YouSaid · the spoken record

Josh Younger

lines on the record: 67
first: 2023-06-19
most recent: 2023-06-19
sittings or episodes: 1
sources: podcast

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“I think the lesson is at least just the experience of the US in that period is, and the US in some sense, when dollar dominance is coming into place, you have the disruption of the Second World War. So you have a massive disruption of the global monetary system. The US is essentially the only economy left standing. And so like the fundamental arguments about global reserve currencies very much apply to that period. Even so, there were lots of policy decisions that had to get made. This was not a foregone conclusion. There were key decision points where certain key policies were put in place or backstops provided or agreements offered. And so the story of global dollar dominance is an interesting one, I guess, is kind of the conclusion. It's an interesting one with characters and actors and decisions and near misses. And we usually think of it as just kind of like a boulder rolling down a hill and kind of unstoppable. And that may yet have been so, but the real story is a very rich one.”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, and they're the thing that makes it grow the most. Oh, interesting. But all of the basics have to be in place for that to actually work.”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“Building up of the eurodollar market is kind of like put to work in a sense through the oil shock of 1973 and the rise of the petrodollar system. It's important to say that petrodollars don't create the euro dollar market. It has to be in place elastic and flexible and already that has the network effects that allow it to function as a distribution mechanism.”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, and so it doesn't happen all at once. Like Saudi is not all oil supply, but something like Bank of England put out an estimate a few years later by $75, like 80% of oil revenue, and then by 76, they're like 94% of oil revenue. So it happens pretty quickly. But, you know, at that point, the dollars are already the medium of global trade for the most part. It's already the primary reserve currency. But because oil revenues are the primary thing happening in global finance and global monetary system, like this cements in some sense that status. So all of this.”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“And it's not like they're getting a better price, they're just getting somewhat better treatment in the sense that they can go through, they can look at the auction, decide if they like how it went, if they like the price, they can buy more.”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“Like that's where the record is a little sketchy, but the timing and the nature of these agreements has led some people to speculate that they were connected.”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“Not clear that's the only reason, but like those two things are connected in time, and some people have put together that story. There's later comments from Treasury officials that are like the Saudis are holding the line on the dollar, even though people want them to use other things. And so”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, and basically the response of the administration Saudi Arabia is like no comment to the State Department. So they said it's very unfortunate that this happened. So I don't know what you take from that other than maybe this was like an unintended release of information, but like it happens on the 13th of December, on the 14th of December, that there's an agreement on the Treasury deal. So there's a lot of alignment between these two decisions. There's no evidence that they were coordinated in any respect, but they certainly go. The same direction, and some people speculate that there was like a quid pro quo there. There's no direct evidence of that in the record, but people put two and two together.”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“I think it was November. And in December, there's a surprise announcement from the Saudi oil producing companies that they will no longer accept sterling in exchange for oil. So all revenue in dollars. Very awkward because the British Chancellor of the Exchequer is in Saudi Arabia when this leaks out. And as for comments.”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“There's pitch in July, and it's reasonably well received, and they start dabbling in the treasury market in September. Suddenly, he has a heart attack in DC while he's on a set of meetings. And so it takes him a little while to find a successor, but the whole thing gets put on ice for a little while. And then when they find a successor, he's identified, he's not in anyone's list. There's a bunch of State Department cables who are basically who is this guy because nobody thought he would be one of them. But he's a technocrat. He was educated in the US. He's viewed as, quote, very pro-American was the evaluation the State Department had. And he's viewed as the harbinger of a technocratic administration that's going to be much more US friendly. So it's like a big signal from the Saudi government that, at least taken to be, that we're willing to sort of work with you guys on stuff. When he's appointed, literally his first meeting is with Treasury to restart deal negotiations on treasury purchases. Like three days before he takes office, he goes, I want that to be my first meeting. So they have the meeting.”