Lots More with Lev Menand on the Eurodollar Market Now

Odd Lots has been exploring the history of the eurodollar market in a special three-part series hosted by Columbia Law School's Lev Menand and the New York Fed's Josh Younger. But why should we care about the origins of this market at all? How do eurodollars fit into the global financial system right now? And what role do they play in maintaining the dollar's reserve currency status? In this episode, we bring back Lev to give an update on the modern eurodollar market. We discuss why some policymakers have been sounding the alarm and whether stablecoins are the new eurodollars. See omnystudio.com/listener for privacy information.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  Finance is increasingly being built on digital rails. But as the adoption of virtual assets, tokenization and stable coins grows, can regulation not only keep pace but help accelerate it? Find out more later in the podcast.

• 0:15Speaker 01

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• 0:45Tracy Alloway?

  Hey there, Odd Lots listeners. We have a very special announcement. Joe and I are hosting our annual Frot Lots Pub Quiz on Thursday, February 13th in New York City, and it's going to feature some very special guests and prizes. So come test your wits in finance, markets and economics for a chance to win the ultimate Odd Lots glory and hang out with your fellow listeners. Tickets are on sale now at events.bloomberglive.com/oddlotspubtrivia. You can also find links on our Twitter feeds or in the newsletter. And you can find the link also on our show notes. We hope to see you there.

• 1:27Speaker 03

  Bloomberg Audio Studios, podcasts, radio, news.

• 1:33Tracy Alloway?

  Joe, three hours of euro-dollar market history and we can't get enough. We've got to do more.

• 1:38Joe Weisenthal?

  I love that. I couldn't even believe that was real. Just sitting, I'm being totally sincere, just sitting there in the studio, listening to Lev and Josh talk about the history of euro dollars, a career highlight, unironically.

• 1:50Tracy Alloway?

  Definitely a treat. I do feel like there's one thing missing, which is like, we kind of have to put everything in modern context.

• 1:57Joe Weisenthal?

  Yes.

• 1:57Tracy Alloway?

  Right? We didn't really bring it that up to date. We talked a little bit about the euro dollars role in like the 2008 crisis. There was a mention of it, but like, let's talk about the current euro-dollar market.

• 2:09Joe Weisenthal?

  Well, can I say something?

• 2:10Tracy Alloway?

  Yeah.

• 2:11Joe Weisenthal?

  Lev, don't listen to this.

• 2:15Joe Weisenthal?

  Whenever we talk financial market plumbing, or things of that nature.

• 2:19Tracy Alloway?

  Yes.

• 2:20Joe Weisenthal?

  This is like really fascinating. Like, this is really interesting topic. And then I was like, how does this matter to anything at all? So I'd like, no, so I would like to actually talk a little bit more for real about like, how does it actually matter? Because I find it very interesting, but I sometimes forget like when environment. It like matters every once in a while.

• 2:37Tracy Alloway?

  Why did we talk about this for three hours?

• 2:39Joe Weisenthal?

  Yeah, for real, for real.

• 2:42Joe Weisenthal?

  I did a deadlift.

• 2:43Tracy Alloway?

  I am both the most popular trader and most successful trader at Citadel.

• 2:48Joe Weisenthal?

  Fed is going viral.

• 2:49Tracy Alloway?

  Uh, barges.

• 2:50Joe Weisenthal?

  This is an after school special, except.

• 2:52Tracy Alloway?

  I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the US.

• 2:58Joe Weisenthal?

  Black gold.

• 2:59Tracy Alloway?

  These are the important questions. Is it robots taking over the world?

• 3:02Joe Weisenthal?

  No, I think that like, in a couple of years, the AI will do a really good job of making the odd lots podcast. One day that person will have the mandate of heaven.

• 3:11Tracy Alloway?

  How do I get more popular and successful?

• 3:14Joe Weisenthal?

  We do have. The perfect guest. Welcome to Lots More, where we catch up with friends about what's going on right now.

• 3:21Tracy Alloway?

  Because even when all lots is over, there's always lots more.

• 3:26Joe Weisenthal?

  And we really do have the perfect guest.

• 3:31Tracy Alloway?

