Moody's Talks - Inside Economics - Christmas Movies and Currencies

Episode Date: December 23, 2021

Mark, Ryan, and Cris welcome back Joe Kennedy, senior principal economist at MITRE, to discuss the U.S. dollar, reserve currencies, and crypto.Recommended Read:Ending Poverty: Changing Behavior, Guaranteeing Income, and Transforming Government, by Joseph Kennedy. Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics. And this is another special podcast. This is, we're recording this on December 15th, the Wednesday. But this will air a week from now. I believe a week from now or maybe, I'm not sure when, but next week, Christmas week. So we're not going to do the statistics like we typically do, just because they'll be a little bit out of date by the time this air. shares, but we are going to just dive right into our big topic.

And it's the dollar, the US dollar, and I should say currency more broadly. And we have a guest. I'm going to introduce the guest in just a minute to help us kind of navigate through all of this. But before I do, let me introduce my co-hosts, Chris DeReedies. Chris is the Deputy Chief Economist and Ryan Sweet. Ryan is the Director of Real Time Economics. Although you had a tough morning, didn't you, Ryan?

I said I wasn't going to talk about statistics, but we got retail sales today. It was a little bit on the soft side, wasn't it? It came in below what I thought it was. But I was on lower than the consensus. Yes, you were. Yes, you were indeed. Why was it low? The seasonal factors were pretty aggressive.

So if you look at NSA, you're non-seasonally adjusted. The number wasn't that bad. And if you look at all the components, there's some weird volatility going on. non-store was flat in November. That seems a little odd. So, yeah. I'm not too concerned. I think you got to put into context, right?

I mean, October was boom, right? Yeah, it was very strong. And I think September was, as I recall, that was strong too, wasn't it? That was over 1%. So year over year growth in retail sales is, I don't know, what, 18, 19 percent, something like that. Nope. I mean, and of course, there's inflation in there, but even abstracting from the, inflated. Yeah, even if you adjust for inflation, it's still really strong.

Very. Fourth quarter consumer spending will be strong. It will be strong. And Christmas sales, I, you know, I wrote something from the New York Times, and I said in that, that this could be the best Christmas in terms of sales growth in history. Do you think that was hyperbole? Or do you think we got a shot at that? Yeah, we got a shot at it. Got a shot at it. Very good. Hey, and I do want to introduce our guest, Joe Kennedy, Joe, good to see you. Joe is, you're, you're back, Joe. Thank you for coming back. I think I'm the first one you've had back. Indeed. Yeah. I was at first I was really pleased I'd go to my ego and then I thought it might be a sign that you're having trouble getting people. Oh, wow. Ouch. That hurts. Yeah. Every silver lining has a dark cloud somewhere. So I wasn't sure, you know, which way to go.

Well, you diagnosed that wrong, Joe. We had you back. You were great. Well, thank you. We were talking about markets, competition, antitrust. Pretty complex issue. I really enjoyed it. We ran out of time.

Yeah. And just to remind everyone, Joe, and I got to know each other when Joe was the chief economist of the Commerce Department back in the day under President Bush. So I got to know each other. then. And since then, you've been very busy. You wrote a book ending poverty. And you want to tell us a little bit about that book? I don't think we dove into that in the first pocket. Sure. Sure. You got a copy? Okay, I do. I've got like 100.

It's like my book. So yeah, you know, I've had these ideas for a long time about how to restructure government. And so this book, half of it, spells out a system for a guaranteed income provided the recipient does certain things like work, not commit crimes, get educated. And then the rest, when I looked at the economy, it seemed like most sectors were doing okay, but there are a couple of big sectors that are just sort of stuck. And so I devoted a chapter to each to talk about, you know, sort of systematic reform that would over time bring down prices and increase quality. And in the main sectors were healthcare, education, I think I had housing in there.

Because, you know, I think if, why can't that cost of housing go down over time and quality go up? I mean, you know, there's a limited amount of land that you can go up. And we have so many ridiculous barriers to, you know, that add extra cost to building a house that if we got rid of a lot of them, we could see deflation for at least a while. We could see prices fall. And the same with education, same, I believe, with health care. And if you did all that, everybody's standard of living would go up.

quite a bit. Very cool. You know, did, did you notice that corporate profits, this is Q3 data, 21, 2021 Q3 data, corporate profits as a share of national income, is it a record high? When I say record, we have data back to just after World War II, 14.6%. Is that surprising to you? Yeah. I was surprising. Especially thought. You know, you read all, every, you know, all these articles about wages finally going. Yeah. And I would have guessed, you know, right. So they're raising, businesses are able to raise their prices to compensate for the, yeah, the higher labor costs. But that's interesting. Well, well, yeah, that sounds like a great read. And, you know, uh, hopefully it gets on the bestseller list when you, you, you, uh, take another stab at it.

And, and, uh, I think you need to, you know, get it out there in other languages. That would, that would also. Yeah. I, that's what I try. to do. Didn't help me, but right. And now, Joe, you're at MITR. Tell us a little bit about MITER. Yeah. So my MITR runs six what are called federally funded research and development centers. And in each one, it partners with part of government to accomplish certain missions. It does a lot of very technical work in cryptography, in working with statistics, agencies to protect their data in helping these agencies make major IT purchases. And its main goal is to work on really hard problems that the government and society is

facing, to bring together the right people, and then to deliver a product that actually addresses the problem and results in a solution that makes everybody better off. And it really tends to focus on key big issues that involve systems of systems or that involve a whole of government approach to the problem. And one of the things it's doing that attracted me was spending a lot of resources on an internal project to better understand this great power competition that we seem to be starting. to go through with the China and, you know, to a lesser extent, Iran, Russia and some other private countries. And so we're looking at key variables in there, including the role of China's BRI, one belt, one road. One belt, one road. The scope of illegal fishing in in one of these areas is the role of the dollar in how it's been changing in response both to

technology but also to just normal economic factors like the rise of China. Yeah, it sounds like a great place to work, a lot of very interesting topics. Not as good at these analytics, but, you know, I'm just... I couldn't aspire to that. Close second. Close second. Yeah, I have to displace Chris, and I never do that. Oh, I think you're done for my job.

