Follow the Money: Preparing for the Collapse of the Petrodollar System

In the final days of World War II, 44 leaders from all of the Allied nations met in Bretton Woods, New Hampshire in an effort to create a new global economic order. With much of the global economy decimated by the war, the United States emerged as the world’s new economic leader. The relatively young and economically nimble U.S. served as a refreshing replacement to the globe’s former hegemon: a debt-ridden and war-torn Great Britain.

In addition to introducing a number of global financial agencies, the historic meeting also created an international gold-backed monetary standard which relied heavily upon the U.S. Dollar.

Initially, this dollar system worked well. However, by the 1960’s, the weight of the system upon the United States became unbearable. On August 15, 1971President Richard M. Nixon shocked the global economy when he officially ended the international convertibility from U.S. dollars into gold, thereby bringing an official end to the Bretton Woods arrangement.

Two years later, in an effort to maintain global demand for U.S. dollars, another system was created called the petrodollar system. In 1973, a deal was struck between Saudi Arabia and the United States in which every barrel of oil purchased from the Saudis would be denominated in U.S. dollars. Under this new arrangement, any country that sought to purchase oil from Saudi Arabia would be required to first exchange their own national currency for U.S. dollars. In exchange for Saudi Arabia’s willingness to denominate their oil sales exclusively in U.S. dollars, the United States offered weapons and protection of their oil fields from neighboring nations, including Israel.

By 1975, all of the OPEC nations had agreed to price their own oil supplies exclusively in U.S. dollars in exchange for weapons and military protection.

This petrodollar system, or more simply known as an “oil for dollars” system, created an immediate artificial demand for U.S. dollars around the globe. And of course, as global oil demand increased, so did the demand for U.S. dollars.

As the U.S. dollar continued to lose purchasing power, several oil-producing countries began to question the wisdom of accepting increasingly worthless paper currency for their oil supplies. Today, several countries have attempted to move away, or already have moved away, from the petrodollar system. Examples include IranSyriaVenezuela, and North Korea… or the “axis of evil,” if you prefer. (What is happening in our world today makes a whole lot of sense if you simply read between the lines and ignore the “official” reasons that are given in the mainstream media.) Additionally, other nations are choosing to use their own currencies for oil like China, Russia, and India, among others.

As more countries continue to move away from the petrodollar system which uses the U.S. dollar as payment for oil, we expect massive inflationary pressures to strike the U.S. economy. In this article, we will explain how this could be possible.

Alan Greenspan Talks About the Petrodollar System
PETRODOLLAR DEFINITION | The money that oil exporting nations receive from selling their oil which is then deposited into Western banks.

The Coming Collapse of the Petrodollar System

When historians write about the year 1944, it is often dominated with references to the tragedies and triumphs of World War II. And while 1944 was truly a pivotal year in one of history’s most devastating conflicts of all time, it was also a significant year for the international economic system. In July of that same year, the United Nations Monetary and Financial Conference (more commonly known as the Bretton Woods conference) was held in the Mount Washington hotel in Bretton Woods, New Hampshire. The historic gathering included 730 delegates from 44 Allied nations. The aim of the meeting was to regulate the war-torn international economic system.

During the three-week conference, two new international bodies were established.

These included:

In addition, the delegates introduced the General Agreement on Tariffs and Trade (GATT, later known as the World Trade Organization, or WTO.)

More importantly, for our purposes here, another development that emerged from the conference was a new fixed exchange rate regime with the U.S. Dollar playing a central role. In essence, all global currencies were pegged to the U.S. Dollar.

At this point, an appropriate question to be asking yourself is: ”Why would all of the nations be willing to allow the value of their currencies to be dependent upon the U.S. Dollar?

The answer is quite simple.

From Bretton Woods to the Petrodollar System

The U.S. Dollar would be pegged at a fixed rate to gold. This made the U.S. dollar completely convertible into gold at a fixed rate of $35 per ounce within the global economic community. This international convertibility into gold allayed concerns about the fixed rate regime and created a sense of financial security among nations in pegging their currency’s value to the dollar. After all, the Bretton Woods arrangement provided an escape hatch: if a particular nation no longer felt comfortable with the dollar, they could easily convert their dollars holdings into gold. This arrangement helped restore a much-needed stability in the financial system. But it also accomplished one other very important thing. The Bretton Woods agreement instantly created a strong global demand for U.S. dollars as the preferred medium of exchange.

And along with this growing demand for U.S. Dollars came the need for… a larger supply of dollars.

Now, before we continue this discussion, stop for a moment and ask yourself this question: Are there any obvious benefits from creating more dollars? And if so, who benefits?

First, the creation of more dollars allows for the inflation of asset prices. In other words, more dollars in existence allows for a rise in overall prices.

For example, imagine for a moment if the U.S. economy had a total money supply of only $1 million dollars. What if, in this imaginary economy, I attempted to sell you my home for $2 million dollars? While you may like my home, and may even want to buy it, it would be physically impossible for you to do so. And it would be completely absurd for me to ask for $2 million because, in our imaginary economy, there is only $1 million in existence.

So an increase in the overall money supply allows asset prices to rise.

But that’s not all.

The Petrodollar System creates an artificial demand for U.S. Dollars which allows asset prices to rise

The United States government benefits from a global demand for U.S. dollars. How? It’s because a global demand for dollars gives the Federal government a “permission slip” to print more. After all, we can’t let our global friends down, can we? If they “need” dollars, then let’s print some more dollars for them.

Is it a coincidence that printing dollars is the U.S. government’s preferred method of dealing with our nation’s economic problems?

Remember, Washington only has four basic ways to solve its economic problems:

1. Increase income by raising taxes on the citizens

2. Cut spending by reducing benefits

3. Borrow money through the issuance of government bonds

4. Print money

Raising taxes and making meaningful spending cuts can be political suicide. Borrowing money is a politically convenient option, but you can only borrow so much. That leaves the final option of printing money. Printing money requires no immediate sacrifice and no spending cuts. It’s a perfect solution for a growing country that wants to avoid making any sacrifices. However, printing more money than is needed can lead to inflation. Therefore, if a country can somehow generate a global demand for its currency, it has a “permission slip” to print more money. Understanding this “permission slip” concept will be important as we continue.

Finally, the primary beneficiary of an increased global demand for the U.S. Dollar is America’s central bank, the Federal Reserve. If this does not make immediate sense, then pull out a dollar bill from your wallet or purse and notice whose name is plastered right on the top of it.

Have you ever asked yourself why the U.S. Dollar is called a Federal Reserve Note?

Once again, the answer is simple.

The U.S. Dollar is issued and loaned to the United States government by the Federal Reserve.

Because our dollars are loaned to our government by the Federal Reserve, which is a private central banking cartel, the dollars must be paid back. And not only must the dollars be paid back to the Federal Reserve. They must be paid back with interest!

And who sets the interest rate targets on the loaned dollars? It’s the Federal Reserve, of course.

Federal Reserve Note - Money is Debt and Debt is Money

To put it simply, the Federal Reserve has a clear vested interest in maintaining a stable and growing global demand for U.S. Dollars because they create them and then earn profit from them with interest rates which they set themselves. What a great system the Federal Reserve has for itself. No wonder it hates oversight and intervention. No wonder the private banking cartel that runs the Federal Reserve despises all attempts to actually audit its books.

In summary, the American consumer, the Federal government, and Federal Reserve all benefit to varying degrees from a global demand for U.S. Dollars.

The Bretton Woods Breakdown: Vietnam, The Great Society, and Deficit Spending

There is an old saying that goes, “He who holds the gold makes the rules.” This statement has never been truer than in the case of America in the post-World War II era. By the end of the war, nearly 80 percent of the world’s gold was sitting in U.S. vaults, and the U.S. Dollar had officially become the world’s undisputed reserve currency.

As a result of the Bretton Woods arrangement, the dollar was considered to be “as safe as gold.”

A study of the United States economy in the post-World War II era demonstrates that this was a time of dramatic economic growth and expansion. This era gave rise to the baby boomer generation. By the late 1960’s, however, the American economy was under major pressure. Deficit spending in Washington was uncontrollable as President Lyndon B. Johnson began to realize his dream of a “Great Society.”With the creation of Medicare and Medicaid, American citizens could now, for the first time, earn a living from their government.

The Breakdown of the Bretton Woods Arrangement - Lyndon B. Johnson - Vietnam, The Great Society, and Massive Deficit Spending

Meanwhile, an expensive and unpopular war in Vietnam funded by record deficit spending led some nations to question the economic underpinnings of America.

After all, the entire global economic order had become dependent upon a sound U.S. economy. Countries like Japan, Germany, and France, while fully on the mend from the devastation of World War II, were still largely dependent upon a financially stable American economy to maintain their economic growth.

By 1971, as America’s trade deficits increased and its domestic spending soared, the perceived economic stability of Washington was being publicly challenged by many nations around the globe. Foreign nations could sense the severe economic difficulties mounting in Washington as the United States was under financial pressure at home and abroad. According to most estimates, the Vietnam War had a price tag in excess of $200 billion. This mounting debt, plus other debts incurred through a series of poor fiscal and monetary policies, was highly problematic given America’s global monetary role.

But it was not America’s financial issues that most concerned the international economic community. Instead, it was the growing imbalance of U.S. gold reserves to debt levels that was most alarming.

The United States had accumulated large amounts of new debt but did not have the money to pay for them. Making matters worse, U.S. gold reserves were at all-time lows as nation after nation began requesting gold in exchange for their dollar holdings. It was almost as if foreign nations could see the writing on the wall for the end of the Bretton Woods arrangement.

As 1971 progressed, so did foreign demand for U.S. gold. Foreign central banks began cashing in their excess dollars in exchange for the safety of gold. As nations lined up to exchange their dollar holdings for Washington’s gold, the United States realized that the game was over. Clearly, America had never intended to be the globe’s gold warehouse. Instead, the convertibility of the dollar into gold was meant to generate a global trust in U.S. paper money. Simply knowing that the U.S. dollar could be converted into gold if necessary was good enough for some — but not for everyone. The nations which began to doubt America’s ability to manage their own finances decided to opt for the recognized safety of gold. (Historically, gold has been, and will likely remain, the beneficiary of poor fiscal and monetary policies, and 1971 was no different.)

One would have expected that the large and growing demand by foreign nations for gold instead of dollars would have been a strong indicator to the United States to get its fiscal house in order. Instead, America did exactly the opposite. As Washington continued racking up enormous debts to fund its imperial pursuits and its over-consumption, foreign nations sped up their demand for more U.S. gold and fewer U.S. dollars. Washington was caught in its own trap and was required to supply real money (gold) in return for the inflows of their fake paper money (U.S. dollars).

They had been hamstrung by their own imperialistic policies.

Soon the United States was bleeding gold. Washington knew that the system was no longer viable, and certainly not sustainable. But what could they do to stem the crisis? There were only two options.

