Everything You Need to Know: Bitcoin ETF, Lightning Network, & Altcoins | Jeff Booth & Greg Foss

In this episode on On The Margin, Mike is joined by returning guests Jeff Booth & Greg Foss. Jeff & Greg discuss breaking news as the first ever U.S Bitcoin ETF was approved and what this could mean for institutional exposure to Bitcoin. Mike, Jeff & Greg also discuss the recent developments in El Salvador as Bitcoin was made legal tender, The Lightning Network, the deflationary forces & network effects of technology, Bitcoin mining, the difference between Altcoins vs Bitcoin, the outlook for 2021 & the future of Bitcoin.

29:20
el salvador and they
29:23
have been employed by the government for
29:24
the merchant solution for the chivo
29:26
wallet so i’m privy to some information
29:29
that uh well you know what you can’t
29:31
trade on it so i’ll tell you it’s very
29:33
positive
29:34
information coming out of el salvador
29:37
and i want to point something that jeff
29:39
said and here’s how a privileged world
29:41
we live in so you guys may or may not
29:43
know i’m a partner in eight irish pubs
29:45
in montreal
and those eight irish pubs
29:48
we pay as jeff said merchant fees on
29:50
these credit cards of two and a half
29:53
percent and our margins and we’re good
29:55
restaurants we’re at about 14 ebitda
29:58
margin okay we could be at 16 and a half
30:01
percent
if and assuming that not
30:03
everybody pays with credit cards but you
30:05
know a lot of people do a lot of them um
30:07
we could we could definitely increase
30:09
our margins because you know the credit
30:11
card if we don’t have to pay those
30:12
merchant fees well our eva dot margin
30:14
goes up uh accordingly do you know what
30:17
merchant fees
30:18
for credit cards are in el
30:20
salvador eight percent guys eight
30:25
this is outrageous
so you think eight
30:27
percent you think that
30:29
running a business in canada is tough
30:31
with two and a half percent merchant
30:33
fees imagine running a restaurant in el
30:35
salvador where your ten percent ebitda
30:38
margin is doing exceptionally incredibly
30:41
well on an industry average and your
30:43
credit card fees are eight percent
30:46
guys lightning is not just going to
30:48
disintermediate western union
30:50
i’m pretty excited about someday being
30:53
pretty good size short on visa not now