You're talking about it. Yeah, but we'll come back to the dollar. Before we do that, though, the three of us were having an email exchange last night. I'm curious how you'd weigh in on this question. It's a very important question. Very, very important. Obviously, this is one that Ryan posed. It's, what's the best Christmas movie?

And Ryan says there's, this is like a slam dunk. There is an obvious choice for, Yeah, which that went with that guy. That works. Yeah, that's a good one. That's the best. Is it one where you, that? Jimmy Stewart, yeah.

Yeah, my wonderful. It's a wonderful life. That's it. That's the prototypical. Yeah, I like that one a lot. Absolutely. I agree with you, Joe. Do you, do you, Chris?

Yeah. Is that your number one movie? That's the number one Christmas movie by far. Come on. No, that's not what Ryan had in mind. So Ryan, Ryan actually is a diehard man. It can't be diehard, is it? No, no, I was joking about that because everyone's just diehard.

Is that a Christmas movie? Yeah, yeah. So Mark, what you're going to? Well, there was this, I don't know the name of it, but there was this one movie about this small kid, and it was like in a third person voice. I think it was the dad was. Oh, a Christmas story.

A Christmas story. A Christmas story. Yeah. That was funny. It reminded me my, say I'm older than you guys in that movie kind of was my childhood to some degree, you know. Not that my dad was that guy's dad. You know, I thought that was pretty funny, Christmas story. Yeah, I like that one.

But that's not what you had in mine either, is it Ryan? So you're close. Oh, okay. Joe and Chris are way off. Without a doubt, National Ampoon's Christmas vacation is the best. Oh, that is Christmas movie of all time. That is good. That's the Chevy Chase, right?

Oh, yeah. Yeah, yeah, yeah, yeah. Where they have the lights? Yeah. Oh, yeah, yeah. That is hilarious. Yeah, that is funny. It's pretty good.

How about, from an economics point of view, trading places, right? That's the, that's a close second. That's a great movie. Eddie Murphy? Eddie Murphy, yeah. Oh, that's Christmas. Well, again, debatable. It is to the same degree.

that diehard as a Christmas movie it does take place over Christmas that's set in Philadelphia it is yeah that's right

that was right yeah Marshall's future and what's that one with the other guy the new one it's got to be right the new one

it's like it's a takeoff of a Christmas story but it's got the next Saturday night SCTV guy in it I don't know that one.

Bill Murray. It's got Bill Murray in it. Is it a new movie? Yeah. Grown Out Day related. Yeah. No, it's about. Scrooched.

Yeah, that's it. Scrooge. That's a great one. Oh, Mark, you got to see if you love a Groundhog Day. I love Bill Murray. I love Bill Murray. Yeah. Okay.

I've got to watch that. Good. Oh, we got something out of this podcast. Christmas kind of feel to it, right? I mean, you had to do it. It's the week leading up to Christmas. This is perfect. Up to Christmas, yeah.

All right, well, let's chat the dollar and currency and crypto and all that kind of good stuff. So I got to, I know we're not going to play the game, but I'm going to play the game. I got a number for you. This is a good segue into the topic at hand. Are ready? 60%. 60%. I know.

I'm going to guess. currency. It's, it's dollars, the share of reserve currencies, that's, you know, filled by dollars. Got it. Perfect. Wow. Where's that?

No, who knows his numbers? No, it's right. There's right. Thank you. Pathetic, actually. A pathetic. Mapping children, Mark. Nopping children.

Oh, sorry. Right. You're taking care of it. Only so much we can go. Thank you. 60. What, okay, what's the second largest currency in the basket?

If you look at reserve currency, Euros. euros okay but yeah and then what's next after that I guess uh you see their sDRs or the pound oh I'd say pound I didn't even see the SDRs I don't know if maybe these I don't know if STRs uh were included in this table I was looking at I'm not sure uh actually the you know interestingly enough it's the yen it's up like six seven percent reserve basket And the pound is like four or five percent. Then you've got the Chinese currency Renambi and what else is in there?

You know, a few smaller currencies. Yeah. Hey, Joe, what does it mean to be a reserve currency? What does that mean? Well, it's just, it's, so central banks exist at least partly, maybe mainly to handle, well, I guess mainly to handle routine functions, but a big part of what they do. is they serve as bedrocks when the economy goes south for a while. And so one of the things you need to, if you're going to be the bedrock,

is you need assets that you can sell when the time comes so that you can inject liquidity into the market. And so you want an asset that's going to hold its value, maybe even is going to appreciate when the economy goes down or you're just about to enter a recession. and the dollar fulfills that rule because one, the dollar markets are so big and so liquid that you can always sell your dollar assets in get cash. And they're also regarded as very safe in that people don't think they're going to fall over time. And so people, you know, if you put them in your reserve pile, you're pretty sure that they're going to maintain their value.

