Lots More with Lev Menand on the Eurodollar Market Now

Summary

Odd Lots Podcast Summary

Title: Lots More with Lev Menand on the Eurodollar Market Now
Hosts: Joe Weisenthal and Tracy Alloway
Guest: Lev Menand, Associate Professor of Law at Columbia School
Release Date: January 17, 2025

---

Introduction to the Eurodollar Market

The episode delves deep into the intricacies of the Eurodollar market, a pivotal yet often misunderstood component of the global financial system. Hosts Joe Weisenthal and Tracy Alloway welcome Lev Menand to provide an updated and comprehensive analysis of the Eurodollar landscape, highlighting its historical significance and current challenges.

---

Historical Context and Evolution

Lev Menand begins by reflecting on a previous three-hour discussion on the history of Eurodollars, emphasizing the need to contextualize past events within the modern framework.

Joe Weisenthal [01:30]: "3 Hours of Eurodollar market history and we can't get enough."

Lev acknowledges the depth of their historical exploration and underscores the necessity of bridging historical insights with present-day implications.

---

Current State of the Eurodollar Market

Tracy Alloway provides a detailed overview of the current size and significance of the Eurodollar market:

Tracy Alloway [04:09]: "The Eurodollar system right now is probably $13 trillion in size, which makes it more than twice as big as the uninsured deposits in the domestic system and almost as big as the overall deposits in the domestic system."

She explains that the Eurodollar market has grown substantially, now playing a more central role in global finance compared to the mid-20th century. The market’s expansion reflects offshore monetary policies and the shifting dynamics of global banking.

---

Risks and Instabilities

The conversation shifts to the inherent instabilities within the Eurodollar system, particularly concerning the ambiguity of U.S. government backing.

Tracy Alloway [05:51]: "The swap lines are both enabling the problem and mitigating the downside consequences... they're giving people confidence to hold large quantities of these that they will in fact be money good."

Tracy elucidates how swap lines facilitate trust in Eurodollar deposits but also create vulnerabilities. The lack of explicit U.S. government backing leads to uncertainty during financial stress, potentially triggering runs similar to historical bank crises.

Lev Menand adds to this by comparing implicit guarantees to explicit ones:

Lev Menand [10:15]: "It's like really the bazookas are ultimately what do it. And the beauty of bazookas is because they're so intimidating you don't have to fire them."

---

Historical Analogies and Lessons

Drawing parallels with past financial crises, Tracy highlights the lessons from the 1930s and 2008 financial crisis:

Tracy Alloway [05:42]: "In the 20th century we still had a sort of, you know, your grandparents banking system and now it's not."

She discusses how implicit support mechanisms failed during crises, leading to widespread instability and bank failures. The introduction of explicit deposit insurance in the 1930s was a response to such vulnerabilities, underscoring the need for clear guarantees in modern markets.

---

Regulatory Challenges and Prospects

The discussion then navigates the complexities of regulating the Eurodollar market. Tracy poses critical questions about the timing and nature of potential regulations:

Joe Weisenthal [13:11]: "This is my question, like what would be a good time and what would that regulation actually look like?"

Tracy responds by examining historical regulatory inertia and the difficulty of implementing reforms during stable periods:

Tracy Alloway [13:19]: "If the Eurodollar market were to lead to economic fallout on that scale, I feel very comfortable predicting that it would be fundamentally reformed."

She suggests that only in the face of significant crises would comprehensive regulatory measures likely be enacted, drawing from historical precedents where fundamental reforms followed severe economic downturns.

---

Proposed Regulatory Framework

Tracy outlines a potential regulatory approach to stabilize the Eurodollar market:

Tracy Alloway [16:01]: "The cleanest answer, which is an international agreement like Basel, call it Basel IV. That is quite simple. It says each jurisdiction shall ensure that the financial institutions in that jurisdiction only issue short term money like liabilities in their own currency."

This proposal advocates for full reserve banking for global dollars, ensuring that offshore dollar liabilities are fully backed by corresponding assets. Such measures would enhance transparency and reduce the risk of runs by aligning international regulatory standards.

---

Comparative Analysis: Eurodollars vs. Stablecoins

The conversation transitions to comparing the Eurodollar market with emerging digital currencies, particularly stablecoins like Tether.

Tracy Alloway [33:18]: "Stablecoins definitely have the potential to be the new Eurodollar."

