Okay let's talk about the *next* world reserve currency.
Not what country will have it - who knows on that front - but what the shape of it will be.
Because these things follow discrete patterns.
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The first pattern is that there is a force projection component to it, but... you know what let's come back to that.
Because the first aspect is really about who protects trade.
Whoever protects the economically dominant trade lanes is the reserve currency.
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So like there were times back in the day where this was roads.
And this is why historians are always yammering on about how great Rome's roads were (also weirdly about concrete: "oh my gawd these guys could concrete you should see their concrete blah blah")
Anyhow: roads.
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This was before we could build boats worth a damn so roads were a big deal because that's how the real bougie trade (inter-sovereign trade) happened.
So they were the reserve currency.
Then some dork (likely a primitive quant variant) figured out how to do the boat thing.
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And since then it's been about boats. There were phases of this but that's really boring, so just figure whoever controls the oceanic trade lanes is The Money Boss™
It's literally like Catan with the longest road, but again: we're better than roads now.
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Why is it like this? Well look: whoever controls this stuff also protects it.
And protecting it means adjudicating it. And adjudication is often settled with money tokens of the adjudicating sovereign.
Plus also, they're the biggest sovereign so if shit goes down...
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Had this conversation about schooling and how the way the (post)modern pedagogy bends over backwards to respect everyone’s unique perspective has some strange externalities.
As noted below, war crimes aren’t “things I don’t vibe with” and it’s disconcerting how detached… 1/5
…sentiment has become from reality on topics like this.
It’s not a war crime to be superior at war.
It is not colonialism to exact concessions from other nations during trade.
Our pedagogical impulse to include has caused us to fall so far down the rabbit hole of…
2/5
…epistemic relativism that we’re losing the ability to communicate.
“My truth” is not some ontological trump card—in fact the requirement that “everyone’s truth” be respected is a performative contradiction (“my truth is that your truth is false”)
One of the possible consequences of the Fed being so willing to offer cash for assets (often at par) might be a rates market that focuses mostly on policy risk, not duration risk.
That might seem somewhat ironic given how banks have been getting their assets handed to them…
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…by ignoring duration risk, except that they by and large *haven’t* gotten their asses handed to them yet, because of the Fed’s manifold accommodations.
We mused together years ago about the effect putting standing ‘buffer stock’ facilities around the policy rate may have.
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These started several years ago with the SRF and RRP, which essentially allow the policy rate to be set without a full on market rebellion, allowing both the warehousing and the requesting of short term cash in a manner that isn’t short dated treasury paper.
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There’s this facet of game theory that I’m sure many of you already know, but it’s been a recurring touchstone for me in my quest to understand human behavior so I’ll walk it it briefly anyhow.
It starts with The Prisoner’s Dilemma, which is probably familiarr
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But in case it’s not, it’s a way of modeling a scenario where individual outcomes favor non-cooperation, but the best overall for both players comes from cooperating.
Communicating is the way you solve it, which is why cops try not to let cops-conspirators do that. 2/
The cops want both to defect ideally, so they split you up and tell you the other one already has and scare you about the worst outcome which is the one where you’re the sucker.
Anyhow, enough about cops.
This can also be modeled in a strictly positive reward way. 3/
I am fascinated by what’s happening in San Francisco.
It is both microcosm and epicenter of one of the major things driving us all mad:
A plague of revolutionaries.
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Silicon Valley loves a good revolutionary, you see, because when you’re placing convex illiquid bets on people, you want to preferentially bet the ones that don’t ever give up.
The perpetual call option, deep in the money.
This is what venture capital wants to purchase.
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Early on they figured this out and deified the messianic figures like Jobs — “This! This is the pinnacle of what we want to buy!”
Over the decades they selected for this, and lauded other examples that came along.
My guess is that it’s a prolonged slow bleed — the RE equivalent of a rolling bear market that bruises the shit out of most participants.
There are a couple reasons for this. 1/
First off, bank loan books kinda suck and it may take a bit for them to remedy this.
Even if the policy rate is lowered, it would make sense for private credit to remain elevated for some time as banks shore up the aggregate profitability of their loan books. 2/
This will be especially challenging if deposits continue to decline — there’s a fight for survival in bank land, and it’s not at all clear that it’ll be a short fight.
They’ll lend where they have capital to do so, but it won’t be cheap money.
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