Bankless - The End of the Petrodollar | Luke Gromen

Episode Date: June 10, 2024

“Energy is the base layer of money” -  that’s how our guest Luke Gromen puts it in today’s episode. Luke is an Author and Investor who gives us a completely new way to look at money, through the lens of energy costs.  The essential learning of today’s show is that you can’t understand money until you understand energy markets. Apart from that Luke explains why the price of oil is about to force a monetary system change, why the 60/40 portfolio is dead and much more. ------ ✨ Mint the episode on Zora ✨ https://zora.co/collect/zora:0x0c294913a7596b427add7dcbd6d7bbfc7338d53f/11?referrer=0x077Fe9e96Aa9b20Bd36F1C6290f54F8717C5674E  ------ 🎬 DEBRIEF | Ryan & David unpacking the episode: https://www.bankless.com/debrief-the-luke-gromen-interview  ------ 📣 SPOTIFY PREMIUM RSS FEED | USE CODE: SPOTIFY24  https://bankless.cc/spotify-premium  ------ BANKLESS SPONSOR TOOLS: 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://k.xyz/bankless-pod-q2    ⁠ ⚡️ CARTESI | LINUX-POWERED ROLLUPS https://bankless.cc/CartesiGovernance    🏠 CASA | SECURE YOUR GENERATIONAL WEALTH https://bankless.cc/Casa   🛞MANTLE | MODULAR LAYER 2 NETWORK https://bankless.cc/Mantle  🌐 TRANSPORTER | CROSS CHAINS WITH CONFIDENCE https://transporter.io/  🔗CELO | CEL2 COMING SOON https://bankless.cc/Celo  ------ TIMESTAMPS 0:00 Intro 5:57 Luke’s Thesis 12:23 Energy lens 23:23 Arc of the Dollar 28:31 Why Oil? 31:31 Energy as a Denominator 38:12 Energy Price Changes 45:31 Energy Miracles 59:22 Monetary System Change 1:10:41 Capital Controls 1:18:12 Future of the US 1:24:56 How to Prepare 1:30:37 Closing & Disclaimers ------ RESOURCES Luke Gromen https://x.com/LukeGromen   FTT, LLC https://fftt-llc.com/   Luke Gromen Weekly Newsletter https://fftt-treerings.com/   Visualizing the History of Energy Transitions https://www.visualcapitalist.com/visualizing-the-history-of-energy-transitions/   ------ Not financial or tax advice. See our investment disclosures here: https://www.bankless.com/disclosures⁠   

Most people are still assuming dollar equals oil. They're assuming the denominator is the same. And I think they're different. And not even I think. I know they're different. I can show it to you on the charts. S&P 500 total return since January 1, 2020 in dollars, up 75%. In gold, up 15%.

In Bitcoin, down 81%. That's telling you the denominators are wildly different. Welcome to bankless, where today we're exploring the frontier of energy, empires, and maybe the end of the petro dollar. This is Ryan Sean Adams, and I'm here with David Hoffman, and as usual, we are here to help you become more bankless. Energy is the base layer of money. That's how our guest, Luke Groman, puts it in today's episode. We look at money and empire through the lens of energy costs, and we see why Luke says the price of oil is about to force. a massive monetary system change. David, I really think this is essential learning for people

in the bankless journey. We haven't often unpacked an episode that looked at money primarily through the lens of energy, which is what we're doing in today's episode. And I walked away from this kind of convinced that you don't really understand money until you start understanding energy markets and all of the forces surrounding them. One of my favorite parts of this episode is in addition to exploring these topics, Luke actually leaves people with like some actionable ideas on how to prepare, like what to invest in. And here's maybe a hint. The 60-40 portfolio is dead, folks. So that's a definite takeaway from today's episode. Understanding what Luke means when he talks about the relationship between energy and money is certainly interesting.

I think any topic that unpacks a little bit of how money comes to be is worth discussing. I'm definitely learning from this episode. Before there was money in finance, there was just resources. And money and finance is built on top of just commodities and resources. In the 21st century, we're kind of blessed to live in a sufficiently stable global economy that we don't really have to think about what's going on in the basement of financial markets, the trading of physical commodities and that's relationship with geopolitics and financial markets. But things aren't always so calm. And as we've been exposed to over the last like five years or so, the world's just getting like pretty crazy. So it's probably best to be kind of informed about how

energy resources impacts economies. And that's what Luke gives us on the episode today. So let's go ahead and get right into that episode with Luke Groment. But first, a moment to talk about some of these fantastic sponsors that make this show possible. Like Cracken, our preferred crypto exchange in 2024. If you do not, have an account with Cracken, consider clicking the links in the show notes to getting started with Cracken today. If you want a crypto trading experience backed by world-class security and award-winning support teams, then head over to Cracken, one of the longest-standing and most secure crypto platforms in the world. Cracken is on a journey to build a more accessible, inclusive and fair financial system, making it simple and secure for everyone, everywhere to trade

crypto. Crackin's intuitive trading tools are designed to grow with you, empowering you to make your first or your hundredth trade in just a few clicks. And there's an award-winning client support team available 24-7 to help you along the way, along with a whole range of educational guides, articles and videos. With products and features like Cracken Pro and Cracken NFT Marketplace and a seamless app to bring it all together, it's really the perfect place to get your complete crypto experience. So check out the simple, secure, and powerful way for everyone to trade crypto, whether you're a complete beginner or a season pro. Go to crackin.com slash bank lists to see what crypto can be. Not investment advice, crypto trading involves risk of loss. Have you ever felt that the

tools for developing decentralized applications are too restrictive and fail to leverage advancements from traditional software programming? There's a wide range of expressive building blocks beyond conventional smart contracts and solidity development. Don't waste your time building the basics from scratch and don't limit the potential of your vision. Cartesee provides powerful and scalable solutions for developers that supercharge app development. With the Cartesei virtual machine, you can run a full Linux OS and access decades of rich code libraries and open source tooling for building in Web3. And with Cartese's unique roll-up framework, you'll get real-world scaling and computation. No more competing for Blockspace. So if you're a developer

looking to push the boundaries of what's possible in Web3, Cartesey is now offering up to $50,000 in grants. Head over to Cartese's grant application page to apply today. And if you're not a developer, those with staked CTSI can take part in the governance process and vote on whether or not a proposal should be funded. Make sure your vote ready by staking your CTSI before the votes open. Are you worried about the security of your cross-chain transactions? Cross-chains with confidence using Transporter, the revolutionary token bridging app designed to give you peace of mind. Powered by ChainLink CCIP, Transporter is your trusted gateway for securely moving assets like ETH, Native USC, and Link, and so many more across some of your favorite blockchains.

Over $2.8 billion has been hacked from token bridges to date. Transporter puts a stop to this by ensuring your transfers are protected by the most robust security features available. Chainlink CCIP provides that level five security backed by multiple decentralized Oracle networks and an independent risk management network. Transporter also provides real-time tracking throughout your transaction with its newly engineered user experience, so you'll never have to second-guess the safety or location of your assets ever again. And the best part, Transporter makes it simple. Whether you're a blockchain beginner or a season trader, Transporter's intuitive interface lets you, execute cross-chain transactions with just a few clicks. No additional fees, just a low cost for

using CCIP, which can be paid in Link or your blockchain's native gas token. But don't just take my word for it. See for yourself. Why Transporter offers a stress-free bridging experience. Experience the future of token bridging at transporter.io and just send it. Bankless Nation, we are very excited to bring on Luke Groman. He is the founder and president for For the Trees. That's FFTT, where he helps investors see the big picture so they can prepare for the future. And we're going to be doing some of that preparing, I hope, on the podcast today, because Luke thinks there is a coming monetary system change up in the works, driven in part by high energy costs. It's going to shake up everything we know about markets,

about investing. So we'll talk about that, how to prepare. Luke, welcome to bankless. Thanks for me on, guys. It's great to be here. So let's start with a question, maybe, just to frame up the entire conversation we're about to have. I think every good investor has a thesis for how things will play out. It's just like something that they believe the market is fundamentally mispricing. So for bankless, our thesis has been, hey, the world doesn't understand crypto yet, and they will, and it's going to have a massive impact. And so I want to begin this conversation by asking what your thesis is in the broadest strokes. Like, what do you think the rest of the market isn't seeing right now?