Tracy acknowledges the similarities in dollar-denominated liabilities but distinguishes the purposes and applications of Eurodollars versus stablecoins. While Eurodollars are integrated into real economic activities and international trade, stablecoins are primarily used within the cryptocurrency ecosystem, though they have the potential to expand into broader financial transactions.

---

Geopolitical Implications and Swap Lines

Tracy elaborates on the geopolitical dimensions of the Eurodollar market, especially in the context of international swap lines:

Tracy Alloway [35:41]: "The whole swapline based Eurodollar system is very much a product of a particular geopolitical diplomatic arrangement between the United States and a variety of allies and partners."

She discusses how recent shifts in geopolitical landscapes, such as changes in the U.S. administration, could destabilize the existing swap line arrangements, potentially leading to increased uncertainty and risk of financial panics within the Eurodollar system.

---

China’s Role in the Global Financial System

The episode examines China's strategic maneuvers in the global financial arena, particularly through its swap line network:

Tracy Alloway [29:05]: "The Chinese are interested in spreading use of the RMB... Their swap lines though are not trying to achieve that in anything like the way that the Fed swap lines are facilitating dollar money creation."

Tracy explains that China's swap lines are aimed at promoting the yuan (RMB) as a global currency, differentiating them from the Federal Reserve's swap lines, which support dollar liquidity. This strategic positioning allows China to expand its financial influence without directly challenging the dollar's dominance.

---

Future Outlook and Potential Reforms

Lev Menand and Tracy Alloway conclude by contemplating the future trajectory of the Eurodollar market amidst evolving financial technologies and geopolitical shifts.

Tracy Alloway [37:05]: "If you change the rules on how banks in Japan and London hold dollar balances and you make them fully reserve... that's going to stabilize the global dollar."

They emphasize the necessity for international cooperation and regulatory alignment to ensure the stability and sustainability of the Eurodollar system in an increasingly interconnected and digital global economy.

---

Conclusion

The episode provides an in-depth exploration of the Eurodollar market, highlighting its historical roots, current significance, inherent risks, and the complex interplay of regulatory and geopolitical factors shaping its future. Lev Menand, alongside hosts Joe Weisenthal and Tracy Alloway, offers valuable insights into how the Eurodollar system maintains its centrality in global finance while navigating emerging challenges and opportunities.

---

Notable Quotes:

• Tracy Alloway [04:09]: "The Eurodollar system right now is probably $13 trillion in size, which makes it more than twice as big as the uninsured deposits in the domestic system and almost as big as the overall deposits in the domestic system."

• Tracy Alloway [05:51]: "The swap lines are both enabling the problem and mitigating the downside consequences."

• Tracy Alloway [13:19]: "If the Eurodollar market were to lead to economic fallout on that scale, I feel very comfortable predicting that it would be fundamentally reformed."

• Tracy Alloway [16:01]: "The cleanest answer, which is an international agreement like Basel IV... ensure that the financial institutions in that jurisdiction only issue short term money like liabilities in their own currency."

• Tracy Alloway [29:05]: "The Chinese are interested in spreading use of the RMB... Their swap lines though are not trying to achieve that in anything like the way that the Fed swap lines are facilitating dollar money creation."

---

Note: This summary excludes all advertisements, promotional segments, and non-content sections to focus solely on the substantive discussions related to the Eurodollar market.

Transcript

[Lev Menand]

89% of business leaders say AI is a top priority, according to research by Boston Consulting Group. The right choice is crucial, which is why teams at Fortune 500 companies use Grammarly with top tier security credentials and 15 years of experience in responsible AI. Grammarly is how companies like yours increase productivity while keeping data protected and private. See why 70,000 teams trust [e-mail] Meta's.

[Dr. Cal Clark]

Open source AI available to all, not just the few. Here's Dr. Cal Clark of Zaron Labs.

[Tracy Alloway]

Meta's open source AI model Llama helps us collaborate with universities to help radiologists catch more errors.

[Dr. Cal Clark]

Learn [e-mail] open hey there odd Lots listeners.

[Joe Weisenthal]

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

[Dr. Cal Clark]

Bloomberg Audio Studios podcasts Radio News Jo.

[Joe Weisenthal]

3 Hours of Eurodollar market history and we can't get enough. You gotta do more.

[Lev Menand]

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

[Joe Weisenthal]

Definitely a treat. I do feel like there's one thing missing, which is like we kind of have to put everything in modern context, right? We didn't really bring it that up to date. We talked a little bit about the Eurodollar's role in the 2008 crisis. There was a mention of it, but let's talk about the current Eurodollar market.