30:56
not now i’m not gonna be michael burry
30:58
that calls it out for seven friggin
30:59
years and then he’s finally right and
31:01
he’s some sort of i’m gonna just say
31:04
watch visa
31:05
oh maybe that’s why jamie dimon’s a
31:08
little concerned because his captive
31:11
merchant fees
31:12
in third world countries might be under
31:15
pressure i’m not saying that you do your
31:18
own mathematics the other thing that i
31:20
do know
31:22
again there were only two and a half or
31:24
there’s six million people in el
31:26
salvador i think
31:27
a million and a half of them had bank
31:29
accounts
31:30
there’s currently three million people
31:32
in el salvador with a wallet
31:35
a bitcoin wallet on their phone
31:37
you tell me this stuff isn’t
31:39
life-changing for these people
31:41
changing the gdp of the country changing
31:44
the uh profitability of restaurants and
31:47
small businesses in el salvador and also
31:50
then the livelihood and the and the
31:52
productivity of the people who can store
31:55
value on their phone they didn’t even
31:57
have access to bank accounts prior to
31:59
this
32:00
like i’m telling you this is only el
32:02
salvador this is six million people now
32:04
jeff
32:05
i’m going to tell you i was very honored
32:08
to be yesterday
32:10
speaking to 45 members of parliament in
32:14
canada
32:15
on bitcoin
32:17
led by our friend pierre paul
32:20
okay 45 members of parliament
32:23
they want to know about bitcoin and i
32:25
did tell them on
32:27
the
32:28
uh on on the zoom call i and i said it
32:31
with all respect to my french canadian
32:33
wife and certainly pierre poliev who’s
32:35
franco alberton he’s not a quebecois
32:38
i said maybe we should start learning
32:40
spanish in canada because if we don’t
32:42
get our acting gear we’re going to be
32:44
reporting to the central americans
32:47
who’ve embraced this before canada
32:50
this is all about competitive a
32:53
marketplace no different than a country
32:55
or excuse me a company this is country
32:58
dynamics much like another company would
33:00
look down the road and say
33:02
boy why is jeff booth’s bar doing so
33:05
well
33:06
well because he’s encouraging people to
33:08
pay with bitcoin and can therefore cut
33:10
eight percent off the price of his beer
33:14
to get more clients to come into his
33:16
restaurant you know all of these things
33:19
are unbelievably cool opportunities that
33:22
increase the network adoption that jeff
33:24
very eloquently laid out
33:27
so greg if you just build on that piece
33:29
so the first part that incentivizes
33:33
restaurants or anybody to use it and
33:35
actually the same thing that then that
33:37
we talked about before early on a uh in
33:41
in google or amazon right you just think
33:44
about
33:44
the people that are blocked out of this
33:46
the existing financial infrastructure
33:48
today
33:49
third world countries are blocked out of
33:51
the existing financial so it’s just a
33:53
country example of the same phenomenon
33:56
happening at a person level here
33:59
why we don’t see it as much is because
34:02
of our privilege
34:04
we don’t see that there’s a cost of our
34:06
privilege elsewhere in the world
34:08
and that and that cost is the same
34:10
reason that some of these countries are
34:12
moving to it to it faster than the
34:14
country is in the g7 um and
34:17
greg’s right they better we better get
34:19
our act together because otherwise we’re
34:21
going to be falling behind because all
34:22
of the innovation and all of the
34:24
dynamics are going to move to those to
34:26
those countries because it because it
34:28
provide again
34:30
the first wave
34:32
coming companies will do it because it
34:33
increases their margin
34:35
and they’ll be more profitable and
34:37
they’ll be big and they build way better
34:38
businesses than the ones that aren’t on
34:40
it and then the ones that aren’t on it
34:42
are going to compete and they’re going
34:43
to drive into it as well and what in the
34:46
second wave
34:47
is prices come down
34:50
and and and
34:52
you know from my book i talked about
34:54
technology reduces it gives us more for
34:57
less
34:58
it is
34:59
it is a central point of this whole
35:01
thing fighting against that with
35:03
monetary policy
35:05
to be able to to concentrate control in
35:08
a very small hands
35:10
is an
35:11
is an aberration against the world
35:15
so so this bitcoin force is a forcing
35:18
function essentially by stopping the fr
35:21
by by stopping the free market from
35:23
happening but stopping creative
35:24
destruction and the free marker swapping
35:26
creative destruction in the overall
35:28
market and socializing losses creative
35:31
destruction has come for money
35:33
the world will never look the same
35:36
uh the free market has come for money
35:39
and and what you’re seeing is that
35:41
crazy network effect network effect
35:44
technology
35:46
brains moving into this field
35:49
advancing advancing something that won’t
35:51
be stopped
35:52
and it it’s it’s a really good thing
35:55
because prices will fall everywhere on
35:57
everything and it’s actually the only
35:59
way if you go to a way higher level
36:02
a requirement to move into the future
36:05
where we are in uh with human a
36:07
requirement
36:09
is tech is a
36:10
digitally native currency that allows
36:12
for deflation
36:15
because without that requirement
36:17
you’re concentrating all wealth and
36:19
power in very few hands
36:21
and that is a fact
36:24
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39:02
you know the idea of a something that
39:04
looks like an internet native currency
39:06
right this is actually something that’s
39:08
existed for a lot that the the need has
39:10
been understood right uh for this for a
39:12
really long time guys like milton
39:13
friedman identified this a long time ago
39:16
um right and it just didn’t happen
39:18
henry and henry ford buckminster fuller
39:21
and then
39:22
all of these people for the for for a
39:24
long time of time what would be the
39:26
perfect currency the code wasn’t cracked
39:29
to create the perfect currency so you’re
39:31
exactly right so so thought leaders
39:34
throughout our time
39:36
have talked about what this could look
39:38
like but we didn’t have the technology
39:40
the technology didn’t exist to to allow
39:42
it to happen and so even if you think
39:44
about the innovation of when bitcoin
39:46
came out
39:48
all of the different innovations that
39:50
came together to create that
39:53
that spot
39:54
in in time it is it’s a 20-year course
39:58
through through 20 years of evolving
40:01
through through
40:03
um
40:04
through markov chains a whole bunch of
40:05
different things to be able to find to
40:07
be able to get to that point where
40:09
bitcoin
40:12
it was invented
40:14
and that’s amazing because you know 100
40:16
