TFTC: A Bitcoin Podcast - #187: Luke Gromen

Episode Date: August 24, 2020

Join Marty as he sits down with Luke Gromen, founder of Forrest for the Trees research firm, to discuss: - The Dollar as a rubber band ruler - The Fed's catch-22 - Bankruptcy via inflation - Debt/GDP - Apolitical alternatives to the Dollar - Money + energy - much more Follow Luke on Twitter Shoutout to this week's sponsors. Cash App. Start #stackingsats today. Use the promo code: "stackingsats" to receive $10 and contribute $10 to OWLS Lacrosse when you download the app.

What's up, freaks? Freaks? Am I calling you freaks? Yes, you're freaks. It's your boy Marty Ben here to introduce this episode of Tales from the Crypt. I sat down with Luke Roman from the Forest for the Trees LLC. Somebody with an incredible view on macro themes and huge macro events that are going on in the world right now. We sat down to talk about a bunch of things. You'll hear them once you listen to this episode. uh luke also just released uh volume two of his mr x interview series uh so if you guys want to check that out um we will be linking to luke's bio in the show notes so that you can go find that book it's on amazon if you just want to look it up uh the mr x interview volume two this

episode is brought to you by good friends at the motherfucking cash app you freaks should know all about them but if you don't know all about them let me tell you about them and help make this Sats is standard. You can buy sats, sell sats if you need to, send sats, receive sats. Again, we're buying whole sats, not fractions of a bitcoin. You can make sats the standard within the app. It's the easiest place to stack sats in the U.S. And you can also stack slivers of stonks if you want to.

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That's Owls Lacrosse. Woo! Woo! Woo! Owls lacrosse stacking sats use the code and enjoy this episode with luke roman uh really enjoyed the conversation dense hour i think you guys are gonna love it you've had a dynamic where money's become freer than free if you talk about a fed just gone nuts all all the central bank's going nuts

So it's all acting like safe haven. I believe that in a world where central bankers are tripping over themselves to devalue their currency, Bitcoin wins. In the world of fiat currencies, Bitcoin is the victor. I mean, that's part of the bull case for Bitcoin. If you're not paying attention, you probably should be. What is up, freaks? Welcome back to Tales from the Crypt. It's your boy Marty Bent here on a lovely Monday afternoon. Very excited for this conversation.

I'm sitting down with Luke Roman, founder of The Forest for the Trees, LLC. Luke, welcome to the podcast. Thanks for having me on. I'm excited to be here, Marty. Thank you for coming on. This is a bit of a pinch myself moment for me. I've been consuming your content for years and really respected your views on macroeconomics and the state of the U.S. economy and the U.S. dollar as a reserve currency of the world. I actually was just telling you before we hit record, I've written a few newsletters riffing off of your content around commodities, particularly oil, getting settled in currencies other than U.S. dollar, mainly between China and Russia. But I think today you've been doing an incredible round of podcasts, most recently with Preston Pish on the Investors Podcast.

Great episode. If you freaks haven't listened to it yet, definitely go do it. So just to set the stage for this conversation, don't want to repeat too much of what was going on, but I think you had a great tweet this morning. Basically saying, investing as if the U.S. dollar is gold and not a ruler printed on a rubber band is dangerous. building a system using rulers printed on rubber bands is also dangerous um and so alluding to the fact that we have a global economy uh being priced in an asset that that is not very good at pricing things at the moment well it's you know it's it's whether it's good or not in terms of pricing things right it's like the old saying what's what's normal for the spider is chaos for

the fly, right? So what I meant by that tweet was highlighting that there just seems to be a couple different narratives out there at different ends of the spectrum. And one seems to be looking at the world as if the dollar is gold and fixed in price and sort of a North Star for figuring out investment assets, and the reality is it's not. It's flexible, and as we saw in March, when we need to create more dollars, the Fed can create a lot more dollars very, very quickly, and there are some very good things about that system. At the opposite side of the spectrum, you have a group of investors or some investors,

So certainly the other side of the spectrum for this debate is that acknowledging that the system has structure, that the dollar is infinitely flexible, and that as long as inflation isn't problematic, that this can go on and on and on. and there are issues with that view as well and so i i think we're sort of in between where we're in a spot sort of if if if these are sort of two trapezes where you know we were we were holding on or the markets were holding on to the dollar is gold in march and and and we've seen the dollar fall the fed supply dollars um uh markets rally over the ensuing you know i guess we're gosh session was coming up on the six month mark. Now, now we're at this other side of things where it's, you know, there's no downside to this. We can keep doing this. Inflation is on, inflation is tame. And so I just think that there's, you know, I think we're coming up on a make or break moment in markets and in the economy where we're either going to, I think, have authorities pull back and then we're going to be moving back towards that. the dollar is gold or we're going to really start, you know, putting, putting this, this concept of the rubber ruler to it,

to the test a little bit more than we even have. What do you think the likelihood of them pulling back is at this point? It seems like they're backed into a corner. If they were to pull back, it would immediately send things into a tailspin. Isn't that exactly what happened with the, the repo hiccups last year around this time, actually? yeah I think it's the short answer is I think if they pull back on the stimulus I think it's very problematic I think it'd be very bear or bullish for the