[Lev Menand]

Well, can I say something, Lev? Don't listen to this. Whenever we talk financial market plumbing or things of that nature. Oh, this is really fascinating. This is really interesting topic. And then I was like how does this matter to anything at all? So I would like. No, so I would like to actually talk a little bit more for real about like how does it actually matter? Because I find it very interesting but I sometimes forget like when and why it like why?

[Joe Weisenthal]

Why did we talk about this for three hours?

[Lev Menand]

I did a deadlift.

[Joe Weisenthal]

I am both the most popular trader and most Successful trader at Citadel Fed is going viral. Barges.

[Lev Menand]

This is an after school special, except.

[Joe Weisenthal]

I've decided I'm going to base my entire personality going on campaigning for a strategic pork reserve in the US Black Gold. These are the important questions. Is it robots taking over the world?

[Lev Menand]

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

[Joe Weisenthal]

How do I get more popular and successful?

[Lev Menand]

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

[Joe Weisenthal]

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

[Lev Menand]

And we really do have the perfect guest.

[Joe Weisenthal]

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

[Tracy Alloway]

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

[Lev Menand]

No, for sure.

[Joe Weisenthal]

Do an All Thoughts spinoff on Eurodoll.

[Lev Menand]

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

[Tracy Alloway]

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

[Lev Menand]

Why? Why does it matter more today?

[Tracy Alloway]

Size and centrality in the US dollar monetary system and in the global financial system. The Eurodollar system right now is probably $13 trillion in size, which makes it more than twice as big as the uninsured deposits in the domestic system and almost as big as the overall deposits in the domestic system. And it's the leading edge of monetary expansion in the US dollar system takes place offshore, not onshore. And when we were talking about the development of this in the 50s, 60s and 70s, the onshore, domestically regulated dollar deposit system was a much bigger percentage of the overall hull. And now we're in a world that looks quite a bit different in terms of the relative importance. And we've been in that world for about 25 or 30 years now. And the 2008 crisis was a crisis of that world, and 2020 was in part a crisis of that world. And so we're now in a financial system where instability in the Eurodollar market, that's the main with the addition of the repo market, that's the main area of instability and concern for our whole system. In the 20th century we still had a sort of, you know, your grandparents banking system and now it's not.

[Joe Weisenthal]

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

[Tracy Alloway]

The swap lines are both enabling the problem and mitigating the downside consequences. They're enabling the problem because they lead to the ability of Eurodollar issuers to draw in Eurodollar holders. When you think about what a Eurodollar issuer is doing, they're actually selling a product that's their liability. It's a money instrument that people can hold who have cash, have demand for cash and cash equivalents in large quantities. And they are competing with domestic US Banks that have a really nice product, the deposit that is up to $250,000 per account insured by the FDIC explicitly and a whole bunch of other money like products created by other shadow banks. Money market mutual funds create various products. And the swap lines, the existence of the swap lines is what gives people confidence that this is a pretty robust money type instrument that has backing from the sort of central bank which is the creator of dollars that makes these money like liabilities money good. And so in order to get such a huge $13 trillion, such a huge market, you need the swap lines there in the first place to give people confidence to hold large quantities of these that they will in fact be money good. But the problem you have is that the extent to which the US government stands behind this $13 trillion dollar money supply, it's ambiguous, it's not explicit. It is like uninsured deposits in the domestic system. It's worse though, but it's similar to it. And so it's highly runnable and unstable insofar as people aren't sure the extent to which the system will be supported by the central bank of the United States when it gets into trouble in various bad states of the world. So in good times it's fine, but in bad times people decide, you know what that competing money instrument created in the domestic US banking system or those T bills are just a much better place for us to be, we want out. And I have a historical analogy since we've been doing so much history on this. Think about the US system in the 1920s, going to the 1930s, we created the Federal Reserve and the discount window at the Federal Reserve for domestic US Banks. It's like a swap line for the banks directly. It's Doing what the swap lines are doing with the addition of the foreign central bank, people thought we're going to fix bank runs. We've got this infrastructure set up, we created this central bank, it's going to backstop all these deposits. And we had the worst bank run ever in the 32, 33 period. What happened was the Fed didn't support all the banks. When push came to shove, the Fed allowed a bank called the bank of the United States, a Jewish run bank based in New York, to fail and created a lot of uncertainty about the extent of its support for state chartered banks that were not members of the Federal Reserve System. And runs just went throughout the system and over a third of the banking system ultimately collapsed. Even though we had this support system. And what you saw in 2008 is a similar problem. People just don't know how much the Fed will be there and to what extent. And that can cause systemic catastrophe. And the reason why we got deposit insurance in part in 1933 was the government saying, you know what, we just have to be explicit about the fact that we're backing these money instruments. We can't have this implicit insurance program that is through Fed lending. We gotta just be explicit. And that worked really, really well.

