend?

Jeff Snider: They don't have enough balance sheet capacity to create the money and credit that the global economy needs.

Peter McCormack: How do they create more balance sheet capacity?

Jeff Snider: Again, it's the mathematics; it's capital ratios, it's balance sheet metrics, it's all this internal black box stuff that we have no idea what goes on.  So we have to look at the whole because we can't observe what banks are actually doing.  We don't know what banks are doing on any given day, but financial markets tell us basically what's happening, because we can kind of tell what's going on.

Peter McCormack: But does each bank set its own rules? 

Jeff Snider: Yes.

Peter McCormack: So, it's because these banks have created their own set of rules; okay, I get it.  Right, so it says to me that, ideally, these banks would be taking on more risk.

Jeff Snider: Yes, that was the inherent problem though; the pre-crisis system required banks to do a lot of stupid stuff in order to create enough credit and money, maybe actually create too much credit and money, in the pre-crisis era.  And, in the post-crisis era, and seeing what happened, Bear Stearns, AIG, Lehman Brothers, that there's a downside to all that, because that was the big belief that supported balance sheet expansion; we had recency bias and all these black box models that said, "You can take all the risk you want, the downside is very small, very thin", and then we realised that wasn't true. 

Now we know that the downside is real, in fact the downside is so real it caused some of the oldest, most well-known names on Wall Street to essentially get thrown out of business, insolvent and bankrupt, there is a tremendous downside.  The very way balance sheets are run in the post-crisis era is very different from beforehand, not just the mathematics but even the human processes.

If you wanted to expand your book, your mandate in a bank before the crisis, you basically just went to a boss and said, "I have this idea, it's crazy, it's stupid, but we can make money", and the boss would say, "Go ahead and do it".  You could come up with any exotic derivative transaction you wanted to, and you were likely to get approved, which had the effect of your client was happy, your balance sheet was expanded, everybody seemed to be making a lot of money.

Nowadays, you can't do that, you've got to go through risk committees, you've got to go through different layers of compliance; banks are run very differently, their balance sheets are run very differently because of obvious reasons.

Peter McCormack: They don't want the same to happen again.

Danny Knowles: And that's not regulation, that's just the risk tolerance?

Jeff Snider: The regulation came along afterwards.  So, banks already started redoing their balance sheets from the very moment that the system broke down in August 2007, then accelerated their transformation in the March 2008 when Bear Stearns put the exclamation point on the whole thing.

But the thing is, going back to your original question, the global economy, it needed monetary and credit resources in order to continue to expand and globalise.  But now, we had a system that was foolish, but we never replaced that anything, so we have this malfunctioning system that doesn't produce enough credit because banks won't expand their balance sheets.

Then, to your point, regulations have come along afterwards and made it even more expensive, made it even more difficult to expand your balance sheet, so what have banks done?  Kind of logically, they hold the safest liquid assets, they only lend to the safest most liquid credits; everybody else has to go wait in line.

Peter McCormack: But the implication of that is, well, there are multiple implications, but for the US it means a strong pound which means your -- I say "your" because you're an American and I'm not -- your balance of trade changes, but it also has implications on the rest of the world in that a strong dollar causes deflationary pressures on smaller nations.  I'm repeating something Cathie Wood said to me about half an hour ago rather than just being super-smart, but I'm understanding those pressures and --

Jeff Snider: Well, those pressures are just the other side of the dollar shortage.

Peter McCormack: Yes, but what are the ways that this dollar shortage can be dealt with?  If the banks outside of the US aren't willing to lend more, does the Fed have to step in here; do they have to provide the liquidity?

Jeff Snider: How?

Peter McCormack: You tell me.

Jeff Snider: They don't, they can't.

Peter McCormack: They can't?

Jeff Snider: That's the issue; that's why you see the Fed constantly evolving its tactics.  First it was, back in 2006, in 2007, Mr Subprime said, "Oh, no big deal", but what was the first thing the Fed did?  They lowered interest rates; did that help?  Of course it didn't, so then they constantly had to evolve.  What came after lower interest rates?  There were TAF auctions and overseas dollar swaps.  So, that was a tacit admission right then, in December of 2007, "We have a global dollar problem".  Why is the Fed instituting dollar swaps with foreign central banks?

Danny Knowles: So, is that swap lines?

Jeff Snider: Yes.

Danny Knowles: So, I've heard that described as QE for other countries.

Jeff Snider: Yeah, it's just as worthless and, in fact, yes.

Danny Knowles: But how does it actually work?  I never understood that.

Jeff Snider: The Fed, essentially, institutes a swap line with a foreign central bank, because it has no legal authority to transact with anybody outside the US boundary except for foreign governments.  So, what happens is the Fed does a dollar swap with a foreign central bank, say the ECB.  So, the Fed and the ECB agree on the terms of the swap immediately, which means the Fed gets euros on its balance sheet and the ECB gets dollars on its balance sheet based on equal exchange value, and then the EBC auctions those dollars to its local banks.

Danny Knowles: So that would, presumably, in their mind, that's liquidity, but you don't think it does?

Jeff Snider: It only reaches the largest banks, and then a lot of the banks that bid for those overseas dollar swaps -- so, it's not a European bank at the ECB getting dollars from the ECB, it's usually a foreign subsidiary of a US bank buying dollars at the ECB and then transferring them back to the parent in the US to be redistributed at huge premiums to everybody else.  It's essentially a money-making scam that allows the largest banks to get as much liquidity as they want balance sheet free, it doesn't affect their balance sheet numbers whatsoever, because they can charge huge premiums to everybody else that is short of dollars.

So again, it's another one of those things that people say, "The Fed is doing this, it's overseas, it must be like QEs, money printing", when in fact it's a lot more complicated, at the very least, and when you actually see what happens, you can see why it's actually not helpful.

So, again, back to my point, the Fed constantly has to evolve tactics, because none of the things they do actually work.  So, after we had the TAF and dollar swaps in December 2007, we had something called the Primary Dealer Credit Facility; that didn't do much, that came after Bear Stearns, that led to Lehman Brothers and AIG, then we had a whole bunch of alphabet initialisms coming late 2008; did those work?  We had overseas dollar swaps that went to $600 billion almost during the worst financial panic since the Great Depression; did they work?  They couldn't have, because we had the panic anyway. 

So, the Fed constantly evolves these tactics because they can never solve the big issue, which is balance sheet constraint of all these global banks that used to create dollars freely, who can no longer do so for various reasons.

Peter McCormack: Okay. 