  Well, Lev Menand is here with us and he's going to provide an update on the market. He is, of course, an associate professor of law at Columbia School. So Lev, thank you, thank you for coming on and talking to us even more about Euro dollars.

• 3:45Speaker 05

  I also think this is a topic that we could just keep doing episodes.

• 3:50Joe Weisenthal?

  No, for sure.

• 3:51Tracy Alloway?

  Do an odd lot spin off on Euro dollars.

• 3:53Joe Weisenthal?

  All the good topics are fractal in that you could just go down. This is a core thing I've realized is that actually the good topics, the only limitation on how many episodes you could do is creativity and depth. But actually, we could just do, keep going, right?

• 4:06Speaker 05

  Yeah, and if anything, it matters more today than it did in 1964 and 1954, which was the periods we were covering.

• 4:12Joe Weisenthal?

  Why? Why does it matter more today?

• 4:14Speaker 05

  Size and centrality in the US dollar monetary system and in the global financial system. You know, the euro-dollar system right now is probably 13 billion, 13 trillion dollars in size, which makes it, you know, more than twice as big as the uninsured deposits in the domestic system.

• 4:37Joe Weisenthal?

  Wow.

• 4:37Speaker 05

  And almost as big as the overall deposits in the domestic system. And it's the leading edge of monetary expansion in the US dollar system, takes place offshore, not onshore. And when we were talking about the development of this in the 50s, 60s, and 70s, the onshore domestically regulated dollar deposit system was a much bigger percentage of the overall whole.

• 5:08Joe Weisenthal?

  Right.

• 5:08Speaker 05

  And now we're in a world that looks quite a bit different in terms of the relative importance. And we've been in that world for about 25 or 30 years now. And the 2008 crisis was a crisis of that world. And 2020 was in part a crisis of that world. And so we're now in a financial system where instability in the euro-dollar market, that's the main, with the addition of the repo market, that's the main area of instability and concern for our whole system. You know, in the 20th century, we still had a sort of like, you know, your grandparents' banking system, and now it's not.

• 5:46Tracy Alloway?

  But we have the dollar swap lines, right? Like, isn't that the solution to all of the instability, or at least it has been in the past?

• 5:54Speaker 05

  The swap lines are both enabling the problem and mitigating the downside consequences. They're enabling the problem because they lead to the ability of euro-dollar issuers to draw in euro-dollar holders. When you think about

• 6:17Speaker 05

  What a euro-dollar issuer is doing is they're actually selling a product that's their liability. It's a money instrument that people can hold, who have cash, have demand for cash and cash equivalents in large quantities. And they are competing with domestic US banks that have a really nice product, the deposit that is up to $250,000 per account insured by the FDIC explicitly, and a whole bunch of other money-like products created by other shadow banks. Money market mutual funds create various products. And the swap lines, the existence of the swap lines, is what gives people confidence that, you know, this is a pretty robust money-type instrument that has backing from the sort

• 7:02Speaker 05

  of central bank, which is the creator of dollars, that makes these money-like liabilities money good. And so, in order to get such a huge $13 trillion, such a huge market, you need the swap lines there in the first place to give people confidence to hold large quantities of these, that they will in fact be money good. But, the problem you have is that the extent to which the US government stands behind this $13 trillion money supply, it's ambiguous. It's not explicit. It is like uninsured deposits in the domestic system. It's worse, though, but it's similar to it. And so, it's highly runnable and unstable insofar as people aren't sure the extent

• 7:46Speaker 05

  to which the system will be supported by the Central Bank of the United States when it gets into trouble in various bad states of the world. So, in good times, it's fine. But in bad times, people decide, you know what? That competing money instrument created in the domestic US banking system, or those T-bills, are just a much better place for us to be. We want out. And I have a historical analogy, since we've been doing so much history on this. Think about the US system in the 1920s going to the 1930s. We created the Federal Reserve and the discount window at the Federal Reserve for domestic US banks.

• 8:29Speaker 05

  It's like a swap line for the banks directly.

• 8:32Joe Weisenthal?

  Yeah.

