The Endgame For Bitcoin That Nobody Is Talking About – Alasdair Macleod |Btc
Jim Rickards, legendary gold expert, says soon 👉YOU MIGHT NOT BE ABLE TO BUY GOLD AT ANY PRICE!! 👈I reveal the insider information YOU NEED to understand Jim Rickards reasoning and determine if you should buy gold now or wait. And how gold could go to 100k an ounce!! Jim Rickards is the foremost expert on the price of gold, when he talks the markets listen and YOU SHOULD TOO. If you’ve followed his work you know Jim Rickards is one of the premier macro thinkers in the world. And if you don’t know who Jim Rickards is, you need discover his ideas RIGHT NOW. Understanding and listening to Jim Rickards now, could save and make you a lot of money in the future.
Jim Rickards is a heavy hitter in the world of macro economics and gold. He’s revered as one of the top thinkers in the country and he’s made some huge calls on the price of gold saying it can easily to to $10,000 to $50,000 an ounce. Jim Rickards comes to that conclusion in a very scientific manner. It’s really just about math.
In this Jim RIckards video I explain how he comes to those conclusions and then go on to reveal how the price of gold could actually go to $100,000 an ounce!! As shocking as it sounds its realistic, but you’ve got to watch the video to discover the details.
This is a must watch Jim Rickards video, I discuss the following:
1. How experts like Jim Rickards, Peter Schiff, and Jim Rogers think the dollar will crash.
2. You’ll discover the actually math behind how Jim Rickards comes to his 10k-50k gold price.
3. I reveal how, using Jim Rickards logic, the gold price could actually go to 100k and higher!
If you’re interested in the gold price or Jim Rickards you’re going to love this video!!
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On July 2, 2018, Reason and The Soho Forum hosted a debate between Erik Voorhees, the CEO of ShapeShift, and Peter Schiff, CEO and chief global strategist of Euro Pacific Capital. The proposition: “Bitcoin, or a similar form of cryptocurrency, will eventually replace governments’ fiat money as the preferred medium of exchange.”
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It was an Oxford-style debate in which the audience votes on the resolution at the beginning and end of the event, and the side that gains the most ground is victorious. Voorhees won by changing the minds of 15 percent of attendees.
The Soho Forum is held every month at the SubCulture Theater in Manhattan’s East Village. At the next debate, which will be held on August 27, William Easterly, professor of economics at NYU, and Joseph Stiglitz, a Nobel Prize Winner in economics and professor at Columbia, will discuss whether free markets or government action is the best way to eliminate global poverty. You can buy tickets here.
Source: Columbia University (view highlights)
Columbia Law School Scholarship Archive Faculty Scholarship Faculty Publications 2016 A “Barbar A “Barbarous Relic ous Relic”: The F “: The French, Gold, and the Demise of Br ench, Gold, and the Demise of Bretton Woods Michael J. Graetz Columbia Law School, email@example.com Olivia Briffault Follow this and additional works at: https://scholarship.law.columbia.edu/faculty_scholarship Part of the International Law Commons, and the Law and Economics Commons Recommended Citation Michael J. Graetz & Olivia Briffault, A “Barbarous Relic”: The French, Gold, and the Demise of Bretton Woods, THE BRETTON WOODS AGREEMENTS, TOGETHER WITH SCHOLARLY COMMENTARIES AND ESSENTIAL HISTORICAL DOCUMENTS, NAOMI LAMOREAUX & IAN SHAPIRO, EDS., YALE UNIVERSITY PRESS, 2019; YALE LAW & ECONOMICS RESEARCH PAPER NO. 558; COLUMBIA LAW & ECONOMICS WORKING PAPER NO. 560 (2016). Available at: https://scholarship.law.columbia.edu/faculty_scholarship/2541 This Working Paper is brought to you for free and open access by the Faculty Publications at Scholarship Archive. It has been accepted for inclusion in Faculty Scholarship by an authorized administrator of Scholarship Archive. For more information, please contact firstname.lastname@example.org. Electronic copy available at: http://ssrn.com/abstract=2827738 1 © 8/19/16 A “Barbarous Relic”: The French, Gold, and the Demise of Bretton Woods By Michael J. Graetz and Olivia Briffault By the time 730 delegates from 44 countries met at the Mount Washington Hotel in Bretton Woods, New Hampshire, in July 1944 to create a new post-war international financial order, two decades had passed since John Maynard Keynes had described the gold standard as a “barbarous relic.” But the French were never convinced: to them, gold was the key to international monetary stability and an essential paving stone for their path to global political prominence. The French attachment to gold dates back as far as the French Revolution. In 1789, the National Assembly began issuing “assignat” or paper money backed by the value of the properties that had been confiscated from the Catholic Church. Rampant inflation and illegal exchanges for old regime coins caused the assignat to depreciate quickly. In an attempt to combat this hyperinflation, Napoleon established official bimetallism in 1803 with the fixing of the ratio of silver to gold at 15:1/2:1. 1 The history of the assignat and the first major hyperinflation instilled in French politicians a fear of hyperinflation and a preoccupation with the stability of gold. 1 Michael Bordo and Finn Kydland, “The Gold Standard as a Rule,” Federal Reserve Bank of Cleveland Working Papers 9205 (1992). Electronic copy available at: http://ssrn.com/abstract=2827738 2 By the end of the nineteenth century, not only France but also the United States and all the powers of Europe had adopted a gold standard that permitted people to convert their money into gold on demand. Gold served as the “nineteenth-century global monetary anchor.”2 Indeed, from the earliest use of bills and coins as money until August 1971 money was a claim on gold.3 On Sunday, August 15, 1971, at 9:00 p.m., Richard Nixon, the thirty-seventh president of the United States, announced what he called a “New Economic Policy.” Most of what he said described domestic economic policy changes designed to help ensure Nixon’s reelection the following year: income tax cuts for the middle-class and for businesses, elimination of an excise tax on automobiles, and most dramatically, a 90-day freeze on all U.S. wages and prices along with a new government agency (the Cost of Living Council) to maintain price stability after the freeze expired. Nixon also announced a ten-percent surcharge on all imports. Finally, in a move that, along with the import surcharge, produced shock and dismay around the world, Nixon announced that the United States, which had long been willing to exchange dollars for gold at the rate of $35 per ounce, would no longer do so routinely at any price.4 Beyond understanding that this meant the U.S. dollar would be devalued, especially against the Japanese yen and the German mark, no one knew exactly what Nixon’s “closing the gold window” implied. But it soon became clear that in a few short paragraphs the president had dismantled the existing international monetary system and abrogated the agreements of Bretton Woods, a key plank of which had required each country to maintain the exchange rate of its 2 Ibid., 81-83. 3 Benn Steil and Manuel Hinds, Money, Markets and Sovereignty (Cambridge: Yale University Press, 2010), 88. 4 Nixon’s speech on going off the gold standard is available at http://www.presidency.ucsb.edu/ws/?pid=3115. See also Richard Nixon, Executive Order 116165 – Providing for Stabilization of Prices, Rents, Wages, and Salaries (August 15, 1971), http://www.presidency.ucsb.edu/ws/?pid=60492 and Proclamation 4074 – Imposition of Supplemental Duty for Balance of Payments Purposes (August 15, 1971), http://www.presidency.ucsb.edu/ws/index.php?pid=107023. Electronic copy available at: http://ssrn.com/abstract=2827738 3 currency within one percent of a specified value of gold. What would follow, however, was unknown. The French knew what they wanted: a return to a gold standard with its price doubled. No topic sounds more grounded in economics than international monetary arrangements. But for the French—without denying the critical economic role of international currency relationships— international politics had long played a crucial role. To achieve its political and economic objectives, the French hungered for gold to be reinstated as the centerpiece of any worldwide monetary agreement. Before Bretton Woods Richard Nixon was not the first U.S. president to abandon the gold standard. In 1933, shortly after Franklin Roosevelt took office, the U.S. – faced with a growing imbalance of payments with imports exceeding exports despite large tariffs – dissolved the link between the dollar and gold. By executive order, Roosevelt required private citizens to turn their coins and bullion over to the Federal Reserve and prohibited any exports of gold. Congress then followed with a law overriding the gold payment requirements of public and private contracts, a decision that was ratified by a 5-4 vote in the Supreme Court two years later.5 Roosevelt had become convinced that his only choice was between devaluation of the dollar or domestic deflation, and he preferred the former, a sentiment shared by the twenty-five other nations, including the UK, that had already devalued and de-linked their currencies from gold beginning in 1931.6 The French, however, stayed on the gold standard, and that produced serious imbalances between the value of the French currency and those of the U.S. dollar and UK sterling. By going 5 Benn Steil, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order (Princeton: Princeton University Press, 2013), 25. 6 Ibid. 4 off the gold standard, the U.S. and UK had devalued their currencies – lowering export prices and raising import prices — while the French franc stayed strong and the French economy continued to stagnate.7 This imbalance was further exacerbated by fears among owners of French assets following the formation in 1936 of a French socialist Popular Front government led by Léon Blum. In combination, these events induced major gold outflows from France and forced the French also to devalue their currency in 1936 but without abandoning the franc’s relation to gold.8 In 1934, Roosevelt, using powers Congress had granted him, set the price of gold at $35 an ounce, devaluing the dollar by nearly 60 percent.9 (Gold’s previous price had been $20.67 an ounce.10) This sharp devaluation was intended to stabilize domestic prices, improve the U.S. economy, and provide greater liquidity to the capital markets. Instability in currency markets, which some labeled “currency wars,” led in September of 1936 to what Roosevelt described as a “gentleman’s agreement” (certainly not a treaty) among the U.S., the UK, and France under which the Americans and the British agreed not to contest a 30 percent devaluation of the franc.11 The initial French draft of this “Tripartite Agreement” had proposed a system where the franc, the dollar, and sterling would fluctuate within narrow bounds and the three countries would agree not to devalue except by mutual consent. The French aim was to stabilize the relationships among the currencies and to restore gold convertibility.12 The Americans, however, refused to agree to bilateral rates or to return to a firm link between the dollar and gold, so the final Tripartite Agreement simply stated the three nations’ desire to 7 Michael D. Bordo, Dominique Simard, and Eugene White, “France and the Bretton Woods International Monetary System: 1960 to 1968,” NBER Working Paper Series 4642 (1994). 8 Steil, The Battle of Bretton Woods, 32. 9 Roosevelt’s gold proclamation is available at http://www.presidency.ucsb.edu/ws/index.php?pid=14750. 10 Steil, The Battle of Bretton Woods, 28. 11 Ibid., 32. 12 Bordo, Simard, and White, “France and the Bretton Woods International Monetary System,” 5. 5 minimize exchange rate fluctuations (limit devaluations) and continue free trade.13 The agreement, however, required subscribing nations to agree to avoid competitive depreciations of their currencies and to maintain currency values at existing levels (after the 30 percent French devaluation).14 The Tripartite Agreement, coupled with other economic measures in the U.S., helped stabilize the currencies, at least in the short term, but by 1938, the French had to devalue again.15 While the French held on to the gold standard in the interest of currency stability and urged a return to a proper international gold standard, Roosevelt was determined to achieve both monetary stabilization and the dominance of the U.S. dollar by establishing the dollar price of gold as an essential monetary benchmark.16 Years later, at Bretton Woods, the stability of the dollar – not a link to gold – became the key to international monetary stability. And the same divergence in French and U.S. attitudes towards the monetary role of gold would be repeated in the aftermath of Nixon’s shattering of Bretton Woods. Bretton Woods A monetary and financial conference held in Bretton Woods, New Hampshire to shape the post-war Western economic order and open international trade met in 1944. The most important questions at the conference were with respect to the governance and powers of the international institution that would become the International Monetary Fund (IMF), how to 13 The Tripartite Monetary Agreement is available at http://www.bis.org/publ/arpdf/archive/ar1937_en.pdf. 14 Ibid. 15 Steil, The Battle of Bretton Woods, 33. 16 Ibid. The US increasingly took control of the gold standard, as the US economy was nearly three times larger than that of either France or Germany. See also Robert A. Mundell, “A Reconsideration of the Twentieth Century,” Prize Lecture: Department of Economics, Columbia University (December 8, 1999). 6 create international liquidity, and how countries could gain access to that liquidity.17 Although 730 delegates from all 44 allied countries met at Bretton Woods, the United States and United Kingdom dominated the accords and economic agreement.18 The leading figures drafting and discussing how best to organize the post-war economic order were Harry White from the United States and John Maynard Keynes from the UK. Each drafted their version of an economic agreement and much of the conference was devoted to arguing over their plans. The White Plan advocated a central status for the dollar as the world’s sole surrogate for gold, but conceded that the dollar should be backed by gold (reflecting the U.S.’s large gold holdings).19 Keynes, on the other hand, was repelled by the idea of a gold standard.20 The two plans overlapped, however, in many other features: an end to the economic warfare of the 1930s; the need for an institutional forum for international cooperation on monetary matters; and fixed exchange rates. The governments agreed that, absent floating exchange rates, all states needed the assurance of liquidity through an adequate supply of monetary reserves.21 The big disagreement was whether that assurance should be, as proposed by Keynes, provided by a world bank, which could create new reserves called “bancor,” or a borrowing mechanism through what became the IMF, as preferred by White.22 After bargaining for some concessions, the other countries at Bretton Woods largely agreed to American proposals for the IMF and World Bank in the expectation that most of them would be net borrowers and that the United States would be the largest creditor. So, the final agreement ended up being closer to the White Plan, reflecting U.S. preferences, with the dollar exchangeable for gold at the fixed price of $35 an ounce. 17 Steil, The Battle of Bretton Woods, 233. 18 Ibid., 229. 19 Ibid., 128. 20 Ibid., 138. 21 Ibid., 148. 22 Ibid., 143. 7 The French had also drafted an economic plan that they presented at the conference. The French Plan of 1943, written by Hervé Alphand and André Istel, was designed to create balance and parity among participating countries – relying on a gold standard.23 The French plan would have had participating countries fix their official currency values by reference to the currencies of other countries – official values that must be maintained and could be changed only after consultation with all other participating countries.24 The French plan also would have required each member to hold each other’s countries’ currencies to increase liquidity. The French, for example, would hold dollars and other currencies, especially those of European countries recovering from World War II. Pegging all international currencies with reference to the dollar meant that gold could be used as an international reserve asset and as a means of settlement.25 The French hoped that the agreement would define currencies in terms of a fixed weight of gold.26 The French also proposed a Monetary Stabilization Office to facilitate currency clearings, serve as a depository for collateral, and become the location of international consultation.27 The French would have placed gold, not the U.S. dollar, at the center of the world monetary system. That did not happen. The French plan had virtually no impact on the structure of the IMF or the World Bank. The Articles of Agreement at Bretton Woods, however, did define international currencies with reference to gold, and members agreed to declare a par value and maintain it within a one percent margin.28 Members also agreed to make their currencies convertible for current account transactions. The U.S. pegged the price of gold at $35 an ounce.29 Other members would then 23 Bordo, Simard, and White, “France and the Bretton Woods International Monetary System,” 3. 24 Ibid. 25 Ibid. 26 Ibid. 27 Ibid. 28 Steil, The Battle of Bretton Woods.. 29 Bordo, Simard, and White, “France and the Bretton Woods International Monetary System,” 6. 8 intervene in foreign exchange markets by either buying or selling dollars to maintain the value of their currency within the one percent margin. The last attempt the French made to shape these international arrangements related to gold quotas. Each country’s gold quota determined their position in the directorship. The French wanted a more important gold quota so they could hold a rank in the directorships of the IMF and World Bank. The first three ranks were the U.S., the UK, and Russia. The French wanted the fourth rank, but it was given to China whose economy was growing more quickly.30 Pierre Mendès, the head of the French delegation, complained, “the Americans have taken key positions which are against the French.” To placate the French and affirm the US commitment to France, Henry Morgenthau, the U.S. Treasury Secretary and President of the Bretton Woods conference, added a fifth directorship for the French up from the previously planned three. He responded to Mendès, “I told you I would not go to bed until I tried to correct [the] impression that the American delegation was unfriendly to France.”31 From its inception, the Bretton Woods system became an asymmetrical dollar-gold system.32 Instead of turning dollars into gold and holding gold, countries held dollars, and the dollar became both the private and official international currency.33 As the system moved farther away from a gold standard and closer to a “dollar standard,” there was little the French, who so wanted a return to gold, could do. France’s reconstruction problems – including chronic external and internal imbalances – limited its influence in the postwar monetary system. Because of its 30 Steil, The Battle of Bretton Woods, 233. 