Jeff Snider: Deep breath!

Peter McCormack: I think I'm starting to get it now, is that these banks were able to create, I want to call them fictitious dollars.

Jeff Snider: Yes.

Peter McCormack: Lend them out.

Jeff Snider: Well, they're virtual.

Peter McCormack: They're virtual dollars.

Jeff Snider: Right.

Peter McCormack: Lend them out, expand their balance sheet to do that, but now they've got tighter requirements, they've got tighter controls, and because of this, there are now not enough dollars in the system, which is the reason the dollar's so strong. 

Jeff Snider: Yeah, everybody has to be pay essentially a margin charge, so a liquidity premium for accessing the dollar system.

Peter McCormack: So, the alternatives are that people pay in other currencies, which may or may --

Jeff Snider: It happens, yes.

Peter McCormack: -- they pay a premium on the dollars, which is why everything's getting more expensive.

Jeff Snider: Then you see what happens though, it becomes more inefficient. 

Peter McCormack: Yeah.

Jeff Snider: So, even though it's not like you can directly observe, "Okay, the dollar system just shut off", it's sort of this hidden shadow drag on economic activity, because behind the scenes, you can't really see, businesses that used to be able to transact freely at really reasonable terms and predictably.  Suddenly now they're faced with, "Am I going to be able to get dollar funding next week, or the week after?  I have to change around the way I do things".  It becomes much more inefficient, which is a drag on commercial activity.

Peter McCormack: Well, when countries like Bangladesh are buying their energy in dollars, and the dollar is increasing and --

Jeff Snider: You've got no dollars left for anything else.

Peter McCormack: No dollars left for anything else; that means this can destroy -- so the dollar, to be a global reserve currency, needs to be highly liquid?

Jeff Snider: That's what a reserve currency is, and it's something that I don't think many people spend much time thinking about, because when it works, you shouldn't think about it.  But essentially, a reserve currency's not about pricing commodities, it's about having a currency available in enough places around the world, and freely available, that different parts so the world can transact with one another very seamlessly.

Peter McCormack: But can it be too liquid?

Jeff Snider: Yes, that was the downfall of the eurodollar; it went out of control.

Peter McCormack: So, how do you maintain the right level of liquidity?

Jeff Snider: Well, I think part of it has to do with knowledge because again, getting back to the ideal currency, lack of transparency.  What dominated the eurodollar system in the 1990s until the early 2000s was recency bias; because nobody knew what was going on, it just continued to expand and expand and everybody was convinced that volatility was really low so that you could continue to expand and expand until you couldn't.

So, it was because nobody really understood what was happening at the time, but also because everybody believed there was no risk to doing any of these things; I mean, it was absolutely absurd. When you step back and look at it from the position of hindsight, it's absolutely absurd what happened, but at the time you could understand why it got out of control; when you've got the most complicated mathematical models humans have ever created saying that the risk of this going wrong is this small, and everybody believes that, it's easy to get out of control.

Really, a simple balance sheet example proves a point; if you're going to lend and create $1 billion and your expected loss is, say, 5%, you're okay doing $1 billion.  But if volatility ticks up unexpectedly, what happens if you're expected loss goes from 5% to 10%?  Well, for the same value of expected loss, you can only print half the money.

Peter McCormack: So, where do you see this going then?  There is a dollar shortage, it's not improving --

Jeff Snider: Oh, it's gotten worse!  You've got countries like India complaining about how bad the dollar situation -- they called it rapid external tightening.

Peter McCormack: Well, it almost feels like some of these nations are going through a death spiral.

Jeff Snider: Yes.

Peter McCormack: The dollar's so strong, therefore that's affecting a number of things in their local economy, which means their governments, like in the UK, are now having to maybe print, whatever you want to call it, borrow a lot more money which is then weakening the pound, and so it's like this death spiral.

Jeff Snider: And it's happened again, we can see the instability accelerate.  It was Beirut a couple of years ago, that was, "Oh, Beirut, a little small -- okay, it's Beirut, no big deal".

Peter McCormack: Lebanon.

Jeff Snider: Yeah, sorry, Lebanon, and then Sri Lanka and then maybe --

Peter McCormack: Turkey?

Jeff Snider: Argentina, Turkey; we're starting to get a little bigger.  Now, we're talking about India, UK, I mean, it's expanding for that reason.  One of the things that you can see with the dollar shortage is what happens to the countries on the other side; because they can't replenish their dollars, that country has to use --

Peter McCormack: Their reserves.

Jeff Snider: The reserves.  If the local bank that was feeding dollars to the local corporation to do things on the global dollar market, the local bank can't get dollars, it will go to its central bank and say, "I can't get dollars".  So, usually the central bank will say, "Well, I've got to sell some reserve assets to create liquidity to then give to the local banks to try to circumvent or bypass the eurodollar shortage".  So, that's a primary symptom of the global dollar shortage when you see countries' reserve balances start to go down.

You might remember that China, 2014 and 2015, $1 trillion in reserves just disappeared; they didn't just disappear, that was a global dollar shortage that massively affected emerging markets that ended up in depressions which they've never recovered from.  So, we go through these dollar cycles every couple of years because it's never really been fixed.

Peter McCormack: So, how did we get over those previous shortages of the dollar?

Jeff Snider: Before 2008?  There weren't any.

Peter McCormack: Okay, so why since 2008 has it become a particular problem?

Jeff Snider: Because it's, again, the way the banking system used to create money has changed.  The banks know they can't do the things that they used to do, so they're no longer able to do it, which means that we don't have a replacement for what they used to do.

Peter McCormack: So the only option is, therefore, the banks to go back to the way they did it before?

Jeff Snider: Or to do something different.

Peter McCormack: But what is the different?

Jeff Snider: That's what everybody is wrestling with, they're trying to answer that question; that is really the question here.

Peter McCormack: But the end of the dollar as a global reserve isn't an ideal scenario; that would cause calamity?

Jeff Snider: Well, we've experienced a lot of that over the last 15 years!

Peter McCormack: Bitcoin, we can save that discussion for later.  Is there no way for the Fed, the US Government, to inject or make available more dollars and deliver them long.

Jeff Snider: I mean, it's an open-ended question; in my opinion, no.

Peter McCormack: Could they not create their own bank?

Jeff Snider: Sure, they already have; I mean, they don't need to, the Federal Reserve system is essentially a bank.

Peter McCormack: So, why can't they just create dollars and put them into the…?

Jeff Snider: They did that once.

Peter McCormack: When?

