Manhattan Reborn 1978

Manhattan, New York.

Near lunch time

In a small meeting room on the fifth floor of the New York Federal Reserve at 33 Liberty Street, Paul Volcker, chairman of the New York Federal Reserve, put down his pen, carefully read the notes he had just written, looked up at David, who had "raised his hands in surrender," and smiled gently.

"You really didn't disappoint us."

"Haha~"

David smiled bitterly, shrugged at the "bald bad old man" chairman, and spread his hands.

"I have inquired about it a long time ago. Whether it is carry trading or hedging, people have been trying it in the past two years. It is not a financial innovation at all."

"No, it's different!"

Mr. Volk adjusted his glasses with his hand, turned to look at Judith K. Morgan, who was sitting next to David and stayed behind to "escort" him, and asked with a gentler smile.

"Recently, I heard that Stanley is preparing to launch a swap contract that can avoid the risk of interest rate fluctuations, right?"

"That's right." Julie gently swung her crossed legs with a proud look on her face.

"Then can you give me a brief introduction? David!"

"Uh..." When David heard this question, several thoughts flashed through his mind quickly. In the end, he looked at Julie, waiting for him to reply.

"Say it, it's okay."

"Paul is our friend and can be trusted." Julie nodded to David, as if she had already made up her mind before her old friend Paul spoke.

"OK~"

When David heard that his "boss" had spoken, he couldn't help but let out a sigh of relief and explained in a relaxed tone.

"I think you are familiar with David Ricardo, the famous British classical political economist, and his theory of comparative advantage."

"David Ricardo, in his masterpiece Principles of Political Economy and Taxation, proposed the theory of comparative advantage, which holds that the basis of international trade is the relative, not absolute, differences in production technology and the resulting differences in relative costs."

"He believes that two products can be produced in both countries and one country is in a good position to produce both products."

“If the former specializes in producing products with greater advantages and the latter specializes in producing products with less disadvantages and comparative advantages, both sides can still benefit from specialized division of labor and international trade.”

"After reading and studying this theory carefully, I feel that this theory is not only applicable to international trade, but also to all economic and financial fields."

"Because the history of human economic development is actually the history of using comparative advantages to conduct division of labor and exchange."

"As long as there is a comparative advantage, both parties can benefit from appropriate division of labor and exchange."

"Swaps are the most vivid application of the theory of comparative advantage in the financial field."

"I think according to the theory of comparative advantage, as long as the following two conditions are met, they can be interchanged~"

“First, both parties have a need for the other party’s assets or liabilities.”

“Second, both parties have comparative advantages in two assets or liabilities.”

“So, the swap contract I’m proposing is a contract between two parties to exchange cash flows that they believe to be of equal economic value over a certain period of time in the future.”

“The specific objects exchanged in the contract can be currencies and bonds of different types and countries, or interest rates and foreign exchange rates of different countries.”

“In general, it is a transaction where two or more traders agree on a payment rate, exchange rate, interest rate, etc. based on market conditions and make payments to each other based on a determined principal amount.”

"You mean, this kind of contract can not only swap interest rates and foreign exchange, but also other things..." Mr. Volcker picked up the pen again, stared at him with burning eyes and asked.

"Yeah~"

David felt that he had already said everything, so there was no need to hide it anymore, so he spoke directly.

“The swap contracts I envision can be divided into several different categories~”

“They are interest rate swaps, currency swaps, equity swaps, credit default swaps, commodity and foreign exchange cash swaps, and so on.”

“For all the above types of swap contracts, you can refer to the basic contract template I provided, and then add terms according to the specific needs of the contracting parties.”

"Okay, I understand." After Volker recorded the conversation, he thought for a moment, nodded slowly, and asked again.

"When you were speaking on stage just now, you said that you would use the Japanese yen as the main target for carry trades and hedging transactions?"

"Why?"

"How do you determine that the yen will continue to appreciate or depreciate? Is there any specific basis for this?"

"Of course."

"Actually, I've already said that..."

"You said... it's the interest rate? An interest rate hike?"

"Yeah!" David nodded seriously to Mr. Volker and replied.

"I know that as the president of the New York Fed and a significant voting member of the Federal Reserve Board (FOMC), you must be careful."

"However, we all know that the monetary policy adopted by the Federal Reserve in the past few years has been very ineffective in curbing rising inflation."

"Because between the two options of curbing inflation and controlling unemployment, raising interest rates will inevitably lead to higher unemployment."

"But according to the theory proposed by Robert Triffin, a monetary system that relies on sovereign currencies to serve as international settlement capacity will inevitably fall into the Triffin dilemma and gradually collapse."

"Whether this currency can be exchanged for gold or not, regardless of which country's currency it is, and regardless of whether it is dominated by one country's currency or an average of several countries' currencies..."

