More Swap Lines Just Announced...This Isn't Good

Added: 2026-05-21

[00:00:01]Hello, fellow Rebel Capitalists. Hope you're well. So, big news. Swap lines.

[00:00:07]Swap lines. Swap lines. Remember the swap lines that we first heard about?

[00:00:11]When was that? Maybe was that 2019, 2020, I don't know. But they're back in full force. And everybody is talking about how this is. What we want to do is we want to go over what a swap line is. It's actually pretty simple. I don't even need a whiteboard for this. And then we want to go over how that's going to impact the guy or gal on the street, the business, the average Joe and Jane, and then also how that might impact the treasury market or might not impact the treasury market. So, let let's go over to what I'm referring to more specifically. And the swap lines have been talking about a lot of them going to the Middle East, Middle Eastern countries and Asia. So I'm going to go back to Scott Bent talking about this because he's actually rather coherent here. Um it's just very easy to take what he is saying and misconstrue it to come to very very wildly inaccurate conclusions. Um but let's start here. So that's right. Oh, let me do a screen share.

[00:01:23]Almost forgot.

[00:01:26]There we go.

[00:01:29]So this is from a couple weeks ago and this is Scott Bent defends US dollar swap lines is Iran war harms global finances and I think more recently they have opened up swap swap lines to the UAE which uh I think a lot of people are kind of pissed off about that because the UAE is rich country but they're not really understanding what's going on at the swap line. So key talking points here. Bent on social media, this was a few weeks ago, defended the possibility of the US participating in swap lines.

[00:02:03]Now my initial thought was why is the Treasury saying it like what does Scott have to do with this? Because they're with the Federal Reserve and uh later on in the article they say, "Yeah, it's usually with the Fed, but the Treasury has a way of doing this if they really want to." But I still think it would probably go back with the to the the Federal Reserve because that's usually how those swap lines are done. It's between central banks. But anyway, getting back to this second key talking point, ongoing discussions with those countries about US dollar swap lines are part of ongoing routine conversations that US Treasury I guess that's Scott Bent's handle on Twitter maybe with our partners over the number of years. Okay. Bent previously said many allies in the Gulf Sea. Well, not just many allies in the Gulf. Many allies period because this is a big big problem. It is absolutely a problem.

[00:03:00]It's just not a problem in the way most people think.

[00:03:06]So, okay, we get this. He defends his position on X.

[00:03:11]Uh, continue reading. Yes, please.

[00:03:17]Okay, there's his tweet.

[00:03:21]Trump is saying it's great.

[00:03:25]Here you go. Swap line. And I'm starting right here, guys. Swap lines involve two countries central banks agreeing to exchange equivalent amounts of each other's currency while agreeing to swap back the quantities as specified future day. So this is just really it's almost like a rever like a like a repo but instead of using treasuries and and dollars you're just using dollars and euros or dollars and rubles or yuan or rupees or whatever.

[00:03:54]So or this you know you got Canada England yen or J Japan uh yen.

[00:04:00]So it's just we'll use a Japanese central bank. So they come in and say hey we need some dollars. We're running short because these oil prices are so high. So, we'd appreciate it if you go ahead and deposit into our account another10 billion, whatever. And then we'll go ahead and deposit into your account another10 billion in yen and then we'll go ahead and swap in two weeks. We'll give you the dollars back, you give us the yen back, and we're good to go. And usually the, you know, the United States isn't going to do anything with it. So that yen is going to be sitting in their account just kind of maybe collecting interest. So you see it's it's very similar to repo transaction. I mean it kind of I guess it's the exact same thing as a repo transa transaction actually. It's just you're not using treasuries. But then on the other hand you're using different denominations of currencies because you very well could argue that treasuries are in fact a currency. You know what is a treasury other than just a longdated or a longer maturity dollar.

[00:05:07]Like if you had a dollar set up or if you had dollars set up in a in an account that you weren't going to touch for a month, like what's the difference between that and a four-week tea bill?

[00:05:18]Like nothing really. Especially when you start thinking about it in terms of collateral and the monetary system and everything. Then the the lines get even more blurred between a treasury and actual cash. Anyway, getting back to it here. So they say the tools date back to the 1960s, okay? Yada yada yada. And they've been used during the 80s, 911, GFC, surveickness.

[00:05:49]Oh, they say the Treasury can provide its own version of swaps using exchange stabilization fund. So, I actually was not aware of that, but I don't know why the the Fed would be opposed to setting up a swap line if the if Scott Bent was gung-ho about it.

[00:06:10]So, a potential swap line runs the risk of being an unnecessarily ba an unnecessary bailout for a country.

[00:06:17]Uh, I mean, here here's where, you know, even the talking heads at CNBC or the people writing these stories, I don't know that they really have thought through uh a swap line. So, as an example, let's say that the BOJ has an additional $10 billion that they didn't otherwise have.