I think the market is not seeing, I guess, two things. Number one, the productivity and Implied by AI, humanoid robotics, etc. Are over time exponentially deflationary and fundamentally incompatible as a result with the global sovereign debt-backed and based monetary system. What does that mean? That means if AI and humanoid robotics do directionally, what? people think they're going to do over the next five years, ten years, global central banks are going to have to fully reserve consumer debt, sovereign debt, starting with sovereign debt, fully reserve. What does that mean? Buy it all with printed money. Can you illustrate why does it

mean that? Simple, because, you know, I just saw in Korea, there's a Starbucks running with two people and a hundred robots. There was an article on RethinkX last month, earlier this month, actually, suggesting that humanoid robotics wages will go towards a dollar by 2035 and 10 cents by 2045 an hour. Who can afford their student loan payments if global wages go to $10 an hour by 2035? The answer is barely anybody. Who can afford their car loan payments? Barely anybody. Who can afford their mortgage payment?

Barely anybody. Who can afford their apartment rent? Barely anybody. Their credit card. Barely anybody. Deflation is fundamentally incompatible. with a debt-back monetary system which requires exponential growth. So practically speaking, those people won't be able to afford their payments. They will default. As they default, they'll take

down banks. As they take down banks, banks would sell what they can, not what they want to. What do they hold? Is their wealth reserves? They hold treasury bonds. They'll sell treasury bonds. We saw that start to happen last margin. We saw what the Fed did. BTF, more dollar liquidity. They'll buy it all. That is, I think, perhaps, the best. biggest fundamental thing. It's quite the paradox. Normally, if I say, hey, there's something in deflationary coming, buy bonds. You don't buy bonds when debt to GDP is as high as it is, when sovereign debt is as high as it is when you have deflation. It becomes impossible to pay the debt back for the whole system. So that's number one. Number two is at the same time,

it's getting much more expensive to find a marginal sources of oil, to find marginal sources of copper. We're going to build all this electric stuff to replace the use of oil, except it's going to require a lot higher prices of copper, a lot higher inflation. Great. Who wants to hold $35 trillion in U.S. government debt if inflation has to rise to get the copper to support the electricity transition? Not me. And nobody has a 35. No one has a balance sheet to hold that, except the Fed. So here, too, you get to the same point. They're going to have to reserve much of the government debt. And so these two things, and I guess the last thing is just per capita, you know, people say, well, great, we'll electrify and then oil won't matter.

China right now is a billion four people. They use one-fifth the oil of the U.S. per capita. India has 1.4 billion people. They use 1.15th the oil of the U.S. per capita. Both of those numbers are 2021 numbers. If India goes from using 1-15th to 1-10th, oil demand will explode. If China goes from one-fifth to one-fourth, oil demand will explode because I'm talking about in total 2.8 billion people. And why would they begin to use more oil per capita? Simple. Why does the U.S. consume so much more? Is it because we're better? Is it because we're smarter? No, it's because we can print dollars for oil and we've been able to for 40 years. And guess what China and India are starting to be able to do? They are in the pregame. They aren't even in inning one. They have just started be gaining the ability to print you on and rupee for oil.

And as they gain more of that ability through gold and through their own productive capacity, their economies, their per capita oil consumption is going to rise. So there's this fascinating set of conflicting dynamics, one deflationary, one inflationary, all of which, though, point to the unsustainability of a sovereign debt-backed system that's been in place for the past 50s. plus years, and all of which suggests that we're going to continue this trend of higher rates, rates get too high, cause a crisis. Fed comes in, essentially caps rates with more dollar liquidity or the Treasury. It doesn't really matter. They're basically both the same at this point anyway, Fed and Treasury. We get more liquidity asset prices, go up, wash or impede, and away we go. So that's what I think are the two biggest fundamentals, the energy side. And then this, you know, everybody's hyped up about AI, et cetera, maybe for good cause. But,

I know they haven't thought through the second derivative because they wouldn't be doing what they're doing. Bonds, a 10-year bond in the U.S. wouldn't have a forehandle. The Fed wouldn't still be selling bonds if that was the case. People really understood what it meant. So, Luke, you really think the market really hasn't priced these things in and you're kind of like maybe front-running this. I want to ask you to give us a energy lens on things because this is something we've not really explored deeply in our content. We've explored all sorts of different lenses on like this question. Of course, that's very relevant to crypto, which is what is money.

but I don't think we've done the energy lens justice. And I know Helen Thompson uses this term energy blindness to describe policymakers who basically like make policy in a vacuum and don't consider the geopolitical social ramifications, monetary ramifications of seeing the world through the lens of energy. And I kind of fear that like maybe I don't see the world through the energy lens enough too. And I have got some energy blindness here myself and maybe some bankless listeners do as well. Can you give us the story of why energy matters so much? I notice in the intro and I asked the question of like, what do you see that others don't see? Like one was AI being a deflationary source. The other answers was all to do with energy costs and energy demand. So like why does energy price matter so much to the world, to asset prices, to empires? Like where should we start this conversation? Energy is the base layer of money. Why? Because human life is finite. As much as we'd all like to live forever, none of us are going to live forever. Okay, so if we have finite lifetime, during our lifetime, we work.

How do we work? We expend energy. So when we work, we work for money. Money comes to us. Work is just the expenditure of energy. Okay. So if work is just the expenditure of energy, when I borrow money to buy something more than I can afford today, a house, a car, whatever, I am promising to work in the future. I am promising the future expenditure of energy to pay my loan over time so I can afford something today.

If the price of energy changes, if it goes up a lot, if my wages don't keep up with energy, I can't afford my house, the whole system I default, etc. So really debt is simply a future promise to expend energy. The challenge within that, I guess, is twofold. Number one, in order for that to work, energy has to remain a small enough percentage of the overall economy. If energy gets too big as a percentage of the economy, it becomes impossible to pay back the debt because people are consuming too much of their own energy just to pay for energy. It doesn't leave the extra funds over to pay the interest on the debt.

The debt starts to default. Similarly, if you make a bunch of promises unbacked promises like governments do, sovereign debt, entitlements, etc. Those are all promises to expend energy in the future. And once you promise too much, if you promise too much relative to the size of the energy market, you either in the future in terms of what the energy market evolves to, you either have to default on those promises, which has a political and monetary and inflationary impact, or you have to inflate the energy market to be, quote, unquote, big enough to back those promises,

which also has an inflationary, monetary, systemic impact. But either way, energy is just fundamentally the base layer because debt is nothing other than a promise to expend energy in the future. Money is just nothing but a manifestation. of the expenditure of energy. Okay, so do the central bankers know this? Does the Fed know this? Does Treasury know this? Do the lawmakers know this? Does the president, like, know this? How come we have this energy blindness? How come so many people, if energy is the base layer of money, how come so many people have had the luxury of not having to think about it? Like, you know, I would argue, I don't think

about energy costs in my day-to-day life, like maybe price of the pump, like just that sort of thing. But you're saying it's the base layer for money, which, which means it's also the base layer for the U.S. dollar. And of course, the dollar is so central to, you know, U.S. financial capital markets dominance as well. So it must be central to the U.S. Empire. And yet, we don't think about it. We have this luxury of, like, not having to worry about it, at least up to this point. Can you explain this? Sure, because you get the media to tell people that you're not in Iraq because of the oil. It's because of freedom. It's because of weapons of mass of destruction. You know, why does, why,

why is there something called the Carter Doctrine, you know, that existed from the 70s up until just recently, which translates to no Russians in the Middle East? Why does the U.S. even care about the Middle East? The answer is in plain sight. It's hiding in absolute plain sight. Why have we been at war in Afghanistan, in Iraq, and why have we done these things? Why do we prop up? If we're so pro-free, if we're pro-democracy, explain the 80-year relationship between Saudi Arabia and the United States. States, the answer is right there. It's all hiding in plain sight. The answer is that energy is fundamentally, that's why we don't think about it. We don't think about it because the U.S. military and people willing to do violence on our behalf have been doing it while we sleep comfortably in our beds. I mean, I'm going to call the U.S. an empire for a second. I don't know if used that framing, but I've heard others use that framing. So let's go with that. So like, to what extent do you think every empire in history has based sort of their empire on

having access and securing a cheap source of energy. Is that a thing that is just central to the U.S. or have other empires done this throughout history? Is this just table stakes? If you sort of like, you know, 101, if you want to become an empire, like step one, go get a cheap source of energy, and then like step two is secure it and then make your population like forget how you secure it and just like that fades into the background. But how central is this to empire in general? It's central to the life of empire. It's central to the life of every living thing on this planet, right? Energy is just food. You stop eating, you're going to die. Full stop. I can tell you within, you know, roughly a couple days when it'll happen. So you have to secure enough energy. There's a concept called entropy, which is essentially, I'm going to misphrase it, but it's the amount of energy you have to expend. just to kind of keep stuff together. And empires, the bigger and more far-flung they get,