And in fact, they even increase in value in times of financial stress because everybody goes to the dollar. So reserves are what they sound like, the reserves, right? Yes. The governments hold these currencies in reserve if they need them to, and you're saying they generally don't need them in typical times. you know, they'll build reserves or they'll wind down reserves a little bit, depending on what's going on with trade and the balance of payments. But in times of stress, you know, that can come, that's particularly important because people need businesses, households need cash.

They need liquidity, as you said. And the reserves provide that source of liquidity in times of stress. Yeah. And they also pay for, you know, if the country runs a trade deficit over time, you know, you can use your reserves to pay that for that. Pay that down, right? But you can only do that for so long until you get in trouble, which, you know, some, and, you know, there's, there's this always this kind of underlying, lingering concern

that you hear expressed that, you know, the dollar is going to lose, the dollar is the reserve currency, 60% of all reserves are in dollars, that it's going to lose its status as the reserve currency, the currency that's used in a lot of global transactions and, as you say, is kind of a safe haven when times are tough. Do you have any sense that that is, you have any concern about that that the dollar could lose its reserve currency? Not really. It's reserve status is the dollar fulfills several functions. And one is

reserve status, another is invoicing currency. That oil is usually priced in dollars rather than some other currency. And then also that it's used in transactions. And as far as

as a reserve currency, you want something that's going to hold value. And to do that, you need the The country that is providing the reserve currency needs to be big. Its markets need to be liquid and varied. But you also need an institutional setting that reassures people. You need a rule of law that will uphold contracts.

You need a pretty free lack of capital controls. that you can sell different currencies and exchange them as you want, you know, in the government's not going to, you know, put down, have new laws that limit your... You come in and say, look, you can't change the dollar for the euro or the dollar Chinese or NIMBY or whatever it may be. Yeah. That's that that's free flow of capital. There's no capital controls. Like the Chinese have capital controls. Yeah. And the other thing is, since the economy is expanding over time, the USA, since it's the dollar,

has to provide more dollars over time, and that means it runs a trade deficit. And so the country has to be willing, if another country is going to displace us, it has to be willing to run a significant trade deficit over many years. And I don't see any country willing to do that. the Chinese lack the institutional setting, the free cap, the free markets, and just the stability

that the U.S. has. And so I don't think it's ever going to seriously challenge the dollar as a reserve currency. One one currency that could is if a true euro market arose, Right now you have a euro market, a French euro market, a German euro market, a Greek euro market. But if more euros were backed by all countries, and so they were interchangeable, that would significantly broaden the pool of assets in their liquidity. And that could boost the euro's percentage as far as reserve currencies.

One thing I did notice, you know, looking at the data is, you know, it's been 60% roughly. It's been 60% for a long time, roughly. You know, it's up a little bit, down a little bit in any given year, but it doesn't really, it has not really changed to any appreciable degree, despite all the hand-wringing about this. And, you know, I guess the question is if it isn't the dollar, exactly who would, this currency would be the reserve currency. And it's hard to imagine. I mean, yeah, the euro maybe could not displace this, but increase its importance.

But we've been through this before. It was concerned about the yen. There was concern about the mark, the German market, and there was concern about the euro when it was created. There was a little bit of concern over SDRs issued by the IMF. And now there's concern over China. China. And in each case, I think just when you look at it, the advantages that the dollar are so great. Yeah. We've mentioned SDRs twice. Can you just describe quickly for the listener what an SDR is? Sure. It's called special drawing rights. And it's made up of a basket of currencies, including the one.

And the IMF issues it periodically to members of the IMF. They issued certain baskets. And then those members can, if they want to, at some point, take them back to the IMF and get paid in the currencies. And so it gives each recipient country, you know, a basket of currencies that they can sell if they need assets kind of quickly. Yeah. Yeah.

So I had another thought, but it'll come back to me. I've got plenty of thoughts. I've got plenty of thoughts. So why do we want to be the reserve currency? I mean, what's the deal? I mean, why? Yeah. If who cares if Euro or yen or even the Chinese Juan became the reserve currency,

Why would we have a problem with that? We get, you know, maybe if different people measure it differently, but we get maybe $300 billion in benefits a year from having the reserve currency. Yeah, we get some seniorage because, you know, it costs less to make a dollar than to get, you know, then just to sell it. So you make a little bit of money there. but more important. Sounds like an NFT to me. Huh? Sounds like an NFT to me. So no, come back to that. You know, a more important reason is that all this demand for dollar assets reduces the interest rate on dollar borrowing.

So when the Federal Reserve that goes out to borrow money or the Treasury goes out to borrow money, it gets a lower rate. But also when you and I go out to borrow, we get, you know, it's a lot. slightly lower rate on what we, you know, the loan we get. Another is we get a, our financial industries have a sort of leg up overseas because they're already deeply entrenched in the dollars, the dollars benefits. You know, another is that if we tighten up monetary policy in this country, some of that pain is shared by other countries. Because how do we tighten up monetary policy?

We raise interest rates. And if you raise interest rates on the dollar, then other countries have to worry about capital flowing out to the U.S. So they feel I need to raise interest rates too to keep funds from leaving. So, you know, so those are some of the main benefits. Yeah. Hey, Chris and Ryan, did you think Joe missed anything here with the question around the currency, the concern?

Are you guys at all worried about the U.S. dollar losing its reserve currency status? Any concerns about that? You're in the same cap with Joe? Yeah, not my lifetime. Yeah, not anytime soon. But if it did, I don't know that I would be terribly. If the Euro did take, yeah, there are benefits that. That's because you're Italian.

