Dollar Erosion: Understanding The Loss Of Reserve Currency Status

- Everybody welcome to the first seminar of winter quarter. We, we had conflicts with distinguished visitors the first two weeks. That's why we're starting on the third week. We are very happy to have Arvin Krishnamurthy talk today and, and lemme just remind people. So we're gonna go for an hour and 15 minutes to 1 45. And Arvin said it's fine to interrupt with questions. So we're doing it kind of like econ finance seminar rules, although if people get outta hand, feel free to, you know, recapture the floor. Really? Yes. So I think that two of your co-authors are online, Zin Yang Jing and Robert Richmond and Han Lustig, who's at another seminar might be able to join us. And so the title of the talk is Dollar Erosion, understanding the Loss of Reserve Currency Status. Very, very topical. Take it.

- Okay, from here. Thank you, Valerie. Thank you for having me here. Thank you all for coming to listen. All right, so here's what I'm gonna do. I'm gonna walk you through some data, particularly around tariff shock last year and what I use, you've probably seen some of this data, but I would just want you to put, put a bunch of data together and show you that the behavior and the dollar and treasuries was, was weird, right? It was a real change in correlations relative to what we have seen in the past. And I'll, I'll show you some data on that. I think just looking quickly at what has happened in the last two days with the Greenland shock, it sort of looks similar again. So there's been something going on around that. And I'm gonna interpret as I talk you through the data, I'm gonna interpret that the shifts in correlation are due to shifts in the perception of dollar safe assets as the world's reserve asset. That's what I'm gonna argue to you. I'm not gonna argue to you that the world has switched completely to another safe asset as the world reserve asset. But if you imagine that what has happened over time, as we were in a world where we were sort of a hundred percent sure that the dollar asset was the safe asset, and the events over the last year have shifted some of those probabilities, that's a way of understanding some of the changes in asset prices. And so I'll walk you through some data around that. Then I'm gonna shift over a model calibration exercise. And basically I, I want to try to put some numbers down on how to think about endpoints for where this could go. And as I said, I don't think this is where the world is, but I'm gonna put an endpoint of, suppose the reserve asset demand for dollar safe assets just disappears completely. Where would things end up? And in particular, I wanna walk you through, I'll, I'll take you through a computation of where equilibrium interest rates in the US will end up and exercise onto where the real exchange rate in the US will end up. And just to tell you where I'm going, I'm basically gonna be comparing across two steady states, one in which there's world demand for dollar assets as safe assets, and one in which I turned that off to zero. And I'll compare and see how asset prices compare across these two. The comparison I think is useful for a couple of reasons. One, you know, there's been what I call the, we call the Moran hypothesis, which is that the dollar safe, the fact that the US has been, the reserve currency has led to an appreciated dollar and that has had, you know, various knock-on effects. So one of the things you can take away from the computation I'm gonna do is I'm gonna effectively tell you how much higher the dollar was has been because of particularly reserve asset demand. Okay, I'll, I'll give you a number on that. And then the other side of looking at that is to say, suppose we've been moving this probability down from one of, we're always in this safe asset world where, where's the endpoint? Right? We, if we just let this all play out, where will exchange rates re equilibrate? So I'll take you through exchange rate and interest rate computations. And the interest rate computation in particular is very closely related to another computation that I'm gonna take you through, which is, what is the wealth loss to the us? I'm gonna try to put some numbers on what it'll mean and in terms of measured wealth, and you'll see what I mean by measured wealth, if we end up in the state in which reserve asset demand completely disappears,

- Okay? Does this give you any leverage? I'm guessing not 'cause they're steady states about like this is to happen and what, what it means or what it would, what would require up some other currency to take the place in the us

- Yeah. So I, I'll, I'll one could imagine, I I I think there's an exercise that we could do and we, we've thought about, which is, as I said, you can interpret the data as shifting probabilities. If I impose a model on that and tell you this is where things would end up, if the probability goes to one, then I can, I can put some, I can actually probably extract a time series of these probabilities. We haven't done that. And in, in part, you'll, the reason you'll see when I do the exercise part, we're missing many things. Like I'm gonna do an exercise where I'm gonna take reserve asset demand for dollars away, and I'm just gonna show you what happens. You should really think about it almost as like a, it's a partial derivative of the world with respect to one thing. Now surely if that one thing happens, 17 other things will happen too. So I don't, I don't know if I want to go too far down that road because I'm not sure I have the model that has all the things that would happen in that state of the world, right? So I, I view this more as an exercise to give me an idea of magnitudes as to what this means for the world.

- Okay? Talk about time period, this occurs over,

- Yeah, I mean, I, I'll I'll take you through the data and you'll see the data I'm talking about as, as to, as opposed as I think might, you might be asking over what time period might preserve asset demand disappear. And there's nothing in the data that's gonna tell me that. In fact, you know, I think those of us who have looked at quantity data, it's hard to discern big shifts in dollar holdings. There's some uncertainty about the positions because we don't measure that very well. But at present it doesn't look like quantities have shifted dramatically. But I, I mean the, the, the reason to look at asset prices, which is what I'm gonna do, is asset prices are forward looking. So if I tell you in two years it'll disappear, today's price will already pick that up. And so I'm gonna look at everything through the lens of vast prices. Okay? With that, let me walk you through some data. I mean, this is the thing that I think is really striking. If you've paid attention to movements and dollars around times of global financial stress, I hope you can see this, the top there, that's the, the 2008 crisis. And I'm plotting the VIX in orange against the value of the dollar. And you know, the typical pattern during periods of financial panic is the VIX spikes and the dollar appreciates, right? There's sort of this flight to dollar, flight to treasuries thing that you see in the world. Sure,

- Five to 10% in the,

- Yeah,

- Global financial crisis,

- COVID absolutely fair. You know, fairly significant movements in, in dollar exchange rates around these type of periods. Historically, this is the COVID period. The correlation is not quite as strong, but it's still there. It's interesting, it's not quite as strong. Maybe something had already shifted and I'll, I'll come back and say this, this is the march to May, 2025 after the tariff war. And you can see it just goes in the totally the opposite direction, right? This is a, a, a core correlation that looked like was playing out in asset markets, which is when the world blows up, people look to park their safe safety in dollar safe assets. Looked like it wasn't happening here, right? Here's another version of this computation. I'm graphing here. The exchange rate, euro dollar exchange rate, that's the orange curve. And then in blue here is the yield differential between Kenya, European government bonds and, and treasury bonds. And again, you see this pattern that the dollar depreciates, but the yield spread whites, right? In particular, it looks like treasury yields are rising relative to foreign yields. And if you, just to give some magnitudes here, the