The first option would require that Washington immediately reduce its massive spending and dramatically reduce its existing debts. This option could possibly restore confidence in the long-term viability of the U.S. economy. The second option would be to increase the dollar price of gold to accurately reflect the new economic realities. There was an inherent flaw in both of these options that made them unacceptable to the United States at the time… they both required fiscal restraint and economic responsibility. Then, as now, there was very little appetite for reducing consumption in the beleaguered name of “sacrifice” or “responsibility.”

Goodbye, Yellow Brick Road

The Bretton Woods system created an international gold standard with the U.S. dollar as the ultimate beneficiary. But in an ironic twist of fate, the system that was designed to bring stability to a war-torn global economy was threatening to plunge the world back into financial chaos. The gold standard created by Bretton Woods simply could not bear the financial excesses, coupled with the imperialistic pursuits, of the American economic empire.

On August 15, 1971, under the leadership of President Richard M. Nixon, Washington chose to maintain its reckless consumption and debt patterns by detaching the U.S. Dollar from its convertibility into gold. By “closing the gold window,” Nixon destroyed the final vestiges of the international gold standard. Nixon’s decision effectively ended the practice of exchanging dollars for gold, as directed under the Bretton Woods agreement. It was in this year, 1971, that the U.S. dollar officially abandoned the gold standard and was declared a purely “fiat” currency. (A “fiat” currency is one that derives it value from its sponsoring government. It is a currency issued and accepted by decree.)

Here’s a brief 2-minute excerpt of the actual televised speech delivered by President Nixon on August 15, 1971 in which he ended the U.S. Dollar’s convertibility into gold.

As all other fiat empires before it, Washington had come to view gold as a constraint to their colossal spending urges. A gold standard, as provided by the Bretton Woods system, meant that America had to attempt to publicly demonstrate fiscal restraint by maintaining holistic economic balance.

By “closing the gold window,” Washington had affected not only American economic policy — it also affected global economic policy. Under the international gold standard of Bretton Woods, all currencies derived their value from the value of the dollarAnd the dollar derived its value from the fixed price of its gold reserves. But when the dollar’s value was detached from gold, it became what economists call a “floating” currency. (By “floating,” it is meant that the currency is not attached, nor does it derive its value, from anything externally.) Put simply, a “floating” currency is a currency that is not fixed in value.

Like any commodity, the dollar could be affected by the market forces of supply and demand. When the dollar became a “floating” currency, the rest of the world’s currencies, which had been previously fixed to the dollar, suddenly became “floating” currencies as well. (Note: It did not take long for this new system of floating currencies with floating exchange rates to attract manipulation by speculators and hedge funds. Currency speculation is, and remains, a threat to floating currencies. Proponents of a single global currency use the current manipulation of currency speculators to promote their agenda.)

Petrodollar System

In this new era of floating currencies, the U.S. Federal Reserve, America’s central bank, had finally freed itself from the constraint of a gold standard. Now, the U.S. dollar could be printed at will — without the fear of not having enough gold reserves to back up new currency production. And while this new-found monetary freedom would alleviate pressure on America’s gold reserves, there were other concerns.

One major concern that Washington had was regarding the potential shift in global demand for the U.S. dollarWith the dollar no longer convertible into gold, would demand for the dollar by foreign nations remain the same, or would it fall?

The second concern had to do with America’s extravagant spending habits. Under the international gold standard of Bretton Woods, foreign nations gladly held U.S. debt securities, as they were denominated in gold-backed U.S. dollars. Would foreign nations still be eager to hold America’s debts despite the fact that these debts were denominated in a fiat debt-based currency that was backed by nothing?

 

The Iraq and Afghanistan wars were both “resource wars” sold to the American public under false pretenses. America’s empire of 700+ military bases in 130+ nations serves as a global oil protection service, not a national military seeking to protect American citizens. Instead of protecting our nation’s borders, the U.S. military is used by the Washington elites to protect the petrodollar system. The foundations of the American empire are now crumbling as emerging nations are no longer willing to spend their lives and their new found wealth propping up the U.S. consumer. Nor do they have any desire to tolerate the belligerence of the U.S. war machine.

Like all failing empires, America will fall under its own weight as more nimble economies arise in its wake. America’s attempts at regional dominance of Central Asia will lead to further friction with Russia and/or China. This friction will provide the spark for yet another war

Surplus recycling, currency unions and the birth of the Global Minotaur

In yesterday’s post, I began to tell the tale of how the USA planned and implemented a Global Plan for the world economy, placing the US administration at the heart of a global Surplus Recycling Mechanism. Today, I have two offerings: One is a brilliant paper by George Krimpas which states the case for such a Surplus Recycling Mechanism, as expounded by Keynes during the Bretton Woods conference in 1944. It is called The Recycling Problem in a Currency Union. Secondly, I am continuing today my own story of how the postwar Global Plan unravelled, giving rise to a brand new, terriblyunruly, yet puzzlingly effective Surplus Recycling Mechanism which I call the Global Minotaur (1971-2008). It comes from Chapter 4 of my forthcoming book (also entitled THE GLOBAL MINOTAUR). Enjoy. (As I am about to board a plane for Australia, and then Korea, my postings will be intermittent for a while.)The Global Plan’s Achilles HeelThe Global Plan unravelled because of a major design flaw in its original architecture. John Maynard Keynes had spotted the flaw during the 1944 Bretton Woods conference but was overruled by the Americans. What was it? It was the lack of any automated Global Surplus Recycling Mechanism (GSRM) that would keep systematic trade imbalances constantly in check.

The American side vetoed Keynes’ proposed mechanism, the International Currency Union (ICU), thinking that the US could, and should, manage the global flow of trade and capital itself; without committing to some formal, automated GSRM. The new hegemon, blinded by its newfangled superpower status, failed to recognise the wisdom of Ulysses’ strategy; of binding itself voluntarily to some Homeric mast.

Less cryptically, Washington thought that global trade imbalances would favour America in perpetuity, casting in stone the its economy’s status as the world’s surplus nation. Then, the power bestowed upon the United States by the surpluses it extracted from all over the world would be utilised benevolently and efficiently in order to manage the world economy along the lines of an enlightened hegemony. Indeed, this is exactly what the United States did: They recycled graciously the American surpluses in the form of capital injections into Japan, Germany and other deserving regions.

Alas, US policy makers failed to foresee that global imbalances could undergo a drastic inversion, leaving the United States in the unfamiliar position of a deficit country. During the heady days of the late 1940s, the Global Plan‘s architects ostensibly neglected to take seriously the possibility that the lack of self-restraint would lead Washington to codes of behaviour that would undermine their brilliant grand design.

The Global Plan unravels

The Global Plan‘s path was not laid with roses. A series of mishaps marked its evolution, with Chairman Mao’s triumph delivering the first blow. Quite impressively, it reacted creatively to adversity, often as a result of unintended consequences. We have already seen how the Korean War was exploited to shore up the Global Plan‘s far eastern flank. So, when the United States dragged itself into the Vietnam War, a similar wave of ‘creative destruction’ was on the cards.

Though it is a gross understatement to suggest that its persecution did not go according to the original plan, the Vietnam War‘s silver lining is visible to anyone who has ever visited South East Asia. Korea, Thailand, Malaysia and Singapore grew fast and in a manner that frustrated the pessimism of those who predicted that underdeveloped nations would find it hard to embark upon the road of capital accumulation necessary to drive them out of abject poverty. In the process, they provided Japan with valuable trade and investment opportunities which lessened the burden on the US authorities which, before the mid-1960s, had shouldered alone the burden of generating enough demand for Japanese factories in Europe and in the US itself. Years later, the same model was copied by Deng Xiao Ping and delivered the China we know today.

The problem with unintended consequences is that they are not reliably advantageous. Ho Chi Minh’s stubborn refusal to lose the war, and Lyndon Johnson’s almost manic commitment to do all it takes to win it, were crucial not only in creating a new capitalist region in the Far East, but also in derailing the Global Plan. The escalation of the financial costs of that war that were to be a key factor in its demise.

Setting aside the appalling human cost,[1] the war cost the US government around $113 billion and the US economy another $220 billion. Real US corporate profits declined by 17% while, during the period 1965-1970, the war-induced increases in average prices forced the real average income of American blue collar workers to fall by about 2%.[2] The war was taking its toll not only ethically and politically, as a whole generation of American youngsters were marked by the fear and loathing of Vietnam, but also in terms of tangible loss of working class income which fuelled social tensions. Arguably, President Johnson’s Great Society social programs were aimed, largely, at relieving these strains.

As the combined costs of the Vietnam War and the Great Society began to mount, the government was forced to generate mountains of US government debt. By the end of the 1960s, many governments began to worry that their own position, which was interlocked with the dollar in the context of the Bretton Woods system, was being undermined. By early 1971, liabilities in dollars exceeded $70 billion when the US government possessed only $12 billion of gold with which to back them up.

The increasing quantity of dollars was flooding world markets, giving rise to inflationary pressures in places like France and Britain. European governments were forced to increase the quantity of their own currencies in order to keep their exchange rate with the dollar constant, as stipulated by the Bretton Woods system. This is the basis for the European charge against the United States that, by pursuing the Vietnam War, it was exporting inflation to the rest of the world.

Beyond mere inflationary concerns, the Europeans and the Japanese feared that the build-up of dollars, against the backdrop of a constant US gold stock, might spark off a run on the dollar which might then force the United States to drop its standing commitment to swapping an ounce of gold for $35, in which case their stored dollars would devalue, eating into their national ‘savings’.

The flaw in the Global Plan was intimately connected to what Valery Giscard d’Estaing, President de Gaulle’s finance minister at the time, called the dollar’s exorbitant privilege: The United States’ unique privilege to print money at will without any global institutionalised constraints. De Gaulle and other European allies (plus various governments of oil producing countries whose oil exports were denominated in dollars) accused the Unites States of building its imperial reach on borrowed money that undermined their countries’ prospects. What they failed to add was that the whole point of the Global Plan was to revolve around a surplus generating United States. When America turned into a deficit nation, the Global Plan could not avoid going into a vicious tail spin.

On 29th November 1967, the British government devalued the pound sterling by 14%, well outside the Bretton Woods 1% limit, triggering a crisis and forcing the United States government to use up to 20% of its entire gold reserves to defend the $35 per ounce of gold peg. On 16th March 1968, representatives of the G7’s Central Banks met to hammer out a compromise. They came to a curious agreement which, on the one hand, retained the official peg of $35 an ounce while, on the other hand, left room for speculators to trade gold at market prices.

When Richard Nixon won the US Presidency in 1970, he appointed Paul Volcker as Undersecretary of the Treasury for International Monetary Affairs. His brief was to report to the National Security Council, headed by Henry Kissinger, who was to become a most influential Secretary of State in 1973. In May of 1971, the taskforce headed by Volcker at the Treasury presented Kissinger with a contingency plan which toyed with the idea of “suspension of gold convertibility”. It is now clear that, on both sides of the Atlantic, policy makers were jostling for position anticipating a major change in the Global Plan.

