Negative Vibes - Why the Reserve Currency should go Negative

I try and answer your questions relating to my recent twitter outburst regarding the role of negative interest rates. I explain how the external trading value of the dollar is being held hostage. That the US has lost its exorbitant privilege. Yes, it can still print money, should its private sector banks be willing, however it can no longer lower the external value of the dollar vis-a-vis its trading partners. The mercantilists have gained the upper-hand. I try and explain how negative US dollar rates might represent a valid and rational attempt to free the US from such serfdom. Give me 48 hours and I'll clean up the transcript. And I'm putting together a video montage for my YouTube channel - ever wondered how the Treasury pleading with the G7 would look inside my head? Stay tuned.

Transcript

What do I mean by the US Treasury endorsement?

I mean that for the dollar to go lower, for it to break, let's say, 92 on the DXY index, and move lower to the 70s really would be of enormously huge significance and, for it to happen, would require, the official endorsement of the Treasury.  The Treasury is responsible for where the the US dollar, the external value of the dollar, rests.

And it would require the Biden appointed new Treasury Secretary to stand up and say, "Hey, you know, I got together with my fellow members of the G7 and I don't know if it's because I'm a big guy, I'm a Texan or whatever, but I just told them straight, you know - eat it! We're going to devalue the dollar. " Imagine, the US Treasury stands at the Washington podium Monday morning and declares its intent to sell dollars. And that their colleagues at the finance ministries of other sovereign nations agreed with the US Treasury; that the globally shared imperative was that the US dollar must decline. Boom!

That's what I mean, when I say that, for the dollar to weaken substantially from here, would require US Treasury endorsement...

Can you explain the dark web of offshore eurodollars? How it functions, and what it means in the context of the dollar. And how do you track these dollars?

Big Big question. The offshore eurodollar market is essentially a market response to the closure of the dollar window in 1971. And shortly that, after the closure of the dollar window, of course, we had the cartelization of our our OPEC friends who forced the oil price up from I want to say two or $2 to $10 and then onwards to $40 per barrel in 1979/80. And in doing so, they began to run huge current account surpluses. They were tiny Bedouin nations at the time  that imported almost nothing and of course, overnight, they were exporting immensely expensive oil  _ essentially they were sending out oil and in return they were receiving US dollars.

The market response to these factors was to develop a kind of dark, unregulated network. Effectively, you  had non US domiciled banks accepting dollar deposits, and when you accept a deposit, you get fractional reserve lending which to say that $1 deposits became two x three x four x...10 x. Abracadabra..! The magic of invisible reserve currency creation.

Which Mercantilist nations am I referring to?

I'm referring to all of them. To generalise,  that would be countries which have consistently run current account surpluses in let's say seven out of the last ten years. Those therefore would be nations that take measures to suppress the purchasing power, the domestic purchasing power, of their citizens in order to favour less imports and more exports. To force savings higher domestically, and to export these surplus, or confiscated savings, into dollar assets in order to preserve the purchasing power of the US, their largest customer. That has become the way of the dollar hedgemon today.

There's a lot of willing parties in that equation. In China, there's really very little day to day need for dollar transactions within the Chinese economy. And therefore, those dollars that they receive, from their exporting activities, are mopped up and sent to the central bank. The Chinese monetary authorities buy dollars from their commercial banks and sell renmibi in its place.

Currency markets seek to restore equilibrium. Trade surplus, consistent year after year surpluses, normally signal that one nation enjoys a comparative advantage over others; that it's costs and productivity levels allow for sustainable cost advantages.  Sometimes the advantage is unfair; you might say that China's environmental and social welfare regulations  were less stringently adhered to. But mostly its the immaturity in your development cycle, that you have yet to really undertake that S curve expansion in your GDP growth. The productivity leap forward in your cost space as you you go from peasant agrarian societies to a modern urban industrial economy is frankly enormous. Currency markets try rush to the inevitable conclusion. And so speculators want to front run comparative advantages and be long the currencies of mercantilists bidding their value up to a tipping point were they are unable to game the global dollar system for their own purpose. The point where hard working systems reap the benefit of superior purchasing power - when foreign imported goods become cheaper and within reach of ordinary folk.