[00:06:39]How does that help the average Joe?

[00:06:43]Like, is the average Joe going to somehow get part of that 10 billion? No.

[00:06:49]So, I mean, you say, "Well, George, it helps the banks because the banks need those dollars and they can lend those dollars out to real estate developers that need those dollars to buy commodities or that need the additional dollars to buy oil or something like that." Okay, but the banks aren't going to lend out the dollars unless they're going to get paid back.

[00:07:11]So it's it's it's not like those10 billion dollars go to Japan and then those 10 billion dollars just get like helicopter money just gets released on everyone in the economy.

[00:07:26]Most of the time the swap lines are like pretty much a nothing burger. Now where they are not a nothing burger is when it comes to the currency uh the local currency. So why is that? Because what you're doing, let's just say you don't have any dollars and XYZ Japanese corporation needs dollars to buy oil.

[00:07:49]What are they going to do? Well, they might sell treasuries. And this is where most people kind of the conclusion they come to and why they say this is a big debt crisis and the bond market is going to blow up. But we'll get to that here in in just a moment.

[00:08:03]So, going back, if they don't have the treasuries, what are they going to do?

[00:08:06]They're just going to take yen on their balance sheet. They're just going to send sell that and the bank, you know, they don't have the dollar. So, there's going to have to sell that under the FX market. That means that outside of Japan, there's more yen circulating and there's more demand for dollars. So, the yen devalues, all being equal relative to the dollar. And this is at a time when the BOJ is trying to prevent the yen from going above 160 to the dollar, meaning depreciating. So, they don't want to do that. They don't want to do that. See the difference is when the central bank has the dollars and that corporation needs the dollars to buy oil, they can go ahead and take the yen, go to their bank. The bank gives them the dollars and they just give it to the central or the central bank gives it to the bank. The bank gives it to them and they give the bank their yen and then they're good to go. Right? You see that what happens in that scenario is the yen don't go outside of Japan and start circulating global FX.

[00:09:04]So you really don't have a a negative impact on the yen when you're getting those dollars from the central bank. If the central bank doesn't have the dollars, then you still have to have them, but you're going to get them from the global FX market, which could put downward pressure on the yen, which is what these countries don't want. They don't want downward pressure on the dollar, especially when you have all these countries having to intervene right now to prop up their currency such as Japan, such as India, etc., etc., etc. And if I'm not mistaken, the UAE is pegged to the dollar. So that's probably what they're worried about is they don't have the the let's say the reserves necessary or they potentially don't have the reserves ne necessary to because of the disruption in the Middle East and the Straits of Hormuz to go ahead and maintain the peg. And I that's probably what's going on. So then the argument becomes, okay, well, if they can't get the swap line, they can't get the dollars, therefore they're going to have to sell anything on their balance sheet.

[00:10:10]And this is uh what Bent hits on here.

[00:10:14]He just talks about US denominated assets or dollar dollar denominated assets uh can benefit our country reinforcing dollar usage. Okay. So, his argument here is this is great for the United States because the more swap lines we provide, it just shows that we have a willingness to provide uh dollars where they're needed in times of stress and that just increases the probability of those countries using dollars on a move forward basis. And I I I guess I mean there's something to that, but the argument there is a little weak from a standpoint of if they didn't do that, the countries don't have a choice. Like it's not like they're they're sitting there like, well, we could use dollars or, you know, those rupees, they they're looking pretty attractive here. um we might want to go ahead and dump the dollars moving forward because those, you know, those sons of guns at the Treasury or the Federal Reserve, they didn't give us those swap lines last time and nah, we don't like them anymore. We're going to go over here and just we're going to put all our faith and confidence in the Indian central bank. They're not going to do that. Why are they not going to do that? This is what most people get wrong about currencies.

[00:11:29]What gives a currency value is its utility.

[00:11:33]Now, the maintaining of its value relative to other currency and goods and services, that is a part of the utility, but that's not the main component. So, my great friend Mike Maloney is going to be speaking at Rebel Capitalist Live.

[00:11:47]So, shameless plug there. You got to get your tickets ASAP. But Mike talks about, I'm sure you've seen his videos on when he goes through all these components of what actually makes a currency. But the one thing that he forgot was the most important part and that's utility and that's network effect. Right? So what I'm saying there is you got utility here but the biggest component of utility is the network effect. And if you want proof of this just look at that experiment I did with Josh when we drove across Argentina and we used nothing but gold, silver, and Bitcoin. Why is it that no one wanted gold? Why is it that no one wanted silver? Why is it that no one wanted Bitcoin? Why is it that every single person there preferred to have their local garbage currency that at the time was depreciating by 20% per month?

[00:12:43]Why?

[00:12:44]Because their garbage currency had more utility. Why did it have more utility?

[00:12:50]Because of the network effect.

