In Part 3, I answer some critiques and questions from the audience. The discussion on liquidity and Repo, the base layer of the Eurodollar system is now moved to Part 4 coming up soon.
Questions from Epistemicrisis, Xan, CryptoGamer and Colin Harper.
WTF is happening with the Fed?! – Is this inflation w/ Ansel Lindner – WTF 5
by Bradley Stone
Hello, Bitcoiners, welcome back to the show. Today we are doing Part 3 of my Case for Deflation. It was gonna be on liquidity and the REPO market. I think I’m going to save that for Part 4, because I went into some questions from Discord and Twitter, and then my explanations went a little bit long. So, we’re going to do Part 4 on liquidity, repo, and the base layer of the eurodollar system. This one (Part 3) is going to be question-and-answer time.
Of course, I have to preface this upfront, I’m not a 100% expert on this by any means. I have been learning about this now for a little while. I have a background as an Austrian and I have a degree in economics. So I have some background in currency and money and history, but the eurodollar is fairly new to me. I discovered it a couple years ago, and I’ve been diving in deep. It connected a ton of dots, and I think it will do the same for other people.
Before I get into all that,
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Another housekeeping item, it’s come to my attention that some people might think this is anti-Austrian or anti-business cycle, “this is just the business cycle.” I think it’s greater than that, and maybe complimentary. I’m hoping that it’s complimentary. I understand that it’s similar, but I think it’s a different beast all on its own. That’s why I’m concentrating so much on it, because this ends in deflation. I’m saying that deflation is the predominant force that we’re living in right now. Some people have also misconstrued what I’m saying here — that I don’t believe in inflation. I’m not saying that, we definitely have money-printing right now. But we need to be precise about definitions. That’s why I started Part 1 with a definition of inflation as “an expansion or increase in the money supply”.
Inflation and money-printing are not synonyms. They aren’t the same thing, just like how inflation and price increases are not the same. You can have money printing going on, but the overall quantity of money is still decreasing. That’s what I think we’re in; a money-printing era, but the overall quantity of money is still decreasing faster than it’s being printed. And not every second of every day. So, some days there might be a net gain in the quantity of money, or some week, and we can see that on some charts. But overall, over the long term of this global monetary system that we have right now, deflation predominates.
Also, inflation has ill effects. Yes, there’s moral hazard, there’s malinvestment, there’s all of these other things. And also one characteristic of inflation is it doesn’t go through the economy in a consistent manner. We don’t have a general rise in prices. We have prices going up in one section of the economy and prices stagnating or going down in other parts of the economy. I’ll argue that the same works in deflation.
Deflation isn’t a general decrease in prices — It’s an inconsistent decrease in prices. You can see some prices going down, while other prices are going up at the same time the quantity of money is shrinking. We have to go back to first principles and say that this is debt-based money, it works differently than fiat money or even commodity money.
I’ve covered how deflation plus money-printing (because you can have the same you can have those at the same time) equals stagnation, which leads to monetary reform.
If we point just to stocks, bonds and some other things, they have complex forces upon them. We can see prices for bonds going up (means yields are going down) because of a need for collateral. So the demand is shifting. It’s not necessarily due to money-printing, rather it’s demand. That demand exists in the same system that money printing exists, but we have to be able to tease out the different demand drivers here. Just because stocks and bonds are going up in value does not mean we have inflation; it can still be deflation. That shifting demand around in the economy causes prices to fluctuate, just like inflation. So if you point to stocks or bonds, you’re doing a disservice to your argument because there can be fluctuations there and complex forces.
Let’s get into the listener’s questions. (Sorry for that background noise. I am the father of four and it’s Saturday so they’re playing out there). The first question is from EpistemiCrisis on Discord. He asked, “I’d love for you to focus more on how dollars are getting made outside of the purview of the Federal Reserve.”
Answer: I haven’t done a great job of describing the eurodollar system or the history of it, so I’ll try to do that now. It all started with Bretton Woods in 1944, and the eurodollar system started about 10 years after that. There were all of these dollar reserves around the world because the US dollar was the global reserve currency backed by gold and everyone else was pegged, or the major currencies were pegged to the US dollar. US dollar was pegged to gold, while other major currencies were pegged to the US dollar. Dollars took the place of gold in many country’s reserves after WW2. Also, the US dollar was the currency of international trade and settlement.
There were a lot of dollars outside of the US by the mid-50s, and into the 60s, the foreign countries, the European countries, they wanted to expand their money supply, because that’s what everybody wants to do. They think they want to print money and get growth from that. But their hands were tied by this peg, because if they unilaterally printed money, then they would have a hard time or they couldn’t keep their peg to the US dollar.