31.Ibid. 32 Ibid. 33 Ibid. 9 weak economy, France had to devalue the franc multiple times to comply with the Bretton Woods agreement. 34 The U.S. – by far the wealthiest and most stable Western country – basically dominated international monetary arrangements. The Bretton Woods system, therefore, never actually became a convertible system of international currencies into gold as the agreement seemed to imply, but instead was effectively a dollar standard, with the dollar pegged to a fixed price of gold. “Banaliser le Dollar” If French policymakers had any policy priority in the period between Bretton Woods and when Nixon closed the gold window in 1971, it was to “banaliser le dollar” (dethrone the dollar).35 By 1947, postwar difficulties and domestic reconstruction needs, along with troubles for the British around the world (especially in India, Greece, and Palestine), had undone the British Empire and simultaneously any potential for sterling to compete with the dollar as an international reserve currency.36 The French viewed the British as overly sympathetic to American needs. The beginning of the Marshall Plan the following year, coupled with large U.S. military expenditures, provoked an unprecedented outflow of dollars from the U.S. The French regarded the enormous power the U.S. held in the international community as an attempt to control the world economy for selfish purposes. Over the next decade, the fragility of the Bretton Woods arrangements became apparent. In 1959, the economist Robert Triffin told Congress that the use of “national currencies in 34 Ibid., 6. 35 Harold James, “The Multiple Contexts of Bretton Woods,” Oxford Review of Economics Policy 28:3 (October 2012), 91. 36 Steil, The Battle of Bretton Woods, 309-311. 10 international reserves” was a “built in” destabilizer to “world monetary arrangements.”37 Foreign governments that accumulated dollars as reserves could not use them at home, so they either lent any dollars in excess of the costs of the imports they purchased back to the United States or held them as reserves. The Triffin Dilemma, as it became known, is that there was no practical way for the U.S. to provide sufficient dollars to satisfy the world’s liquidity needs for trade and international capital transactions and simultaneously limit the number of dollars to guarantee that they could be redeemed for gold at a fixed price.38 Jacques Rueff, an extremely influential French economist committed to a gold standard, agreed. Here is how Rueff described the problem of deficits in the U.S. balance of payments while the dollar serves as the international reserve currency: The United States…pays the creditor country dollars, which end up with its central bank. But the dollars are of no use in Bonn, or in Tokyo, or in Paris. The very same day, they are re-lent to the New York money market… So the key currency country never feels the effect of a deficit in its balance of payments. And…there is no reason whatever for the deficit to disappear… [I]f I had an agreement with my tailor that whatever money I pay him he returns to me the very same day as a loan, I would have no objection at all to ordering more suits from him.39 In theory, dollars could be converted into gold at $35 an ounce, but it did not take long for the number of dollars in circulation to overwhelm the capacity of the U.S. to redeem them in gold. In 1962, British Prime Minister Harold MacMillan told President Kennedy that most of the world’s monetary difficulties would be solved if the U.S. doubled the price of gold to $70 an ounce, but Kennedy regarded such a devaluation as signaling U.S. weakness and he refused.40 Nor was Kennedy willing to accept austerity at home, so the U.S. kept expanding its money 37 Ibid., 333. 38 Steil, The Battle of Bretton Woods, 333. See also Robert Triffin, Gold and the Dollar Crisis: The Future of Convertability (New Haven: Yale University Press, 1960). 39 Jacques Rueff and Fred Hirsh, “The Role and the Rule of Gold: An Argument,” Princeton Essays on International Finances 47 (June 1965), 2-3. See also Jacques Rueff, The Monetary Sin of the West (New York: Macmillan, 1972), available at http://mises.org/library/monetary-sin-west. 40 Ibid., 334. 11 supply. By the mid-1960s, the dollar shortage of the early 1950s had turned into a dollar glut.41 And the ratio of U.S. gold reserves to the number of dollars circulating through the world had shrunk. The French, unsurprisingly, were unhappy. More than 30 countries around the world had devalued their currencies since the war. France, which had faced ongoing economic difficulties including budget deficits and trade imbalances, had devalued its franc numerous times by 1958. The rebellion of a division of the French Army in Algiers in May of 1958 revealed the weakness of the French Fourth Republic. This attempted coup led to the return of Charles de Gaulle to political power. De Gaulle blamed the constitution and the institutions of the Fourth Republic for France’s economic and political weakness. He drafted a new constitution with Michel Debré that emphasized a strong executive in a presidential regime with bicameralism. This new constitution ushered in the French 5th Republic. De Gaulle wanted to create a new image of France: politically unified, economically strong, and internationally powerful.42 De Gaulle addressed the country’s ongoing deficits through tax increases, large cuts in government spending, and another devaluation of the franc in 1958. 43 This austerity, de Gaulle believed, was necessary to restore France to its rightful place at the center of world affairs and to offset the predominance of the United States. De Gaulle appointed Jacques Rueff to lead a commission to pave a path to economic expansion, which he believed to be the first step toward French domination. Rueff concluded that the major obstacle to French economic strength was that the United States blocked and manipulated interest rates.44 Returning to a real gold standard and a strong French franc was a centerpiece of his plan to regain economic domination. 41 Benjamin J. Cohen, “Bretton Woods System” in Routledge Encyclopedia of International Political Economy, ed. R.J. Barry Jones (Routledge, 2002). 42 Bordo, Simard, and White, “France and the Bretton Woods International Monetary System,” 6-7. 43 Cohen, “Bretton Woods System.” 44 Marc Flandreau, Money Doctors: The Experience of International Financial Advising 1850-2000 (New York: Routledge, 2003). 12 The Treaty of Rome, signed in 1957 by six countries – France, Germany, Italy, the Netherlands, Belgium, and Luxembourg – had liberalized and expanded trade, especially within Europe, and by the mid-1960s the European economies were enjoying robust postwar economic growth.45 This was accompanied by growing European concerns with domination by the U.S. government and by American multinationals. No one expressed this unease more forcefully than Charles de Gaulle. “The purpose of Europe,” he said, “is to avoid domination by the Americans or Russians.” “Europe,” he added, “is the means by which France can once again become what she has not been since Waterloo, first in the world.”46 At a press conference on February 4, 1965, de Gaulle urged major changes in international monetary arrangements. He described a monetary system based on any single nation’s currency as a danger to the world and sang praises to gold.47 Gold, he said, “does not change to nature” and is “in all places and at all times, the immutable and fiduciary value par excellence.”48 In his memoir, de Gaulle was even more explicit. He described the countries of the West as having “no choice” but to accept the international monetary system of Bretton Woods in which “the dollar was automatically regarded as the equivalent of gold.”49 This, de Gaulle said, enhanced American hegemony, and the surplus dollars exported by the U.S. to France, he added, “put a strain on our currency” that benefited only the Americans. “[T]he monumentally overprivileged position that the world has conceded to the American currency since the two world wars,” he said, “left [America] standing alone amid the ruins of others.”50 So, beginning in 1965, the French adopted as official policy the conversion of its dollar reserves into gold to induce the 45 James, “The Multiple Contexts of Bretton Woods,” 36-37. 46 James, “The Multiple Contexts of Bretton Woods,” 37. 47 See Charles de Gaulle, “Monetary Crisis Ghost of 1965,” https://www.youtube.com/watch?v=Q9r1NLMFixo. 48 Rueff and Hirsh, “The Role and the Rule of Gold,” preface. 49 Charles de Gaulle, Memoirs of Hope: Renewal and Endeavor, trans. Terrence Kilmartin (New York: Simon and Schuster, 1972), 371-372. 50 Ibid., 371. 13 U.S. to begin reform of the international monetary system. 51 The U.S. and France were on a collision course over their differing visions of international monetary reform and over the role of gold.52 France had become the principal antagonist of the U.S. in monetary affairs. This was in sharp contrast to Germany, which relied heavily on the U.S. military commitment. The German Bundesbank promised the U.S. that it would hold onto dollars. Given the inflation that the U.S. experienced in the 1960s and the accompanying influx of dollars to Germany, this was a decision the Germans came to regret. In a 1970 interview, Karl Blessing, president of the Bundesbank, said, “we should aggressively have converted the dollars into gold until [the Americans] were driven to despair.”53 The French were convinced that the Germans were being manipulated by American desires. The very different frustrations of the French and the Germans inspired both to seek a more coordinated international financial policy; this, in turn, would, two decades later, result in the creation of the euro, in part at least, as a counterweight to the dollar. In 1961, nine central banks from the U.S. and eight European countries created the London Gold Pool in an attempt to maintain fixed convertible values for their currencies and the $35 price for an ounce of gold.54 Half the required supply of gold for the pool came from the U.S. But by 1965, the pool could not stem the outflow of gold. The world gold supply had not increased to match the growing supply of dollars, the U.S. deficit had ballooned, and U.S. inflation was increasing as a result of spending on both social programs and the Vietnam War. By the late 1960s, the Bretton Woods agreement had largely unraveled. 51 Bordo, Simard, and White, “France and the International Monetary System,” 12; James, “The Multiple Contexts of Bretton Woods,” 64. 52 Bordo, Simard, and White, “France and the International Monetary System,” 14. 53 James, “The Multiple Contexts of Bretton Woods,” 64. 54 Peter M. Garber, “The Collapse of the Bretton Woods Fixed Exchange Rate System” in A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform, eds. Michael D. Bordo and Barry Eichengreen (Chicago: University of Chicago Press, 1991), 464. 14 De Gaulle’s attempts to control the international monetary system, however, did not stop at simply controlling imports and exports of gold. Beginning in 1965, de Gaulle began exchanging France’s dollar reserves for gold. This was de Gaulle’s attempt to punish the British, as he believed their economic policies were also being unduly influenced by the United States. In 1966 France stopped contributing to the international gold pool, forcing the U.S. to increase its contribution to the gold pool by the amount previously supplied by France. By 1966, gold accounted for more than 70 percent of French international holdings. 55 When the U.S. rebuffed France’s pressure to devalue the dollar by increasing the price of gold, the French continued accumulating gold. President de Gaulle refused to devalue the franc calling the idea, “the worst possible absurdity,” a refusal that was widely criticized by the international community.56 French economic and political difficulties then created large imbalances of payments for France that produced substantial reserve losses. After de Gaulle retired to his country home in April 1969, the newly elected Georges Pompidou was soon forced to devalue the franc. The Chicago Tribune called the decision a thankful “break with de Gaulle’s monstrously absurd foreign exchange policy.”57 By May 1968, the Gold Pool had completely fallen apart and had been replaced by a twotier gold system with separate private and public gold markets. Governments traded gold in the public market at a fixed price while in the private market the price of gold was set by supply and 55 Bordo, Simard, and White, “France and the International Monetary System,” 12. 56 “After the French Devaluation,” Chicago Tribune, August 13, 1969, 24. 57 Ibid. The 1969 devaluation was particularly important as parity between the French franc and the German mark was an important topic in the 1969 German elections. Germany was debating whether it should revalue the mark upwards. Germany welcomed the French devaluation because it removed the disparity of a key currency with the mark and suggested that an upwards revaluation was “wholly unnecessary.” Germany relied heavily on its relationship to the franc as it struggled between national pressures to maintain the mark’s value and the American desire for the mark to be revalued upwards. 15 demand.58 The next year, the Gold Pool nations stabilized the price of gold by agreeing to stop selling gold in private markets and by allowing the price of gold for nonmonetary transactions to fluctuate.59 In the meanwhile, private gold markets faced separate pressures. Economic sanctions against South Africa for its policy of apartheid and its relations with the Soviet Union made the Krugerrand – which accounted for close to 90% of the global gold coin market — an illegal import in many Western countries (including the United States). This limited the supply of gold, and contributed to anxiety about the status of gold in the international monetary system.60 The reduced supply of gold from South Africa was accompanied by speculation about a potential devaluation of the dollar. In March 1968, the IMF abandoned a single fixed price for gold and reversed its policies regarding purchases of gold from South Africa.61 By September 1969, Germany informed the IMF that it was unable to maintain values for the mark within the prescribed limits around par value.62 A year and a half after that, in a contentious decision, especially upsetting to the French, Germany decided to float the mark.63 French Minister of Finance Giscard D’Estaing then declared, “The world monetary system must be set in concentric circles: the first one being gold, and then, the second, if necessary, recourse to deliberate and concerted creation of either reserve assets or credit facilities. The inner circle is gold. Experience in recent years has shown us that, aside from any theoretical preference, gold remains the essential basis of the world payments system.”64 According to D’Estaing (in a speech to the National Assembly in May 1971), the French 58 Margaret de Vries, The International Monetary Fund 1966-1971, Volume I: Narrative (Washington D.C.: International Monetary Fund, 1976). 59 Ibid. 60 Ibid. 61 Ibid. 62 Garber, “The Collapse of the Bretton Woods Fixed Exchange Rate System.” 63 Ibid. 64 De Vries, “Volume I: Narrative.” 16 Government had three main concerns: to protect the French economy from the international upheaval in currency markets; to fix the roots of international monetary problems; and to ensure that any measures taken in response to international monetary difficulties not compromise the French desire to create a monetary and economic union in Europe.65 D’Estaing criticized Germany’s decision to float its currency – complaining that it was not a European community decision and would not help in creating a European economic monetary union.66 D’Estaing was willing instead to accept a collective revaluation of international currencies.67 In such a case, the European countries would compensate for the United States’ monetary inflation by deflation in Europe.68 But D’Estaing would accept this sacrifice only if it meant continuing the gold standard. By the late 1960s, it was unmistakable that U.S. gold reserves, which had been falling relative to U.S. dollars since 1957, were inadequate to fund convertibility of dollars into gold at the fixed price of $35 an ounce.69 In 1968, riots in both France and the U.S. essentially took international monetary reform off the agenda. In 1969, George Pompidou succeeded Charles de Gaulle as president of France, and Richard Nixon succeeded Lyndon Johnson in the U.S. Domestic disorder on both sides of the Atlantic was a harbinger of the next decades’ social, economic, and international upheavals. In the period leading up to Richard Nixon’s August 1971 policy shift, the U.S. balance of payments deteriorated substantially: the $3.2 billion deficit in the second quarter of 1971 exceeded the deficit for all of 1970. In the third quarter, the deficit was $3.1 billion, hardly better. One of the few constants, however, was the continuing divergence of American and French views concerning the proper role of gold in international monetary affairs. 65 “La politique étrangère de la France: textes et documents,” dir. de publ. Ministère des Affaires Etrangeres. Paris: La Documentation Française, Octobre 1971. “Déclaration de Valéry Giscard d’Estaing à l’Assemblée nationale” (12 Mai, 1971), 162-167. 66 De Vries, “Volume I: Narrative.” 67 Ibid. 68 Ibid. 69 Bordo, Simard, and White, “France and the International Monetary System,” 18 and Figure 5. 17 After the “Nixon Shock” In August 1971, French president Pompidou sent a battleship to New York harbor to remove France’s gold from the vault of the New York Federal Reserve Bank and to transport it to the Banque de France in Paris. Soon thereafter, gold accounted for 92 percent of French reserves. On August 11, the British requested that the Treasury remove the $3 billion of gold from the U.S. depository of Fort Knox to the New York Federal Reserve vault, where the gold of foreign governments was stored. As Paul Volcker, who was then treasury undersecretary for monetary affairs, put it: “If the British, who had founded the system with us, and who had fought so hard to defend their own currency, were going to take gold for their dollars, it was clear the game was indeed over.”70 When Nixon spoke on August 15, 1971, the U.S. held less than 10,000 tons of gold, less than half of what it once had.71 Nixon’s August 1971 decisions caught foreign government by complete surprise. They also surprised most U.S. policymakers and officials. Nixon’s speech and the policies it announced had been suggested to him a few weeks earlier by his charismatic Treasury Secretary, John Connally, and the details had been developed at a meeting of Nixon’s economic advisors who had been sequestered at Camp David the weekend before Nixon’s Sunday night address. As Paul Volcker had told the group, billions might be made with advance knowledge of what the president was planning to do. The necessary secrecy, however, had meant that both technical and strategic planning for its aftermath could not happen until the new policies had been announced. In the weeks following Nixon’s announcement, Connally, Volcker, and other administration officials spent much of their time traveling to foreign capitals attempting to assuage foreign 70 Paul Volcker and Toyoo Gyohten, Changing Fortunes: The World’s Money and the Threat to American Leadership (Three Rivers Press, 1993), 77. 