• 8:33Speaker 05

  It's doing what the swap lines are doing with the addition of the foreign central bank. And people thought, oh, we're gonna fix bank runs. We've got this infrastructure set up. We created this central bank. It's going to back up all these deposits. And we had the worst bank run ever in the 32, 33 period. What happened? What happened was the Fed didn't support all the banks. When push came to shove, the Fed allowed a bank called the Bank of the United States, a Jewish run bank based in New York, to fail and created a lot of uncertainty about the extent of its support for state-chartered banks that were not members of the Federal Reserve system. And runs just went throughout the system.

• 9:18Speaker 05

  And over a third of the banking system ultimately collapsed, even though we had this support system. And what you saw in 2008 is a similar problem. People just don't know how much the Fed will be there and to what extent. And that can cause a systemic catastrophe. And the reason why we got deposit insurance in part in 1933 was the government saying, you know what? We just have to be explicit about the fact that we're backing these money instruments. We can't have this implicit insurance program that is through Fed lending. We gotta just be explicit. And that worked really, really well.

• 10:03Joe Weisenthal?

  This is like that, I mean, this is a principle, right? That like big blanket guarantees are cheaper, right? From a dollar basis than sort of backup things that you don't know whether they're gonna come or you try to go cheap, right? Because you're gonna let this bank fail and you're gonna send a message to the other banks.

• 10:18Tracy Alloway?

  Or you say you're gonna do whatever it takes and hope that you don't have to.

• 10:21Joe Weisenthal?

  And hope that you don't have to. It's like, really? The bazookas are ultimately what do it. And the beauty of bazookas is because they're so intimidating. You don't have to fire them. Are deposits in the euro-dollar market, are the depositors compensated for this ambiguity about runability?

• 10:37Speaker 05

  Of course, so.

• 10:38Joe Weisenthal?

  How does that look like? How's that? What is that?

• 10:40Speaker 05

  So, as a general matter, the way in which shadow money instruments, non-deposit deposits, deposit alternatives.

• 10:48Joe Weisenthal?

  Yeah.

• 10:49Speaker 05

  Money instruments, cash equivalents, that are competing with just sort of like your checking account at JP Morgan Chase, they are competing on price. They are paying more interest than, obviously, your checking account at JP Morgan Chase, where often, you know, JP Morgan Chase will just pay you almost zero on that checking account in terms of interest. And so, the Euro-dollar market all developed, you know, 50s and 60s, London banks offering more interest on balances than National City Bank in New York, and drawing depositors to their own banks. They could have a deposit account in dollars in London that just paid more

• 11:32Speaker 05

  interest. And that's the same story you see with the repo market and money market funds. These are ways to get a little bit more yield on your cash instruments. They're competing on price. And, and the main customers, historically, were the corporate treasurers, who had huge cash balances. And there are lots of different customers now who have cash they want a little bit more yield on. The, the thing that goes wrong in these markets is they are sacrificing money-ness, you know, the, the safety. They're sacrificing the extent to which it's really a liability of the United States government for some more yield. And when we get to a bad state of the world, that trade-off starts to look a little bit different, and that's

• 12:12Speaker 05

  what creates the run dynamic. Suddenly, we're in a bad state of the world. Think August 2008, and you're a repo counterparty of Lehman Brothers. You're parking your extra cash in Lehman Brothers for a little extra yield. And you think, you know what? I'm just going to move my balance to a regular bank account. I'm going to go to JP Morgan and just have a big balance there. Yeah, I'm going to be earning a little less yield on my cash, but I know that it's money good and it's going to be available. And you know what? I just don't need to be a repo counterparty to Lehman Brothers anymore. And that was what brought down Lehman Brothers. It was just an old fashioned bank run on its repo book.

• 12:53Tracy Alloway?

  Yeah, collateral crunch. So one thing that stands out in the series is there are these brief windows where regulators basically consider actually regulating Euro dollars. But then what happens is like, there's a crisis in energy markets, or there's a banking crisis. And so everyone decides now is not the time to start fiddling around with.

• 13:14Speaker 05

  Yes, it's never a good time to regulate.

• 13:16Tracy Alloway?

  So this is my question, like, what would be a good time? And what would that regulation actually look like?

• 13:22Speaker 05

  So really deep and difficult question because you guys may have been following the Basel Endgame Capital Requirements project of the last several years of the US banking regulators and Michael Barr, the vice chair of the Fed for Supervision, who's been leading that project, who has recently announced he's going to step down as vice chair for Supervision. And part of it is just that it seems unlikely that he's going to be able to get that project over the finish line. And the reason I bring this up is you might think when the banking system is making record profits and the economy is humming along nicely, would be a great time to strengthen the regulatory regime.

