This Is Zoltan Pozsar's Vision For Bretton Woods III

you know this is kind of weird? But whenever I think of poker nowadays and poker chips, I always think this is probably just me, but I always think of Sultan posars analogy of how reserves are kind of like

poker chips. Do you remember that we have lots of different kinds of money is in the existing system, and they might even have the same name, like dollars, dollars, dollars, but a lot of them are sort of like all pegged to each other one to one cash money your bank account, bank account, money held at the federal reserve. Not that the similar from dollar poker chips in the casino, right, But this is something that's been coming up in various

ways on recent episodes of Odd Lots. This idea that you do have different types of money, and at any one point of time there could be changes in how the world thinks of that money or how it uses it. And you know, for years and years we've had the euro dollar system, basically the synthetic dollars that are sort of slashing around in the global financial system. We've had reserves courtesy of the central banks and quantitative easing and

things like that. And now I hesitate to use the term inflection point, but once again it feels like a central banks begin to tighten as we see this big question mark over the role of the dollar. Given the sanctions against Russia, it feels like this question of what is money, what could a new monetary system actually look like? Is coming at into the four Yeah, exactly right. And then the other element that's extremely big right now is

and that the Russian sanctions were part of this. But it's clear that, like FX, reserves aren't enough security, especially in a world of commodity disruption, supply chain breakdowns, things like that. It's great to have money, it's great to have foreign currencies, particularly if you're a vulnerable emerging market and so forth. But he is Russia is discovered, you could lose access to your fex reserves. But more importantly and Afghanistan, that's right, but more importantly like even if

you having for reserves, you also need food. You also need wheat, you also need natural gas. If you're in Canada, maybe you need a maple stockpile. In the US, of course, we just saw the announced release of some of the spr oil. These are also very important. So we're also in a regime in which physical things really matter again big time, right, And there's not necessarily a guarantee that you know, the financialized oddities are going to be I

guess redeemable one for one against the physical commodities. It feels like that's what we're learning right now. Well, whenever we're talking about big money ideas, there is of course one person who we turned to and I already mentioned his name, but we are going to be speaking once

again to re Sultan Posar. He's a strategistic credit Swiss multi time odd lots guest at this point, and he's been writing about these themes, including an earlier note a few weeks ago talking about the threat to the dollar's dominance, and he's back to go into further detail about how he sees a new monetary system actually evolving. I feel like after we did that last episode with him a few weeks ago, bam, everyone wanted to like, Okay, the dollar system is in trouble, yeah, but what's next? And

then he published what's next? Talk to us next? But we're having a faster because there's so much demand for like the next chapter of this story. It's the natural cycles Alton right something. And then he comes on All Thoughts to talk about it. So Re Sulton, thank you so much for for coming back on the show. Very

nice to be back. Instead of looking forwards, why don't we begin by looking backwards, and why don't you give us your overview of what the existing monetary system actually looks like, because I think that's going to help us frame your vision of the future. Yes, so so before we before we look at the existing system, let's just you know, go all the way back to the Second World War and you know what, you know the system that grew out of that, and that was the original

Breton Woods three Breton Woods system. You know, this was the unipol or world where the US basically shaped the course of things to come. You know, the euro dollar was not a dominant currency back then immediately after the end of the Second World War, but it became the dominant reserve currency and a dominant phenomenon over the forty forty fifty UH years. And so you know, Breton Woods

was about gold. Everything was linked to gold. And then Invent one, we took the dollar of gold and then we basically said that we will guarantee price stability, and that's what became the FEDS mantra and everything in in the fiscal and monetary domains was about making sure that that price stability is there as an anchor to a currency that was only a paper form of money. UH. And then the system evolved further within the stable prices

nominal world that we had. Once we removed the peg to gold, we had a crisis in seven or fixed exchange rates. Southeast Asia then started to accumulate reserves. As a lesson from that. In two thousand, three years later China UH joined the w t OH. They started to export and manufacture everything for the rest of the world. They accumulated a huge amount of f express serves. All of these reserves basically were recycled into U S treasuries.

This is you know Greenspan's conundrum, you know, his hiking rates, but the back end of the curve doesn't move. Ben Bernankey called it the global savings clot Before Ben Bernankey, David Folkers Landau at Deutsche Bank, and Mike Dooley they call this breton Woods too. So basically, the shift from Breton Woods the breton Woods two is the shift from a gold backed dollar to a a dollar governed by

the idea that the guarantee price stability. And because the guarantee price stability, it's okay to accumulate your dollar reserves in treasury securities. And you know that system was fine. But again, you know, you have Minsky moments and Paul McCulley,

and you know, stability gets instability and shadow banking. So all that system blew up in two thousand and eight, and then accumulation of U S treasury securities stopped in certain parts of the world, and then the big central banks like the SET and the ECB started to buy the depth of their own governments, and that, you know, led to income inequality and soaring stock prices and some of the things that we are kind of dealing with