We lose. But I don't know that it's such a, I don't see it as a catastrophic event, right? The British pound was the reserve currency for centuries. And then it wasn't anymore, but UK still goes on, right? So not a cataclysmic event. Do you think that's right? Yeah. Well, no, not a catastrophic event.

But I think what would seriously hurt the dollar's role is all things that the U.S. would be responsible for it. So if we let inflation get wildly out of control, that would make people think twice about the dollar. If we toy a little bit too much about defaulting on the dollar and not paying it back and not making payments quite on time, like we sort of do every year. hit the debt ceiling, you know, if people start to really take that seriously, that could really hurt us. So, so, you know, just general mismanagement of our economy could really hurt the dollar over time, not suddenly, but over time. And so, you know, the lesson is if you're concerned about those things, let's get our house in better shape. Got it. And we've been, the dollar has been the reserve currency now since, really since World War

two really or maybe even one at least yeah you could argue lower one because it Germany came or not Germany came out of that with a lot of debt but sort did great bit in Britain yeah yeah yeah so really and in the British pound was the reserve currency in the 19th century up through world war one yeah so 125 150 or something like that yeah okay all right very good hey you know before we move on to crypto You know, one thing that I've observed I find fascinating, I guess it's in a kind of a weird, wonky sense, is that the dollar, the value of the dollar has been very stable against other currencies. You know, there's chaos in the economy, right?

Pandemic, geopolitical issues, China, U.S. trade war, you know, or, you know, kinds of things, you know, all things going on, but through it all, certainly in recent years. recent years. I mean, you know, if you go back to, you know, last five, six, seven, eight years, the dollar has been stable. And if you look at the dollar on a broad trade weighty basis, so of course the dollar, you can look at it against all these different currencies. And if you look at against these currencies appropriately weighted to reflect, you know, our trading relationship with those countries, the broad trade weighted dollar is today roughly where it's been on average, this is on a real basis, on average since the

the Bretton Woods Agreement collapsed and we went to floating exchange rates back in the early 1970. So over the past 50 years, if you go look at the average real broad trade weight of dollar, we're pretty close. Maybe a little on the high side, you know, right now, but, you know, very, very close. And again, relative stability. Is that something you have, you know, that is just me or is that something you've observed and have thought about? this to anybody to Joe, to Ryan, to Chris. Is this kind of entered into your thinking at all? Yeah, no, no, certainly.

So as we talked about the gold standard in our inflation episode. So certainly that to me is evidence. Why are we even contemplating a change here, right? Things are working out relatively well. Obviously, there are things going to improve, but why would we reject the current environment here? go back to a gold standard that we know has a track record of volatility, right? I agree with you. It's so normal that I think we take it for granted.

Yeah, there are comments around that, Joe. I mean, have you, is that got on your radar screen that an observation I just made about the stability of the currency markets? I mean, historically, you can see big swings in currencies, right? We've seen that in the past, but we just have not seen that. in recent years, despite all the volatility that's going on. That's something that's got on your radar screen. Yeah, and I haven't thought a lot about it.

But to me, it's just another sign that, you know, these markets are deep in liquid. And the advantages that the dollar has are so systematic that it's, it just it it's going to take a long time for anything to replace the dollar and right now no asset has the traits that would be necessary to to do that right right and of course this is a nice segue although i'm not sure i want to make the segue exactly at this moment because there's one of the thing i want to talk about but this makes a nice segue into crypto right one of the issues with crypto obviously bitcoin ethereum and there's a gazillion other ones at this point

is their value fluctuates widely against everything and anything else, right? Particularly, we compare it against the dollar. We tend to compare everything against the dollar. But if you compare it against the dollar, it's like up and down and all around. But before we go to crypto, and I know I've teased this a couple times, I promise we're going to get to crypto. Why, you know, one of the criteria for being a reserve currency is size and, you know, heft in global trade. And obviously talking about size, you've got to, you think China and, you know, in terms of trade, I think the Chinese trade more than the U.S. now. So you add up imports and exports

from China to the rest of the world. It's in sheer numbers and dollars. It's bigger than, I think, the U.S. at this point. And, you know, obviously that's going to continue to be the case, I believe. So that obviously isn't the only criteria for choosing a reserve currency, but why don't you think the Chinese could displace the dollar as a reserve currency? Ryan said not in my lifetime. Well, why do you think that? What is it about the Chinese system that precludes it from, you know, taking on the reserve currency status? Anyone want to take a crack at that question? Yeah.

So, you know, if you're a different, you know, government, the European government say, and you, you, you will, you will, you will, you're building up reserves and you want them, you know, you want them to be there and retain their value in, you know, in times of crisis. So you can have the dollar, which has, you know, got a long history, deep markets, rule and law, pretty stable government policy. Or you could have the Chinese one, which is, you know, increasingly controlled by a, a, a, a, a, a a, you know, hostile dictatorship that, you know, the Communist Party reserves the right to renegotiate international agreements at any time, has strict capital control, so you can't easily change, you know, a couple billion dollars worth of one into something else, all of a sudden.

And, you know, it is not, you know, it looks out for itself and doesn't really care about what impact its policies, national policies have on other countries. You know, it seems faced with that choice, countries are going to choose dollars. Got it. And I don't think, you know, that characterization of the Chinese government is going to change anytime soon. So to summarize, it boils down to property rights most fundamentally, I mean, because the Chinese government can change the rules on who owns what with just a statement, really. And I guess capital controls are, you know, part and postal of that same. It's a tangential, it's in the same vein as property rights, but kind of a different kind of problem. for the wand to become a reserve currency.