the more energy they require just to avoid collapse. There's lots of ways you can do that. Lots of them are unpleasant, but they all involve around fundamentally mispricing or buying energy on the cheap. You can do it with gigantic pools, of slaves. You can do it with robots and productivity enhancers. You can do it by militarily enforcing a deal where the world has to buy oil and your currency, full stop, or else you invade

it and replace the leadership. There's lots of ways you can do. And like I said, this is what's true for empires is true for humans. If we stop eating, all of us are going to be dead in under three weeks. It's scientifically proven. If we stop fertilizing our lawns, our lawns will eventually die. It'll die a lot faster in Arizona than it might here in Ohio, but they'll die. Same concept. It's just natural law. So I think ultimately, it's just about how do you couch that, how do you achieve that? What are the various ethics, morality of the regime in question? What's your worldview? What can you do culturally, et cetera, and that varies over time. But empires require lots of energy, and that's the fundamental miscalculation. Most Americans and most people in Washington think American power comes

from the dollar. But without the energy, without that dollar, think about it this way. How many dollars do you want to hold if every gas station in the United States is empty? If you show up with your dollars to fill up your car and they're all empty, what value is the dollar. We have at least a directional experiment we can refer to. It's called the 1970s gas lines. Dollar didn't do so well in 1970s. No fiat currency really did. The fundamental base layer for currencies is energy. And that, look, that can change. That doesn't necessarily have to be oil. If we had a lot of foresight, we could build up an electrification and a domestic infrastructure and build up a bunch of nuclear power plants and run tens and hundreds of thousands of miles of electrical trains and

completely, you know, in electrical vehicles, they're where we didn't need oil. And oh, by the way, this is what China's been doing for 15 years now, while we spend $7 billion for seven charging stations like the Biden administration just did. Energy is the fundamental error. It is understood at the highest levels of finance, at the highest levels of the U.S. administrations dating back decades. It's understood at the highest levels of U.S. and global militaries. And all you have to do is watch what they do, not what they say. They're not where they are for freedom and democracy and all this stuff. Come on. I mean, if that happened as a side benefit, great. That's not why they're there. We've done macro episodes talking about like the primacy of the U.S. dollar. There's always kind of

this connotation of an arc to the dollar. And like growing up as a child, maybe it was just because I was naive. Maybe it was because in the United States was in good times in the 90s when it had like, energy backing the dollar. And I just kind of remember as we invaded Afghanistan and Iraq, just the obsession around like the price at the pump. It turns into like a reoccurring news headline on like my local news. So like flashing red lights price at the pump and then like the price of gas would just like be on the screen. And that was like a news story for like all of my childhood. Maybe it still is. I just don't watch TV anymore. I'm wondering Luke if like the arc of the dollar, everyone kind of alludes to like a coming to an end of the arc of the dollar.

And I'm wondering if this is something that you are also similarly doing just with the context of using energy to kind of frame that conversation. Is there like a collision course that the dollar is having with like energy? Is that kind of what you're alluding to? Well, I think it's well underway. I think, again, when you watch the behavior of players at the highest level, I think it's been well underway for 10 years. So when global central banks stop buying treasury bonds and buy gold instead, they're telling you, in essence, we are nervous about, the purchasing power of treasury bonds in oil terms. The deal, in essence, the U.S. had with the world in 73, after this sort of set up the petrodollars system, was never expressed, but you can see it in the financial

prices of charts of treasury bonds and oil and rates, et cetera, which is the U.S. had to keep the dollar as good as gold for oil. They had to keep the treasury bond as good as gold for oil. If you go back 150 years, the price of oil and gold is remarkably steady. And if you go from 1973 to 2003, the price of a treasury bond in barrels of oil is fairly steady. It's 15 to, if I'm doing the math right, you know, say it's a $1,000 face value of treasury bonds and oil from 73 or 74 through 2003 or 2004 consistently traded between $15 and $30, right? So 33 barrels to, you know, 60 barrels per treasury bond, give or take. 33 to 33 to 50, something like that. Anyway, the dollar was as good as gold for oil.

That was the deal. And so people didn't mind holding dollars. Starting around 2004, 2005, combination of factors, China entering WTO and growing. And so their oil demand was exploding. Geological realities where peak cheap oil was starting to bite as some of the world's biggest oil fields account for a remarkably high percentage of the world's daily oil production, began peaking and rolling over, things like Cantorrell in the Gulf of Mexico, some other ones. The dollar stopped being good as gold for oil. The treasury bonds stopped being as good as gold for oil.

So much so that by summer of 08, oil is 150, right? So now you've gone from a 30-year period from 73 to 0304, where oil is, you know, $15 to $30 a barrel or 40 to 60 barrels per treasury bond, now you're getting six barrels of oil, seven barrels of oil at $150 for your $1,000 treasury bond. That's not a good deal to hold treasury bonds anymore. And I think ultimately the reason why central banks have spent the last 10 years slowly and more recently, much more rapidly, moving away from treasuries and holding gold instead, But a big part of it is energy awareness. We have to have a reserve asset that holds its value in energy terms or else we're dead. And you can see this with China.

You can see this with Russia. You can see this, quite honestly, as far back as 99 with Europeans, with the structure of the euro, with how they treated gold. More recently, there's been some sanctions issues as well that I think accelerated this meaningfully. But this fundamental monetary reality that nobody. going to hold paper if paper falls against the necessities of living energy for very long, and they will switch to reserve assets that hold their purchasing power in energy terms, like gold, if that situation is violated for too long. It's really interesting. When you're looking through an energy lens and you're looking at

what is money and you're answering that question, we often talk about money as a store value, a medium exchange unit of account. And you could just add the, I guess the suffix for energy, at the end of each of those. Like, what is a good money? It's a medium of exchange for energy. It's a store of value for units of energy. It's a unit of account for energy. It's all of those things.

And the petro dollar has had that in the past. I want to ask this question, though, and this might be still like a 101 type question for you, Luke, but I think it's on many listeners' minds. When you talk about, like, the price of energy, you were going back multiple times to a barrel of oil. And it's like, why a barrel of oil, right? So I've got a chart open.

This is from like visual capitalists. And so it's charting human energy used from the 1800s all the way to like, you know, 2020. And in the early days, in the 1800s, we're using a lot of traditional biomass. And I imagine that stuff like wood as energy like coal, burning coal, you know, out of whale blubber, stuff like this, right? Biomass. And now, of course, we're, you know, well into the 2000s. A lot of our energy comes from coal, oil, natural gas, nuclear, and renewables. That's kind of that energy mix.

but you keep going back to barrels of oil. Are these things like composable? Are they like fungible? Like why barrels of oil when our energy mix is like more diverse than just oil? Oil is still, I mean, you can look at that chart, right? Especially if we take out traditional sort of biomass out of it. You know, we're talking about coal. We're talking about oil. We're talking about gas. And then there's nuclear renewables and everything else. And it's, you know, oil eyeballing it looks like it's probably still. 40% of the mix. Oil and gas is still easily a majority of the mix, particularly as they're phasing out coal. So I look at it as it's still by far one of, if not the biggest marginal sources of energy. It is still the primary transport fuel by far, which in a globalized supply chain

world is critical. So it's really still a very critical. It's the biggest marginal source. yeah, it's still 40% of the production, and it's easily identifiable. I mean, we could certainly use BTUs a gas. We could use, you know, I don't even know what we would use for uranium. You know, if you want to use, I don't know, whatever the thermal unit is that they're using. End of the day, it doesn't really matter. It's basically proxy for BTUs. And so I guess a follow-up to this. One thing I've just learned in my investing journey, and this is probably one of the most important learning lessons in general is pick your denominator very wisely. for how you measure investment returns.