Jeff Snider: A couple of years ago, 2020.

Peter McCormack: Okay, so why can't they keep doing that, and should they do that?

Jeff Snider: They're legally prevented from doing that again, because that wasn't really the Federal Reserve, that was the Treasury Department, so that means they need congressional mandate, you need laws, you need all that legal mumbo-jumbo to justify it.

Peter McCormack: But they managed to do it before.

Jeff Snider: They did, under extreme circumstances.

Peter McCormack: Is this not extreme?

Jeff Snider: Again, this is part of the problem because if you asked the typical politician in Congress, "Are we experiencing a dollar shortage state that needs a new law that gives the treasury unlimited ability to create cash?" what are they going to say?  They're going to say, "No, what are you talking about this?  This is nuts!"

Danny Knowles: Do you think they should do that though?

Jeff Snider: No, God, no.  The more the government does, the worse it gets; I think that should be the primary lesson that most people -- they intuitively realise that anyway, the more the governments do, the more they're going to mess things up.

Danny Knowles: You're a bitcoiner.

Peter McCormack: Yeah, are the banks in Europe incentivised, like does there become a time where they actually will have to change their rules because this dollar shortage will directly impact them, or does it benefit them?

Jeff Snider: There are always winners and losers and unfortunately, if there are more losers than there used to be, even the winner's a little bit nervous; that's really what happens.

Peter McCormack: Because it can collapse on them?

Jeff Snider: Yeah, "Am I next?  I don't think I am, but I don't trust the numbers I used to have either.  These black box models I used to have beforehand, I used to think were gospel; I'm not so sure.  The tolerances get wider, the margins get slimmer".  It's natural, it's even prudent why you see these banks pull back because it's not as definitive as it used to be, it's not as certain as it used to be, and you see all these examples, "Bear Stearns, they were not a subprime mortgage peddler and yet they lost their business, I could be next".  It's understandable why banks are balance sheet constrained in one sense because forget the Fed, the Fed didn't save anybody, you could be the next Bear Stearns or Credit Suisse.

Peter McCormack: Oh yeah, we can talk about that as well.

Jeff Snider: That's what I'm saying, you keep seeing these continual problems; why do we keep seeing them?  It's because the system is broken, and it has not been fixed.  And, because the system is broken, that's also why you see central banks and governments continuously respond.  Why is Japan on the 26th QE?  Because they don't fix the problem.

Peter McCormack: Yeah, I saw somebody mentioning this the other day saying Japan, the yen, always looks like a good short.

Jeff Snider: Yeah.

Peter McCormack: But it never is.

Jeff Snider: Until it is.

Peter McCormack: Until it is, and you won't know, and it will collapse.  Okay, the thing I don't understand, we talked about this in the last show and I still don't understand this; a bank can choose to lend somebody money and they can just create that money, and they lend that and that goes maybe to another bank.

Jeff Snider: Right.

Peter McCormack: And, at some point, these banks settle with each other, but there's no physical thing; whereas I have money in a bank, okay, but I also have a house; that is a physical thing.  If I sell that house to Danny, he takes that physical thing, or a car, even Bitcoin, it's a bearer instrument; I know I have that Bitcoin.  I know I can go to the bank and withdraw cash and I feel like I have a physical thing, but all these banks, it feels like everything is backed by fuck all.

Jeff Snider: Faith?

Peter McCormack: Yeah, faith, fuck all; there's nothing backing all this.

Jeff Snider: That's every monetary system in human history.

Peter McCormack: Not Bitcoin, Bitcoin is backed by maths.

Jeff Snider: I knew you were going to say that!  Maths is fallible.  When you write a cheque, what happens?  No cash is moved.

Peter McCormack: No.

Jeff Snider: It's a book entry.

Peter McCormack: Yeah, it's a promise.

Jeff Snider: So, that's how the system worked; it's all about book entries.  So, if it's you writing a cheque to pay for groceries, if it you that's using a debit card to pay for groceries -- it's no different if you use a credit card.  What happens with a credit card is a different set of book entries happen where the bank doesn't create a deposit for you, it goes to an SIV and creates a deposit there, where the SIV owns the paper or the cashflow extremes from the credit card that you just used.  But it's all just book entries. 

So, all the banks really do are blockchain transactions, they just keep track of who owes what to who; that's all it is.  And we've privileged these banks because we have in our mind this idea that they have cash in a vault when they don't, some of them do, but they don't, they don't really. 

Peter McCormack: But this is the point, so it's like if I want to transact with Danny with Bitcoin, when I send him that Bitcoin, I know I've sent him a percentage of the 21 million; I know he's got a percentage of that, and if he sends it back to me, it's a percentage of that 21 million, and I'm comfortable with that.  I know, if I think of the value of my assets and money, I'm comfortable with the value of my house because there are bricks and there's land that is mine, and when that mortgage is paid off, whatever happens, that is mine.  My money in the bank, I am starting to think, "I think I need to buy some shit with that because --"

Jeff Snider: Well, no, it works the same way though.  If you believe the bank is a dispassionate, objective arbiter of monetary transaction, it's the same exact thing because what happens is you write me a cheque for $5, and it's drawn on the bank, there's no cash that's moved; I now have that $5 according to the bank.  It's only because the bank says I have that $5 and you transferred it to me, so now I can use the $5 and I'm not going to actually get cash out of the bank, I'm going to write another cheque to Dan, or whoever else, and the bank says, "You own this $5 so, therefore, you can transact in that medium of exchange".

Peter McCormack: I think what I'm trying to get to is that the value of the stuff, the physical things I hold, is based on --

Jeff Snider: An illusion.

Peter McCormack: No, no, the physical things, like the house.

Jeff Snider: It's based on an illusion.

Peter McCormack: Well, no, yes, but still there are physical things there, and the Bitcoin is valued based on a percentage of 21 million.  It feels like the money I have in the bank, its value is derived from the aggregate risk management of that bank.

Jeff Snider: Yes, and they do a horrible job of it; now you're seeing the problem.

Peter McCormack: The aggregate value of the risk management of the banks and the success of central banks' monetary policy, or the government because for example, I know my pounds are worth less because the UK government fucked up, so it's the banks and the government.

Jeff Snider: Well, the UK's experiencing a problem that India's experiencing; their original problem is that the eurodollar system is looking at Britain in the same way it's looking at Sri Lanka.  Because the UK government has screwed up, because the situation in Britain, no longer part of Europe, for ill or worse, I'm not going to get into that, but because they're not part of the European system, they never really integrated fully but at least they were considered that way, Britain is now looked at as an extremely weak credit.  And, in a risk-averse environment, what happens to the extremely weak credits?  They're deprived of monetary and credit resources. 