You just have the capital controls. People can't take their money in and out of China easily. That's a problem. Yeah. Okay. Very good. Okay. So let's turn to the other currency that people seem to be thinking might ultimately displace the dollar or so-called fiat currencies.

Fiat meaning they're backed by the full faith and credit of government. So you have trust in the government is going to support the value. of that currency and not debase it, not result in two things that are going to result in, you know, high rates of inflation or deflation. You're going to maintain the stability of that currency. And that's crypto. So crypto, you know, people think in this, you know, fiat currency is, you know, in some sense, private, but it's also public, right? Ultimately, it works because it has the backing of a government and institutions that people trust. And crypto is purely private.

At this point, there's no government support to it. So a very different kind of way of operating. So I guess, Joe, I'd like to know, before we dive in here into this conversation, are you, and I know what Ryan and Chris are, but Chris is, I would call it a crypto crazy. You know, he believes in crypto. And Ryan is a crypto denier. You know, he thinks it's going to go into zero. Obviously, I'm mischaracterizing their perspectives.

They, you know, I think they both, and I'll let them speak for themselves on this. But are you a crypto crazy? Do you know, think this is the future or are you a crypto denier? Just so we level set here in the beginning. Yeah. So I guess I'm midway there. I mean, I think the movement and especially Bitcoin have. come up with some valuable innovations like the blockchain, the fact that you don't need a central

money market or moneymaker, you can deal, you know, people can deal directly. You can exchange funds with anybody without somebody intermediating. I think also the ability to do transactions relatively cheaply, especially international transactions, is really important. And I think those innovations would be integrated into the formal market in some way, and probably not just in the financial markets, but other markets will find a way to use things like the blockchain. shame. But I don't see why, like on domestic markets, where increasingly transactions are electronic anyway. You give you a debit card or your credit card. You know, and transactions between

banks are totally electronic. So what is, you know, something like Bitcoin off? in that. And also the transfers domestically are pretty cheap and rapid. Bitcoin or cryptocurrencies could put pressure on them a little bit. But, you know, I don't see what, you know, what the very is, is. What's the value? Why? Yeah. What does it offer that the dollar or the euro in the end doesn't provide? Yeah. And, the crypto market really is still Bitcoin. And Bitcoin's, I think, way too volatile to ever be, you know, in a foreseeable future, a, you know, widely used for making transactions. Maybe as a store value, if people might be correct in thinking that it's going to continue to go up over time

and maybe lose some of these wild swings. But as a medium of transaction, is a medium of pricing products. I don't see it being Bitcoin. Yeah. Well, I think there's a lot to impact there. One thing I think is important for people to recognize is we need to distinguish the blockchain from the cryptocurrency, right? The blockchain is a technology that the cryptocurrency utilizes.

But the blockchain, you know, is a technology know, is a technology that has many potential use cases, although at this point there isn't a whole lot of them, but, you know, it allows for, you know, transparent accounting of transactions between entities, you know, people, businesses, that kind of thing. So it's a, it's a, it's a technology that the, that Bitcoin and Ethereum and other cryptocurrencies use, but, you know, these are independent things. It does add the value that, you know, it is transparent, and you can make sure that, you know, the transactions are, you know, proper in an order.

So it does add value to, you know, Bitcoin and the theorem. But these are, these are independent, you know, kind of things. In terms of the point about the medium of exchange and store of value, you know, my sense is that that's the, those are the two key. sources of value of any currency, right? You use it as a medium of exchange. You know, I get a dollar and I can spend it for, you know, a tube of toothpaste and I can exchange it and I feel confident that the dollar I have in my pocket today is going to buy the same roughly tube of toothpaste a week from now and a month from now.

And the other is it's a store of value. So I can, you know, just put that dollar away and get it, you know, three years from now when I'm in retirement and it's still, you know, it's going to lose a little bit of value because we'll have some inflation, but, you know, I can still use it. And if I take that dollar and I invest in some asset that's producing some kind of interest rate, you know, I can build my wealth and, you know, I have more money when I retire. All of that, both of those values, the medium of exchange and store value depends on stability, right, on the stability of the currency on that that thing is not going to move in value in a big way. And that obviously is not the

case for crypto, right? I mean, it goes up and down all around. Yeah, it's not the case for Bitcoin. It could be the case for some crypto. You know, there's just talk of stable coins where you back, just like in their bank, you, you know, you issue coins or money. And then you back all that money with with liquid assets. And so whenever somebody comes to you and they want to redeem a bunch of the coins, you give them dollars back. And so those stable coins are designed to hold their value relative to whatever is backing them, whether it's the dollar or a mix of currencies.

Okay, just to take a step back. So, okay, we've got Bitcoin Ethereum. We're using those as the poster child. for a cryptocurrency. And now you're saying, okay, yes, everyone now understands that the volatility of the price of Bitcoin and Ethereum makes it less valuable or useful as a store of value or medium of exchange. You know, maybe it's useful as a medium of speculation, but you can't use it as a currency.

So how do I solve that problem? And the way that the market has tried to solve the problem was the so-called stable coins. So what would be an example of a good tether would be an example of a stable coin? And stable coins say, okay, I'm going to, you give me a dollar. I'll give you whatever you, I'll give you the stable coin. And I'll make sure if you give me that stable coin back, you're going to get the dollar back. Right.