years ago over 100 years ago henry ford
40:18
famously said an energy currency that
40:21
would eliminate wars right um so i find
40:25
it very interesting that uh vlad putin
40:29
is entertaining uh the potential for oil
40:32
to be paid for and he called it crypto
40:35
but vlad putin is a smart engineer and
40:37
he knows that
40:38
the first law of thermodynamics which is
40:41
conservation of energy means that oil
40:43
and natural gas naturally
40:46
should be priced in bitcoin because
40:48
bitcoin is digital energy
40:50
so that i just wanted to build on that
40:52
one for from jeff’s perspective you know
40:55
lots of people have been calling for it
40:56
it hadn’t been
40:58
developed but bitcoin is what ford saw
41:03
over 100 years ago
41:05
there’s another great henry ford quote i
41:07
thought you were gonna bring up there
41:08
which is uh it’s just as well that the
41:11
american people don’t understand the
41:12
banking system for if they do i believe
41:14
there’d be a revolution tomorrow
41:16
in the morning and i’ve lived that life
41:17
too because i told the members of
41:18
parliament yesterday when i first
41:20
started working at the royal bank of
41:21
canada canada’s largest financial
41:23
institution
41:24
it was insolvent and i know it didn’t
41:27
sink into their head until i said
41:30
bankruptcy
41:31
yeah what
41:33
and then they realize
41:34
the banking system is only what it is
41:37
because of the implied backstop of being
41:39
able to print this thing called fiat
41:42
money
41:43
have you guys noticed that uh and maybe
41:45
this is uh where we can transition to
41:47
probably part of the conversation that
41:48
we’re not going to agree on as much
41:50
because jeff i do want to talk to your
41:51
get your thesis on kind of all coins and
41:53
the stuff encrypted outside of bitcoin
41:54
uh but if you notice that uh people that
41:56
are getting into the space
41:58
there’s a remarkably similar thought
42:00
pattern that occurs across a whole bunch
42:02
of different types of people like when i
42:04
was first getting involved in um
42:06
i remember listening to pomp in one of
42:08
the early days of his shows described
42:09
this and it really
42:11
it resonated with me uh but back then
42:12
enterprise blockchain in like 2017 2018
42:14
remember that was still a thing and um a
42:17
lot of people went on this journey i was
42:18
a consultant before this so what i
42:19
understood was operations and supply
42:21
chain and uh you know you first get
42:23
exposed to something like crypto and
42:24
bitcoin you’re like well i’m not really
42:25
sure this makes a whole lot of sense but
42:27
like some sort of light bulb goes on you
42:29
try to jam it into your own world view
42:30
or how you understand things uh and i’m
42:32
like oh well like oh okay this is cool
42:34
like all assets get tracked to the
42:35
system there’d be supply chain
42:36
applications for this yada yada then you
42:38
go down that road and you’re like wait a
42:39
second none of this makes any sense
42:41
actually it was all bitcoin you know the
42:43
whole time and then you but there’s this
42:44
kind of remarkable journey that everyone
42:46
goes through and like greg what you were
42:47
saying is like everyone thinks they’re a
42:48
day trader i can’t tell you how many of
42:50
my friends i’ve talked to about bitcoin
42:53
they’re like i’m gonna wait for a dip
42:55
like
42:56
why do that why do you do that that’s
42:58
just not a smart interest either this is
43:00
an asset worth owning or it’s not
43:02
okay if it is then it is and then what’s
43:05
the entry strategy you dollar cost
43:06
average waiting for a dip is just a poor
43:09
entry strategy for how to get ownership
43:11
of this asset but like everyone thinks
43:13
like that so
43:15
you know your guy that writes brian uh
43:17
that writes for your block works i wrote
43:19
a pretty neat article either
43:22
was it today or yesterday where he said
43:24
look i don’t try and short the market as
43:26
a as a profession because over time the
43:28
market goes higher uh but you know and
43:32
it was neat because it’s a very wise uh
43:34
equity trader type of uh thought process
43:36
the reality is uh there’s another
43:39
expression never short a bull market
43:41
right uh trend is your friend all these
43:43
other things so yeah everyone uh says
43:45
gosh they have price uh
43:47
uh
43:49
remorse uh i missed it at a thousand i
43:51
missed it at five thousand i missed it
43:53
at ten thousand let me be very clear
43:55
about this uh and i think this is
43:57
something i can talk about because i’ve
43:59
done this for 32 years uh and thirty
44:02
years i did it professionally managing
44:04
other people’s money managing other
44:06
people’s money is a horrible horrible
44:08
job
44:09
okay because they will only give you
44:12
credit
44:14
their credit to you oh the guy did great
44:16
he’s a bitcoin allocator he did great
44:19
but i’m so smart i put my money with him
44:21
and uh look at me i’m a superstar
44:24
allocator and this guy
44:26
convinced me to get into bitcoin the
44:29
flip side of that is i’m a money manager
44:31
i own bitcoin and bitcoin goes offside
44:34
and these guys are upset god he’s stupid
44:36
why did i ever listen to him like as if
44:39
i i had pulled them in in some sort of
44:41
uh you know false narrative
44:43
managing money is horrible in order
44:45
priorities it’s easiest to lose your own
44:47
money second easiest to lose a bank’s
44:49
money and absolutely horrible to lose
44:51
friends family and client money okay
44:54
anyone who thinks they want to do that
44:55
on a professional basis trust me sit in
44:58
the chair for a year and a half in a
44:59
bear market you don’t want to do this
45:02
and so i’ve seen the world melt down
45:04
four successive times in my career
45:06
i think i know how to manage risk i
45:09
survived all four of those financial
45:10
crises i came out
45:13
with war wounds and you know
45:15
stomach ulcers and i talk about you know
45:18
my
45:19
perhaps a little
45:20
grosser types of things that i came out
45:22
with but at the end of the day
45:23
bitcoin today right now
45:26
is cheaper on a risk-adjusted basis than
45:29
it was when i got in involved with
45:31
bitcoin in 2016.
45:34
okay
45:35
what happened since 2016 when i got
45:38
involved in bitcoin
45:40
not only the price has gone up 50 times
45:42
okay that’s fair but colvid cove
45:45
and governments have proved that we will
45:47
never escape this debt spiral ever
45:50
cynthia loomis said it so beautifully on
45:52
a c-span thing
45:55
the governments have been irresponsible
45:56
and mathematically it’s impossible to
45:58
escape this debt spiral very cool
46:02
head yourself accordingly don’t
46:04
overthink it bitcoin is the best
46:07
asymmetric trade i’ve ever seen and it’s
46:10
actually gotten better since i got
46:12
