There’s a US$14 trillion market you’ve likely never heard of.
It’s called the Eurodollar market, and it’s a hidden world of US dollar loans made outside the regular banking system.
When things break in the financial world, often the Eurodollar market can accentuate — or even cause — events to move much quicker than expected.
This opaque world of ‘cloak-and-dagger’ banking started up in the aftermath of the Second World War.
US dollars were the main game in town, but not everyone had access to the US banking system.
This meant that those who did have access had an extremely profitable piece of leverage to exploit.
Here’s the thing…
I think just such a market is opening up again.
Like the Eurodollar market, it’ll likely rise regardless of government policy or regulations. In fact, impending regulations may drive the big banks towards it.
The good news?
You can stake your claim here before the real money starts to flow in.
Let me explain more…
It was 1969
It was 1969 and little-known Greek banker Minos Zombanakis had hit upon the deal of a lifetime.
You see, the cash-strapped Shah of Iran needed cash fast but regular banks wouldn’t give it to him.
This moustachioed banker from Greece could.
Zombanakis put together a US$80 million loan using US dollars that ‘lived’ outside the regular banking system.
As the Economic Times wrote, everyone was very happy:
‘The Iranians brought the beluga caviar and Zombanakis brought the vintage champagne.’
It must have been heady days…
Back then, Zombanakis was one of a small group of international bankers working hard to open up cross-border capital flows.
This market had been in the doldrums since the Wall Street crash of 1929.
At the same time, the US dollar was the de facto global reserve currency so demand for it was high.
Zombanakis and his banking friends exploited this fact by creating a secondary market for US dollars.
In the early days, most loans were set deal by deal at agreed terms. It was slow, cumbersome, and inefficient.
But Zombanakis took the Eurodollar market to the next level.
His deal with the Shah marked the birth of LIBOR — a refence interest rate based on a daily survey of big London-based banks.
Libor standardised lending in the Eurodollar market and thus helped propel its growth into the stratosphere.
Incidentally, LIBOR was replaced earlier this year by a new reference rate (SOFR) after it was found LIBOR was being manipulated by colluding traders to scalp quick profits.
But that’s not a story for today.
The main point I’m making is that a huge, unregulated market for US dollars grew exponentially over the past five decades.
And yet hardly anyone talks about it.
It existed because of the powerful impetus of banker greed, immense demand, and regulatory arbitrage.
History could be repeating now…
The Dr Calomiris dossier
Zombanakis and his pioneers got the ball rolling.
But then everyone wanted in.
In the 1960s and 70s, major US banks set up offshore offices in the City of London to take advantage of this fast-growing Eurodollar market.
It was simply a matter of profits.
At the time, the US Government had put a stringent cap on how much US banks could pay for dollar deposits, cutting the amount of interest they could charge on bonds (loans).
The reason?
The US Government wanted to keep interest rates down as they were running substantial deficits (not helped by the ongoing Vietnam War).
But in London, the US banks could skirt these regulations and make fatter profits on Eurodollar loans.
Which brings us to today…
Today, the US Government is also running huge budget deficits. These are estimated to be around 6% on annual GDP of about US$24 trillion.
Unfortunately, US Government debt stands at around US$30 trillion.
The maths is worrying for politicians and central bankers alike. Rising rates don’t help either.
They’re now north of 5% in an effort to fight inflation, so the US Government is shooting itself in the foot every time the Fed raises rates (see yellow line below):
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| Source: Gavekal/Macrobond |
The whole world and her dog knows this trajectory is unsustainable.
But what to do about it?
Enter Dr Calomiris…
Despite his Greek surname, Dr Charles Calomiris is a card-carrying member of the US financial elite.
Hi resume reads, Princeton, Columbia, Yale…all the seats of economic academic influence in the US.
Here’s the thing…
The good doctor just published a new paper on the Fed website. It’s the kind of paper I’d wager Jerome Powell and his cronies are carefully studying.
Because it’s a blueprint for the US to solve their budget deficit problem.
His solution?
Cap the interest paid to US bankers by forcing them to keep more funds in central bank reserve accounts that pay zero interest.
I don’t want to get into the complexities of all this, but you can read the full paper for yourself here.
All you need to realise is that it’s a repeat of the 1960s trick the US Government tried to pull on US banks.
Namely, they want to reduce the interest the government has to pay to finance their ever-growing debt load.
The upshot is a massive hit to big bank profits.
As Calomiris writes (emphasis added):
‘Given the small size of the currency outstanding, if the government wishes to fund large real deficits, that will be easier to do if the government eliminates the payment of interest on reserves. This potential policy change implies a major shock to the profits of the banking system.’
As patriotic as I’m sure they are, the Jamie Dimons and Larry Finks of the world won’t be happy swallowing that.
Neither will their shareholders.
You can bet your bottom dollar they’ll be planning an escape.
What they need is an offshore market they can still make huge profits in no matter what mess the US Government gets itself into.
Just like they had in the 1960s.
Where does such a market exist?
The cryptocurrency market…
The new ‘Eurodollar’ market
The sceptics amongst you might be raising an eyebrow right now.
After all, the big banks hate crypto, don’t they?
Well, they might give the impression they do but their actions tell a different story.
Consider…
BlackRock, Fidelity, VanEck…all of them have recently applied of Bitcoin spot ETFs.
BlackRock is also a major shareholder in most listed US Bitcoin mining companies.
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| Source: X |
There’s more…
JPMorgan and Citi have plans to ‘tokenise’ Wall Street; a market Bernstein predicts will be worth US$5 trillion over the next five years.
US fintech giant PayPal Holdings [NASDAQ:PYPL] just announced a spate of deals recently to make it easier for customers to use crypto, including one with an Australian crypto exchange.
There are heaps more examples I could give you of big US banks moving into crypto fast.
And not just them either.
This was even a headline this week:
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| Source: Forbes |
Hmmm, reminds me of another Middle Eastern deal from 1969…
The point to understand is that crypto itself was never the problem.
It was who owned it.
In my opinion, with many crypto-native companies like FTX, Binance, and others now in retreat because of regulatory scrutiny, the big banks are moving in fast to fill the hole.
They’ve realised there’s immense value in play here.
But more than that.
I think they’ve worked out the government is also coming after them.
And if they do move to cap their earnings from the traditional banking arena, exactly like they did in the 1960s, then being the gatekeepers of a new potentially multi-trillion untapped, global market isn’t a bad fallback.
You’ve got to remember, crypto, as it stands, only makes up 0.1% of global wealth.
If it becomes a ‘Eurodollar mark II’ market, this will surge a lot higher.
As Boston-based fund manager Larry Lepard recently said about the price of Bitcoin:
‘I think we’ll hit $100,000. Then I think we’ll reach $1 million, and […] ultimately $10 million per coin. I’m sure my grand kids will be shocked at people who own one coin. I mean being a whole coiner will be a big deal,’
Beneath all the narratives and gamesmanship, this is the silent game being played.
And it’s all so obvious when you look at what the players are doing (not what they’re saying).
By the way, you can watch a special presentation here where I lay it all out, including how you can take advantage of what could be a once-in-a-lifetime moment.
It’ll stay up on our website until Tuesday.
Good investing,
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Ryan Dinse,
Editor, Money Morning