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“You buy treasury bonds. They will be after the auction. You can look at the price and decide if you want more. We'll do them on an add-on basis, which means you're not an active participant in the auction. You get like a second look and you can decide if you want them at that price. Your name will not appear on the ticket. So like the Federal Reserve from New York is going to be the custodian. And so they're going to transact on your behalf. You get confidentiality. And the implication is in exchange. This is pitch to the set to the”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“There first, and they're like, buy the mortgage bond. The mortgage system is like this whole back and forth in the State Department about who approved this and why is this guy here first? No one told me. But there's a little bit of a gold rush dynamic, but he shows up and he says, okay, here's what we can offer.”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“I guess I can't validate that specifically, but that seems plausible. All we know is that they decided that this was a good way to sell Treasury bonds Which makes sense is a lot of excess dollar based savings abroad, but that requires one that the oil exporting countries be comfortable buying treasuries, which is like got a bunch of things around that, and two, that it's stay in dollars. Those two things are connected. So in the spring of 74, Kissinger convened this council that Saudi Arabia specifically to think about U.S.-Saudi economic coordination. We don't have a lot of records from that that at least I have easy access to, but David Spiro wrote a book about this a while ago, and his view was those meetings in part revolved around trying to convince him to use only dollars for their oil revenues. So like that was one line of debate at these council meetings. The other is the treasury side of it. And so Bill Simon's idea is your dollars are the primary recycling mechanism. But like, while we're at it, maybe we'll get some revenue for the government. And so he flies to Riyadh in July. He actually gets scooped by Fannie Mae.”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, so it wasn't always petrodollars. It was originally 75%, 25% sterling. So it was a mix. I don't know where that ratio came from, but that was sort of like the agreed upon rough. Breakout of oil revenues in like 1973. And the question is, why was it all dollars after then? And I wouldn't say conspiracy theory, but there was a policy decision at the Treasury that we do want them using dollars and we specifically want them buying treasuries, which makes sense. So other than the euro dollar market, you can have governments provide this redistribution mechanism as opposed to intermediating the extension of credit, it can go through government spending. And the US is looking at a widening budget deficit.”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“They were very clear about their commitment in a public forum as opposed to having you behind the scenes conversation that gets leaked out.”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“So specifically to facilitate liquidity in the euro dollar market, and the implication is we need this thing to avoid a global monetary contraction. There's a lot of like hand wringing in the press. If they don't do something, we could have global monetary-based destruction through the collapse of the eurollar system. That's what happened in 1929 to 1933. It could happen again. We're looking at another Great Depression. Somebody do something.”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“Maybe it's a telex. There we go. Good question. But they put a public communication that this is the case, the goal being to stop the contagion.”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“They leave out some details like what do you literally mean? But because they put it in a communique, this is all about central bank communication. Yeah, yeah. So like we're putting it on paper, we're putting it in the newspaper. They send it to the Wall Street Journal because that's what you had to do back then, right? There's no computers. And so please print this. And so they print it to the Wall Street Journal.”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“So, the regulatory impulse reverses completely. And in September, the G10 central bank governors go so far as to put at a public communique where they say, we are going to do what is necessary. This is whatever it takes the first time. So this is just like what happened in Europe around the sovereign debt crisis, but it's in 74 with relation to the eurodollar market. And they say we're going to do whatever it takes. I don't remember the exact words to facilitate liquidity in the eurodoll market and make sure it's stable.”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“Like at the very beginning, so finally, 20 years later, they start really contemplating this in detail. And just the first instance is 54. Then in 1974, they go, you know, we really need a plan for this. And so they start convening meetings and the usual things. In July of 74, there's like a tacit agreement to do something, but it's not concrete. It's unclear how it's going to be like executed. And basically the market goes do better. You have this massive shift where on the one hand, the euro dollar market comes from out of favor to very much in favor. This is an important mechanism to maintain the flow of oil. Facilitate economic growth, we need a stable euro dollar market”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“So then the question is what do you do if there's another run? How do you backstop the euro dollar market in a more concrete way? Yes. Who is the lender of last resort to the euro dollar market?”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“So now your euro dollar issuers can't hedge. They can't hedge their foreign exchange risks. Now they're long dollars or they're short dollars from their deposits and they don't have any hedge for the other side. So unless they have a match with the assets which they didn't always have, they have a problem.”