What is your denominator? Is it dollars? Or maybe should it be something else? I remember a conversation David and I had with Arthur Hayes who said, like if he could pick any denominator of wealth, right? He'd probably pick barrels of oil. In fact, if he could, like, store enough oil, he'd have like a little oil can around his belt, he said,

and just like store his wealth that way. ESA's hydrocarbons are essentially the denominator. is units of energy, right? So any investment return, this is not enough to outperform dollars, not enough to outperform the stock market. You actually have to outperform barrels of oil or else you're better off like holding energy. Let me ask you kind of the same question. When you approach investing just in general, is energy kind of your denominator or do you something else? How do you think about this? When I think about what oil is, I think gold is just a proxy. I think about Bitcoin. Bitcoin is just a proxy through the proof of work expenditure of

energy. Gold, you have to expend energy to mine it and refine it, and then you have it. You hold it, and there it is. So it is, I think about the denominator, I mean, I live in a dollar country. It's a dollar reserve currency world. And so I consistently have two things in mind. What's the dollar return and what's the real return? And that, I think, I think, think ties back to my initial point that I think most people don't understand what's happening still, which is most people are still assuming dollar equals oil. They're assuming the denominator is the same. And I think they're different. And not even I think. I know they're different. I can show it to you on the charts. I have a chart on my Twitter feed or X feed today. S&P 500 total return since January 1,

2020 in dollars, up 75%, in gold, up 15%, in Bitcoin, down 81%. That's telling you the denominators are wildly different. And yet, most people are still viewing bonds in particular, but markets more broadly in general through this lens that the dollar is as good as gold for oil. And demonstrably, empirically, it's not, it hasn't been. And more importantly, the debt load of America, unless we are going to slash defense and entitlement spending by probably 30 to 40 percent tomorrow forever, and then deal with what would fall out of that, which would be a worse than the Great Depression probably times

two, there's no way the dollar can stay as good as gold for oil. can't. It can't. So we're watching in real time a breaking of that longstanding relationship of 73 to 03 or 04 where the dollar was as good as gold for oil. And then we broke down for a bit, right? I said oil went to 150 by, you know, from 04 to 08, oil went from 40 to 150. And then we had the shale miracle, right? We had shale from going to 2010 through, I don't know, 2020, we'll say. And shale reestablished the dollar as being as good as gold for oil again at a higher rate, right? So the new number wasn't, you know, oil didn't trade, you know, 73 to 03 oil trades 15 to 30, most of the time, 20 to 30 most of the time. Post-Shale oil trades 50 to 90 most of the time.

Really now, the numbers probably 70 to 90 most of the time. but I can look at shale production and most importantly in the mother of all shale fields, the Permian, it's flat. US shale's flat to rolling over. And to keep it from rolling over really fast, they need higher prices. But to get higher prices between higher inflation, which is going to blow up the bond market, which we can't abide either. So what's happening in shale, we're basically in the early days of sort of the second round

of this dollar equals oil denominator being. broken. It was broken in 0405, and then it sort of was reestablished by 1112 by shale, and now it's breaking again. And there isn't a shale fix coming for oil. The fix is, hey, let's all drive electric cars, except there's no chance we're going to have the grid for that any time in the next 10 years. And that assumes we have the copper for any of that, which is a very low chance anytime in the next 10 years. And that we have the nuclear power base load for that any time in the next two 10 years, assuming we could get the first two sooner than minimum of 10 years. And there's no chance. There's no friggin chance. So I think we're again reentering this

period of time that we last saw in 03, 04, where there's this recognition of, oh, my gosh, the dollar is breaking its tie to energy. Again, what do you own? Well, then gold did awesome. Gold went from 300 to 2,000 in eight years. You know, that sounds probably about right. Six-X. It's probably about right. And now we didn't have Bitcoin then. Now we do. So I think you're going to see that do really well. I think you'll see industrials do well. I think you'll see inflation be sticky and high. I think commodities will do well. But that's when you talk about the fundamental misperceptions, that's it. people are still thinking that the dollar and a unit of energy are equivalent and they're not anymore. They can't be. We're watching the early days of that breakdown again. So you said a few things before. So it seems like gold is better able to preserve its oil, its energy purchasing power. And you've said this gold is rebecoming an oil currency, which is interesting and maybe taking the place of the dollar and the petro dollar. At just like the highest of levels, Luke, why does energy get more expensive in dollar terms and fiat terms? And then why does it get cheaper?

is it basically kind of like a supply demand type of thing where, you know, it seemed like energy prices in dollar terms like decreased as a result of the shale boom because we, you know, got a civilizational unlock and we just discovered all of this, you know, shale mining, cheap natural gas resource. And so that was a big unlock for us. So it seems like maybe a pattern here is technological unlocks can decrease the price of energy, at least relative to a fiat so long as that empire is maybe like controlling that resource. So is that a pattern that plays out? And then why does it get expensive over time? Like, so what are the puts and takes of why energy increases in price and why it goes down, at least in fiat terms?

We can go back to 1970. U.S. oil production was peaking and rolling over. We were the world's biggest oil producer. It was starting to roll over. And you could see that it was going to leave us dangerously dependent on the Middle East. We were starting to see oil imports rise, what have you. You can read various takes on it, but remember, in 1970, the dollar was gold-backed. So when we talk about the price of oil in 1970, it wasn't priced in dollars, ultimately, it's gold. So what's one way of dealing with a geopolitical situation where the U.S. domestic production, which we control is rolling over, it's going to leave us much more heavily exposed

to cheaper production from places that are either very volatile, the Middle East, and which may not really like us, the Middle East, or that we were involved in a Cold War in, the Russians. How do we deal with that? Well, there is a view that American politicians at the highest level

understood that oil liked gold. In other words, the Arabs liked gold. They liked the gold-backed dollar. Great. Close the gold window. What happened? Disconnect gold from the dollar. Disconnect the dollar from gold. Price of oil goes up a lot because it's no longer connected to gold. You can see that. Right. So we disconnect the dollar from gold, and the price of oil goes from about three to about 12 in a very short period of time. That right there tells you the difference between oil and fiat and oil and gold. geopolitically, strategically, it's brilliant on two fronts. Number one, if you're involved in a

Cold War with a major power, the Soviets, who derive a lot of their revenue and power from oil, and they have to expend the real energy to lift the oil, move the oil, refine the oil, blah, blah, blah. While you simply print the dollars, because you've struck a deal with the biggest marginal producer of the Saudis that it's all priced in dollars, now everybody has to have dollars to have oil, you can just print oil. You can print dollars for oil. You're going to win the Cold War eventually. It might take a while and sure enough 18 years later we did. Number one. Number two, it was strategically brilliant because the resulting price of energy increase made economic oil basins that were uneconomic assuming a gold-back dollar. Gold-back dollar oils at

three. UK-North Sea, they knew existed. It wasn't like they just discovered it. Just couldn't afford to produce it. It's too expensive. It's underwater, blah, blah, blah. Gulf of Mexico, same thing. Prudo Bay, Alaska. Same thing.

So as oil explodes through the 70s, guess what comes online in the 80s? Massive amounts of oil supply in very friendly areas. Alaska, Gulf of Mexico, UK North Sea. Great. Yes, you have an inflationary shock and blah, blah, blah, the 70s. But now you can print dollars for oil and the Russians can't. And now you bring on a bunch of oil supply at the higher price once you disconnect the dollar from gold and you bankrupt the Russians and you win the Cold War.

So when you look at it through that lens, like Shale was a miracle and the sort of the steerable length of the horizontal fracking runs. That clearly was a technological advance. No question. And some of the 3D mapping and all of that stuff. Incredible. But they knew about Shale in the early 80s. They knew about those basins in the early 80s. They knew they were there. Again, when oil goes to 150, voila. Hey, guess what's affordable now, U.S. Shale? So then we fracked it. So it was a combination of currency devaluation. The dollar fell 90% against oil, right, from 98 through 08. 98, oil's 10 bucks a barrel. 08, oil is 150 a barrel, right? That's a 90% decline in the value of the dollar against oil. And what did we get for that? We got a big exploitation of the shale basin when you combine it with some of the technology of improving in fracking. His fracking wasn't invented in 2010. But some of the technological, the long laterals and the steering and the imaging and that stuff, that clearly improved the productivity of those basins. So the point is that the question is a big one because You can make it do whatever you want it to do based on your geopolitical goals.

Do you want cheap oil? Offer a deal where you'll send a couple grams of gold with every barrel. And then they'll take very little Fiat. And on the QT, you send gold over and boom, oil prices will stay low. Do you need more domestic production for geopolitical reasons? Okay, you're going to need more oil inflation to do that. So how do you do that? You shift it to a poorer currency, a weaker currency, Fiat.

oil will get more expensive. So it depends on your goals of what you're trying to achieve geopolitically, domestic policies, etc. The rule of thumb is it's a version of Gresham's law. If you're going to pay in fiat currencies, oil is going to be expensive. If you're paying gold, oil's going to be really cheap. I think this is part of the reason that many of us have an energy blindness is because, like, the last 40 years, energy has been like relatively cheap. So we've just like lived in that world. We've never lived in a world of kind of energy, you know, cost. spikes and this type of thing. But Luke, maybe before we get into how this affects the monetary system and the U.S. dollar as a global reserve currency status, I just want to ask a final question on energy.