d be long to the point where the remembering would pre see it would become more expensive, and becoming more expensive. When we use this binocular versus the US dollar. For the last 234 years, it's traded somewhere around seven with people like that dex and Kyle bass, claiming that the remember was going to crush it, crushing that context would be to treaty, seven to nine that would be presently it takes about seven Remember to buy $1 casing and make good at nine or 10. So you'd require mortar maybe to buy US dollars. What I'm talking about is with these, these cost a domestic cost advantages visa v. Us producers, that there is a rational motivation for currency speculators, speculators to bid the value of the RMB higher, which is to say from seven, to six, to five, to some mythical level whereby that comparative advantage would be priced out or into the expense and the expense or the higher trading volume. Remember, that remember, would be a good thing, that would be increasing the purchasing power of Chinese citizens, that would make the purchase of a Tesla, Tesla's another predominately no meeting in China, they do have a California implant, it will probably be closed shortly. But if the you remember, we were trading at five to the US dollar, you would acquired five from me to buy one US dollar, then your Chinese citizens money would go farther that the Tesla produced in California would be cheaper, that your income would be higher on the international stage, the Chinese soul from be the Safe, safe being what is safe, was it Stanford sure whether it's a oxymoron, but it is a department of the Central Bank of China pboc. And they are hell bent on making sure that their citizens are not conferred that income advantage, because they would much prefer and doesn't make sense. But hey, you know, bureaucrats, they would much prefer that little wealth, I would not call it wealth. But and this is the problem with China that they can print. And they can produce magnificent GDP numbers, but it is at the expense of wealth. Actually, I would argue, and people like Professor Michael Pettis would argue that Chinese GDP growth is coming very much at the expense of the destruction of Chinese wealth. And so an example of the destruction of Chinese well, is that the sell these dollar reserves that they purchase from the Chinese commercial and money center banks in the US that is firepower, and they use it to buy us dollars to ensure that the remin b does not treat it at C five or some mythical level, which will ensure that over the next 10 1520 years that the current account was not inevitably or the trade account, I should say rather, that the trade account was not inevitably going to be in surplus visibly the rest of the world.

What do you mean by an inverted yield curve and explain how it slows down the economy.
 
