The Fed Hasn’t Done This in Over 40 Years!! Here’s What You Must Know

I've been waiting a long time a long time to make this video to ask this question is Kevin Walsh about to put money back into the Federal Reserve Now at first to those who aren't familiar with your dollar University that question may sound strange after all isn't the Fed the center of the Monetary universe its officials talk about what they call monetary policy They they testify before Congress about it. They issue statements with the word monetary in it yet for decades And I mean decades there was no actual money in anything the Fed said or did but That might be finally about to change the Federal Reserve's latest key report included almost an entire page Discussing the money supply and during his Senate testimony this week Fed chair Kevin Walsh jokingly called it quote an Easter egg that we hid in there to see if anyone read the release now Walsh was careful to say I don't show up here In front of Congress as a monetarist But he also said monetary aggregates such as m2 should be part of his word the mosaic of information Examined by central bankers and that sounds completely reasonable In fact, it's so reasonable that the first question everyone should be asking themselves is why wasn't money part of the mosaic all along? The truth is the real truth is it hasn't been for decades What Walsh is doing by putting a little money info back into the Fed is Effectively admitting two major pieces one what I've been telling you all along That by not being a central bank and monitoring money officials have been blind Not accessing the wealth of information that money and money circulation in particular Provides and the second bigger part is no the Federal Reserve is not a central bank They haven't seriously discussed money since the 1980s what they call monetary policy It's interest rate policy by purposeful disguise Kevin Walsh is letting the cat out of the bag a little bit about the biggest lie in a monetary history So let's dig into what this is and what a Fed talking about money finally might actually mean moving forward now first We got to be precise about what just changed the Federal Reserve never completely stopped calculating or releasing m2 Money stock data continue to appear in the Fed statistical releases What disappeared was money significance within the policy framework money supply became something the Fed technically published But practically ignored was largely excluded from the institution's flagship analysis It's policy communications and most importantly money played zero role in the models that officials used to explain Inflation growth financial conditions basically everything they do and I'm not joking You wonder how the central bank could be so blind to the monetary crisis in 2008 Well, it's econometric models had no monetary input whatsoever Instead the Fed emphasizes interest rates unemployment or GDP consumer prices the public's inflation expectations basically macro not money Worsh is now elevated money supply information back into a key policy report for the first time in literally Decades not as a primary source for the Fed to rely on but at least it's back in the official conversation That's the real change Money is being invited back into policy discussion after spending decades outside the room and for your dollar University This is at least partial validation of what we've been saying the entire time Central bankers have been attempting to conduct monetary policy without the monetary part of it interest rates are not money They've been trying to fly an airplane without knowing how much fuels in the tank where the fuel lines go Whether fuel is even reaching the engines instead They look at the plane's altitude speed or passenger behavior then work backward to guess what the engines must be doing So Worsh is mosaic it's a positive step but adding m2 doesn't come close to solving the underlying problem because The reason money disappeared from central banking was not that economists suddenly proved money was unimportant It disappeared because the monetary system evolved beyond their ability to measure it to see it and even Understand it and that story Begins with the euro dollar now this episode is sponsored by Augusta precious metals Now most of what we cover on the show is how the financial system actually works the mechanics the incentives the plumbing But one question I get from everybody is okay. I understand everything now, but what do I do with this now? I can't answer that question for you Everybody's different but one thing worth Understanding is that a lot of retirement accounts are built around a pretty narrow set of asset types and most people never learn what else Is available to them physical gold held in an IRA is one of those options now whether it makes sense for you That's a separate question And the reason I'm comfortable pointing people to Augusta precious metals is that their approach is education first Just like us at Eurodollar University They'll walk you through how a gold IRA actually works the mechanics the fees the custodial side and let you decide if it's relevant to Your situation if you want to learn more go to Eurodollargold.com or text euro to 35052 and they'll send you a free guide now Augusta precious metals is a paid sponsor and we thank them for their sponsorship This is for educational purposes only and not investment advice consult a qualified financial professional before making any investment decisions For most people the word dollar means some kind of American currency or a dollar that's on a deposit with the bank somewhere Maybe at most you think the Federal Reserve its bank reserves are a dollar too but this all began to change in a big