And that's this. It seems in the 2010s we got this like shale type natural gas miracle, right? And you said, as the price of oil increased, it sort of incented us to go, like, you know, extract some of this natural gas. Are there any other energy miracles out there just like waiting for us? I mean, if the price of oil spikes, can we just not tap into some other natural resource? It's like for their history of my life, something has always emerged as a technical solution to the energy problem. And it's just we've been able to continuously kick the can down the road. Like, why can't we just find another miracle? Are there others waiting for us here? Do you think this time it's different? I think it's always a question of what's the miracle? and what are the second derivative impacts, right? So, you know, AI can be a productivity miracle. And what are we going to do with the, you know, 10% of population that's unemployed by AI? Or, you know, the happy version of that is, oh, they're all going to be artists, and they're going to pursue what they love and all these things.

And, like, that sounds good. And the reality is, like, we have experience with that. China was a productivity miracle. China into the WTO in December of, And then the next nine years, six million manufacturing jobs were lost. They went overseas. Those 35% of global manufacturing. We know all sort of how that played out. They didn't all become artists, right? The reality is much messier. Are there energy things that could be classified by the government or that we have? Sure, there's stuff that could happen. There's small modular

nuclear reactors we've seen discussions of. There's probably stuff they have. that they don't necessarily want to roll out unless they have to or want to, that wouldn't surprise me in the least. But again, what are the second derivative implications of that? You know, nuclear fusion, like nuclear fusion's, you know, 10 years away and it's been 10 years away for 80 years. You know, we'll see. It depends on what you think the second derivative impacts might be. And those things can be pleasant or unpleasant, depending on how. how they are allowed to evolve. Taking self-custody of your crypto

is one of the most important things you can do on your bankless journey. It's also one of the hardest things to get right, with huge consequences if you don't. If you want help going bankless, talk to CASA. Kaza helps you take custody of your crypto assets so you don't have to wonder whether you're doing it right. Kasa is a one-stop shop for doing self-custody the right way.

With Kasa vaults, you can hold ether, bitcoin, stable coins, all with one simple app and multiple keys for the ultimate peace of mind with a support team to help you every single. step of the way. But it doesn't stop at self-custody because even though crypto is forever, you are not. We all plan on making life-changing wealth in crypto, but with CASA's inheritance product, life-changing wealth can elevate to generational wealth. For your kids and your loved ones, who don't know anything about crypto. With CASA, you won't lose your private keys and you won't

accidentally take them to the grave either. Click the link in the description to get started securing your generational wealth. Sello is the mobile first and EVM-compatible blockchain that's built for the real world and designed for fast, low-cost payments worldwide. real-world use cases like Opera MiniPay, one of the fastest growing Web3 wallets with over 2 million users across Africa. Sellow is seeing a meteoric rise with over 375 million transactions and a million monthly active users. Not to mention Tether and Circle just deployed native USDT and USCC on SLO, supported by leading exchanges like finance. And now Sello is looking to come home to Ethereum as a layer two. With a game-changing proposal, core contributors at

C-Labs aims to leverage optimism's OP stack pioneering a transition as the biggest L-1 to become a 2, with TestNet arriving as early as summer, 2024. With the cello layer 2, gas fees will stay low, and users can even pay for gas using ERC 20 tokens, including native USC and USDT, sending crypto to phone numbers across wallets using social connect. But SELO is a community governed protocol. Make your voice hurt in the SELO forum to shape the future of Ethereum. Follow at SELO on Twitter and explore the ecosystem built for the real world on cello.org

slash quests. New projects are coming online to the Mantle layer 2 every single week. Why is this happening? Maybe it's because Mantle has been on the frontier of Layer 2 design architecture since it first started building Mantle DA, powered by technology from EigenDA. Maybe it's because users are coming onto the mantle layer 2 to capture some of the highest yields available in Defy. And to automatically receive the points and tokens being accrued by the $3 billion dollar mantle treasury in the Mantle reward station. Maybe it's because the Mantle team is one of the most helpful teams to build with, giving you grants, liquidity support, and venture partners to help bootstrap your mantle application. Maybe it's all of these reasons all put together.

So if you're a dev and you want to build on one of the best foundations in crypto, or you're a user looking to claim some ownership on Mantle's Defi apps, click the link in the show notes. So getting started with Mantle. So we have been in a paradigm of the petrol dollar, which I'm sure bankless listeners are familiar with that term, like the formal coupling of basically energy petrol and the dollar. And this has been like the equilibrium that we've been in for many, many decades.

And we've been watching like over in the east, China's using the yuan to start to do some of their trade in violation of the petro dollar. And we've heard you say this line and other podcasts, the price of oil will ultimately force a monetary change. And I'm wondering if you can kind of unpack that because I think what you're alluding to and what the world is heading towards is that, well, previously the price of oil backed the dollar. And now the price of oil is going to work against the dollar. That's kind of like the vibe that I've been getting. I'm wondering if you can kind of unpack this take about the price of oil forcing a monetary change. I think the dollar is going to remain the reserve currency, but gold is empirically replacing

treasuries as a primary reserve asset, and that will force a repricing much lower of the dollar ultimately, in my view. You can understand why energy is forcing a change by putting ourselves in the shoes of the Chinese. Kyle Bass famously said in 2019, look, the Chinese, they're importing a lot of oil, they have to pay dollars, they have a finite amount of dollars, their oil consensual. is up every year because they're growing and sooner or later they're going to run out of dollars and when that happens they're going to have a late 90s southeast Asia currency crisis and political crisis where they have to shrink their economy they have to devalue the yuan and they're going to have an inflationary debt crisis and then the chinese communist party is going to tip over you know he said that in

2019 none of that's happened why because china has gained the ability to buy energy in its own currency. Why? Not because China necessarily wants to end the dollar or create problems for the treasury market. This is existential self-interest. And oh, by the way, this whole thing that Kyle's rooting for, if China tips over, Lehman had an $800 billion balance sheet. It went bankrupt. It nearly brought down the financial system. China has a $37 trillion balance sheet. Like, if the China Hawks think the China tipping over because a dollar shortages around their commodity import bill isn't going to blow up the system, they're kidding themselves. They're just kidding themselves. The Fed's going to have to buy everything. And in which case, the system's going to

change anyway. So, a bit of a sidetrack. The best thing for China to avoid this currency crisis is that what Kyle laid out is 100% true is switch the currency you pay for it. Number one is you exchange dollars, stop buying treasury bonds, start buying oil fields, oil refineries, ports, coal mines, copper mines, gold, hard assets around the world, which they've been doing for 15 or 18 years with dollars. Basically, every year we send China $300 billion with the stuff and they use a bunch of that money to buy finite hard assets. And since 2018, at accelerating pace, they've been converting that into yuan denominations. So now what they do is instead of paying in dollars, they'll pay Russia and Yuan for oil. Russia ends up with Yuan. China ends up with oil.

Okay, what does Russia do with the yuan? Well, it turns out China's the factory of the world, and it's no longer making cheap plastic crap at Walmart. It's satellites, weapons, semiconductors, Huawei 5G, some actually, you know, the cheapest electric cars in the world, et cetera, et cetera, et cetera, they make some pretty good stuff. So Russia will take their yuan, they'll buy Chinese goods. whatever's left over, they will buy gold in yuan terms. Except the gold that they buy in yuan terms can't be from inside China. Chinese rules disallow any gold inside China from coming

outside of China. So if they're going to buy it in Hong Kong, Dubai, Singapore, London, elsewhere, Shanghai's free trade zone, the gold has to first come from London or New York, which we can see happening. People have been saying, wow, look, gold's going up in price, but instead of how it always worked, gold ETFs in the West are losing gold tonnage. London is losing gold tonnage. I wonder why this is. Hey, look, Russia's gold holdings are going up or China's gold holdings are going up. Hey, India's gold holdings are going up.