In August of 1971 the French government decided to make a very public statement of its annoyance at the United States’ policies: President George Pompidou ordered a destroyer to sail to New Jersey to redeem US dollars for gold held at Fort Knox, as was his right under Bretton Woods! A few days later, the British government of Edward Heath issued a similar request, though without employing the Royal Navy, demanding gold equivalent to $3 billion held by the Bank of England.  Poor, luckless Pompidou and Heath: They had rushed in where angels fear to tread!

President Nixon was absolutely livid. Four days later, on 15th August 1971, he announced the effective end of Bretton Woods: the dollar would no longer be convertible to gold. Thus, the Global Plan unravelled.

Interregnum: The 1970s oil crises, stagflation and the rise of interest rates

Soon after, Nixon dispatched his Secretary of the Treasury (a no non-sense Texan called John Connally) to Europe with a sharp message. Connally’s account of what he said to the Europeans was mild and affable:

We told them”, he told reporters, “that we were here as a nation that had given much of our resources and our material resources and otherwise to the World to the point where frankly we were now running a deficit and have been for twenty years and it had drained our reserves and drained our resources to the point where we could no longer do it and frankly we were in trouble and we were coming to our friends to ask for help as they have so many times in the past come to us to ask for help when they were in trouble. That is in essence what we told them.”

 

His real message is still ringing in European ears: It’s our currency but it’s your problem! What Connally meant was that, as the dollar was the reserve currency, i.e. the only truly global means of exchange, the end of Bretton Woods was not America’s problem. The Global Plan was, of course, designed and implemented to be in the interest of the United States. But once the pressures on it (caused by Vietnam and internal US tensions that required an increase in domestic government spending) became such that the system reached breaking point, the greatest loser would not be the United States itself but Europe and Japan; the two economic zones that had benefited mostly from the Global Plan.

It was not a message either the Europeans or Japan wanted to hear. Lacking an alternative to the dollar, they knew that their economies would hit a major bump as soon as the dollar would start devaluing. Not only would their dollar assets lose value but, additionally, their exports would become dearer. The only alternative was for them to devalue their currencies too but that would then cause their energy costs to skyrocket (given that oil was denominated in dollars). In short, Japan and the Europeans found themselves between a rock and a hard place.

Toward the end of 1971, in December, Presidents Nixon and Pompidou met in the Azores. Pompidou, eating humble pie over his destroyer antics, pleaded with Nixon to reconstitute the Bretton Woods system, on the basis of fresh fixed exchange rates that would reflect the new ‘realities’. Nixon was unmoved. The Global Plan was dead and buried and a new unruly beast, the Global Minotaur, was to fill its place.

Once the fixed exchange rates of the Bretton Woods system collapsed, all prices and rates broke loose. Gold was the first commodity discretely to jump from $35 to $38 per ounce, soon to $42 and then to float unbounded into the ether. By May 1973 it was trading at more than $90 and before the decade was out, in 1979, it had reached a fabulous $455 per ounce; a twelvefold increase in less than a decade.

Meanwhile, within two years of Nixon’s August 1971 bold move, the dollar had lost 30% of its value vis-à-vis the Deutschmark and 20% against the Yen and Frank. Oil producers suddenly found that their black gold, when denominated in yellow gold, was worth a fraction of what it used to be. Members of the Organisation of Petroleum Exporting Countries (OPEC), which regulated the price of oil through agreed cutbacks on aggregate oil output, were soon clamouring for coordinated action (i.e. reductions in production) to boost the black liquid’s gold value.

At the time of Nixon’s announcement, the price of oil was less than $3 per barrel. In 1973, with the Yom Kippur war between Israel and its Arab neighbours apace, the price jumped to between $8 and $9, thereafter hovering in the $12 to $15 range until 1979. In 1979 a new upward surge began that saw oil trade above $30 well into the 1980s. And it was not just the price of oil that scaled unprecedented heights. All primary commodities shot up in price simultaneously: Bauxite (165%), lead (170%), silver (1065%) and tin (220%) are just a few examples. In short, the termination of the Global Plan signalled a mighty rise in the costs of production across the world. Inflation soared as did unemployment: a rare combination of stagnation with inflation that came to be known as stagflation.

The conventional wisdom of what caused the 1970s stagflation is that the OPEC countries pushed the dollar price of oil sky high against the will of the United States. It is an explanation that runs against logic and evidence. For if the Nixon administration had truly opposed the oil hikes, how are we to explain the fact that its closest allies, the Shah of Iran, President Suharto of  Indonesia and the Venezuelan government, not only backed the increases but led the campaign to bring them about? How are we to account for the administration’s scuttling of the Tehran negotiations between the oil companies (the so-called Seven Sisters) and OPEC just before an agreement was reached that would have depressed prices?

Quoting an influential American observer of these crucial discussions, “…a split was announced in the talks in Tehran by a special US envoy, then-Under Secretary of State John Irwin, accompanied there by James Akins, a key State Department man on oil….[T]he real lesson of the split in negotiations with OPEC was that higher prices were not terribly worrisome to representatives of the State Department… the whole subject of what the negotiations were about began to focus not on holding the price line but on ensuring security of supply.”[3]

The question is thus begged: Why did the United States not oppose with any degree of real commitment the large increases in oil prices? The simple reason is that the Nixon administration, just like it did not regret the end of Bretton Woods, did not care to prevent OPEC from pushing the price of oil higher. For these hikes were not inconsistent with the administration’s very own plans for a substantial increase in the global prices of energy and primary commodities!

Recalling that the new aim was to find ways of financing the US twin deficits without cutting US government spending, or increasing taxes, or reducing US world dominance, American policymakers understood that they had a simple task: To entice the rest of the world to finance its deficits. But this meant a redistribution of global surpluses in favour of the United States and at the expense of the two economic zones they had built around Germany and Japan. Two were the prerequisites of the planned reversal of global capital flows which would see the world’s capital stream into Wall Street for the purposes of financing the expanding US twin deficits:

A. Improved competitiveness of US firms in relation to their German and Japanese competitors; and

B. Interest rates that attracted large capital flows into the Unites States

Prerequisite A could be achieved in one of two ways: Either by boosting productivity in the United States or by boosting the relative unit costs of the competition. The US administration decided to aim for both, for good measure. Labour costs were squeezed with enthusiasm and, at the same time, oil prices were ‘encouraged’ to rise. The drop in US labour costs not only boosted the competitiveness of American companies but, also, acted as a magnet for foreign capital that was searching for profitable ventures. Meanwhile, as oil prices rose, every part of the capitalist world was affected adversely. However, Japan and Western Europe (lacking their own oil) were burdened much more than the United States.

Meanwhile, the rise in oil prices led to mountainous rents piling up in bank accounts from Saudi Arabia to Indonesia, as well as huge receipts by US oil companies. All these petro-dollars soon found their way into Wall Street’s hospitable bosom. The Fed’s interest rate policy was to prove particularly helpful in this respect.

Turning to Prerequisite B, money (or nominal) interest rates jumped from 6%, were the Global Plan‘s final years had left them, to 6.44% in 1973 and to 7.83% the following year. By 1979 President Carter’s administration began to attack US inflation with panache. It appointed Paul Volcker as Fed Chairman with instructions to deal decisively with inflation. His first move was to push average interest rates to 11%.

In the following year, June of 1981 to be precise, Volcker raised interest rates to a lofty 20%, and then further up again to 21.5%. While his brutal monetary policy did tame inflation (pushing it down from 13.5% in 1981 to 3.2% two years later), its harmful effects on employment and capital accumulation were profound, both domestically and internationally. Nevertheless, Prerequisites A&B had been met even before Ronald Reagan had settled in properly at the White House.

A new phase thus began. The United States could now run an increasing trade deficit with impunity while the new Reagan administration could also finance its tremendously expanded defence budget and its gigantic tax cuts for the richest Americans. The 1980s ideology of supply-side economics, the fabled trickle-down effect, the reckless tax cuts, the dominance of greed as a form of virtue etc. were just manifestations of America’s new exorbitant privilege: the opportunity to expand its twin deficits almost without limit, courtesy of the capital inflows from the rest of the world. American hegemony had taken a new turn. The reign of the Global Minotaur had dawned.

The Global Minotaur

 

The United States had neither wanted nor resigned easily to the collapse of the Global Plan. However, once America lost its surplus position, US policymakers were quick to read the writing on the wall: the Global Plan‘s Achilles’ Heel had been pierced and its downfall was a matter of time. They then moved on very rapidly, unwilling to countenance the prospect of jeopardising global hegemony in a futile attempt to mend a broken design.

Perhaps the best narrative on the violent abandonment of the Global Plan comes from the horse’s mouth. In 1978 Paul Volcker, the man who was among the first to recommend that Bretton Woods be discarded, addressed an audience of students and staff at Warwick University. Not long after that speech, President Carter appointed him to the Chair of the Fed. One wonders if his audience grasped the significance of his words:

“It is tempting to look at the market as an impartial arbiter… But balancing the requirements of a stable international system against the desirability of retaining freedom of action for national policy, a number of countries, including the US, opted for the latter …”

And as if this were not sufficiently loud and clear, Volcker added the following:

“[A] controlled disintegration in the world economy is a legitimate objective for the 1980s.” (the emphasis is mine)

It was the Global Plan‘s best epitaph and the clearest exposition of the second post-war phase that was dawning. Volcker’s speech was a blunt proclamation of the future that US authorities envisaged: Unable to maintain reasonably well balanced international financial and trade flows any longer, America was planning for a world of rapidly accelerating asymmetrical financial and trade flows. The aim? To afford America the exorbitant privilege of running up boundless deficits and, thus, to entrench further US hegemony (not despite, but) courtesy of its deficit position. And how would such a feat be accomplished? The answer Volcker gave, with his usual bluntness, was: By choosing to fling the world economy into a chaotic, yet strangely controlled, flux; into the labyrinth of the Global Minotaur.

In the decades that followed, the days when the United States would be financing (directly, through war financing, or by the exercise of political power) Germany and Japan became a distant memory. America began importing like there was no tomorrow and its government splurged out unhindered by the fear of increasing deficits. As long as foreign investors sent billions of dollars every day to Wall Street, quite voluntarily and for reasons completely related to their bottom line, the United States’ twin deficits were financed and the world kept revolving haphazardly around its axis.

The Athenians’ gruesome tributes to the Cretan Minotaur were imposed by King Minos’ military might. In contrast, the tributes of capital that fed the Global Minotaur flooded into the United States voluntarily. Why? How did US policy makers persuade capitalists from all over the world to fund the superpower’s twin deficits? What was in it for them? The answer turns on four factors. To stick to the mythological narrative, let’s call them the Minotaur‘s charismas.

I shall be returning to these four charismas in my next posting.


[1] 2.3 million dead, 3.5 million seriously wounded, 14.5 million refugees.

