The Breakdown - The Geopolitical Implications of a Too-Strong Dollar, Feat. Brent Johnson

Episode Date: May 29, 2020

You know the meme: Money printer go brrr. It means inflation right?  Not necessarily, says Brent Johnson. Since 2016-2017, Johnson has been arguing the big economic issue of our time isn’t inflation of the U.S. dollar due to excess money printing, but the havoc caused by a global system where the dollar keeps getting stronger and sucks up liquidity from the rest of the world.  As the dollar has strengthened over the COVID-19 crisis, his ideas look more prescient than ever. In this conversation with NLW, Johnson discusses: What the “Dollar Milkshake Theory” is  Why the implications of the theory stress him out, even though he created it Why everything is relative and no asset can be analyzed in a vacuum  Why we could see the dollar, bitcoin and gold rise at the same time  Why we can’t discuss macroeconomics without discussing geopolitics and even the military

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond. This episode is sponsored by ArisX.com, the Stellar Development Foundation, and Grayscale Digital Large Cap Fund. The Breakdown is produced and distributed by CoinDesk. Here's your host, NLW. Welcome back to The Breakdown. It is Thursday, May 28th, and one quick thing before we dive into the interview, I was really excited to see how many of you have responded. to my request yesterday for beta testers for some new bonus content, newsletter content, mini podcast, micro podcasts. I basically just have a bunch of ideas of things that I want to experiment with with the breakdown listener community. So if you are interested in learning more about that, participating in some content beta tests, email me at nLW at wittamore.iow or hit me up on

Twitter DMs at nLW and I will get back to you later this week. But with that said, let's move to our main topic for today, which is the geopolitics of the dollar milkshake theory. My guest today is Brent Johnson. Brent Johnson is the CEO of Santiago Capital. He's a really well-known thinker around the dollar and just macroeconomics writ large. He's been on real vision. He's frequently featured as a commentator in economic and political media. And I was really excited to get to talk with him about his theory of the dollar milkshake. And so basically, this theory is all about how the dollar and the U.S. economy in general is in this position to basically just suck up all the liquidity from around the world with huge implications for asset prices,

for emerging economies. And it's really interesting. As you'll hear, there are a lot of people who get frustrated with this theory, including Brent himself. He talks at one point about how this theory came out of a lot of intense study, not him wishing that we're this way. So I really hope you enjoy this conversation as much as I did. As usual, edited only lightly. You know the drill. Let's dive in. All right. We are here with Brent Johnson. Brent, thanks so much for hanging out. Absolutely. Thank you for having me. I always enjoy talking to new people. Yeah. So I've been following your work for a while. And I think you're in this interesting position where something that you've been talking about articulating, giving shape to has been increasingly

validated in the market. So I want to get into your idea of the dollar milkshake theory. Let's just kick it right off the bat with what this idea is. And then maybe I'll help try to walk listeners back through how this idea came to be formed. But let's start with the idea itself. Sure. So for lack of a better word, the dollar milkshake theory is something that I've kind of developed over time over the last, call it four to five years. And it's basically one where I think we're kind of reaching the end of this global super debt cycle. The global debts have gotten so big that I think there's going to be a reckoning day. And I think for a number of reasons, the global liquidity is going to get squeezed, for lack of a better word, into the U.S. dollar.

And as a result, I think U.S. dollar and U.S. dollar assets will get squeezed higher over the next couple years. and the rest of the globe will be deprived of liquidity over the rest over the next couple of years. So the milkshake comes from the fact that the central banks around the world have just been flooding the markets with liquidity since 2009. And for a period of time from 2016 to 2019, the U.S. was raising interest rates while the rest of the world was still mixing the milkshake, so speak, and the fact that we were raising rates acted like a straw and pulled, you know, capital into the United States. Now, a lot of people have said that this isn't maintainable because we have now stopped raising interest rates and, in fact, we have gone back to injecting liquidity. And so now we are mixing the milkshake along with all the other central bags again.