So, they had to come up with a roundabout way to print money. They said, “Hey, we have all these dollars in our national reserves and reserves at major European banks (because they do business and make settlements in dollars). How about we just make dollar-denominated loans based on those dollars?”
There were enough dollars out there in the system to repay that, especially with exporters in Europe. You’d have exporters in Europe that were receiving dollars and they could pay off their dollar-denominated loans. It slowly grew. It started very small, but it grew quickly. And it was unrestricted. There was no reserve ratio. They were able to piggyback off the strength of the United States, sorry in the strength of the dollar. Maybe “strength” isn’t the right word, but stability grew and grew until about 1985, when some estimates report that the eurodollar market was already over $1.2 trillion. Trillions in the 80s was quite a bit, roughly the same as the US debt at that time.
In the 90s, the eurodollar system really picked up, and we see that with the boom that happened. The 90s boom led into the dot-com bubble. Any chart you look at, that was an exceptional time in history. So that’s when the eurodollar market really had its biggest growth. It’s morphed a few times, but since 2008, something has changed. And it doesn’t function as it once did. It doesn’t function as well as it once did.
That’s why we see a breakdown in this eurodollar market. Maybe it’s due to bad collateral. Maybe it’s due to excess debt. There’s a lot of good suspicions that we have, but we don’t know exactly why. So that was a brief history of the eurodollar market.
The way their dollars are created, to directly answer Alex’s question, is the same way dollars are created here. Dollars are just lent into existence. So that’s how it’s printed outside the United States. And this is not counted on the Federal Reserve’s balance sheet, or any sort of M2 or M3. This is pure shadow banking. Nobody knows the entire size of it right now. There was an estimate in 1985. Those estimations were from JP Morgan, so they are inside the system, and they were making an estimate, but I haven’t seen anything like that in recent years. If I do run across something, I will update you guys.
Next question is from Xan on Discord. Thanks for the question. “What I’m wondering is how a deflationary period will impact Main Street. It will probably lead to less production, but at the same time, governments will likely implement UBI, meaning more money chasing less goods, which leads to inflation or probably increasing the prices.”
I’m not sure about this because there’s so many competing forces out there. Overall, the money supply is contracting. When deflation rues the day, large expenses for Main Street will go down. Housing, gas, and any sort of transportation like cars and stuff, all those prices will go down. There will be a big shock right at the beginning where people can’t service their existing debt. But overall, I think prices of big items will go down. Some consumer prices will see a vast increase in price.
Prices react to inflation or deflation in a complex way, and we can’t say outright that it’s going to get more expensive for main street. It probably will to some degree, it will definitely change. One thing I’ve noticed — and you guys might see the same as this is over the last 20 years — in my adult life is I’ve felt like this is such a materialist culture. Even though I really like the American freedom culture, there’s lots of materialism built in there. There’s lots of plastic crap, toys for kids, fast food, fast toys, fast entertainment. That’s corrupted our culture a lot; it’s caused bad effects in society. This is due to money-printing, inflation and deflation, but overall, I think we will see a reduction in that. We’ll see a reduction in cheap toys, cheap food, and some of these other things.
I never eat fast food, so the decline of the fast food industry isn’t going to affect me. It’s not going to affect my budget, because I don’t eat there, but it could affect a lot of people. If they are used to getting a $0.99 Big Mac or whatever, they might have to replace that with the $2 sandwich. That is going to be an increase in prices for them, but for many people, it won’t be. With the supply chains moving away from China, probably lots of jobs and other things coming back to United States production, we will see prices increase. That will be kind of inflationary, but it’s for a different reason.
The prices would increase even if the money supply was steady. If we were in a Bitcoin world and we had rock-solid, fixed supply, and then you brought the manufacturing supply lines back to America, then you would still see an increase in prices. So it’s not due to inflation, it’s due to many other aspects. The last thing I’ll say here, is you mentioned UBI. Don’t forget UBI is financed through debt. They always sell treasuries to pay for things. They don’t just conjure money out of thin air with zero debt attached. So UBI in the grand scheme, it doesn’t increase the money supply. The second part of that is, couldn’t the government offset the debt destruction with fiat money creation and by that method, make the impact to Main Street minimal?
No, the system is not set up that way. In modern banking, we have balance sheets. So even the Fed, when they do QE, when they create the money, they buy Treasuries. They give that money to the bank, the primary dealers they buy from. But that money sits on the liability side of the balance sheet as reserves at the Fed. So they have an asset in the Treasury, but they also have an offsetting liability that they created. There’s a balance to the way the system is constructed. So for the government to offset this debt destruction by fiat money creation, they could technically do it, but our system isn’t set up that way. When they spend money, they have an offsetting liability. So they’re within the system.