• 14:06Speaker 05

  And the Biden administration and its bank regulators have tried to strengthen the domestic, you know, onshore deposit, you know, regulatory regime of domestic deposits, and they've been completely stymied. And so plainly, when things are good, that's not actually a good time because nobody wants to, nobody. It all looks like it's working, right? It's, everyone's like, everything is fine. We don't need to make any changes right now. And so the inertia prevents changes. And so actually, practically, it is during crisis. It happened to be the case that the 74 crises that we talked about, they felt like. Things were too fragile to do anything.

• 14:50Speaker 05

  Similarly, in the aftermath of 2008, there was a similar mindset. You might recall there were more significant reforms discussed and at least mooted privately, including with respect to repo and euro dollar liabilities. And the thought was, we're in a bad recession right now. We should try to get out of that recession and let's not upset the apple cart. And so clearly, a certain type of crisis is not enough either. If you just look to history, one thing you do see is if the crisis is really bad,

• 15:29Speaker 05

  not like 74 or 08, but like 1933, then you get fundamental structural reform. And so if the euro dollar market were to lead to economic fallout on that scale, I feel very comfortable predicting that it would be fundamentally reformed.

• 15:50Joe Weisenthal?

  What would it look like? And I mean, part of the question, and I guess Tracy has that, but I get like, okay, the timing, one thing, but what would it look like? And also, what's to stop me ever from being a bank and offshore and offering something that I call a dollar?

• 16:04Speaker 05

  Yeah, two great questions. So of course, it could look like a bunch of different things. There's not one answer. There is the cleanest answer, which is an international agreement like Basel. Call it Basel IV. That is quite simple. It says each jurisdiction shall ensure that the financial institutions in that jurisdiction only issue short term money like liabilities in their own currency. And so if you're a London based bank regulated by UK financial regulators,

• 16:48Speaker 05

  you cannot issue a dollar demand deposit type liability unless.

• 16:54Speaker 05

  It's fully reserved on the asset side of the bank with a dollar instrument, either a dollar at a US bank, like a correspondent bank, and that's going to actually tie into the second question, or like a T-bill of a very short maturity. And so, you know, you could still have lots of dollar-based banking globally. You wouldn't be getting rid of global dollar. You would be stabilizing the global dollar by going to full-reserve banking for the global dollar. There would be no money creation outside of the US. The expansion of the dollar-money supply would happen by US domestic banks, but dollars could be held by, say, Japanese banks, as long as it was on a one-to-one basis.

• 17:39Speaker 05

  And I think that would be the optimal answer, and we could talk about why. But you don't have to go all the way to that. You could allow some dollar-money creation outside of the US, but subjected to some type of US-based oversight and regulation to have congruence between the domestic dollar-money creation regulatory scheme and the overseas dollar-money creation regulatory scheme. What makes the current system so unstable and difficult to govern is there is no congruence, and in fact, there can be race-to-the-bottom dynamics. And even worse, right now, there's so much opacity. You know, I said $13 trillion,

• 18:24Speaker 05

  but we don't really know the figure because there's no systematized reporting. In the US, all of the banks file reports quarterly with their balance sheet information, and we can track the amount of dollar deposits. We actually cannot track the amount of deposit-like liabilities being created offshore because there is no international agreement by which that information is reported to US authorities. And that would seem to me to be like low-hanging fruit. You don't have to get rid of the ability of banks in Japan and Europe to create dollars. Why don't we just make them tell us how many they're creating

• 19:06Speaker 05

  and just some information about the assets on the other side of those balance sheets?

• 19:24Speaker 00

  What's next for virtual assets? I'm Jacob Rees, host of Economy Scale, a series exploring growth in key global sectors. And in this episode, we're diving into the digital forces shaping finance. Sean McHugh from Dubai-based Virtual Assets Regulatory Authority has this to say.

• 19:39Speaker 06

  We're seeing a lot of insocial players come in. Digital asset dedicated hedge funds, high-frequency traders and that sort of thing. And folks who service insocial clients.