And my comment to that is that even though in, you know, a couple years ago, the raising of interest rates was the primary driver of the U.S. having the straw with which we would drink the rest of the world's milkshake, it was not the only driver of the straw. There are many other factors, which we can get into if you want, which I think will drive liquidity into the U.S. dollar. So I still think even though everybody's mixing the milkshake again, I don't think it's so important who mixes the milkshake. I think it's important who captures the milkshake, for lack of a better word, and who drinks it. And I think that by and large, the U.S. is going to be the one to do that. And so I don't know if that helps explain it or not, but I think we're headed towards a fairly big financial crisis. And I think all the dominoes will fall, but I think the U.S. will be the last domino to fall, if that makes sense. Yeah, so there's a ton to unpack here.

And I think one of the really key themes that I'm sure we'll spend time on is, that this is all, when we speak about everything, right, all these economic terms, whether it's safe haven assets or whatever, they're all relative to one another. And that's, I think, a key part of nuance in this that gets missed. But before we get into that, let's actually go back to the response to the first round of QE, the response to the great financial crisis, how, you know, kind of what happened at first, what people expected, and then why you started to get the sense that there might be this break and we might actually start to see interest rates. Because from what you've said, that was kind of the genesis where you started to really think about

this. Yeah. So I think in order to get the full picture, and I don't know how much time you want me to spend on this, but if in order to really get the full picture, I think we need to go back 13 years to 2007. And I'll try not to make it too of a long and boring story, but I'll try to keep it somewhat brief and somewhat interesting. But a long story short, 13 years ago, I was working for.

Credit Suisse, which was a major investment bank in global financial institution. And I had a very fortuitous meeting with a young couple who had just sold their business for several, you know, tens of millions of dollars. And I was trying to convince them to invest their money with us. We had a meeting. And in that meeting, this young couple proceeded to ask questions of my superiors, the chief investment officer, the head of wealth management that I did not feel were that hard of questions, but needless to say, these managing directors could not answer those questions. And I felt that that was, you know, after the meeting, they thought it was funny that this young couple asked these questions. And I just thought that that was wrong, that, you know, that they were

making fun of this young couple when, you know, it was them who couldn't answer the question. And so that kind of led me on a period of self-discovery. And, you know, I kind of had literally a light bulb moment when I went back to my desk and, you know, with a sheet of white paper and a pencil, tried to figure out the answer to some of their questions. And I realized that it was just not a good situation and that a lot of the questions they were asking were not only important, but kind of key to the next two or three years. And that meeting kind of set me off on a path to where I did a bunch of self-research, self-discovery, I guess self-education.

And so when we got into the heart of the financial crisis in 2010, I kind of knew why it was happening and what was happening. Now, I wasn't smart enough to predict it ahead of time, and I wasn't smart enough to figure out how to profit from it, but I did feel like I had an edge up on everybody else because at least I understood what was happening. And that, you know, part of that self-education was understanding the monetary system as it's currently designed. And so in 2009, when the central banks came in and started flooding the market with liquidity, it made sense to me that gold and silver would rise because we were going to have high rates of inflation. The central bank was going to try to deflate the value of dollar. And, you know, you needed to get out of

financial assets and into real assets. Or, you know, stocks would do well because they are kind of an inflationary hedge as well, but probably didn't want to be in bonds, probably didn't want to be in other things that wouldn't do well in an inflationary period. And, you know, that kind of worked for the first kind of two years because while equities didn't do that great, Gold and silver did fantastic from 2009 to 2011, let's call it. And then, you know, we got into 2011 and 12, and, you know, the markets had gone up a little bit, but not as much as they probably should have. And, you know, we started to get into this European crisis. And yet, you know, after 2011, gold, you know, in 2011, they did QE3, you know, and I thought, wow, that's even more of the same.

gold's really going to rock it now. But the interesting thing was, was that it didn't. Gold started to fall, and the dollar didn't really sell off even. They were doing more QE. And, you know, I kind of fought that for a couple years. I had been pretty bearish on equities because I thought we were ready for have another crash. And then, you know, between 2011 and 2013, you know, the market went higher, but gold didn't. And it just wasn't making sense to me.

So I kind of went back to the drawing board again. This was probably 2014, 2015. And that's when, you know, I realized that, you know, even though they printed all this money, the dollar had actually gone up in value. And I was trying to figure this out. It didn't really make sense to me. And what I kind of, the conclusion I kind of came to was that I had done very good analysis on the U.S. and the U.S. dollar.