at the present. I mean, you know, the last time I was on the show, you know, we talked about this piece that I wrote about how we need a new Vulcar moment and a little bit of volatility and risk assets and wealth destructions you can bring people back into the labor force and all that stuff. And so then then instead of a Vulcar moment, we got a Puchin moment, and we basically have war. And out of

this war something will will also emerge. Um And and you know, out of this I think this Breton Woods three framework that I um that I started to kind of develop and and run with is a is a world where we are again going to go back to commodity backed money, where gold once again is going to play a big role, and not not just gold, but I think all forms of commodities, because you know, this crisis is about commodities. This is about you know, the

largest commodity exporter. This is about metals and rains and and energy, and so in a way, you're back to where you started from after the Second World War, but it's going to be a little bit more different and a little bit a little bit more complex. Is not just gold, but it's commodity, is more broadly, and it's not just one currency that's dominance, but there is going to be you know, as a reflection of a multiple

or world, a multitude of currentcies. You know, rubles if you want to get Russian oil, um r and B. If you want to get stuff out of China, you have the dollar, and you know if you trade the US and and so it's a fragmented system where commodities play much big a role and their price stability is a big issue in certain parts of the world. So so this is a very complex mosaic that they need to navigate here. And you know, um, that's what breton

Wood is about. That that was fantastic. I wanna you know, before we even dive further into what this Breton would three looks like. I was reading your latest note and it's you cite some ideas from your sometimes co author and one time cocus on this podcast of Kerry Maryland, which talks about is actually the four prices of money. And I don't think many people really think about that. I think, okay, maybe the interest rate or the risk free rate at a given country is sort of a

price of money, so to speak. The adjust that but if you point out like money is priced in many different ways, can you talk a little bit about that? Why is that an important idea to understand that any given currency has so many different inherent prices? Yes? Yes, Well, actually I think the next guest you should have uh for me is Perry, because from what I understand, he doesn't agree with me. He thinks he doesn't. Yes, so

that's interesting the dollar rates agreement. And obviously he's going to have his beautiful new book, Money and Empire, which is well Charlie Kindleberger and the birth of the Dollar system, and you know, that's that's about, you know, why the dollar is the dominant currents and how it became the Dominican And from what I understand, having caught up with him in a couple of months, he does not agree with Breton Street. So it will be a one of

the full kind of counter counter pieces. I pretty much owe the structure of my understanding of the world to to Paris writings and Paris teaching, So so I think he has done a tremendous service, I think, to to anyone who's trying to understand monitory frameworks and money markets and whatnot. So with that So the four prices of Perry. So there's four prices which are par interest for an ext change and the price level. So what what do

I What does he mean by this? Par basically means that currency and a bank deposit and a bank deposited jpmore again and a bank deposited city bank always traight at one. Okay, So money fund shares and banking all that stuff, right, poor broke in two thousand and eight, right, the money fund money funds broke the box. You know, bank deposits were not certain, so you need to increase the positive insurance all that stuff. Interest is about the

time value of money, money today versus money tomorrow. You know what it costs for me to part with my liquidity if I lend it to you for three months to go play in a desert in Vegas. I'm good, yes, yes, yes. And then so that's the time value. That's the basic idea. And then there's obviously different money market. So there's the repo market, the epic spot market on secure money, goold you know, these all have like you know, the crisis, and so there is spreads between oh i s curbs

and these other other money markets. Interests interests. You think about two ways. You either trade it in terms of O I s you know how many times the feed is going to hike, are gonna hike cavery gonna cut rates? Or you trade the basis around O I s you know cruss currency basis blows out because it's money fund reform, or it goes out because COVID nineteen hits and everybody needs to fund credit lines that corporations are taking down.

You know, this is where you think about the bond basis that blew up in early twenty when the pandemic hit. So you know this is this is about basis between various money market curves and various prices of money. Foreign exchange is uh, you know, fixed or floating exchange rates, the price of dollar versus the price of other currencies. You know, foreign exchange is what broke in for example,

when when South Korea abandoned its sixx sec. And then there's the price level, which is basically the price of commodities in terms of money. And by that, you know we mean basically energy, grains, metals and all the goods that get created from the drawn materials and so so, once again the par interest foreign exchange and price level prices of money, as Perry has taught us, is the

four prices. And basically this little historical review that I gave you tells you that crisis that happened, the big crisis that have happened since, which again Southeast Asia two thousand and eight and March twenty twenty, these were all crises of money. Was about a broken ffex bag. Two thousand and eight was a crisis of par and March twenty TWANTU when the bond basis blew up, that was

a crisis of interest, price level type stuff. You know, the price of commodities in terms of money hasn't really been a big deal since ninete. So we were lucky and and we basically had only those types of crises where the central bank has to step in because it's a nominal exchange rate and it's a nominal bond basis, and it's a nominal thing that you know, the reserve primary fund cannot pay part back. And so it was

a dollar problem and a Euro problem. And in the case of the sovereign debt crisis, and a central bank that deals with a nominal crisis in its own currency has it easy because what do you do as a central bank? You provide emergency licuity to people that have the trouble assets and can't fund, and you also buy the trouble assets, which is either some peripheral sovereign at

or stuff prime mortgages or treasury securities. And in March twenty twenty, I mean with South Korea is different because it was the I m F that had to step in to provide the dollars dollars because they didn't have the spot lines. But the bottom line is these are all crises where someone has to put balanceet on the line by the trouble assets pumping the couidity and problem solved. Today.