[Lev Menand]

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

[Joe Weisenthal]

Say you're going to do whatever it takes and hope that you don't have to.

[Lev Menand]

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

[Tracy Alloway]

Of course.

[Lev Menand]

So how does that look like? How does that, what does that.

[Tracy Alloway]

So as a general matter, the way in which shadow money instruments, non deposit deposits, deposit alternatives, money instruments, cash equivalents that are competing with just sort of like your checking account@ JPMorgan Chase, they are competing on price, they are paying more interest than obviously your checking account at JPMorgan Chase, where often JP Morgan Chase will just pay you almost zero on that checking account in terms of interest. And so the Eurodollar market all developed 50s and 60s London banks offering more interest on balances than National Citibank in New York. And drawing depositors to their own banks. They could have a deposit account in dollars in London that just paid more interest. That's the same story you see with the repo market and money market funds. These are ways to get a little bit more yield on your cash instruments. They're competing on price. And the main customers historically were the corporate treasurers who had huge cash balances. And there are lots of different customers now who have cash they want a little bit more yield on. The thing that goes wrong in these markets is they are sacrificing moneyness, safety. They're sacrificing the extent to which it's really a liability of the United States government for some more yield. And when we get to a bad state of the world, that trade off starts to look a little bit different. And that's what creates the run dynamic. Suddenly we're in a bad state of the world. Think August 2008 and you're a repo counterparty of Lehman Brothers. You're parking your extra cash in Lehman Brothers for a little extra yield. And you think, you know what, I'm just gonna move my balance to a regular bank account. I'm gonna go to JP Morgan and just have a big balance there. Yeah, I'm gonna be earning a little less yield on my cash. But I know that it's money good and it's gonna be available. And you know what, I just don't need to be a repo counterparty to Lehman Brothers anymore. And that was what brought down Leon Brothers. It was just an old fashioned bank run on its repo book.

[Joe Weisenthal]

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

[Tracy Alloway]

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

[Joe Weisenthal]

This is my question, like what would be a good time and what would that regulation actually look like?

[Tracy Alloway]

It's a really deep and difficult question because you guys may have been following the Basel endgame capital requirements project of the last several years, US banking regulators and Michael Barr, the vice chair of the Fed for supervision, who's been leading that project, who has recently announced he's going to step down as vice chair for supervision. And part of it is just that it seems unlikely that he's going to be able to get that project over the finish line. The reason I bring this up is you might think when the banking system is making record profits and the economy is humming along nicely would be a great time to strengthen the regulatory regime. And the Biden administration and its bank regulators have tried to strengthen the domestic onshore deposit regulatory regime of domestic deposits and they've been completely stymied. And so plainly when things are good, that's not actually a good time because nobody wants to. Everybody looks like it's working right? Everyone's like, everything is fine, we don't need to make any changes right now. And so the inertia, inertia prevents changes. And so actually practically it is during crisis. It happened to be the case that the 74 crisis that we talked about, they felt like things were too fragile to do anything. Similarly, in the aftermath of 2008, there was a similar mindset. You might recall there were more significant reforms discussed and at least mooted privately, including with respect to repo and Eurodollar liabilities. And the thought was, we're in a bad recession right now, we should try to get out of that recession. And let's not upset the apple cart. And so clearly a certain type of crisis is not enough either. If you just look to history. One thing you do see is if the crisis is really bad, not like 74 or 08, but like 1933, then you get fundamental structural reform. If the Eurodollar market were to lead to economic fallout on that scale, I feel very comfortable predicting that it would be fundamentally reformed.