[2] These estimates are due to New Deal economist Robert Eisner, Professor at Northwestern University and a one-time President of the American Economic Association.

[3] V.H. Oppenheim, V.H. (1976-77), ‘Why Oil Prices Go Up: We Pushed Them’, Foreign Policy, 25, 32-33

A Crisis to Shatter the World

Saturday, 11/10/2007 10:59

If the US won’t swap Dollars for gold, the rest of the world will just have to make the exchange itself…

THE PRESIDENT of FRANCE went to Washington this week. He spoke to Congress en Français and told the United States to stop dumping Dollars on the rest of the world, risking a global financial crisis.

Zut alors! Sounds just like old times…

The Dollar cannot remain solely the problem of others,” said Nicholas Sarkozy before a joint session of Congress on Wednesday. He was riffing on the (infamous) joke made by John Connally, Treasury Secretary to Richard Nixon in the early ’70s.

Connally had told the world that the Dollar was America’s currency “but your problem.” Au contraire, replied Monsieur le President this week.

If we’re not careful,” Sarkozy went on – apparently using “we” to mean both himself and the US Congress – “monetary disarray could morph into economic war. We would all be its victims.”

Ooh la la! Did Sarkozy need to take a little Dutch courage before speaking his mind to US legislators and wonks? (As the Belgian news anchor in this clip from June’s G8 summit puts it, M.Sarkozy only ever drinks lots of water.) Telling the US to take responsibility for its actions – and its currency – is a gambit for only the brave.

It weighs heavy with history, too. “What the United States owes to foreign countries it pays – at least in part – with Dollars that it can simply issue if it chooses to,” barked French president Charles de Gaulle in a landmark press conference of Feb. 1965.

“This unilateral facility contributes to the gradual disappearance of the idea that the Dollar is an impartial and international trade medium, whereas it is in fact a credit instrument reserved for one state only.”

De Gaulle did more than simply grumble and gripe, however. Unlike Nicholas Sarkozy, he still had the chance to exchange his dollars for a real, tangible asset – physical gold bullion – at the Federal Reserve.

Gold “does not change in nature,” de Gaulle reminded the world in that 1965 speech. “[Gold] can be made either into bars, ingots, or coins…has no nationality [and] is considered, in all places and at all times, the immutable and fiduciary value par excellence.”

How to collect and hoard this paragon of assets? Back in the 1950s and ’60s, world governments could simply tip up at the Fed, tap on the “Gold Window”, and swap their unwanted dollars for gold.

So that is exactly what de Gaulle did.

Starting in 1958, he ordered the Banque de France to increase the rate at which it converted new Dollar reserves into bullion; in 1965 alone, he sent the French navy across the Atlantic to pick up $150-million worth of gold; come 1967 the proportion of French national reserves held in gold had risen from 71.4% to 91.9%. The European average stood at a mere 78.1% at the time.

“The international monetary system is functioning poorly,” said Georges Pompidou, the French prime minister, that year, “because it gives advantages to countries with a reserve currency.

   “These countries can afford inflation without paying for it.”

In 1968, de Gaulle then pulled out of the London “Gold Pool” – the government-run cartel that actively worked to suppress the Gold Price, capping it in line with the official $35 per ounce ordained by the US government. Three years later, and with gold being air-lifted from Fort Knox to New York to meet foreign demands for payment in gold, Richard Nixon put a stop to de Gaulle’s game. He stopped paying gold altogether.

De Gaulle called the Dollar “America’s exorbitant privilege“, repeating a phrase of his favorite economist, Jacques Rueff. This privilege gave the United States exclusive rights to print the Dollar, the world’s “reserve currency”, and force it on everyone else in payment of debt. Under the post-war Bretton Woods Agreement of 1946, the Dollar could not be refused.

Indeed, alongside gold – with which the Dollar was utterly interchangeable until 1971 – the US currency was real money, ready cash, the very thing itself. Everything else paled next to the imperial Dollar. Everything except gold.

And today?

Printing a $100 bill is almost costless to the US government,” as Thomas Palley, a Washington-based economist wrote last year, “but foreigners must give more than $100 of resources to get the bill.

“That’s a tidy profit for US taxpayers.”

This profit – paid in oil from Arabia…children’s toys from China…and vacations in Europe‘s crumbling capital cities – has surged since the Unites States closed that “Gold Window” at the Fed, and ceased paying anything in return for its dollars.

Now the world must accept the Dollar and nothing else besides. So far, so good. But the scam will only work up until the moment that it doesn’t.

“The US trade deficit unexpectedly narrowed in Sept.,” reported Bloomberg on Friday, as “customers abroad snapped up American products from cotton to semiconductors, offsetting the deepening housing recession that is eroding consumer confidence.

“Exports have reached a record for each of the past seven months, the longest surge since 2000,” the newswire goes on, which “may help explain why the Bush administration has suggested it’s comfortable with the Dollar’s drop. It has declined in all but one of the past five years, even as officials say they support a ‘strong’ Dollar.”

What Bloomberg misses, however, is the surge in US import prices right alongside. They rose 9.2% year-on-year in October, the Dept. of Labor said on Friday, up from the 5.2% rate of import inflation seen a month earlier.

Yes, the surge in oil price must account for a big chunk of that rise – and the surge in world oil prices may do more than reflect Dollar weakness alone. The “Peak Oil” theory is starting to make headlines here in London. Not since the Club of Rome forecast a crisis in the global economy in 1972 have fears of an energy crunch become so widespread.

But if you – an oil producing nation – were concerned that one day soon your wells might run dry, wouldn’t you want to get top dollar for the barrels you were selling today? Especially if the very Dollar itself was increasingly losing its value?

“At the end of 2006, China’s foreign exchange reserves were $1,066 billion, or 40% of China’s GDP,” notes Edwin Truman in a new paper for the Peterson Institute. “In 1992, reserves were $19.4 billion, 4% of GDP. They crossed the $100 billion line in 1996, the $200 billion line in 2001, and the $500 billion line in 2004.”

What to do with all those dollars? “If all countries holding dollars came to request, sooner or later, conversion into gold,” warned Charles de Gaulle in 1965, “even though such a widespread move may never come to pass…[it] would probably shatter the whole world.

“We have every reason to wish that every step be taken in due time to avoid it,” the French president advised. But the step chosen by Washington – rescinding the right of all other nation-states to exchange their dollars for gold – only allowed the flood of dollars to push higher.

Nixon’s quick-fix brought such a crisis of confidence by the end of the ’70s, Gold Prices shot above $800 per ounce – and it took double-digit interest rates to prop up the greenback and restore the world’s faith in America’s paper promises.

The real crisis, however – the crisis built into the very system that allows the US to print money which no one else can refuse in payment – was it merely delayed and deferred? Are we now facing the final endgame in America’s post-war monetary dominance?

If these sovereign wealth funds – owned by national governments, remember – cannot tip up at the Fed and swap their greenbacks for gold, they can still exchange them for other assets. BCA Research in Montreal thinks that “sovereign wealth funds” owned by Asian and Arabian governments will control some $13 trillion by 2017 – “an amount equivalent to the current market value of the S&P500 companies.”

And if China doesn’t want to buy the S&P500 – and if Congress won’t allow Arab companies to buy up domestic US assets, such as port facilities – then the sovereign wealth funds will simply swap their dollars for African copper mines, Latin American oil supplies, Australian wheat…anything with real, intrinsic value.

They might just choose to Buy Gold as well. After all, it remains – “in all places and at all times…the immutable and fiduciary value par excellence,” as a French president once put it.

Charles de Gaulle also warned that the crisis brought about by a rush for the exits – out of the Dollar – might just “shatter the world”. It came close in January 1980. Are we getting even closer today?

 

Adrian Ash is director of research at BullionVault, the physical gold and silver market for private investors online. Formerly head of editorial at London’s top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian’s views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany’s Der Stern; Italy’s Il Sole 24 Ore, and many other respected finance publications.

See the full archive of Adrian Ash articles on GoldNews.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

How would the US react to the collapse of the Petro-dollar system?

If the petrodollar collapsed, the entire world would collapse with it into an economic crisis worse than the Great Depression. For a while.

A little history:

In the Bretton Woods conference of 1944, the US dollar was tied to gold at a fixed rate of 35 dollars per troy ounce of gold. This made the dollar very attractive as a reserve currency for many countries and created an artificial demand for dollars that allowed the US to print out money without it resulting in inflation. At one point the US held about 80% of the world’s gold reserves.

However, the US has a history for being bad at balancing budgets. In 1971, near the end of the Vietnam War, the US had a massive fiscal deficit. In the same way you fear for your money if your bank is making bad investments, countries who had their reserves in dollars started to feel uneasy with the way the US was spending (or printing money). They started buying back gold with the dollars they had, the equivalent of a bank run. The US realized it didn’t have enough gold reserves to cover the massive amounts of money they had printed out (like a fractional reserve bank), and so they unilaterally decided to let the dollar float in what is now called the Nixon Shock. It was a virtual default. Since then, the USD has lost more than 30 times its purchasing power relative to gold.

Without gold backing the dollar, demand for dollars would have collapsed. In fact, for a while, the “oil shocks” that resulted from Nixon’s decision caused considerable economic instability and inflation. The US had to figure out a way to stabilize and solidify the dollar.

So, how did they do it?

First, a deal was struck with Saudi Arabia, by far the biggest producer of crude oil in the 70s, that required them to sell their oil exclusively in US dollars. In exchange, the US offered the Saudis weapons and protection, something they readily accepted given the Middle East’s propencity to military conflict (in part exacerbated by the US itself). And thus the petrodollar was born. The idea was to make the global oil trade depend on the dollar, creating the demand needed to prevent too much inflation.

It was certainly easier for everyone (even if you had your differences with the US) to trade oil in US dollars, because it made markets more accessible, competitive and transparent. Soon after the Saudi deal, the entire world was trading oil in dollars, even the USSR. But it gave the US a massive amount of control, and since then the US has defended this fiercely with military force and political scheming. Recently, Gaddafi and Saddam tried to challenge the petrodollar, and the US immediately gave them a good dose of “democracy”. Saddam was falsely accused of having WMDs. They didn’t even bother to make up a good story for Gaddafi, and simply said he was an evil, corrupt despot (which he incidentally was). They’re both dead now. Al Qaeda and ISIS are both the result of the US funding proxy wars to topple governments they wanted to control. Just a few examples.

The US is the middle-man for the most lucrative trade in the world and much of its prosperity depends on keeping it so. With a high demand for dollars, they keep inflation under control, because all countries subsidize the growing money supply when they buy oil. It has worked brilliantly. The US has issued debt like crazy (and let’s not even mention the fact that the FED is a private institution), and despite this has had super cheap debt, because everyone wants those precious dollars to buy oil.