involved in it five years ago i know it
46:14
doesn’t resonate with people and they
46:16
want to buy a dip and they want to do
46:17
this
46:18
put five percent in your portfolio and
46:21
then concentrate on the other
46:23
95 of your portfolio that really is
46:27
risky
46:28
bitcoin’s your insurance it’s just i
46:31
just need people to take that experience
46:34
i’ve seen people literally carted off a
46:36
trading floor because they had a heart
46:38
attack right in front of me
46:42
jesus
46:43
yeah i’ve managed to risk for 32 years
46:46
please
46:47
it has nothing to do with where it’s
46:50
been it’s
46:51
has everything to do with where it is
46:54
going yeah
46:56
and
46:57
and if you’re talking price
46:59
again and a lot of people are talking
47:00
price you just asked about price and
47:02
everything else and that’s that’s the
47:04
natural thing that a lot of people are
47:05
doing and they’re measuring that price
47:07
in u.s dollars they’re measuring that
47:09
price
47:10
in a system that is that has to
47:14
print money forever that has to keep on
47:16
you so so
47:18
so
47:19
um
47:20
but
47:22
i so number one it we i i totally agree
47:25
there is no asymmetric bat
47:27
unless the majority of people
47:29
misunderstand it
47:32
so so the majority of people still
47:34
misunderstand it and and how and how how
47:37
early we are that’s how greg is a
47:39
traitor
47:41
who creates that arb that is how but but
47:44
it’s this exact same thing as any
47:46
entrepreneur wanting to change the world
47:48
with their idea
47:50
everything around us is just an idea the
47:53
system we live in as an idea first
47:55
started with an idea the iphone is an
47:58
idea that replaced another idea
48:00
and you have to have conviction you have
48:02
to have two things you have to be able
48:05
to see the future of your idea pass out
48:08
and you have so you have to any of deaf
48:10
conviction on that idea otherwise you’d
48:12
never start a business
48:14
and you have to be right
48:17
on both of those you create asymmetric
48:20
bets
48:21
right and because most people don’t see
48:23
that that’s why entrepreneurs are seem
48:25
so crazy to the rest of the world
48:27
because most people live in
48:29
a world where everything stays the same
48:31
forever and it’s constantly changing and
48:34
it’s and and entrepreneurs are creating
48:36
the future that we we are part of
48:39
if you look at bitcoin through that same
48:40
lens that’s all it is
48:42
it’s a whole bunch of people that
48:44
believe in a new system that and they’re
48:46
creating that system and the more belief
48:48
that there is in that system
48:51
we’re going to transition to that system
48:53
and that system is going to be a far and
48:55
produce far better results for society
48:58
now yes a whole bunch of people that are
49:00
going in early are going to create
49:02
untold wealth in that new system
49:05
and but this is actually critically
49:07
important to understand too because
49:08
there is
49:10
a
49:10
belief from a lot of people who don’t
49:12
understand what we’re talking about
49:14
right now
49:15
that you’ve just transferred power to a
49:17
new set of people
49:19
and the world looks the same
49:21
and that couldn’t be anything there
49:23
couldn’t be anything further from the
49:24
truth
49:25
because the world looks the same because
49:28
because the people at the top of the
49:29
economic pyramid
49:31
write the rules of the system
49:34
and they keep on changing the rules so
49:36
that they stay on the top of the
49:37
economic pyramid
49:39
that doesn’t happen in bitcoin you make
49:41
a mistake you make a bad bet you lose
49:43
your bitcoin if you want to if you want
49:46
wealth doesn’t equal power in the
49:47
bitcoin world if you have a whole bunch
49:49
of wealth in in in in bitcoin and you
49:52
want control of other people so you
49:54
bring a whole bunch of people so you pay
49:56
them more to control them
49:58
then you’re distributing your bitcoin by
50:00
trying to retain control
50:03
so
50:04
the the system incentives
50:07
make ensure
50:08
that the path to abundance for the
50:11
greater part of humanity
50:13
are aligned um and so it’s a way bigger
50:16
deal than the money you might the
50:18
generational wealth that you might gain
50:20
from
50:21
bitcoin by by getting in early it’s a
50:23
way bigger deal
50:25
because there is no fix from the
50:26
existing system short of concentrating
50:29
all power in the state
50:32
i want to get to a part of the
50:33
discussion uh because i’m pretty sure
50:34
we’re in violent agreement about almost
50:36
everything discussed so far but i want
50:38
to talk about an area where maybe we’re
50:39
not in such agreement um
50:41
so uh you know i like bitcoin for me was
50:44
uh
50:46
it’s still a large focus right uh block
50:48
workshop obviously covers a lot of stuff
50:50
outside of just the bitcoin ecosystem
50:52
i’d love to give both of your thoughts
50:53
in general on
50:55
uh assets outside other crypto assets
50:58
outside of just bitcoin so ethan even
51:00
beyond right some of these other layer
51:01
ones or gaming things like acting
51:03
infinity whatever kind of cropping out
51:05
um i know uh maybe i’ll pick on you jeff
51:07
go first because i know you have some
51:08
thoughts on this so maybe you can kick
51:10
off your your thoughts i am not in any
51:12
of those
51:14
and i’m not in and and not to say that
51:16
if it was just about wealth or
51:18
short-term trade
51:20
that that i might not be you can imagine
51:23
with with the type of influence or
51:26
dynamic and everything else i could go
51:28
create a coin right away a whole bunch
51:29
of people and create crea create a coin
51:31
and create a whole bunch of wealth that
51:32
way and essentially
51:35
game my advantage
51:37
to the loss of other people
51:39
right i could pre-mine a coin i could
51:41
bring a whole bunch of people and they
51:42
say and by the way i have been asked to
51:44
do that
51:45
by countless people
51:47
to get involved in their thing because
51:49
because that’ll bring more people on to
51:51
their
51:52
altcoin platform right right and and to
51:56
to one i will say unnamed person in this
51:59
space in the financial world that said
52:02
but we should write the rules
52:05
of what that looks like and i’m
52:07
categorically against that
52:11
and so so i i’m not categorically
52:13
against a free market deciding what coin
52:16
is better
52:17
i’m not uh
52:18
but i’m categorically against
52:21
kind of
52:22
integrity to i’m going to sell my soul
52:24
for money
52:25
so
52:26
uh so
52:28
so most of those i see as as say all of
52:33
those i see over time and this we can
52:35
disagree here and i might be wrong
52:39
but i actually can’t see if the base
52:41
layer is money okay
52:44
and now the technology starts to exist
52:47
because the base layer can’t be
52:48
corrupted and it’s secured