It's different because you know, the price level is where real needs nominal You are talking about the price of real goods in nominal terms, and central banks can't do a bloody thing about commodity shortages. You know, the type of environment that we are that we are going through now. And I'm sure you'll ask next, you know, so there's the four four pillars of commodity trade, and will come

to that next, but that's basically the four prices. You know, you've been running a lot about funding stresses showing up as a result of the volatility that we've seen in commodities recently. Yes, so, I guess I'm wondering is there a tension there between saying that commodities as funding collateral can suddenly decline in price and cause a lot of problems for people and including commodities as part of the sort of monetary framework of the future, Like, how do

you sort of think about that tension? Yes? So, so, first of all, you always like to kind of ask me the things that I'm wrong about. But yes, I know this is this is very interesting because I was very right, but I was very wrong. You know, I was right that the commodity derivative complex and the commodity trading world is going to have liclarity crisis. We are having that liclarity crisis. Where I was wrong is that none of this is going to show up in traditional

measures and fundings. Best and you know, you always learned from your mistakes what I have learned. The commodity trading world completely funds itself through bank credit lines. They do not tap the fx slock market, they do not issue cp they don't do anything in the report market because they don't have the type of financial assets that the repo market would accept as collateral for funding. So you then basically had a world where you have, okay, the

two extremes. You know, you have the commodity treading world on left, and then you have one and a half brillion of cash in the resverse report facility sitting there. And then you have the big banks again the old visus JP Morgan as the posted child. You have five billion dollars that JP Morgan holds at the Federal Reserve Bank of New York. Again, the funding stresses that the commodity world is having are being lessened by more and more and more lending that the big banks provide two

commodity traders. But because the big banks are sitting on piles of cash, okay, they can just lend that money to the commodity treators in need. But they don't need to raise that money on the margin. And so because they don't have to raise money on the margin, they just don't have the repo market or the fex pop and you don't have to issue cps. So, you know, the traditional kind of stirre domain of spreads is very calm. However, that doesn't mean that there is no stresses in the

commodity treating. And we know that there are stresses because Pbody Energy had to pay ten pc interest when they took their credit line from Golden sectually being Bloomberg wrote an article about this right and and we know that you know traffic Gurro was in the news about taking credit line from a consortium of four banks, then trying

to raise activity from black Stone. Then you know, a day later, all the commodity creators were basically writing a letter to central banks that they need emergency the curity support. So the strain is there. The strain has has a multitude of sources. Here again back to this idea that everything that the commodity traders do is financed by banks. And again I think you know, we all we all

live and learn and learn as we go. You know, one thing, for example, I've learned from commodity traitors is that you know, when when it comes to these credit lines that the traitors used to finance themselves, is you know, you get x amount of credit through a credit line from a bank, you draw of it to lead the ship to fill up the ship with cargo, but you don't use a hundred percent of the credit line, because while the goods are in transit, you will have to

pay variation mark right, I mean the prices go up, prices go down, depending on the side of the physical side of trade you are on. You will either get paid money or you will have to pay money. And for that too, you will tap a credit line from a bank. Um. And so when you have a price shock, and when you have all this volatility, you a need more money to move the same amount of physical goods around, and you also need more credit to be able to pay margin on all this cargo as it is in

as it is in transit. So this is where the liquidity strains are coming from. And you know it's a mess because you know banks are basically facing credit risks when when they are lending into the commodities world. And and not only that, but basically you have a shock in terms of the nominal amount of money you need to land, the nominal amount of balance sheets that you

permit to this world. And and you know, I guess one lesson from this and again conceptually and again in extreme terms, just to concentrate the mind and two sparks and thinking the value of say five billion dollars of reserves at the FED, if you're a large bank, is worth a lot more in a world where inflation is low and stable, and commodity prices are low and stable, where the only thing you have to worry about is you know where am I going to lend my next

ten take the thirty billion dollars to harvest the next crost currency basis, So five is worth a lot more in the world like that, then in a world where basically you need to lend an extra hundred billion dollars to all sorts of commodity traders to move around and

to finance all commodities imagined. So that is happening now, which which is another way of saying that this lowest comfortable level of reserves that we like to think about in terms of how much q T can the FAT do and how much reserves can you take out that l C l o R again that the minimum level of reserves the banks feel comfortable of running with is going up as we speak. We don't know how much because it's unobservable, but you know, the FAT does this