dollar excuse me and bearish for just about everything else and the challenge within all that is that we're in a hyper political environment and a hypersensitive time of the political cycle given how close we are to the presidential election and so that to me is probably your biggest risk really is It's just how the unpredictability of that. Now, the one thing I would say that I think is really importantly different now versus a year ago as it relates to, in particular, the repo rate spike and some of the regulatory constraints that helped drove that, that helped drive that, to use proper English, is that in April of this year, the Fed changed the banking regulations, the Supplementary Leverage Ratio, or SLR for short, regulations

that exempted treasuries from the calculation of bank leverage ratios. And so whereas there were hard and fast leverage ratios for the banks as it relates to buying treasuries, which in short effectively was sort of a gold standard of sorts through the dollar and through the Basel III banking regulations around the dollar system, those have been removed as they're related to treasuries now. And so it's not fully crossing the Rubicon, but we've waded in and we're probably up to our knees in the Rubicon River in terms of the separation of the Fed and Treasury. And so now you basically have a situation where the banking system can buy an infinite amount of treasuries and hold them on their books. And as long as nominal yields are positive, that is a nominally economic value-added activity for them. They are going to be making a positive spread. And so there's this release valve through the banking system this time that didn't exist a year ago. If we start to see politically some pullback on the stimulus.

but again it ultimately when you look at the percentage of gdp percentage of consumption percentage of consumer spending that have been coming effectively from government transfer payments over the last six months it's hard to imagine that being a good situation if we really get a hard shutdown if you will yeah and that's like i saw a tweet this morning from somebody throughout history uh 50 out of 51 countries that have have had a debt to gdp ratio above 130 have defaulted the only one not to is japan and the tweet uh was sent out because if we keep on this course by the end of the year the u.s will be at 140 debt to gdp do you think we can escape like japan has from this default um and it was but if i remember

You're right, the underlying source for that, I'm trying to think of the name of the money manager who had the original source data. Herschman Capital. Herschman Capital, yes. I knew it was an H. I wanted to say Horschman Capital, but Herschman. And I've seen the data, and the bottom line is that the fault can take place either through restructuring or through inflation, is the point. to answer the question, can we avoid it like Japan? In my opinion, no. And I think it will

be done via inflation. I think we've started that process. It's a little bit of a political process that has to take place within the United States to accomplish that. But I think we're very different than Japan. We're a debtor nation. Japan's a creditor nation. They have a significantly positive net international investment position as a percent of GDP. Ours is negative 50 percent of GDP. They have historically funded internally, whereas we have historically funded externally. And so when you put all these things together, the United States situation is 180 degrees different than Japan's. And so to me, it strains credulity that the United States would end up in same situation as japan now a big a big mitigator of that to this point and and in the short run i

think it continues is where the reserve currency in japan wasn't and i think that's been a big a big deal but you know to my the point i made starting off with in terms of this political process a decision has to be made for the us to my eyes um it looks like that those that political machinery has been started when you look back at donald trump invoking the national defense Production Act, which gives him and the U.S. government great leeway to spend as they see fit. When you see the COVID crisis basically removing all pretenses on either side of the aisle in terms of concerns about deficit spending, when you see that also give the Fed carte blanche to do what it has done, and then importantly, when you get the supply chain disruptions we've had,

you've got yourself a pretty nice little cocktail recipe for potentially significant inflation, which that would be very different than what Japan has experienced. And so I think that that's I think that my view has been and continues to be that the United States will not avoid that situation. that will be the 51st out of 52, and then it'll be via high rates of inflation. And, you know, we're starting this process as well. Unlike Japan, we're starting this process with very high rates of debt to GDP. And so we can't afford higher interest rates. The Fed is, if inflation does pick up and the bond market does start to snip it out,

you're likely going to see the Fed have to take down increasing amounts of the bond market. And as crazy as that sounded six months ago, obviously, since then, we've seen what they've done with treasuries, we've seen what they've done with mortgage banks, we've seen what they've done with corporates, and even small amounts of junk debt. So, you know, the short answer is no, I don't think we'll avoid it. Yeah, it seems like we find ourselves in a very precarious situation. and going back to your comment of can they pull back the decision to pull back or moving forward you said they can't pull back politically because it may make the dollar stronger but the economy would suffer as a result but isn't there a political like this is why i think fed's in a catch-22 and the u.s economy's in a catch-22 because even if they go forward and the inflation

that you're describing um comes to fruition there's gonna be some blowback there too and there's also an argument to be made that this policy has angered people too because you see the the cnbc shot of nasdaq at all-time high while 30 million people unemployed it seems that both uh both solutions to the the problem that the fed has found itself in lead to something that's not politically uh desirable at any point i think that's right i think ultimately when you look around the country and you see social unrest at the levels, the highest levels it's been in, in arguably 50 years, I think some of these protests,

I think clearly all these protests have some element of a social angle to it, but I think underlying that the real sort of big logs, the fuel logs to keeping these, the social unrest burning is income inequality, frustration with the system, and these types of socioeconomic issues that people have been highlighting for a long time. I think they're finally showing up.