profound way in the 1950s in the 1960s a vast dollar-based banking network developed outside the United States and these became known as Eurodollars and yes The name is misleading a euro dollar doesn't have to be in Europe and has nothing to do with the euro currency It is broadly speaking a dollar denominated bank liability created outside the conventional domestic American banking framework A bank in London could accept a dollar deposit make a dollar loan and create additional dollar denominated claims Without moving Federal Reserve notes across the Atlantic banks accomplished this through their balance sheets through their ledgers The interbank relationships and their promises to pay it wasn't counterfeiting or some obscure loophole It was a brand new ledger money system that was delivered by the banks who operate the system banks not Central banks banks don't simply wait for someone to deliver a pile of physical currency before lending it to someone else They create deposits and liabilities through bookkeeping primarily constrained by balance sheet capacity Perceived risk collateral and funding access and most of all the willingness of other institutions to accept their promises The euro dollar system expanded because global trade and finance required the dollars while the domestic American framework was too narrow It was too regulated and geographically limited to meet that global demand Multinational corporations, they badly need a dollar financing governments and companies. They needed to settle international trade banks They needed ways to fund assets to hedge currency changes move liquidity and money around the entire world The offshore system supplied those needs and then some it grew from traditional deposits into negotiable CDs interbank loans Deposits, repos, commercial paper, foreign exchange swabs, derivatives and increasingly complicated Collateral arrangements. The dollar was no longer merely a currency issued by the United States Which it never really was to begin with it become the denomination for this global network of bank balance sheets and most importantly Most of this network operated beyond the Federal Reserve's direct jurisdiction and therefore it did not show up in the monetary Statistics. The Fed could count certain deposits at regulated American institutions and verify physical currency It had its own books with its own reserves held by banks, but it couldn't comprehensively count offshore dollar liabilities, these collateral transformations, the derivative based funding arrangements or the enormous chain of interbank Promises that functioned as money for wholesale participants. The monetary system had escaped the monetary authority But here's the shocking part. As you're about to see Monetary authorities knew it all along for decade after decade They lied to you and covered it up, but now in a very small way The truth is starting to come out This Eurodollar evolution created a major problem for economists and central bankers. Traditional monetary theory placed money at the center of the economy for an obvious reason Inflation, properly understood, requires money. Deflationary depressions, bank panics, credit contractions are rooted in it Economists therefore tried to connect the quantity of money with prices and economic transactions from the very beginning of economics way back in the 19th century And that effort eventually produced familiar aggregates such as M1, M2, and M3 And there are others in different places around the world. Now M1 was supposed to capture the most immediately spendable forms of money M2 added savings deposits, small time deposits, and other near money instruments. M3 Attempted to include an even wider range of large and institutional balances. It included some repo as well as Eurodollar stuff But it never got there The hope was that one of these aggregates would maintain a stable relationship with nominal spending, economic output, and consumer prices If you could count money, estimate how rapidly it circulated, what economists call velocity, and then estimate potential output You might have a useful framework for judging monetary conditions That was the theory. In practice, every time officials settled on a definition Banks and markets and commercial participants evolved around it. In a complex dynamic world Money was never gonna be a set thing. It was constantly changing It's still constantly changing to this very day. A liability classified as money might lose monetary significance Another instrument that's excluded from an aggregate might begin functioning as money for major financial institutions Funds could shift between deposits, money market instruments, repos, Offshore accounts, and other balance sheet forms without producing the economic meaning that's implied by the published totals The problem was not simply financial deregulation It was the rise of a global wholesale collateral based monetary system that no traditional aggregate could adequately capture. By the 1970s Federal Reserve researchers knew they had a serious problem They experimented with new definitions and different monetary targets But the relationships kept breaking down The Volcker Fed is often remembered as the great monetarist central bank because it announced reserve and money targets in 1979. Yet even during that period the practical connection between those targets and the actual monetary system was Entirely broken, the part you never heard about. So by 1982 the Federal Reserve had effectively shifted toward targeting the federal Funds rate, not money, the federal funds rate. That was a profound Profound turning point. Unable to reliably define or measure money the central bank Substituted the price of overnight domestic reserves It would