And the dollar you give me, I'm going to invest in whatever. You know, I'm going to invest in. And you're saying that solves that problem, or at least addresses that problem of volatility. it makes it more likely to be a medium of exchange. It does as long as the stable coins can be redeemed at any time. And so the worry is like the money markets. Exactly. Great.

And everybody says, oh, we don't need federal backing of money markets. Everybody understands the risks. And then you go into almost depression and a couple of the money markets, you know, break the dollar. the Fed feels compelled and the federal government feels compelled to come in and back everybody out. So, Chris, you were just commenting there. So can you want to explain that risk in a little bit more detail? You know, what's the concern about stable coin at this point in time? It goes right to your point about it being backed a dollar for dollar, right? That promise that a depositor makes in exchanging a dollar bill for a U.S.

a tether or US dollar, whatever stable coin, that that promises ironclad, right? If at the next day, the fund Feather is investing those funds in whatever instruments, and there is a crisis, they may not be able to redeem those coins back for a dollar. So that's the issue I see. I also, I still fail to see what the true value to the consumer, how is this any different? to me than entries in my bank account, electronic entries in my bank account. What is the advantage of paying for something with this coin versus just the debit card or not transfer? That's the value.

Why would you do that? Yeah. I think there are two reasons. One is on international transactions, there are high transaction costs. And so the other one is secrecy, you know, these stable coins or the crypto coins, they don't offer complete privacy or security. But they are pretty secure and anonymous. And so if that's what you want, either for legal or illegal purposes, that would be an asset. or is an asset.

It's also a main regulatory concern. Right. So two fundamental sources of value. If you solve the question of the volatility of the value, which is stable coin, you get two sources of value. One is that it's a better medium of exchange in international transactions. Because right now, let's say I'm a,

immigrant worker in the Central Valley of California. I get my paycheck and I want to get it back to my family, let's say in El Salvador. Previously, I had to go down to the Western Union with my cash. They would turn it into a wire, wire it down to El Salvador. My relative would have to go to the Western Union down there and collect the cash. And of course, Western Union, this could be a two-day, three-day process. Western Union collects its VIG, you know, it takes a fee. And there's reports of, you know, people getting robbed as they come out of the Western Union in El Salvador,

because people know they're going there for getting cash, right? So that's a problem. So here, this could solve that problem to get that money down. And that's why to some of the reasons why El Salvador said, okay, we're going to take Bitcoin as legal tender. Dollars, welcome. You know, we've been dollarized in El Salvador. we'll take bitcoins as well. So does that. And the other value is, as you say, you know, secret. I can move the money around and, you know, it's hard to track. Yeah. And actually,

one other is that if for people who aren't, for, you know, people who don't have bank accounts, it can, it can provide several valuable services, especially, you know, yeah. Here, you know, that population is relatively small in other developing countries, especially when in the rural areas, you know, very few people might have bank accounts. And so this gives them a place to easily, everybody's got a phone. So they can buy stuff, they can put stuff in a savings account. Yeah. Yeah. Go ahead, Chris. Yeah. I was going to say this. I could he see you wanted to say something. Okay.

This is one solution. But, you know, we have other solutions out there too, right? Yeah. I make international transactions as well. A family in Europe, obviously, it's not a developing country, but yeah, I've seen the prices of those transactions falling over time. Can very easily PayPal someone today. So I think the technologies are interesting and we will learn from them. I see this as just an extension of broader fintech.

trends, right? So we had that fintech boom a few years ago, perhaps it's ongoing in terms of lending. And now the banks have largely adopted many of those technologies. So I think it's great that we're experimenting it, but I don't see the long-term viability. I think these, there are other advantages that we've just described or ascribed to the dollar that I think are going to overwhelm the, any advantage of the Bitcoin to provide. I guess the other issue is regulation, right? I mean, the banking system is highly regulated, which adds to the confidence that, you know, money good. If I put my money in the bank and move it in the banking system, you know, that money's there. No one's going to, you know, I'm not going to lose it. You know,

I'm going to get, I'm going to get dollar for dollar. And also money market mutual funds now post financial crisis, right? I mean, you, because before the financial crisis, money market mutual funds could so-called break the buck. One of them did, and that was one of the proximate causes for the cratering of the financial system because people thought, oh, my gosh, this was money good, but it really isn't. I'm going to lose money, and there was a run on money market mutual funds. And so the stable coin is very much, as Joe, you said, the analog to a money market mutual fund, but it's not at this point, not regulated, right, Joe?

I mean, you can't be assured you're going to get your money back. They say you're going to get your money buying, but who knows. Yeah. I mean, they're kind of regulated. And then if you, you know, if you sell these things under a promise, the federal government will hold you to that promise. And so a couple of staple coins have gotten fined because the assets they had in reserve were the assets that they were telling everybody they were.

Okay. But there's an indirect form of regulation. I think most people think, well, you've got to regulate them somewhere in his banks because the government's, you know, going to have to guarantee them at some point. Why would we want the bank? We established the regulations in the banking system to protect against this problem of runs on the system, which are devastating in times of crisis, right? I mean, What happened in the 1930s was a bank run. What happened around the financial crisis? That was a run on money market mutual funds on the financial system. So we know that those are pretty bad things. We don't want that to happen. So why would we let this other system that's setting up that has the same risk not be regulated in the same way?

That doesn't make sense, right? Getting back to it's a wonderful life. Oh, there you go. I like it. It's all there. Full circle. Circle life, yes. It's all there.