And so it is, they are in a bit of a catch-22. And to me, it speaks to the importance of this election in terms of what we're starting to see. So I saw Biden either yesterday or over the weekend talking about basically forgiving student debt. Um, that to me, number one, it sets it up as, as it sets things up as game changers for the election. If, if, if Biden increasingly runs on what Obama is saying, looks a lot like Bernie Sanders platform, um, you know, that is, that is, uh, that's probably a winning ticket for him.

And, and if that's the case and he follows through importantly, um, you know, either one either he's gonna follow through or he's not and if he doesn't then i think we're gonna go right back to um you know to a lot of u.s cities on fire and uh if he doesn't uh or if he does follow through that is you know another several steps deeper into the rubicon we're waiting in terms of um you know lending money uh and then and forgiving it and and i think ultimately this is where we have to go um this is the you know had we not wanted to do all this there there are you know there's no undoing this without either a time machine or uh some very very unfortunate or drastic uh measures um happening and so the um

you need to have some sort of debt jubilee and it needs to and on either a real basis uh you know student debt's a real easy one because the government owns the other side of it right so they have a printing press collateralizing all that debt that debt's hanging over the head of students they can wipe that out with one one one you know click of the keyboard you know delete maybe two delete enter and and um boom all of a sudden you have directly put um a whole bunch of money into the pockets of a group of people that actually have a very high marginal propensity to consume. And that I think is really important when you look at a part of our problem is not just the wealth inequality that we have, but the demographic wealth distribution. And so when

you've got so much of the money held by a group of people with a very low marginal propensity to consume that is older people um that relative to the younger if you start putting money in people in younger people's hands you're going to start seeing velocity in the economy pick up velocity of money velocity of activity um you know basically you look at the demographic charts from ages 25 to 45 or 43 whatever the age is is the maximum there's a there's a line up into the right in terms of per capita spending and and so you put money in those people's pockets directly and they're going to turn around and spend right away you do things like taxing or it cuts for the wealthy and the wealthier over 65 probably by and large you know they they'll take it but at the end

of the day you know maybe they'll go out to eat one more time a week maybe uh they don't you know as a group now this is smoothing over the income effects even within that group but as a group they don't need the money um and so uh that you still would need sort of some sort of inflationary uh part of a debt jubilee where you're working down the real uh the real value of that debt for the debtors but a big first step would be something like that so i think it's going to be important to see some of the political uh you know outcomes i guess if you will uh as we move into the election uh yeah it's uh a debt you believe student debt i mean i know a bunch of people my age would would very much like that but but how that could be a bit effective but then you think about like

unfunded liabilities going into the future and these state pension funds and their uh propensity to underfund what they're promising and is the wave of of debt too big to overcome when combined when it's all combined yes debt jubilee of student debt may afford some temporal relief but at the end of the day there's there's a bunch there's a tsunami of of other debt crises right behind it no i think that's right and the short answer is no it's it wouldn't be enough it would it would buy time it would help a politically influential group um but and it's not nearly enough and we have been highlighting in our work going back for our clients going back two three years that if you looked at the rates of growth of debt the rates of the growth of gdp uh how

important uh the the stock market is in terms of driving the us economy and we've highlighted it's 160 percent total u.s equity market cap to 160 percent of gdp uh if you let look at net capital gains plus taxable IRA distributions. They are 200% of personal consumption expenditure growth. So the U.S. economy cannot grow mathematically unless stocks are rising. And so when we looked at all of these things, we basically said that in the next crisis, it would be unlikely that the stock market would be allowed to sell off for very long before authorities began taking very aggressive measures. And then whenever we had that next crisis, you were going to see, we thought at the very latest you would see a U.S. fiscal crisis begin to get acute. I want to say

in late 18, we said it was mid, I think we said late 21 to early 2022. And what COVID has done is just completely blown a gaping hole in the fiscal projections, in the numbers, and pulled forward that late 21, early 22 date to March of 2020. The U.S. now has a fiscal crisis. That's not going away. V-shape, K-shape, L-shape, it doesn't matter. It's here. And so that then informs the next point, your point, which is a great one, which is, okay, we can forgive student loan debt. That's actually mechanically super easy. It's even politically pretty easy on the grand scheme of things. Where it starts to get trickier is the entitlement obligations, the pensions, public pensions, and there's no easy solution for that. If you raise taxes

dramatically because of how important the stock market is and asset price inflation is to driving tax receipts and where the disproportionate amount of assets held at upper income brackets, you could very easily drive a decline in GDP as a result of a tax increase. And then you would actually end up with a lot less in terms of tax receipts by increasing tax rates. That's how far gone we are. And so when you consider that, you keep trying to figure out the different possible avenues. And you realize the only angle that works is basically the Fed grow on the balance sheet. Basically, the Fed's balance sheet sitting at around $7 trillion today up from 3.7 a year ago is they and or they through the banking system as proxy for ways we

highlighted before, you're basically going to have to move towards this modern monetary theory, wartime finance footing that allows the U.S. government to just say, we're going to spend money to stimulate this or that or that and the Fed's gonna have to onboard the whole thing by key effectively by keeping rates capped at politically expedient levels and basically our view has been and has continued to be what we're talking about here is that you end up getting a bailout of these of these pensions systems markets over the backs of bondholders in the US and globally vis-a-vis the dollar and I guess that begs the question is how long will those