- Same thing be true jbs,

- I haven't looked at jbs, I'm, so, I can't, I'm not going tell the other top man. I have some Japanese yields later in the talk, but I haven't looked specifically at this one. This is true across a whole bunch of other currencies I looked at, I looked at as a spec to the uk. That was true there, but I, I don't have a full answer for you. Just to give you an idea of magnitudes here. You know, if you, if you look at these 10 year yield differences, they widen bare on 50 basis points. If you use just long run uncovered interest parity as a benchmark, and you move yields by 50 basis points, basis points, present value that the exchange rate should appreciate by 5% higher, higher returns in the us. Instead the dollar depreciates by six and a half percent. So again, a very clear sign that something is sort of odd around this period. Here's another metric. So I, I'm guessing most of you have seen those two spreads. I'm gonna show you some other numbers that you probably haven't seen before and talk you through them. This is a spread that we have constructed and looked at extensively. It is take the yield on a one year US government bond. So a treasury bill, compare that to the yield on, say, a Canadian government bond. Now if I just take that yield differences, I'm not doing apples to apples because one is in dollars and one is in Canadian dollars. Take the Canadian dollar bond tack on a foreign exchange swap that converts the Canadian dollar cash flows into US dollars. Now the package then of the Canadian government bond with the FX swap is now an equivalently a dollar bond, right? Sort of a Canadian package to dollar bond, but it's a dollar bond. Compare that yield to the US treasury yield. And I'm gonna do that as an average across the G 10 countries. So Japan is included in this one. Why is that an interesting measure? Because it tells you something about world demand in particular for dollar assets, right? If, if, if what has happened and is historically, which is the quantity data certainly suggest the world has heavily held safe assets in US dollars and particularly in treasuries, then this will be an indication of something like excess demand for treasuries relative to other world safe assets. The

- Cost of swaps change.

- You know, at a, at a, at high frequencies there are financial mediation frictions that can influence the FX hedging costs. And that certainly happens at times. This, I'm looking at a sample period from 88 to 2017 and just let me talk you through this. I don't think that's the main thing that that's going on here. Right? Here's that spread. So I'll first notice that spread is basically typically positive. And the way to think of a positive means that foreign above treasuries, so there's been kind of a premium on treasuries. Historically, the premium blows up at certain times. These look, these are typically times where, you know, the US is in some type of the world is in some type of recessionary conditions. What's the first blow up? That's the recession in the US in 93. That's, you know, obviously the tech bubble bursting, that's 2008. This thing averages about 22 basis points, not a huge number, but it blows up at certain times. I'll come back and want to talk to you about the 22 basis points and not what, not a huge number means because I'm really constructing two assets that, you know, from a finance perspective, these things should be zero, right? And the fact that there's even 22 is, is kind of remarkable. And, but the time series is also interesting 'cause the time series goes up during these periods of financial stress, which is very much consistent with a way of thinking about flows into these dollar safe assets in particular during times of financial stress, right? So in 2008 there's a flight, you know, I showed you the VIX and the dollar, the sort of a flight to treasuries, which would exactly pick up in this type of spread. So this is one of the reasons we have used the spread. It's a sort of an attractive spread to, to at a very fine tuned level measure the specialness of dollar safe assets.

- So ar Arvin one. Yeah. One of the other things that happened in, in April,

- Yeah.

- Was that the credit default swap on on dollars?

- Yeah.

- You know, went way up. Yeah, I think it would be interesting too and include that in also because, and that's a reflection of the fact that people no longer view us government bonds as

- Yeah, I'll, I'm gonna show you some, some numbers on that in just the next few slides. Okay. So this is a kind of a historical fact about 22 basis points. We've gone back as far as 88 because that's about as far as we can go back with FX data to construct this consistently. I have a feeling if we went back further, we would see this back into the early eighties. We've done some comparisons of the UK and the US back into the seventies there. The correlations look like they flip sign much more. So if you think of the seventies as a period where the dollar wasn't established as sort of the world's reserve asset, that's very consistent with some of these patterns. All right, lemme flip to bring you to the, to around the tariff shock. Here's the same basis right around April. And what I want you to notice is that as the exchange rate is depreciating, this thing goes negative, not positive, which is what it has historically been. So again, it's very consistent with what looks like sort of a flight away from treasuries. This is one year treasuries, bob, not long-term stuff. So, you know, I'm shouldn't be defaulted. It should, this is not the thing that you would be worried about default. It's kind of remarkable that it goes negative. When we first looked at this, this, this is what sort of jumped out at us that, that the, that this looked

- Not, I'm just gonna interrupt. Yep. Sorry for a second. So the one year treasury credit default swap in April went from 16 basis points to 52. Okay? 52 basis points is a lot.

- It's a big number Okay.

- Because of 22.

- Yep, absolutely. Let me show you some, some other numbers as I go through. What makes you

- Emphasize the short term change as opposed to where it comes back to as if you're thinking about, yeah, is this

- Sorry, I, I I agree. So it, I I, when we first looked at that, I was really struck by the opposite correlation. I think that's really what I wanted to emphasize. The thing moved in the wrong direction relative to historical correlations. Then here's the same construction, and now I'm going backwards in time that around the blue line and the, the, the spread going down is March, April. If you go backwards in time, first of all, notice it turned negative sometime last summer, which is striking, you know, consistent with Bob, what you're saying. But it's really, this spread has been going down since 2022, right? Like, you know, historical numbers, it bounces around as I showed you from the previous graph, you know, averaging 22, but going up as high as one 1.5% in the financial crisis. So this, if I just looked at this pattern, I sort of stopped this at the beginning of 2023. This, I would say this is in the range of normal, but from 2022 down onwards, it's basically been falling. And if you look at it in that light, what had happened in March, April was a event that marked a change in a correlation that already taken place further, the world had already shifted away to some extent in asset pricing land away from dollar safe assets.

- So is there any reason to believe that the spreads should be in variant to levels

- The level of interest rates?

- Yeah. And we had a big surge in inflation. Inflation started coming down, for example.

- Yeah,

- The euro to euro zone had, likewise had, but it differed a bit from country to country. They had some a similar

- Thing. Sorry, I mean, I, I can answer,

- So I'm just

- Saying Yeah, I can answer the question

- Ethereum that I don't know

- About. No, no, there's no theum. I like, look, if, if you want me to put a model on this, which we have a model of this, the end, the model would be something about demand for dollar safe assets. And then if you kind of unpack that and says, where is the demand for dollar safe assets coming from? There are surely macro and monetary factors underlying that of which, you know, world growth, what is happening to interest rates around the world, definitely play a role. So I'm sure that that's there. If I go back, I showed you the longer time series for which we have good data on, we can just take that time series and project that on interest rates. And if you want to, we could do that and sort of strip that out. Not much happens to this competition. But I think the other thing though, which is the, the, the number that really jumps out at me is the fact that it went basically down to zero and then eventually crossed zero. Which, you know, if you told me we were moving from 40 to 20 because of something about two relative monetary policies. Yeah. But to go all the way the other side, that feels like some, there's a, a fundamental change in, in a relationship we looked at

- That's a second secular change sort of interesting in the background is a growing problem of public debt.

- Yes. - From a secular issue, yes. Very slowly time Yes. Being solved, taxation of congress.