• 19:48Speaker 00

  As more capital enters the market, adaptive regulation is likely to become increasingly key. Rees-McRae's Rippel says.

• 19:56Speaker 05

  A lot of regulators globally would like to keep the industry at arm's length. That's the opposite here. I think also what you'll find is that regulation and frameworks can come out, but some of them are maybe a slight iteration on some 80-year-old policy and not actually in line with what the technology can do and offer. And again, that's very different in Dubai.

• 20:15Speaker 00

  Listen to the full episode wherever you get your podcasts. This series is brought to you by Bloomberg Media Studios and the Dubai Department of Economy and Tourism.

• 20:24Speaker 01

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• 21:31Tracy Alloway?

  One of the really interesting things here is, as you just mentioned, Eurodollars basically mean that banks outside of the US can create dollars, which you would think would impinge on US monetary sovereignty.

• 21:43Speaker 05

  I mean, it does.

• 21:45Tracy Alloway?

  It does, yeah. But at the same time, the existence of Eurodollars combined with the dollar swaps, which, you know, basically make them, as you were saying, a more attractive product to people to use, has solidified the dollar's role in the global financial system. Like, it has helped the dollar achieve and maintain reserve status. So, oh, you're shaking your head. Okay.

• 22:12Speaker 05

  Yeah, I think it's not, it's definitely, that's conventional wisdom.

• 22:15Tracy Alloway?

  Okay, all right.

• 22:17Speaker 05

  So there's nothing wrong with this.

• 22:18Tracy Alloway?

  I'm happy to be conventional. But the question I was going to ask is, if you had additional oversight of the market, would that start to dent the dollar's role, given that there are concerns over, you know, the US going too far on sanctions and things like that?

• 22:34Speaker 05

  I think you're asking a very important question, and I want to try to unpack it a little bit. Because what I was calling conventional wisdom, I think, jumbles up a lot of issues. And it's understandable that they get jumbled up. But really, to explain what the stakes are of the Basel IV type of response I was just describing, we really have to unjumble them. So first, there's the role of the dollar as a reserve currency. This is really quite distinct from Eurodollars, which are the creation of US dollar money offshore by offshore financial institutions. We're going to connect it back a little bit. But the dollar's role as a reserve currency,

• 23:18Speaker 05

  what that's directly about is the fact that foreign central banks hold Treasury securities as their reserve assets. It's not about using the dollar to transact or to finance trade, although those are also related. It's about the fact that the Chinese, for example, have huge reserves, and they have to invest those reserves. And they have chosen to invest a very large percentage of them in Treasuries. So dollar as reserve currency means foreign central banks hold reserves in Treasuries.

• 23:58Speaker 05

  And they have chosen treasuries for lots of reasons, having very little to do with, certainly, whether their domestic financial institutions have the ability to create dollar deposit liabilities versus have to hold one-to-one balances with US banks. But also even that has little to do with whether dollars are being used to finance, trade, or settle international transactions. If you are a central bank and you have a very, very large amount of reserves, let's say a couple trillion dollars, what assets are you going to put it in?

• 24:36Speaker 05

  And the choice to invest in treasuries has a lot more to do with US economic hegemony and the sheer enormous quantity of US treasuries than it has to do with what currency is being used to globally trade. So China, for example, has historically held lots of US treasuries. It's really hard to think that it has anything to do with the euro-dollar market, which is really not something that is benefiting in any meaningful sense the Chinese. What does relate to this sort of dollar as a reserve currency for foreign central banks

• 25:20Speaker 05

  is the liquidity of treasury markets, of course. And one reason why Saudis or the Chinese would want to hold their reserves in treasuries is that they can buy and sell very, very easily with very low cost. That is a shadow banking story, in part, about the creation of the repo market and treasury repo, which is a way to subsidize liquidity in treasury markets. But that's not a euro-dollar shadow banking story, that's a repo shadow banking story. Okay. So the first point is, if you change the rules on how banks in Japan and London hold dollar balances and you make them fully reserved, is China going to decide they want to hold

• 26:03Speaker 05

  euros instead of treasuries? That's, I find, really, really sort of hard to substantiate. It just doesn't really connect. So, does that mean it has nothing to do with it? No. So, the global dollar is more than just a reserve currency?