international bond holders hold those bonds for if they realize this is going on and yeah you know and that that's it's an important question and I think ultimately I think central banks began seeing the writing on the wall in the aftermath of 08 as you saw them start to buy gold for the first time in 30 or 40 years. And then in 2013, at the end of 2013, excuse me, by 3Q14, global central banks stopped growing their holdings of treasuries on a net basis and they have not risen since then. Their holdings of gold have continued to rise. And so I think at the highest levels of finance, it began to be seen. Certainly when you look back to last August, there was an excellent white paper written

by the Black Rocket Investment Institute, and former Fed Vice Chair Stan Fischer, former head of the Swiss National Bank, Philip Hildebrandt, and then Bank of Canada Governor Jean-Baptiste Ben, wrote a paper, and it was absolutely pivotal, excuse me, pivotal in my view. It laid out, in the next crisis, we're going to have to go direct, and it's really hard to, you know, and by direct, we mean we're just going to bypass the interest rate, you know, traditional interest rate channel bypass the banks fiscal spending monetization and the hard part is once we let this genie out of the bottle this isn't something that's easily um easily adjustable in terms of the inflation the currency depreciation and importantly it's everybody want

the paper laid out by region u.s japan europe china so they know they they're sort of all in the same boat and so there's this ongoing debate of okay is it all coming out of the dollar is it you know it's a race between the various major currencies who's going to win and our view has really evolved over the last couple years to you know i we we know based on it being a dollar based system that the u.s will have to print the mostest we don't know if they'll print the fastest but we know they'll print the mostest they have to um and in the intervening time there'll be a race sometimes the u.s will be ahead of printing sometimes they'll be behind um but ultimately as as carol sokoloff at 13 d says that's why gold is so easy that's why gold's

so simple because i don't have to get that race right right it's like you know betting and you know going to the ballpark and watching you know ketchup and mustard and the hot dog and relish race around the park in the seventh inning it's like you never know it's all a fixed race anyway just you know bet you know bet on you know the fact that they're gonna sing take me out to the ballgame which is is is gold yeah and i believe earlier this year you you expand on how how much the fed could expand this balance sheet i believe it was you and you probably probably i wrote yeah I wrote quite a bit about it. Yeah, $35 to $40 trillion, I believe, was the number.

Yeah, I mean, if you look at what we said back in March was ultimately, so we did a nice job of recognizing this crowding out of the U.S.'s own banking system that culminated in the repo rate spike and then what the Fed would likely do after that. We did not catch how severe the COVID crisis was going to be. However, once the COVID crisis began to become serious, and in particular, once the authorities began shutting down the real economy, what we said is, look, you cannot have closed down markets, closed stores, closed ports, closed economies, and open markets. because everybody's short dollars. It's a fractionally reserved system. Everyone's going to show up in markets

and sell assets to acquire dollars until either markets are at zero or markets are closed. And so our view was either they are going to close markets or the balance sheet of the Fed is going to have to move toward total credit market debt outstanding rather rapidly until the COVID crisis passes. And our view was, okay, total credit market debt outstanding is, I think, $70 trillion in the U.S. So, yeah, I mean, conceivably, if you'd stay in lockdown, you would need the Fed's balance sheet to move towards totally reserving, fully reserving that debt, which means basically putting tens of trillions of dollars onto their balance sheet.

And I think that's the direction we're still moving. But really, the pace at which we're moving that direction is a function of underlying economic growth, what's going on with COVID, and those factors. Yeah. So those factors in conjunction with the fact that the Treasury and the Fed have essentially merged together, the Fed is no longer as private as they would like people to believe they are. is this the death row of the federal reserve system in your mind like and obviously i know you're a big gold guy and this is a bitcoin podcast i believe that we're in the death rows but i don't want to put words in your mouth like is this throwing the hands up last ditch effort hail mary and what happens if the hail mary fails um i don't i think it's i think it's in the current iteration of the dollar-centric system that we've seen since 71. That I think we are in the death throes of. And I think ultimately that is a good thing for the U.S. I think some of

that is being driven by the defense establishment because part of what this system requires is the U.S. to become the Saudi Arabia of money, as the FT put it a year, year and a half ago. Our job is to run deficits to export dollars. So we bring in stuff and we export dollars. And there are very clear winners and losers within that system. The Wall Street wins, Washington DC wins, the exporters of treasuries.

The exporters of stuff in the United States economy are losers, middle class, working class, manufacturing, industrials, et cetera. There was a period of time, there was a conscious decision to do this. helped us win the cold war from 71 to 89 it was it was a an accepted sacrifice post 89 after the soviet union collapsed we should have restructured the system then but um look at being a unilateral power was just too tempting for us to to do and so we hit the pedal to the metal on that system

the problems with it became we're becoming increasingly apparent over the last 10 years to people in the defense establishment people whose job is to consider supply chains and logistics and for those that weren't and they weren't obvious and those problems to say them specifically was we were sole source to china on too much valuable stuff bottom line and the military was getting increasingly concerned about this and when we fast forward to covid anybody that wasn't worried about that i think became at least cognizant if not worried about that problem as well and so i think covid might have been a final piece in a term in terms of not only blowing a hole in you know in the uh u.s's fiscal situation beyond repair and really the western social democracies

beyond repair but it also highlighted the the the one catastrophic flaw of this neoliberal economic system over the last 50 years, which is we are now in a much more adversarial relationship with China, and we are in no position, our supply chain, our defense supply chain, our industrial supply chain has been severely weakened by these neoliberal economic policies of the last 50 years, and in particular, the last 25, 30 years. And so I think that system where we import stuff and we export dollars and treasuries, I think that system is in its death throes. I think the federal reserve system,