[Lev Menand]

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

[Tracy Alloway]

Yeah, two great questions. So of course it could look like a bunch of different things. There's not one answer. There is the cleanest answer, which is an international agreement like Basel, call it Basel iv. That is quite simple. It says each jurisdiction shall ensure that the financial institutions in that jurisdiction only issue short term money like liabilities in their own currency. And so if you're a London based bank regulated by UK financial regulators, you cannot issue a dollar demand deposit type liability unless it's fully reserved on the asset side of the bank with a dollar instrument, either a dollar at a US bank, like a correspondent bank. And that's going to actually tie into the second question or like a T bill of a very short maturity. And so, you know, you could still have lots of dollar based banking globally. You wouldn't be getting rid of global dollar, you would be stabilizing the global dollar by going to full reserve banking for the global dollar. There would be no money creation outside of the U.S. the expansion of the dollar money supply would happen by U.S. domestic banks, but dollars could be held by say Japanese banks as long as it was on a one to one basis. And I think that would be the optimal answer. And we could talk about why, but you don't have to go all the way to that. You could allow some dollar money creation outside of the US but subject it to some type of US based oversight and regulation to have congruence between the domestic dollar money creation regulatory scheme and the overseas dollar money creation regulatory scheme. What makes the current system so unstable and difficult to govern is there is no congruence and in fact there can be race to the bottom dynamics and even worse right now there's so much opacity. You know, I said $13 trillion, but we don't really know the figure because there's no systematized reporting in the U.S. all of the banks file reports quarterly with their balance sheet information and we can track the amount of dollar deposits. We actually cannot track the amount of deposit like liabilities being created offshore because there is no international agreement by which that information is reported to U.S. authorities. And that would seem to me to be like low hanging fruit. You don't have to get rid of the ability of banks in Japan and Europe to create dollars. Why don't we just make them tell us how many they're creating and just some information about the assets on the other side of Those balance sheets?

[Lev Menand]

89% of business leaders say AI is a top priority, according to research by Boston Consulting Group. But with AI tools popping up everywhere, how do you separate the helpful from the hype? The right choice is crucial, which is why teams at Fortune 500 companies use Grammarly. With over 15 years of experience building responsible secure AI, Grammarly isn't just another AI communication assistant. It's how companies like yours increase productivity while keeping data protected and private. Designed to fit the needs of business, Grammarly is backed by a user first privacy policy and industry leading security credentials. This means you won't have to worry about the safety of your company information. Grammarly also emphasizes responsible AI so your company can avoid harmful bias. See why 70,000 teams and 30 million people trust [e-mail] Enterprise that's [e-mail] Enterprise Grammarly Enterprise Ready AI this show is sponsored by BetterHelp BetterHelp has been revolutionary.

[Tracy Alloway]

In connecting people to mental health services. Using BetterHelp can be as easy as.

[Joe Weisenthal]

Opening your laptop or your phone and.

[Tracy Alloway]

Clicking a button and the session begins. Clients are able to choose in what way they would like to communicate with me. Whether video or on the phone or.

[Dr. Cal Clark]

Chat texting, BetterHelp is there when you need it. And that's what makes all the difference. Visit betterhelp.com podbusiness to get 10% off your first month. Therapists were compensated.

[Joe Weisenthal]

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

[Tracy Alloway]

I mean, it does, yeah.

[Joe Weisenthal]

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

[Tracy Alloway]

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

[Joe Weisenthal]

Okay.

[Tracy Alloway]

All right, so there's nothing wrong with.

[Joe Weisenthal]

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

[Tracy Alloway]