As the Reserve Bank of India said just a couple of months ago, "What you see is massive gross financial instability", which is exactly what's happened in the UK.  So, it's a response to the original dollar problem, which only makes it worse because the UK government's response to the dollar issue is to make the dollar system look at the UK even more risk-averse.  So, it becomes this self-reinforcing spiral where there's really no way to get out of it.

Peter McCormack: So, you think the pound is going to continue to drop against the dollar?

Jeff Snider: Yes.

Peter McCormack: How low can it go?  It almost like the dollar/pound parity feels like something to defend, once we see it, like, "We will defend that with our might!"

Jeff Snider: Yeah, but the thing is, the more that central banks try to defend these arbitrary lines in the sand, the more likely it is to fail; you saw that with India.  India actually put a soft floor under the rupee at $80; it lasted for maybe six weeks, now it's $82 and falling.

Peter McCormack: So, how low do you think the pound could drop?

Jeff Snider: No idea, it depends on how long these things go.

Peter McCormack: See, what I've made a decision to do is, there is a scenario where it is the bottom and the pound has dropped this low before and come back, there is that scenario, and there is a scenario where it falls further; I'm essentially hedging by holding both.

Jeff Snider: But see, that gets back to our original problem.

Peter McCormack: Thinking about money.

Jeff Snider: We shouldn't be.  If I leave all my assets in the pound, am I going to be wiped out?  That's the last thing that should happen in a monetary system; it's the worst case because now you're thinking, "I can't go out and do this, and I need to expand my business, I need to do this or that.  I can't even think about that because I don't even know if I'm going to have cash that's worth anything in a week, or two weeks, or a month, it doesn't matter".  The fact that you're even thinking about that seriously is an incredible impediment on the commercial system, an incredible imposition on the commercial system that is a drag upon economic growth and sustainable systems.

Peter McCormack: But I don't want to do the opposite, although I wish I'd done this from the start of the year, I don't want to keep all my money in the dollars in case somebody does something else and suddenly the pound massively rises against the dollar; if it went 25% up, I'd lose 25% of my money.  It's like, "What the fuck do I do here?"

Jeff Snider: Well, you wait for everything for clear out, buy Bitcoin I guess, right?

Peter McCormack: Buy Bitcoin, well, I've done enough of that. 

Jeff Snider: But that's the other issue, cryptocurrencies, digital currencies, why have they experienced the Bitcoin winter, the crypto winter over the last year too?

Peter McCormack: Well, there are multiple reasons for that; they tend to go in cycles, and it very much went in the cycle, but there are other signals that it was a response to cheap credit and the tightening.

Danny Knowles: The Fed tells us what to do.

Peter McCormack: The Fed tells us what to do, risk on, risk off.

Jeff Snider: See, I would look at it the other way, the cycles are dollar cycles; 2017 and 2018 was a deflationary cycle in the eurodollar.

Peter McCormack: Right.

Jeff Snider: So, we had the same thing, 2021 into 2022, deflationary cycle in the eurodollar.

Peter McCormack: What's going to happen in 2023/24; shall we buy Bitcoin?

Jeff Snider: Well, that's the bottom.

Peter McCormack: That's the bottom?

Jeff Snider: We don't know what the bottom looks like just yet.

Peter McCormack: You think it's going to get worse?

Jeff Snider: Again, because we can't directly observe what these banks are doing, the eurodollar system as a whole is a black hole, and you can't directly observe a black hole, but you can tell what's going on in the black hole by how things are moving around it how stars are orbiting around the black hole tells you something about the size of the black hole, how fast a star orbits, all that stuff.  So, if we look at financial markets, if you look at money markets, look at the dollar's exchange value, all these things tell us what is actually going on in the eurodollar, even if we can't directly observe it, and these things are not looking very good at all; we're talking about 2007 levels of inversion and treasury and eurodollar futures, obviously the dollar's exchange value is rekking people everywhere around the world.  So, I'm not incredibly optimistic about this year into next year.

Peter McCormack: Is this a particularly worse scenario, or do you think it's just similar to 2007, 2008?

Jeff Snider: I don't want to make any direct comparison, I'm just saying the last time the markets told us that the monetary system was confronting this level of concern and uncertainty was in 2007.  We're not going to have another 2008, that will never repeat, but that doesn't mean we can't go through some really bad periods here because we've already seen that happen around the world many times.

Peter McCormack: All right, you don't want to make any predictions?

Jeff Snider: No, never make predictions.

Peter McCormack: How are you preparing?

Jeff Snider: How are you preparing is understanding what's going on, listening to the financial system.

Peter McCormack: No, how are you preparing?

Jeff Snider: How am I preparing?

Peter McCormack: Yeah, how are you preparing?

Jeff Snider: I'm being as safe and as risk-averse as I possibly can.

Peter McCormack: So, what is safe and risk-averse right now?

Jeff Snider: It can be any number of things, and again, I don't want to give out investment advice, I don't want to get into any of that stuff.

Danny Knowles: Is the one indicator that would be contrary to that the unemployment rate?

Jeff Snider: No, because that's a lagging indicator, and it's also faulty because it doesn't take into account, in the US, the participation problem.

Danny Knowles: What does that mean?

Jeff Snider: Fewer people have come back to labour force since 2020, so the unemployment rate doesn't take into account all the people who didn't come back; we're just sort of supposed to ignore that.

Danny Knowles: Oh, I see.

Jeff Snider: The participation problem is a deflationary problem that John Maynard Keynes identified a century ago, but it happened, starting in 2009, 2010, and we just ignored it.  So, we have fewer people working, but the unemployment goes down because we don't ignore all the fewer people who don't work.  Why?  Nobody knows, nobody seems to know.  Economists have said, "Well, Americans are lazy, they won't go back to school and learn new jobs, they're drug-addicted", any number of excuses that basically blames workers for what is a macro issue.

Danny Knowles: What do you think the reason is for that?

Jeff Snider: It's again, like we talked about, commerce is spending too much time worrying about money and so it's a drag on economic growth, globalisation; more inefficient economic systems means there's less opportunity to create sustainable enterprise that leads to employment.  So, I think the average American worker who's out of the labour force knows more about what's going on in the economy than every central banker and economist there is.  They can feel the fact that there are no jobs available because companies are struggling with all of these issues.