• 26:21Speaker 05

  It's also a currency of international trade and international finance. And so there's lots of trade between third countries that doesn't involve the United States, where they use dollars to transact. That's the means of exchange. And because that's the means of exchange, it's also the lending currency associated with financing that exchange. And so we have this dollar financial system that's quite a bit distinct from dollar as reserve currency. You know, Chinese central bank wants to hold treasuries, has a bunch of reasons for that. Totally different calculus for why Indian conglomerate

• 27:03Speaker 05

  wants to sell its products to South American country in dollars. Yeah. Different calculus. And with that second calculus, the euro dollars fit in a bit more. A bit more. Because what's going on there is the Indian company has a bank, and the South American company has a bank. And in all likelihood, their primary banks are not US-based. And those banks would like to be able to create dollars. Yeah. Lend them in dollars and not have to look to US banks for that liquidity. And so what the euro dollar system is really doing

• 27:44Speaker 05

  is cutting foreign financial institutions into the profits of dollar seniorage. They're giving them a piece of the action, and they're giving them a reason to want to be in the dollar business. And the way the whole thing got going initially was a lot of London banks wanted to get into the dollar business, and we let them in, basically. And that makes them evangelists for dollar-based finance, as opposed to... Constantly trying to say to their clients, you know what, let's do this deal in pounds because we create pounds. And if we had to do this deal in dollars, then we're going to have to go borrow from Citigroup, the dollars that we need because we can't just create them ourselves. And there's not this whole euro-dollar market for us.

• 28:28Speaker 05

  We got to go to the domestic US-dollar market. And so we would have all these foreign financial institutions trying to suggest other currencies for international trade and financing, and not being as gung-ho about the dollar, which is not to say that they would necessarily succeed in convincing the vast majority of their clients to change currencies. There's a lot of reasons why you would just, you know, open up a bank account with a US-based bank, shift your business there. At the same time, the US has gotten very far in embedding and entrenching the dollar by building this coalition of global financial institutions

• 29:11Speaker 05

  that all are able to profit and benefit off of being in the dollar, as opposed to trying to keep all of those benefits onshore for US-based banks.

• 29:22Tracy Alloway?

  So just to further understand this point with a concrete example, one thing that's gotten attention recently is China building out a swap network. And I have seen that couched as, you know, China takes on the US-dollar and that sort of thing. What do you think they're trying to do in that context?

• 29:42Speaker 05

  So as it turns out, China's swap lines are just totally different from the Fed's swap lines. And so the Chinese are interested in spreading use of the RMB. They want other countries to use the RMB in trade, especially with China. They would be thrilled if the Indian company wanted to sell to the South American company and denominated in RMB. Its swap lines, though, are not trying to achieve that in anything like the way that the Fed swap lines are facilitating dollar money creation.

• 30:22Speaker 05

  The Chinese swap lines are basically a central bank lending program for indebted foreign governments. And so it's like World Bank or IMF loans. And so like a major borrower is Pakistan. Pakistan has had a swap line with the People's Bank of China.

• 30:39Tracy Alloway?

  Sounds like an outcrop of Belt and Road.

• 30:41Speaker 05

  It is an outcrop of Belt and Road. It's exactly an outcrop of Belt and Road. And in the US, we would just never do that type of lending through our central bank. We did do something like that for Mexico in 1995, $20 billion loan. That came from the Treasury Department. That's like what the PBOC is doing. And they might have some sort of regulatory reasons. One thing that happens if you do it through your central bank is you don't report it as sovereign lending to like the World Bank. So it's much harder for international observers to keep track of how much Pakistan and Mongolia

• 31:21Speaker 05

  and these various recipients of PBOC swap line lending, how much they are actually incurring. It's less reported than maybe if the Chinese did it in a more official channel. But it's nothing like what the Fed swap lines are. There's over $30 billion right now of PBOC swap line outstanding. There's like basically zero of the Fed swap lines. It's a, you know, the PBOC is like an ongoing lending program.

• 31:46Tracy Alloway?

  Got it.

• 31:47Speaker 05

  It's structured to look like it's not, but it is. That's what it is.