This has gone on for over 40 years now. 40 years of continuous fiscal deficits, military intervention in the Middle East (Iraq 2x, Libya, Syria, etc), artificially cheap debt, and a manufactured demand for dollars. All financed by the entire world’s consumption of oil.

Meanwhile, globalization has made the dollar the cornerstone of not only the oil industry, but virtually everything else, particularly the financial industry.

But make no mistake: the dollar itself is the biggest economic bubble there’s ever been. There is a massively corrupt and greedy element of geopolitical control in the dollar, rotten to the core. That greed is ultimately, I think, the biggest source of hate, sorrow and war in today’s world.

And yes: were it to suddenly collapse, it would be a disaster. The dollar supply would far and away exceed demand, resulting in high inflation. Everyone all around the world would scramble to get rid of their dollar reserves. And since everything, everywhere is connected to the dollar, it would be a catastrophe. It would all have to start with the US losing control of the oil markets.

It’s already happening now, to some extent. We’ve seen many instances where the US just can’t deal with the economic and political threats through military intervention as it did in the past:

  • China and Russia are pushing towards a non-US dollar oil market. China already has plans for a gold-backed oil futures contract in yuan. Basically, China will do what the US was doing pre-Nixon, and that’s what made everyone want to buy dollars at the time. It’s already being called a “game changer” for the oil industry. It is by far the biggest threat to the petro-dollar right now, and the US is powerless to stop it.
  • The Syria affair, one of the biggest screw ups in foreign policy history. Aside from that one, the US has a massive PR issue in the Middle East in general.
  • Venezuela is collapsing and it seems Russia and China are ready for scavenging.

Times have changed. Today, even piss-poor countries like North Korea can force the US into submission, by threatening to fire a ballistic missile across the world and flatten an entire city. The world has become too unstable to use force as an effective foreign policy instrument.

A complete collapse of the petrodollar can’t happen overnight, though, because the dollar is backed by not just oil, but the world’s biggest economy. It also wouldn’t be a complete collapse, because the US itself is one of the biggest oil producers in the world, so a big chunk of trading will always be done in US dollars.

But a decline will gradually happen. The US government is running the biggest ponzi scheme in history and in doing so is keeping the entire world’s economy hostage to the privately owned FED. Since 2008, the US printed about 3 trillion dollars in their “quantitative easing” program, quadrupling the FED’s reserves. But China, Europe and Russia all want a piece of the pie and are fighting for it. In fact, I think the entire world is a little bit fed up with the whole thing too, especially in Europe, where the monumental cluster f**k that is the Middle East has resulted in serious demographic problems that aren’t on some remote corner of the world anymore… They are at their doorstep.

HOW CORONAVIRUS EXPOSED THE “SHAKY FOUNDATION”

What happens when an upheaval so massive forces financial markets, governments, and society to rethink how our systems work? Michael Krieger, author of the Liberty Blitzkrieg, joins Real Vision to explain what coronavirus and the response to the outbreak has revealed about the condition of American systems – from financial markets to the health care system. Tracing the story of financial markets and societal trends over the past two decades, Krieger outlines how our systems have been pushed to the brink – focusing on emergency policy responses and the everything bubble. He also provides viewers with potential solutions to the systemic decay that has been brought to the forefront by the coronavirus outbreak.

Peter Schiff VS Brent Johnson: The Future Of The US Dollar

In this video from VRIC 2020 Peter Schiff and Brent Johnson debate about the future of the fiat money specifically US Dollar and the gold standard.

Peter Schiff believes the US market has never been as overvalued and over priced. And one of the major warning signs is we blew up the private equity market. This decades dot.com bubble is the private equity market destruction. This destruction will lead to the decline of the US dollar and eventually a remonetization of gold as the dollar loses its place as the Worlds Reserve Currency.

Peter Schiff’s theory is that Central Bankers around the world are under the false impression that a cheap currency is a good thing because it allows them to export more to the United States. However, the US is broke and can never pay for what it’s buying.

And since America is the largest debtor nation in the world and have more debt than other major countries combined and manufacturing is such a small portion of the US economy, there is a complete dependency on foreign goods.

And Relative to Wealth producing components of GDP no other country on earth has as much debt as the United States.

Add in contingency guarantees such as bank accounts, pensions, brokerage accounts that the US government is committed to funding despite the lack of money to pay for these things.

Combine all of this together and there is the potential for a currency crisis the likes the world has never seen. Schiff thinks this because there is an unrealistic level of belief for the US Dollar.

Schiff thinks the dollar will perform worse than other fiat currencies around the world and that we’re going to remonetize gold as the central asset.

Brent Johnson ultimately believes the same ending but with a different theory on how it will all go down.

Brent’s theory is that MMT is that the government will spend more money into existence and the central banks will want to control of the monetary policy. And that the dollar will go up and people will continue borrowing and buying which will ultimately lead to a massive currency crisis.

Every country in the world has over leveraged their economy and Brent Johnson believes that Central Bankers in every country are making the same bad bets across the world.

Brent Johnson makes note of The Plaza accord and that it was put in place in 1986 to artificially weaken the dollar against the other worlds Fiats because it was too strong. He argues that the dollar will be the the worlds central currency until fiat fails.

Schiff’s theory is “Money Is Nothing” and the value is the production and real goods that a country has. Money just lets you divvy up whats been produced. The wealth of the nation is the productive capacity of that nation.

Schiff also believes that in order to have a strong country you need:
*Factories
*Skilled Workers
*Production

Which are things that the US severely lacks and will pay a massive price for the over dependence on countries that do have these things.

The Canadian economy will benefit from a resource and precious metals boom that will help the Canadian dollar.

Schiff on inflation: Inflation initially pushes up asset prices before consumer prices.

Brent believes that digital currencies could be the future of money and likely will be implemented by most countries in the near future.

Brent and Peter agree that The Gold Standard will happen after a general loss of confidence in fiat currency.

Schiff explains MMT Modern Monetary Theory as the practice of taking Quantitative easing to the extreme. Printing Money without creating prosperity. Democrats will rely on the central bank to fund their spending agenda.

Repo rates have spiked to 9% – the market wants rates higher but Americans have so much debt and American can’t afford to service the debt. And international banks have been accessing the FED repo market to a greater extent than the US domestic markets. Repo rates spiking shows a demand for funding from the US dollars.

Americans have so much debt that the US government has to keep rates low other

Marin Katusa postulates that the highest risk lies in the credit market with debt in triple BBB

Quantitative Easing & Cryptocurrency: Nuggets News presentation at GAIC 2019

Alex Saunders of Nuggets News shares his thoughts on what to expect from central banks on the road ahead from dropping rates, implementing quantitative easing and the applying modern monetary theory. Explaining why this is important to understand when investing in hedge assets like Gold and Bitcoin.

Alex Saunders is one of Australia’s leading blockchain educators and founder of Nuggets News.

Filmed at the Gold and Alternative Investments Conference 2019, Saturday, October 26, 2019.

 