71 One metric ton of gold is composed of 32,150 troy ounces. 18 leaders who were apoplectic about the import surcharge and insecure about the new U.S. monetary policy – whatever that might be. Within the U.S. government, efforts to fashion a new international monetary agreement did not jell until mid-November 1971 in anticipation of a meeting of the G-10 in Rome later that month. The U.S. position was heavily influenced by the need for the French – its principal antagonist – to agree. For economic reasons primarily having to do with trade, the U.S. wanted a substantial devaluation of the dollar vis a vis the German mark and the Japanese yen. For its trade policy, the French needed to maintain the relationship between the franc and the mark, but because its trade with the U.S. was relatively small, France had little concern about the relationship of the franc and the dollar. The French government, however, cared deeply about the price of gold and, unsurprisingly, wanted to preserve an official relationship between the U.S. dollar and gold. Not only did the French government hold the bulk of its official reserves in gold, but virtually every French resident also had a little gold stashed away. On November 29, 1971, the arguments and discussions culminated in a meeting of the finance ministers of the world’s ten richest countries (the G-10) in Rome. At the Rome meeting, the chairmanship, which rotated, was held by the U.S.’s John Connally and he insisted, so that he could be “impartial,” that Paul Volcker would present the U.S. position. Volcker then announced that the U.S. – which had refused since the 1930s to change the official price of gold from $35 an ounce – would accept an upward revision of that price and would eliminate the import surcharge in exchange for an appreciation of other OECD currencies by a weighted average of 11 percent. This devaluation of the dollar was greater than the other G-10 countries expected, and not well 19 received by the other finance ministers. The only real outcome of the meeting was an agreement to hold another meeting the next month in Washington, DC.72 In the interval between the two meetings, crucial negotiations took place between Nixon and Pompidou in the Azores. Pompidou began their meeting with a “Gaullist lecture on gold and the evils of the dollar standard.”73 Ultimately, however, Pompidou agreed to a rise in the price of gold from $35 to $38 an ounce, a rise of 8.5 percent, significantly less than the 11 percent the U.S. had wanted. Soon thereafter, the G-10 meeting took place at the Smithsonian Castle on the Mall. The negotiations, as in Rome, centered on trade agreements and tariffs, the need to devalue the dollar, future exchange rates, and the convertibility of the dollar into gold.74 The U.S. was adamant about its desire to move away from gold. The French were equally adamant to the contrary. The difference in French and U.S. policies were neither new nor driven solely by the economics of the time. French policy was, to be sure, based upon the longstanding French position. By December 1971, the French held enormous gold reserves, but had limited international economic power. The U.S. was in the opposite position: its gold reserves had dwindled, but it still had immense international economic sway. The U.S. was determined both to maintain its global economic dominance and to improve economic conditions at home. The first issue discussed at the Smithsonian meeting was gold convertibility. The French insisted on maintaining gold convertibility, arguing that such convertibility was essential to a fixed currency parity system, and that under the IMF agreement the U.S. was required to 72 These events were related in Edwin S. Cohen, A Lawyer’s Life Deep in the Heart of Taxes (Tax Analysts, 1994) and the collections of his papers at the University of Virginia Law Library, Box 102, “Institutional Monetary Issues.” Cohen’s account is confirmed in Volcker and Gyohten, Changing Fortunes. 73 Volcker and Gyohten, Changing Fortunes, 88-89. 74 Garber, “The Collapse of the Bretton Woods Fixed Exchange Rate System.” 20 maintain to fixed currency relationships. 75 The French expressed their dismay that the U.S. had violated international law, and were determined not to reward the U.S. for breaking its international commitments.76 For the French, Nixon’s unilateral action was just one more example of how the U.S. behavior transgressed the laws that all other countries must obey. The only way to force the U.S. to act like other countries, the French believed, was to force the U.S. to return to a gold standard. The French argued that, although the dollar was clearly overvalued, the only proper way to devalue the dollar was to adjust the price of gold – otherwise the system would remain biased in the U.S.’s favor. 77 When countries allow their currencies to stray too far from the price of gold, the French insisted, they must revalue their currency.78 Georges Pompidou criticized the American approach, “I cannot conceive that the U.S. thinks it can make up the deficit in its balance of payments with exports to Europe. The U.S. balance-of-payments deficit is an American problem.”79 After Nixon suspended convertibility in August 1971, the French had urged Europe to make the U.S. pay.80 Paul Volcker, then undersecretary of the treasury, said that the fundamental structure of the IMF would have to be changed for convertibility to be maintained.81 Volcker believed that gold should no longer play a role in the international monetary system and instead that SDRs (Special Drawing Rights issued by the IMF to play the role of an alternative reserve currency) 75 Jacques Amalric, “Les dirigeants américains paraissent résignés à la dévaluation du dollar,” Le Monde, 17 August 1971, 1. 76 Ibid. By participating in and creating the Fund, the U.S. had promised to tie the dollar to gold; by stopping dollar convertibility the U.S. effectively broke its promise. 77 Jacques Rueff, “La Reevaluation Des Monnais, Faux Problem,” Le Monde, September 10, 1971, reporting the French insistence that the way to fix Bretton Woods would be to enlarge the margin of fluctuations and change the price of gold – not remove gold from the picture. 78 Ibid. 79 Clyde H. Farnsworth, “Europeans Re-Examine Goals,” New York Times, January 14, 1973. 80 Rueff, “La Reevaluation Des Monnais, Faux Problem.” 81 Edwin S. Cohen, “The Highlights of the Group of Ten Deputies Meeting at the International Monetary Fund at 11:00 am, November 16, 1971,” in International Monetary Problems, f.202, ed. Special Collections (University of Virginia Law School, December 16, 1971). 21 should be extended.82 Volcker proposed to increase liquidity, but without any link to gold, and he insisted that in order to maintain the necessary liquidity the U.S. must be free to adjust its own exchange rate. The French rejected Volcker’s arguments, continuing to insist on a return to gold convertibility in order to limit the role of the U.S. dollar in international economic arrangements. The U.S., having consistently rejected French proposals for monetary reform since before the Tripartite Agreement, held firm. It was difficult for the French to gather much support for their position. If gold remained at the center of the international monetary system and the U.S. doubled or even tripled the price of gold in dollars, other countries’ exchange rates with the dollar would also have to change – many by a large amount. Unsurprisingly, the discussion at the Smithsonian then turned to the question of fixed versus floating exchange rates. By the time of the Smithsonian meeting, not only Germany but also the UK, Canada, and several other nations had begun to float the value of their currencies against the dollar as fixed exchange rates had been difficult to maintain with the ongoing decline in the value of the dollar. The U.S. had already decided to lift its import surcharge for nations that agreed to float their currencies against the dollar and was also interested in floating the dollar.83 But the French were adamantly opposed to floating rates. In the French view, floating exchange rates caused unnecessary instability and price uncertainty.84 On the other hand, fixed exchange rates created a need for the U.S. to constantly adjust its domestic economic policies and increased the likelihood that the U.S. would erect and maintain significant trade barriers to 82 Ibid. 83 Department of the Treasury, “Memorandum: Preliminary Notes on International Monetary Problems,” ed. Edwin S. Cohen (Washington DC: University of Virginia Law School, September 16, 1971). 84 Ibid. 22 solve its balance of payment deficit problems.85 The French thought that a two-tier market for gold would solve this problem: governments would privately trade gold and francs at a fixed exchange price, but in the public market supply and demand would determine the price of gold.86 According to the French, floating rates were highly selfish. A Le Monde article from September 1971, reflecting French government opinions on floating rates, compared floating exchange rates to a state of anarchy.87 The article suggested that by floating a currency a country is freer to pursue any policy it would like – as opposed to being constrained by the linkage of its currency to that of other countries.88 Flexible rates allow countries to pursue autonomous economic and monetary policy. The French insisted that floating rates, free from fixed links to the currencies of other countries, would in the long run create even greater international disorder. A central reason that the French wanted to maintain fixed exchange rates was that fixed rates would make the transition to a European economic union, which could compete against the United States, easier. The French believed that Europe needed a common currency.89 The French regarded a link to gold as helping to facilitate the monetary unification of Europe, and with monetary unification, the French expected greater political unification and enhanced French influence in world affairs. 90 An “écu” (European Currency Unit) could be linked to gold and might replace the ubiquity of the dollar in international transactions. 91 Transition to the écu would be made easier by maintaining fixed exchange rates. The French planned to have the écu defined by its relationship to gold and guaranteed by a European reserve fund.92 A European 85 Ibid. 86 De Vries, “Volume I: Narrative.” 87 Paul Fabra, “La Faillite Du Système Monétaire,” Le Monde, September 25, 1971 88 Ibid. 89 Léon Lambert, “Une Monnaie Européen Tout De Suite,” Le Monde, 20 December 1971. 90 Ibid. 91 Ibid. 92 Ibid. 23 currency would then help France counterbalance the U.S. in international economic matters by providing the world an alternative currency that might compete with the dollar. In a final attempt to salvage the Bretton Woods agreement, the negotiations at the Smithsonian meeting concluded with the result that the Azores agreement between Nixon and Pompidou had preordained: the dollar was pegged to gold at $38 an ounce (up from the previous $35) with other countries agreeing to appreciate their currencies by a fixed amount with respect to the dollar. This resulted in an official devaluation of the dollar of 8.57 percent, less than the U.S. had proposed at Rome, but more than other countries had initially anticipated. 93 The G-10 also set wider margins for currency fluctuations based on the new dollar value. The group agreed to help balance the world trading system through special drawing rights (SDRs) issued by the International Monetary Fund.94 The U.S. also agreed to eliminate its new 10 percent surtax on imports. President Nixon announced the agreement at the Smithsonian’s Air and Space Museum, then next door to the Castle where the meetings had been held. The French were still not content. They continued to insist that the U.S. return to the gold standard, but the U.S. would not. For the next decade, the French would continue to blame any failures of the Smithsonian agreement on the U.S. refusal to return to a gold standard. The Smithsonian agreement did not long survive. The rather small margins of currency fluctuations agreed to proved impossible to maintain and as the price of dollars in the free market fluctuated, this put pressure on its official price for exchange. As early as 1972, the French were again criticizing American monetary policy. The French continued to insist that the U.S. should buy surplus dollars from European nations with gold, but the U.S. no longer held enough gold to 93 Garber, “The Collapse of the Bretton Woods Fixed Exchange Rate System.” 94 Ibid. 24 do that. 95 Nor did the U.S. have any intention to do so. The French said: “The dollar cannot be a truly international currency, why not make more use of gold, this fiduciary asset par excellence? The official price of the yellow metal, in order to be credible, must not vary too greatly from the market price. Since Washington insists on an excessive discrepancy between the two prices, let us, the Europeans, decide to fix a realistic price for gold for our own transactions.”96 However, the rest of Europe did not support the French view. In June of 1972, the British decided to float the pound, a move that created even greater price discrepancy. The French complained and called the British move a political failure.97 On September 11, 1972, Paul Volcker, still undersecretary of the Treasury, testified before a subcommittee on international exchange of Congress’s Joint Economic Committee.98 He described the British decision in July to float the pound as disrupting the “period of calm” following “the exchange of rate equilibrium so arduously worked out” at the Smithsonian. He also described the interventions in world currency markets undertaken by the Treasury and the Federal Reserve as necessary to keep the value of the dollar in an appropriate relation to other currencies, and he informed the committee that such interventions would continue at U.S. discretion. Here is what he said about gold: With respect to gold, the United States has repeatedly expressed the view that the role of that metal in the international monetary system should and must continue to diminish. Such an evolution is, of course, fully consistent with the trend of monetary history over a period of many years. Governments around the world long ago reached the inevitable judgment that domestic monetary systems and policies could not safely be hostage to vagaries in gold demand and supply – the cost in terms of economic stability was simply too high. Internationally, gold 25 years ago accounted for about 70 percent of total national monetary reserves. By 1972, the ratio had declined to some 27 percent. 95 Richard Janssen, “Connally Suggests New Monetary Rules Discipline Nations with Chronic Surpluses,” The Wall Street Journal, March 20, 1972. 96 Ibid. 97 Roman Eisenstein, “France Has to Back Dollar,” The Guardian, 5 August 1972. 98 Statement of the Honorable Paul A. Volcker, Under Secretary of the Treasury for Monetary Affairs, Before the Subcommittee on International Exchange and Payments of the Joint Economic Committee, September 11, 1972. 25 There are irresistible geological, industrial, and economic facts behind these trends. The physical supply of gold is both limited and, in the Western World, virtually entirely under the control of one producing nation. … Gold is both an attractive and useful metal, but the residual supply is in no way related to the liquidity needs of the world community. … I suppose there are some who would argue that additional liquidity in a gold-based system can be provided by increasing from time to time the price at which gold is traded among monetary authorities. But surely such an approach would make a mockery of any presumed “discipline” from a gold centered monetary system – the virtue sometimes still attributed to the use of gold. A system relying on gold price increases to regulate liquidity would be both continuously destabilizing to the monetary system and capricious in whom it benefits and whom it hurts. Obviously referring to the French view, Volcker added, “I do not think it will be easy to resolve differences about what to do about the precise role of gold.” That was an understatement. The Smithsonian agreement continued to disintegrate. Rather than stabilize the dollar and produce a large U.S. surplus to cure adverse U.S. balance of international payments, the agreement was followed by a weak dollar, and similar problems as before. Early in 1973, the U.S. devalued the dollar to make U.S. products more competitive in world markets and to improve the U.S. balance of payments. This was followed by a dump of dollars into the market in a rush to exchange them for German marks and Japanese yen.99 The combination of high rates of inflation and the first oil crisis in the fall of 1973 made the fixed rates agreed to at the Smithsonian untenable. By late 1973, the U.S., Japan, and all the countries of the European treaty had decided to let their currencies float against the dollar. In the fall of 1975, the principal antagonists, the U.S. and France, reached agreement on a few sentences of amendments to the IMF Articles of Agreement to provide a formal legal basis for floating exchange rates, and in 1976 the IMF Articles were formally amended to reflect the new reality. Both the 1944 agreement of Bretton Woods and the one reached just a few years earlier at the Smithsonian were officially dead. 99 Farnsworth, “Europeans Re-Examine Goals.” 26 Conclusion The interment of gold as a monetary standard has not ended ongoing debates over its strengths and weaknesses. But despite the periodic calls for its renewal by some analysts and many politicians both in the U.S. and abroad, it is difficult to imagine gold’s resurrection as the foundation of international monetary arrangements. Floating rates allow nations to reduce their exposure to the risks of any one currency by diversifying their holdings of foreign currencies. Intermittent national interventions that affect the valuation of domestic currencies to serve domestic economic and political interests remain inevitable. The Maastricht Treaty of February 1992, which led to the adoption of the euro, has, to be sure, reduced the international power of the dollar, but it has also produced some serious economic dislocations in the Eurozone. Some analysts are now looking to the currencies of large emerging countries, such as China, to add stability to the system. But it seems that all we can be sure of – more than seven decades after Bretton Woods and nearly half a century since its demise – is that the stability of the international monetary system rests primarily with judgments of the world’s central bankers and of the international monetary institutions, especially the IMF. This state of affairs proved its mettle during the 2007-2010 financial crisis, but it hardly ensures confidence or monetary stability. The French failure in its efforts to return to a gold standard has not, so far at least, become a loss for everyone. But there is more of the story yet to unfold.