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, and so the clearinghouse association starts allowing for clawbacks of payments until the next day afternoon to try to facilitate this. And that kind of works for the spot market, but doesn't really work for the foreign exchange derivatives market. And so you get a tiering of intermediaries, of counterparties, where the largest best capitalized, most well-known banks can trade freely, but the small and medium-sized banks are essentially shut out of the market. This sounds a lot.”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“So in New York, the payments don't go through. It's a significant amount of money. There's a lot of banks holding the bag. And the payment system essentially breaks down. Like no one's willing to do cross-border payments because they're not sure if this is going to happen again. Like who's next? What's the next shoe to drop?”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“I only a synonym. It's the reason we have Basil bank regulations in the first instance. So the Basel Committee is convened to address this issue and it ultimately evolves into a much more elaborate international standard and standard setting mechanism. But the idea of having international coordination of bank regulations comes out of this episode. So that's also, I guess, another episode. But from a...”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, but the bank fails. It's seized by German regulators in the German afternoon, which makes sense. The problem is they had a bunch of outstanding dollar transactions in New York slated for New York afternoon. So the European transactions”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“Hirsch never takes responsibility for this, by the way. He writes an autobiography later called How My Life Savings Was Stolen From Me, or My Life's Work Was Stolen For Me in German, so I'll check with. With somebody on transport. Commitment”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“I'm going to take the bait Yeah, so something breaks, not what you'd expect. I think there's the 34th largest bank in Germany, but this Bankos Herschadt. People talk about Hirsch.risk now, but Bank has Hirsch. Is very involved in speculating on currencies. And I didn't talk about the Nixon shock and the deep pegging of the dollar. That's a whole story in and of itself. But what it does is it generates a lot of volatility in foreign exchange rates, which have previously been very sticky. And so some people see this as a risk. Some people see this as an opportunity. And Ivan Hirstadt runs Bank of Hirschtad. It's a privately owned bank. And he's like, this is my, I think he called it his big hour, right? This is my moment to make my mark. They take a massive long dollar position. Goes bad. And they fail, like the bank fails”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“This bank, they like that bank, they'll move their money, or they're paying incrementally higher rate or that sort of thing. So, how sticky Eurodollar deposits are is an open question. But the loans are long data because countries have ongoing need to import oil. So the euro dollar market grows exponentially, but it incurs a much larger liquidity mismatch or maturity mismatch. It's doing more and more and more and more liquidity transformation, long-term loans, short-term liabilities. And there's this increasing concern by the spring of 1974 that the system is creaking under the weight of this demand and something might break.”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“It's just like all the usual massive banks. Like, they were all involved in this. There's old pamphlets when I was JP Warry, I went down to the archives. They had these old pamphlets. They're like, the Eurodollar market, a great opportunity for this, that, or the other thing. And so it's like, it's just seen as like a very lucrative, very high growth business area. The concern is that these loans are relatively long dated. And these deposits are relatively hot and flighty. And so there's a lot of analogies to today, right? So you issue a short data deposit. You're not sure how long it's going to stick around. You think it's going to stick around for a long time. But if the Saudis decide that they don't like...”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, and they should assets, right? So they had loans to oil importing countries and liabilities to deposits from oil exporting countries. And so they're the bridge because the financial system doesn't track oil imports.”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“They take that money, they put it into something that has to somehow get to the next country that has to buy $100 worth of oil. And it goes back to Saudi and it kind of goes around a circle. That's why it's called Petrodollar Recycling. And so those petrodollars need an intermediary that has elasticity. Elasticity means they can grow substantially to meet this massive increase in demand. And eurodollars, the US in particular, Bill Simon, who's the Treasury Secretary in 1974 for Nixon, he is very focused on using that channel specifically private market intermediation, not going through the IMF, not going through the BIS, but specifically private market intermediaries. Serving as that distribution system.”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“Kind of come from nowhere, right? It's just the price of this commodity has gone up. It's not like people issued $100 billion new dollars with which to buy it. And so they have to figure out a way, in a sense, to issue $100 billion new dollars a year to facilitate this flow. Most people are focused on the oil revenues needing a place to go, but you also need dollar loans to the oil importers to buy that oil in the first instance. So you need both sides of the equation. And the euro-dollar market for all the reasons we talked about was reasonably well developed at the time. So in their search for a distribution mechanism, which is again to take the oil, Saudi Arabia sells $100 worth of oil.”