- Absolutely. And

- Then the timing with the tariffs, isn't that just the sort of crazy, but they really are crazy. So it really just not updating priors, interacting with this sort of curating fiscal situation or thinking about the role of the secular versus the sort of

- Yeah, so this, this is sort of, this is the sense in which, I mean, I think to me, the way I interpret this is there's events that are moving slowly. There are many things that are going on in the background. The fiscal situation is surely one of them. I'm sure they're especially after tariff. And there are questions about the fed's independence that are probably playing out here. There's a bunch of more macro stuff that's playing out here, and I'm gonna interpret this all through the lens of just put that all together and put a probability on it. And that's about all I can say. I, I can't unpack how much of each of these things is happening in the paper. We do an exercise, we do a kind of a calibration exercise of what happens if you just double US debt and make the fiscal situation worse. What, what, what type of effects? But I, I'm not, I'm uncomfortable ascribing this specifically to one factor or the other.

- Well, there has to be some binding constraints on arbitraging this situation, right? So this is this, so I was reading, I was reading yesterday about that, that treasury swap spread. So it's a difference between the fixed, the fixed rate on the swap and the, and the corresponding treasury and yeah. And there are four different margins there that, you know, that are involved with, with the repo market and you know, and is it a, is it a safe repo? Is it, is it in, you know, in real terms, you know, and it would be interesting, I think to look at what, you know, what, what margins are active here because it, you know, your, your story about the, you know, the safe asset, you know, doesn't address, you know, why, you know, if there's, you know, big demand for safe asset, you say, okay, then the dollar, you know, the dollar should be strong. The the, the rate should be positive, the differential should be positive, but, but there has to be some reason why it's not arbitraged.

- Yeah, I mean I think one, one way of thinking about the arbitrage margin is the arbitrages, the banks for taking the other side to some extent, they surely are, are effectively creating safe assets by shorting. So if you think, imagine the way, the way to think about the world is there's a demand for dollar safe assets. It's provided by, in different forms, by the US government, by different parts of the private sector. Suppose at the the quantities, there's still a spread. Then the, the, the financial system comes in and says, we'll short let is create repo and buy some of the foreign assets to convert them into dollar safe assets. If in if after all of that there's still a spread, it tells you that there's, there's some costs that's left that they're not fully dealing with. I think that relates to what Mike was asking as well. So that's how I kind of interpret these spreads. I'm gonna show you one more number, Bob, and this is related to your treasury point. We did another computation in which, take a look at the, the blue line here. This is European safe rates relative to US repo on a swap basis. Treasuries are off the table here. These are repo rates against safe collateral. This is primarily treasury collateral, but these are repo rates where the underlying repo index is overnight. I think it's reasonable to think that we'd be worried about US government default over the next 30 years. This is overnight repo. That's the underlying index here. I am basically don't believe that the CDS number you mentioned has any bearing on this construction directly. And you can see here that that blue line looks about the same as what I showed you for one year treasuries. It is kind of noteworthy that it doesn't go through zero, right? It remains, it, it follows the same pattern, but it remains slightly above zero during this period. And that tells you something that surely within the US market, the safe asset market within the us there's been some discrimination away from treasuries and towards stuff like overnight repo, which I think is consistent with worries about the fiscal position of the government. But it, the, the zooming out, it's still the case that overall we've had a deterioration in this spread relative to in blue line Euro assets,

- Cash going up while that's going down. Pardon? Cash paper money, a hundred dollars bills. Is there any relationship between like more hundred dollars being issued as rates go down?

- I haven't looked. I have no

- Idea. You do? You don't know. I have no idea. Okay. 'cause some people think that's worth focusing on. Namely, Scott Sumner writes about that stuff all the time. I don't know whether you like it or not, believe it or not, but he's been making a very strong argument on that point.

- I guess, I mean the lens I've always taken through this, through all of this stuff is this is about global portfolios. No large reserve asset managers, private sector agents around the world looking for Well, and is China gonna show up somewhere

- Down the road on your data?

- No, no, I, this is the last bit of data I'm gonna show you. I'm gonna look the model in a second. Okay.

- No, China, - I mean China is an outcome of what, I mean, this is in the background. China must be driving some of these prices, right? Okay. I don't, but I'm, I don't have any quantity data in China to tell me that this is being driven by China. The other, that's the, so when I looked at this, I mean I think this is what I I it, I'm comfortable saying it's not treasury CDS, it's a broad statement about safe assets in the US that's coming off of the blue line. The other comparison I'm doing here is the same spread relative to yen safe assets. So take a yen safe asset rate, swap it into dollars, compare it to the US repo rates, right? And what I want you to notice is basically there's a decline as well. It's a decline that is left a more positive spread at the end. So, you know, you could interpret that as some of the things, there's been shifts and maybe what's happened is some set of investors have shifted or are expected to shift into eurosafe assets. There's less of that that's happened in Japan. The red line is Danish kroner. I thought Danish kroner was an interesting spread to look at because it's basically pegged, pegged to the Euro, but it doesn't have the size of the Euro market. You can see the same pattern, you know, fairly big drops in, in, in spreads, but levels that are higher. So, you know, I, if I look at these three numbers, one second, Marcus. My interpretation is there's, they look the the financial data looked like there's been deterioration of the dollar with respect to everything. I'm not sure that the financial data tell me that there's been a rotation particularly to euros or to anything else. It's just sort of diminishing of the dollar safe asset premium with respect to all assets. Yeah.

- So Arvind, everything you said makes perfect sense in a world where the relative supplies of the different assets in the world are the same. I wanna ask about too much of a good thing if you keep increasing a really terrific liquid safe haven like the US Treasury. Yeah. Eventually people are gonna say, look, I, you know, I don't need that many safe assets enough. If you want me to hold I'm, I'm only gonna do it if you pay me an extra

- Yield.

- Yeah. That's not really, I mean, I don't know. It gets interpretation, but I'm not turning away from the asset. I'm just saying I, yeah, it's terrific. I love it. But I can only take so much of my wealth and put it into, lock it into a safe asset like the treasurer. I gotta do something with the rest of the money.

- Yeah, fair enough. Okay. So I mean there's sort of two things going on here. The supply and demand, it's an upper, it's gotta be an upper limit to the amount people want. Absolutely. For portfolio statement. Perfect. I mean there's clearly supply and demand here that's going,

- It has to turn in elastic at some point and people have been arguing this for 30 years. We're about to get there.

- Yeah. Yeah, we haven't, I mean, I, I have to say when, you know, I, we look at the date of before 2020, there's a spread, we have way more debt post 2020. Remarkably there was still a spread. So supply went up, but it sure looked like world demand kept up with the increased in supply until recently. So I mean in,

- In response to Darrell's question, I don't think that this action could be supplied. Supply hasn't changed that much over this period. I don't have any instruments here and I'm not gonna run any regressions camels back in every

- Yeah.

- Quantity.