Peter McCormack: Well, people care now and they want to know.

Jeff Snider: Yes.

Peter McCormack: We see it with our numbers.  Our podcast numbers are essentially a derivative of the Bitcoin price; when the price goes up, our downloads shoot up and we get a new base, but when it drops, it drops.  We put out a show today with Lyn Alden talking about the crisis in Europe, straight line up.  People want to know because they want to protect themselves, because they know they're being fucked by the central banks.

Jeff Snider: They also know they're being lied to.

Peter McCormack: Yeah, of course.

Jeff Snider: That's the issue, it's instability, you can feel the instability, they've got Jay Powell on the TV saying, "No worries, I've got this covered.  I'm going to hike rates and the economy's going to be just fine.  There'll be a soft landing, we're all good", and everybody knows that's bullshit, right.

Peter McCormack: Because it's bullshit about transitory.

Jeff Snider: You have to understand what the Fed says in public is not what it says in private.  If you look at some of the academic studies, the literature, they know they have no idea what they're doing, but their job requires them to tell the public that they do.  Again, the eurodollar system put the Fed out of the money business, so what has the Fed been doing for the last 50 years?  It's been in the business of convincing people that it's in the money business when it's not, but that requires putting on this façade that says, "I know everything that's going on".  But then you read the academic studies and the literature, and it says, "We haven't got a fucking clue what we're doing here!"

Peter McCormack: Do you support the idea of ending the Fed?

Jeff Snider: Yeah.

Peter McCormack: Do you think the economy could operate without a central bank?

Jeff Snider: The US economy's best growth period was before the Federal Reserve was instituted. 

Peter McCormack: Really?

Jeff Snider: Yeah, before 1913.

Peter McCormack: Tell me about that because I know nothing about that.

Jeff Snider: The late 19th century, boom/bust cycles left and right; you can understand why the original Fed came about, was because the private banking system did a relatively decent to lousy job at times of liquidating elasticity.  So, people said, "Let's create a public utility so we don't have to depend on the Chicago clearing house to create clearing house debt certificates whenever there's a monetary crisis.  Let's have a public utility that has the mandate to create elasticity during crises so we don't go these boom/bust cycles".  And it was a total disaster because within two decades we had the Great Depression, the worst of the worst case.

So, the idea that the government could create a perfect elasticity machine to make sure the monetary system was in working order through the ups and downs of the boom/bust cycle was total hubris.

Peter McCormack: So, are we better off just accepting boom/bust cycles?

Jeff Snider: I don't think we need to accept them in the most extreme cases, I think we need to accept the fact that there are boom/bust cycles because human beings are human beings.

Peter McCormack: Yeah.

Jeff Snider: So, we cannot perfect humanity; how are going to perfect the complex human interrelationship?  I think the idea is more along the lines to make sure it doesn't get too far out of tolerances in either direction.  We don't want to be too constrictive; we also don't want to be too tolerant.

Peter McCormack: Okay.  If you support the idea of ending the Fed, do you think it could ever realistically happen?

Jeff Snider: Yes.

Peter McCormack: You do?

Jeff Snider: Absolutely.

Peter McCormack: Because of public response or political will?

Jeff Snider: Just what you said, people are interested in the topic in a way -- trust me, I've been doing this a long time, and when I first started nobody cared.

Peter McCormack: No one gave a shit, yeah.

Jeff Snider: "Who are you?  What are you talking about?  Eurodollar, banks?  No, we don't care.  Alan Greenspan's a maestro", and now things have really changed; it just needs to get to a critical mass where people who are asking questions get connected with the ideas that answer those questions.

Peter McCormack: Do we know of any politicians who particularly stand for ending the Fed?

Danny Knowles: I'm sure there are some, but I don't know.

Peter McCormack: Probably Ron Paul.

Danny Knowles: Yeah.

Peter McCormack: Dr Ron Paul probably.

Danny Knowles: He was all at the Fed, wasn't he, at least?

Jeff Snider: Yeah, what good is that going to do?  The Fed is really transparent, there are no hidden secrets there.  It's really the Fed doesn't do the job that it was designed to do, and that was because they can't, they literally cannot do that job anymore because of the monetary and banking evolution a long time ago.

Peter McCormack: Jesus!  I don't know what to do, Danny.  Okay, so it is a particularly difficult time for people, in the UK is particularly difficult as well because we also have this energy crisis which is really, really causing a lot of problems for a lot of businesses.  I'm particularly worried that the UK economy could go into a specific and deep crash.  You don't want to do predictions --

Jeff Snider: No, but we can talk about probabilities. 

Peter McCormack: Yeah, probabilities.  What are the probabilities of certain scenarios then?

Jeff Snider: Well look, again, what the financial market is saying is the probabilities of downside cases have accelerated.

Peter McCormack: Yes.

Jeff Snider: That's what accelerated, not consumer prices, downside cases have accelerated.  I mean, for the first time, in September, the German curve inverted; never happened before.  What does that tell you of an unprecedented German curve inversion?  That means that the financial system, the monetary system, in that particular focus, on that particular part of Europe is saying the downside chase is something we've never confronted before, to the point that I would rather own a 30-year German bond than even a 10-year or a 5-year.  That's an extreme downside case, a probability where what we used to call tail risk is not so tail, it's not such a tail anymore.

Peter McCormack: What is the reason to own different length bonds then?  I don't know anything about bond trading, never bought a bond and never traded a bond; why is a 30-year bond indicative of that, you're locking up your money?

Jeff Snider: No, that's part of it, you're locking in returns because you think, "Well, very generally, broadly speaking, interest rates are going to go lower through time".

Peter McCormack: So, you want to lock in that interest rate?

Jeff Snider: Yeah, and it's also about liquidity factors involved too, but primarily when you see curve inversion, what you're saying is, "I want to own a ten-year because I think, over the next couple of years, interest rates are going to go down to the point that owning the ten-year is going to be a tremendously profitable position". 

So, the yield curve in the US is heavily inverted where the 10-year is 40, sometimes 50 basis points below the 2-year, which means that the Fed is pressuring the front end of the curve to its rate hikes and the market is waiting for the interest rates to go down, just waiting for that moment for the Fed to realise that it has screwed up so badly that it has to not just stop hiking rates, it has to actually aggressively cut them.  Not just treasuries, eurodollar futures, are all waiting for the moment Jay Powell gets on TV and says, "Oops"; it's basically priced into all of these markets.