I think is in the process of evolving to something that looks a lot more like the 1946 to 1971 federal reserve system or dollar system, where you have a neutral reserve asset. I think the price would, for example, in 1946, 71, primary reserve asset was gold. It was not treasuries, except gold is fixed at 35 and then $42 an ounce.

I think we're moving towards some sort of system where we go back to a neutral settlement asset, whether that's gold at a floating price. In theory, Bitcoin could be it, or some sort of government crypto asset could certainly be it. Regardless of what it is, it's very inflationary for the dollar, for the dollar system,

whether it's gold, whether it's crypto, whether it's government crypto. Um, and I, I think you've seen signs over the last 12 months of a recognition of this from central bank, whether we go back to Jackson hole a year ago at that meeting where Mark Carney, um, came out and said, look, the dollar's the problem. And to me, that was a, you know, we need a neutral settlement asset to me. It was a, it was a huge moment.

Um, PBOC said the same thing in 2009, but that's a PBOC they're quote unquote, a rogue country. And then Russia said the same thing in 2011, 2014, rogue country. The Iranians, rogue country. Venezuelans, rogue country. British, very different animal. And in terms of them saying that. And I had been told a number of years ago that Europe has long felt that the dollar's the problem by a very high level European finance slash central banking people. But then it's also something

that no one's allowed to be on the record saying and you can't, everyone knows the dollar's a problem, no one's allowed to say the dollar's a problem. And so when you see Carney step up and say vocally the dollar's the problem, that to me was, again, a real acceleration of the evolution, I think, of where we're going in terms of the Federal Reserve System, where I just think we're evolving

again. And, you know, we'll see how it ultimately looks. But to me, I think we're definitely evolving. And I think we are in the death throes of the 71 to present system, dollar-centric system as structured. Yeah. So we've seen the Triffin dilemma play out to its full extent at this point. Absolutely. That's exactly what it is. We can't pay back the debt in anything resembling real terms um and so the the less we can pay it back in real terms the less foreigners want to hold that debt knowing we're going to dilute them um and the system just starts to break down and this i think ultimately what larry summers talked about is as secular stagnation is it's secular stagnation is simply a symptom of this of the breakdown of the dollar centric system

the post-$71 centric system due to Triffin's dilemma, which 50, 60 years ago they said was going to happen. Yeah. Do you think we learn a lesson as a global financial system? Maybe it isn't ideal to have national global reserve currencies like the U.S. dollar, and something apolitical like gold or Bitcoin seems just politically like a much better option.

And, I mean, that's the whole point of the Triffin dilemma is we don't want to give it give it up because it's what keeps us in power but obviously there's going to have to be some strong medicine taken and a correction to some degree um but do you think the the world learns after this like again you've written about china and russia trying to uh denominate oil trades in in their local currencies do you think anybody tries to step into the vacuum created if the dollar were to lose favor um and and sort of take its spot as a national currency um i don't think anyone else wants that mantle right heavy is the head that wears the crown and the the the reason that crown's so heavy is if you want to be the dollar

structured as the dollar system was structured after 1971 you have to outsource all your manufacturing. You've got to run massive deficits. You've got to send your young men and women around the world to places no one can find on a map to bleed. And none of those things are politically popular in places like Europe and in Asia, which would be your most likely candidates. And so I just don't think they even want that. And I think that's why they've structured their currencies to have this tie to a neutral reserve asset gold for the time being at a floating rate um have we learned our lesson i think the i think the world has learned the lesson for a long long time uh every time the dollar got strong and they sort of you know got slapped on the wrist they've known

for a long time this system uh had a finite life uh had winners and losers uh by and large it's It's sort of worked for them, I think, up until 2008. I think after 2008, the world said, okay, we know this isn't going to work now. And I think that's why you started to see central banks buying gold again for the first time in 34 years. Within the United States, have we learned our lesson? I think some groups, yes, some groups, no. but the the groups that are yes i would say are sort of the more objective responsible adults in the room the the the the military establishment guys who are apolitical they are just looking at

can i do my job which is my job i have a sworn oath to the constitution of the united states to defend the constitution and right now as a result of this system my ability to have the logistics support to do my job has been increasingly weakened by this economic system. Those people, I think, absolutely have learned the lesson. And they've been talking about it for a decade, in some cases more. Those that I say no are, but are rapidly changing. I think certain elements in technology, lots of people at the high end of U.S. corporate America and at the high end of U.S. political America, I think they love this system right up until the point the barbarians showed up at their gig, so to speak. And in the last year or

to the barbarians have shown up at their gate, whether it's Chinese technology posing a threat to US technology, whether it's the Chinese stealing technology, whether it's all of these things that Washington and Silicon Valley and corporate America have really shifted on over the last five years. I think ultimately,

you hear it spun as well, we thought if we gave them all this stuff that we would be able to change their political system. And, you know, it reminds me a bit of the fable of the frog and the scorpion, right? Where the waters rise in and the scorpion says, please, you know, frog, just swim me across so I don't drown.