Satoshi gave the world Bitcoin, a true “something for nothing.” His discovery of absolute scarcity for money is an unstoppable idea that is changing the world tremendously, just like its digital ancestor: the number zero.
Zero is Special
“In the history of culture the discovery of zero will always stand out as one of the greatest single achievements of the human race.” — Tobias Danzig, Number: The Language of Science
Many believe that Bitcoin is “just one of thousands of cryptoassets”—this is true in the same way that the number zero is just one of an infinite series of numbers. In reality, Bitcoin is special, and so is zero: each is an invention which led to a discovery that fundamentally reshaped its overarching system—for Bitcoin, that system is money, and for zero, it is mathematics. Since money and math are mankind’s two universal languages, both Bitcoin and zero are critical constructs for civilization.
For most of history, mankind had no concept of zero: an understanding of it is not innate to us—a symbol for it had to be invented and continuously taught to successive generations. Zero is an abstract conception and is not discernible in the physical world—no one goes shopping for zero apples. To better understand this, we will walk down a winding path covering more than 4,000 years of human history that led to zero becoming part of the empirical bedrock of modernity.
Numerals, which are symbols for numbers, are the greatest abstractions ever invented by mankind: virtually everything we interact with is best grasped in numerical, quantifiable, or digital form. Math, the language of numerals, originally developed from a practical desire to count things—whether it was the amount of fish in the daily catch or the days since the last full moon. Many ancient civilizations developed rudimentary numeral systems: in 2000 BCE, the Babylonians, who failed to conceptualize zero, used two symbols in different arrangements to create unique numerals between 1 and 60:
Vestiges of the base-60 Babylonian cuneiform system still exist today: there are 60 seconds in a minute, 60 minutes in an hour, and 6 sets of 60 degrees in a circle. But this ancient system lacked a zero, which severely limited its usefulness. Ancient Greeks and Mayans developed their own numeral systems, each of which contained rough conceptions of zero. However, the first explicit and arithmetic use of zero came from ancient Indian and Cambodian cultures. They created a system with nine number symbols and a small dot used to mark the absence of a number—the original zero. This numeral system would eventually evolve into the one we use today:
In the 7th century, the Indian mathematician Brahmagupta developed terms for zero in addition, subtraction, multiplication, and division (although he struggled a bit with the latter, as would thinkers for centuries to come). As the discipline of mathematics matured in India, it was passed through trade networks eastward into China and westward into Islamic and Arabic cultures. It was this western advance of zero which ultimately led to the inception of the Hindu-Arabic numeral system—the most common means of symbolic number representation in the world today:
The Economization of Math
When zero reached Europe roughly 300 years later in the High Middle Ages, it was met with strong ideological resistance. Facing opposition from users of the well-established Roman numeral system, zero struggled to gain ground in Europe. People at the time were able to get by without zero, but (little did they know) performing computation without zero was horribly inefficient. An apt analogy to keep in mind arises here: both math and money are possible without zero and Bitcoin, respectively—however both are tremendously more wasteful systems without these core elements. Consider the difficulty of doing arithmetic in Roman numerals:
Calculation performed using the Hindu-Arabic system is significantly more straightforward than with Roman numerals—and energy-efficient systems have a tendency to win out in the long run, as we saw when the steam engine outcompeted animal-sourced power or when capitalism prevailed over socialism (another important point to remember for Bitcoin later). This example just shows the pains of addition—multiplication and division were even more painstaking. As Amir D. Aczel described it in his book Finding Zero:
“[The Hindu-Arabic numeral system] allowed an immense economy of notation so that the same digit, for example 4, can be used to convey itself or forty (40) when followed by a zero, or four hundred and four when written as 404, or four thousand when written as a 4 followed by three zeros (4,000). The power of the Hindu-Arabic numeral system is incomparable as it allows us to represent numbers efficiently and compactly, enabling us to perform complicated arithmetic calculations that could not have been easily done before.”
Roman numeral inefficiency would not be tolerated for long in a world enriching itself through commerce. With trade networks proliferating and productivity escalating in tandem, growing prospects of wealth creation incentivized merchants to become increasingly competitive, pushing them to always search for an edge over others. Computation and record-keeping with a zero-based numeral system was qualitatively easier, quantitatively faster, and less prone to error. Despite Europe’s resistance, this new numeral system simply could not be ignored: like its distant progeny Bitcoin would later be, zero was an unstoppable idea whose time had come:
Functions of Zero
Zero’s first function is as a placeholder in our numeric system: for instance, notice the “0” in the number “1,104” in the equation above, which indicates the absence of value in the tens place. Without zero acting as a symbol of absence at this order of magnitude in “1,104,” the number could not be represented unambiguously (without zero, is it “1,104” or “114”?). Lacking zero detracted from a numeral system’s capacity to maintain constancy of meaning as it scales. Inclusion of zero enables other digits to take on new meaning according to their position relative to it. In this way, zero lets us perform calculation with less effort—whether its pen strokes in a ledger, finger presses on a calculator, or mental gymnastics. Zero is a symbol for emptiness, which can be a highly useful quality—as Lao Tzu said:
“We shape clay into a pot, but it is the emptiness inside that holds whatever we want.”
More philosophically, zero is emblematic of the void, as Aczel describes it:
“…the void is everywhere and it moves around; it can stand for one truth when you write a number a certain way — no tens, for example — and another kind of truth in another case, say when you have no thousands in a number!”
Drawing analogies to the functions of money: zero is the “store of value” on which higher order of magnitude numerals can scale; this is the reason we always prefer to see another zero at the end of our bank account or Bitcoin balance. In the same way a sound economic store of value leads to increased savings, which undergirds investment and productivity growth, so too does a sound mathematical placeholder of value give us a numeral system capable of containing more meaning in less space, and supporting calculations in less time: both of which also foster productivity growth. Just as money is the medium through which capital is continuously cycled into places of optimal economic employment, zero gives other digits the ability to cycle—to be used again and again with different meanings for different purposes.
Zero’s second function is as a number in its own right: it is the midpoint between any positive number and its negative counterpart (like +2 and -2). Before the concept of zero, negative numbers were not used, as there was no conception of “nothing” as a number, much less “less than nothing.” Brahmagupta inverted the positive number line to create negative numbers and placed zero at the center, thus rounding out the numeral system we use today. Although negative numbers were written about in earlier times, like the Han Dynasty in China (206 BCE to 220 BCE), their use wasn’t formalized before Brahmagupta, since they required the concept of zero to be properly defined and aligned. In a visual sense, negative numbers are a reflection of positive numbers cast across zero:
Interestingly, negative numbers were originally used to signify debts—well before the invention of double-entry accounting, which opted for debits and credits (partly to avoid the use of negative numbers). In this way, zero is the “medium of exchange” between the positive and negative domains of numbers—it is only possible to pass into, or out of, either territory by way of zero. By going below zero and conceptualizing negative numbers, many new and unusual (yet extremely useful) mathematical constructs come into being including imaginary numbers, complex numbers, fractals, and advanced astrophysical equations. In the same way the economic medium of exchange, money, leads to the acceleration of trade and innovation, so too does the mathematical medium of exchange, zero, lead to enhanced informational exchange, and its associated development of civilizational advances:
Zero’s third function is as a facilitator for fractions or ratios. For instance, the ancient Egyptians, whose numeral system lacked a zero, had an extremely cumbersome way of handling fractions: instead of thinking of 3/4 as a ratio of three to four (as we do today), they saw it as the sum of 1/2 and 1/4. The vast majority of Egyptian fractions were written as a sum of numbers as 1/n, where n is the counting number—these were called unit fractions. Without zero, long chains of unit fractions were necessary to handle larger and more complicated ratios (many of us remember the pain of converting fractions from our school days). With zero, we can easily convert fractions to decimal form (like 1/2 to 0.5), which obsoletes the need for complicated conversions when dealing with fractions. This is the “unit of account” function of zero. Prices expressed in money are just exchange ratios converted into a money-denominated price decimal: instead of saying “this house costs eleven cars” we say, “this house costs $440,000,” which is equal to the price of eleven $40,000 cars. Money gives us the ability to better handle exchange ratios in the same way zero gives us the ability to better handle numeric ratios.
Numbers are the ultimate level of objective abstraction: for example, the number 3 stands for the idea of “threeness” — a quality that can be ascribed to anything in the universe that comes in treble form. Equally, 9 stands for the quality of “nineness” shared by anything that is composed of nine parts. Numerals and math greatly enhanced interpersonal exchange of knowledge (which can be embodied in goods or services), as people can communicate about almost anything in the common language of numeracy. Money, then, is just the mathematized measure of capital available in the marketplace: it is the least common denominator among all economic goods and is necessarily the most liquid asset with the least mutable supply. It is used as a measuring system for the constantly shifting valuations of capital (this is why gold became money—it is the monetary metal with a supply that is most difficult to change). Ratios of money to capital (aka prices) are among the most important in the world, and ratios are a foundational element of being:
“In the beginning, there was the ratio, and the ratio was with God, and the ratio was God.” — John 1:1*
*(A more “rational” translation of Jesus’s beloved disciple John: the Greek word for ratio was λόγος (logos), which is also the term for word.)
An ability to more efficiently handle ratios directly contributed to mankind’s later development of rationality, a logic-based way of thinking at the root of major social movements such as the Renaissance, the Reformation, and the Enlightenment. To truly grasp the strange logic of zero, we must start with its point of origin—the philosophy from which it was born.
Philosophy of Zero
“In the earliest age of the gods, existence was born from non-existence.” — The Rig Veda
Zero arose from the bizarre logic of the ancient East. Interestingly, the Buddha himself was a known mathematician — in early books about him, like the Lalita Vistara, he is said to be excellent in numeracy (a skill he uses to woo a certain princess). In Buddhism, the logical character of the phenomenological world is more complex than true or false:
“Anything is either true,
Or not true,
Or both true and not true,
Or neither true nor not true.
This is the Lord Buddha’s teaching.”
This is the Tetralemma (or the four corners of the catuskoti): the key to understanding the seeming strangeness of this ancient Eastern logic is the concept of Shunya, a Hindi word meaning zero: it is derived from the Buddhist philosophical concept of Śūnyatā (or Shunyata). The ultimate goal of meditation is the attainment of enlightenment, or an ideal state of nirvana, which is equivalent to emptying oneself entirely of thought, desire, and worldly attachment. Achievement of this absolute emptiness is the state of being in Shunyata: a philosophical concept closely related to the void—as the Buddhist writer Thich Nhat Hanh describes it:
“The first door of liberation is emptiness, Shunyata
Emptiness always means empty of something
Emptiness is the Middle Way between existent and nonexistent
Reality goes beyond notions of being and nonbeing
True emptiness is called “wondrous being,” because it goes beyond existence and nonexistence
The concentration on Emptiness is a way of staying in touch with life as it is, but it has to be practiced and not just talked about.”
Or, as a Buddhist monk of ancient Wats temple in Southeast Asia described the meditative experience of the void:
“When we meditate, we count. We close our eyes and are aware only of where we are at in the moment, and nothing else. We count breathing in, 1; and we count breathing out, 2; and we go on this way. When we stop counting, that is the void, the number zero, the emptiness.”
A direct experience of emptiness is achievable through meditation. In a true meditative state, the Shunyata and the number zero are one and the same. Emptiness is the conduit between existence and nonexistence, in the same way zero is the door from positive to negative numbers: each being a perfect reflection of the other. Zero arose in the ancient East as the epitome of this deeply philosophical and experiential concept of absolute emptiness. Empirically, today we now know that meditation benefits the brain in many ways. It seems too, that its contribution to the discovery of zero helped forge an idea that benefits mankind’s collective intelligence — our global hive-mind.
Despite being discovered in a spiritual state, zero is a profoundly practical concept: perhaps it is best understood as a fusion of philosophy and pragmatism. By traversing across zero into the territory of negative numbers, we encounter the imaginary numbers, which have a base unit of the square root of -1, denoted by the letter i. The number i is paradoxical: consider the equations x² + 1 = 0 and x³ + 1 = 0, the only possible answers are positive square root of -1 (i) and negative square root of -1 (-i or i³), respectively. Visualizing these real and imaginary domains, we find a rotational axis centered on zero with orientations reminiscent of the tetralemma: one true (1), one not true (i), one both true and not true (-1 or i²), and one neither true nor not true (-i or i³):
Going through the gateway of zero into the realms of negative and imaginary numbers provides a more continuous form of logic when compared to the discrete either-or logic, commonly accredited to Aristotle and his followers. This framework is less “black and white” than the binary Aristotelean logic system, which was based on true or false, and provides many gradations of logicality; a more accurate map to the many “shades of grey” we find in nature. Continuous logic is insinuated throughout the world: for instance, someone may say “she wasn’t unattractive,” meaning that her appeal was ambivalent, somewhere between attractive and unattractive. This perspective is often more realistic than a binary assessment of attractive or not attractive.
Importantly, zero gave us the concept of infinity: which was notably absent from the minds of ancient Greek logicians. The rotations around zero through the real and imaginary number axes can be mathematically scaled up into a three-dimensional model called the Riemann Sphere. In this structure, zero and infinity are geometric reflections of one another and can transpose themselves in a flash of mathematical permutation. Always at the opposite pole of this three-dimensional, mathematical interpretation of the tetralemma, we find zero’s twin—infinity:
The twin polarities of zero and infinity are akin to yin and yang — as Charles Seife, author of Zero: Biography of a Dangerous Idea, describes them:
“Zero and infinity always looked suspiciously alike. Multiply zero by anything and you get zero. Multiply infinity by anything and you get infinity. Dividing a number by zero yields infinity; dividing a number by infinity yields zero. Adding zero to a number leaves it unchanged. Adding a number to infinity leaves infinity unchanged.”
In Eastern philosophy, the kinship of zero and infinity made sense: only in a state of absolute nothingness can possibility become infinite. Buddhist logic insists that everything is endlessly intertwined: a vast causal network in which all is inexorably interlinked, such that no single thing can truly be considered independent — as having its own isolated, non-interdependent essence. In this view, interrelation is the sole source of substantiation. Fundamental to their teachings, this truth is what Buddhists call dependent co-origination, meaning that all things depend on one another. The only exception to this truth is nirvana: liberation from the endless cycles of reincarnation. In Buddhism, the only pathway to nirvana is through pure emptiness:
Some ancient Buddhist texts state: “the truly absolute and the truly free must be nothingness.” In this sense, the invention of zero was special; it can be considered the discovery of absolute nothingness, a latent quality of reality that was not previously presupposed in philosophy or systems of knowledge like mathematics. Its discovery would prove to be an emancipating force for mankind, in that zero is foundational to the mathematized, software-enabled reality of convenience we inhabit today.
Zero was liberation discovered deep in meditation, a remnant of truth found in close proximity to nirvana — a place where one encounters universal, unbounded, and infinite awareness: God’s kingdom within us. To buddhists, zero was a whisper from the universe, from dharma, from God (words always fail us in the domain of divinity). Paradoxically, zero would ultimately shatter the institution which built its power structure by monopolizing access to God. In finding footing in the void, mankind uncovered the deepest, soundest substrate on which to build modern society: zero would prove to be a critical piece of infrastructure that led to the interconnection of the world via telecommunications, which ushered in the gold standard and the digital age (Bitcoin’s two key inceptors) many years later.
Blazing a path forward: the twin conceptions of zero and infinity would ignite the Renaissance, the Reformation, and the Enlightenment — all movements that mitigated the power of The Catholic Church as the dominant institution in the world and paved the way for the industrialized nation-state.