periodic surveys about l C l ORE. I think it's time to do a survey like that now, because these are these are issues, and I don't think that the issues and commodity world are are going to fade away anytime soon. They're probably gonna get much much worse. There is the community strange, they just don't show up as such. And by the way, the moment, some some big name can't pay and defaults as a result. And again you can use your imagination. It doesn't have to be a

commodity trader. It can also be a CCP, the default fund of a CCP and if someone can't pay margin and in a futures exchange, you know, the Ellemys. The Ellemy case with Nicole is a interesting case in point. But and again the other thing that people like to rub in as well, this was not a Leman two point so after all, but give me a break, Lehman

took a year to happen. You know, b MP couldn't fund the sub prime you couldn't value the subprime exposure and its county funds in August of oh seven, and by the time they got to be men, twelve months have passed. I think the writing is all over the wall that a lot of things are happening. A lot of things have happened in thirty days. This is like I think, two thousand and eight kind of compressed in time.

Um and and again things can get first. So I think we need to be approaching this with an open mind. We need to be thinking about a lot of scenarios, and we should not assume that just because we haven't had any blow ups today, there won't be any. But once those blow ups come, the flavor in the markets are going to change, because then counterparty risk is going to be something to worry about, which is not something we have to worry about. Its two thousand and eight.

So you know, keep an open mind, and I think I think we need to be humble. Uh you know, I'm the first thing to recognize keep an open mind about the awful things that could be coming in the next Yes, yes, and again I'm I'm I'm the first person to you know, admit you can be right but lose a lot of money because you express your views bongly.

So yes, you know, for all I s and cross currentcies would not have been the right way to express any of these things, but they are happening on the last and things are not getting that Again, yours I've thought of this already to be incredibly helpful and just thinking about like, okay, a commodity price level shock, it's very different and fundamentally other types of like financial nominal shocks,

it might be politically unpalatable. It might have been politically unpalatable to do TARP or maybe for the euro crisis, it might have been politically unpalatable to bail out peripheral spreads. But it could be done, and it can kind of be done at the push of a button, and it's kind of trivially simple if you build up the will and the fundamentally, commodity shocks are just not like that. They're not in a category where there's a button you

can press and solve it. And so what do you talk about that further, because that's sort of the direction of this Britton Woods three vision is the challenge that arises in a period of commodity volatility. And you talked a little bit about it just now, with what it means to liquidity in the system and funding various margin positions and so forth. What do you sort of like build from there about the sort of implications and the

different of of a sort of a commodity driven economy. Yes, so so yeah, so maybe we should we should just start from the four prices of money and then let's do that build you know, kind of build out the the mirror image of all that in the physical world exactly. You know, the fourth prices, the price level, the price of commodities in money, and then the commodities. So what,

what's what's the thing about commodity as well commodities? You know, the dirty thing about commodity is the ugly thing about commodity is that most of it is coming from the developing world, and most of it is being consumed by the developed world. Right then Russia and China, OPEC countries, you know, you know the deal, right, um. First, second, all these commodities, not only that you can't print them like money, but you need to move them around. You know,

you need to ship them. Most of this is cboard. You know, you don't fight commodities to ship them, you know, wet cargo, dry cargo, much like in the world of money. You know, when we think about you know, when when we talked about you know, the token system and how reserves move around in the money markets. You always need balance sheets for some bank to borrow here and land there and harvest some funding spread. You know, funding report,

landingfex wops make a spread. In the world of physical commodities, you know that balance sheet is basically a ship to load cargo in port A, you bring it to port B. You know, the cargo is not money, The cargo is a commodity. But you encumber capacity, you know, ship capacity to move stuff around. So so there is that. And then of course you know there's the par value of

money equivalent in the physical world, which is protection. Protection, because you know, as as I've learned from Paul McCulley, you know, money is either a purely public or a public private partnership, which in English means banking doesn't work unless there is a cential bank, right because nobody can take their money out of a bank. All at the same time, you need someone who's going to do the

protection if that happens. Similarly, when you move all these all these foreign cargo from the developing world to the developed world on ships, which are like balance sheets and are like kind of banks in the in the bank balance sheets in the real world, equivalence of phenomenal world of money protection in the case of commodities is about making sure that sea lanes are open, traits are open.

You know, there's no pirates, you know, no one's blocking your the passage of your ships and that type of stuff. And that's also something that the state needs to be involved in because you know, the high seas have to be policsed. I mean, it's it's basic stuff. You know what the Navy is to shipping lanes. You know, that's exactly the same as the FED is to the promise

of a par value. But back and you know Breton would stu as a concept was born when when China started to accumulate the fex reserves, but really it existed much earlier, ever since you know the seven to three oil price shock, where you know, you ship oil, you get dollars and then you be invested those dollars into treasuries. You know, China did the same, but they did goods and so that. But that's basically Breton would do. That's euro dollars, that's petrol dollars, that's that's all of that.