I think you're asking a very important question, and I want to try to unpack it a little bit, because what I was calling conventional wisdom, I think, jumbles up a lot of issues, and it's understandable that they get jumbled up. But really, to explain what the stakes are of the Basel IV type of response I was just describing, we really have to unjumble them. First, there's the role of the dollar as a reserve currency. This is really quite distinct from Eurodollars, which are the creation of US Dollar money offshore by offshore financial institutions. We're going to connect it back a little bit. But the dollar's role as a reserve currency, what that's directly about is the fact that foreign central banks hold treasury securities as their reserve assets. It's not about using the dollar to transact or to finance trade, although those are also related. It's about the fact that the Chinese, for example, have huge reserves and they have to invest those reserves, and they have chosen to invest a very large percentage of them in Treasuries. So dollar as reserve currency means foreign central Banks hold reserves in Treasuries and they have chosen Treasuries for lots of reasons, having very little to do with certainly whether they're their domestic financial institutions have the ability to create dollar deposit liabilities versus have to hold one to one balances with US Banks. But also even that has little to do with whether dollars are being used to finance trade or settle international transactions. If you are a central bank and you have a very, very large amount of reserves, let's say a couple trillion dollars, what assets are you going to put it in? And the choice to invest in Treasuries has a lot more to do with US economic hegemony and the sheer enormous quantity of US Treasuries than it has to do with what currency is being used to globally trade. So China, for example, has, you know, historically held lots of US Treasuries. It's really hard to think that it has anything to do with the Eurodollar market, which is really not something that is benefiting in any meaningful sense the Chinese. What does relate to this sort of dollar as a reserve currency for foreign central banks is the liquidity of treasury markets, of course. And one reason why Saudis or the Chinese would want to hold their reserves in Treasuries is that they can buy and sell very, very easily with very low cost. That is a shadow banking story in part about the creation of the repo market and treasury repo, which is a way to subsidize liquidity in treasury markets. But that's not a Eurodollar shadow banking story. That's a repo shadow banking story. Okay, so the first point is, if you change the rules on how banks in Japan and London hold dollar balances and you make them fully reserve, is China going to decide they want to hold Euros instead of Treasuries? That's I find really, really sort of hard to substantiate. Just doesn't really connect. So does that mean it has nothing to do with it? No. So the global dollar is more than just a reserve currency. It's also a currency of international trade and international finance. And so there's lots of trade between third countries that doesn't involve the United States where they use dollars to transact. That's the means of exchange. And because that's the means of exchange, it's also the lending currency associated with financing that exchange. And so we have this dollar financial system that's quite a bit distinct from dollar as reserve currency. Chinese central bank wants to hold Treasuries, has a bunch of reasons for that totally different calculus, for why Indian conglomerate wants to sell its products to South American country in dollars. Different calculus. And with that second calculus, the Eurodollars fit in a bit more. A bit more, because what's going on there is the Indian company has a bank and the South American company has a bank. And in all likelihood their primary banks are not U.S. based. And those banks would like to be able to create dollars, lend them in dollars, and not have to look to US banks for that liquidity. And so what the Eurodollar system is really doing is cutting foreign financial institutions into the profits of dollar signiorage. They're giving them a piece of the action and they're giving them a reason to want to be in the dollar business. And the way the whole thing got going initially was a lot of London banks wanted to get into the dollar business and we let them in basically. And that makes them evangelists for dollar based finance as opposed to constantly trying to say to their clients, you know what, let's do this deal in pounds, because we create pounds. And if we have to do this deal in dollars, then we're gonna have to go borrow from Citigroup the dollars that we need, because we can't just create them ourselves. And there's not this whole Eurodollar market for us. We gotta go to the domestic US dollar market. And so we would have all these foreign financial institutions trying to suggest other currencies for international trade and financing and not being as gung ho about the dollar. Which is not to say that they would necessarily succeed in convincing the vast majority of their clients to change currencies. There's a lot of reasons why you would just, you know, open up a bank account with a US based bank, shift your business there. At the same time, the US has gotten very far in embedding and entrenching the dollar by building this coalition of global financial institutions that all are able to profit and benefit off of being in the dollar as opposed to trying to keep all of those benefits onshore for US based banks.

[Joe Weisenthal]

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

[Tracy Alloway]

So as it turns out, China's swap lines are just totally different from the Fed's swap lines. And so the Chinese are interested in spreading use of the rmb. They want other countries to use the RMB in trade, especially with China. They would be thrilled if the Indian company wanted to sell to the South American company and denominated an rmb. Its swap lines though are not trying to achieve that in anything like the way that the Fed swap lines are facilitating dollar money creation. The Chinese swap lines are basically a central bank lending program for, for indebted foreign governments. And so it's like World bank or IMF loans. And so like a major borrower is Pakistan. Pakistan has had a swap line with the People's bank of China.

[Joe Weisenthal]

Sounds like an outcrop of belt and road.

[Tracy Alloway]

It is an outcrop of belt and road. It's exactly an outcrop of belt and road. And in the US we would just never do that type of lending through our central bank. We did do something like that for Mexico in 1995. $20 billion loan that came from the Treasury Department. That's like what the PBOC is doing. And they might have some sort of regulatory reasons. One thing that happens if you do it through your central bank is you don't report it as sovereign lending to like the World Bank. So it's much harder for international observers to keep track of how much Pakistan and Mongolia and these various recipients of PBoC swapline lending, how much they are actually incurring. It's less reported than maybe if the Chinese did it in a, in a more official channel. But it's nothing like what the Fed swap lines are. There's over $30 billion right now of PBOC swap line outstanding. There's like basically zero of the Fed swap lines. It's a, you know, the PBOC is like an ongoing lending program.