Power of The Church Falls to Zero
The universe of the ancient Greeks was founded on the philosophical tenets of Pythagoras, Aristotle, and Ptolemy. Central to their conception of the cosmos was the precept that there is no void, no nothingness, no zero. Greeks, who had inherited their numbers from the geometry-loving Egyptians, made little distinction between shape and number. Even today, when we square a number (x²), this is equivalent to converting a line into a square and calculating its area. Pythagoreans were mystified by this connection between shapes and numbers, which explains why they didn’t conceive of zero as a number: after all, what shape could represent nothingness? Ancient Greeks believed numbers had to be visible to be real, whereas the ancient Indians perceived numbers as an intrinsic part of a latent, invisible reality separate from mankind’s conception of them.
The symbol of the Pythagorean cult was the pentagram (a five-pointed star); this sacred shape contained within it the key to their view of the universe—the golden ratio. Considered to be the “most beautiful number,” the golden ratio is achieved by dividing a line such that the ratio of the small part to the large part is the same as the ratio of the large part to the whole. Such proportionality was found to be not only aesthetically pleasing, but also naturally occurring in a variety of forms including nautilus shells, pineapples, and (centuries later) the double-helix of DNA. Beauty this objectively pure was considered to be a window into the transcendent; a soul-sustaining quality. The golden ratio became widely used in art, music, and architecture:
The golden ratio was also found in musical harmonics: when plucking a string instrument from its specified segments, musicians could create the perfect fifth, a dual resonance of notes said to be the most evocative musical relationship. Discordant tritones, on the other hand, were derided as the “devil in music.” Such harmony of music was considered to be one and the same with that of mathematics and the universe—in the Pythagorean finite view of the cosmos (later called the Aristotelean celestial spheres model), movements of planets and other heavenly bodies generated a symphonic “harmony of the spheres”—a celestial music that suffused the cosmic depths. From the perspective of Pythagoreans, “all was number,” meaning ratios ruled the universe. The golden ratio’s seemingly supernatural connection to aesthetics, life, and the universe became a central tenet of Western Civilization and, later, The Catholic Church (aka The Church).
Zero posed a major threat to the conception of a finite universe. Dividing by zero is devastating to the framework of logic, and thus threatened the perfect order and integrity of a Pythagorean worldview. This was a serious problem for The Church which, after the fall of the Roman Empire, appeared as the dominant institution in Europe. To substantiate its dominion in the world, The Church proffered itself as the gatekeeper to heaven. Anyone who crossed The Church in any way could find themselves eternally barred from the holy gates. The Church’s claim to absolute sovereignty was critically dependent on the Pythagorean model, as the dominant institution over Earth—which was in their view the center of the universe—necessarily held dominion in God’s universe. Standing as a symbol for both the void and the infinite, zero was heretical to The Church. Centuries later, a similar dynamic would unfold in the discovery of absolute scarcity for money, which is dissident to the dominion of The Fed—the false church of modernity.
Ancient Greeks clung tightly to a worldview that did not tolerate zero or the infinite: rejection of these crucial concepts proved to be their biggest failure, as it prevented the discovery of calculus—the mathematical machinery on which much of the physical sciences and, thus, the modern world are constructed. Core to their (flawed) belief system was the concept of the “indivisible atom,” the elementary particle which could not be subdivided ad infinitum. In their minds, there was no way beyond the micro barrier of the atomic surface. In the same vein, they considered the universe a “macrocosmic atom” that was strictly bound by an outermost sphere of stars winking down towards the cosmic core—Earth. As above, so below: with nothing conceived to be above this stellar sphere and nothing below the atomic surface, there was no infinity and no void:
Aristotle (with later refinements by Ptolemy) would interpret this finite universe philosophically and, in doing so, form the ideological foundation for God’s existence and The Church’s power on Earth. In the Aristotelean conception of the universe, the force moving the stars, which drove the motion of all elements below, was the prime mover: God. This cascade of cosmic force from on high downward into the movements of mankind was considered the officially accepted interpretation of divine will. As Christianity swept through the West, The Church relied upon the explanatory power of this Aristotelean philosophy as proof of God’s existence in their proselytizing efforts. Objecting to the Aristotelean doctrine was soon considered an objection to the existence of God and the power of The Church.
Infinity was unavoidably actualized by the same Aristotelean logic which sought to deny it. By the 13th century, some bishops began calling assemblies to question the Aristotelean doctrines that went against the omnipotence of God: for example, the notion that “God can not move the heavens in a straight line, because that would leave behind a vacuum.” If the heavens moved linearly, then what was left in their wake? Through what substance were they moving? This implied either the existence of the void (the vacuum), or that God was not truly omnipotent as he could not move the heavens. Suddenly, Aristotelean philosophy started to break under its own weight, thereby eroding the premise of The Church’s power. Although The Church would cling to Aristotle’s views for a few more centuries—it fought heresy by forbidding certain books and burning certain Protestants alive—zero marked the beginning of the end for this domineering and oppressive institution.
An infinite universe meant there were, at least, a vast multitude of planets, many of which likely had their own populations and churches. Earth was no longer the center of the universe, so why should The Church have universal dominion? In a grand ideological shift that foreshadowed the invention of Bitcoin centuries later, zero became the idea that broke The Church’s grip on humanity, just as absolute scarcity of money is breaking The Fed’s stranglehold on the world today. In an echo of history, us moderns can once again hear the discovery of nothing beginning to change everything.
Zero was the smooth stone slung into the face of Goliath, a death-stroke to the dominion of The Church; felled by an unstoppable idea, this oppressive institution’s fall from grace would make way for the rise of the nation-state—the dominant institutional model in modernity.
Zero: An Ideological Juggernaut
Indoctrinated in The Church’s dogma, Christianity initially refused to accept zero, as it was linked to a primal fear of the void. Zero’s inexorable connection to nothingness and chaos made it a fearsome concept in the eyes of most Christians at the time. But zero’s capacity to support honest weights and measures, a core Biblical concept, would prove more important than the countermeasures of The Church (and the invention of zero would later lead to the invention of the most infallible of weights and measures, the most honest money in history—Bitcoin). In a world being built on trade, merchants needed zero for its superior arithmetic utility. As Pierre-Simon Laplace said:
“…[zero is] a profound and important idea which appears so simple to us now that we ignore its true merit. But its very simplicity and the great ease which it lent to all computations put our arithmetic in the first rank of useful inventions.”
In the 13th century, academics like the renowned Italian mathematician Fibonacci began championing zero in their work, helping the Hindu-Arabic system gain credibility in Europe. As trade began to flourish and generate unprecedented levels of wealth in the world, math moved from purely practical applications to ever more abstracted functions. As Alfred North Whitehead said:
“The point about zero is that we do not need to use it in the operations of daily life. No one goes out to buy zero fish. It is in a way the most civilized of all the cardinals, and its use is only forced on us by the needs of cultivated modes of thought.”
As our thinking became more sophisticated, so too did our demands on math. Tools like the abacus relied upon a set of sliding stones to help us keep track of amounts and perform calculation. An abacus was like an ancient calculator, and as the use of zero became popularized in Europe, competitions were held between users of the abacus (the abacists) and of the newly arrived Hindu-Arabic numeral system (the algorists) to see who could solve complex calculations faster. With training, algorists could readily outpace abacists in computation. Contests like these led to the demise of the abacus as a useful tool, however it still left a lasting mark on our language: the words calculate, calculus, and calcium are all derived from the Latin word for pebble—calculus.
Before the Hindu-Arabic numerals, money counters had to use the abacus or a counting board to keep track of value flows. Germans called the counting board a Rechenbank, which is why moneylenders came to be known as banks. Not only did banks use counting boards, but they also used tally sticks to keep track of lending activities: the monetary value of a loan was written on the side of a stick, and it was split into two pieces, with the lender keeping the larger piece, known as the stock—which is where we get the term stockholder:
Despite its superior utility for business, governments despised zero. In 1299, Florence banned the Hindu-Arabic numeral system. As with many profound innovations, zero faced vehement resistance from entrenched power structures that were threatened by its existence. Carrying on lawlessly, Italian merchants continued to use the zero-based numeral system, and even began using it to transmit encrypted messages. Zero was essential to these early encryption systems—which is why the word cipher, which originally meant zero, came to mean “secret code.” The criticality of zero to ancient encryption systems is yet another aspect of its contribution to Bitcoin’s ancestral heritage.
At the beginning of the Renaissance, the threat zero would soon pose to the power of The Church was not obvious. By then, zero had been adapted as an artistic tool to create the vanishing point: an acute place of infinite nothingness used in many paintings that sparked the great Renaissance in the visual arts. Drawings and paintings prior to the vanishing point appear flat and lifeless: their imagery was mostly two-dimensional and unrealistic. Even the best artists couldn’t capture realism without the use of zero:
With the concept of zero, artists could create a zero-dimension point in their work that was “infinitely far” from the viewer, and into which all objects in the painting visually collapsed. As objects appear to recede from the viewer into the distance, they become ever-more compressed into the “dimensionlessness” of the vanishing point, before finally disappearing. Just as it does today, art had a strong influence on people’s perceptions. Eventually, Nicholas of Cusa, a cardinal of The Church declared, “Terra non est centra mundi,” which meant “the Earth is not the center of the universe.” This declaration would later lead to Copernicus proving heliocentrism—the spark that ignited The Reformation and, later, the Age of Enlightenment:
A dangerous, heretical, and revolutionary idea had been planted by zero and its visual incarnation, the vanishing point. At this point of infinite distance, the concept of zero was captured visually, and space was made infinite—as Seife describes it:
“It was no coincidence that zero and infinity are linked in the vanishing point. Just as multiplying by zero causes the number line to collapse into a point, the vanishing point has caused most of the universe to sit in a tiny dot. This is a singularity, a concept that became very important later in the history of science—but at this early stage, mathematicians knew little more than the artists about the properties of zero.”
The purpose of the artist is to the mythologize the present: this is evident in much of the consumerist “trash art” produced in our current fiat-currency-fueled world. Renaissance artists (who were often also mathematicians, true Renaissance men) worked assiduously in line with this purpose as the vanishing point became an increasingly popular element of art in lockstep with zero’s proliferation across the world. Indeed, art accelerated the propulsion of zero across the mindscape of mankind.
Modernity: The Age of Ones and Zeros
Eventually, zero became the cornerstone of calculus: an innovative system of mathematics that enabled people to contend with ever-smaller units approaching zero, but cunningly avoided the logic-trap of having to divide by zero. This new system gave mankind myriad new ways to comprehend and grasp his surroundings. Diverse disciplines such as chemistry, engineering, and physics all depend on calculus to fulfill their functions in the world today:
Zero serves as the source-waters of many technological breakthroughs—some of which would flow together into the most important invention in history: Bitcoin. Zero punched a hole and created a vacuum in the framework of mathematics and shattered Aristotelean philosophy, on which the power of The Church was premised. Today, Bitcoin is punching a hole and creating a vacuum in the market for money; it is killing Keynesian economics—which is the propagandistic power-base of the nation-state (along with its apparatus of theft: the central bank).
In modernity, zero has become a celebrated tool in our mathematical arsenal. As the binary numerical system now forms the foundation of modern computer programming, zero was essential to the development of digital tools like the personal computer, the internet, and Bitcoin. Amazingly, all modern miracles made possible by digital technologies can be traced back to the invention of a figure for numeric nothingness by an ancient Indian mathematician: Brahmagupta gave the world a real “something for nothing,” a generosity Satoshi would emulate several centuries later. As Aczel says:
“Numbers are our greatest invention, and zero is the capstone of the whole system.”
A composition of countless zeroes and ones, binary code led to the proliferation and standardization of communications protocols including those embodied in the internet protocol suite. As people freely experimented with these new tools, they organized themselves around the most useful protocols like http, TCP/IP, etc. Ossification of digital communication standards provided the substrate upon which new societal utilities—like email, ride sharing, and mobile computing—were built. Latest (and arguably the greatest) among these digital innovations is the uninflatable, unconfiscatable, and unstoppable money called Bitcoin.
A common misconception of Bitcoin is that it is just one of thousands of cryptoassets in the world today. One may be forgiven for this misunderstanding, as our world today is home to many national currencies. But all these currencies began as warehouse receipts for the same type of thing—namely, monetary metal (usually gold). Today, national currencies are not redeemable for gold, and are instead liquid equity units in a pyramid scheme called fiat currency: a hierarchy of thievery built on top of the freely selected money of the world (gold) which their issuers (central banks) hoard to manipulate its price, insulate their inferior fiat currencies from competitive threats, and perpetually extract wealth from those lower down the pyramid.
Given this confusion, many mistakenly believe that Bitcoin could be disrupted by any one of the thousands of alternative cryptoassets in the marketplace today. This is understandable, as the reasons that make Bitcoin different are not part of common parlance and are relatively difficult to understand. Even Ray Dalio, the greatest hedge fund manager in history, said that he believes Bitcoin could be disrupted by a competitor in the same way that iPhone disrupted Blackberry. However, disruption of Bitcoin is extremely unlikely: Bitcoin is a path-dependent, one-time invention; its critical breakthrough is the discovery of absolute scarcity—a monetary property never before (and never again) achievable by mankind.
Like the invention of zero, which led to the discovery of “nothing as something” in mathematics and other domains, Bitcoin is the catalyst of a worldwide paradigmatic phase change (which some have started calling The Great Awakening). What numeral is to number, and zero is to the void for mathematics, Bitcoin is to absolute scarcity for money: each is a symbol that allows mankind to apprehend a latent reality (in the case of money, time). More than just a new monetary technology, Bitcoin is an entirely new economic paradigm: an uncompromisable base money protocol for a global, digital, non-state economy. To better understand the profundity of this, we first need to understand the nature of path-dependence.
The Path-Dependence of Bitcoin
Path-dependence is the sensitivity of an outcome to the order of events that led to it. In the broadest sense, it means history has inertia:
Path-dependence entails that the sequence of events matters as much as the events themselves: as a simple example, you get a dramatically different result if you shower and then dry yourself off versus if you dry yourself off first and then shower. Path-dependence is especially prevalent in complex systems due to their high interconnectivity and numerous (often unforeseeable) interdependencies. Once started down a particular pathway, breaking away from its sociopolitical inertia can become impossible—for instance, imagine if the world tried to standardize to a different size electrical outlet: consumers, manufacturers, and suppliers would all resist this costly change unless there was a gigantic prospective gain. To coordinate this shift in standardization would require either a dramatically more efficient technology (a pull method—by which people stand to benefit) or an imposing organization to force the change (a push method—in which people would be forced to change in the face of some threat). Path-dependence is why occurrences in the sociopolitical domain often influence developments in the technical; US citizens saw path-dependent pushback firsthand when their government made a failed attempt to switch to the metric system back in the 1970s.
Bitcoin was launched into the world as a one of a kind technology: a non-state digital money that is issued on a perfectly fixed, diminishing, and predictable schedule. It was strategically released into the wild (into an online group of cryptographers) at a time when no comparative technology existed. Bitcoin’s organic adoption path and mining network expansion are a non-repeatable sequence of events. As a thought experiment, consider that if a “New Bitcoin” was launched today, it would exhibit weak chain security early on, as its mining network and hash rate would have to start from scratch. Today, in a world that is aware of Bitcoin, this “New Bitcoin” with comparatively weak chain security would inevitably be attacked—whether these were incumbent projects seeking to defend their head start, international banking cartels, or even nation-states:
Path-dependence protects Bitcoin from disruption, as the organic sequence of events which led to its release and assimilation into the marketplace cannot be replicated. Further, Bitcoin’s money supply is absolutely scarce; a totally unique and one-time discovery for money. Even if “New Bitcoin” was released with an absolutely scarce money supply, its holders would be incentivized to hold the money with the greatest liquidity, network effects, and chain security. This would cause them to dump “New Bitcoin” for the original Bitcoin. More realistically, instead of launching “New Bitcoin,” those seeking to compete with Bitcoin would take a social contract attack-vector by initiating a hard fork. An attempt like this was already made with the “Bitcoin Cash” fork, which tried to increase block sizes to (ostensibly) improve its utility for payments. This chain fork was an abject failure and a real world reinforcement of the importance of Bitcoin’s path-dependent emergence:
Continuing our thought experiment: even if “New Bitcoin” featured a diminishing money supply (in other words, a deflationary monetary policy), how would its rate of money supply decay (deflation) be determined? By what mechanism would its beneficiaries be selected? As market participants (nodes and miners) jockeyed for position to maximize their accrual of economic benefit from the deflationary monetary policy, forks would ensue that would diminish the liquidity, network effects, and chain security for “New Bitcoin,” causing everyone to eventually pile back into the original Bitcoin—just like they did in the wake of Bitcoin Cash’s failure.