- Yeah. Yeah. So it could be that the right way to think about this is as supply has changed, the world is shifting to thinking about an equilibrium where it would be better if demand spread itself across currencies. That's entirely possible. That that is, we were tracing a world in which demand was stable, supply was expanding. At some point, supply got to a point where the world recalibrated demand and said, let's move to a new equilibrium in which we're not a hundred percent in dollars and now let's spread ourselves. That would be consistent with this. And that's the sense in which, I mean, I was telling you put a probability one to a lower probability, I think that would be entirely consistent. You can't tell a pure fixed demand expanding supply story to hit this type of debt.

- The gold is up 80% this year.

- Absolutely. And that, that fits exactly with, you know, if I told you that what's happened is we were a hundred percent in dollar safe assets and we're not so sure and we start to diversify into gold, that fits very consistently with this, with what I'm seeing here.

- Does the rise of crypto play into this as well?

- No. Gold. I feel comfortable that there's something in that, but crypto I have really have

- We seen because of the sanctions probably had made a better major role.

- Yeah, I'm

- Sure. Yeah. The official sector is moving out. It's replaced by less stable funding

- Essentially. Yeah, absolutely. So I mean, if you say, if you, again, if, if the world demand was a mixture of a bunch of these things, some of it was demand that previously never thought about sanctions, suddenly things about sanctions and that's the shift that's happening. That's entirely possible. This is, i i there's a sense in which I feel like I can't, you're, there's a, I cannot unpack how much is equilibrium shift, how much is some of the stuff. What I can tell you is it looks like that's gone away clearly.

- So move away from the macro stuff.

- Yeah.

- There's sort of two kind of background things going on, on reserve currency status. One is the efficiency of making two trades in dollars versus pairwise trades and other things. The markets are too, too thin, the bid as spreads are too large. And then there's what you've estimated as convenience yields with a series of papers. Yep. And that's basically that it's convenient to hold this as collateral in a variety of ways. Yeah. So it's kind of a stock of, yeah. I dunno if I wanna call it quasi quasi buffer or something of that sort. Yeah. Are you able to sort to get at any of that in here?

- So I, again, this data, I'm, I can't tell you, but I'm in your mind I do think they're connected. I mean if, if you ask me to, I would tell you the following, which is that the payment system relies on moving collateral around, it relies on a stock of safe assets in the background to facilitate payment flows. Sure. So those two things are definitely connected. The fact that the dollar market has been the, the liquid asset, safe asset of choice, in part because it's large liquid and safe supports a payment system that allows for easy transactions and why the world typically goes through the dollar to do trades

- At the risk of hitting something. The blockchain is changing that system.

- Absolutely. Yeah.

- And therefore, could that be

- Part of what's going on? Yeah, yeah. But it, for the blockchain to change that system, we have to ask the question, does the blockchain change it in a way that uses dollar safe assets as the backing asset? Like currently what we're thinking about stable coins, which in which case we're sort of sta stay in the same world, or are we moving to a world in which there's some diversified portfolio that's the backing asset. Right? And those are kind of important questions that need to be sorted out. This is my last data slide. I know I haven't answered all the questions that have come up. What I was gonna do next is, you know, I think I've, I've, I explained this, my, my, my take on what has happened in the world is this probability has been shifting around, was stuck at one for a long time and it just looks like it's been bouncing around, right? And it's really kind of striking to see these correlations flip signs. So what I'm gonna do next is I'm gonna walk you through basically a calibrated model exercise and the model I'm gonna, I'm just gonna give you sort of a, a, a schematic version of the model if there's more equations and details in the paper that was circulated. But the model, which I'm gonna write down is one in which I'm gonna argue that the US X has been exporting liquidity services to the rest of the world. That is the rest of the world has been holding assets in dollars and particularly in dollar safe. And as I've emphasized at various times in assets that are particularly low yielding, that has meant that the US collectively has been financing itself cheaply. That's export of a liquidity service, a liquidity. Good. So I'm gonna ask what happens if we just cut that off, right? That's the, the, the, the, the model of computation I'm gonna do is around a very particular model. It's a model in which think of the world as being two blocks in which the rest of the world has held a whole bunch of dollars safe assets on which it's earned low yields. Suppose we turned that off. And the exercise that I'm gonna do is the following. I think the way to think about it is that's the hopefully familiar, usual exchange rate expression that comes from iterating on the UIP condition. Think of the exchange rate today as reflecting, you know, future paths of interest rates between two currencies. This is our special thing. Something about convenience yields on currencies, something about risk premium on currencies, and then some terminal value in 10 years of say the exchange rate. Okay. So today's exchange rate at any one point in time and even over the last year, it's probably reflective of all of these components. I don't know how much each of these components have changed. I'm gonna do a computation that asks how much has this component changed and could it, what would happen to an exchange rate far out in the future. That's why I'm sort of thinking 10 years, if we were to move to a world in which the new steady state ends up being one in which reserve ASCE demand appears. I'm not gonna take a stand on where the reserve asset demand goes to, does it go to euros or anything else? I'm, as I said, I'm just doing kind of a partial exercise to benchmark how big these numbers are as to what would happen if we drop this. Okay. And so these are the, I'll, I'll take you through an exercise and I'll give you answers to these three questions.

- Sterling, with the sterling to dollar switch, maybe the other things were happening the war and Tom may make. Yeah. Okay. I was wondering whether you see similar things. Also just wondering to what extent does help by the fact that substitute, if there was a

- Yeah, - A good substitute out there maybe think would be worse in terms of this.

- Yeah. Yeah. I mean, so we've looked at, at correlations between these convenience field measures and the dollar sterling exchange rate starting around that period, the early seventies, the core vary very strongly. And during that period the signs flip. Like the convenience yield is in some periods on the dollar assets, some periods on the sterling assets. Oh, recently and the, the signs flip and, but it tracks exchange rates fairly well during that period. In the seventies. In the seventies, eighties and

- Nineties.

- Yeah. Disappear. Sterling's gone by the, by eighties, nineties. I mean, I think by the time our others, the picture I showed you shows up like in the late eighties, the convenience deals was pretty much sitting in the dollar asset