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, so petrodollars are sort of broad term for the dollar-based revenue from the sale of oil. Petrodolls have been around for a while. Actually, the oil-producing countries were involved in the euro dollar market since the 60s. The thing that happens in 1973 is as a consequence of U.S. involvement or support for the Israelis and the Yankapur War, there's an embargo of oil shipments to the U.S., the price quadruples, and oil revenues go from 1 or 2% of global GDP to 5% of GDP. So we're talking about $100 billion a year in 1970.”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“So it's kind of got like a pop thing going on. And so the view is at some point this is going to get contained. And by 1973, there's like a relatively broad consensus that this is sort of necessary. And then in September, there's the Yom Kippur War and the oil embargo. And that's when everything changes.”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“Going to commission a really thorough study, and we're really going to think about this. And we have agreed that this is an important problem that's worthy of attention. But there's very little actually done. In the financial press, people kind of get to the point where they believe the screws are coming. The screws are going to stuck in tightened, the hammer's coming down. There's an article in the economist called Who Killed the Eurodollar Market. I think that was 72. There's this sense that it's kind of like... Getting to the point where someone's got to do something at some point in this process, there's a company that starts selling euro dollar.”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, no, I mean, it's sort of like more money for the same Perceived risk. Now we can debate whether or not it's the same risk, but from the investor cash investor's perspective. get 3% here or 5% here and looks the same I'll take five hopefully it was a little more nuanced than that but but I think that is kind of the logic and so there's a lot of like hand wringing at the BIS in these regular meetings at the FOMC minutes Federal Open Market Committee meeting minutes they start getting a regular rundown of like what happened at Basel this month and it's kind of a new development because that's the point where it becomes really important and so Governor Dane and sometimes Charlie Combs or the various people who attend these meetings going back and forth to Europe in 1971 seems like a pretty like aggressive thing to do every month but I guess the planes were nicer and they had served better meals but but they get a rundown and basically the message is”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“On central bank placements into the eurodollar market. So the governors of the major central banks get together, the G10, and they say we're not going to put any more money into this market.”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“Posited, and so you have two problems associated with that one is just multiplier effects. Right. And the other is the sort of official moniker of like, oh, central banks are using this market. That means I can use this market. And so they all agree to stop putting new money into the Eurodaw market. The problem is there's not much else to do with your money. And so after three months, they kind of abandon that agreement. So it literally lasts until the first renewal date. And then they all kind of go their separate ways.”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“So they start to call meetings and commission studies, basically. It says what it does. Yeah. So the problem is the US is maintaining a low interest rate policy. It's attracting dollars overseas. And so the euro dollar market is absorbing outflows from the US where interest rates are low relative to euro dollar rates and European rates. And so it's a monetary policy dynamic. And that's causing some consternation because at the same time, Milton Friedman is becoming very popular. The monetaryist movement is growing. And so lack of control over the money supply is much more concerning when you're focused on the money supply for monetary policy purposes. And so in 1971, the BIS calls the standing committee on the euro currency market. It's like very august sounding body. And they meet and they decide to have a standstill agreement where central banks will no longer deposit their own funds in the euro dollar market because there was some concern that when the bank of Italy puts dollars into the euro dollars, then those get relent and redeposited and relent and redeposit.”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, so your dollars meant dollars for BSEN for Eurobank. Was like a shorthand for payment processing agents and things like that.”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, I should have mentioned at the beginning when we were talking about The Soviet Union, the euro dollar does not refer to Europe, it refers to the telex address of BCEN. So BSEN's telex address was eurobank-BCEN”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“It's like an outdoor cat. Yeah, yeah. So the 70s are where this all starts to get a little more worrisome, basically. Lots of things got more worrisome. The 70s, eurodollars start to fall out of favor in the late 60s and early 70s. And for two reasons. One is there's these speculative attacks on various currencies that are blamed on the euro dollar market as the vehicle through which the speculative funds are flowing around. They call them hot money. So the pound crisis of 1967, varying crises in subsequent years, kind of blamed on the eurodollar market. That's the first thing. The second is it's growing rapidly, and that's for a couple of reasons. One is LIBOR is invented. So now you can manage the interest rate risk in a eurodollar bank. So LIBOR is created for the purposes of euro dollar lending and floating rate loans. And so now you don't have this maturity mismatch that would otherwise be hard to risk manage. There's a lot of analogies to the present day, actually. It's so funny.”