Path-dependence ensures that those who try to game Bitcoin get burned. Reinforced by four-sided network effects, it makes Bitcoin’s first-mover advantage seemingly insurmountable. The idea of absolute monetary scarcity goes against the wishes of entrenched power structures like The Fed: like zero, once an idea whose time has come is released into the world, it is nearly impossible to put the proverbial genie back in the bottle. After all, unstoppable ideas are independent lifeforms:
Finite and Infinite Games
Macroeconomics is essentially the set of games played globally to satisfy the demands of mankind (which are infinite) within the bounds of his time (which is strictly finite). In these games, scores are tracked in monetary terms. Using lingo from the groundbreaking book Finite and Infinite Games, there are two types of economic games: unfree (or centrally planned) markets are theatrical, meaning that they are performed in accordance with a predetermined script that often entails dutifulness and disregard for humanity. The atrocities committed in Soviet Russia are exemplary of the consequences of a theatrical economic system. On the other hand, free markets are dramatic, meaning that they are enacted in the present according to consensual and adaptable boundaries. Software development is a good example of a dramatic market, as entrepreneurs are free to adopt the rules, tools, and protocols that best serve customers. Simply: theatrical games are governed by imposed rules (based on tyranny), whereas rulesets for dramatic games are voluntarily adopted (based on individual sovereignty).
From a moral perspective, sovereignty is always superior to tyranny. And from a practical perspective, tyrannies are less energy-efficient than free markets because they require tyrants to expend resources enforcing compliance with their imposed rulesets and protecting their turf. Voluntary games (free market capitalism) outcompete involuntary games (centrally planned socialism) as they do not accrue these enforcement and protection costs: hence the reason capitalism (freedom) outcompetes socialism (slavery) in the long run. Since interpersonal interdependency is at the heart of the comparative advantage and division of labor dynamics that drive the value proposition of cooperation and competition, we can say that money is an infinite game: meaning that its purpose is not to win, but rather to continue to play. After all, if one player had all the money, the game would end (like the game of Monopoly).
In this sense, Bitcoin’s terminal money supply growth (inflation) rate of absolute zero is the ultimate monetary Schelling point — a game-theoretic focal point that people tend to choose in an adversarial game. In game theory, a game is any situation where there can be winners or losers, a strategy is a decision-making process, and a Schelling point is the default strategy for games in which the players cannot fully trust one another (like money):
Economic actors are incentivized to choose the money that best holds its value across time, is most widely accepted, and most clearly conveys market pricing information. All three of these qualities are rooted in scarcity: resistance to inflation ensures that money retains its value and ability to accurately price capital across time, which leads to its use as an exchange medium. For these reasons, holding the scarcest money is the most energy-efficient strategy a player can employ, which makes the absolute scarcity of Bitcoin an irrefutable Schelling point—a singular, unshakable motif in games played for money.
A distant digital descendent of zero, the invention of Bitcoin represents the discovery of absolute scarcity for money: an idea as equally unstoppable.
Similar to the discovery of absolute nothingness symbolized by zero, the discovery of absolutely scarce money symbolized by Bitcoin is special. Gold became money because out of the monetary metals it had the most inelastic (or relatively scarce) money supply: meaning that no matter how much time was allocated towards gold production, its supply increased the least. Since its supply increased the slowest and most predictable rate, gold was favored for storing value and pricing things—which encouraged people to voluntarily adopt it, thus making it the dominant money on the free market. Before Bitcoin, gold was the world’s monetary Schelling point, because it made trade easier in a manner that minimized the need to trust other players. Like its digital ancestor zero, Bitcoin is an invention that radically enhances exchange efficiency by purifying informational transmissions: for zero, this meant instilling more meaning per proximate digit, for Bitcoin, this means generating more salience per price signal. In the game of money, the objective has always been to hold the most relatively scarce monetary metal (gold); now, the goal is to occupy the most territory on the absolutely scarce monetary network called Bitcoin.
A New Epoch for Money
Historically, precious metals were the best monetary technologies in terms of money’s five critical traits:
- recognizability, and
Among the monetary metals, gold was relatively the most scarce, and therefore it outcompeted others in the marketplace as it was a more sound store of value. In the ascension of gold as money, it was as if free market dynamics were trying to zero-in on a sufficiently divisible, durable, portable, and recognizable monetary technology that was also absolutely scarce (strong arguments for this may be found by studying the Eurodollar system). Free markets are distributed computing systems that zero-in on the most useful prices and technologies based on the prevailing demands of people and the available supplies of capital: they constantly assimilate all of mankind’s intersubjective perspectives on the world within the bounds of objective reality to produce our best approximations of truth. In this context, verifiable scarcity is the best proxy for the truthfulness of money: assurance that it will not be debased over time.
As a (pre-Bitcoin) thought experiment, had a “new gold” been discovered in the Earth’s crust, assuming it was mostly distributed evenly across the Earth’s surface and was exactly comparable to gold in terms of these five monetary traits (with the exception that it was more scarce), free market dynamics would have led to its selection as money, as it would be that much closer to absolute scarcity, making it a better means of storing value and propagating price signals. Seen this way, gold as a monetary technology was the closest the free market could come to absolutely scarce money before it was discovered in its only possible form—digital. The supply of any physical thing can only be limited by the time necessary to procure it: if we could flip a switch and force everyone on Earth to make their sole occupation gold mining, the supply of gold would soon soar. Unlike Bitcoin, no physical form of money could possibly guarantee a permanently fixed supply—so far as we know, absolute scarcity can only be digital.
Digitization is advantageous across all five traits of money. Since Bitcoin is just information, relative to other monetary technologies, we can say: its
- divisibility is supreme, as information can be infinitely subdivided and recombined at near-zero cost (like numbers); its
- durability is supreme, as information does not decompose (books can outlast empires); its
- portability is supreme, as information can move at the speed of light (thanks to telecommunications); and its
- recognizability is supreme, as information is the most objectively discernible substance in the universe (like the written word). Finally, and most critically, since Bitcoin algorithmically and thermodynamically enforces an absolutely scarce money supply, we can say that its
- scarcity is infinite (as scarce as time, the substance money is intended to tokenize in the first place). Taken in combination, these traits make absolutely scarce digital money seemingly indomitable in the marketplace.
In the same way that the number zero enables our numeric system to scale and more easily perform calculation, so too does money give an economy the ability to socially scale by simplifying trade and economic calculation. Said simply: scarcity is essential to the utility of money, and a zero-growth terminal money supply represents “perfect” scarcity — which makes Bitcoin as near a “perfect” monetary technology as mankind has ever had. Absolute scarcity is a monumental monetary breakthrough. Since money is valued according to reflexivity, meaning that investor perceptions of its future exchangeability influence its present valuation, Bitcoin’s perfectly predictable and finite future supply underpins an unprecedented rate of expansion in market capitalization:
In summary: the invention of Bitcoin represents the discovery of absolute scarcity, or absolute irreproducibility, which occurred due to a particular sequence of idiosyncratic events that cannot be reproduced. Any attempt to introduce an absolutely scarce or diminishing supplied money into the world would likely collapse into Bitcoin (as we saw with the Bitcoin Cash fork). Absolute scarcity is a one-time discovery, just like heliocentrism or any other major scientific paradigm shift. In a world where Bitcoin already exists, a successful launch via a proof-of-work system is no longer possible due to path-dependence; yet another reason why Bitcoin cannot be replicated or disrupted by another cryptoasset using this consensus mechanism. At this point, it seems absolute scarcity for money is truly a one-time discovery that cannot “disrupted” any more than the concept of zero can be disrupted.
A true “Bitcoin killer” would necessitate an entirely new consensus mechanism and distribution model; with an implementation overseen by an unprecedentedly organized group of human beings: nothing to date has been conceived that could even come close to satisfying these requirements. In the same way that there has only ever been one analog gold, there is likely to only ever be one digital gold. For the same quantifiable reasons a zero-based numeral system became a dominant mathematical protocol, and capitalism outcompetes socialism, the absolute scarcity of Bitcoin’s supply will continue outcompeting all other monetary protocols in its path to global dominance.
Numbers are the fundamental abstractions which rule our world. Zero is the vanishing point of the mathematical landscape. In the realm of interpersonal competition and cooperation, money is the dominant abstraction which governs our behavior. Money arises naturally as the most tradable thing within a society—this includes exchanges with others and with our future selves. Scarcity is the trait of money that allows it to hold value across time, enabling us to trade it with our future selves for the foregone opportunity costs (the things we could have otherwise traded money for had we not decided to hold it). Scarce money accrues value as our productivity grows. For these reasons, the most scarce technology which otherwise exhibits sufficient monetary traits (divisibility, durability, recognizability, portability) tends to become money. Said simply: the most relatively scarce money wins. In this sense, what zero is to math, absolute scarcity is to money. It is an astonishing discovery, a window into the void, just like its predecessor zero:
Fiat Currency Always Falls to Zero
Zero has proven itself as the capstone of our numeral system by making it scalable, invertible, and easily convertible. In time, Bitcoin will prove itself as the most important network in the global economic system by increasing social scalability, causing an inversion of economic power, and converting culture into a realignment with Natural Law. Bitcoin will allow sovereignty to once again inhere at the individual level, instead of being usurped at the institutional level as it is today—all thanks to its special forebear, zero:
Central planning in the market for money (aka monetary socialism) is dying. This tyrannical financial hierarchy has increased worldwide wealth disparities, funded perpetual warfare, and plundered entire commonwealths to “bail out” failing institutions. A reversion to the free market for money is the only way to heal the devastation it has wrought over the past 100+ years. Unlike central bankers, who are fallible human beings that give into political pressure to pillage value from people by printing money, Bitcoin’s monetary policy does not bend for anyone: it gives zero fucks. And in a world where central banks can “just add zeros” to steal your wealth, people’s only hope is a “zero fucks” money that cannot be confiscated, inflated, or stopped:
Bitcoin was specifically designed as a countermeasure to “expansionary monetary policies” (aka wealth confiscation via inflation) by central bankers. Bitcoin is a true zero-to-one invention, an innovation that profoundly changes society instead of just introducing an incremental advancement. Bitcoin is ushering in a new paradigm for money, nation-states, and energy-efficiency. Most importantly, it promises to break the cycle of criminality in which governments continuously privatize gains (via seigniorage) and socialize losses (via inflation). Time and time again, excessive inflation has torn societies apart, yet the lessons of history remain unlearned—once again, here we are:
The Zero Hour
How much longer will monetary socialism remain an extant economic model? The countdown has already begun: Ten. Nine. Eight. Seven. Six. Five. Four. Three. Two. One. Liftoff. Rocket technicians always wait for zero before ignition; countdowns always finalize at the zero hour. Oil price wars erupting in Eurasia, a global pandemic, an unprecedented expansionary monetary policy response, and another quadrennial Bitcoin inflation-rate halving: 2020 is quickly becoming the zero hour for Bitcoin.
Inflation rate and societal wellbeing are inversely related: the more reliably value can be stored across time, the more trust can be cultivated among market participants. When a money’s roots to economic reality are severed—as happened when the peg to gold was broken and fiat currency was born—its supply inevitably trends towards infinity (hyperinflation) and the functioning of its underlying society deteriorates towards zero (economic collapse). An unstoppable free market alternative, Bitcoin is anchored to economic reality (through proof-of-work energy expenditure) and has an inflation rate predestined for zero, meaning that a society operating on a Bitcoin standard would stand to gain in virtually infinite ways. When Bitcoin’s inflation rate finally reaches zero in the mid 22nd century, the measure of its soundness as a store of value (the stock-to-flow ratio) will become infinite; people that realize this and adopt it early will benefit disproportionately from the resultant mass wealth transfer.
Zero and infinity are reciprocal: 1/∞ = 0 and 1/0 = ∞. In the same way, a society’s wellbeing shrinks towards zero the more closely the inflation rate approaches infinity (through the hyperinflation of fiat currency). Conversely, societal wellbeing can, in theory, be expanded towards infinity the more closely the inflation rate approaches zero (through the absolute scarcity of Bitcoin). Remember: The Fed is now doing whatever it takes to make sure there is “infinite cash” in the banking system, meaning that its value will eventually fall to zero:
Zero arose in the world as an unstoppable idea because its time had come; it broke the dominion of The Church and put an end to its monopolization over access to knowledge and the gates to heaven. The resultant movement—The Separation of Church and State—reinvigorated self-sovereignty in the world, setting the individual firmly as the cornerstone of the state. Rising from The Church’s ashes came a nation-state model founded on sound property rights, rule of law, and free market money (aka hard money). With this new age came an unprecedented boom in scientific advancement, wealth creation, and worldwide wellbeing. In the same way, Bitcoin and its underlying discovery of absolute scarcity for money is an idea whose time has come. Bitcoin is shattering the siege of central banks on our financial sovereignty; it is invoking a new movement—The Separation of Money and State—as its revolutionary banner; and it is restoring Natural Law in a world ravaged by a mega-wealth-parasite—The Fed.
Only unstoppable ideas can break otherwise immovable institutions: zero brought The Church to its knees and Bitcoin is bringing the false church of The Fed into the sunlight of its long-awaited judgement day.
Both zero and Bitcoin are emblematic of the void, a realm of pure potentiality from which all things spring forth into being — the nothingness from which everything effervesces, and into which all possibility finally collapses. Zero and Bitcoin are unstoppable ideas gifted to mankind; gestures made in the spirit of “something for nothing.” In a world run by central banks with zero accountability, a cabal that uses the specious prospects of “infinite cash” to promise us everything (thereby introducing the specter of hyperinflation), nothingness may prove to be the greatest gift we could ever receive…
Thank you Brahmagupta and Satoshi Nakamoto for your generosity.
Is bitcoin a new digital gold?
That’s the question on everyone’s mind recently.
Over the weekend, Barron’s laid out the skeptical case in an article titled “Is Bitcoin A Safe Haven?”:
“This week certainly would appear to qualify as a good test for an asset’s safe-haven bona fides,” the magazine wrote. “There was a market meltdown in Argentina, escalating trade tensions between the U.S. and China, inversion of the Treasury yield curve (viewed as a recession indicator), grim economic news from Germany, and anti-government protests in Hong Kong.”
And yet, it noted, bitcoin ended the week down 10%.
I guess the whole “bitcoin = digital gold” thesis is dead, right?Today In: Money
Bitcoin Is Like Gold … Just In The 1970s
Safe haven assets are supposed to be boring. Take gold, for instance: The annualized return of gold since 1980 is 2.3%/year. Adjusted for inflation, it’s -0.7%/year. While there have been good years, like the 2000s, for the most part, it’s just sat there, like a dumb rock, holding its value.
Which is, after all, what it’s supposed to do.
If you’re interested in wealth creation, history suggests you don’t actually want a store of value; you want an emerging store of value. That is, an asset that has all the characteristics of a store of value, but doesn’t yet have widespread acceptance amongst investors.
We know this by studying the history of gold. The vast majority of returns gold has enjoyed in the modern era came in the 1970s. Consider the returns by decade:
- 1970s: 1,365%
- 1980s: -22%
- 1990s: -28%
- 2000s: 281%
- 2010s: 50%
The 1970s was, of course, when the U.S. abandoned the gold standard. At the time, people didn’t know what to make of gold. Would it succeed as a “safe haven” asset, untethered from the dollar, or be cast aside as a “barbarous relic,” as John Maynard Keynes once called it?
The result was a period of significant volatility, as the two forces argued back and forth. There were years, like 1975, when gold tumbled in value, falling 25%. And years, like 1979, when it soared, rising 120%.