52:51
through proof of work
52:52
why the technology doesn’t evolve
52:56
to handle every other use case
52:59
that current alt coins
53:01
handle
53:02
so in it i understand totally why
53:05
ethereum would
53:07
it would live for a time
53:09
well that technology didn’t exist
53:12
because you could create a whole bunch
53:14
of you could sell art on on that and you
53:17
couldn’t on bitcoin right you could you
53:19
could do a whole bunch of uh different
53:21
things you could create a a a
53:24
and so you could actually drive a
53:25
network effect on ethereum because it
53:27
did a different job ordered a bunch of
53:28
the other coins
53:30
um because it did a different job and
53:32
now it’s a race to the bottom on fees
53:35
um and why why why
53:37
why they keep changing the rules of
53:39
these altcoins
53:41
is because
53:42
it’s the race to the bottom on fees and
53:44
somebody is attacking them
53:46
right or
53:48
you you manage for security through
53:50
proof of work so so you look at this
53:52
entire ecosystem
53:55
that is is almost i would say
53:59
trying to find
54:00
what it’s going to be long term
54:04
at the same time
54:06
bitcoin is advancing the technology
54:08
stack to remove it all
54:12
and and and so if i’m looking at a long
54:14
term if i’m looking at a long term
54:17
for forget the for forget now
54:20
making money because i think you make
54:22
way more money over the long term in
54:23
bitcoin but forget that
54:25
if i’m looking for the long term thing
54:27
that is going to to
54:31
be a network transfer from one system
54:33
that can’t work to another system
54:35
it’s only bitcoin
54:38
and so so that’s that’s my reason
54:42
so what a great uh
54:44
again
54:46
it’s great to be on a podcast with you
54:47
jeff um you bring everything you you
54:50
distill things into first principles and
54:52
simplest terms uh i i want to take a
54:54
step back and make sure everyone
54:56
understands why i got involved in
54:57
bitcoin because i had been searching for
55:01
a replacement to the fiat ponzi for 30
55:03
years okay i just never found it i
55:06
understood gold i just didn’t embrace it
55:09
like some of the other gold portfolio
55:11
managers uh because of some of the
55:12
shortcomings that being said
55:16
the thing that i loved
55:17
after having met jeff is i read his book
55:21
after i wrote my research paper on
55:24
bitcoin being valued using credit
55:26
default swaps
55:28
and it was really comfortable comforting
55:30
to read jeff’s book because he used a
55:33
lot of the same data as to the
55:34
inevitability of the debt spiral from
55:37
sources like institute of international
55:39
finance that aren’t widely published by
55:42
the investment banks in new york i guess
55:45
why because it would be exposing the
55:47
fiat excuse me the fiat ponzi so i was
55:50
really comforted by the fact that jeff’s
55:52
book used the same data by and large as
55:55
i did or vice versa i was comforted that
55:57
i used the same data that he did and we
56:00
came to the same conclusion
56:01
independently and then became pretty
56:03
good friends who i was out skiing at
56:04
whistler one time in the in the winter
56:06
just less than a year ago and i called
56:08
them up and we instantly
56:10
bonded over the ability to
56:13
distill the the information that’s
56:15
available but not widely disseminated
56:17
because you know the investment banks
56:19
don’t disseminate that
56:20
so i met jeff
56:22
and we had never talked about this we
56:25
don’t talk about altcoins we talk about
56:27
our desire to improve the world’s most
56:30
pressing problem
56:32
which is fiat currency and none of these
56:34
other altcoins can do that in my opinion
56:37
now will there be more than one winner
56:39
in the short term on a number go up
56:42
because there’s defy on erc20 and
56:45
there’s different blockchains that have
56:48
various levels of decentralization but
56:50
at the end of the day they
56:52
sort of smell like a lot of centralized
56:54
control
56:55
over time there’s a lot of people that
56:58
believe
56:59
that
57:00
other blockchains and apps on those
57:02
blockchains are essentially a test net
57:06
for layer 3 bitcoin
57:08
and as a trader all my life i am not
57:11
short any of those
57:14
okay
57:14
there will be a time when it’s very
57:16
clear that the dodgy coins of the world
57:19
that are true zero-sum scams promoted by
57:22
a pretty famous guy
57:24
uh but look
57:26
you got to call it out as it is there
57:28
are times when it will pay to be short
57:31
those but right now
57:32
bitcoin is
57:35
the leader by market cap but it also is
57:38
what most big money is gonna understand
57:41
they need it as a hedge
57:43
to the absolute certainty of fiat
57:46
debasing and this brings me back to my
57:48
career as a bond trader
57:50
if you
57:51
advance
57:52
a 10-year loan to the u.s treasury
57:55
highly highly likely but not 100 certain
57:57
you’ll get your money back in 10 years
57:59
the biggest problem is you get a d based
58:01
currency 100 cents on the dollar back in
58:04
10 years you might have 65 purchasing
58:06
power if you’re lucky what kind of
58:08
contract is that like what i’m a bond
58:10
manager this is i need to start thinking
58:13
outside the box and that bond market is
58:16
400 trillion dollars that’s all fixed
58:19
income by the way it’s not just
58:20
government bond market point being
58:23
why are we battling with the gold bugs
58:25
that’s 10 trillion that’s okay gone see
58:27
ya we don’t care like we want gold to go
58:30
up because gold will go up because
58:32
bitcoin goes up because fiat 100 certain
58:35
d bases
58:36
and a lot of these other coins that are
58:38
out there
58:39
yes they will go up why they solve a
58:42
short term problem but in the long term
58:45
is there a better decentralized
58:47
blockchain for those apps to exist on
58:51
how about this
58:52
right now i’m not going to worry about
58:55
that my biggest problem
58:57
is i don’t want this fiat system to
59:00
collapse before we have this other
59:02
network in place where there can be an
59:04
orderly transfer
59:06
and i want to sum it up with
59:08
a a saying that i love saying i want
59:11
bitcoin to be north america’s store of
59:13
value that the chinese graciously have
59:16
given us like have you seen these mining
59:18
stats now usa biggest center of mining
59:21
for bitcoin mining
59:23
china almost down to zero
59:25
my goodness i think is a capitalist with
59:28
a heart okay i have a heart i want to
59:30
help the people at the lower end of the
59:32
privilege spectrum but i’m a capitalist
59:34
not a communist
59:35
these the communists have given this as
59:38
a as a present to the west
59:40
embrace it bitcoin is your store value
59:42
savings account
59:44
fiat currency in this in the short to
59:46
medium term will be your checking
59:48
account