And the frog says, no, you're a scorpion, but I'll drown if you don't, please. And so the frog says, all right. And so the frog swims him across, they get to the side, scorpion gets off into dry land, it stings and kills a frog. Frog says, why'd you do that? me he goes well i'm a scorpion and so it's you know we we you know i've tweeted about it a couple

times and you know i'm my father-in-law was like a second father to me he was he was a teamster official it was a labor union official a long time in ohio um a little different guy than i think than a lot of folks but growing up with that perspective at the end of the day the deal corporate america made was is they felt like the lesser threat to them was the communist chinese party the chinese communist party relative to u.s labor unions and u.s wages and workers that was the bet they made they made that you know they made their bed and they had to lie in it and now at the you know sort of when the devil is here to take the high most um they're starting to realize that it maybe wasn't as good a deal as they thought it was a very front-end loaded deal for

corporate america uh and at the back end what you have is chinese competitors who may or may not treat your intellectual property very well uh and and um compete against you beat you at your own game and that is as i say the barbarians are now the p the last sort of group of holdouts that still really like this system that sort of hadn't quote unquote learned the lesson i think the barbarians showing up at their gate over the last two years one year five years you know, depending on constituency, I think by and large that you're, I don't want to say you're at a consensus in the U.S., but you're probably more of a consensus on this issue politically in the U.S. than you are about a lot of other issues. I won't say virtually any other issue,

but relative to a lot of other issues, you're at much more consensus. And so I think that's, you know, learn the lesson, but that's, at the end of the day, if you can move something in a productive manner whether they learn the lesson or not is secondary to that yeah i would say the barbarians already in inside the walls too in the forms of uh middle america which has been hollowed out as a product of of this globalization and this tripping dilemma that we found ourselves in and so getting attacked from both sides if you will and yeah it'll be interesting to see the next couple how the next couple years play out particularly uh with that being said how big of an opportunity do you see out there for these apolitical monetary goods whether it

be gold or bitcoin um as as the world starts to look away from the dollar i think they're enormous opportunities um ultimately they it's it's ironic the the the central banks need them the rise to signal, hey, we're doing our job. We're getting the inflation. The U.S. needs them to rise to help weaken the dollar to accomplish what it wants to accomplish and basically start to resolve Trevin's dilemma to be able to compete again. And then when you look at the amount of debt outstanding, when you look at even if, say, you know, something we've written extensively about, which is ultimately what you need to do is not change the entire dollar system. What you need to do is separate the medium of exchange the dollar from the store of value the treasury bond

and um basically replace the treasury bond with gold bitcoin government crypto some neutral settlement asset and really when you look at intra-country flows the what jumps out is the biggest differentiator or the biggest creator of imbalances whether they be surpluses deficits etc tend to be commodities and in particular energy and so when you take a look just at the oil market physical dollar annual production relative to the dollar annual production of physical gold the oil market itself is about 10 times the size of the physical gold market just to give you an idea of just because ultimately if you're going to move from treasuries to something neutral that something neutral needs to be made big enough to be liquid enough and

physically big enough to for those to settle uh the the trade that needs to be settled which tends to be commodities so energy alone gold would need to be anywhere from five to ten x bigger uh uh oil alone excuse me then you throw natural gas on top you throw other forms of energy on top then you start throwing in things like copper and nickel and some of these other uh still good size but but smaller commodities you end up realizing that whatever neutral settlement asset you use needs to be much much bigger and then you get into things like bitcoin where you know to me i i look at bitcoin as a as a neutral settlement asset for the people if you will right i mean it's i can get on my phone and i can you know gosh okay we had revenues of this this week

expenses of this this week uh i need set aside escrow this for taxes and i need to escrow this for the kids tuition what do i have left over oh okay you know a few hundred dollars perfect put it in bitcoin you know and now i just bought some bitcoin and i oh we have a tax bill coming up quarterly okay go you know how are we on cash flow oh it's a bitcoin okay back out and so it's this reserve asset um that is that is that is it is exactly how i'm using it and i think a lot of of people are starting to use it that way. And so the punchline, the answer to your question is you start thinking about the amounts of surpluses, however they're generated. At the national level, it tends to be commodity driven, but at the personal level, it's just, bank's not paying me.

Why would I put any more money in the bank than I need to? I'm going to put it somewhere where at least i i i'm happy to take the risk on the downside um but i just want to hold it in a in a in a more finite asset than what the bank's going to put it in which are effectively you know short term u.s treasuries yielding zero uh that i know aren't going to rise in price um you know they won't fall in price and so i'm i i i it's not like i take the entire profits of the year for fftt and throw it into Bitcoin and hold it there. But I think it's just that storing of surplus. And as more people do this,

you're just going to, the market's going to evolve where you're going to get the separation of the medium of exchange and the store of value. And I think as that happens, the upside for things like gold, for Bitcoin are just really, really big. Yeah.