There was daily volatility too: In 1973, gold’s price moved more than 3% one out of every ten days! Sounds almost like bitcoin to me.
It was exactly this risk, however–the possibility that gold could be cast into the dustbin of history, like cowry shells and other forgotten stores of value–that led to gold’s volatility and strong returns. As evidence mounted that gold would in fact continue to serve as a safe haven, returns spiked and more investors made gold a part of their portfolios.
That same process is taking place in bitcoin today.
(Note: In the mid-2000s, gold saw a large run largely catalyzed in part by the launch of the first gold bullion ETF, the SPDR Gold Shares (GLD), which opened up access for a new wave of investors; easy monetary policies also helped).
Bitcoin Is Both A Safe Haven Asset And Volatile. Let’s Get Used To It.
People love to make analogies and put unfamiliar things in a box. The bitcoin=gold narrative is an easy crutch because bitcoin shares many characteristics with gold. It’s
- doesn’t degrade over time, and
- has value even though it has no cash flows.
Moreover, in certain moments, bitcoin has shown signs of behaving like a classic store of value. When the U.S. labeled China a currency manipulator in early August, for instance, bitcoin prices spiked.
But at the same time, bitcoin is also a risk asset. It’s new, and much like gold in its first decade, its long-term position in the world is not yet secure. As a result, it shares characteristics with other risk assets, like stocks and venture capital investments. When markets enter a risk-off mode, some buy it as a safe haven while others lose faith and sell to peel back their risk.
These two forces—shelter from macro threats, and exposure to risk—can come into direct conflict. When the market stumbles for macro reasons, for instance, the day-to-day returns of bitcoin become hard to parse.
Over time, however, the dominant paradigm is clear: Bitcoin is an “emerging store of value.” Each day, more investors gain greater confidence in bitcoin’s place in the world. Each day, it gets easier for institutional investors and financial advisors to buy. Each day, millennials—who prefer bitcoin to gold by a 9-to-1 ratio—inch closer to their prime investing years.
Like gold in the 1970s, this has translated into volatile but strong returns. Given the level of skepticism that remains about bitcoin’s role in society, there’s still plenty of upside left.
Some day, maybe, bitcoin will also be boring as dirt. But chances are, if we get to that point, prices will be significantly higher than they are today.
Watch Brent Johnson’s follow up to The Dollar Milkshake Theory: https://rvtv.io/2tdRouM and The Great Dollar Debate with Brent Johnson and Luke Gromen: https://rvtv.io/2TGSnza only on Real Vision. — Santiago Capital CEO Brent Johnson rejoins Real Vision with a plethora of predictions that revolve around a strengthening dollar. Johnson believes that a global currency crisis looms, but that there is a bull case to be made for the greenback, gold and U.S. equities. Filmed on May 29, 2018 in San Francisco. Published on June 6th, 2018.
Now, one thing I want to make clear is this is not a story that ends well.
This is a story that ends very, very badly.
The strength of the dollar is going to cause such chaos in the global monetary system that
the safe haven that gold has always provided, I think, is going to become into higher demand.
And there will be a point where they rise together.
This isn’t a Pollyanna view.
I’m not saying to go out and buy equities, because things are good.
I’m saying, go out and buy equities, because things are bad.
Things are really bad.
It’s just that the road to bad looks much different than what the typical person thinks.
I’m really happy to be able to come onto Real Vision today, because I haven’t been this
excited about markets in a very long time– not because I think everything is going to
be easy, and things are fine, but really, because I think everything is bad, and it’s
going to be very hard.
But I think that it’s also going to present a lot of amazing opportunities for those who
can kind of see through the fog of what the markets are going to do over the next year
to two years.
Now, I’m sure over the next 30 or 40 minutes, there’s going to be a few of you out there
who agree with what I say.
But I know for a fact that there’s going to be a lot of people who disagree or who maybe
agree with part of what I say, but who are going to disagree with a lot of what I say.
And there’s also going to be some people out there who absolutely disagree with everything
And that’s fine.
What I’m asking you to do now is, at least for now, let’s put aside challenging me, and
just actually listen to what I say and think about how I might be right.
And if it turns out after you’ve actually thought about it and more than for a minute
or two, and you still want to have a conversation to discuss it, I’m more than happy to do that.
We’ve seen a nice bounce in the dollar after losing 10% to 12% on the dollar over the last
12 to 18 months.
So I think it’s a good time to discuss this.
I really think the dollar move higher is really just getting started.
Now, that doesn’t mean that there’s not going to be starts and stops, and in the short term,
it’s probably due for somewhat of a pause or even a short pullback.
But one thing I want to get across to people is this move is only just getting started.
The dollar, in my opinion, is going to go much, much higher over the next year to two
And so as I get into what the actual dollar milkshake theory is, it really comes down
to the fact that I think the whole world is really one trade right now.
And it’s the trade on the dollar.
Everything wraps around the dollar.
I’m going to talk about gold after a while, but I think even gold– all roads go through
So even though I’m very bullish gold long-term, that road also goes through the dollar.
And so at the end of the day, why I think the dollar is so important is because whether
you’re talking about a company, whether you’re talking about a family, or whether you’re
talking about a country, everything comes down to cash flow.
Everything investing ultimately comes down to cash flow.
And if you don’t have enough supply of cash, then you need flow of cash coming through
to keep operations going.
And I really think that’s where the whole monetary system is right now.
And that’s really the heart of the dollar milkshake theory.
And so I’m going to get into that as we go further into the conversation.
Now, one thing I want to make clear is this is not a story that ends well.
This is a story that ends very, very badly.
But I think the road to badly is much different than a lot of my peers think it is.
To get really into the theory, we all know that the central banks of the world injected
$20 trillion of new money into the global economy over the last 10 years.
And I kind of title this as this is the milkshake that all the different countries created.
They pushed down on their syringes, and they injected this tons of liquidity into the market–
euros, yen, pounds, yuan, dollars.
And they created this soup or this milkshake of all this liquidity out there.
But now, while the rest of the world is still pushing down on their syringes, the United
States has– we’ve gotten this monetary policy divergence, where we’re not using a syringe
We’re no longer injecting liquidity.
In fact, we’ve swapped out our syringe for a straw.
And so as we lift up on our interest rates, that sucks that liquidity to the US domestic
It sucks that liquidity up into our domestic markets.
And I think it’s going to push asset prices higher.
In other words, we’re going to drink the milkshake that the rest of the world is still mixing.
So the implications of this milkshake theory are several, and I’m going to try to walk
through them step by step.
But they really kind of all happen at the same time, and they all kind of go on at the
So while I’m going to try to walk through this linearly, I don’t want you to think of
it as necessarily a progression.
One might happen before the other.
They might happen at the same time.
But it’s really this soup.
It’s this milkshake that we’re dealing with.
So there’s three main implications of the theory, and the first part of the theory is
that the US dollar is going to strengthen.
And when I say the US dollar is going to strengthen, I don’t mean that it’s going to
strengthen a little bit.
I mean it’s going to strengthen a lot, and I hesitate to use the
word “supernova,” but it has the opportunity to really break out to incredible highs.
The second implication is that this dollar strength is going to lead to all kinds of
trouble in the global marketplace, specifically in the international markets and the
And finally, the third implication of this is it will ultimately react into
a currency crisis.
And we’re already starting to see the beginnings of that.
The monetary system is just not designed for a
So the implications of a strong dollar are really profound.
It really comes down to the flow that I was talking about earlier, but it’s the monetary
policy divergence as interest rates differentials eventually pull flow into the dollar.
Now, that hasn’t happened for a while.
The first part of the year, it didn’t look like
interest rate differentials mattered.
But you’re starting to see with a two or three-month lag that it actually does matter.
We’re also in a period where there’s not only this
increasing demand for US dollars due to the flow into the higher interest rates, but
we’re also– it’s compounded by the fact that we now have a situation where supply is
So you have increased demand with contracting supply.
That’s through the quantitative tightening that the Fed is
The other thing is that demand for dollars– there’s a lot of talk about a lack of
demand for dollars.
There is an incredible amount of demand for dollars just to pay
the interest on dollar-based debt in the world.
Now, a lot of people will focus on the $20 trillion that the United States government
And that is a problem.
I’m not going to deny it.
But the fact is that there’s another $20 trillion outside the United
States, either through direct dollar loans or the shadow dollar market, that
international entities own.
Oh, and those are dollar-based demand that they need as
And so if you add up all the dollar-based debt in the world, and if you just assume
that all that debt has the same rate as the US Treasury, which is 2.3%, which is
There’s no way that that’s what all these different loans are actually made
at, but if they did, there’s over a trillion dollars a year in demand for dollars just
to pay the interest on the dollar-based debt.
And that stays the same, whether– even if people totally move away from the dollar and
never borrow another dollar going forward, there’s still a trillion dollars
in demand to service the existing dollar-based debt.
And the reality is it’s probably twice that high.
It’s probably $2 trillion.
Now, another reason is that– we’re getting into a period where the dollar is going to
go higher– is that the US debt ceiling is now gone.
And we’re at a place where the government is providing fiscal stimulus.
And this provides increased demand.
And what I mean by that is a year ago, we bumped
up against the debt ceiling, and we could not issue new bonds.
And so the checking account that the US government, that
the Treasury has at the Federal Reserve, had about $500 billion in it.
And they drew that down to less than $100 billion.
So they pushed $400 billion out into the system.
That created supply of dollars, and that’s part of the reason why the dollar dropped.
That’s completely flipped now.
Not only is the government not pushing that $500
billion or $400 billion out into the market, but they’re actually entering the
dollar market to get funding.
They’re selling bonds in exchange for dollars.
So you have a situation where the supply of dollars is
no longer increasing, and now you have the biggest buyer in the world– the US
government– entering the dollar market, buying dollars, competing with everybody
That’s a recipe for price to rise.
Another part of the cash flow back to the United States theory is the US repatriation
after the new tax bill.
A lot of people didn’t think that even if they passed it,
governments– or I mean corporations– wouldn’t repatriate.
But we are seeing a repatriation.
And I think one thing a lot of people forget is it’s not just US corporates
repatriating cash back to the United States.
Foreign banks, foreign entities can also send cash back to United States, and they
can get that higher interest rate on doing it.
Now, if you don’t think that’s possible, just go look at the breakdown of the reserves
of the Fed.
Over half of the reserves, bank reserves at the US Fed, are from
So not only are they going to do it, but they’re already doing it in
a big way.
Now a fifth reason that the dollar will gain some of this flow coming from around the
world is that as the dollar does get stronger, it creates chaos everywhere else.
And so the dollar will start to get flow just from
a safe haven demand.
And we’re actually starting to see this already.
We’ve got problems in Turkey.
We’ve got problems in Italy.
China has just recently come out and said they’re probably going to have to
lower their reserve ratio requirements and provide stimulus at some point over the
So we’re already seeing that the strong dollar is impacting other markets.
And I don’t really have time to get into the whole euro
situation, other than to say that the euro is
just– I mean it’s really a disaster.
I really don’t know how else to say it.
It’s just not a currency that is going to be able to function
They have all the same problems that we do.
Their balance sheet is bigger than ours.
They’re still providing stimulus.
They don’t really have a way to draw down the stimulus.
And they’ve also got the political problems on top of it.
So as people real– and they’re overregulated.
The number of regulations that have gone on in the EU in the last two years are
dramatic, and we’re already starting to see the impact that that has on corporations.
So I think all of these five combined are really going to push the flows back to the
So one of the arguments that I often hear is that, what if people just leave?
What if they default on the dollars that they owe
and just go off to a new agreement that they’ve created?
Would that cause chaos?
It would absolutely cause a lot of chaos.
But is it possible?
Yes, it’s absolutely possible.
And that’s one of the reasons, by the way, you should own gold, because you
never know what could happen.
That said, one thing you have to realize is if these people default on their dollar
loans, and they leave, and they go somewhere else, in a debt-based monetary
system, it’s not just the debt that leaves.
It’s not just the obligations that leave.
Money disappears as well, because in a debt-based
monetary system, when debt gets defaulted on, money evaporates.
And if money disappears, that means supply falls.
So if you think about this like a musical chairs example, and we’ve got a number of
digital or paper participants swirling around the limited number of monetary base
dollars that actually exist, if some of these players decide they don’t want to play
anymore, and they leave, and they default on that debt, that’s fine.
But when they leave, money disappears as well.
So the chairs disappear as well.
And if the chairs start to disappear at the same
rate that the obligations disappear, if you get supply falling even faster than demand,
price still rises.
So I don’t buy that argument that they can just walk away and
that there won’t be any chaos and any implications involved with that.
Another thing I would say is even if they do raise rates, and it does cause a recession,
well, then, that means the US is now in recession, and the rest of the world’s biggest
customer now have a cold and cannot buy all the goods from those other countries
that they were selling before.
So that has a knock-on effect to EM, and I actually think
it hurts EM and international more than it hurts the US.
So even if that does turn out to be correct, I don’t think that that’s necessarily
Now, the big one that I always hear is that the Fed is going to have to– again, they’ll
have to– they can’t keep raising rates, so they’ll have to reverse course, and they’ll
actually have to implement QE again.
And that’s not going to happen either, in my
And the reason that I don’t think that that’s going to happen is because the
whole point of QE is to provide artificial flow from somewhere outside the current
That’s the whole point of buying the bonds to get that injection.
When the Fed would buy bonds, they would inject currency
into the system.
So if you can get that injection of currency into the system from somewhere other than
the Fed, then the Fed doesn’t need to provide it.
And this is the heart of the dollar milkshake theory.
The rest of the world is still providing an incredible amount of
stimulus into the market.
But we’re the only ones with a straw.
Everybody else is pushing the liquidity out into the market.
The Fed has a straw, and they’re sucking up that liquidity.
And as they suck up that liquidity, that is an injection from outside the
domestic market into the market that allows the flow to keep happening.
And that is no different than QE if we were doing it ourself.
Just because they’re operating QE out of Tokyo or out of Frankfurt doesn’t mean that
those dollars or that liquidity– the euros, the yen, whatever– stays in those domestic
In a global marketplace, all those assets can flow to the US, and I think that’s
what’s going to happen.
And that is literally the heart of the dollar milkshake theory.
It doesn’t really matter who provides the QE.
What really matters is who captures the QE.
And with our higher rates and relatively better economy than the rest of the
world, we’re going to capture that QE.
One of the other arguments that often gets made is the fact that if the Fed continues
to raise rates, then it’s going to invert the
Now, I can’t argue with that.
If you look back at history, whenever the yield
curve inverts, it almost always does lead to a recession.
But what many forget to put forth when they put forth this argument is
that the length of time from when it inverts until when it goes into recession is typically
18 to 24 months, and that goes back on several occasions as well.
Not only that, but what happens during that 18 to 24 months is typically a speculative
And that leads to the blow-off top.
And if you think about it– and I can’t prove this– but if you think about the typical
yield curve that a bank would want, they want a very steep curve.
They want short-term interest rates and high long-term interest
They want to lend long, and they want to pay short, and they make that
Well, if that’s great for the banks, that’s probably not great for the speculators.
But if you reverse it, and you get into an inverted
yield curve, that’s not good for the banks, because they’re having to pay short and lend
long, and they’re upside down.
But if it’s bad for the banks, who takes the other
side of the banks’ trade?
Well, that’s the speculators.
And if the speculators can borrow long and invest short and make that
spread and lever it up, that’s like Disneyland for them.
And that leads to the speculative mania, and that’s what leads to
the crazy excesses, and that’s what leads to the blow-off tops that nobody think can
And that’s why I don’t think that an inverted yield curve– I don’t think it’s
negative for the dollar, and in the short term, I
don’t think it’s negative for the markets.
OK, so where does all this lead?
What does this dollar milkshake mean to us in the
Well, I think what it means is that we haven’t seen the blow-off top yet.
I still think it’s coming.
I think equities are going a lot higher.
And again, this isn’t a Pollyanna view.
I’m not saying to go out and buy equities, because things are good.
I’m saying go out and buy equities, because things are bad.
Things are really bad.
It’s just that the road to bad looks much different
than what the typical person thinks.