• 32:03Speaker 01

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• 32:34Speaker 03

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• 33:18Speaker 03

  in what's become a billion-dollar gray market amid the rise of do-it-yourself medicine as people increasingly turn to social media or artificial intelligence for medical help. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at ChatGPT.com.

• 33:34Tracy Alloway?

  So the other thing I wanted to ask is, you compare the size of the Eurodollar market to Tether, basically throughout the podcast, to describe how it's growing. Are stable coins the new Eurodollar? I mean, they kind of serve, they seem to serve a similar purpose, and they seem to be similar things in the sense that they're dollar-denominated liabilities.

• 33:56Speaker 05

  Stable coins definitely have the potential to be the new Eurodollar. Tether in particular has a lot of Eurodollar flavor to it, but there are really important differences. One is that Tether is not being used to finance or settle international trade. The Indian companies are not selling to South American buyers or vice versa using Tether. That's, the Eurodollar system is tied to the real economy and real economic activity. And up until this point, the cryptocurrency space is very much looking at itself.

• 34:41Speaker 05

  And so Tethers are used primarily to buy cryptocurrency, not to facilitate real economic activity.

• 34:50Speaker 05

  Or they're used to conduct illicit transactions that are difficult to conduct in the fiat-regulated system. I did air quotes, but that doesn't come across in this medium. That said, Tether has gotten huge, and it is exploiting the same sort of regulatory loophole that the Eurodollar system is exploiting. The Tether balances have a very similar economic status to the Eurodollar balances. And one could imagine, insofar as Tether is legitimated

• 35:30Speaker 05

  in some sense, and it takes on greater scale, that it could expand its role and sort of jump over, get out of just the crypto ecosystem and get into the real economic activity and be a real competitor with other dollar-money forms. It certainly is a dollar-money form, and it could be a competitor in certain transactions for certain purposes.

• 35:58Tracy Alloway?

  So there is a sense of multilateralism at play with the entire, the development of the Eurodollar market certainly, and the swap lines. And I guess I'm wondering, with the new Trump administration coming in, is there any sense that those swap lines could be maybe not as reliable as they were under previous administrations?

• 36:19Speaker 05

  Absolutely, and I think this is something that's probably not getting talked about enough. The whole swap line-based Eurodollar system is very much a product of a particular geopolitical diplomatic arrangement between the United States and a variety of allies and partners that involves a certain orientation to those allies and partners, where the US is basically making an ongoing commitment over a long period of time that it will be there to provide, in essence, discount-window-like backing.

• 36:59Speaker 05

  To the extent that the US isn't capable of making those types of long-term commitments, or everything is going to be hashed out on a case-by-case basis, and that's the new sort of international multilateral paradigm, that's deeply destabilizing for the euro-dollar market. And to the extent questions would be raised about whether certain countries would be able to actually draw on their swap lines, that could lead to runs and panics, just in the way that in 1932 and 1933, there were runs and panics throughout the US banking system, in part because it wasn't clear the extent to which the Federal Reserve was actually going to be there with discount window lending to backstop those entities.

• 37:42Tracy Alloway?

  I think we've learned a lot more about the euro-dollar market, including why it is not the euro-dollar exchange rate. Do you feel like-

• 37:50Speaker 05

  No, that I get now.

• 37:51Tracy Alloway?

  That's been hammered into your head, right?

• 37:53Speaker 05

  Yeah, no, that I know. I knew that before. That I knew.

• 37:56Tracy Alloway?

  You have admitted to not knowing that before.

• 37:58Speaker 05

  At one point, I didn't know that.

• 37:59Tracy Alloway?

  Yeah, okay.

• 38:05Tracy Alloway?

  Lots More is produced by Carmen Rodriguez and Dashil Bennett with help from Moses Ondom and Kale Brooks.

• 38:11Joe Weisenthal?

  Our sound engineer is Blake Maples. Sage Baumans is the head of Bloomberg Podcasts.

• 38:15Tracy Alloway?

  Please rate, review, and subscribe to Odd Lots and Lots More on your favorite podcast platforms.

• 38:21Joe Weisenthal?

  And remember that Bloomberg subscribers can listen to all of our podcasts ad-free by connecting through Apple Podcasts. Thanks for listening.

• 38:33Speaker 01

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