59:49
don’t save your money in your checking
59:51
account
59:52
use that for
59:54
not having to do barter
59:55
what are where do altcoins then fit in
59:58
between here okay think of your savings
60:01
account checking account
60:02
i think a neat way of seeing whether an
60:05
altcoin has any value how close is it to
60:07
a checking account
60:09
versus a true savings account
60:11
and play your cards accordingly
60:13
michael i i maybe i ask you and the
60:16
reason i
60:17
so so when i’m investing or building a
60:20
company or
60:21
or spending time on it i wonder i want
60:23
to understand the thesis right from the
60:26
bottom up and i want to understand
60:29
what could possibly go wrong i want to
60:31
understand
60:32
one of the first things i look at is
60:34
what are all the things that could go
60:36
wrong
60:36
with i have this view what are all the
60:38
things that could go wrong
60:40
with with this view and and if i do that
60:43
on
60:45
bitcoin and the altcoins
60:48
i can’t see a path for any of the
60:49
altcoins
60:51
i may be wrong right i may be but but i
60:54
don’t see what they and and the problem
60:57
is
60:58
measuring in a point in time and that’s
61:00
actually maybe maybe the opposite side
61:02
of the argument opposite side of the
61:04
argument is i totally understand how
61:05
some people can make a lot of money in
61:07
the short term uh short term on some of
61:09
the altcoins i totally understand it
61:11
whether they’re whether they’re gamed
61:12
whether if you get in you’re trading on
61:14
a a
61:16
on on hype and everything else and
61:17
you’re trying to trade a momentum play i
61:19
get it i’m talking the thesis for them
61:23
against the thesis for
61:25
uh
61:26
for
61:26
what is going to happen
61:29
with
61:30
projecting what’s going to happen with
61:31
bitcoin forward
61:33
and then specifically i’m talking later
61:36
because it’s i don’t think i don’t think
61:38
we would disagree that bitcoin is
61:40
already
61:41
one layer one store of value
61:44
sure
61:45
absolutely
61:46
and so so so what what in time
61:50
is the technology develops on that on
61:52
layer two and three
61:54
do those alt coins provide that it gives
61:56
it gives a defensible moat to the
61:59
altcoin
62:00
and that would be my question i think if
62:03
you approach everything happening in
62:04
crypto from the standpoint of this is
62:07
solving a monetary problem
62:09
then bitcoin is the clear winner
62:11
solution bar none i don’t even think any
62:13
of these other coins like even ether or
62:16
any of these other layer ones are even
62:17
trying to be a money or a store i mean i
62:19
guess there is the ethos sound money
62:21
whatever i think they it wins the store
62:23
value i think why they just changed to
62:26
that
62:27
is because they realize exactly what we
62:29
just talked about
62:30
they realize that unless it’s
62:32
unless it becomes a store of value which
62:34
is highly unlikely that everything else
62:37
is lost over time i believe that that’s
62:39
why
62:40
but it becomes a centralized store of
62:42
value in that case
62:44
so i would go
62:46
like
62:46
starting way back right the advantage
62:48
that humans have well for everything
62:50
else on this planet is coordination
62:51
right that’s how we hunted back on the
62:53
plains of the savannah that’s how we
62:54
were able to build cities from an
62:55
evolutionary standpoint our one big
62:57
advantage is that we’re intelligent
62:58
enough to coordinate in novel ways right
63:01
we had like nomads roaming around that
63:02
we had cities um
63:05
consummate to that
63:06
uh trend right which is like a millennia
63:09
old trend in humanity uh you have
63:11
everything moving more digital in
63:13
general right life uh is is moving to a
63:16
more digital plane um and in my my
63:18
personal thesis behind everyone who
63:20
doesn’t understand bitcoin the chief
63:22
objection if you scratch hard enough is
63:23
that you can’t pick it up with your hand
63:25
that’s my personal thought process on it
63:27
and i really believe that uh like if you
63:29
really dig hard enough what you come
63:31
down to is the problem that i can’t hold
63:33
it in my hand um so i i personally kind
63:36
of see economies transitioning to
63:38
something that looks a lot more digital
63:40
so if you go back to the original
63:41
innovation of what did satoshi create i
63:44
think what he
63:45
created was
63:47
the creation of scarcity in the digital
63:49
realm and the first most important use
63:51
case of that is the monetary use case
63:54
and i think bitcoin handily solved that
63:57
monetary use case
63:59
now i see what’s happening in
64:01
ethereum and you know dows and nfts is
64:04
like okay now we’ve got the money layer
64:07
of this new digital world solved what
64:09
are the other things that we’re going to
64:11
build in this new digital realm
64:14
and when i look at the existing world
64:16
and everything’s completely out of whack
64:18
today so let’s like use another period
64:20
of time in history but i look at what is
64:22
the
64:24
sound value pristine collateral type
64:26
thing that everyone wants to own in
64:28
relation to riskier assets and more
64:31
productive assets companies things that
64:33
are building on top of that
64:35
pristine collateral and it’s like you
64:37
know so i guess the way i look at it is
64:39
the the eventual value of things that
64:41
are going to be built in this new
64:42
digital ecosystem looks roughly like the
64:44
ratio of gold to equities today that’s
64:47
my like you guys can totally disagree
64:48
and tell me why i’m an idiot but that’s
64:50
the way that i think about it ics
64:53
transitioning to a primarily digital
64:54
native economy i think gold by the way
64:56
like i’m younger i see the value in gold
64:58
honestly if i’d been bored 70 years ago
65:00
i would own a lot of gold today i only
65:02
own bitcoin because i believe that
65:04
economic value is transitioning to a
65:06
largely digital plane i think the
65:08
preferred store value is going to be
65:10
bitcoin and i i actually think when the
65:13
rest of the world starts to consider
65:14
bitcoin as a store value instead of a
65:16
risk asset is when the majority of the
65:18
economy happens on this digital plane
65:20
but that’s my overall framework jeff so
65:22
so yeah so let’s play that for forward
65:25
and and because i agree with a lot so
65:27
you said solve the coordination problem
65:28
i totally totally agree right the the
65:31
byzantines general problem and
65:32
everything else and bitcoin solves that
65:34
coordination program a
65:36
coordination problem at a different
65:38
level
65:39
where you don’t need to have slack in
65:42
the system
65:43
somebody else choosing how much money in
65:46
an intermediary choosing how much money
65:48
is going to be held as slack in the
65:50
system because it can’t it can’t uh it