And you know, we had a unipolar world where everything flows to the US and everything was paid for in dollars and all those dollars were recycled back into treasuries, and so now there's a break in history. And now we are learning that all the commodities, I mean not all of them, but a lot of them in the case of Russia, come from you know, Russia is the

single largest commodity exporters experts in the world. Russia and Ukraine, you know, beat and all that that comes from that is it is a very important look when it comes to the supply of physical commodities and things are getting gumed up. Commodity doesn't come out of that region as easily. If it comes out of that region easily, you know, now they don't accept dollars as a form of payment.

They want googles as a form of payment. If Europe doesn't take the raw material you know, crude oil and whatnot that comes out of Russia, Russia will have to reroute the shipment of those to the East China, which is going to buy cheap Russian stuff. But if you do that, then you basically have to revamp shipping lanes. You basically end up, as I talked about this in my piece yesterday, with a severe shortage of vessels capable

of moving oil cargo on long distances. You know, it's a there's a big difference between shuttling Baltic crew from Premors to Hamburg then it is to ship it from the same port to the somewhere in Shanghai. Okay. So so you end up with shipping capacity issues. If China is now buying cheap Russian oil, then they're going to buy less Middle Eastern oil and then you know, all the Middle Eastern oil do now have to go to Europe because you know, Europe finds it acceptable to buy

it from the Middle East. But then all of that goes through the Sues Canal. You know, do you have the right ship, you know to transport that oil. If it's a VLCC Tannker, then that cannot pass through the canal. So you know, it's going to take more time to ship stuff around. It's going to take more types of specific types of ships. There will the ship shortages as a direct analog to balance sheet shortages and GESP shortages in the financial world. You will have issues of Suez

Egypt wheat oil. Egypt was a huge importer of wheat from Ukraine, for example, and as any country that doesn't have a lot of wheat stockpiles are going to have to pay up for for wheat on the world markets. How do you extract the pand of flesh from somewhere else so that you can pay for your wheat. If there's a food shortage, you can hike the transit fees

through the Suez Canal. When just think about the enormity and the whole plumbing that underne the physical movement and trading of commodities is extremely complex, and in two thousand and eight, nobody really understood the plumbing because you didn't have to, because it worked fine until it didn't. Okay, And I think we are again thirty days into this war, and we are thirty days into figuring out how basically all these things that we used to do very efficiently

are going to be in the future. And how the rerouting of these ships and you know, boycotting commodities from here and giving it to their how that's all going to play with with the level of prices. But but basically, you know, Bretton Woods Tree is about that, and not only about that, but also redrawing the terms in which

we accept payments. Russia is now selling Googles, the Saudias are going to sell consider selling oil to China and and invoicing it in in R and B. The big point about that is that when we have the petrol dollar and the euro dollar is the dominant form of international money. You guys know, probably everybody from who listens knows, banks make loans and create deposits, right, That's how things

get done. When Glencore brings commodities from Port A to Port B, you know, they go to JP Morgan to borrow money to leave the ship then and not or pile of money to fill up the ship, then another pile of money to pay margin as that cargo is in transit and you need to post margin on on futures. So when everything is priced in dollars, you know, you

borrow dollars to move stuff around. The dollar deposits gets created, glen Cork gives it to the Saudiast, Saudis give it to Sama, and Sama shows up at a treasury auction. You have Euro dollars that are created through this whole process that will then get recycled into treasury. The US didn't really have to think about demand for treasuries for the past, I don't know, ever since nineteen seventy three

because this was the game we played. So now, if all of a sudden somebody starts to price things in Google, somebody starts to price things in in R and B, the creation of euro dollars on the margin is going to change. I'm not saying it's going to go down, but the pace of it is definitely going to change. And again, the US Treasury needs to think about this because if you have less creative in the burial dollars, you will have to change the way you found your issuance.

If the petrol dollar recycler is not going to show up at auctions, someone will have to the feb otherwise you have a failed auction. So I think these are all things that you know. This is Breton would feed basically right, and so this is not immediate, it's inevitable,

but it started. You just touched on demand for treasuries there, and you touched on quantitative tightening earlier, and the idea that given everything that's happening in the world right now, you know, shipping is more expensive, commodities are more expensive, there's lower risk appetite, you need to conserve balance sheet things like that, that there's going to be higher demand for bank reserves from the banks. Should the FED be doing quantitative tightening at this moment in time? It seems

it seems like the timing isn't exactly optimal. Yes, well, sure, sure, because there's a lot of X has liquidity in the system. And and just to be clear, the knee jerk response is, yes, we need higher rates, we need to hike uh and we need to shrink the balanty, which makes sense because you know, we blew up the balance sheet for the past decade and a half because inflation was persistently too low and we try to reflate, right, so now the