manipulate a short-term interest rate and assume, just assume, that this would influence broader financial conditions, economic Activity, and eventually consumer prices. As Alan Greenspan himself admitted, the Fed didn't choose interest rate targeting because it had discovered money no longer mattered It chose interest rates because it could no longer determine what money even was Throughout the 90s. It was Alan Greenspan who occasionally in public speeches would mention. Oh, by the way, we don't know what money is It's hiding. It's missing. It's dubious that we can even locate this stuff. And looking back to 1982 Greenspan explained that the historical relationships between money, income, and the price level had completely broken down Monetary aggregates that had previously appeared useful in certain occasions no longer provided reliable signals That was not some minor technical inconvenience. If the Federal Reserve can't even define money It certainly can't directly assess whether monetary conditions are expanding, contracting, or changing form You won't be able to tell whether banks are becoming more willing to create credit or whether balance sheet constraints are binding and spreading through the system. Once the Fed targets the federal funds rate, it damages another potential source of information. A freely determined market rate contains information about demand, supply, risk perceptions, liquidity, broadly speaking. A policy rate that's deliberately pushed toward an official target contains, at least in part, only information about what the Federal Reserve wants that rate to be. Instead of listening to the market, the Fed is Manipulating one part of it. In Greenspan, he recognized that alternative signals would be needed But identifying and interpreting those signals, he said, represented a, quote, severe challenge for monetary analysts. That challenge, for the Fed anyway, was never really solved. Mainstream economics went in one direction It focused increasingly on macroeconomic aggregates and econometric models. It used GDP, unemployment, consumer prices, output gaps, inflation expectations, estimates of neutral interest rates, which they can't even estimate Whereas Eurodollar University, well, we went in the other direction. If the monetary system can't be observed directly, we can study the effects it has on the markets and the institutions around it. That means examining yield curves, money market curves, swap spreads, inflation protected securities, collateral behavior, foreign exchange relationships, credit spreads, a whole bevy of financial signals. It is the black hole analogy. You can't see a black hole just like we can't see the Eurodollar system, but you can observe how nearby objects behave in response to it. In the same way, we can't obtain a complete real-time count of global dollar money, but we can observe how participants inside the system price risk, price liquidity, growth expectations, inflation expectations, collateral conditions, future funding. The signals are imperfect, but imperfect monetary signals are better than pretending. For decade after decade, the monetary system doesn't matter. Where do you think don't fight the Fed came from? It was the lie to help cover up the truth. And this monetary blindness affects a whole lot more than just inflation. As Milton Friedman said, inflation is always and everywhere a monetary phenomenon, but there's a whole lot more that's affected by changes in the monetary system, too. Changes that you don't recognize if you don't have any competency about money. Monetary conditions also shape credit availability, employment, investment conditions, of course, asset prices, exchange rates, financial stability, a whole bunch of stuff. A contraction in Eurodollar balance sheet capacity can restrict funding across the world, even if domestic M2, for example, looks normal. A shortage of acceptable collateral can tighten the entire system, even if the Federal Reserve has created trillions in bank reserves. Banks can become less willing to intermediate, regardless of the federal funds rate. Dealers can refuse to deploy their balance sheets, even when short-term market rates briefly surge to seemingly attractive levels. September 2019 provided a small-scale test case. Repo rates jumped dramatically, yet the promise of enormous nominal returns didn't immediately draw sufficient balance sheet capacity back into the market. And then, the 2008 crisis was the catastrophic example. The world didn't suffer from a shortage of physical dollar bills, it suffered from a breakdown in a global network of bank liabilities, a breakdown in the collateral chains, wholesale funding, and, at the root of everything, institutional mistrust. The Federal Reserve even opened up dollar swap lines with foreign central banks because the supposedly domestic American currency had become the funding basis for a global system the Fed neither controlled nor properly measured. It did them and the rest of the system no good either because this is more than everything. The Fed was basically admitting in its operations that this was outside the United States. Central bankers didn't see the full crisis coming, nor those which followed, because their framework was looking in the wrong place. They watched consumer prices and unemployment rates and, of course, the federal funds rate. By the time the macroeconomic data confirmed the disaster, the monetary contraction had already been developing for months on end. That remains the central weakness today. Economists look at what happened in the economy and try to infer what money must have done along the way. If consumer prices rise, they assume monetary conditions must have been inflationary. If unemployment