So, what the question is, what is the oops; what is the moment there where Jay Powell has to say, "I throw in the towel and I've got to start cutting rates"?  In this environment, it can't be anything good, it really can't be.

Peter McCormack: So, do you think rates are going to be cut again?

Jeff Snider: Yeah, I think the markets have been absolutely sure about that and they've been pricing this for quite a long time, and we continue to keep moving in that same direction.  The eurodollar curve inverted the first time last December, and the initial inversion last December, everybody was talking about an economy that was red hot, inflation as going to be forever, secular inflation, all that.

Peter McCormack: But inflation's dropping now.

Jeff Snider: Yeah, in some places, and maybe it's not as fast as most people would like; but my point was that when it first inverted in December, nobody was thinking that what we're seeing now was actually going to happen.  The market has been ahead of events all the time, and if it's pricing next year, or later this year, continuing on the same path, eventually you get to that oops moment.

Peter McCormack: Well, Cathie Wood kind of agreed with Jeff really that the supply shock component of inflation has not been really considered.  This was something you talked about, other people disagree with you on, but we brought out that chart; we saw it post-World War II, and we saw it post-COVID, and we've also got a supply shock in the energy markets in Europe which have been driving inflation.

Jeff Snider: It's an attractable one too.  That's, again, you get to the cross currency, the ECB is hiking rates; is that going to bring down oil prices?  Why is the ECB hiking rates because that's not how the ECB operates?  You think that inflation is a very simple thing; is there too much money or is there not?  Well, the Fed couldn't tell you, the ECB couldn't tell you, so what do they do?  They hike rates because they're worried oil prices are going to infect people's minds.  You think I'm making this up but I'm not; they're afraid that what will happen is inflation expectation will un-anchor, using their terminology, so they're hiking rates to manipulate the people, employers, investors, whatever, so that they don't think that high oil prices are going to stick around forever. 

It's all about psychological manipulation, it's not about actually cutting back on money supply, it's not really even about controlling the economy, it's about psychological manipulation.  So, the ECB is focused on oil prices, which are going to go up and stay up for probably a prolonged period, and the Federal Reserve is focused on the unemployment rate along with oil prices.  Meanwhile, at the same time, economies are falling apart rapidly around the world, central bankers around the world are complaining about rapid external monetary tightening, and they're all looking at these other things. 

Peter McCormack: So, everything's fucked!

Jeff Snider: No, you can see why market curves are inverted.

Peter McCormack: Yeah, I get it.

Jeff Snider: The short-run interest rates are going to up, in the long run they're going to have to come down because the Fed's focused on this, the world is doing this.

Peter McCormack: Well, the high interest rates, again, I can only speak for the UK, but the high interest rates are potentially going to cause a housing crisis as well.  I've brought this up in a few interviews recently, but 300,000 people a month come off fixed-rate interest and go onto variable rates, and people cannot afford the massive jump in rates that we've seen; they cannot afford to pay their mortgages, which means we're going to have an oversupply of houses in the market which is going to lead to a fall in housing prices.  But also, on top of that, people can't afford the rates for the houses they wanted to buy previously.  I think higher interest rates are good thing, not a sharp increase.

Jeff Snider: Higher interest rates for the right reasons.

Peter McCormack: Yeah.

Jeff Snider: Not because the Fed says so, but because the economy is healing.

Peter McCormack: Yes.

Jeff Snider: If we had an actual rapid economic growth, we would easily absorb high interest rates because it wouldn't be all at once, it would be slowly, gradually, and then you would have people who would get better job opportunities, there would be more jobs available, so they would be able to afford higher mortgage rates.

Peter McCormack: Yeah.

Jeff Snider: But see, that's not what happening here; we have an economy that's falling apart and the Fed raising rates, or the Bank of England raising rates, for totally illegitimate reasons.

Peter McCormack: So, do you think they're going to hike rates before they drop rates?

Jeff Snider: Yes.

Peter McCormack: You do?

Jeff Snider: Yeah.

Peter McCormack: So, when do you think rates will drop?

Jeff Snider: It looks like either later this year or early next year.

Peter McCormack: Right, so it's going to be a painful end of the year then?

Jeff Snider: It looks that way.  I mean, look at all the corporate earnings anecdotes that have out over the last couple of weeks; FedEx was the big one.

Peter McCormack: Yeah, people are not buying shit.

Jeff Snider: Yeah, but what did FedEx say?  They said, "Not just global recession", that's what everybody focused on, they said, "Rapid deterioration towards the end of the quarter".  So they said, "Things were bad and then they got worse", and then FedEx came out with another warning this morning, just a couple of days ago, or last week. 

So, we had the economy sort of fall off a cliff around March when oil prices spiked, so it kind of started the recessionary process or the recessionary transition around March, but when you're in that transition phase, it's ambiguous because the data, it's not as awful as maybe people first feared it's going to be.  So the Fed can say, "Well, we're just slowing down", and it's hard to argue against that because that's kind of what it looks like.

Peter McCormack: Is there a benefit to crashing the market?

Jeff Snider: Oh, God no!

Peter McCormack: There's not?

Jeff Snider: No, not really.

Peter McCormack: So, they're just fucking idiots.

Jeff Snider: 2008 would have been the perfect time to have this conversation about money, that's when we should have done it.  We should have let the system crash so that we could have reset the damn thing because 15 years without economic growth is far worse, just ask everybody in Ukraine, because that's what ends up happening.  When you have prolonged periods in history where there's lack of economic growth widespread across the world, it ends up with conflict, not just countries arguing with each other, shooting wars, that's where it comes from.

Peter McCormack: Hot wars.

Jeff Snider: Yeah, there's a reason why World War II followed the 1930s, because there's a human cycle at work.

Peter McCormack: Okay.  So, we're going to throw in a potential world war to this as well, maybe a thermonuclear war.

Jeff Snider: And again, you've said these stuff, and even in 2009, it sounded crazy.

Peter McCormack: Yeah.

Jeff Snider: It doesn't sound as crazy anymore, doesn't it?

Peter McCormack: No.

Jeff Snider: Instability, instability, instability.

Peter McCormack: So, we need stability?

Jeff Snider: Yeah.

Danny Knowles: When the Fed eventually pivots and starts dropping rates, do you think they'll also start QE again?

Jeff Snider: Yes.

Danny Knowles: But you don't think that is going help anything?

Jeff Snider: No.

Danny Knowles: The rates will help but that won't?

Jeff Snider: No.  I don't think the rates will help much either because by then, it's too late.

Danny Knowles: Well, you think we'll just be in full-blown recession?