- And your treasuries rather than assets. Yeah,

- Yeah. I mean we were looking at one of your treasuries, but one of your treasuries is, is where it was. Okay. So as I said, this is kind of the model I'm gonna put on the table. One in which we have, I want to think about the US as you know, exporting goods, importing goods from the rest of the world. And there's the second thing that the US does, which is exports liquidity services. Okay. I'm gonna try to measure how much liquidity services are being exported. The way I want you to think about these liquidity services is the rest of the world has been holding assets in dollars and earning low rates of return. So you can think of almost like holding money in a bank and getting a very low interest rate on your deposits. You are paying some liquidity services over to the US in order to hold that. So in order to put some numbers on this, I need to measure the size of these liquidity services and I'll tell you how we're gonna do that. Okay. So take those three blocks and just think about sort of the simplest steady state type of analysis. In a steady state, you need imports minus exports to equal the liquidity services. Right? Effectively, if the US is exporting liquidity services to the rest of the world, that is a, that's a net, it's a form of a good that the US is exporting, which allows it to facilitate a larger trade balance plus some constant that maybe has to do with net foreign asset position or stuff that has to do with the capital account. Okay? Write the import minus export relation as increasing in the real exchange rate in the us And effectively the exercise I'm gonna do is gonna measure where liquidity services were. I'm gonna do it particularly in 2016. And that hit some equilibrium with some value of the exchange rate. I'm gonna imagine shutting off liquidity services, which means we gotta move to the left on this curve and that means the dollar has to depreciate. Okay? So we're in a world in which the trade balance was in part buffered by the liquidity services by turn off liquidity services, the trade balance has to readjust by the amount of lost liquidity services. The way that's gonna happen is the exchange rate has to depreciate, how much the exchange rate will depreciate actually just depends upon the slope. What is that slope? That's basically the elasticity of trade with respect exchange rates, which the trade literature has given us some numbers on. So I'm gonna pin down a slope from the trade literature. I'm gonna measure liquidity services, turn that off given a slope, I could tell you how much exchange rates have to move. Okay? And again, as I said, this is just, it's really comparing across two steady states in which I'm holding a whole bunch of other things constantly. The second exercise, which we'll do is the rest of the world has been holding things like US treasuries and they dump all the US treasuries because not such a great asset anymore. US interest rates have to rise. How much do they have to rise? They basically have to rise depending upon the slope of the domestic bond demand group. So if I have an estimate of the slope and I know how much foreign holdings are gonna be dumped, I can figure out how much interest rates. Right? So my, we do this in a more less pictorial way in the model, but basically this is what I'm gonna do. I'm gonna take, we're gonna take you through an exercise in which we put some numbers on these slopes, figure out how much liquidity services are involved and figure out where exchange rates and interest rates will have to readjust

- Foreign hold foreign demand for US bonds can decline because of a perceived deterioration in the quality of the US bonds or because something else comes along that's better.

- Yes.

- Those two things have seem to have very different implications for domestic than for US bonds. I see. So, but you're, but you're holding the, the curve stable there.

- So I don't think it, I don't think it'll affect this guy. I think you're saying it's gonna affect this

- Guy. Yeah, yeah, exactly. I'm asking a question about that. Yeah. So, so there's an implicit assumption there about nature. It's a weird world in which suddenly the rest of the world doesn't wanna hold us

- And the US wants to continue to hold it.

- Yeah. At the same, on the same terms as before.

- Okay. It's a fair point. I, I agree with you. So I'm gonna give you a number and I'm gonna pick the slope based upon historical data. And I think you're telling me the slope has probably changed as well, so I it's totally a fair point. Maybe I, my, I mean my, just if I just think that through logically probably that slope is increased, right? I'm less willing to absorb and I'm gonna give you a number on interest rates and increase it. You

- Just, this is really a slightly off Yeah. Based on your having this one variable model rather than 20. Yeah. Do you feel comfortable enough to make investment decisions on currencies? And do you,

- IIII, I kind of, I told you this at the start, which is all I'm doing is putting a size on an effect.

- No, I understand.

- That's all

- I'm gonna do. But I mean, obviously you're informing yourself and others about things that are, have been happening and Yeah. Trend lines and how you're attributing a lot in the trend lines to a variable

- Yeah.

- Even though others would affect it.

- Yeah. - So just seems to me that this should inform investment decisions trading currencies out to the four of this limit. Maybe you can, so you don't avoid the day-to-day fluctuations. And so do you,

- Do I answer that question I have?

- You don't have to

- Never mind question do answer that question I have. You have to tell, I have to tell you what my,

- I keep asking everybody, but portfolio research, maybe I should,

- Might be priced in

- By, okay, so here's, here's kind of the, the underlying calibration data. We, we, oops, we go and measure the total quantity of safe bonds in the us So these are treasuries, commercial paper, repayable, mortgage backed securities, bank deposits. So we kind of construct a, a a, an aggregate of what we think of as safe assets that contain convenience deals within the us. That number in 2016 is about 150% of GDP. And then from the flow funds, we can figure out what the share is of that stuff is held by foreign investors, right? So that's another number. It's 30% of the total holding. So it's about 45% of us GDPI need and I need to, so that's effectively what foreign is holding the liquidity services that are being exported on that is take that quantity and multiply it by the convenience, right? How much lower are US interest rates? How much are, is the rest of the world paying on a flow basis in order to keep their money in dollar safe assets? I'm gonna put a number on that. I'm gonna share, give you a number, 2%. I'll tell you, explain to you where I get that number from. We need a slope for, for this trade elasticity. It's basically coming from the trade literature. I'm gonna use 0.3. Steven, you can tell me if that's a, a reasonable number. And then I need a slope here. And this is related to Steve, your question. I'm gonna use a bond demand curve elasticity. I'll start with that. It's basically from my JP paper with Annette, which is admittedly historical data, annual data. It gets us a nice demand curve. I'm gonna use that as my curve. Okay? And if you tell me it's wrong and it's becomes steeper, I'm totally with you.

- The data in your paper with your JP paper that yeah, you had a convenience shield, a 50 basis point 75. Okay? 75. Now you've got something 2%, three times that. Yeah. From, but this is estimated went on more recent data.

- No, it's, I, I think, let, let me talk, talk you through the 2% and I'll, I'll explain. I, I've, I've come to understand the falling, which is we were measuring in that, in that paper the spread between AAA corporates and treasuries and calling that a convenience yield on treasuries. That is making a zero assumption. The zero assumption being that AAA corporates had no convenience. Yet I've come to realize that's not true. That in fact aaa, AAA treasury bonds are also a very kind of special asset. And that when we, when I take that 75, it's actually a lower bound and I really should be, if I, I, if I really wanted a full convenience field, I should be using something even higher. Like my, my colleagues at the GSP, Ben Bert, Sebastian Ella and co-authors have tried to use equity returns as the benchmark relative to treasuries to measure a convenience, right? Which I think conceptually is the correct thing to do, but of course equity returns are super noisy. So when you do that construction, you're gonna add lots of measurement error. The nice thing about looking at aaas versus treasuries, which is what Annette and I did, is one side, both sides are relatively low free of risk. So you, you feel like you can pick up something much more cleanly and that has been a general issue. In these convenience you'll measurements, the more accurate the measure, the smaller the number you're gonna get. And so you need to make some guesstimates around where, I'll tell you where, where I'm gonna get the 2% from the wealth

- Transfer. You're gonna use the

- 2%, I'm gonna use the 2%. If you want to, you can double, you can have my numbers if you like 75 better than adjust, everything is linear here. So it's all you. This is just to put some numbers on the table. Okay, so this one is clear, and I think I agree with Steve's caveat. Here's where the 2% is coming from. So I showed you this, this spread before, and I told you this thing average around 22 basis points. What is this? This is a CIP wedge between two government bonds. Okay? It's an excess premium on holding treasuries relative to rest of the world's foreign government bonds. Now, the right number for the liquidity service computation is an uncovered interest parity competition. It's on an uncovered interest parity basis. How much do I want to hold dollar safe assets relative to say European safe assets? That's really the number I should be looking at. That's not what this number is. And it's, it's related, Mike, it's this is taking the Canadian bond and converting it in dollars. So I've sort of, I'm putting, taking two assets, one of which is effectively like a better dollar than the other, right? It's the Canadian bond FX swapped into dollars. Now it's a dollar asset and I'm comparing to treasuries and that's a, that's a, that's a number. It's, it's gonna be a lower bound on what I want to do. I really, what I'm really interested in is if you just offered me and asked me, asked the world investor, you could hold your money in Canadian or you could hold your money in dollars, how much more are you willing to pay on an uncovered basis? Okay, that's a different number differential.