[00:12:53]So the point here is until you create something that is not just better than the dollar, it has to be exponentially better. It has to be 10 times a hundred times better than the dollar in terms of its usability.

[00:13:10]You ain't going to compete with the dollar. I don't care how many swap lines you give or you don't give. So there there's a little I mean I get his point here, but it's it's kind of a mood issue. Let's keep going.

[00:13:24]See, many of the countries have pristine balance sheets mean they're going to pay us back. H okay.

[00:13:36]Dollar dominance and reserve currency status are strengthened by constant longterm initiatives. No, they're not.

[00:13:42]No, they're not. there. Look, if you want to really understand the dollar, what you have to do is you have to separate it. Not only the dollar, but treasuries as well. You have to completely separate them from the US government.

[00:13:59]Like the US government or the central planners, the Treasury, the Federal Reserve, they don't have anything to do with the dollar.

[00:14:09]So the the problem that most people have is they associate the dollar with the United States.

[00:14:15]If you do that, you're done because you're starting from the wrong point.

[00:14:21]That the dollar really has nothing to do with the United States. Just like treasuries or what's happening in the United States really has nothing to do with treasuries as far as debt and deficits, which is the next part that we're going to come to. Now, growth in inflation expectations in the United States, that does have something to do with interest rates and the bond market, the Treasury market. But going back to the dollar itself, there there's nothing like like pull up a chart of the dollar like the DXY and then pull up a chart of deficits or debt or anything that you would think would matter for interest rates, anything that you would think would matter to the dollar relative to other currencies. And there's no correlation above like 50%. It's a coin toss. In other words, there there's no you can't say there's a causal effect there.

[00:15:13]So that once you realize that the United States doesn't really have any control over the dollar, it it's just it shouldn't be named the United States dollar. It should just be named the dollar.

[00:15:31]Just the dollar. It's just it's it's no country. It's not a sovereign entity.

[00:15:36]It's not a sovereign currency. It's just like it just came down from space or but it's no more the real dollar is no more a sovereign currency than Bitcoin or Dogecoin or anything. The US it doesn't have anything to do with a dollar, right? And why is that? Let me explain. Because when you have a global economy of let's say $130 trillion dollars, you're going to have let's just say 75 80 maybe a hundred trillion dollars outside of the United States as far as in bank accounts and all these things added up, right? And I'm talking about dollars, not just global currency denominate or the equivalent of the global amount of currency in dollar. I'm not talking about that. I'm just talking about the actual amount of dollars outside of the United States. I mean, you could easily say there's 70 75 trillion.

[00:16:38]Okay, look at the Fed's balance sheet.

[00:16:43]What are we looking at? Six, you know, bank reserves. 6 trillion, something like that. So, assuming that all of those were bought from non-bank entities, which they weren't, you know, so you got to figure maybe two trillion of that. And then you've got, you know what, two trillion in uh um in um currency in circulation against 75 trillion that was created by banks outside of the United States that have nothing to do with the government, nothing to do with the Treasury, nothing to do with the Fed. It was the banks doing it. So we we really need another name for the dollar.

[00:17:18]The US dollar is extremely extremely misleading.

[00:17:23]It should just be the I don't know. You guys tell me what you think the name should be in the comments. But it's really not a sovereign currency. It's it's not the currency of the United States. That's what I'm trying to say. It's the currency of the international banking system, the Euro dollar, you want to call it that.

[00:17:43]So I I think once you get your head around that, you realize that this is all just talk. This is Kabuki theater.

[00:17:50]when we're getting a quote from Bent or Jerome Pal and we're referencing that in terms of what's happening to the dollar andor treasuries outside of the United States. Okay. Now that said, let's get to the conclusion that many people on social media are drawing uh from this. So their idea is that the swap lines are preventing these countries like the UAE from selling their treasuries to get the dollars they need to buy oil. Now that may be true.

[00:18:24]That may be true. But even if they did sell those treasuries to get the dollars they need to buy the oil, it's not going to impact rates long term. Even in the midterm, it's not really going to impact rates. It might impact rates for a couple days, a couple weeks, but that's it. So why is that? Let's go back to this chart that I've used several times here. It's that rates follow growth and inflation expectations.

[00:18:49]Okay, which again really doesn't have anything to do with with Fed monetary policy or Treasury monetary policy. You could argue it has to do with fiscal.

[00:18:57]I'll grant you that. But it doesn't have to do with the mechanisms that most people attach to control over the quote unquote dollar or inflation in the United States, the CPI.

[00:19:07]So you can see they're tight at the hip.

[00:19:08]So that tells you definitively that this is about growth and inflation expectations has nothing to do with debt and deficit expectations. Now why is this? And this is very important because if you had the UAE and Japan and all these other countries dumping all their treasuries, holy cow, we got to get the dollars we need to buy uh oil or commodities or whatever. Then what's going to happen then? Very short term, you're right, the rates are going to go up. But then what's going to happen?

