Episode Summary
Executive Summary: Episode 248 focuses on the U.S. dollar’s breakdown, why Jeff Snyder thinks QE is not true money printing, and why the real issue is the offshore eurodollar system’s ongoing dollar shortage. Eric and Patrick map the dollar’s technical weakness across major FX pairs and argue that commodities, inflation, and currency trends may be entering a new regime.
Main Topics: Dollar breakdown and FX technicals: Eric and Patrick discuss the decisive break below 92 on the DXY, the implications for further downside, and how the move shows up across EUR, JPY, GBP, CAD, AUD, MXN, ZAR, BRL, RUB, and EUR/JPY. Jeff Snyder’s eurodollar thesis: Jeff argues the dollar system is dysfunctional because offshore eurodollars drive global liquidity, not central bank balance sheets, and that current weakness is not evidence of a true dollar collapse. Why QE is not money printing: Jeff explains that QE only creates bank reserves and repeatedly cites Japan, Europe, and the U.S. as proof that QE/QQE has not produced sustained inflation or currency debasement. Treasuries, deficits, and dollar shortage: Despite record deficits and heavy Treasury issuance, Snyder says auctions remain well bid because a global dollar shortage supports demand for safe liquid collateral rather than triggering a bond or dollar crisis. Commodity and oil-led macro rotation: Patrick links dollar weakness to potential upside in crude and broader commodities, arguing that if the dollar trends lower and production tightens, commodities and commodity currencies could rally for years. MMT as a possible future risk: Eric pushes beyond QE and argues that direct fiscal monetization/Modern Monetary Theory could be a new, genuinely dollar-bearish phase if politicians adopt it at scale.
Key Arguments: QE increases bank reserves but does not equate to broad money creation or direct spending into the real economy. Japan is the clearest case study: huge QQE, negative rates, and overshooting policies did not generate lasting inflation or yen collapse. The problem is the offshore eurodollar system: it creates or destroys global dollar liquidity outside the visible U.S. central bank balance sheet. The world’s complaints about the dollar are about shortage and dysfunction, not inflationary devaluation. Record Treasury issuance has not crowded out demand; dealers continue to bid because Treasuries are valuable collateral in a dollar-short system. A lower DXY does not automatically mean a structural dollar collapse; it may simply be a medium-term cyclical move within a still-broken dollar system. Eric’s counterpoint is that MMT-style direct fiscal monetization could be a different mechanism that might finally prove dollar-bearish in a way QE has not. Patrick believes the more actionable macro trade is a commodity bull market, especially if oil and resource currencies keep strengthening. Gold weakness may be tied to Bitcoin strength; if BTC breaks higher, gold could see another leg lower. The euro is the dominant driver of the dollar index, so the sustainability of a stronger EUR is a key question for the next phase of FX trends.
Data Points: U.S. Dollar Index support: 92 - Eric says a decisive close below 92 triggered the latest acceleration lower in the dollar. DXY level discussed as next target: ~89.90 - Patrick cites the 2018 low as an immediate downside target for the dollar index. Crude oil price discussed: $46 per barrel - January WTI was consolidating near this level with a push toward $50 viewed as likely. Crude oil inventory change: -679,000 barrels - Weekly U.S. crude inventories drew down versus expectations of a build. Cushing inventory change: -317,000 barrels - Cushing, Oklahoma stocks also declined. Gasoline inventory change: +3.5 million barrels - Finished product inventories showed a bullish-looking gasoline build. Distillate inventory change: +2.3 million barrels - Distillate stocks also rose materially. U.S. crude production: 11.1 million barrels/day - Production ticked up by 100,000 barrels/day and was flagged as a key watch item. Potential U.S. production outlook: 5-6 million barrels/day - Eric cites estimates suggesting output could be cut roughly in half over the next year. Z1/Z2 time spread performance: from -$3.20 contango to +$1.30 backwardation - Eric notes the Dec 2021/Dec 2022 spread moved dramatically in favor of backwardation. Gold swing low: $1,762 - Eric says Ola Hansen nailed the technical bottom in gold to the penny. Gold technical level: $1,758 - Eric had previously identified this as the key support area below $1,800. U.S. daily COVID cases: 203,000 - Eric references accelerating pandemic data as a macro risk backdrop. U.S. daily COVID deaths: 2,833 - He cites this as a one-day record at the time. T-bill yield: 8 bps - Eric uses this to illustrate the front end of the curve staying very low even as longer yields rise. 10-year Treasury yield: ~0.92% - Patrick says yields were around 0.92% and seemed to be rolling higher. Australian dollar decline during COVID shock: to ~55 cents - Patrick describes the AUD capitulation before its strong rebound. Mexican peso COVID spike: to ~25 per USD - Patrick highlights the peso’s extreme pandemic move and subsequent normalization. Core CPI in Japan: 1% at best; 3 of 50 months - Jeff says Japan’s overshooting policy never got core CPI above 1% except in three months out of 50. Bank of Japan balance sheet: above 0.5 quadrillion, nearing 0.75 quadrillion - Jeff cites the huge scale of QQE even as inflation remained weak.