- Pardon? Depends on the inflation differential.

- Okay. So the, what we have done in our papers is we've said we've noticed the falling, there's a very strong relation, oops, between the CIP wedge movements and the movements of the exchange rate. So when CIP wedges grow increase dollar exchange rate appreciates the dollar exchange rate capitalizes the full UIP deviation, right? If you just think about the exchange rate expression, it reflects UIP differences. So I, the, based on the code movement of this wedge and the dollar exchange rate, I can extract how much CIP implies for UIP. That ratio from our estimates is about 10 to one. So we get about a 20 basis point average number here, multiply that by about 10, that gets us the 2%. So what we, our, our underlying computation in this e exercise is the, what I really like to know is how much has the world been on paying to hold dollar assets relative to other world assets? That's really a UIP thing. I need to, I need to find some way to get at that. And this is the way, this is where the 2% comes from.

- Okay? The uncovering is

- There's an, there's, there's some assumptions here that gets you to a bigger number. If you, if you want 75, I'm happy with that. You can just have my numbers. Here's another type of number you can look at to try to benchmark this. And now this is within the us take investment grade corporates, CDS, hedge them and subtract that from a safe rate. This is similar to the type of things that Annette and I have used that in the past. This is a premium, the red is the premium relative to repo, which is, you know, over the last five years is numbers ranging from, you know, something like 75 to 90 basis points. So I'm, you know, if you told me, look, your 2% number is too high, I'm only gonna give you 1% half my numbers, I'm fine with that too. Okay. It's interesting. And this is related, Bob, to your point, this is the same spread take investment grade corporates relative CDS attract that to treasuries. That looks like, you know, treasuries don't look like as good collateral repo still looks like a safe asset. That's I think very one thing that's apart from what I'm seeing sort of an interesting fact in the us. Okay. So those are the two numbers I'm gonna put in and then I'm gonna stake, stake those numbers and just do the computation. So effectively what I'm doing is in the background, there's a model in which ex services are being exported and I just compute the model under two steady states. One in which I turn off liquidity demand. The baseline we're doing is think about the world in 2016 and then I'm gonna compare it to a world in which we shut the whole thing off. This is the difference in the exchange rate across these two steady states. So seven, that's 7.6% depreciated, not a huge number. I just want you to notice that that's the number interest rates in the US and admittedly Steve, to your point with the historical slope end up rising by about 92 basis points. Okay? So lemme just kind of interpret some of those numbers for you. This is really what we're doing. We are comparing across steady states. As I said, we're holding everything else fixed. It's a real exchange rate. You know, when we first did this number, 7.6% doesn't look like a very big number. In fact, I, I think one of the takeaways I had from doing this computation is the exchange rate impact of shifting out is actually small. 92 basis points is a big number, right? I, I think that my takeaway from these computations was exchange rate impact, small interest rate impact large and perhaps even larger. Why is the exchange rate impact small? And I've put big numbers in here. I mean, I've put in a 2% convenience yield. I've given this thing a fair amount of room to work. And the answer, I mean it's, it's, we're using a long run trade elasticity and basically that's what's going on. So it's reasonable to think, you know, we have more inelastic measures at the short run and maybe you can use those and get bigger numbers in the paper. We also use asymmetric elasticities, like I think there's reason to think that the US export elasticity is different than the US import elasticity. You can try numbers like that, but that's really what's driving it. It's the 0.3. Coupled with this, which is giving us about 7.6%. As I said, it's a long run real exchange rate. You know, inflation paths of monetary policy all will matter of course about the current exchange rate. But this is sort of just a partial exercise to see to size this effect.

- Yeah. So you've said why, you know, you can't say much about dynamics, which I get, but is there potentially another plausible, more plausible maybe counterfactual, which is not that the demand disappears for the US as a safe asset Yes. But becomes more like, 'cause other, other, other, yeah. Currencies are used, right? Absolutely. It becomes more like other countries.

- Yes.

- And I don't have no idea what those numbers look like. Sure. Is that still a big reduction in

- Easy to do, right? Like I, we could, we could, another exercise which we could easily do is make the US move reserve asset to the world portfolio, right? Right. We've said it to zero so we could move it to the world portfolio. And I, I could tell you what those numbers are. I don't have them off the top of my head, but it'd be easy to do. Okay. Right. Or another exercise we could do is shift it from the US to the rest of the world. Right. Kind of do the reverse and then these numbers would be double what they're

- Follow up on my previous comment. Yeah. There's a useful way to think about it or potentially useful. You can tell me.

- So - If you think that the reduction in the foreign demand for US assets is a repugnant effect or a fear of exp appropriation or subject to sanctions, if your assets are held in dollars Yeah. You can see why that might not alter the slope for domestic investors.

- Yes.

- On the other hand, if you think it's about a general deterioration in the credit worthiness of the US government, then you would expect to get bigger. A slope change. A slope change and playing bigger numbers. So, so to some extent this which, which interpretation you prefer and what you've done or the slope or combined with the slope steepening.

- Yeah. - Depends on what you think is really going on underlying, you know, behind this. Yeah. This change in the demand for dollars, the Trump what? Yeah, exactly. But, but the, the thing about sanctions, the sanctions one that seems like, I don't

- Know this, this is, I I think what you're telling me is this is probably most cons. The the calibration I've done is most consistent with a sanction story. It's not consistent with increased.

- That's, that's how I would think about it.

- I think that's, that's a fair point. Yeah. I mean I, I think on an increasing US risk, I wouldn't know I, off the top of my head what to do. Like I, I know that we should increase the slope. How much? I don't have a benchmark. I'll think about it, but it's a, it's a totally valid point, especially since what it looks to us is the action is an interest rate landfill.

- Yeah. It's a, that is

- A big effect. Effect. It could be bigger if, it could be even bigger than this. Yeah. So

- The, are you holding the Euro interest rate constant?

- I'm holding, as I said, this is, I'm holding every,

- So I mean presumably they're moving into,

- So all, all the caveats have told you before.

- Yes.

- I'm not, this is why I'm not trying to explain the high frequency movements in the dollar,

- Not the general liquidity model of the world asset.

- Yeah. It's, I'm, it's a general liquidity model in which I'm holding a bunch of reaction functions the same. Okay. I mean, you decide, I I still find the 7.6% number. It's at least it gave me an idea as to how big this effect is on the exchange

- Rate. It seems pretty plausible given what we saw in COVID and the great recession. Sure.