What's going on here? I can tell you what's going on here. China, knowing that nobody wants the yuan and China doesn't want to offer Yuan denominated government debt because they don't want to end up like the U.S. in 30 years are net settling these yuan oil imbalances in gold that floats in price. in yuan terms. And so it's a virtuous cycle allowing this recycling of oil. It's basically local currency denominated commodity trade being net settled in gold. And the issue is that the oil market alone in annual dollar terms is 12 to 15 times the size of the annual physical gold market.

Gold has to get way bigger. So you just have oil, this inexorable, monstrous bid, oil, copper, gas, uranium, nickel, coal, local currency, net surplus is being settled in physical gold because nobody wants a paper promise of gold. They want the gold. Americans made sure of that when they seize Russian FX reserves. They're going to take the gold, they're going to bring it home or they're going to store it in a trusted third party area. But at any rate, that's what we're watching happen as we speak. Gold is rebecoming an oil currency. And so what does that mean for the dollar? Well, it means the rest of the world, Eurasia, doesn't need to store treasuries anymore. And they've stopped. And so who buys the treasuries? Well, in the short run, paradoxically, this is really good for the dollar.

Because what happens is there's too many treasuries, not enough demand relative to the supply of treasuries. And rates go up, dollar goes up. And that's allowed to go on for a bit. But the U.S. government has so much debt, it can't afford much more beyond four and three quarters or five percent on the tenure. So what happens when it hits there? Treasury market breaks. Fed Treasury come in. dollar liquidity. Wash rinse repeat, gold goes up more. So this system is, it's a self-reinforced

and systemic transition that is being driven out of geopolitical existential necessity by the Chinese and the Russians, who people say who cares, except the Chinese are the world's biggest commodity importer. The Russians are the biggest commodity exporter. That is a market, a free market. And so they can adjust terms of it, gold to oil ratios, so on, so forth, as they see fit as they need to that will keep this all going and the Americans will turbocharge it periodically when the treasury market breaks again and they inject more dollar liquidity again because there isn't enough demand for treasuries because foreigners aren't buying them because they don't need to hold treasuries as many as commodity reserves like they did for the prior 50 years.

Luke, that was great. I want to bring some data points to what you're saying. The first is this. This is a New York Times headline. China is buying gold like there's no tomorrow. And as you're saying there, Luke, this looks to be mostly physically settled. The global price of gold has reached its highs levels as Chinese investors and consumers buy the metal at a record pace. There's another tweet. I think I found this on your timeline as well. This is the start of de-dollarization. This is a graph showing the share of China's trade that settled in R&B, China's currency. And for the very first time in March of 2003, the RMB, share of trade for cross-border payments, overtook the dollar in terms of the currency that China uses for settlement. And there's also this. China has a competitor to the SWIFT system, which bankless listeners will know what SWIFT is. It's basically kind of like the global payments system that is like primarily U.S. and allies controlled. China has a competitor to that. And they did last year in 2023 over 17 trillion in business volume. So you can start to see the eroding of the dollar supremacy in this type of a world that is repricing currencies at the base level at the base level, at the, energy level. I've heard you say this too, Luke, and I want to ask the question of how does the

U.S. react to this in terms of its monetary system and like what happens next. But you've said this, the U.S. has a choice to either bail out the currency or bail out the bond market. And this to me is kind of the crux of where we are today. And what they choose or how much they choose in one side or the other will probably determine many of the outcomes of what this monetary system change actually looks like. But what do you mean? when you say the choices between bailing out the currency or bailing out the bond market? In essence, what this evolving new monetary system does is leave insufficient foreign demand for treasuries and exponentially rising supply of treasuries. And in any asset class, if you have

more supply than demand, you're going to have the price go down. Well, when the price of a treasury goes down, rates go up. This wouldn't be a problem except the United States has run up 35 trillion dollars in debt, a lot of it doing things that in hindsight weren't very advisable. They weren't very good uses of money over the last 25 years. Iraq, Afghanistan, bailing out Wall Street the way they did, Syria, I could go on and on. Anyway, the issue then is there is a rate where this supply demand mismatch of treasuries that is being caused and reinforced by this monetary system change in terms of who's reserving what. as a reserve asset for net commodity surpluses, do the Fed and Treasury stand aside and let the market

set the interest rate for them? And if they do that, rates are going to go up and up and up, and everything else is going to go down and down and down, and the dollar is going to be the strongest currency in the world. There's almost no limit to it. And that is basically defend the currency. Now, the problem, of course, is that at some point, not too far down the road in that process, U.S. interest expense will overtake U.S. tax receipts, because U.S. tax receipts, as it turns out, are very interest rate sensitive. So as interest rates go up and the dollar goes up, tax receipts are going to go down non-linearly. Interest expense will go up non-linearly, and not too far from here, interest expense alone will be more than U.S. receipts, at which point either the United States

will default on treasury bonds or they will print the difference. They will print the interest. and that's also known as hyperinflation. That's if they stand aside and do nothing and let the currency be strong and let the bond market take the hit. That's not going to happen. What's going to happen, what has happened repeatedly and at ever shorter intervals since the repo rates by September 2019 is rates will hit a point, bond volatility will hit a point, and then Fed and or Treasury will come in and cap U.S. Treasury market volatility to prevent further Treasury dysfunction. They do that by injecting dollar liquidity, which then weakens the dollar, reduces rates. Basically, it's sort of a temporary version of yield curve control. And in that case, the release valve is the currency, inflation, asset prices, etc.

And we've seen them. They have, you know, it's almost biblical, right? Where Peter denied Christ three times. Well, the Fed and Treasury and or Treasury have come in and capped bond treasury market volatility. One, two, three, four, five or six times. since September 2019. So at any point in time, they could theoretically not do it. They're never going to not do it. They could let markets twist in the wind a little more than they have. But again, unless they're willing to let interest expense crowd out defense and entitlements and

then ultimately overtake tax receipts where they have to puts them in a very bad position, that's not going to happen. So they will, in my view, continue to support the bond market at the expense of the currency. Support the bond market at the expense of the currency. So every time they're making that choice, are they sort of just like printing money? Like who wins and who loses in these scenarios here

and the scenario you predict most? You could call up a chart of the S&P 500 over TLT, long bond ETF over the last five years. It looks like this. You call up NASDAQ over TLT. We're looking at hockey six going up for listeners. Yeah, hockey stick up. Hockey stick up.

Bitcoin over TLT. Hockey stick up. Gold over. TLT. Ever since global central banks stopped buying Treasury, started buying gold in 2014, it's an exponential hockey stick. That describes who wins and how they win. Home prices over TLT over the last five years. If they're going to support the bond market over the currency, markets are reflexive and they learn. They're going to figure out, okay, they've done this five times now. Why bother with treasuries? Treasuries are underperform when markets are selling off.

Like today, someone texted me this morning. Zeros, long-end, zero-coupon bonds, have 4x the beta today of the NASDAQ 100. Four times the beta on a down 300 Dow Day, right? Okay, so stocks are down and treasuries are worse. Okay. Well, when they inject money, what outperforms on the upside? Treasuries are a NASDAQ. Well, that's an easy one, the NASDAQ.

So when stocks are down, then long bond does worse. When stocks are up, the long bond does worse. You know, same thing with gold. Stocks are down today, risk off today. Gold is outperforming treasuries, long-term treasuries. When they inject the money, which they inevitably will, gold outperforms on the upside. So you can see it reinforces and accelerates this sovereign problem, which is not enough demand for treasuries. So basically, what wins is everything but treasuries.

and what wins is inflation, what wins is nominal GDP growth, what wins is increasing political instability, what wins is the 1% and the 0.1% the people with the assets. And that's what we've been watching for five years, and I think it's going to continue accelerating. You said the U.S. will be just like Japan, but feel like Argentina. Can you explain that? What does that mean? Yeah, I mean, you can read any number of strategists and economists and investors who've said, well, Japan's got way more debt than us and they're fine. And of course, you know, they've gotten a lot quieter in the last three to six months when all of a sudden the whole Japan's fine thing is not working out so well. But they had a point as long as you don't dig into it at all. Japan does have more debt than us, but Japan has a positive net international investment position of like 65 or 70% of GDP. In other words, they have a foreign piggy bank of 70% of GDP. They own more assets overseas than foreigners own of them. They finance internally. In other words, their own people finance them.

So that's a really big deal because if you've got a lot of debt and you pay them 0% but you're in deflation, people are happy to make 1% or 0% on a bond if their cost of living is going down one a year. Your standard of living are rising. No one's complaining. Your money, your bonds are buying you more money every year. Real rates are positive. The United States is externally funded. We don't have the option of having a 0% coupon on rates. and certainly not having deflation.