Yeah. So I guess Chris's point is, well, once that happens, and logic would dictate that that's going to happen, right? Yeah. I mean, obviously, this is a big debate in Washington right now. And, you know, it's in the legislative process, but feels like at the end of the day, there's going to be more regulation here. So once that happens, the cost of operating stable coin rises to be, you know, more consistent.

And as Chris points out, transferring money and doing all those things that. stable coin can do in the regular banking system better, you know, why stablecoin? Why would you have it? What's the comparative advantage? Why is it going to live, you know, to see another day? I guess the answer is we don't know. Maybe the technology can change in a way that makes it more valuable, but it's hard to see that at the current point in time. But don't you think if there's a run? There was a run on money market mutual funds. The Fed stepped in. Do you think the Fed's going to step into crypto markets? If there's liquidity issue? I don't think so. Why? Not right now? Why not? Yeah, exactly. If they get big.

They have to get much bigger. I mean, they have to pose a contagion effect on the financial system. And I don't think that would. If Bitcoin went to zero tomorrow, I don't think the financial system's going to collapse. How much is instable coin? Do you know what, like, I don't know, is it assets under management, I guess. Do we know? I know the value total crypto right now is about two, so well over two trillion dollars. It got up to three. It sounds like a lot. Yeah. It was. Well, it's come back now, right? It's like down 20%. Depends on the day, I guess. In November, I think it's in three trillion. I think it's relatively minor, but it's been growing rapidly in the last couple of years, two years maybe. Yeah. So I, you know, I kind of agree with Chris.

I don't, you know, I think these companies, the more successful one, are going to push the envelope on technology and services, and hopefully that would get adapted by the incumbents. But, you know, in the end, I think the advantages of fiat currency are so great that it's hard for me to see one of these, you know, emerging. And I think the competition is going to whittle it down to, or two or three, who, you know, fight to be the stable coin. But even then, I think, you know, if you really want a stable coin that's backed 100% by

dollars, why not just half dollars? Yeah. Why do you need this? Exactly. Exactly. Yeah. You need a bank because you want, you want the bank, the bank's going to earn money by lending it at a higher rate to somebody else and it's going to, you know, it is going to, you know, it's

going to, you know, successfully transfer a short-term liability into a long-term asset, but whether cryptocurrency is going to do that's of equal worth. Well, here's the other issue. I mean, we've been talking about the relative merits, but one of the demerits, I think, of the crypto market is it's definitely a vehicle for raw speculation, right? I mean, Speculation in the sense that, you know, I'm just buying this thing because I can, I think I can sell it to the greater, the other fool faster before it falls in value, right? I mean, that, that, again, that, who cares if it's, you know, private parties, not a big deal, can't hurt a lot of people. If prices go down when it, when it does eventually go, because it will go down.

But, you know, if it's big and there were two, three trillion dollars in rising rapidly, that's a whole different ballgame. sucking lots of people in i mean christ did you tell me or was it ryan you saw a bitcoin atm you know yeah it's at my local gas station local gas station right so and there was someone using it i'm curious how it works so next time i go in i'm going to read the instructions what were they putting your american express card in and saying i have no idea one one one hundredth of a bitcoin which is how much that would be that's still a lot of money yeah $1,000. $470.

That would be, yeah, something like that. Yeah. Right. I mean, am I wrong about that? I mean, what do you think? Well, speculation and nefarious. If you are using it for transactions, right? Most of those transactions are not to buy gas, right?

Yeah. Joe, so, I mean, if you, you know, I know you're, you're, you're, you're, you're a, you're, you're, you're, uh, you're, you're, you're, uh, you're, you're, you're, you're, you're. very, I don't think skeptical is the right word, but you're very judicious when you think about, you want to use regulation judiciously. You don't want to overregulate. You don't want to squelch, you know, private activity and innovation. But with that as a prism, tell me if I got that wrong, but it's true. How do you think about regulation of the crypto market? Well, I think we need regulations of stable, of stable. We need that. At a minimum, we need regulations against fraud. If they become any appreciable

size, we need regulations because the Federal Reserve is going to have to worry about backing them in a crisis. Right now, our regulatory approach seems to be that we have five or six existing financial regulators, and they're all sort of jockeying for position and trying to, decide what aspect of cryptocurrency is in their existing jurisdiction and how they should use these existing powers to regulate the economy. I think it would be much better if we step back and we had a broader discussion about how to regulate cryptocurrencies and maybe wrote new rules that applied just to them in assets like them and put them all. all in one regulator rather than having, you know, a couple regulators battle over jurisdiction.

And also preempted state rules so that, you know, if you didn't have to worry about complying with 20 different states that all had their own different rules. You're not against regulation. You're just saying, if we're going to regulate, let's just do it right. Yeah. And I think these, you know, it might be that, you know, 10 years from now, people look back and see China made a big mistake when it banned all these cryptocurrencies and that maybe we benefit a lot because we let them continue and we got a lot of innovation out of it.