65:53
it can’t
65:54
uh
65:55
settle every 10 minutes
65:57
right so so so
65:59
that coordination problem becomes solved
66:01
with bitcoin
66:03
and
66:04
now the next step of that is the
66:06
question is is two
66:08
does it require a whole bunch of other
66:10
altcoins to be built building
66:13
layer two on top of the internet
66:16
right because if if you just say what
66:18
you just said
66:19
is then you have to see bitcoin as a
66:22
primary protocol like tcpip it is the
66:25
internet
66:26
it’s the internet of money if that’s
66:27
true sure
66:29
right now
66:30
what i believe happens on top of that
66:32
internet of money
66:34
through layer two and three layer three
66:36
solutions is all of the innovation takes
66:38
place on top of it rather than
66:40
in a different different silos
66:44
because because it solves that
66:46
coordination problem and it’s already
66:47
solved that that anyways that that is
66:51
if you’re looking out kind of looking
66:54
out and projecting if if you said today
66:56
or if you said let’s not use today
66:58
because we we can see the evidence of
67:00
lightning network
67:02
reinforcing what i’m saying
67:04
and i think you’ll see the evidence of
67:07
of the same thing with taproot and and a
67:09
whole bunch of other things reinforcing
67:11
an entire
67:13
ecosystem build on top of it
67:15
but let’s look back in time two years
67:18
instead and and bitcoin only was the
67:21
store of value
67:22
it was greg’s savings account
67:24
right it was only the store value or it
67:26
was it was just it was competing against
67:29
gold
67:30
and you didn’t have lightning network
67:33
and there was an opportunity and there
67:34
was a whole digital economy thriving
67:37
and there was an opportunity to create a
67:39
digitally native token that could help
67:42
that along
67:43
that was that bitcoin couldn’t do
67:46
that’s why i totally understand ethereum
67:49
where it was
67:51
i understand the value creation that
67:53
came on the ethereum of trying to do
67:55
something else and a whole bunch of
67:56
value delivered from that
67:59
my question is
68:01
i don’t see the use case going forward
68:03
with all of the innovation and
68:05
everything else that’s happening that’s
68:06
reinforcing the primary network i don’t
68:09
and and i may be wrong
68:11
but i don’t see it hey guys i don’t
68:14
think i’m going to get back in the show
68:15
but i have to run anyway
68:17
yeah i’m sorry about that
68:19
it’s all good jeff i’m so glad i had the
68:21
last uh the opportunity to listen to it
68:23
i don’t think i’m i’m being recorded but
68:25
i wanted to say thank you to you both
68:27
and please relay that to the uh to the
68:29
crowd i love being on a show with jeff
68:33
because i learn
68:35
way way way more in 45 minutes or an
68:38
hour and a half than i’ve learned in you
68:40
know the week and a half prior so right
68:43
right back at you greg great back at you
68:45
well let’s keep this going because the
68:47
kids need it michael there’ll be more
68:49
than one winner
68:51
and there needs to be more than one
68:52
winner in the short term
68:54
but in the long term and that’s the
68:56
difference between a trader and an
68:58
investor
68:59
in the long term
69:01
uh you know you play your thesis
69:03
i really really really hope that
69:08
what you guys keep doing is educating
69:11
that’s all that’s important jeff says
69:13
frequently he may be wrong and i know
69:15
for sure i’m
69:17
often wrong
69:18
but there’s a trading expression
69:20
frequently wrong but never in doubt okay
69:23
i’m frequently wrong but i’m never in
69:25
doubt okay so keep up the good work and
69:28
uh and i i really appreciate you guys
69:30
inviting me have fun on your trip jeff
69:31
we’ll talk soon okay bud thanks thank
69:34
you guys thank you good day good day
69:38
all right i’ll give a bit of a
69:39
disclaimer for for greg uh since we i
69:41
think lost him uh for whatever reason it
69:43
might have been uh networking space or
69:45
whatever what we got to wrap this up i
69:47
guess but jeff this has been awesome i
69:49
guess look end of day um i just really
69:51
appreciate you coming on the show
69:52
sharing your opinion here i have no idea
69:54
which one is going to be right i think
69:56
at the end of the day you need to do the
69:58
thing that uh i’ve started to give
69:59
people this advice when they’re like how
70:00
much bitcoin should i buy or say just
70:02
buy the amount
70:03
buy the amount that if it dipped 50 you
70:06
wouldn’t sell it and at the end of the
70:08
day i think people should only really do
70:09
things that they have conviction in i
70:11
have a lot of conviction in bitcoin i
70:13
also have a lot of conviction in eth i
70:14
don’t have a colossal amount of
70:17
conviction in other things outside of
70:19
those two assets at this point so i own
70:21
some of them but i don’t own a whole lot
70:23
and that might change um try to keep
70:25
everyone on the show updated
70:27
but you know at the end of the day what
70:29
i do have deep conviction around is this
70:31
space in general because i can see guys
70:33
like you uh jeff and greg you guys
70:35
moving in that just the pure
70:36
intellectual capital uh and the amount
70:38
of stuff going on just blows my mind all
70:40
the time and i just feel super lucky to
70:42
be a part of it to be completely honest
70:43
yeah and and by the way michael me too
70:45
that conversation we just had on that
70:48
those are the types of conversations
70:49
open curious on and everything else and
70:52
different viewpoints that actually bring
70:54
a whole bunch more and again i might be
70:56
wrong i could be too it’s it’s exactly
70:59
but but that type of conversation brings
71:02
a whole bunch more people to to
71:03
understand and it’s important it’s a
71:06
really important asset class to
71:07
understand yeah i do i want to put you
71:10
on the spot here to plug your book
71:11
because it’s great uh tell people about
71:13
the price of tomorrow where they can
71:15
find it also if they want to find out
71:16
more about you just like what’s the best
71:17
way to do that uh myself just on twitter
71:20
at jeff booth is probably the best place
71:22
to find me
71:23
amazon’s probably the best place to find
71:25
the book the price of tomorrow why
71:26
deflation is key to an abundant future
71:28
jeff’s book was foundational for me for
71:31
understanding a lot of the deflationary
71:32
argument and the impact of money
71:34
definitely i’ll i’ll say it for you jeff
71:36
you should definitely go read this book
71:38
and uh and that’s about all the time
71:40
that we have uh jeff this has been a ton
71:42
of fun uh we’re pouring one out uh for
71:44
greg we lost just at the tail end of the
71:46
show uh but it was a ton of fun thanks
71:48
so much for coming on
71:50
thank you it’s awesome
71:51
thank you
71:53
[Music]