how we’re going guys that’s working so
00:01
hands up who owns gold and hands up who
00:06
owns Bitcoin it’s bit more even than I
00:09
thought so yeah I’m definitely a big fan
00:11
of both and today I’m going to try and
00:13
give you a rundown of bitcoins history
00:15
and how it’s been affected by monetary
00:17
policy where I think that is going as we
00:20
head into the future and Bitcoin is very
00:23
hard to understand so I’m going to tie
00:25
together all these concepts as best I
00:27
can for you in under half an hour and
00:29
just a bit of an intro I run Nuggets
00:32
news I’ve been in cryptocurrency since
00:34
2012 I was actually a pharmacist by
00:37
trade and I’ll talk about how my story
00:40
came about so these days where
00:43
Australia’s leading provider of free and
00:45
premium education with a focus on
00:48
Bitcoin other cryptocurrencies as well
00:50
as the importance of gold and protecting
00:53
your wealth a bit of well-rounded
00:55
financial education so Bitcoin often
01:00
gets called you know digital gold
01:01
internet money and I think these terms
01:03
maybe oversimplify it and don’t do it
01:06
justice so I’m going to talk about all
01:07
the different things that it is bringing
01:09
together and why it is so important so
01:12
another focus of my talk today is you
01:13
know what have we learned from the GFC
01:15
it’s ten years on now and Bitcoin
01:18
actually came about from the GFC my
01:23
journey begins around that time when I’d
01:25
been studying pharmacy but investing it
01:27
always been my passion and when the GFC
01:30
unfolded like a lot of you I’m sure you
01:32
want to know what happened and there’s
01:33
some fantastic documentaries out there
01:35
and you learn about how you know the
01:37
banks effectively caused all this
01:39
trouble and then got bailed out and
01:41
satoshi the creator of Bitcoin embedded
01:44
this message about the the bailouts for
01:47
the banks in the Genesis block of
01:49
Bitcoin so it’s very much one of the
01:51
messages that he was trying to portray
01:53
about bitcoins mission going forward so
01:56
since the the GFC I guess the message
01:59
from central banks and their
02:01
relationship with government has always
02:02
been around you know trust us
02:04
we’ve got these levers of printing money
02:06
and interest rates and we can steer the
02:08
economy and they really ramped up their
02:11
production of of money as most
02:13
in this room probably know to encourage
02:15
banks to lend out and get the economy
02:17
going that I’m gonna talk about how that
02:19
hasn’t really unfolded and what we saw
02:21
around this time was people becoming
02:25
aware of these issues and push back
02:27
against what was happening so Occupy
02:29
Wall Street was pretty prominent at the
02:31
time he kind of died down a little bit
02:33
but this was when Bitcoin was starting
02:35
to get a little bit of traction now like
02:38
a lot of people when you learn about
02:39
what he’s going on in the monetary
02:40
system you know I’m preaching to the
02:42
converted here at a gold conference and
02:44
I know personally I wanted to go out and
02:45
buy some some gold and silver and one of
02:48
the first bars I bought it wasn’t a
02:50
common I commonly made bar and I was
02:52
sort of thinking you know how I know
02:53
that this is legit so I guess that’s
02:54
probably one of the the aspects of
02:57
Bitcoin and auditing and even gold that
02:59
I believe blockchain can help Gold’s
03:01
case as well but I’m very much an
03:02
advocate of gold and silver and I still
03:05
own those today another thing that a lot
03:08
of gold bugs will tell you is the price
03:10
manipulation so depending on what degree
03:12
you believe in that I certainly I can
03:14
understand the case for you know these
03:16
futures markets and ETFs and
03:18
rehypothecation and what what is the
03:20
real gold underlying that and it’s
03:23
something that I hope doesn’t creep into
03:24
the Bitcoin world too much because we
03:27
don’t want that money that once exposure
03:29
to that asset being pushed into these
03:31
things that aren’t backed by real
03:32
Bitcoin or by real gold so you see a lot
03:37
of these different slides around
03:39
bitcoins properties and you know it’s
03:42
it’s all looking pretty good according
03:43
to that but I’m certainly not here to
03:45
tell you that Bitcoin is a replacement
03:46
for gold at all there’s some things that
03:48
it does are better and some things that
03:50
it doesn’t do better that track record
03:52
and the history of gold obviously is
03:53
very hard to compete with but it’s all
03:55
the properties of Bitcoin that give it’s
03:58
you know good credence to be a good
04:00
money the future money the next
04:02
evolution of money so for the first time
04:06
ever we had a way so I guess stick it to
04:09
central banks and governments and say
04:10
well you know if you’re going to try and
04:12
manipulate gold and ETFs and I know most
04:15
people instrument robably fans of
04:16
holding the real thing for the first
04:17
time ever we’ve got a way to hold your
04:21
assets outside the system and become
04:22
your own bank and this was a famous
04:24
photo that you probably saw with someone
04:26
to buy Bitcoin behind janet yellen air
04:29
so what is Bitcoin what are the
04:32
properties that make it a good money
04:34
well the first things you learn is about
04:36
this finite supplier and how the
04:38
inflation rate halves every four years
04:40
so you can see there on the curve we’re
04:43
at a very important point well in May
04:45
next year we step down from 4% inflation
04:47
to 2% and then again four years later
04:50
down to 1% and at that time Bitcoin
04:53
becomes more scarce than that inflation
04:55
that all central banks are targeting of
04:57
two and three percent the new production
04:59
of gold is about one or two percent so
05:01
Bitcoin will become you know more scarce
05:03
in terms of the new coins created and
05:05
that’s very attractive in a world where
05:07
money printing is running right another
05:10
thing that you’ll love about Bitcoin
05:12
once you learn about is this
05:13
decentralized nature so what does that
05:15
mean well anyone can download the
05:17
Bitcoin blockchain running on their
05:19
computer help support the network you
05:21
can download a wallet and you become
05:23
part of the network you can send Bitcoin
05:25
to anyone else there’s no one company
05:27
that can be targeted or shut down
05:29
there’s there’s nodes computers all over
05:31
the world that run this network and it’s
05:33
literally impossible to stop unless you
05:35
plan on showing down the entire Internet
05:38
so around 2013 we saw the Cypress
05:42
bailing so heads up who knows the story
05:44
there so this is the first time that
05:47
we’d seen governments and banks say well
05:49
we’re not we’re not going to bail the
05:50
banks out and give them money you’re
05:51
gonna have to bail your customers in to
05:53
shore up your reserves and they got what
05:56
they call a haircut where the customers
05:57
lost a percentage of all money in their
05:59
accounts and we saw a lot of protests at
06:01
the time the ATMs shut the bank shut in
06:04
Cyprus and Bitcoin ran from a hundred
06:06
dollars to over a thousand dollars as
06:08
people in Cyprus saw that as the best
06:10
way to protect their wealth and have
06:12
access to their money so this was the
06:14
first I guess bubble and Bitcoin does
06:16
follow these these cycles these mini
06:18
bubbles where we have a very scarce
06:20
asset it’s thinly traded so when
06:22
everyone tries to borrow we get these
06:23
big run ups in price and that leads to
06:25
euphoria and speculation and then we
06:27
have these these crashes and like
06:29
anything it overshoots to the downside
06:31
and we have panic so I’ve been through
06:32
seven of these cycles now since 2012 and
06:35
you know every time people who say whoo
06:38
bitcoins dead he’d ends up going up a
06:39
thousand
06:40
sent the following year throughout this
06:43
time and despite this volatility if you
06:45
look at all the network stats for
06:46
Bitcoin and we can pull a lot of data
06:48
from that because the blockchain is
06:50
transparent and anyone can see what’s
06:51
going on the growth in the network was
06:54
very constant so bitcoins price
06:56
unfortunately isn’t just going to
06:58
steadily increase and you know REITs
07:01
these large market caps in the trillions
07:03
where I believe it’s going we’re going
07:04
to have those cycles despite the actual
07:07
growth underlying it being very very
07:09
consistent so most of you’ve probably
07:12
seen this slide about the u.s. debt
07:14
clock it’s probably going up a few
07:15
billion since I took this screenshot
07:17
yesterday and it’s these are the reasons
07:20
why bitcoin is so important because of
07:23
that finite nature that low inflation
07:25
rate that I spoke about there’s also an
07:27
Australian debt clock if you want to
07:29
google that and you can see how quickly
07:31
these liabilities and promises the
07:34
government is saying they’re gonna pay
07:35
us all are unfolding so I’ll put my
07:38
pharmacists hat back on
07:40
and once data like to tell people is
07:41
that for the first time in history
07:42
there’s more adult diapers than baby
07:44
diapers we’ve got a generation of baby
07:47
boomers every day 10,000 baby boomers
07:49
retire in the US and they’ve been
07:51
promised these pensions and this
07:52
Medicare and as you saw in the previous
07:54
slide that’s hundreds of trillions of
07:56
dollars the US and other countries are
07:58
promising at a time when they’re running
08:00
huge deficits there’s no way that this
08:02
can be funded and every dollar of debt
08:04
represents something that needs to be
08:06
paid out in the future so we know that
08:08
the money supply is going to have to
08:09
increase into the hundreds of trillions
08:10
of dollars and that is going to be very
08:13
inflationary in all countries around the
08:15
world at the same time we’ve got a
08:18
generation of young people such as
08:20
myself that have grown up with the
08:21
internet and devices and every time a
08:23
new technology comes along the adoption
08:26
rate speeds up so smart phones and
08:28
Facebook took over the world you know in
08:30
a number of years only a couple of years
08:32
compared to previous technologies and
08:34
communication things spread like
08:36
wildfire these days and when I see those
08:39
charts of the Bitcoin and people saying
08:40
it’s dead it’s a bubble all of those
08:42
little bumps on the road when you zoom
08:44
out just another adoption curve in my
08:46
mind and we’re gonna head to a 80 or 90
08:48
percent penetration and that doesn’t
08:50
mean the Bitcoin becomes a world
08:51
currency or anything like that it just
08:53
means that
08:54
every person he’s going to use it to
08:55
some degree whether it’s just on
08:56
holidays you know to some degree I
08:59
believe Bitcoin is going to be used by
09:00
lots of different people in different
09:02
capacities now when people tell me that
09:05
no one spends Bitcoin no one uses it a
09:07
little company in Australia called
09:08
living room with Satoshi you have
09:10
allowed you to pay any bill in Australia
09:12
since 2014 pay your credit card off pay
09:15
someone else to their bank account pay
09:17
your dentist over be pay you can pay any
09:19
bill in Australia for five years so
09:20
people are using this every day and we
09:23
have more and more merchants that are
09:25
accepting Bitcoin directly so there’s
09:27
websites and and cards where I can use
09:29
to pay for things with my Bitcoin do my
09:31
shopping every week but now we go a step
09:33
further where the merchants and cafes we
09:36
rolled out Brisbane Airport last year
09:37
every shop there now accepts Bitcoin so
09:39
the merchants are now accepting it
09:41
directly as well as those other
09:42
intermediary services now some people
09:45
say that Bitcoin isn’t the best method
09:47
of payment it can get a bit expensive in
09:48
the networks a bit slow and that’s why
09:50
we’re working on things like the
09:51
Lightning Network as you see here so
09:53
that’s a layer that sits on top of the
09:55
Bitcoin network it’s not perfect like
09:57
the internet in the early days we’re
09:59
ironing out all the bugs and we’re
10:00
making this thing work better and better
10:01
over time but as long as you can find a
10:04
route to another person just like we
10:06
used with the internet you know it finds
10:08
a route to that website you want to use
10:09
you don’t even have to know what’s going
10:11
on your computer on the back end this is
10:12
what’s happening in the world of Bitcoin
10:14
and payments now those cycles that I
10:17
spoke about this chart huge is just
10:19
showing you the market cap of Bitcoin as
10:20
it as it grows compared to the realized
10:22
market cap so what that means is we can
10:25
look at the last time a Bitcoin moved
10:26
you know in a wallet when someone bought
10:28
it and if they bought it a hundred
10:30
dollars and then the price runs up to
10:31
$1,000 we can see that the actual market
10:34
cap is now a long way away from what
10:36
they last realized the price of their
10:37
Bitcoin app so people take profits when
10:40
that moves too far away and it reverts