"Okay, be more direct and stop beating around the bush!" This time it was not Mr. Volk's patience that ran out, but Julie, who was sitting next to him, who interrupted David.

"it is good."

David looked at the two "bad bald old men" for a few seconds and said after a few seconds: "Raising interest rates is currently the most effective way to curb inflation."

"Assuming that the Federal Reserve raises interest rates to the range of 18% to 22%, domestic inflation will decline significantly within six months, and will gradually return to a healthier average level within twelve to eighteen months."

"At the same time, during this period, a large amount of overseas US dollars will flow back into domestic banks and financial industries, causing some funds to circulate in banks."

"Also, our domestic treasury bond market, which currently has a relatively small total amount of funds, will become the largest low-risk safe-haven fund pool for international capital in the next few or even a dozen years as the government debt ratio continues to increase. The prices of various international bulk commodities and futures contracts denominated in US dollars will also fluctuate violently."

David said this, looking at Mr. Volcker, carefully observing his facial expression, and continued: "When the Federal Reserve decided to take a substantial interest rate hike and control the total money supply to curb rising inflation, it meant that the door to a new era was opened."

"If you want to be a door pusher, your name will inevitably be recorded in history forever along with the history of stagflation in recent years."

"You will be the giant who breaks the backbone of inflation!"

"But if you fail to withstand the tremendous pressure from all sides and push this door open and then close it again, it will become a Pandora's box of immeasurable power and destroy everything."

"And you will also be recorded in history forever at that time, but... you will become infamous for eternity..."

"Haha~"

Paul Volcker, who is 52 years old this year and has a tough personality, was not scared after hearing David's words. Instead, he looked at his old friend Julie, smiled and nodded slowly.

"I kind of believe those rumors..."

"Ha! So you never believed it?"

"Yeah~"

"FXXX! If you had told me earlier, I wouldn't have let him come today."

"Hahaha~" Mr. Volker put down the pen in his hand with a laugh, turned his head to look at David carefully, and said after thinking for a few seconds.

"I'll have someone prepare an exclusive office for you. You don't have to come to work on weekdays. Just leave a secretary who can contact you at any time."

"Thank you." David blinked in surprise, stretched out his right hand and said with a smile.

"Yeah." Mr. Volker held his hand, his face no longer hiding the admiration, but he suddenly asked another question.

"How many people do you think will seriously consider the use of carry trades and hedging to avoid risks mentioned at the conference today?"

“It will probably be very few.”

"Oh why?"

"Because they haven't realized the huge risks of this crisis, nor have they completely let go of their preconceived positions, let alone their inherent ideas. They can't listen to the advice of a nobody like you."

"..." The smile on Mr. Volk's face gradually faded. He looked at David silently for a while, nodded, packed up and left.

Julie sat nearby and watched "this good show". She stood up and patted David on the shoulder with great satisfaction: "If I hadn't reminded you just now, Paul would definitely not..."

"I know. Thank you."

"Haha~ Okay, don't do this bad habit of being cautious around me again in the future, understand?"

"OK~"

When David heard Uncle Julie's "big thigh" speak, he immediately shrugged happily and said, "If you weren't around, I wouldn't dare to say anything in front of the New York Fed Chairman."

"correct!"

"Just now, the chairman said that I can find a secretary to stay here to facilitate daily communication. I want to ask Lilith's former secretary Maggie Bianchi to come here. What do you think?"

"Her? Sure."

"Well... I have some ideas that I haven't finished talking about just now. Can I talk about them while we have lunch together?"

Julie's smile widened even more. She pointed at David and shook her head: "Hahaha~ you cowardly and cunning bastard!"

----

Afternoon~

Fifth Avenue and 60th Street, Manhattan.

Metropolitan Club, third floor.

After the New York Fed's meeting ended in the morning, some member bankers came here as usual, sitting together in groups of three or five, chatting and laughing in low voices.

David sat in a corner by the window and lit an expensive cigar that was said to be from Cuba with a match.

He doesn't usually smoke. He only smokes one for fun when he feels tired or needs a pick-me-up, so he doesn't know how to taste a cigar, let alone how to tell whether it's good or bad.

However, now someone was willing to explain to him the quality of the cigar in his hand, and started a familiar conversation with him using this as a start.

The man was very thin, wearing a gray handmade high-end suit, black square-framed glasses, and had sparse hair. He spoke with an "orthodox" New York accent and was very talkative in front of David, even making him feel like it was not the first time he met him.

This person was an old friend that Julie had just introduced to him, named Alan Greens.

David had never met Mr. Greens before, but he clearly remembered that this seemingly unremarkable middle-aged man in front of him would succeed Paul Volcker as Chairman of the Federal Reserve in a few years.