remains low, they assume money and credit can't be particularly restrictive. But those are backward-looking conclusions based on lagging data and several questionable assumptions. Without monetary information, central bankers regularly confuse supply shocks with inflation, temporary price changes with sustained monetary trends, and low policy rates for easy money, which we know that's not the case either. A low interest rate is not proof of abundant money. On the contrary, it is instead a sign of weak growth, risk aversion, and intense demand for safety. A large quantity of bank reserves that the Fed prints is not proof that the private monetary system is expanding. Reserves are one particular central bank liability used by a limited set of institutions. They are not a substitute for the full range of bank-created money in balance sheet capacity. This is why, for example, the Bank of Japan's 2013 QQE effort to double the monetary base, or what they called the monetary base, failed to produce the promised result, or any of the dozens of QEs that have been tried over the last quarter century in a whole bunch of different places. Increasing the central bank, quote, monetary base, was never the same as printing the kinds of money the world actually uses. Which brings us back to Kevin Warsh and the sudden inclusion of M2. If Warsh wants money supply figures to be part of the Federal Reserve mosaic, that is definitely a step in the right direction. But let's be honest here. It is a very, very small step. Because M2 by itself won't tell the Fed very much about the modern monetary system. M2 is a domestic aggregate that's based on specific categories of deposits and retail money market instruments. It fails to comprehensively capture offshore dollar creation, repo funding, foreign exchange swaps, all the stuff that we just talked about. You know, collateral quality, dealer balance sheet constraints, the derivatives, the entire global interbank network. This was the whole point of M3, which at least had some repo and euro dollars in it. But M3 was shut down because it was woefully inadequate too. And just as importantly, none of the M's can distinguish between money that's actively circulating and balances that are merely sitting idle somewhere. The quantity is only one part of the equation and the much smaller part, circulation, distribution, balance sheet capacity and perceived risk matter much, much more. Money matters enormously. But that doesn't mean every statistic with money in its name is automatically useful, as researchers found out the hard way 50 years ago. And so this is why there was relatively little objection when the Fed discontinued M3 all the way back in 2006. By then, the aggregate had lost much of its connection to euro dollar reality. Ending M3 didn't prove that money had become irrelevant. It proved that the official measurement had become inadequate. Adding M2 to the mosaic in 2026 is therefore, again, a tiny step, not a monetary revolution. The Fed is putting a map back on the wall, but it's a map that was drawn many, many decades ago before much of the modern city was even built. Still, Warsh's decision is important and it matters because of what it represents. It represents in one part an admission that doing things the Fed's way, blind to the monetary system, maybe didn't work out the way everyone had hoped. It kind of admits that unemployment, GDP, the macroeconomic aggregates, they don't provide a near enough complete picture. It admits that the federal funds rate is not by itself an adequate description of monetary conditions. And it acknowledges that central bankers should at least attempt to examine money rather than merely infer it from economic outcomes after the fact. And that's exactly the criticism Eurodollar University has made for far longer than there has been a Eurodollar University. Obviously, this doesn't mean Kevin Warsh has adopted the Eurodollar framework. He hasn't. The guy wouldn't even know where to begin. Warsh explicitly says he's not arriving as a monetarist. And a page, a single page about M2 falls far short of reconstructing the Fed's understanding of global money. But it is validation of the underlying objection. The monetary system can't remain the missing piece of monetary policy. If Warsh is serious about building a genuine mosaic, the Fed will need to go far beyond M2. It'll have to study wholesale funding, offshore dollars, collateral dealer behavior, curves, swaps, the market signals produced by participants operating inside the Eurodollar. It's going to have to accept an uncomfortable fact. The Federal Reserve is not the center of the dollar universe. It is one minor institution operating within a far larger global network. So is Kevin Warsh finally putting money back in the Fed? Maybe, at least on paper as a start. The Easter egg he talked about is a welcome beginning. But now that someone has found it, the real work is figuring out why money was hidden in the first place, what modern money actually is, and how much central bankers have missed while pretending they could conduct monetary policy without it. Because the biggest problem facing the Federal Reserve was never that it stopped publishing money figures in its major reports. It was that the Fed stopped understanding money in the first place. The economy moves through four distinct regimes and each one rewards a completely different portfolio strategy. So join us for a free webinar where we're going to go over how to identify which regime we're in now, which one might be coming next, and how to position your portfolio for growth, inflation, recession, maybe even deflation. Register now for the four economic regimes and how to position your portfolio for each one.