Astronaut. I really am clinging to your comparison to the energy markets with Bitcoin particularly because I work for a company called Great American Mining and we go into oil and gas fields here in the United States and the Bakken and Permian specifically and we use their waste gas to mine Bitcoin. So any poke a hole in the ground, get the oil out and can't pipe the natural gas to market will show up and just consume that for very low. So comparing Bitcoin to energy markets is really interesting to me because I think we're starting to develop a thesis at GAM that Bitcoin is the currency of energy. And it will be the energy consumer of last resort, Bitcoin mining particularly, that helps get the world to like Henry Ford's energy currency that he envisioned where you're pricing things on a per kilowatt hour basis and how much energy it consumes instead of a free float national currency. That's really interesting. That's exactly what it is, and it ultimately incents the efficient use of energy, which is what you want to do anyway. That's the very definition of capitalism, really, in terms of getting better at making things, et cetera.

But that's exactly what you're doing. it's exactly what gold is too right where you're just just compressed and stored energy where you're taking it from you know because as you guys know I'm imagining that you know taking the gas instead of it being flared off and compressing it or storing it capturing it somehow and moving it from point A to point B it's a capital intensive process I would suspect to a certain degree and so but the very fact that it's capital intensive is the reason it's valuable as opposed to just being created out of out of thin air and that is ultimately the hallmark of a of a you know a real currency of a you know of a real store of value a hard asset yeah bitcoin uses proof of work

to to bring it into uh bring it to the market and it's uh it's funny seeing bitcoin get bashed for like over energy consumption but when people really peel back the uh the curtain and actually look, what type of energy is being consumed, you'll notice that it's a strand of renewables or something like waste gas, which would have just been burned off anyway. So it's better to turn it into something productive. Yeah. And ultimately, if you start actually pricing energy properly, which is what that does, you're going to incent over time society to use that energy more efficiently, to build

more energy efficient infrastructure. So it's actually, even if it was using polluting energy, which it's not to your point, you're still going to, you're basically pricing thing, you're pricing it properly and you're attributing a value. So now all of a sudden, you know, if I can print dollars for oil, what do I care? I mean, I'll just drive the, you know, I'll have a jet come get me. I'll have a helicopter take me to and from work, right? I'll drive to the Hummer and it's awesome. But if you start, you know, pricing energy properly, you basically start balancing out your economy instead of just everyone working in the finance sector because, you know, you can print dollars and create dollars. Who needs to actually make all the other stuff in the energy chain or the industrial chain, et cetera?

You know, let's just make dollars and export dollars because then everyone else will send that stuff. That's that's, you know, sort of a microcosm of this system that has evolved where we can just print dollars. And so you you learn you lose sort of what the real value is of just about anything else. Yeah, I mean, this brings a full circle back to the tweet that we started this off on the dollar as a as a ruler written on a rubber band. That's exactly right. And this, you know, Bitcoin structure puts the ruler on a piece of wood. Yeah, it's, I mean, if you want to extrapolate very far out into the future, if Bitcoin is successful, let's say decades to a century,

you could argue that energy producers would replace the central banks because the central banks right now are at the core of money production with the u.s dollar system particularly but in the future if bitcoin or or gold becomes more more popular more in favor i think bitcoin will will be more popular just because the digital age and its ability to arb these strand of renewal or these stranded energy sources um the energy companies energy producers will replace the central banks as the source of money and literally create building blocks that distribute the new money to to the economy and then then you get into some weird hypotheticals of how finance happens and where it flows from from there

oh i think that's right i think and i would add you you could i would say that you could see energy companies and i would define them as broadly it's not just you know sort of the traditional fossil fuels but new types of energy um you know alternative anything else they sort of create um and and i would love gold miners in there too where they would be sort of the new merchant banks um in terms of of having this um exactly what you described yeah and it's uh so given the the juncture that we find ourselves in it seems uh very very fragile are you and this is like a very broad question but i'm very curious because you seem like a very optimistic person are you optimistic about the future yeah yeah what i'm sorry go ahead

i was gonna say what what particularly makes you optimistic so i i'm optimistic about where things are going um ultimately you know i get i get the sense that we're moving in a direction where you're going to have a much more sustainable economic system um you're going to have a much more balanced economic system, you know, we've seen just the pace of technological change and advancement, you can see, to me, you can see clear to a world where a lot of sort of the basic needs are met, and then, you know, the internet allows a lot of different people to pursue interests that are are much more of interest to them so whether that's you have some sort of um i don't even know uh you have a neutral currency you have a universal basic income for

some component and then you also supplement that with your ability to i don't know if you like art or you like music or you basically the internet allows a renaissance of the united states as a of shopkeepers particularly once you fix the currency issues which I think we're evolving towards and that when you layer that together with some of the technological advances and potential technological advances and things like energy then I'm very optimistic that said I'm also not Pollyannish in terms of if this is managed poorly. If this is managed poorly, boy, it can be catastrophic. Sort of all the worst parts of all the biggest doom and gloomers out there, given the level

of just financially, given the level of debt, given how stretched supply chains are, given the derivatives, given geopolitical tensions. I'm definitely cognizant that historically these geopolitical power competitions haven't always resolved themselves peacefully. You know, so there's, I'm optimistic, but I'm also, there are things I watch for. And I think I know enough about the context of some of the broader issues and how they've resolved themselves historically, that if I see things develop in a certain way where it would trigger some sort of internal warning sign to me of, okay, we're now beyond some point of return