Jeff Snider: Yeah.

Danny Knowles: Do you think we're already in full-blown recession?

Jeff Snider: Yes.  In the US, the labour data says that the recession started in March.  I mean, the official recession date will probably be later in the year, but full-time employment, for example, full-time employment peaked in March, and that's a dead-on recession indicator.

Danny Knowles: Yeah.

Jeff Snider: Full-time employment peaked in I think it was March of 2007, but in that interim period between early 2007 when the Great Recession was declared, at the end of 2007, everybody said, "Well, it's just a slowdown, it's no big deal"; you can't really tell for sure because if you're not paying attention to financial markets which said, "Yes, this is recession, all the labour data, it doesn't look too bad.  The economic data, GDP's still positive, it's still 2%, it doesn't look too bad, right?"  Then, all of a sudden, it just falls of a cliff and everybody's like, "What happened?"  Well, you ignored all the warning signs.

Peter McCormack: While it's not a good thing, is a recession useful in that it is a reset?

Jeff Snider: If it was allowed to be, but our biggest problem here is not that we need to reset the economy, we need to reset the banking system and monetary system, which doesn't happen.  So, we went through 2020, maybe that would have been a perfect time to reset everything, not the great reset, obviously, but…

Peter McCormack: How do you reset though; literally, how do you?  It sounds like it's an impossible task; the only way you can reset it is for it to just collapse, and for it to collapse, burn it to the ground and start again.

Jeff Snider: No.

Peter McCormack: No?

Jeff Snider: Let's look at the eurodollar system, the eurodollar system, Triffin's paradox; Triffin's paradox was you can't have a national reserve system tied to an international currency because the world would need more currency than there is national reserves, which is what happened.  But as I said before, August 1971, that was the official end of Bretton Woods, but the eurodollar system developed, nobody knew it happened. 

So, we had this monetary transformation, it got messy towards the end obviously with the great inflation, but the system didn't crash even though we had this massive monetary evolution and transformation that took place over a two-decade period.  So, maybe that's cryptocurrencies, maybe we're already in the transformation and we don't really even notice it.

Peter McCormack: Well, we're certainly in a transition to Bitcoin, but what its role is is to be decided.  People like me and Jeremy and Danny are in a transition to Bitcoin; we price things in Bitcoin, we consider Bitcoin as --

Jeff Snider: I think there'll be a lot more people like you.

Peter McCormack: Yeah, Bitcoin is my reserve currency; it helps me make my decisions about my future spend and how I hold money, but you aren't completely opposed to it, and in the last episode, when you described the perfect currency, you described Bitcoin apart from the elasticity and liquidity.  Talk to me about the issue of liquidity that you think exists with Bitcoin; talk about how that would manifest itself.

Jeff Snider: Well, part of the problem too, it's just an innate problem with monetary systems, is money tends to pool in successful hands, and if you're successful at what you do, you have a successful business, you're going to end up with more money.  And so the issue is always about, is there enough money for everybody else?  And if there isn't, how do you circulate money that pools? 

I don't think that Bitcoin has developed, and I don't know -- Bitcoin is working on it, or some people are working on it with some of these sidechain pools and sovereigns and some of the other solutions, but I think they're acknowledging that the lack of liquidity in Bitcoin is an issue.  Because it pools and because it doesn't transact in a wide enough area, it creates these deficits, these pockets where legitimate uses of money go unsupplied because --

Peter McCormack: There's no banking system for Bitcoin?

Jeff Snider: There's no financial system.  It doesn't necessarily need to be a bank; DeFi is a potential elegant solution too.

Peter McCormack: I'm not sure on that, but…

Jeff Snider: I said potential.

Peter McCormack: So, there are peer-to-peer Bitcoin-lending solutions?

Jeff Snider: Right.

Peter McCormack: I think Hodl Hodl have got a market, haven't they?  Do you want to draw that up?

Danny Knowles: Yeah.

Jeff Snider: Peter, that's the thing, is that any monetary system, no matter what, has to undergo financialisation, it has to happen.

Peter McCormack: Yeah.

Jeff Snider: The more you're resistant to financialisation the more you're going to run into problems, and I think Bitcoin is very resistant to financialisation.  I'm not say that there are not good reasons to be, but I think there needs to be a balance there.

Peter McCormack: I think there are bitcoiners who are resistant to financialisation because financialisation might mean not holding your private keys, which is something people worry about. 

Jeff Snider: No, and there's always a tug of war here; you need to balance.

Peter McCormack: Can you go onto borrow, Danny?

Danny Knowles: We're on borrow at the moment.

Peter McCormack: What's this Ethereum shit?!  Okay, so I want to borrow, let's put in $25,000, but I'm borrowing dollars against the Bitcoin.

Danny Knowles: Yeah, of course.

Peter McCormack: Yeah, so in this world, this is a world which is two currencies, which allows you to have your Bitcoin as your reserve and the dollar, I guess, as your medium of exchange.  And so that scenario, you mentioned that you need both, and the idea that you would only have one; if you lent Bitcoin, I guess with that, you'd only be lending out at a rate, and with this, you have the protection because there's an LTV.  So, you're lending dollars but you're holding the Bitcoin.

Jeff Snider: Right, so it's not a reserve currency, it's a reserve asset.

Peter McCormack: Yeah.

Jeff Snider: It's almost like collateral, which I think that could potentially be an elegant solution too.  I also think that a single currency, that's unusual; usually, there are many currencies that people have a variety of choices to use, and I think there's value to having that because you have competing currencies, therefore trying to create the best terms for businesses and users, not the other way around.  When you have a completely opaque system that prioritises or gives banks special privileges, they take advantage of those, among them information asymmetry.  So, competing currencies that are open and transparent give all the benefits to the users.

Peter McCormack: Yeah, I think, Danny, that's one of those things we should be making a show about, the idea that if we did have a single currency, Bitcoin, what would that mean for trade and what would that mean for the liquidity?  I think, when bitcoiners talk about hyperbitcoinisation, they haven't spent, maybe not all of them, some maybe have, but haven't spent the time considering how global trade works and how this works.

Danny Knowles: Yeah, that's probably another one for Lyn!

Peter McCormack: Poor old Lyn!  All right, Jeff, you've left me ultra-optimistic and excited for my future.  All my hard years of work might be completely burning down.

Jeff Snider: Usually it's the opposite!

Peter McCormack: What are you focused on right now then?

Jeff Snider: I'm focused on what the eurodollar system is doing.