economy an inverted yield curve is when spot rates are higher than long term with that is to see in the old fashioned model. When macroeconomics made sense when micro funds were legend, central banks would come in and they would raise interest rates. They would raise sport interest rates above 10 year rates. Typically, and that was an attempt to slow the economy example, the began raising rates I want to see probably run about 2004, late 2004. And the interest rates peaked February is peaked at 5.25%. The US was pushing rates higher to slow down the boom which was emanating from the housing market and all these Liar Liar Pants on Fire loads from the banking sector, Ninja loans, etc. So, fed spot rates went above 10 year treasuries, 2010 year treasuries, famously, famously, Jim grant, who is the most elegant, Elegant Writer, supposedly the most knowledgeable person you can find on the US Treasury market. And in 2008, with a 10 year rates at 4.25, he was arguing they did not offer a margin of safety to the Intelligent Investor cheap on James grant is the yield curve inverted today, upward sloping, which is the kind of natural order of things, which is to say, spot zero maturity is zero percent, bad 100 and the 10 year, depending on the day's trade, the trading range this year has been c 65. basis points to 85 basis points. So it's upward sloping to the tune of today about 85 basis points. Is that a lot? No, it's not. So it's not it's kind of Marxists are scratching their head about that. No, I was referring to real sufficient adjusted and I got me You got me at one point, because I said that the I mean, absolutely. on a flight of fancy here. And I was comparing the Fed nominal, which is zero with the 10 year Treasury in real terms, which is minus, minus about 100 basis points. real real, which is like a Simple Minds song for one of their albums in the late 1970s. reel to reel cacophony, the reel to reel cacophony. If we were to put Fed funds and express it in real terms, then today, Fed funds would be wiped that the I just listened to. Brent Ben Johnson's interview with Russell Napier. Napier used to be a colleague of mine. And Russell claims that the last official inflation data point out of the US was 1.4% rate of inflation. So if the feds at zero, then spot real rates are minus 1.4. And at the 10 year point, they're about minus one. And in this upside down world of inversion, I think that would be a positive be a positive for a field yielding curve. I'd like to see it positively yielding to the tune of minus 40 bucks and like minus 200 minus 300 basis points, I thought that would elect more, or create more of an impulse to change the inaccurate status quo. But yes, I was wrong. Or I was just aggressive and say that it was as if the Fed was trying to slow the economy by having higher rates today than father. Right? Where are we? beach do this very long. This is what I wrote the recurring real growth of maybe point five and then I give you my previous I've given you my alchemy formula, I'd said if you've got debt of 450%, every year, it's been minus 100. And if the economy is growing at recurring growth, by then you would be transparent about 4% of GDP, from data from creditors to debtors. How does this work? So first of all, that is not occurring. Isn't also going no one apart, someone is approaching gamble pretty much and very, very large baby safe businesses with no need for cash bonuses can borrow in real terms, at negative rates. The rest of us cannot. Even myself and sit Bart's boring 20 year fixed 2% To plus, I'm having to pay five each year because amortization the bank, it's so good to repay it. So being seven. And let's stick with that. Stick with that us inflation data point of 1.4. So being very, very real 5.6%. And I think I cited either here or elsewhere, that I got new friends was faced on businesses, almost riskless businesses, businesses with profits, which will be a worst flop this year. In the student context, Taylor talks of GDP decline. And they can't borrow from banks, they're borrowing from hedge funds, they're paying between against six and 8%. And that's the interest rate that's not including amortization. I am saying that there is this policy that rates are zero, there are no with credit risk. The are very, very positive and not is choking off demand. And therefore keeping the Staci status of overcoming mouthfuls for depression, that, if we had if we were able to engineer the Fed, and Marcus pushing rates negative if you were charging a rant on the creditor class such that they had no choice but to to give you that money where the nor do we have binary choices, they could have their money in a mattress, they could put it in a secure safety deposit box. But otherwise, if they had it with a financial savings institution behind it, invest in us sovereign government bonds, then, let's say 300 basis points a year would be deducted from the net, three 300 basis points was then pushed through to the to all of the borrowers in the US economy and that borrowing amounts to fortune 50% of GDP. And, and and then you adjusted for the fact that the risk credit risks such as net the net interest rate being paid, mostly being received in real terms was 100 basis points, then you'd effectively be subtracting a trillion dollars worth that's 4% of US GDP, a trillion dollars worth of value of wealth, you be taking that away from the creditor class and that creditor class is wide. The credit creditor class would be wealthy US citizens who would be wealthy businesses. And it would be the China's the Japanese, and the Switzerland's of this world. The creditors take many shapes, many forms. And if you were to to impose rent on their savings, which were used to subsidize lending rates, or borrowing rates, then you'd be I'm talking about transferring a trillion dollars of wealth from the Saudi Arabian rapiers of this world. So the moms and pops are really pushing densive gravity you will not find from me on a Friday night quiet. Can you connect the dots for me between negative rates and GDP growth? Just something super simple is the noise. I am saying to you that policy rates are too high. I am saying to you that if I was to be offered a bullet loan, wish to see a non amortized loan I do do not want to repay my debt. I'm very happy being 2% have been happier has been 1% if you were to and I'm very happy to take the very happy to take the principal risk and very happy to see that the the main economic activities today investing in Super luxury property accommodation on the island of St. Barts happy to take the bet that in 20 years time, land values in St. Barts will be higher than they are today. And I have confidence in saying that because of the actions of central banks, they are spending all of their time in shooting the collateral values such as land and stock markets and bond markets that risk asset prices are maintained at very high levels. Therefore, why why not use that? Why not confer and turn that into an advantage to the wider economy by saying to the banks Hey, look, you don't look please stop actually we are your banking regulator. We like professional Should Werner maintains in his books, you can come in and give mandates, you will lose your banking license you can be a bank in France, Germany of America, United Kingdom, on the following conditions and the condition that we'd like to impose today moving forward is that you will make interest only non amortization, mortgages and other loans. That would be a blessing to GDP growth. In my instance, it would mean that I am presently deeply up to my ankles in mud. digging out and constructing a new house in St. Barts, I would be doing two two properties. At the same time, if we had that, that, that change which to say, I'd be employing twice the number of plumbers, electricians, carpenters, and I'd be spending twice the amount of money on cement, wood, etc, etc, all those purchases, if you add up all the purchases in the economy in a year, it gives you GDP one, GDP can be measured in three terms, it can be the purchases, or all the incomes that you spend income, including profits, or it can be of course, final