My definition of fiat is “money without a corresponding debt”, and it’s hard to grasp, that’s the MMT mindfuck that they do. Our system isn’t set up for that. How would we even account for that? How would we even know?
Next question is from CryptoGamer on Twitter. Thanks for the question. “Great explanation, Ansel, and good to get into considering a lot of Bitcoiners are on about the ‘brrrr’ meme. It’d be cool if you could also give your thoughts on how stagflation might fit into this as opposed to inflation or deflation.”
Good question. I’m a fan of the “brrrr” meme, though it’s not very accurate. There is money-printing going on, but that doesn’t lead to inflation. It’s not the same thing. It’s rising prices, not inflation necessarily, and neither is money-printing. But it’s good to get people into this thought process. They will learn about sound money, they will look deeper into this thing, and they’ll find (probably) Bitcoin.
It doesn’t matter why they buy bitcoin. I just want people to buy bitcoin not necessarily to make my bags go up — They would — but because it’s good for them, it’s good for society. It’s good for my kids if all these people buy. And that’s not because my wealth will go up, but because society will get better.
As for stagflation, I’ve only been looking at the eurodollar for a couple years, so I haven’t really gone back and studied the 70s-era stagflation as it pertains to this eurodollar system. But if we look at Japan, they don’t have stagflation. Japan has only stagnation, and that’s what I think we’re going into. I see Japanification, I don’t see a stagflation, but a lot of people that I respect and I’ve listened to over the years that are familiar with this eurodollar situation, they are on the stagflation bandwagon. They know better than I do, go to those people and see what they’re saying. But as far as I can tell, malinvestments in this capital structure will just create an era of deflation before stagflation.
You’ll have a crisis before you have inflation, and that crisis will be deflationary. We’ll see how this goes, but that’s what side I would err on. If people are saying that there’s two years until stagflation, we’ll have a two-year period of deflation, and then we’ll have stagflation or inflation, I know Mike Maloney is big on the deflation and then inflation, but you gotta ask him, what stops it from just deflating again?
Of course, we have these big swings, and the global economy is so big and still slow. We’re used to fast stuff, fast news cycles — “Inflation is gonna pick up in a week”. No, it takes a long time for things to work their way through the economy. You might see an era of five years of inflation, but then you have one year of deflation that takes it all back away (a crisis).
We might have some periods of stagflation or inflation, but deflation predominates.
Next question is by Colin Harper — I was on the Bitcoin magazine WTF podcast a couple days ago (link above). Colin and Christian are doing that show over there, and it was really fun. I’ll put a link to that in the show notes. Colin’s question: “How is the US dollar not fiat?”
Answer: Everybody (including myself for many years) has said that it is fiat. In a way it is, as fiat technically would be not convertible to the base money (which would be gold or silver) and also backed by decree of legal tender. I get that, but in my mind, debt-based money is convertible into debt. So my definition of fiat is a little bit different — It’s money that is not based off of a corresponding debt. It’s strictly conjured.
It’s just something that you have to go over in your head multiple times. It’s the idea behind MMT. So once you start studying MMT, and you learn that the government can just print money without debt, then you have to use it for legal tender, and it’s collected again with taxes. That is the MMT framework, and that is what I would consider pure fiat. If there’s a debt that is associated it can be securitized, bundled, and sold off. The dollar, the thing that it’s convertible into, because the dollar is debt itself. It’s like if you have gold coins, and you say the gold coin is not convertible into anything. But it is the gold. So this debt is the debt itself.
Also, on this is that the dollar system is much, much bigger than the United States. I was just looking at the Fed’s monetary base chart on the Fred database, and it’s nearly 4 trillion right now. That is only the Federal Reserve monetary base, it’s not the dollar monetary base. The dollar system is much, much larger than just the United States. Overall, we don’t know the exact size, but the US GDP is 20% of the world. So the eurodollar market, which is upwards of 90% of all international settlement, is four times bigger outside of the United States than it is inside, and that is a pure anarchic system. The eurodollar system does not have a regulatory body. It’s just companies, hedge funds, banks, and some sovereigns in there, and they’re all trading. The larger dollar, the global dollar standard is not fiat.
I hope I did a good job explaining that.
I’m going to wrap it up for this episode, Part 3. In Part 4, I’m going to go into the liquidity and repo markets, talk about collateral, and other things that happen on the base layer of this dollar standard system, the eurodollar system. Alright guys, thanks for listening. Don’t forget to support the podcast, go to Patreon.com. Also, on my website bitcoinandmarkets.com, I’ve been posting a lot of blog posts with commentary, and I have where you can sign up for my free weekly newsletter as well. So go on over there and sign up for that. Thanks, guys. See you next time.