[Joe Weisenthal]

Got it.

[Tracy Alloway]

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

[Lev Menand]

89% of business leaders say AI is a top priority, according to research by Boston Consulting Group. But with AI tools popping up everywhere, how do you separate the helpful from the hype? The right choice is crucial, which is why teams at Fortune 500 companies use Grammarly. With over 15 years of experience building responsible secure AI, Grammarly isn't just another AI communication assistant. It's how companies like yours increase productivity while keeping data protected and private. Designed to fit the needs of business, Grammarly is backed by a user first privacy policy and industry leading security credentials. This means you won't have to worry about the safety of your company information. Grammarly also emphasizes responsible AI so your company can avoid harmful bias. See why 70,000 teams and 30 million people trust [e-mail] Enterprise that's [e-mail] Enterprise Grammarly Enterprise Ready AI I'm Sonali Basak.

[Sonali Basak]

And I hope you'll join me and many of the most important institutional investors and money managers for the year's preeminent finance event, Bloomberg Invest. Returning to New York on March 4th and 5th, come face to face with leading voices in markets. Identify the next big investor Investments forge meaningful connections and swap strategies. Register [e-mail] invest. That's BloombergLive.com invest.

[Joe Weisenthal]

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

[Tracy Alloway]

Stablecoins definitely have the potential to be the new euro dollar. Tether in particular has a lot of Eurodollar flavor to it, but there are really important differences. One is that tether is not being used to finance or settle international trade. The Indian companies are not selling to South American buyers or vice versa. Using tether, that's the Eurodollar system is tied to the real economy and real economic activity. Up until this point, the cryptocurrency space is very much looking at itself. Tethers are used primarily to buy cryptocurrency, not to facilitate real economic activity. Or they're used to conduct illicit transactions that are difficult to conduct in the fiat regulated system. I did air quotes, but that doesn't come across in this medium. That said, tether has gotten huge and it is exploiting the same sort of regulatory loophole that the Eurodollar system is exploiting. The tether balances have a very similar economic status to the eurodollar balances. And one could imagine insofar as tether is legitimated in some sense and it takes on greater scale that it could expand its role and sort of jump over, get out of just the crypto ecosystem and get into the real economic activity and be a real competitor with other dollar money forms, it certainly is a dollar money form and it could be a competitor in certain transactions for certain purposes.

[Joe Weisenthal]

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

[Tracy Alloway]

Absolutely. And I think this is something that's probably not getting talked about enough. The whole swapline based Eurodollar system is very much a product of a particular geopolitical diplomatic arrangement between the United States and a variety of allies and partners that involves a certain orientation to those allies and partners where the US Is basically making an ongoing commitment over a long period of time that it will be there to provide, in essence discount window like backing to the extent that the US Is incapable of making those types of long term commitments or everything is going to be hashed out on a case by case basis. And that's the new international multilateral paradigm that's deeply destabilizing for the Eurodollar market. And to the extent questions would be raised about whether certain countries would be able to actually draw on their swap lines, that could lead to runs and panics. Just in the way that in 1932 and 1933 there were runs and panics throughout the US banking system, in part because it wasn't clear the extent to which the Federal Reserve was actually going to be there with discount window lending to backstop those entities.

[Joe Weisenthal]

I think we've learned a lot more about the Eurodollar market, including why it is not the Eurodollar exchange rate. Do you feel like no, that I get now that's been hammered into your head.

[Lev Menand]

Yeah, that I know. I knew that before. That I knew.

[Joe Weisenthal]

You have admitted to not knowing that at one point.

[Lev Menand]

I didn't know that.

[Joe Weisenthal]

Yeah. Okay. Lots More is produced by Carmen Rodriguez and Dashiell Bennett with help from Moses Ondahm and Cale Brooks.

[Lev Menand]

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

[Joe Weisenthal]

Please rate, review and subscribe to ODD lots and lots more on your favorite podcast platforms.

[Lev Menand]

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

[Dr. Cal Clark]

Join Bloomberg in Atlanta or via livestream on February 11th for the Future Investor finding the opportunities this 2025 event series will examine how companies are investing in their businesses to create efficiencies, innovate their products and services, and improve the customer experience. This series is proudly sponsored by Invesco. Q. Q. Q. [e-mail] futureinvestoratlant.