inflation is hearing, it's deeflate. Fine. And also, you know, before the war, I mean I wrote a lot about so how is this QUT gonna play out? There's gonna be beautiful QUT and I'll be qut active cut or sus passive duty. And now you just need to do a warrant peace edition. Um. You know. Bretton Woods three

messages this up for two reasons. Number one, as we mentioned before, the lowest level of the lowest comfortable level of reserve is going up, so banks need more reserves all else equal, which means that when you think about the marginal buyer of treasuries as qute progresses, I would say that in this quote unquote new world order that we are in, banks will have less appetite to buy treasuries for their portfolios trade reserves for treasuries than before

the war, because credit needs from the commodity treating world, you know, and from everybody else ultimately, right, because everybody will have to pay more for for goods and trade tenents and and and all that is going up. So if they will buy less than you know, all this money that's in the reverse report facility is going to be more important, much earlier on in the QT process than before. And so there we have one and a

half Chilli and others orself and so fine. But then again, the other thing about Breton Woods three is that, you know, we're just talking about the creation of less euro dollars on the margin, and who creates money in the system, the central bank and private banks, and the standoff between you know, the feed shrinks the balance, she takes money

out of the system. That always needs to be understood in the context of how much lending and money creation is in the system, because that can take out money. But if there's more private deposits and more private money getting created through the banking system, you know, the two things can offset each other. But now we are saying,

is the fet is gonna take pipitity out. The creation of euro dollars is going to slow on the margin, So the OPEC countries and whoever used to recycle eurodators and petrol daughters is not gonna do as much of that, And so that's an issue. Then another issue, this whole whole idea of Okay, well, you know you just froze half a trillion dollars of G seven inside money. So maybe it's time to diversify away from our existing holdings

of US treasuries. So maybe some reserve management not only not going to buy and recycle less eurodators, but they

are going to trim their exposure to US treasuries. And so you know, I I say all this because you know, if the banks don't buy and the FED doesn't buy, and there is less petrol dollar recycling, and there is diversification from existing holdings of FEX reserves, it inevitably means that those balances in the overnight reverse report facility will be soaked up pretty quickly through poor quality demands, but demand nonetheless, the guys that fund in the report market

are basically dealers that are getting backed up with treasury inventory and the RV funds which are in it for a basis. I mean, it's all a level position along the bond short the future funding repo. That type of stuff not a pretty form of demand, but a form of demand nonetheless. But again, you know, you go from steady, sleepy, reliable buyers in the Middle East and China two fast money stuff that is levered. But it's going to be

fine because we have the standing report facility. So even if you end up with the report deficit, you know, thank god the spending people to say that things there so you can just kind of seed is that. You know. Another legacy of reaten with speed will be that all this is going to be less international and it's gonna be more domestic. It's gonna be some domestic people funded antity that's going to fund this, not the rest of the world. Let's talk about the other currencies in the

roles that they'll play. And so, as you mentioned, okay, Russia is going to be selling its commodity exports and oil and gas, or maybe uh Saudi Arabia starts selling invoicing in R and B for sales to China, and so then the question naturally emerges like, well, how significant is this? There's a lot of arguments against the role of these currencies, playing big rule of law questions and market depths and the degree to which the Chinese will ever open up it's capital account. So where do you

see these going? Like, because this is what these headlines get everyone excited about. Cost oil might be sold in R and B, what does it mean? But there are some difficulties for these currencies to overcome to have any more significant. Sure, people are not born who they become, right, So you're born as a baby and then you know, you learn to walk and talk, and then we all end up doing something with alliance. Right, So again back

to back to where we started from. After the Second World War, the U. S. Dollar was not what it is today. It became that no currency is born a reserve currency, it becomes it. Sterling was what it was, and then the dollar came, and then dollars became euro dollars. The R and B is what it is, and then it will become something else. All these were It's kind of funny and it makes more sense in the present.

But you know, we allll obsessed about, you know, the internationalization of the R and B and a correspondent banking stuff and all the Hong Kong on shore on shore and the offshore and the volumes are not that big. All that stuff was the baby is born, the baby is learning to walk, the baby is walking. That's the plumbing, that's the basic stuff. And then there's a catalyst like the war that we're looking at now and the whole conversation we are having now, and then things will change.

But then you basically have an infrastructure to build up and then things can go very fast. I also get it that China has a closed capital account and people like to have open capital accounts, But for Christ's sakes, what's the difference between an open capital account that exposed can be shots the case with the CBR, versus an accently closed capital account that you know that over time is going to open up. People also tend to forget when China became a part of the World Trading Organization

and you know, it started to accumulate surpluses. I mean I was the surpluses were first accumulative bank opposits, and then the Chinese started to buy bills, and then they started to buy two year, five year tenure trunches. Then they board mortgages, then they funded C I C, and then they started to do private equities. Right big stick in in black Stone, I think right in two thousand

and eight they bought. The point is surpluses accumulate, and it's more and more accumulates, you change the way you do things. If the dollar became the dollar to lend lease, you know, we lend you money and then you lease stuff from us. You know, maybe the Chinese are now going to lend you money, and then maybe you buy our our corn and wheat reserves or something like that.