Peter McCormack: Okay.

Jeff Snider: I'm also trying to figure out what possible solutions there could be.  I guess I am very optimistic about digital currency, in fact I'm almost 99% convinced that, within a reasonable length of time, we will be more digital currencies than not.

Peter McCormack: Not CBDCs though.

Jeff Snider: No, God, that's not a digital currency!

Peter McCormack: Thank you.  Danny, have you got any final questions for Jeff?

Danny Knowles: I've actually got one from Ben here; I'm going to pull something up. 

Peter McCormack: Ben works on the show; he is our editor and publisher. 

Danny Knowles: And our inhouse macroeconomist.

Peter McCormack: Yes.

Danny Knowles: So, this was from Lyn's latest article.

Peter McCormack: Right, let me read this out just so people listening can hear; "Back in my June 2022 newsletter, I wrote about an upcoming 'checkmate' scenario for central banks, where they were forced to print money into a high inflation environment due to a combination of untenably high debt and commodity-driven inflation.  Japan has over 250% public debt-to-GDP; Italy has over 150%; UK and the USA are both over 100%.  The thesis here is that the macroeconomic environment is like the 1940s for them, high debt and high inflation, not like the 1970s, low debt and high inflation, and their sovereign bond markets therefore require support from central banks to avoid a fiscal spiral and nominal default.  This support typically takes the form of yield curve control, yield curve management and various other types of financial repression".  I think we need to get you and Lyn together; I think that'll be fun.

Danny Knowles: I think that would be really good.  So, he said, "Will central banks be forced to print money due to high debt and commodity inflation despite high CPI, and can they even print; do they have that power?"

Jeff Snider: No, and the other issue is that commodity-driven inflation, what if commodity-driven inflation doesn't continue?  I mean, we've already seen commodities come way down, outside of energy, base metals are down, what, 30%-something since March.

Danny Knowles: That's what Cathie Wood was saying.

Jeff Snider: So, I'm not sure that's even going to continue to be a problem.  Commodity-driven inflation, we've seen core CPI start to soften a little bit too as businesses are starting to discount and liquidate some of their inventory.  There's still a massive record inventory overhang; in the United States, it's biblical, and around the rest of the world, it's still -- so I don't think it's going to be in response to commodity-driven inflation, or inflation at all, and most of what central banks are doing is in response to energy prices; that's a non-economic issue, it's a political issue mostly.  So, that just drives them into one corner when the overall economy's going in the other direction.

So, I don't think that leads to yield curve control or any of those types of financial repression, I think it leads to different financial repression, but there's no need to do that, which is why we see inverted curves because there's demand for sovereign bonds, and obviously not the weaker ones, but there's demand for sovereign bonds once we get through the rate hikes.

Once the Fed goes, "Oops", once the EBC goes, "Oops", watch what happens to interest rates.  We already saw it last month when the Bank of England did their gilt operation, and they don't want to call it QE but it was very similar to QE, what happened to yields?  They immediately dropped because everybody around the world is waiting for the moment when Jay Powell says, "Oops".

Danny Knowles: But they've almost gone back to where they were before they stepped in.

Jeff Snider: Because that's the nature of markets, you have these fluctuations.  So, if what happened in late-September had been the moment, interest rates would have gone down, but instead it was the jump-the-gun kind of thing, "Oh, the Bank of England did a QE; is there going to be another one?  Well, I'd better start buying bonds because I'll wait for the next… Oh, that wasn't the right one".

Peter McCormack: I'm sure they announced that today. 

Danny Knowles: I've got this here, so this is the 30-year gilt yield.

Peter McCormack: If you go onto my Twitter, Danny, I tagged Greg Foss, Lyn, Preston and Dylan all in a post.

Danny Knowles: The Squad?

Peter McCormack: The Squad.

Danny Knowles: The Bitcoin Squad?

Peter McCormack: The Bitcoin Squad.  It was last night I think, about 3.00am when I should have been asleep and I'm thinking about this bullshit.

Danny Knowles: Sorry, I'm struggling to find it.

Jeff Snider: You were tweeting in anticipation of Ben Bernanke's massive career accomplishment, achievement.

Peter McCormack: Honestly!

Jeff Snider: It's enough to make you sick.

Peter McCormack: It's fucking embarrassing.

Jeff Snider: But you know, there's no better illustration of the position we're in, right, when you give somebody who was at the Fed during the worst crisis and the Great Depression and you give them a Noble Prize.

Peter McCormack: Let me find it.

Danny Knowles: I've got it.

Peter McCormack: You've got it, "Bank of England says launching temporary expanded collateral repo facility".  By the way, I have no idea what that means, that's why I tagged my friends; I should have tagged you as well.  "You can't taper a Ponzi", I think that's Greg Foss's favourite term; it's basically QE.

Jeff Snider: Well, there are some nuances there but at the end of the day, does it really matter?

Peter McCormack: No, it doesn't matter.  Great, we're fucked! 

Jeff Snider: No, but again, that's what markets are prepared for.

Peter McCormack: Yeah.

Jeff Snider: This is the first, not the last.

Peter McCormack: Yeah.

Jeff Snider: So, as soon as the ECB and Jay Powell say, "We screwed up.  We've got to start cutting rates again", the market interest rates are going to be going way lower before that even happens.  As soon as that becomes the most realistic probable scenario, interest rates will fall.

Peter McCormack: And buy Bitcoin.  Jeff, as ever, this was great.  I think next time we come to Miami, hopefully next year, there might be a time when Lyn is here as well, and I think you two would make for an amazing show together.

Jeff Snider: We've actually done a podcast once.

Peter McCormack: Oh, you did?

Jeff Snider: I think that was George Gammon; was that a year ago, two years ago, something like that, yeah?

Peter McCormack: Yeah, but we like them in person, so I'm going to try and get the two of you together and talk about this stuff, if we've got an economic system left!  Brilliant.

Jeff Snider: We've got to survive first!

Peter McCormack: We've got to survive this, get through it, bear markets for survival.  Jeff, tell people where to go to listen to your podcast and follow what you do.

Jeff Snider: You can find YouTube, Eurodollar University, also the website, eurodollar.university, pretty simple. 

Peter McCormack: Danny's become a regular listener.

Danny Knowles: I think I've listened to every show since the last one.

Jeff Snider: I appreciate it.

Peter McCormack: All right, man, take care.  Thank you for doing this, appreciate your time and your expertise.  See you soon.

Jeff Snider: Yes, no problem.  Thanks.