- Yeah. And it's also, as I said, it's an answer to 7.6% is not a big number. If the Miran hypothesis was that was the cause of manufacturing jobs, I think one would have to look elsewhere. It just doesn't look like that could be, yeah. That, that's an important point. That's a, that's a, it could just, couldn't possibly be that big according to this. Right. Here's another way of thinking about this, and this is really building off of the, the 90 basis point number, the 0.9% number. You can, you know, a different way of interpreting the equilibrium we've been in is that the US has an asset in the background that pays a dividend. And that dividend, which is the liquidity services, the rest of the world buys is what allows us to run, you know, partially offsets the trade deficit. So another question I could do is, what is the value of that asset that gets very directly to this 90 basis point number that I've shown you? So I'm gonna do a competition where I'm just gonna take my, now I'm gonna use 45% of GDP of dollar bonds. That's what the rest of the world holds. I'm gonna use 2%, Mike, if you wanna have it, please go ahead and have it. And as I do this computation, and I, I'm gonna ask, what is the value of that asset? Right? That's a, that's a, a flow of goods that the US has had for a while. Suppose you were to lose that 0.9% as a flow of GDP. It should, something should change, right? That asset valuation should be capitalized in a bunch of places. Like, if I think about it, the most direct places it should be capitalized is in the franchise values of safe asset issuers like banks. You know, there's been can, yep.

- Can you look at the Chinese wine? Is that that as, as an alternative?

- I'm in what sense? As

- A, as a currency.

- Oh, you're saying in the world. Could that be the case? Absolutely. I, again, I'm not taking a stand at this point on where the money goes. Right. I'm just taking a stand on it goes away from the dollar. Right. Obviously if, depending upon where it's gonna go to the constellation of currencies, will and interest rates will move differently, right? It, I think it, so asset values should be somewhere in, in equities, in collateral assets like housing, in the financing cost of the US government. So something about the PV of the future tax burden. I don't know where exactly it's sitting. I'm just gonna take a very macro exercise and just PV this thing. Okay. So here is another computation. Take 0.9% of GDP. It's a loss on a slice of GDP, right? Which think of GDP as a risky growing stream. And now this is just simple finance at this point. We used a QRS valuation model to put some numbers down. Aqs valuation model is a 1.7% risk-free plus equity risk premium 1.6%. And we need a growth estimate for GDP, which we're gonna use 1.8%. We need a beta on GDP. So to figure out what the discount rate should be, we're use, you're gonna use a beta of two thirds. This is from some of my co-authors. Other work. If you just take those two, those numbers, take the senior edge, do a, just a PV formula, R minus G, it's 93% of GDP or roughly 29 trillion. Okay. If you wanna drop my convenience yield from 2% to 1%, just have that number. That's a big number. Green. Yeah. It's a lot of, yeah. So I, I think, as I said, I I, the, the thing I took away from this exercise is that the big effects are not in exchange rate. They're in, in the asset valuation market for the us And you know, this, these are just rough estimates. I don't want, I'm not gonna tie my hands to 29 trillion, but it's in, that's the type of number that if you want exorbitant privilege has been worth to the us

- This is assuming about the term structure of the debt.

- No, no, I I'm not not taking any, the dollar holdings say they're all in one year treasury. So it doesn't matter. So I all, I'm pre I'm present valuing the, the convenience yield flow, whether it's coming from the rest of the world, it assumes that that's gonna be rolled over continually Right. 0.9% of GB forever. That's, that's what, that's the point. So, so it, the, the underlying assumption was the world was one in which the rest of the world wanted to hold dollar safe assets was paying up this 2% convenience yield on an annual flow basis. They were paying it to, to the treasury. They were paying it to banks. They were paying it to, to the housing market in the form of lower cheaper mortgages. They were paying it in all sorts of places. Right. I'm not, I I, I'm not gonna distinguish between all those different places.

- That's, that's my only point that you're just assuming it goes on forever. And Yes. Okay. And you can consider other scenarios where this unfolds in a way where people change their term structure. They have, they hedge that in various ways. Ah, this gets adjusted. So no question up there, Axel.

- Yes. Hi. I come as a practitioner and so apologies, I don't, don't perfectly fit into the model. When I think about this liquidity reserve, I think about it in the context, and you, you referenced April 2nd last year, I think about it in terms of barriers to trade interrupting not just the flow of goods, but also in the context of a trade deficit, the flow of currency. And so to me, the, the liquidity services are not external, but an integral part. And then you can, you could also see that, that when the terrorists were imposed that the bond yields were rising because the financing happened more domestically. I was just wondering how that jives with the sort of model that you have presented, whether that's pardon or not. And then the, the other part I just wanted to, to to point out, a lot of the times when there's a discussion about these dec equivalent of liquidity services, the US acting as a bank or a hedge fund, or the exorbitant privilege, however, one wants to phrase that. People say, oh, the US won't lose that because there's no alternative. And then of course, in currencies, we're always thinking about the currency payer, if I'm not mistaken, there does not need to be an alternative that the, that the alternative that we we're heading towards is a global disintegration where there's less liquidity in the world. And I, I, I just wanted to have your thoughts on those. That would be great.

- I mean, on, on your first point, I think the, the economics that you outline are in the model that is, it's, it is, there's a coupling in the, in the model between the, what's happening in the goods market and what is happening in the financial market of holding liquidity in dollars. Those two things are coupled. So I think it captures the economics that you're after, right? The, the broader point you're making about what an, a new equilibrium would look like. Again, I, there's nothing I've shown you that sheds any light on that. I'm happy to talk about it because I've thought about it and you know, my read on the world and in history is that at times the world has grappled towards other reserve currencies. And those periods are volatile times, which are not so great. The seventies weren't great, the thirties weren't great. So

- Yeah, it gets to the point that if one envisions the dollar no longer being the global reserve currency, yeah. That's something much worse than the 29 trillion will probably be going on.

- Yeah, there's bunch. So as I said, worse things like that, many other things could be happening along there and it's probably something really ugly. I agree. I I, that's all I have to

- Show, show you. So that's my confus. Yeah, no, that's very helpful. Thanks. It was just one of, is g should

- Be actually a global growth rate.

- G should be global. The demand comes from based on the global market. Yes. It should be global growth. You're, you're right, it should be global growth.

- Yeah. Yeah. So I, Marcus just pointed out I'm using us GDP growth to grow this dividend. But if you think that it's world demand, and it's certainly the case that world GDP and world demand for safe assets in dollar assets has grown faster than us, GDP, that's probably the right number to use. So it could be even larger than this.

- Yeah. What's the present value of GDP to compare this, to do the

- Multiplying that's

- Multiply 29 trillion kind of shrieks out as a huge number. Yeah. Because relative to the present value of GDP, it's kind of modest.