Pivotal Quotes: "QE means quantitative easing, which already denotes that the central bank is doing the quantifying and therefore it must already know the right quantity of easing in order to produce the desired inflationary recovery results." — Jeff Snyder: Used to argue that repeated QE rounds undermine the claim that QE is straightforward money printing. "There is no magic number of bank reserves or central bank balance sheet side. There is no long enough period of time for QE." — Jeff Snyder: Snyder summarizes his case that QE has been empirically shown not to cause sustained inflation. "I think if she were here, she would tell us: well, yes, indeed, devaluing the U.S. dollar is to Stephanie Kelton... That's the whole idea." — Eric Townsend: Eric’s argument that MMT-style fiscal monetization could be materially more dollar-bearish than prior QE programs.
Implications: Listeners should treat the dollar move as more than a headline event: it may signal a broader FX and commodity regime shift. But Snyder’s core warning remains that without a real eurodollar-system change, QE-era inflation fears may still be overstated.
From the Episode
Has to be bigger than the last magic number, which in hindsight couldn't have been big enough, right? It's always bigger, bigger. And if you actually think about it, you'll already notice how it falsifies the entire QE premise. I mean, QE means quantitative easing, which already denotes that the central bank is doing the quantifying and therefore it must already know the right quantity of easing in order to produce the desired inflationary recovery results. So if there's any more than a single QE, then straight. Away, you're alerted to the fact that, well, it couldn't have been quantitative, could it? Already something's wrong, something's missing. And you're right, Eric. If you're a central bank and you've screwed up the number, you know, the size of the large-scale asset purchase program, then merely change the size of it and give it a second try, you know, or a third or a fourth or a 24th, as in Japan. You know, the magic number has to be in there somewhere, right? Here's the thing, though: Japan has already done this, they've done this massive upsizing. If you go to slide 13.
To inflation, then QE or QQE, whatever you want to call it, isn't money printing. Okay, so let's net this down to going back to your list of factors for a potential dollar crash. You're basically, all of this is just to say you're unequivocally crossing the first one off, money printing. Yeah, so slide 27: you know, there is no magic number of bank reserves or central bank balance sheet side. There is no long enough period of time for QE. It's 100% empirically established. There's no relationship between the central bank balance sheet. Expansion, an increase in bank reserves, and consumer price increases or acceleration. It just doesn't exist. So, you know, we've got 12 years of that in the West. We've got nearing 20 years of this stuff, this money printing bank reserves in Japan. We've got a range of all sorts of geographies, all kinds of variations in the programs, different lengths, different asset classes being targeted, variations in monthly rates, et cetera. You name it. QE has been tested to death. There really is no doubt about it, except that everyone's still.
Planet, who has my confidence to figure out how to really and truly cause significant downside in the U.S. dollar with genuine bona fide money printing, not just bank reserves, but real, honest to goodness, money printing. It's Professor Stephanie Kelton. And I'm not saying that sarcastically, Patrick. I don't mean in any way to disrespect Professor Kelton. I think if she were here, she would tell us: well, yes, indeed, devaluing the U.S. dollar is to Stephanie Kelton in the Other people who subscribe to this school of thought around modern monetary policy. That's the whole idea. That's the objective of what they want to accomplish. They believe that should be the goal. And I think it's already starting to work for them. So even though I agree completely with Jeff Snyder about how we got here, I think that as we look ahead, we have to expect that there's going to be a whole new generation of money printing. It's not going to be bank reserves. And I think it could be very, very U.S. dollar banks.
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Weekly market commentary by Hedge Fund Manager Erik Townsend and interviews with the brightest minds in the world of finance and macroeconomics. Made possible by funding from Fourth Turning Capital Management, LLC