It doesn't matter. The more trade the rest of the world is invoicing the Chinese R and B, the rest of the world is going to accumulate R and B surpluses. Those surpluses initially will inevitably accumulate on Chinese banks balance sheets, and then the Chinese banks get to a point that we just don't want to have all these surplus and our balance sheet because it's using too much capacities. State,

please take it off our books. The state will start issuing debt to take all that liquity surplus off the balance sheet to the Chinese banks. And then as the rest of the world accumulates more, you know, and it's going to start with central bank bills again held by foreigners, and then you know, the foreigners they accumulate more, they would have more and more long term and so that's going to be the birth and the development of the of the debt securities market in China. I mean, all

this stuff is a step by step process. Again, just as a child is born and learns to walk and talk and does other things in in life. So I think this is going to be a path. This is I think inevitable. I think it started already. The infrastructure for it has already been built, and I think this

is going to pick up from here going forward. On the topic of alternate currencies, this is something that came up in one of your previous research items where you were talking about the possibility of people holding reserves in something other than dollars, and you mentioned bitcoin, but it had this big caveat around it, which was you put in parentheses if bitcoins still exists by then, what do

you see as bitcoin's um utility here? If any? Joe sparked the kind of bilateral conversation on that too via email, which which was which was interesting. And by the way, Joe, my capslock got stuck. So whatever you said in your article is capitalized. It was not intentional. I thought you were very excited. No, no, no, I don't know. I was like, oh, there is extremely excited. It is beautiful. It's a sovereign has to be involved with the question

of money, and bitcoin is basically short the sovereign. You know, bitcoin to short the sovereign, which is precisely which is precisely why you can't have bitcoin in China, because you can't be short the sovereign. In China. There's no outlet for political frustrations. It's one party. Not not to be facetious or anything here, but I mean, if we are talking about commodity shortages and energy shortages, and if it takes a tremendous amount of energy to mind the marginal bitcoin,

I mean that just makes no sense. You mean energy is any your energy, energy is going to be wasted on mining something that. Yeah, so the question is why would governments who are already facing commodity shortages continue to allow for the energy intensive mining of the thing the short the sovereign. Yes, I mean if you are releasing record amends from strategic patrollum reserve and like, I don't know,

we need you see what I mean? So it's like if all the strategic patrolum reserves are empty, well, and then you know people are using corn to make ethanol and then people are hungry, and like you're burning ethanol to mind bitcoin or something that makes no sense. But that's one and the other thing, the whole central bank digital currency. How does that fit into this? I think Breton Woodstreet is not about that, because we are talking

about rethinking reserve assets. This is fex reserves, which is a nominal pile of wealth versus commodity reserves, real versus nominal. The center bank digital currency is a liability side question for central banks, like what technology do I use to distribute my liability? This is like landlines versus cell phones, or you stream your movies, or you slept to a video store and get a v statement, stick it into a machine to watch it. That's that Breton Woods three

is about how do you invoice stuff? How do you get stuff from a poort A to word B. Once you get paid, what do you choose as your optimal reserve? Is it a real asset? Is that a nominal asset that type of stuff. You know, listening to this conversation, it does not necessarily strike me as a negative environment for the US, especially vius of the other rich countries, because okay, maybe the dollar doesn't have the same status.

On the other hand, unlike other rich countries, tremendous ability, at least in theory, to produce oil, tons of natural gas, tons of open space for wheat, corn, and soy metals, if we want to mind them. We have rare Earth's here. Uh, you know, some of the more advanced tech. It's sort of a political choice when we're going. It doesn't necessarily seem like in a world in which and of course our military and so that to the degree that the military is the price of shipping or the price of

protection for a lot of shipping lines. Obviously, the US far and away still the strongest military in the world. It seems like even in a new regime, the US has tremendous Milton advantages and stores of wealth. So yes, when you think about let's say three regions, you know, US, Europe, Asia, China, Eurasia. Again conceptually very high level. The country that's buying stuff on sale cheaply stocking up is going to be China, right because that's where all the Russian commodities you're going

to go. That's just the country that can fill some of the you know, you can freck your way out of this or throw your wheat out of this. US is fine. I think Europe is in a very delicate position because this is basically you know, between Russia and Europe, and you know, the German reliance in Russian fossil fuels and and so yes, you know, I think this is

you know Bretton Woods three. I think is is also a world where the East certainly has some i don't know, quote unquote renaissance and it has it better and inflation is less of a problem there. The West has quote unquote some relative decline. It's not going to go down the tubes. But you know, this is a multipolar world, which is not meant to be you know, status quo. But you know, someone rises, someone declines, but still too dominant.