- Absolutely. Hundred percent. Can I just go back? So I think your, your exchange rate point that these, even this, you know, just shutting off the demand for foreign US foreign demand for US treasuries entirely as the 7.6%, in fact, that that is a, that is a striking result in the modernness of the size I want. And, and so I, and it speaks to these issues that Moran and others have raised and the many take quite seriously. So are there, can you help me think about whether there are reasons beyond your framework that could, could let lead that effect to be much bigger than you've estimated it to be? Or should I really think of this as a, a solid number that I can say at least puts an upward bound? I feel

- Like I've, I've, I mean, I, I think this has come up. I feel like I've given it within the context of No, within the context of given your,

- I given it as much room as possible. You have, I, I want, yeah. I'm groping to help me think about your own framework and its potential deficiencies in this respect. So is there something, is there some other reasonable framework I might bring to bear that would make that number bigger

- Exchange rate effects?

- Say it again?

- Talking about the exchange rate effects.

- Yeah, the exchange rate effects. 'cause 'cause that is, there's many interesting things that come out of your analysis, but that's one, that's that thing that jumps up I find quite striking that I have not seen before.

- I mean, again, I, so it's a real exchange rate. Yeah, well that, that seems like the right one. That seems like the right thing to do. Yeah. I mean, when, when people look at the world, they're used to thinking about paths of monetary policy, which are moving at the high frequency. I'm sure that the movements in the dollar last year have been driven by a bunch of others. This is just a little stub of that valuation equation. But this is the right stub for the long run question. Right. That's why what is missing? I, I don't have an answer. Right.

- I guess an an offsetting factor would be that if this were to occur, then presumably the US would no longer be the world's policemen and we would benefit from reduced defense spending, although there might be in more war happen as a result.

- Yeah, yeah. Well, what would happen to sea lanes? So there may be a sharp decline in global trade. Yeah,

- I, Steve, there's one, one thing that I think

- Along with that decrease in defense spending,

- Which we've, we've run through. So the, if you, if you take the historical trade elasticity and you slap on tariffs, then effectively the size of trade is shrinking, right? Which means that in order to readjust to a loss of liquidity services, which is the same loss with a smaller trade, smaller adjustment, you, it's a bigger percentage adjustment, which means exchanger has to move more. So, you know, one way of going to, to make this number bigger is to affect, you have to cha slow change the slope, right? And there's different ways of changing that slope. One way of one exercise, which we've done in the paper is do a combination of tariffs and lose and lose the dollar. Lose the dollar status. Yeah. Oh, okay. So that maybe that's one answer. I am, I'm all here though, because this, as I, when we did this computation, this was the thing that jumped out at me. The, it jumped out at me too.

- I don't know if it's in the paper, I apologize for not reading the paper in advance, but something that would be useful would be to just lay out a table with different parameter values and seeing what's what happens.

- Yeah. So I, I'm, I'm showing you kind of our baseline. The paper has a bunch of different ca we have different slopes that we use from different papers to try to get some benchmarks.

- So in, in the model there, the foreign country has demand for safe asset for US safe assets. But there's, there's no reverse part. Yeah,

- Yeah. I'm turning, I'm turning it off.

- Yeah. Shouldn't that be there to,

- Yeah. Okay. So actually maybe that's a, that's a better answer to Steve's question as well. That's a good point. If we flipped it and made the, the, the new steady state one in which the US buys the foreign asset, then I mean symmetrically in a sense it would double the numbers maybe. That's a good answer. Right. And that's, I think that I agree with you, Bob. That's a better answer to Steve's question. So,

- So you, you, in response to the, the other question I guess was the same question you said, you said, you know, your framework's more like the, the sanctions of fact than the fiscal position, longer fiscal position back. But in your early work, you know, the, the empirical work at the beginning, maybe I, I mean maybe there aren't clean events that raise the, you know, that sort of raise the relative demand of a country to try to replace the us but think about,

- Yeah,

- War with Ukraine sanctions, alternative currencies to trade in. I mean, do any of those show up in the data?

- No, I mean there, there, over the sa over the p other, the other paper that I showed you a little bit of, we ended our sample in 2018. There's nothing that looks like everything looks like dollars more dollars, please. More dollars. So I have no hint of an another correlation. The only hint that Steve asked about this is the, the seventies period with the UK and the us there's, there's some hints of other things going on there. Sorry, Steve, just to come back to you. I think I, I could, I could put the other side and I could get a bigger number and that would be interesting. It would not be directly about the Moran hypothesis though, which is really about the 7.6, right? Right. Because that's about how much has world demand for us assets led to an appreciated dollar. And so there's an asset pricing question about where the Moran

- View, it seems the benchmark ought to be something like the US is just part of the global portfolio share of safe assets, maybe equal to its share of world GDP. Perfect. And then, then,

- Then it would be even smaller than 7.6 and you

- Said yields maybe too high.

- Yeah. And that would be an even smaller number than 7.6 if that's the case.

- But if you were to sell some other goods, also it change to exchange. Right. Now

- I'm steady stating. Right. So yes, just thought particular good. You're selling, you, you're saying if the, but again, like this is all comes back to the partial exercise, right? You're saying suppose tariffs came or US was in exporting or importing totally different goods, then that's a different exercise.

- What, what I'm trying to grope towards and is it, it is important if you can put out into the public discourse in some way that people can understand that the particular concern that Moran raised cannot be a very big source Yes. Of USD industrialization. That that is an important Yes. I mean I'm not particularly sympathetic to that view anyway, but some people are.

- Yeah.

- And if one could show that no, that really can't be what's going on, that would be a very useful public

- Service. So Steve, what more would you like to see?

- No, I like what you've done already. I'm, I'm, yeah, I mean I, I've seen it before and so it's resonating with

- Me.

- What I, what would make you more, what I would like to see, what I would like to see, and I'll talk to you about this later, is I'd like to see you write this up in five or 10 pages in a way that the Morans of the world might understand.

- Okay.

- That's a challenge

- M sure. I'm capable of that big

- Demand

- Ideally.

- So if we take a bigger step back, the forecast accuracy in the exchange market and the bond markets has, has missed almost every big trend. Badly. Yeah. They missed the inflation of the seventies, the disinflation, the eighties when the Fed lowered the discount rate at the fund funds rate to zero in December of 2009. The bond market expect stay there for nine months and stay there for seven years. I could go on and on. So if something as big as you're talking about happens, like we're shutting off, I guess one question is, I, I'd be interested in a wide range of understanding of how financial markets would react. They've got

- Brexit, right? The pound depreciated greatly and British growth prospects in the aftermath have been pretty, you know, so that was like 1, 1 1 on the other side of the ledger of your examples. Yeah. Yeah.

- I'm not saying they're always wrong, I'm just saying for, for many of the big events in US economic history since Bretton Woods,

- I mean the, you know, the, the historical shifts of reserve currencies happens over decade, two decades, centuries. Yeah. This is slow moving stuff. It's not Brexit. So I'm not sure one should ask for a quick response.

- Yeah. You know, it's also, I think Rogoff makes this point quite frequently that there's never been a global reserve currency as dominant in the, in the exchange system as the dollar is. The pound was never that the gilder and it was before the Yeah,

- In the financialized world it matters anymore. Your answer will have to wait.

- He knows what Marie Christine says. Well, lots of food for thought. Thank you so much, Arthur.