sales, they all kind of mind. Can you see what it means to hoard dollars to maintain super competitive exchange rates? And is that foreign central banks foreign to the US Central Banks, if you look at their total reserve reserves, that 43% of those reserves are invested in US Treasuries, which is way way, way greater than the relative size of the US economy versus the global economy is way out of proportion to the US proclivities for international trade, it's just way out of order in terms of the universe, and it can, and therefore, it demonstrates that people are hoarding Who are these people, central banks are hoarding that they are choosing to own extra dollars. And that extra is necessary. In order to maintain the value of the dollar. This has been a practice, this has been a motivation. For decades, it is unlikely to change in an environment where globally, economies are weak, or politicians are vulnerable. This has been the mechanism outside the US for generating economic growth, to ensure that your economy is super competitive with the US dollar to ensure that your citizens are subject to macro prudent policies by the government and the central bank, which deny them income advantages, which haven't forbid might make foreign produced goods and services more attractive and therefore likely to be consumed domestically, and do so to eliminate trade surpluses. That make sense. nearly finished. Am I talking about outsourcing? I am not talking about sourcing again. It's basically the direct transfer imposed on sovereign nations, but also that would be on us domestic citizens and organizations, enterprises. Those that found that they were sitting on surplus cash surplus cash deposits sitting idly in near cash sight deposits. And I'm seeing that those domestic plus overseas organizations such as the central banks would have upwards of 3% all of that wealth that they chose to be denominated in site cash transfer from them and used to prop up and to encourage credit risk lending within the wider US economy. Is there a good data set to back this up? How do you recall a futures protect in a negative US Treasury rate scenario? Excuse me, your US Treasury eurodollar futures trade at some like 99 spot 99 spot I want to see six five, which is to see and pretty much constantly on the coverage to say that at most the market can see the next three four years that the markets best guest is that the Fed were to Anything below 100 is is the fed with positive rates, they should be trading at the eurodollar futures should be trading at 100 are saying the trade at 99, spot six, or thereabouts, which is to say markets best guess is the Fed would most likely go positive, most likely every quarter like 25 basis points positive in a rate hiking cycle, but kind of very much a little, they're often when I'm right, those eurodollar futures would actually trade at 102 103 and up by 99, spot six, something around to three decimal points. And you make every kind of basis point change in that depending on how much money you have invested in the futures would add up to quite a big deal. And then if you were to buy options on these very, very liquid, very liquid eurodollar futures, there would be a huge amount of convexity you literally could make two times your money because, again, this is a flight of clients that is not expected to. But then, in my experience, lots of unexpected things, things that are not supposed to happen end up happening. I think you have a larger question. If indeed your assertions do go negative, do you see at least some percentage decline the dollar demand? No, I don't I think I mentioned that sovereigns are owning dollar treasuries, not because they're hedge funds, but because they have these objectives of achieving harmony with their citizens, that harmony is reflected in their politicians be popular and being reelected. And that typically is a function of those citizens being fully engaged in the labor market and having access to credit, which would be they believe would be jeopardized. Where the where the dollar to fall significantly visibie their currencies. So, I do not see central banks shifting dollars elsewhere. You mentioned gold. So US Treasury market is $25 trillion dollars, roughly, then, at least 25 door, knocking on doors, doors, actually, it's trading sizes is greater because the Federal Reserve will be fewer sovereign nation like China. And we had we got a bit weird COVID part, you know, part three, Part Four, and there was another crisis as deep if not deeper than what we saw earlier this year in March, then rest assured, you would be able to sell your treasuries because you would need those treasuries in moments of crisis to put out fires domestically. And rest assured, there would be no liquidity risk, it might take you two days, but the central bank, the Federal Reserve, would get its act together. And it via the means of quantitative easing, it would should ensure that you had an orderly liquid market for you to sell your treasuries And apparently, the buyer, so that huge, huge liquidity. Compare that to gold gold that most is a $10 trillion market. Compare that to Bitcoin, a bond. Bitcoin is perhaps half a trillion dollars. So it's 150 of the size at max is 150 of the size of Treasury. And none of these things are supported, aided abetted by the Federal Reserve equities. At the margin, they'll have some money in equities are one of the largest equities in the world. And it is about $1.3 trillion. Again, it's a 10th of the gold market. That's that's a big deal with only one stock. But reserve assets, dollar assets, held on behalf of central banks have to be profoundly liquid, the central bank or the paymasters of the central bank, the politicians are gonna call upon those dollars to be sold and transferred back into the local currency to bail out banks and other savings institutions at the most arduous and difficult moments in economic history. And therefore, as a central bank, where you're not a hedge fund manager, where you could be sent to prison for incompetence. The number one most important job or task that you can assign yourself is to make sure that you invest in the most deep and liquid risk assets in the world. That my friend is the US Treasury market. Finally, we get to a point where traditional portfolio allocation has to change and target and target date funds, date funds, change in US allocations, probably all things change. 6040 was an anachronism for a particular point in time, who cares? philosophically, we may reach a point where people rationally wish to change those allocations. But they may find themselves on able to change those ratios or allocations or into Prudential regulatory overreach by the government. It may be that governments insist that you have to be at all times as a large domestic us or indeed other financial institution that you have to be allocating X percent of your fresh funds into treasuries. The Italian economist Robbins or 18th century French don't say Tony's French origin, sees law of supply creates its own demand. For sure there's going to be a perpetual supply of US Treasuries, and for sure, those treasuries will be sold, will be purchased, says that they will be purchased, that the very act of creating those things via the transaction of a sale, obviously agendas the purchase, it'd be a great example. Despite all of it these wars auctions, battalion BGP auctions never fail. US Treasury auctions will never fail partly because overseas financial overseas central banks will buy and perhaps because of micro Prudential rules which will insist it's a bit like in the UK. Index linked bonds are overvalued or to the need absolute absolute mandated demand by the UK government that you have to immunize as a pension fund. So as any institution with long term liabilities you have got to buy not tips for to become the UK. Treasury index linked securities, you have to buy them regardless of price you have to buy them. So probably 6040 for much longer. There you go. 44 minutes. See why I chose to get it transcribed. To discuss I'm off to bed. We're sorry The number you have dialed is not in service at this time.