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“And stabilizing the global monetary system was the more important thing. And so these swap line allocations keep growing. They keep growing the max size of that facility to make sure that if needed, they can stabilize the dollar and provide liquidity to the offshore dollar market”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“From the US, that helps them try to stabilize this outflow. So that's the sort of financial stability argument. The cost of that is like your money or your life, right? So the other version of that is losing monetary sovereignty. There's dollars that are being issued by non-U.S. entities not regulated by the Federal Reserve or the OCC with only sort of intermediated access to liquidity. They don't have a direct access to the discount window. They have to go to their central bank, which goes to the VIS, which goes to the Fed. So it's a coordination requirement there. And so the question is, which of these two things is more important in the 60s, through the early 70s, the prevailing view was closing the current account deficit and not the current account deficits or the balance of payments gap.”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“It's a trade off. So, in the mid 60s, this gold drain is accelerating. So the US is forest for sort of, I don't know if you call that monetary policy. It has to do with the currency, but to maintain the stability, the international financial system and close the current account deficit, which was large, to basically stop the flow of dollars out of the country and bring balance to the global monetary system. They had to impose capital controls. So that starts with what's called the interest equalization tax, which was basically penalizing the issuance of dollar-denominated foreign bonds in New York. So you applied a sur tax to that to equalize the exchanger, equalize the interest rates. They eventually have voluntary credit restraint, specifically with extensions of credit abroad. So like New York banks should not loan to foreign entities. The whole point being to keep the dollars in the U.S. The only way that works with that”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“Days, and that allows it to grow a lot. So, you know, we were talking about 1960, it's roughly $2 billion market. By 1964, it's roughly $10 billion market. By the late 60s, it's $60, $70 billion market. So it keeps growing exponentially much faster than the money supply.”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“And so that's the initial logic, but Bob McCauley and Catherine Schenck uncovered this second swap line with the BIS. It's set up in 1964, which was not for Swiss franc, but was for any other European currency. And it was made with the explicit arrangement that the BIS would act as a channel to the euro dollar market if it needed liquidity. So there's evidence that the BIS didn't love this swap line, but they said, oh, the Fed called this and asked us to draw it, so we'll draw on it. It was sort of acting as agent for the Fed on behalf of the whole system. And it was used primarily at the end of the year when there were liquidity pressures due to seasonal effects or the usual sort of variations in demand for liquidity were smoothed over with the swap line, but it was also there and got gradually bigger as a backstop to the euro dollar market more generally. But it was ultimately not a lender of last resort because it required coordination, but it was a line. It was like a lifeline for the eurodollar market.”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“Like somewhat indirectly, I guess I would say the first. So the swap lines started in, I think it's 62, it might be 63, but Charlie Coombs, who's the special manager for foreign exchange at the Federal Reserve Bank of New York, is tasked with setting up arrangements with foreign central banks at the time the focus was defending the dollar. So if the dollar comes under attack, everyone's worried about speculative attack. That's kind of like, it's the original bond vigilante, right? It's the foreign exchange vigilantes. And they're worried that speculative attack on the dollar would lead to a greater run on this sort of like international banking arrangement that the U.S. was functioning as. And so he goes to England and France and Italy and the Bank for National Settlements in Basel and the Swiss National Bank. And he slowly but surely negotiates a bunch of swap lines, which are designed to be able for the US at the time to pull in foreign currency and then buy the dollar with those foreign currencies. So it's kind of the opposite of how they were used in more”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source
“No, and that's the interesting thing is that they can pay a high rate of interest, but they should because there's no liquidity backstop. So if I go to a Eurobank, they recalled, and I say, I want dollars, like they might have a bank account in the US where they can fund withdrawals from, but it's not going to be fully reserved, which means I might not get my dollars. And then there's nowhere to go. And so the Bank of England and other central banks are initially a little skeptical. They like it because it brings business to London. They don't like it because it devalues the pound in international finance, in London specifically, and also it's hard to control. And part of this is just usual fact-finding. This is something all central banks do to this day is just try to figure out what's going on because it's really important to have good intelligence. So, you know, they're concerned only in that they didn't see it coming and they don't have detail. Other than that, the record's a little sketchy, but ultimately England is pretty supportive because it makes London a very important financial centre. And that's very important to them in these sort of post-Sterling.”
2023-06-19 · Odd Lots · Josh Younger on the Surprising Origins of Eurodollars and Petrodollars · IDENTIFIED FROM THE TRANSCRIPT · source