10:42
back to the mean and we bottomed out
10:44
again last year in 2019 at around three
10:46
thousand dollars and the little orange
10:48
line you can see at the top there is is
10:50
that realize market cap so it basically
10:52
means where everyone’s had a chance to
10:54
sell now if they want to take profits
10:55
and whatnot and so the actual true value
10:57
that’s been realized at the Bitcoin
10:59
network is at all-time highs and
11:00
consistently increasing now people say
11:03
Bitcoin it’s not a good story value it’s
11:05
too volatile well it
11:07
we’re in a bear market we’ve been in a
11:08
bear market for almost two years and
11:10
it’s still been profitable for 90
11:11
percent of bitcoins life to buy Bitcoin
11:13
you’re still in profit and I believe
11:15
we’re gonna pass those all-time highs in
11:17
the next 12 or 24 months and that will
11:19
go back to a hundred percent of the time
11:21
becomes been a good store of value now a
11:23
lot of people to the Gold’s of a good
11:25
story value if you bought it over $1,900
11:27
and then it falls to a thousand well you
11:29
bought silver at fifteen and falls to
11:30
fifteen dollars but those same arguments
11:32
we can use for Bitcoin zoom-out look at
11:34
the longer-term chart over time it’s
11:36
consistently been a better story value
11:38
than every currency on the planet so
11:41
what happens when you’ve got an asset
11:42
that’s the best performing asset and
11:43
then planet every year buy one for ten
11:45
years or there’s a lot of copycats come
11:47
out and other coins so one of the
11:49
arguments often hears about Bitcoin
11:50
Forks someone can copy the network hands
11:53
up who’s heard of Bitcoin cash it’s a
11:55
it’s a fork of the Bitcoin network so a
11:58
community can say well we think Bitcoin
12:00
will be better if we have this feature
12:01
and they can split away and it’s up to
12:03
you then to convince everyone why your
12:05
coin is better so there’s over a hundred
12:07
Forks 99.9% of them are crap they have
12:10
zero value but it’s allowed people to
12:13
try and experiment with something
12:14
different now they pretty much extends
12:16
for all cryptocurrencies there’s over
12:18
ten thousand out there today the term
12:20
cryptocurrency probably doesn’t do it
12:21
justice because most of them aren’t
12:23
trying to be currencies these days
12:24
there’s just a lot of projects and
12:26
businesses in the real world that are
12:28
using a blockchain technology so we need
12:30
to start referring to these things as
12:31
digital assets they’re not trying to be
12:33
currencies and I think that confuses a
12:35
lot of people so Bitcoin cash has been
12:37
the most successful hard fork and that’s
12:39
only captured around two or three
12:40
percent of the network so Bitcoin
12:42
continues to get stronger and stronger
12:44
we call it anti fragile throw out any
12:46
attack he won on it or any copycat coin
12:48
and it continues to gain market share
12:50
and any feature that actually works
12:52
really well Bitcoin can update and
12:55
absorb that feature so now we see
12:59
everyone wanting to get into this space
13:00
the payment space banks have had it
13:02
pretty good for a fair while now so
13:04
Apple pay launch email card
13:05
recently Facebook came out with the
13:07
Libra cryptocurrency
13:09
now all these coming up with payment
13:12
coins stable coins JPMorgan have
13:15
launched their own coin so it’s very
13:16
different to what Bitcoin are trying to
13:18
do it’s not finite they can
13:20
as many of those stable coins as they
13:22
want and that’s just absorbing value and
13:25
it’s pegged to fiat currency that has
13:27
all the issues that I’ve been talking
13:28
about it’s no good being pegged to
13:29
something that’s going to be inflated
13:31
away over time and we’ve already seen
13:33
big regulatory pushback MasterCard Visa
13:36
PayPal they’ve all pulled out of this
13:38
labor project and Mark Zuckerberg was in
13:40
front of Congress getting and grilling
13:42
again yesterday one of the things that
13:44
actually said in that Congress hearing
13:46
was we can’t call the CEO of Bitcoin in
13:49
here they’re actually admitting that
13:51
there’s nothing they can really do about
13:52
it because it is truly decentralized so
13:55
for ten years now you know the big banks
13:57
have seen these huge profits the execs
13:59
get these huge bonuses and yet here we
14:01
are at the moment last night the Fed
14:03
prints another hundred billion dollars
14:05
and lend it out to banks because they
14:06
they’re crying poor we haven’t got
14:08
enough money to show up our books that
14:09
have been paying themselves these
14:10
enormous bonuses no one’s gone to jail
14:13
nothing’s been fixed since the GFC and
14:15
this is at a time when asset prices are
14:18
at record highs so the sp500 property
14:21
prices bonds you name it this has been
14:23
one of the periods of you know enormous
14:27
growth and your banks are still crying
14:28
for you know help us out print us some
14:31
more money now now people aren’t buying
14:34
this anymore
14:34
and it’s very very clear even the
14:36
Federal Reserve in their notes are
14:38
admitting that what they did didn’t work
14:40
it ended up with asset inflation and
14:42
it’s caused inequality so the top one
14:44
percent you know they’ve gained enormous
14:46
wealth the bottom 90% you know we see
14:48
this in Australia as well there’s no
14:49
wage growth it’s just getting harder and
14:51
harder for that average person to afford
14:53
to live and they report inflation at two
14:55
or three percent but if you look at a
14:57
lot of the work that’s been done by you
14:58
know alternate economist it’s far closer
15:01
to 7 or 9 percent when you see your pack
15:03
of the Tim Tams getting smaller
15:04
your bottle of coke getting smaller and
15:06
the price stays the same there’s ways
15:08
that they hide inflation from us so as I
15:12
said this period should be very
15:13
prosperous for banks they’ve got it very
15:15
good they get to create that money and
15:17
you know they should be really booming
15:19
but yet we see Deutsche Bank in these
15:21
European banks are on their knees we saw
15:23
a study come out this week that half the
15:25
world’s banks wouldn’t survive a
15:26
downturn now with markets at record
15:29
highs and we know that this is one of
15:31
the longest periods of expansion in
15:33
history
15:34
every day a recession is drawing near
15:36
it’s just a natural part of the business
15:37
cycle so they’re admitting that when
15:39
that hits half our banks aren’t going to
15:41
survive so at the moment they’re giving
15:42
them a hundred billion dollars a day I
15:44
very much think that the new QE
15:46
quantitative easing is going to be to
15:47
the tune of trillions of dollars to have
15:50
to say the bank’s now because they don’t
15:52
have those reserves and they’re so weak
15:54
we’re hoping to see them take measures
15:56
to force people to keep their money in
15:57
them and in the legislation we’re seeing
15:59
Balian laws being written in in
16:01
countries like Australia just like we
16:03
saw in Cyprus so this week ANZ
16:05
updated their terms where they can
16:06
freeze your account they can stop you
16:08
getting money out and they can close
16:10
your account altogether if it would mean
16:11
that they would suffer financial loss
16:13
we’re also seeing the the cash war in
16:17
Australia at the moment they’re trying
16:18
to ban those $10,000 payments they’re
16:20
already talking about dropping that to
16:21
five or two thousand dollars and where
16:23
this is all heading is negative interest
16:25
rates in all these countries around the
16:26
world that abandon cash the IMF wrote a
16:28
paper that said look negative interest
16:31
rates don’t work if cash exists because
16:33
people can pull money out and if we we
16:34
want to enforce negative interest rates
16:36
we need to keep people in banks so we
16:37
need to ban cash so whether it’s you
16:40
know banks or the well bond market this
16:42
is a virus that’s spreading and I think
16:44
people are asleep at the wheel because
16:46
we’ve had it pretty good in Australia
16:47
and and in the US but as soon as those
16:50
rates go negative in our country and in
16:52
the US it’s a big big wake-up call to
16:54
everyone that what what is going on
16:57
interest rates for the past 20-30 years
16:58
have been trending down people thought
17:00
they couldn’t go past zero and yet
17:02
they’re you know negative one percent or
17:03
greater in some of these countries now
17:05
that should be traditionally seen as
17:07
strong in Europe so the amount of
17:09
negative yielding debt in the world it
17:11
recently passed seventeen trillion
17:12
dollars you know how how easy is it to
17:15
park some money in gold or Bitcoin or
17:17
something that doesn’t have a negative
17:19
yield people are rushing into negative
yielding bonds because they think that
central banks are going to print money
out of thin air and buy those bonds off
them so everyone’s on the one side of
17:28
the boat and that what worries me with
17:29
this this bond bubble now at the same
17:32
time everyone’s playing happy faces here
17:34
where there’s never been greater
17:36
mistrust of banks and policymakers so
17:39
Commissioner Haynes said that trust has
17:41
been lost to all the corporations and
17:43
institutions and banks in Australia and
17:45
I very much agree
17:48
now for the first time ever we’re seeing
17:49
widespread civil unrest people say oh
17:52
you know it’s it’s just Argentina or
17:54
then it’s just Venezuela then it’s just
17:56
symbolic
17:57
this week it’s Chile Hong Kong you know
17:59
it’s coming to a city near you where
18:01
people and governments are saying well
18:03
what we gonna do here let’s just raise
18:05
taxes and people are saying no we’re not
18:07
going to stand for that anymore and and
18:09
everywhere Bitcoin is becoming part of
18:11
this social movement now at the same
18:13
time we’re seeing central bankers Mark
Carney from the Bank of England
literally saying that you know it isn’t
fair that the US dollar has this world
reserve currency they get way too much
an advantage here so this isn’t Russia
18:25
and China throwing this anymore this is
18:26
their best friend saying that you’ve had
18:28
it too good for too long now the u.s.
18:30
being a world reserve currency means
18:32
that all these other regional currencies
18:34
have their debt denominated in u.s.
18:35
dollars and as their currencies fall and
18:37
u.s. dollar gets stronger they owe more
18:39
and more money back in terms of their
18:41
local currency so when seeing the US
18:43
dollar strengthened at a time when he’s
18:45
really hurting everyone else and so
18:47
there’s questions around how long it can
18:49
remain the reserve currency and make
18:51
mark carney they’re calling for a new
reserve currency a digital currency to
replace the dollar we’re also seeing
calls for the u.s. we know that china
are launching their own cryptocurrency
19:02
we’ve seen venezuela launch theirs so
19:05
whether or not the US does it you know I
19:07
don’t really care it’s gonna be a case
19:09
of you know trust us again this is a new
19:11
currency the only difference is they’re
19:13
going to be able to monitor literally
19:14
everything you do on a blockchain versus
19:17
what they do already with the banks and
19:18
they’re going to print those hundreds of
19:20
trillions of dollars of digital US
19:22
dollars it’s nothing like Bitcoin that
19:24
has a set amount and Bitcoin just
19:26
becomes more and more scarce relative to
19:29
all these other currencies that banks
19:31
and governments and the Facebook’s of
19:33
the world want to create so at this time
19:36
when all our currencies are going
19:38
digital everyone uses their online
19:39
banking less people use cash everyone
19:42
does the pay past these days so money is
19:44
already digital but people still think
19:46
about it as as notes or people don’t
19:48
realize it’s not backbite by gold
19:50
anymore so we’re seeing penetrations of
19:53
smart phones you know 90 percent or
19:55
greater even in emerging markets even if
19:57
they don’t have a smartphone they’ve got
19:59
a basic phone these days and you don’t
20:00
need a good
20:01
their connection to the Bitcoin payments
20:02
you need a very basic mobile connection
20:04
is all you all you need to be able to
20:06
participate in this network and become
20:08
your own bank
20:09
so throughout these Asian countries you
20:11
know Hong Kong was another recent
20:12
example where they’ve had issues with
20:14
the ATMs and whatnot these people are
20:16
extremely familiar with digital payments
20:18
and scanning and shops with their QR
20:20
codes and Bitcoin is just the next step
20:22
in that evolution of money so the
20:25
greatest opportunity in lies in these
20:27
emerging market economies where there’s
20:29
billions of people so too often people
20:31
say are the government will never let
20:32
Bitcoin overtake you know things in
20:34
Australia or the u.s. it doesn’t matter
20:36
Bitcoin has already been used widely in
20:38
Venezuela and all these other countries
20:39
where there’s billions more people than
20:42
in Australia the u.s. all these these
20:44
Western countries that are unbanked so