Inflation is probably more of a problem in the West, and then I think Europe is very much in the middle. So now when we think about this medium term, what it means for commodities and inflation and who wins who loses. Some of the themes that come out of this is Learry think is right. For rather, it's probably more informed than all of us on this forum. I do agree that globalization as we know it is probably over. So what are some of the things that are coming out

of that? And and some of this conversation resource nationalism is a part of Breton Woods three. More military spending, you know Europe for sure, in the US least sea lanes, but not is definitely coming out of this. Stockpiling of commodities definitely coming out of this. Rethinking supply chains is definitely coming out of this. Breton Woods two was about a singular supply chain, Fox com making everything and breton

Woods three. If all that world orders torn up and we have to duplicate production facilities and supply chains and always that, we need to provide a lot of investment and capital into that. So you know, not to mention all the E S G and cutting, uh, you know, the investments related to that. I think the investment needs for for the world that threatened what's three reflect is going to need more commodities, It's going to need more capital.

And so you know, the West I think has things to worry about because you know, we are basically talking about opping investment in the West at the expense of consumption, which is exactly a mirror image of the problem China has, which is they had too much investment and too little consumption. Like even kicking it even higher in the higher get

the whole conversation. I think China needs a stronger exchange rate and the US needs to reaper exchange rate kind of more consumption, less investment there, more investment, less consumption. Here the types of investment that we are talking about, our investments that are going to be driven by the States and by corporations as they any things there exist. Sultan, I feel like we could talk about this for hours. Big so much for coming back on Fantastic. Yeah, that

was really good. Thank you very much. Guys. It's always great having Sultan on the show. And one of the things that came out of that is, I mean, I really think the sort of summary of all of it is that if you're interested in interest rates and the economy, you know, say you're a short term interest rate strategist or sturred trader or whatever, you're gonna have to start paying attention to shipping and commodities and all the micro

in order to do the macro. You know what, I thought that was one of the best conversations ever to think. You know, people always talk about turning points, right, Oh, it's a deflection points, the turning point post dollar. It's you know, we've been talking about for years. I thought that was one of the best conversations I've ever heard that actually put some like meat on the bone, so

to speak of what that looks like. Thinking about what are the price equivalents when it comes to commodities, storage protection, uh, the equivalent of maintaining par and then what are the institutions that have to build up around that to sort of recreate a more commodity centric world economy is like extremely extremely interesting, right, and then just underscoring in what a poor position a lot of the central banks are in order to do this, because under Sultan's framework, you know,

this idea of you have the sort of nominal monetary stuff, things like price levels, and par and interests or the future value of money, stuff like that. But the problem is emanating from the real which, of course central banks don't really have any control over. Right. We can hope, okay, if we slow things down a little bit, tap the brakes, maybe things are okay and we get some easing in

the price of world. But everybody knows it. I mean, everybody knows that the issues that are arising right now, at least some of them, like particularly on the food and energy side, are pretty far from like something that the FED, any central bank, let alone even the FED

can handle. Yeah, and all. The other point he made is that the last time the FED really had to fight inflation um, which would have been with vulcer in the sort of late seven days early nineteen eighties, that it was such a different world than and a lot of the problems were sort of emanating from a space where the central bank could have an impact, and it was doing it in a sort of maybe not totally unilateral world, but a more cohesive West certainly, and people

could sort of follow on follow suit, And now that might not be as possible. And I'm just trying. I love this the analogy. So it's like what is the commodity equivalent of balance sheet space? And you talked about like space on ship shipping. It's so interesting, like try It's like, I find it to be a very useful exercise to think about these different things like interest rates and obviously curves or that's the equivalent of the old

curve and obviously like a commodities futures curve. Things like that. It's a very useful thought exercise to think about how strange might emerge and how government policies might have to be different in this in this new world. And poker chips as poker chip tokens synthetic dollars still peg one to one against the dollar at this point. Excellent, All right, shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts podcast. I'm

Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe Why Isn't Though? You can follow me on Twitter at the Stalwart Big Thanks to our producers Magnus Hendrickson and Colin Tipton. Followed the Bloomberg head of podcast Francesca. Leave at Francesca Today and check out all of our podcasts under the handle at podcasts. Thanks for listening. Hey, there are all thoughts listeners. We are very happy to let you know that we've been nominated

for a Webby Award. Yeah I'm not you know, Tracy, I'm not normally like a big awards person, but now it were nominated for one. I'm really excited. You really wanted Yeah, I kind of really want to win. Okay, Well, on that note, we would very much appreciate if you can take two minutes of your time and head over to vote dot Webby Awards dot com and vote for us. You'll find us nominated in the business podcast category. Yeah,

very competitive business podcast category. Were one of five nominees, So if you so choose, if you like, if you're a fan of onlocks, if you want to help us raise our profile a little bit, please go check out the Webby nominees in book. Thanks very much,