We can't afford positive real rates. We need negative real rates, which means we need to steal money from the people who order our bonds. We need them to hold bonds while the real value of those bonds declines in energy terms like we've just discussed. That's very different. And then lastly, China runs a current account surplus. They got more money coming in every year. We run the twin deficit by virtue of the system structure. We got money going out.

We got big deficits to finance every year. So there's a chart I've showed before. It shows that the Bank of Japan's balance sheet. percent of GDP just hockey sticking and people say, we're just going to be Japan. I'm like, yeah, sure. The Fed's balance sheet's going to hockey stick just like the Bank of Japan's. And the easiest way to frame up why it's going to feel like Argentina. Right now, the Fed's balance sheets, I don't know, 35% of GDP, 30% of GDP. I don't know. Bank of Japan's like 110%. Imagine if I told you that in five years, the Fed's balance sheet was going to be 70% of US GDP.

So 70%, that's 1.4. That's 1.4. One eight. Okay, so that's about 18 trillion more. The balance sheet's going to be $25 trillion in America in five years. Is that inflationary or is that deflationary? Is that Japan or is that Argentina? It's 100% Argentina. It's 100% Argentina. It sounds kind of bad. What's bad? What's bad, right?

Like what's normal for the spider is chaos for the fly. You own a bunch of long bonds, yeah. You're going to get paid every dollar you're owed if you want a bunch of long-term treasuries, but they're going to go from buying you, you know, diamonds to buying you cubic syconia at a buying new cracker jack on a string because you know what you didn't react fast enough. Luke, I don't expect a lot of bankless listeners will own a lot of bonds, right? It's just, I think they're hedged into different assets that, you know, like definitely skews younger, skews crypto, not the bondholder type. But in all these scenarios you just described,

bondholders take a massive haircut. I guess my question, though, is what if that's not enough? At some point, the demand for bonds has got to kind of like shrill up. The market's smart enough to understand the play and what's going on. And like, is there, are other measures going to be needed? We had a recent podcast episode with Lynn Alden where we talked about a world of capital controls as well. And we can already see some of that creeping in, maybe not so much in the U.S., but maybe in some ways. You know, like there's talk of a CBDC. I think you've called that dangerous before. Do you think that things could ratchet up to a level where giving bondholders a haircut is kind of like not enough, and the capital has to come from somewhere else, and we

move to a regime of capital controls. I've heard of this book. I've not read it yet. It's called The Great Taking, I believe. I don't know if you've read that or have a preview of that, but that type of a world where the government comes and basically force-confidence gates some level of wealth, or I'm not sure exactly how this would turn about, but do you have any thoughts? So the financial oppression side, we're already 10 plus years into that, right? So in 2014, The Fed regulated U.S. banks into holding more treasuries as high-quality liquid assets. And we saw how that worked out last spring, right, with BTFP. The banks started selling treasuries or they couldn't sell treasuries because they were so underwater. They would have to take the earnings hits. So the Fed came in and basically swapped them out par so that they didn't create a run on treasuries as a result of the run on a few banks. 2015 money market funds in the United States were regulated into buying more T-bills. It crowded out private money market assets, sent LIBOR up, sent the dollar up. 2018, Trump tax reforms incentivized, had to contain clauses, incentivizing U.S. pensions to buy more treasuries. And they did. So you've seen all of this happen. And this is just stuff that like Brazil and Argentina and various emerging market, Latin American, Southeast Asian in the late 90s, countries do when they have fiscal problems. And it's not been enough, to your point. And so ultimately, there are.

are extreme measures you can take. You know, I've talked about this before. If you go to the financial accounting manual for Federal Reserve Banks, you can Google that. It's online. It's a public document, Section 2, period 1-0. Treasury Secretary can instruct the Fed to revalue the gold on the U.S. government's balance sheet. 261 million ounces every $4,000 is about a trillion dollars mechanically dropped into the Treasury General account, free and clear, no debt offsetting it. $20,000 an ounce is $5 trillion. Yellen could take that $5 trillion, weighed into the Treasury bond market, buyback $5 trillion in bonds overnight, increase basically the money supply by $5 trillion overnight.

Voila, U.S. debt, the GDP. Wait, wait, you just revalued the gold? Because the U.S. has a ton of gold, right? I mean, the most gold reserves of any country in the world. It's like, what do you mean, revalue it? You could just, like, name your price. I mean, don't they have to go for a market value? What's the market?

And then with haircuts like mine and guns tell you what the price is. Wow. It's in the Federal Reserve Operating Manual. I didn't know the Fed has an operating manual. There you go. There's a financial accounting standards manual. You can look it up. Google it.

It's right there. So what happens is Yellen gets $5 trillion deposited into the TGA, and she buys back $5 trillion in bonds. Boom, overnight. Now the U.S. debt to GDP is, you know, between taking out $5 trillion in bonds and the resulting nominal GDP growth, which is going to frigging explode because you just increase the monetary base by $5 trillion. So inflation's going to go nuts.

Like, that's in the cake. That's going to happen no matter what. Because we've done a bunch of stupid stuff with borrowed money for 30, 40, 50, 60, 70 years. So now you end up with debt to GDP, 50, 60 percent. Now you can raise rate, take rates to eight. Take rates to 10. Nasty recession, who cares? You're going to put some private sector of people out of business, but who cares?

You're not going to threaten the solvency of the U.S. government. They'll be able to pay 10% rates. And I'll be happy to, you know, if you buy back all that debt, And I'll be happy to sell my gold at 20,000 an ounce and buy 10-year treasuries at 10%. Great. It's just a wealth transfer. Yeah, that's one extreme thing you can do. The Great Taking is an example of another extreme thing you can do.

And what I can say is I don't know David Rogers Webb personally. I know he's a former Cleveland guy. I know his firm was once a client of my firm. That's the author of The Great Taking. What is the thesis of that book? The thesis of that book is pretty straightforward, which, and it's very meticulously researched and annotated and footnoted, which is over the last 30 years, U.S. and global policymakers have quietly converted ownership of most financial assets from legal ownership to,

I forget the legal term, but it is basically like a general claim on legal ownership. so that in the case of a too big to fail bank or series of too big to fail banks failing under the way it used to be you owned the stocks in your mutual fund those were yours post these changes quietly and surreptitiously made over the last 30 40 years you don't own them anymore they now in the case of a too big to fail bank failure or series of failures your mutual fund funds, your 401k, your IRA, your pensions, the paper wealth of this country, go into a general collateral pool to bail out the big bank's derivative books first. And then if there's anything left over, you get your 401k back, your IRA back, blah, blah, blah, blah, blah. And with a quadrillion

plus and derivatives, the chances of you getting much of any of your assets back on net is slim and nomin, Slim probably left town a few years ago. That's the great taking in a nutshell. So they just take your assets, just confiscate the kind of the paper money. They already took your assets. You just don't know it. That's, that's the, the great taking was something that unnerved me in a way that I haven't been unnerved in some time. I'm adding that book to my reading list because it was just like so fascinating when I stumbled across it. You're like, Luke, maybe just two more things. We've talked about energy. We've talked about the monetary system change. Who's going to lose from

that maybe who the beneficiaries of that might be. I want to talk to you about preparation, what we can do as individuals. But one quick topic before that is the U.S. itself, okay? It seems really weak right now. At least the tenure of this conversation has been, right? We got a terrible balance sheet, debt to GDP at like historic highs. You have a tweet in your timeline somewhere that talks about the Baltimore Bridge, you know, remember the collapsing bridge, how estimates for that rebuild take 10 years. We've got other countries like China outpacing us in every way, the interest rates on the debt that we pay in the U.S. are now starting to exceed and have exceeded the cost of military, right, which is also historic for the U.S.

But yet, you've also said you're bullish on the U.S. over the next two decades. Can you square this for me with all of the headwinds that we're facing, some of the issues we've talked about, even just if you on the list, I just listed out, why are you still bullish on the U.S. for the next two decades? Why am I still bullish on the U.S.? So the U.S. has still, I think, the best legal system, property rights, et cetera. It's not using it to its advantage as I think it might eventually. And I think importantly, it's certain areas of the U.S. I'm much more bullish on than others. And ultimately, you know, there's an apocryphal quote by Winston Churchill,

where he says the Americans always do the right thing after they've exhausted all the alternatives. and everything you just listed, and in particular that the interest expense is above defense spending, we're about out of all the alternatives. So, like, look, at the end of the day, what's the right thing to do? Bondholders are going to get killed on a real basis. We're going to go through a period of inflation that's really high, and we're going to rebuild, and we're going to do industrial policy, and, you know, we're going to play catch-up for a bit, and wages are going to explode, and, you know, things are going to be good.

