The Fate Of Global Dollar Credit | Robert McCauley & Joseph Wang on Eurodollars, FX Swaps, and SOFR

Today’s special guest is a true expert in global money. Robert McCauley’s life work on the international monetary system is authoritative and seminal, and he joins Jack Farley and Joseph Wang to answer questions such as:

- how do Eurodollars actually work?

- is the rest of the world long or short dollars? (the answer may surprise you)

- how does the level of the dollar mechanically impact offshore dollar credit?

McCauley confirms many rumors about Eurodollars (offshore dollars), as well as debunks several of their myths. He shares his view on the dollar’s role in the future of global money, and he details the astronomically large sums in the FX swap market used to hedge dollar exposure. McCauley also asks Joseph Wang a question about the fall of LIBOR (London Inter-Bank Offered Rate) and the rise of SOFR (secured overnight financing rate). Filmed on June 21, 2023.

Robert McCauley is the Senior Fellow at the Global Economic Governance Initiative at the Boston University Global Development Policy Center. He previously served as senior advisor to the monetary & economics department at the Bank for International Settlements (BIS), as well as at the New York Fed.

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Robert McCauley’s Eighth Edition of “Manias, Panics, and Crashes”:

https://www.bu.edu/gdp/2023/03/22/manias-panics-and-crashes-a-history-of-financial-crises/

On Amazon:

https://www.amazon.com/Manias-Panics-Crashes-History-Financial/dp/303116007X

Robert McCauley’s papers referenced during the show:

“The Global Domain of the Dollar: Eight Questions”:

https://www.bu.edu/gdp/2021/02/09/the-global-domain-of-the-dollar-eight-questions/

“Dollar debt in FX swaps and forwards: huge, missing and growing”:

https://www.bis.org/publ/qtrpdf/r_qt2212h.pdf

“Seven decades of international banking”:

https://www.bis.org/publ/qtrpdf/r_qt2109e.pdf

“The International Economic and Financial Order After the Pandemic and War,” pages 123-128:

https://media.iese.edu/research/pdfs/76606.pdf

“London as a financial centre since Brexit: evidence from the 2022 BIS Triennial Survey”: https://www.bis.org/publ/bisbull65.pdf

Joseph Wang’s latest piece on SOFR (paywalled): https://fedguy.com/long-live-sofr/

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Joseph Wang’s YouTube channel: https://www.youtube.com/@Fedguy12

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Timecodes:

(00:00) Introduction

(01:33) Origin Of The Eurodollar System

(19:46) Eurodollar Deposits Rarely Take Losses, But Silicon Valley Bank's Eurodollars Are In Limbo And May Be Lost

(26:12) Can Non-U.S. Banks Print Dollar Deposits At Will?

(39:50) Banking As A Percentage of GDP Peaked Many Years Ago

(43:14) Is The Rest Of The World Long Dollars, Or Short Dollars?

(53:49) Is The De-Dollarization Narrative Just A Lot Of Hot Air?

(01:11:49) Who's Going To Buy U.S. Treasurys?

(01:20:38) The Dollar's Role Does Not Give The U.S. An "Exorbitant Privilege"

(01:24:29) $35 Trillion Dollar Hidden Debt Via FX Swaps

(01:38:05) Robert McCauley's Question For Joseph Wang On SOFR & LIBOR

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Disclaimer: Nothing discussed on Forward Guidance should be considered as investment advice. Please always do your own research & speak to a financial advisor before thinking about, thinking about putting your money into these crazy markets.