And I think that as we get into this inverted yield curve, as we get into problems
around the world, as we have currency crises, the United States is going to be seen
as a safe haven.
And all roads go through the dollar.
And when that money flows into the dollar, it eventually goes into US
And I think it’s going to push equities to all-time highs.
I also think that it’s going to have a big impact on bonds.
Now, I’m of the opinion that interest rates are headed higher.
I don’t necessarily think that bonds are going to
crash, but I think they are going to break.
And I think that that is going to have a big impact on assets as well.
Now, there’s no doubt that there’s going to be some
moments of pure panic and terror along the way.
I’m not sitting here saying that bonds are going to fall, equities are going
to go up, and it’s all going to be smooth.
I don’t think that at all.
I think it’s going to be really frightening at points.
But I think rates are headed higher.
And when you think back to the fact that there’s been a 40-year bull market in bonds, that
means somebody could have invested their whole life for 40 years and been a fixed income
investor and made money quarter after quarter, year after year, decade after
They have never really lost money on bonds as long as they were buy and
Sure, along the way, maybe they did some trading of bonds where they
lost money, but essentially, nobody has lost money in bonds in 40 years.
Well, now we have interest rates heading higher.
We seem to have broke out of the chart of truth.
Will we retest?
Will there be some moments where bonds rally?
But I think interest rates are headed higher, and when people actually start
losing money in bonds, I think that’s going to be a real wake-up call not just for finance, but from an emotional perspective.
If you have made money on something for 40 years in a row, and then all of a sudden,
you wake up, and you’ve lost money, it’s kind of like the turkey at Thanksgiving.
They have 364 great days, but that 365th day is kind of a nightmare.
I think that can happen in bonds.
And as funds flow out of bonds, I think a lot of that’s
going to flow into equities.
And so all of this– again, I’ve kind of walked through this
linearly, but this is really all going on at the same time.
And as we’ve got a period where interest rates are headed higher, I
think around the world, as bonds start to break– not crash, but as they break– and
funds start to flow out of it, as dollars flow–
as funds flow into the dollar and push asset prices up, I really think we get into this
George Soros talked about it in his book, The Alchemy of Finance.
You get into a place where dollar strength begets more dollar
strength, because as the dollar strengthens, it causes all kinds of problems
And as the yen gets into problems, people seek out safe haven back
into the dollar.
Now, gold will, obviously, I think, be a beneficiary of this.
But I don’t think people around the world are going to sell everything
they own and put all their money into gold.
In fact, we don’t need them to put everything into gold.
They can just put a little bit into gold, and gold does really well.
But I think the dollar is going to be the big
beneficiary, and I think, again, as I’ve said many times, all roads go through the
So of course, as always, I have a lot to say about gold.
I think the first thing I want to get across is that my thesis on gold has not
Everybody should own gold.
It should be part of everybody’s portfolio.
And I’ve said for a long time that gold is going to go to at least $5,000.
That hasn’t changed.
Gold is going to go to $5,000, and the reality is it’s probably going to
go a lot higher than that.
But you know, for anybody that’s trying to put me– peg me down
as far as time and price, I’ll say $5,000.
Now, I don’t know if I’m going to necessarily tell you exactly when, but I still
think gold goes to at least $5,000.
The only question is when.
But part of the other thing is that– part of the reason that gold will go that high
is because it will be at least part of the solution
when this horrible system that the central banks have created eventually comes down.
This dollar milkshake theory is not one in which the dollar remains the world reserve
I think we’re going to get to a place where the dollar gets so strong, they’re
going to have to come to some new kind of Plaza Accord or some kind of a system
where they dramatically reduce the dollar.
But it’s not going to be that we reduce the dollar, and people are mad at us.
I think the world’s going to beg us to reduce the
value of the dollar, because the strong dollar, quite honestly, it just breaks the
entire monetary system.
It breaks international markets.
It breaks the emerging markets.
And it actually is, in the long term, not great
for the US market either.
But it doesn’t mean it’s going to happen right now.
So I think over the next couple of years, the dollar goes much, much stronger.
I think initially, that breakout is going to
surprise a lot of people.
I think it’s going to create a lot of chaos, and it will ultimately
be that chaos that makes gold go a lot higher.
I tell people all the time that a lot of the typical gold theory is that dollar gets
inflated away, and gold goes through the world, goes through the roof.
And there is that view.
But there is nothing that is more long-term bullish for gold than a strong dollar.
Before we get into that, let’s talk about a little bit why gold, quote, unquote, hasn’t
worked for the last several years.
Well, the reality is I think gold has worked for the
last several years.
Many of us in the gold world got it wrong as far as timing when it
would work in US dollar terms.
But if you’re not a US dollar investor, and you lived in
Cyprus or Russia or Argentina or Venezuela, gold works just fine.
Gold did what it has always done for 5,000 years.
It’s provided a safe haven when things got bad.
And the reality is that things did not get worse here in the United States over the last
five or six years.
And as a result, gold has not performed as it has in those other
But it doesn’t mean that gold isn’t working.
I think a lot of the pain and a lot of the frustration with those in the gold world that
are feeling the frustration from gold not having done anything are those who bought
gold as a speculation, not as insurance, or it’s those who told themselves they bought
it as insurance, but really bought it as a speculation or a get rich quick scheme.
If you bought gold as a hedge against the rest
of your portfolio and the rest of the world blowing up or all the spinning plates that
the central bankers have going crashing, then gold is still working, because the reality
is the plates have not crashed yet.
There’s no doubt that they will, but they haven’t yet.
And so gold hasn’t needed to do anything.
But gold’s been around for 5,000 years.
It’s always been, at least from a market perspective, a currency and the last currency
of resort, and that’s not going to change over the next 5,000 years either.
So if you’re a gold investor, and you have it in your
portfolio, and you didn’t put all your money in gold, you’re probably just fine.
So now there’s also many people in the gold world who will say that the only reason
gold hasn’t worked for the last five years is manipulation, that the decades long gold
manipulation scheme between the central banks, the governments, and the
commercial banks have worked together to keep the price of gold low.
Now, even if you take that view, the fact is you are still
wrong, because if you– this is not a new theory.
This manipulation theory has been out there for decades.
Anybody who’s spent more than five minutes in the gold world
knows about this theory.
So if you bought gold five or six years ago, four years ago, whatever it is, and you
were wanting it to pay off much quicker, and it didn’t, because you think it’s been
manipulated over that time period, well, the only reason you would have bought it
four or five years ago is not because it wasn’t manipulated.
You knew it was manipulated.
The only reason you bought it then was because you thought that the
manipulation was going to fail.
And the reality is the manipulation hasn’t failed.
If you subscribe to the view that gold has been manipulated
lower, then the manipulation is still working.
And so I think it would help a lot of people in the gold world if we would just admit
that we’ve been wrong for the last five years.
I didn’t think that the monetary authorities could keep the plates spinning
for another five or six years.
I thought it would come down much sooner than that.
I was wrong.
The plates are still spinning, but it doesn’t mean that gold has failed.
It just means we got timing wrong, and I think the fact that if you say the words, “I was
wrong,” it’s very freeing.
It actually takes a lot of pressure off you, and you can actually
then move on to the next step and say, well, why was I wrong?
Why did the gold not go up?
Why are the plates still spinning?
And I think that will help prepare you for the next five or six years.
So now let’s talk a little bit about the dollar milkshake theory and how it applies to
Well, I think it largely depends on where you’re sitting and in what currency
You know, if you’re an international person or entity, and you
are not denominated in dollars– I don’t know if you’re in euros, or you’re yen, or
you’re yuan, or bolivar, or whatever you are– I think you can probably pretty much
back up the truck and buy over the next couple of months.
I think the dollar is going to get a lot, lot stronger.
But if the dollar gets a lot, lot stronger, that means a lot of
these other currencies are getting a lot, lot weaker.
That means gold, in those terms, is probably going to go a lot, lot higher.
It would not surprise me at all if these other currencies of gold rises 15% to 30% over the
next 12 to 18 months.
I think that could easily happen.
So I think determine where you’re at and which currency you’re denominated before
you just say, gold is going up or down.
I think that’s a very important point to make.
Now, I think it gets a little bit more complicated if you’re a dollar investor.
I have said for over two years now that I think eventually,
we’re going to get into a situation where dollars and gold rise together, and
I still firmly believe that.
The strength of the dollar is going to cause such chaos in the
global monetary system that the safe haven that gold has always provided, I think, is
going to become into higher demand.
And there will be a point where they rise together.
Now that said, for those of you that heard me say gold’s going to $5,000 earlier, I
want you to keep those positive feelings that you had when I said that, because I
don’t know that it’s going to happen over the next five or six months.
In fact, I think there’s a good chance that gold goes lower
in the short term.
It might not, and if it goes higher, I will embrace the break-out,
and we’ll be on to probably another five or 10-year bull market in gold.
But I’m just not sure that it’s going to break out yet.
We had another great opportunity this spring to break out, and it didn’t happen.
And I think with the move that the dollar is going to make over the next six to 12 months,
I think it will be very challenging for gold to break out initially with that.
And so I think if you are a US investor or a dollarbased
investor, I’m not saying that you should sell your gold.
The gold theory is still very much intact, but I’m just not convinced
it’s going to break out right now.
So as far as gold and the dollar rising together, I know that seems kind of
But at the end of the day, I really don’t think it is.
They’re both currencies, and they’re both measured against
all the other currencies in the world.
And so I think in the same way that the yen and the euro could rise together, dollars
and gold could rise together against a number of different fiat currencies.
Again, I don’t think that– I’m not even sure that
the dollar bulls have a proper appreciation for
how much damage that the dollar bull market is going to cause.
Again, the design of the monetary system was just not built for
a strong dollar.
And when it gets going and rocking and rolling, it is going to cause all kinds of
And that should be very good for gold.
When markets start melting down, and when chaos starts to happen, and confidence
starts to get lost, and you can feel the panic in the streets, that’s typically
great for gold.
And so whether or not things panic and break down in the United States,
if they panic in Europe, or if they panic in
Africa, or they panic in Asia, that’s a good opportunity to provide a chaos trade, so
to speak, or a safe haven trade.
And I think dollars will benefit from that, but gold
will benefit too.
And again, we don’t need everybody to sell everything they own and go buy gold.
The gold market’s very small on a per capita basis.
We just need the rest of the world to put 1% or 2% of their assets in gold, and
So we don’t need a mass exit out of fiat currency into gold for gold
to do very well.
The other reason that gold and the dollar can rise together is that we talked about
gold being a small market.
Well, if the dollar is rising a lot– and I mentioned other
currencies would be going down a lot– if those investors do start seeking out gold,
if Europeans start buying gold en masse, or the
Asian continent starts buying gold en masse, that can have dramatic implications
for supply of gold.
And so again, we don’t need it to be really big for it to impact.
And that’s another reason why, even though the dollar may be getting a safe haven
trade, that gold can get a safe haven trade as well.
And once we get to a place where the dollar and gold is rising together, I mean then
it’s just really rock and roll time.
I mean that’s just where the gold really starts to go
And then I think in a couple of years from now, whether it’s 2020 or 2021, after
the dollar has caused all this damage, the global authorities will have to get together,
and they will either have to, at that point, weaken the dollar either through QE or
some type of Plaza Accord, or maybe they introduce a whole new monetary system,
whether it’s an SDR or whether it’s a combination of a basket of assets.
I don’t know what it is, but what I know is that the monetary system, as it’s currently
designed, has a dramatic flaw.
And that dramatic flaw is about to be thrown a real
curve ball with the dollar getting stronger.
And that should be good for the US dollar.
It should be good for gold, and it should be good for those who are prepared.
A lot of people say that nobody sees the fact that the dollar has this problem, that
they have all these liabilities, all these unfunded liabilities, that our trading partners
are wanting to move away from the dollar.
I just don’t think that’s the case.
I think a lot of people see that this is a problem.
I think a lot of people want to leave the dollar.
I think there’s a big mistake in saying that this is a small problem that a few
people have discovered and that they’re going to profit wildly when the dollar gets
thrown by the wayside.
I go to meetings all the time.
I talk with investors all around the world all the time.
I can’t remember a meeting in the last couple
of years, where it either wasn’t brought up already or that I didn’t bring it up about
the dollar and its status in the world, that everybody around the table wasn’t familiar
with the issue.
Never once has anybody said, well, what are you talking about, “leaving
Everybody starts nodding their head, and everybody starts putting their
two cents in.
I think a lot of people have talked– or I think a lot of people have thought about this.
I don’t think this is some small issue.
I don’t think anybody’s come up with a real answer, but I don’t think it’s an issue that
nobody knows about and nobody discusses.
Now, even though I don’t think gold has got it wrong over the last five or six years,
and while I don’t think gold has stopped working, per se, I think gold is doing exactly
what it has always done.
Again, I think, as I alluded to earlier, I think we’re the ones that got it wrong.
Now, why did we get it wrong?
Well, I think part of it is that a lot of us, me included,
thought that quantitative easing was going to be dramatically inflationary.
I didn’t think that the world could inject $20 trillion
into the global economy and not inflate fixed assets, gold being one of them.
But you know what?
We got that wrong.
It was inflationary to asset prices.
Real estate went higher.
Equities went higher.
Some commodities went higher, but some commodities
In my opinion, all the low rates and the QE ended up being deflationary
to some assets, just as much as it was inflationary to other assets.
And I think keeping rates at the zero bound is overall
And so the fact that $20 trillion pumped into the economy was going to
create hyperinflation– it didn’t happen.
We got that wrong.
And I think it’s important– I really do think it’s important that we admit that we got that
wrong, because if you just say, “buy gold,” all the time, and you never say that it
could possibly go down, well, then we’re no different than those who say buy equities
all the time, and never buy gold.
I think we’ve got to be very careful that we don’t fall
into the same hypocritical arguments that the traditional Wall Street does.
I have a lot of friends in the gold world.
I have a tremendous amount of respect for them.
Most of them are my friends.
If you’re in the gold world, and you’re not my
friend, I think it’s probably because we didn’t spend too much time together.
But I do think that we can do ourself a lot of good
by kind of taking a step back and really trying to understand why gold didn’t do well
over the last five years.
Just admit that we got the timing wrong.
There’s nothing wrong with that, because just because we
got the last five years wrong, it doesn’t mean that we’re going to get the next five
I mean, in fact, I’m pretty sure we’re going to get the next five years right.
But I think in order– for credibility’s sake or to be
able to take a step back and be objective and
try to really understand why gold didn’t break out in dollar terms over the last five
years, I think it’s important to just acknowledge that we missed something along the
Now, somewhere else where I think you can see it is in equities.
Now, at the beginning of the year, I said I thought that
equities were going to go higher.
I thought they might very well have a 5% or 10% correction
before that happened.
I said I thought it would be nice if we had it.
It would be helpful.
Well, we got it.
So kind of be careful what you wish for.
But if you look at equities, both the S&P and the NASDAQ are both in a wedge
And I think they’re kind of near the bottom of that wedge pattern.
I’m not saying it’s going to be a straight line, and
it’s going to be easy, but I think we’re going to move higher to the top of that wedge pattern,
and I think we’re going to break out of that wedge pattern.
I think equities are going higher.
I think the Fed’s going to continue to raise rates, and I think this
dollar milkshake theory is really going to get
So again, I’m really excited about where markets are headed, not because I think
things are going to be easy.
I actually think they’re going to be hard.
I think they’re going to be scary.
But I think they’re going to be fun, to be honest.
I think they’re going to present a lot of great opportunities.
And I think if you have a plan for how to get through it, I think the opportunities
are actually pretty incredible.
I think one thing to remember is never be closed off to any ideas.
I always consider everybody’s arguments that they send back
I’m happy to think about them.
It doesn’t mean that I’m giving up on my own opinions, but I think one of the
most important things to do over the next couple of years is keep an open mind.
I think we’re going to see things happen that
many people just don’t think can happen.
And I think that for those who kind of stay nimble and have a plan, there’s going to
be an opportunity to make some good profits in the years ahead.