Zoltan Pozsar and Perry Mehrling Debate Bretton Woods 3.0

Tracy Alloway (0:14)

Well, hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:19)

And I'm Joe Weisenthal.

Tracy Alloway (0:21)

So we have a very, very special episode for two reasons.

One, we're recording this in front of a live audience. And secondly, we're going to be featuring two of our favorite people to speak to.

Joe Weisenthal (0:32)

Yeah, absolutely right. We're going to be talking about the future of the dollar, which for our entire careers, I feel like, oh, the dollar's, something is going to happen to the dollar. It's going to blow up, people are going to stop using it, whatever. I still don't even know what the question means. And it's like, what is a post-dollar future?

I don't even understand the topic completely, but we have people who actually do.

Tracy Alloway (0:54)

Well, we have a lot of time to dig into it. So without further ado, I'm going to introduce our guests for this particular debate. We have Zoltan Pozsar, strategist at Credit Suisse, and Perry Mehrling, Boston University professor and also the author of the forthcoming book, Money and Empire, Charles P. Kindleberger and the Dollar System. That's already out in the UK. It's coming to the US soon. And you can probably guess from the title what side of the dollar debate Perry sits on.

But why don't we jump into it? Joe kind of gazumped me on that question.

But when we talk about the future of the dollar, what exactly are we talking about? Both of you have spent your entire careers talking about money and specifically different types of money. So what is the dollar?

Perry Mehrling (1:41)

What is the dollar? What is the dollar?

Tracy Alloway (1:43)

What's the dollar?

Perry Mehrling (1:44)

Well, so that's actually a very interesting first question, as a matter of fact, because there's a lot of different kinds of dollars.

And we already know there's the dollars that are printed by the government. They're little green pieces of paper. There's the dollars that are the liability of the Fed that are bank reserves. There's the dollars that are the liability of the banking system, which we use to make payments to each other. But I would particularly put on the table right now, there's the whole offshore dollar system, the Eurodollar system, where there are liabilities of banks that are not American banks and the assets of people who are not American citizens. And that is now the global dollar system, which is, I think, very important to appreciate and that this has grown up basically as the infrastructure of the global trading system.

Tracy Alloway (2:33)

Zoltan?

Zoltan Pozsar (2:35)

I agree with that.

What is the dollar? I think, let me add some things to that. There's all this offshore dollar, which is not only on the balance sheet of non-American banks, but then those balances are held by countries that are either aligned or not aligned with a certain view of the world. And so that's an extra dimension that I think we have learned about when we think about the dollar. There's also the dollar in the context of price stability, where you basically have a unipolar world, where there is one hegemon and basically the commodity trade is in the control of that hegemon. But then there's also a dollar in the world where the commodity market is becoming more geopolitical, resource nationalism is creeping into the picture.

And that has an impact on the price level. It has an impact on inflation. So, I would say that the dollar is a project.

Joe Weisenthal (3:52)

Well, let me ask you this, Zoltan, you've been writing about this Bretton Woods 3 idea, this shift, and of course we've been talking about it a lot. I guess my question is, what is a testable hypothesis of whether you're right? What does something look different, either now or a few years' time?

They would say, yes, we entered into some sort of new global regime.

Zoltan Pozsar (4:16)

Yes. So the first time we talked about Bretton Woods 3.0, I think we said that this is going to be a long-term journey, but it has started.

What are some of the markers since we have first talked about Bretton Woods 3 that would support the thesis? I think a number of things.

We know that the commodity market is no longer exclusively priced in US dollars. We know that certain countries are getting heavily discounted Russian commodities, for example, China, for example, India. We know that those countries are paying renminbi and rupees for those commodities. We know that Europe stopped paying certain countries, stopped paying euros for gas and they paid roubles. Now there is gas flow issues, obviously. But again, I think on the margin, it's no longer the case that commodities equal dollars. That's number one.