The END GAME for the Dollar: China vs the U.S. | Grant Williams and Luke Gromen

In this episode of On The Margin Mike is joined by returning guests Grant Williams & Luke Gromen. We welcome back two financial market veterans for a special episode exploring the fracturing geopolitical landscape between the east and the west. Grant and Luke share their insight surrounding China’s declaration of war on the U.S, how the current monetary system could collapse China’s economy, the consequences of globalization, what the end game is for the dollar & how to prepare for the changing world order as two global superpowers collide.

Timestamp:

00:00introductions

00:55 ・ The great power competition: China vs U.S

08:39 ・ Is it ethical to be in business with China?

18:44 ・ The consequences of globalization

20:11 ・ A battle of ideologies between the east and the west

24:51 ・ The current structure of the monetary system

31:30 ・ Inflation is the only way out of a sovereign debt crisis

31:30 ・ Emblematic of moral decay

49:38 ・ Understanding the financial oppression

55:06 ・ Opinion on how Bitcoin plays in all this

 

 

Charlie Rose Interview with Sir James Goldsmith on Trade, 1994

Goldsmith warned elites about the dangers of free trade.

 

Timestamps:

00:00・Introduction

00:55・The great power competition: China vs U.S

08:37・The difference in financial markets between China & the U.S

18:42・The consequences of globalization

20:08・A battle of ideologies between the east and the west

24:48・The current structure of the monetary system

28:45・Coinbase Prime Ad

30:02・Ledger Ad

31:26・Inflation is the only way out of a sovereign debt crisis

36:52・The end of an empire

41:15・Financial repression

49:32・What assets to buy during financial repression

54:58・Grant & Luke’s framework for Bitcoin

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.

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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.