Yeah, and that brings up the last thing I'd like to chat about with you, and that is Central Bank digital currency. And as you point out the Chinese, did they actually ban all crypto? You're not allowed to? I believe they did. And they now have, they haven't adopted, but they are, I think they have a proof of concept, let's call it, for a central bank digital currency. Do you want to describe what they're up to and, you know, what CBD is actually all about? Because it's not, it's kind of, it's a digital currency, so it's into the same crypto. It's a block, it's not blockchain based, is it? I don't think it is. No, it'll have to be. Yeah, yeah, right. So, yeah, I've been meaning there.

plug another book. Eshwar Pralad's book on the future of money is just absolutely great on this. And he goes up until about June of this year. So it's got a lot of recent events in and just a wonderful explanation of all these issues. We've got a book list. We've got a book on there. And he. You know, and it's on there. you have i have i don't know how many people have i'm not going to start a book club uh so yeah and he i kind of agree with him that sort of

CBDCs are pretty inevitable um you know these are these are this the central bank now issues dollars uh and and so instead of issuing dollars it would give everybody an electronic account. Well, if you could have a system where just only banks have digital accounts with the Federal Reserve, but that's the system we already have. It's just they're in dollars, not in some other electronic something. But if you had what they call a retail system where a lot of individuals and businesses had their own account,

in these digital dollars, the Fed would issue them. And there's some advantages. There's one that the Fed contains control of the money supply, and all these things are backed in the same way that a dollar bill or a quarter is backed. It could make it easier for the Federal Reserve to conduct monetary policy if it had to inject money into the economy quickly, they could just put money in these accounts overnight where it could aim at certain businesses

or certain types of individuals and give them more money. It would probably displace any other digital coins that think why would you need another coin if you have these. So it has real advantages. It would be tougher to conduct illicit business with a digital. Isn't the downside?

Oh, Chris, go ahead. I've got a couple downsides, but I'm sure you're going there too. No, go ahead. Well, go ahead. I'll start you. I mean, the disadvantage, right, advantage perhaps for greater control, but disadvantaged certainly at commercial banks, right? As you mentioned, we already have a commercial bank digital currency.

Most currencies actually created by the banking system, right? So isn't that, that seems to me as a significant downs. You're putting all the eggs in the basket of the Fed. It is, it is. But you could put these accounts in banks and just allow the Fed to reach into the bank and, you know, add money to the account. or you could have a, you know, you can have a minimum, a maximum size on the account so that most of your money still is in the banking sector.

The banks still get, you know, the vast majority of deposits and use those to lend out. But I agree. It's a serious issue, and you don't want the Fed to be deciding who should get credit. You want the private sector to do that. Go ahead. Go ahead, Chris. I'm sorry. Go ahead.

Go ahead, Mark. I was just going to say, shouldn't we be worried, though, about central government control? I mean, my sense is that's one reason why the Chinese want this because they now have complete control over everything in the payment system. And holy cow, you know, that's a lot of control and power. It just feels, I don't know, big leverage to me. I'd be very, I don't know, is that just misplaced concern? Yeah. Yeah.

I think it's a general problem with technology. You know, we have these security cameras all around and other things. And, you know, on one hand, you want government to be able to stop fraud and stop crime. And on the other hand, you want to protect individuals. And I've always thought that, you know, we need some sort of system where, If the feds or any, you know, the state wants access to certain data, it has to show a court that, well, there was a crime committed here, you know, between this hour and that hour.

And so I want to look at all the security cameras in that area. And then that, you know, the court oversees that examination to make sure that the government doesn't tamper with the records or go beyond it's, you know, what's been allowed. and show that the controls of access by the state is, you know, very restricted to legitimate means. And you could do that, you know, you could set up that sort of a system with a CBDC. Yeah. Well, okay, let me, how do you handicap this, Joe? I mean, in the U.S. 10, let's say 10 years from now, what are the odds that we're going to be moving in the direction of a, central bank digital currency.

I think about 100%. I think it makes sense to do it slowly, to get Congress on board, to have it so everybody, including most of the public, understand what's being done and how it's going to work and why we're doing it.

I don't think we have to race China to set one up, but I think we would do it. Wow. 100%. That's a, that's... Okay, Matt, 98. That's conviction.

Do you have any podcast other than this? You're going to continue to rise every morning? 100%. That's pretty confident. Yeah. Okay. Did Chris, did you hear that, Ryan? I heard it.

Yeah. Do you have a different set of odds? Or do you need to think about it more deeply before you guys? I'll take the under. Good move. Ryan, I'm sure Ryan's the same way. That is my mistake right there. Well, you know, one of those things.

you know, it's going to take a lot longer to happen than people think. And then all of a sudden it's going to happen very quickly, you know, so I don't know about 10 years from now, but it could be a couple of, sorry about my dogs. You know, it is what it is. But it's going to, you know, maybe a generation from now and then all of a sudden. But I think, I suspect it's going to take more than 10 years first to move down this path. I said big change. It feels like to me. Yeah.

Big, big change. Yeah. Anyway, we covered a boatload of ground, as they would say, and I do want to make a couple advertisements. At Marks, Andy. There we go. Never fails. On Twitter.

So my handle is at Mark Zandi. Ryan, last week you told me you were going to tell us what your new Twitter handle is. I forgot to check. I'll have it for you next week. You're playing nonchalant. And Joe, are you on Twitter? I am on Twitter. I think my handle is.

At JV underscore Kennedy. So it doesn't sound like you use it very often. Not too often. I get on in these people I follow. I mean, I don't know who they are. It's just quite a creepy thing. Hey, I'm just saying, Joe, at Mark Sandy. I mean, you know, you can follow me.

Chris, you're not on Twitter, right? I am following you. Oh, you are? Yeah, this week I logged in. I did do that. Okay, fantastic. Very good. Okay, well, anything else anybody wants to bring up? I mean, I know it's getting close to Christmas. So I'm sure people are, want to get on to other things other than listening to the podcast and Central Bank digital currency and Bitcoin and SDRs and reserve currency. I know there's a lot to cover, but very, very important. Thank you, Joe. Really appreciate it. And I always enjoy it. Merry Christmas. Happy New Year. Thanks. You guys, too. Thanks, guys.