[00:19:38]People are going to come in and buy because if this delta gets too extreme, then it creates basically an arbitrage opportunity. And especially with the banks, they they have an infinite balance sheet as we all know collectively, right? Collectively, the banks have an infinite balance sheet.

[00:19:57]The constraint is risk. That's it. It's not Basil 3 or bank reserves or anything like that. It's it's at the end of the day, it's really risk.

[00:20:04]And so if they have an infinite balance sheet, then how many if the delta gets too extreme here, meaning that interest rates are way up here and expectations for nominal growth way down here to where you're getting this positive return risk-free, you're going to take that all day long. And then what that's going to do is that's going to bring the interest rates back down. So sure, you could have all the sellers you want. It doesn't matter because the banks are going to pick up the slack. And if the banks don't pick up the slack, then the retail, all the other investors will because the higher the yields go, the more attractive they are relative to the underlying growth and inflation expectations. So if they get too far out of whack, then you've got a natural equilibrating mechanism there. And this is just what people because they eliminate the banks from their equation or their analysis.

[00:21:01]So if you eliminate the banks from the analysis and your only buyer of treasuries in your mind is just central banks, then yeah, it makes sense. Sure.

[00:21:13]But but you that's ignoring the elephant in the room. That's ignoring the 800 pound gorilla and the global monetary system.

[00:21:23]And that's again why you actually see an inverse correlation between debt and deficits. And you've got this tied at the hip with what's happening with nominal GDP in the United States. So the main takeaway here is are you going to see swap lines pro? Well, it depends, right?

[00:21:43]It depends how long this continues in the Middle East because if you have these disruptions where dollars aren't circulating, then yeah, you're you're going to need swap lines. Uh if you don't get the swap lines, then you're going to have to sell treasuries. I don't really think that impacts the US too much. It doesn't really impact the bond market over the long run as far as interest rates, but it's like, you know, you're doing them a favor at the end of the day. And do you want the UAA the UAE's peg to break? Like, no.

[00:22:17]That doesn't do the US any good. Like, do you want Japan to blow up? No. That doesn't really do the US any good. So it it's not really it's more so, you know, do you want to blow up all your trading partners?

[00:22:32]No, because that's going to impact your GDP.

[00:22:36]So it's not really saving the bond market. It's bailing out your trading partners in an effort to bail out your economy because your economy is dependent upon those trading partners at the end of the day. That's what this is really about and that's how you've got to look at it. So the opportunity here is to take the view that this is going to blow up the bond market and maybe fade that.

[00:23:03]You I'm not not saying I'm not giving you any investing advice. It's just when I see these things I just say look this narrative is completely based on something that's false and demonstrabably false. So therefore, maybe, just maybe, it might be something that's wise to go ahead and fade. The real story here, the real story is that the dollar is so powerful, unfortunately, that you have to have the swap lines.

[00:23:40]And what does that tell you about the dollar moving forward?

[00:23:46]If you have to have these swap lines, if your view is that the global economy is continuing is going to continue to get worse, if your view is the global economy is going to continue to bifurcate, right? And these countries are going to become more and more and more isolated and they're going to have more and more protectionism, which is probably the way we're going.

[00:24:06]That means that global trade is going to decrease. If global trade decreases, what happens to the amount of dollars that are circulating?

[00:24:15]it goes down. What happens to those countries? They get right back in the same position where they're screwed and they have to have more and more and more and more and more and more and more and more and more dollars that by the way they have to pay back. It's just increasing the amount of dollar debt and therefore just increasing the future demand for dollars.

[00:24:34]So the real problem here is this is a clear clear signal that the endgame most likely isn't the dollar crashing.

[00:24:44]The endgame is most likely the dollar crashes up, not down.

[00:24:50]The dollar crashes up, not down. All right, guys. Enjoy the rest of your afternoon. As always, make sure you're standing up for freedom, liberty, free market capitalism. Definitely want to check out Rebel Capitalist Live. Josh put a link in the description, put a link in the chat. Like I said, we got Mike Maloney who just said today that he wants to do a keynote presentation at Rebel Capitals Live. Everyone always loves hearing from Mike. He's a great guy. And by the way, Mike's one of the nicest guys you ever meet. So, when we talk about what makes Rebel Capital live so special and the ability to hang out with the speakers and rub elbows and have a beer and sit there and talk to them, Mike would be like, if I had to write down like all the people that I wanted to meet and hang out with as far as our list of speakers, Mike would be right at the top. he would be right at the top because not only is he really really a smart dude and just a legend, right? An absolute legend for good reason, but he's like one of the nicest dudes ever.

[00:25:47]So anyway, get your tickets to Rebel Capitals Live ASAP and I'll see you in a couple weeks in Orlando.