20:46
just like they didn’t get phone lines
20:47
and they started using mobile phones
20:49
they’re not going to get banks they’re
20:51
just going to start using digital
20:52
currencies on their phones so the value
20:55
of the Bitcoin network comes from the
20:57
number of connections and that’s why we
20:58
see just like Facebook grow that any
21:00
good technology it grows exponentially
21:02
and the value comes from the number of
21:04
connections in the network that’s known
21:06
as Metcalfe’s law so as more and more
21:08
people use Bitcoin it means more people
21:10
can send it to each other you know my
21:12
business that I started we’ve got a
21:13
number of services from say nine dollars
21:16
a month to $50 a month our customers are
21:18
all over the globe how someone in Russia
21:20
meant to send me nine dollars a month
21:21
for my newsletter it’s not possible
21:23
without Bitcoin and digital currency so
21:25
my business and hundreds of others are
21:27
examples of what’s possible we’ve crypto
21:29
currencies without the banking system so
21:33
this is a screenshot of a blockchain
21:35
Explorer so just like you can search
21:37
something in Google with on the Bitcoin
21:39
blockchain you can search for
21:40
transactions now this is a good and bad
21:42
thing if you know anyone’s address you
21:44
can send anyone else on the network
21:46
money there’s no no I can sense of that
21:48
transaction or freeze your account and
21:49
in terms of crime just last week this
21:53
helped regulators catch the bad guys
21:55
this is their best friend they could
21:57
follow the bitcoins where they’ve paid
21:58
them to when they cash them out and they
22:01
catch these crooks so to say that
22:02
bitcoins bad because you get to use for
22:04
crime you know that it’s just simply not
22:06
true it’s a regulators best friend now
22:09
one of the big debates we are going to
22:11
have is once Bitcoin starts to implement
22:13
more privacy so it’s important for be
22:15
this is not to be able to see every
22:16
transaction that they do so whether the
22:18
privacy upgrades come on the main
22:20
Bitcoin chain or second layers that’s
22:23
going to be a big debate as we move
22:24
forward about giving Bitcoin more
22:26
privacy at the same time we’re going to
22:29
get rid of those long strings of letters
22:30
and numbers that you just saw that are
22:32
confusing you’re going to be able to
22:33
send your cryptocurrency to Nuggets news
22:36
Bitcoin or Alex Saunders crypto so human
22:39
readable names and addresses just like
22:41
you do in your phonebook click of a
22:42
button send money to anyone in the world
22:44
another argument often hear is that
22:46
bitcoins wasteful bitcoin uses you know
22:49
more energy than a small country these
22:51
days but what they won’t tell you in the
22:52
mainstream is that the vast majority of
22:54
that is spare capacity at reactors that
22:57
would already be gone waste or renewable
22:59
energy so pick coin is the fastest
23:01
growing renewable energy industry on the
23:03
planet people are actually going out and
23:05
and building renewable energy plants
23:07
because they can start to mine Bitcoin
23:09
and pay it off you know this is uses
23:11
expanding our renewable footprint at a
23:13
time when governments are being slow to
23:15
act now part of bitcoins one of the
23:19
features that keeps it so secure it’s
23:21
the most secure computer network on
23:23
earth so when you hear about hacks there
23:25
are people that left their password in
23:27
there in their email account well they
23:28
left their you know being logged in at
23:30
work Bitcoin network has never been
23:32
hacked because it is so secure all these
23:34
computers all 10,000 that I showed you
23:36
at the start on that world map they’re
23:38
all securing the network so unless you
23:40
can hack every one of those at once you
23:42
can’t hack the Bitcoin blockchain so
23:44
this feature of how much energy it uses
23:46
secures it if governments tried to
23:48
attack it with every supercomputer and
23:50
on earth it wouldn’t even put a dent in
23:53
Bitcoin there’s so many more computers
23:54
globally that are securing the network
23:57
all that money that has been invested by
23:59
those miners to buy those computers that
24:02
is all very important in terms of the
24:04
infrastructure of the Bitcoin network so
24:06
if I said to you I was here yesterday
24:08
for the panel discussion I think
24:11
yesterday I said what would it be worth
24:12
if Microsoft or Apple came out and said
24:15
hey guys we build a network that can’t
24:17
be hacked it’s got no down time that
24:19
would be worth hundreds of billions of
24:21
dollars so that is what the Bitcoin
24:22
network is it’s not just this payment
24:24
system or this store of value it’s the
24:26
most secure computer network in the
24:28
world and that
24:29
while we see someone like Microsoft say
24:31
geez this is better than anything we’ve
24:32
got let’s just our building our products
24:34
on top of the Bitcoin blockchain so
24:37
these household names like Microsoft
24:38
Vanek or one of the biggest providers in
24:40
the world of investment ETFs these are
24:43
the household names now that people are
24:45
realizing that oh this isn’t about this
24:47
isn’t a bubble they’re telling their
24:48
clients the investment case for Bitcoin
24:50
now a lot of people are tech savvy they
24:53
can’t figure out the hardware wallets
24:55
which is like a little USB stick where
24:57
you store your bitcoins yourself and has
24:58
your password on the device so it can’t
25:00
be hacked but not everyone wants to do
25:02
that you know we’ve done education
25:04
around all that sort of stuff if you’re
25:05
interested but some people they don’t
25:06
want to hold their own shares they just
25:08
want someone else to do it for him so
25:09
we’ve seen reputable companies like
25:11
Lloyds of London and bit go they’re
25:14
offering insurance and custody and
25:16
that’s why we’ve seen influx of high net
25:18
worth clients over the past 12 months
25:20
and in Australia our biggest growing
25:22
demographic is baby boomers so we did
25:24
one on one education we have a premium
25:27
community we’re but the number of over
25:29
65 now and they they’ve been through
25:31
cycles and crashes they see the
25:33
importance of gold and they’re starting
25:34
to understand the importance of Bitcoin
25:37
at the same time we’ve seen the futures
25:39
market take off as I said for I’m not a
25:41
big fan of that maybe it makes me quite
25:43
a bit more legitimate but I don’t like
25:44
those type of assets that are backed by
25:46
real Bitcoin but we’ve seen things like
25:48
option markets and even decentralized
25:50
option markets so it’s not one company
25:52
now anyone can create a market and a
25:55
theorem it’s the world’s second largest
25:57
cryptocurrency I’m also very bullish on
25:59
because the world of decentralized
26:01
finance is just exploding so instead of
26:03
paying $20 to calm sector trade shares
26:05
you’re gonna pay one cent and you’re
26:07
gonna buy them off someone else that’s a
26:08
shareholder and what blockchain does is
26:10
cut out the middleman of all these
26:12
services that are you know rent-seeking
26:14
and just taking their little clip each
26:15
time and it makes everything
26:17
peer-to-peer so tying this all together
26:21
we’ve seen the Federal Reserve start to
26:23
create billions of dollars each night to
26:25
help these banks and the old trustus you
26:27
know everything will be fine we’re gonna
26:28
normalize everything I think that’s why
26:30
we’ve seen gold correct over the past
26:32
few years as people thought oh it’s all
26:34
gonna go back to normal 3% growth 5% in
26:36
a bonding my retirement account
26:38
I don’t need gold or Bitcoin and now
26:40
that story is not being bought anymore
26:41
it’s qe4
26:43
you know they can’t stop printing this
26:44
money in the debt based system that 200
26:47
trillion dollar figure that I’ve spoken
26:48
about we have to continue to grow and
26:50
create debt if we’re going to pay all
26:52
these people so once again we’re seeing
26:54
a lot of tension whether it’s between
26:56
you know the US Fed who don’t want to
26:58
drop rates and Donald Trump saying let’s
26:59
get rates to zero or negative everything
27:01
will be growing even more for the first
27:03
time throughout history we’re seeing
27:04
real tension between governments and
27:06
central banks who are saying trust us
27:09
we’ll fix everything without two levers
27:11
and now they’re saying I think we’re out
27:13
of tools here government it’s up to you
27:15
you need to spend more we’ve done all we
27:16
can do pass the buck
27:17
so who’s going to be left holding the
27:19
back here we know governments are no
27:21
good at running those economies and it’s
27:22
up to them to try an ear trick or the
27:24
central bankers to try something even
27:26
more crazy and I think actually people’s
27:28
QE where they enough to hand out money
27:30
to people because it’s not going to be
27:32
politically acceptable to put money and
27:33
give it to the banks and then we run a
27:35
danger of inflation but people aren’t
27:37
going to let it fly printing money and
27:38
giving it to the banks so you guys know
27:40
the story every fiat currency throughout
27:42
history has been eroded away over time
27:44
this is just last year in terms of
27:46
inflation in in ten countries there for
27:48
example and with more and more people
27:50
that Tim Draper’s of the world
27:51
respectable investors Jack Dorsey the
27:54
founder of Twitter saying that there’s
27:56
you know we’re in this Internet age just
27:58
like the internet opened up the way we
27:59
transfer information across the world
28:01
everyone said oh you can’t do that the
28:03
bad guys were taught for each other
28:04
Bitcoin allows anyone to transfer value
28:06
to each other and then a theorem again
28:08
further expands what we can do
28:10
peer-to-peer so there’s going to be some
28:13
sort of world currency on the internet
28:15
and Bitcoin has the track record so the
28:17
biggest opportunity that I see is these
28:20
currencies there’s over 200 currencies
28:22
globally the top five that are the world
28:24
reserve currencies of the world sure
28:26
that they’re fairly strong and whether
28:28
the US you know you loses its purchasing
28:30
power with all that debt that’s another
28:32
story but who on earth is going to hold
28:34
these hundred Southeast Asian currencies
28:36
and when the government’s are saying
28:38
trust us with the currency wars heating
28:40
up it’s a race to debase their
28:41
currencies as economies weakened they
28:43
all try to get the value of their dollar
28:45
down to help their exports it’s
28:46
literally a race to the bottom and we’ve
28:48
seen Donald Trump tweet about this
28:49
so these currencies have all got market
28:51
caps in the hundreds of billions or
28:53
trillions of dollars with that little
28:54
blip down the bottom there called
28:56
Bitcoin when
28:57
in a country with a smartphone can
28:58
choose to park their wealth in something
29:00
that’s fixed and scarce
29:01
or Park their wealth in this this
29:03
currency that they’ve seen Harper
29:04
inflate away constantly throughout
29:06
history I think the choice is pretty
29:07
clear so we’re seeing this in Argentine
29:10
record volumes Chile you know the list
29:13
is very long the number of people that
29:15
are now choosing Bitcoin instead of
29:16
something else
29:17
so the having next May is very important
29:19
as I spoke about and then again four
29:21
years later and where to Bitcoin derives
29:24
its a lot of its value from similar to
29:25
gold on this chart which you see the
29:27
yellow block up the top right corner is
29:29
the scarcity of gold that is something
29:31
that makes it valuable
29:32
now if gold goes to $5,000 an ounce
29:35
maybe people are going to mine it maybe
29:36
the inflation of gold goes to three or
29:38
four percent silver we see there as well
29:40
gets a lot of its value because of its
29:42
scarcity but Bitcoin as we see it
29:45
trending up that chart over time as it
29:47
becomes more and more scarce it
29:49
increases in value and bitcoin is going
29:52
to surpass gold in terms of what we call
29:53
stock to flow the amount of new supply
29:55
coming into circulation compared to
29:57
what’s already exists and I think the
29:59
bitcoins going to surpass the market cap
30:01
of gold within five years so tying it
30:04
all together when you look at everything
30:06
else told you today it’s a payment
30:07
system the smartest minds in the world
30:10
are working on the cutting edges of
30:11
technology it’s a store of value it’s a
30:14
medium of exchange it’s the world’s most
30:15
secure computing network what’s all that
30:17
worth in a world where we’ve got a
30:19
hundred billion dollar market cap
30:20
compared to the hundreds of trillions of
30:23
dollars that exists in currency markets
30:24
stock markets these technology companies
30:28
I think it’s an absolute no-brainer to
30:30
park a little bit of your wealth in
30:32
Bitcoin and if you want any more
30:33
information on anything we do come and
30:35
see me or head to Nuggets news.com
30:37
today.you thank you
30:39
[Applause]
30:45
[Music]