and my optimistic scenario has now either been impaired or is now off the table. And I don't know what that looks like. I don't know exactly what I'm looking for. I don't know if that would be external or internal to the United States. I could paint pictures of all of those, but I think I would know what it is when I saw it sort of thing. But net-net, I'm still optimistic for where this is going. And as Winston Churchill apocryphally said, the Americans always do the

right thing after they've exhausted all the alternatives. And we're just about out of alternatives uh so uh the fact that you're seeing washington both sides of the aisle come around to some of the things we were talking about before um in terms of the structure of the system suggests to me that okay there's still there's still cause for that optimism yes no i would i would parrot that optimism too especially when you see individual individuals and then companies and corporations just deciding for themselves that apolitical assets like gold and Bitcoin to their balance sheets. Like, hey, we'll prepare for this.

If it's a grassroots, bottom-up transition to an apolitical good, that's a good sign to me. And then you couple that with something like earlier this year when Trump announced, whether you hate him or love him, he announced the fact that we'll be building a chip foundry here in Arizona, which is huge. And so bringing some of that manufacturing back to America. And if anything, this year has acutely highlighted the the problems that exist within our system.

And the first part of solving a problem is recognize you have one. I think more people now than ever recognize that we have a big problem. No, I think that's exactly right. I mean, you get some of the neoliberal economists crowd that has kind of said, hey, well, all trade is good. and yes and no it's all fun and games until we have covet and 80 of our antibiotics are made in a country where they may or may not have our best interests at heart and so like even that crowd being able to say okay maybe we maybe we did go a little too far to your point it's understanding that okay you're right it's the first step to solving a problem is admitting you have a problem and no one could defend after earlier this year no one could defend that old

system how far that old system had gone um hey we don't have enough ppe well no kidding you just outsourced everything to china over the last 20 years and and you all espoused it and okay so now you know we the last this last stragglers of people you know it was it's been an interesting thing for me to see um you know some of the u.s economic establishment sounding more and more like my teamster union leader father-in-law 15 years ago like farmers 15 years ago like working-class americans 15 years wow we should bring stuff back and really okay you know that's but again it's the point is not who's right or who's wrong it's we're moving in the right direction and that's we're finally moving in the right direction i think in terms of

a more balanced economy, more sustainable as Nicholas Nassim Tlaib calls it, anti-fragile economy. And to me, I think it's going to be a really, really good thing for America. It's going to be a really, really good thing for the world. I don't think it's going to be a really good thing for the international trade value of the dollar or for people who have too much of their net worth tied up in nearly 0% yielding debt. But there have been plenty of warnings uh in terms of of where we're moving so and and again if if wages are rising a lot i think that's a good thing um they've not been rising a lot for 50 years in real terms yeah not in real terms at all yeah i'll tell you i'll tell you there's no inflation but

the wages will stagnate i had a great conversation on twitter with uh um oh gosh um I can't think of his name right off the top of my head but he's a pretty widely followed guy and he always makes fun of the inflation truthers what he calls them and it was funny because I said to him I said you know something I've noticed is the the quote-unquote inflation truthers versus not as I tend to find that those saying that inflation is accurately managed tend to be single people with no kids and that basically it's amazing the shift in that that sort of you know inflation truther versus it being accurate how that shift happens once you start having kids and you start having to buy stuff for your kids and you go there's no freaking

way cpi is two or three percent or whatever the heck they say it is it's way more yeah i was a an inflation truther um for a while and then when i had my son six months ago i just it really increased that that belief that that inflation is congratulations that's uh that's an exciting thing they're they're super fun i just saw my oldest one off to college last week so it uh it uh it goes fast he was he was just six months old like uh six months ago it seems like so well congratulations to you for getting one off to college uh my son waved for the first time it's his new trick he's waving to people he's developing social skills that's awesome that's the best i remember that well yeah well uh yeah luke thank you for doing this i want to be

respectful of your time um before we wrap up here you you released a book recently uh the mr x interviews you just want to give a quick blurb on that absolutely um where we can find it absolutely so uh released last week actually the mr x mr x let me try this again the mr x interviews volume two uh to follow up to the volume one that we released a couple years ago and it is the a book I wrote that is conducted in the Socratic method. So an interview conversation between me and a fictional sovereign creditor of the United States that really looks at a number of different issues as a sovereign creditor of the United States would on a real-time basis goes through events of the last several years. So the book starts at the end of 2017 and finishes up in early 2019. So

you can find that on Amazon.com, of course. And in terms of our other work, fftt-llc.com, you can find out more about our different research product offerings there. And I've got an active Twitter feed at Luke Grohman, L-U-K-E-G-R-O-M-E-N. Someone I've been following on Twitter for years and highly recommend. You've been on my finance and economic list since I don't even remember what I threw you on there, but it's been a great value add to um to my information sources particularly on twitter thank you so no thank you for putting out great content and thank you again for agreeing to come on this is a great conversation absolutely thanks for having me on always always a blast awesome all right that's

all we got today freaks peace and love