It's all a question of sort of how does it look like between here and there and what have you. And look, there's ways it could go really pear-shaped. And like I said, there are parts of this country where I'm not bullish at all on. There's parts I'm very bullish on. So some of it depends on where you are in this country because some of the leadership is really, really bad. And some of it's actually decent, people who get it. And the people at Washington, there are people in Washington that absolutely understand what's happening, what has happened, what needs to happen, and they're brilliant.

And we don't ever get to see those people. We get to see sort of, you know, the weather people who, you know, are on TV all the time, you know, the spokesmodels. And they're not very impressive, by and large. And they haven't been impressive for some time. But the people that are actually sort of behind the scenes, there are some that are very, very good. And they know what needs to be done. They know. And so it's just really a question of sort of how that plays out where we clear the decks on debt, however we do it, and then we start playing to our advantages instead of trying to maintain the real value of the bond market, the keys from the Wall Street guys and some, you know, some dollar people happy, they're going to be unhappy.

It is what it is. They had 40 years of fun. It's their turn in the spanking machine. Well, hopefully the U.S. can take its turn into the spanking machine, swallow its medicine, and come back stronger. And it certainly seems like that's the necessary course of action and that it won't be the end of the world to go through that. Well, yeah, I mean, look, the big part of the U.S. has been in the spanking machine for 40 years. The U.S. has spent the last 40 years subjugating the U.S. middle and working classes to support the bond market, Wall Street, and Washington, D.C., and Washington, D.C., has generally made horrible decision after horrible decision in trade policy, foreign policy,

economic policy. And 40 years later, they're now admitting that. When you have the Treasury Secretary of the United States, like Janet Yellet, come out and say, basically throw 40 years of economic orthodoxy in the trash in the Wall Street Journal like she did three weeks ago. I missed that. What did she do there? She came out and said for 40 years, we were taught that if someone wanted to send you cheap goods, you should send them a thank you note. I would never, ever again send China a thank you note. National Security Advisor Jake Sullivan last year to the Brookings Institute went up and gave a speech. U.S. economic policy for the last 40 years has been wrong.

Politico highlighted it in February. The Biden administration is selling treasuries and buying uranium, semiconductor fabs, copper, nuclear power plants as of today. And yet there's still all these people they want to own long-term treasury bonds. They're telling you, this paper is bad on a real basis. You don't want to hear the message. And that's fine. They'll hear it sooner or later.

Markets are starting to hear it. But, like, there's not one U.S. There's multiple U.S. And the part of the U.S. that got subjugated, the middle and working classes, for the last 40 years, to support Wall Street, to support certain Washington D.C. interests, as those D.C. interests sort of, you know, kicked the pieces all over the board in foreign economic and trade policy, those interests are now going to lose on a real basis. and who's going to win is America. You know, and you can see this, like the 0.1% against the bottom 50% total net worth. Over the last 30 years, it's done this. High inflation, high wage inflation isn't bad for America.

Plumbers are making 20% more a year and they got a 3% mortgage. That's called a debt jubilee on their house. So maybe this is exactly what the U.S. needs then, Luke. 100% it is. Well, maybe to close this out, I guess the last question is for individuals when it comes to preparing. So we talked about a world of high energy prices, at least denominated in dollar terms and fiat terms. And this whole monetary system change, the shift. How do investors prepare for this? Everything that you said, it effectively tells me that the old 6040 equity to bonds, like stocks to

bond type ratio, that is like dead, better than dead, at least for, you know, like investors of our generation, this generation. Is that true? What do we replace the 6040 with? Like, what do we need to know, how do we allocate these storms and navigate this as investors? If I wanted to keep it really simple, I think 60, 40 is dead. The 40% that's in bonds, I would keep 10% of the 40% or a quarter of it, maybe even half of it, if you're conservative, in T-bills at 5%. I've got a lot of T-bills. I'm happy to clip a five-and-a-quarter coupon and roll a paper. I see no interest in owning long-term government bonds. That makes zero sense to me. And then I would take the remainder, you know, 10 or 20% in T-bills.

I would take the other 20 to 30% and I would put it in gold and Bitcoin. And then I would go to the beach. That's it. That's it's not hard. Not hard. I mean, like I said, people say, oh, it's going to be so bad. Again, what's normal for the spiders, chaos for the fly, you know? And you keep the stocks.

You think equities are going to, you know, perform okay in this environment. I think they'll be fine. I think they'll be fine. And I think low leverage and low leverage and low consumer loans, right? I wouldn't go taking out a huge mortgage to buy a house unless you're really cash flow in it and it's in some sort of luxury area or something like that. Don't go out and borrow a bunch of money to buy consumer goods because the odds that this is bumpy are very high, right? Like it's going to be fine on high volatility. High volatility doesn't matter unless you're levered.

For the average investor, it's irrelevant unless you're levered. Perfect example. I've used it before. If you look back, Dan Oliver at Mermican Capital is a great chart showing the price of gold overall and then month over month in Weimar, Germany. So this is one of the great hyperinflations of all time. You should be easy. Oro a bunch of money, buy gold and German Reichs marks and get rich. Except if you were levered, you lost all your money four or five times in three years. Because it was so volatile. Because the volatility is so volatile. It really is. Equities will be fine. I personally prefer stuff that will invest in and benefit from the reshoring and reindustrialization, rebuilding of U.S. defense industrial base.

I have a big personal investment in electrical infrastructure manufacturing. It's a private equity investment. I like those types of investments. I like U.S. industrials. I like U.S. energy producers, industrials more broadly. But I think equities will be fine generally because, again, the bubble is in long-term government debt. That's where the bubble is. Everyone wants to believe the bubble is where the last bubbles have been, and it's not. The bubble is in long-term government debt. That's still a variant perception. That's starting to change, but that's still a very variant perception, in my opinion. I think that go-to-the-beach part is essential, too, because what that implies is you're just kind of buying and holding and just relaxing, you're forgetting it. You're not trading all that volatility. You're not, like, sweating those details and going on margin, right? Yeah. Yeah. People think they, can trade this.

Why bother? I mean, A, why bother? But even if you were inclined to, okay, good luck. But what's your analog for what's happening? Peak Jury Boil, first global sovereign debt bubble in 100 years, a quadrillion in derivatives, the geopolitical situation, a global monetary system change, Western sovereign bond bubble, the reserve asset of the last 50 years is a bubble. The volatility is going to be face peeling.

It has been face peeling. It's going to continue to be face peeling. and highly political, no less, right? So, like, look, if you're Nancy Pelosi, you want to buy calls on Nvidia, great. But if you're not Nancy Pelosi's kid for the average investor, like- Most people listening are not. Yeah, so just, I think it's important to just understand that having low leverage is really, really important in terms of managing through this volatility for the average investor. And this is playing out now. Oh, yeah. So this is, like, how long will it take to play out this entire thesis? Does it happen quickly? Are we talking like? like, you know, months to years? Are we talking still? They could continue to kick the can and get another, you know, decade out of this old rusty car. We're 10 years into this shift. U.S. interest expenses above defense spending. You can see the geopolitical impacts. I think the world could look very

different in a good way by the end of the next presidential. You know, by the time we're sitting here getting ready for the election of 2028, I think the world could look very different. And the reason why is interest doesn't sleep. Compounding interest doesn't sleep. And at five and a quarter percent, like the U.S. has on 121 percent that the GDP, the exponential factor, the exponential interest functions a killer. It moves fast. Luke, this has been so great. Thank you so much for joining us. I learned so much about energy and some of these related topics. I was great to pick your brain today. And I think bankless listeners will benefit as well. So we certainly appreciate you. Thanks for me on, Ryan. It's great being here. Also, Bankless Nation, some action items for you today.

you know what you need to do is go sign up for Luke's weekly report. It is absolutely fantastic dives in deep in some of the topics we've been discussing today. We'll include a link in the show notes for that as well as his Twitter account where we sourced a lot of the material and graphs for today's conversation. Got to let you know, of course, this whole finance thing is risky. So is crypto. You could lose what you put in, but man, it's better than holding bonds, right? We are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the bankless journey. Thanks a lot.