And it really should have gone down. But the problem was is that I looked at it in isolation. I just looked at the United States. I didn't look at Europe. I didn't look at China. I didn't look at Australia. I didn't look at Brazil. And the simple fact is, is when you take a bigger view, is that fiat currencies or countries issued by countries, they all trade relative to each other.

None of them are backed by anything. It's just, you know, it's backed by the faith of the government and the people in those countries. And because these all trade relative to each other, it doesn't matter. if the U.S. is in a really bad situation. What matters is if anybody else is in a better situation. And I kind of came to the conclusion that for a number of reasons, as bad as it was here, it was worse everywhere else. And that helped me kind of understand why the dollar had not lost value. And that kind of, you know, so that 2016 was the time frame where I thought that, you know, gold might not break out yet. I had initially thought gold would be breaking out. And then because I understood what was going on with the dollar at this point, I thought, I thought. that the gold might not break out. And, you know, I kind of held that view really until now. And it was right through 2000, through summer of 2019, but about a year ago, gold really kind of had to move. And, you know, I thought we would eventually get into a period of time where both gold and the dollar rose together, you know, versus all other fiat currencies.

And that's kind of happened here in the last year. I'm not sure if, you know, we're kind of off to the races on that yet, but I still do believe that happens. again, mainly because fiat currencies trade relative to each other. And as many, even though we have all these problems in the U.S., I think the U.S. will do better than the rest of the world. And I think gold will probably do better than the number of these other currencies. So that's why I see both gold and the dollar rising versus other currency. So that's kind of a long explanation. I hope that made sense.

But that was really kind of how I got to this theory. Yeah, no, and so I think it's super helpful. What's interesting now is maybe to layer on what these different, what these different kind of elements are that make the U.S. dollar stronger, the U.S. economy in general, stronger relative to other parts of the world. Because it's, you know, you identified interest rates increases starting in 2016. There's other potential factors, the fact that there's the world reserve currency, and so there are debts that are dollar denominated.

Would you maybe just go through kind of what those other elements are? Because I think it is so hard for people to, there's a lot of people, let's put it, that are going through the same feeling that you went through where you're like, hey, viewed in isolation with this incredible amount of money printer go burr, as the meme says, like, why aren't we seeing inflation? And I think you do a good job of looking at all those different elements. Well, the first thing I would say is I want to disabuse people of an idea that you can't have inflation alongside a rising dollar.

absolutely can have inflation alongside a rising dollar. And when I say a rising dollar, I mean versus other fiat currencies. And I can give you a really simple way to prove this to yourself, and that is to just ask yourself, is your cost of living today higher than it was in 2007 or 2008? I think the answer will probably be yes. But if you go back and you look at it, the dollar has has actually risen versus fiat currencies since 2007 and 2008. So that's a 12-year period where the dollar went up in value, but so did the cost of living. So the idea that, you know, inflation is, is the dollar losing value, again, versus what, right? And when I'm talking about the dollar going up in value, I'm talking about it going up in value versus other fiat currencies. Now,

it may lose value against some commodities or some costs, some costs and expenses that you have, but on the global stage, as far as currencies are concerned, the dollar is reigning supreme. And part of the reason is, is the institutionalized effects of the global reserve currency. Now, there are probably a lot of people out there that don't even know what that means. Essentially, what it means is that one nation's currency, typically the most powerful country in the world, issues a currency, and then that currency kind of gets adopted by the rest of the world to use. And so because the U.S. is the global reserve currency, a number of goods and services, mainly

commodities around the world, are priced in dollars. a lot of global trade around the world is priced in dollars. And so the institutionalized effects of, you know, if you sell goods to the United States, and because the United States is one of the biggest consumer markets in the world, if you sell goods in the United States, you reserve dollars in return. And if you receive dollars in return, then you can either hold them or exchange them for foreign currency. But if you're doing a lot of business with the United States already, you may need to keep dollars. So then you invest those dollars.

US dollar assets, maybe treasuries or US stocks or real estate or whatever it is, the point is there becomes this institutionalized effect of because you do a lot of business in dollars, you hold dollars, you hold your reserves in dollars, you hold your savings in dollars, and that leads to the US dollar assets getting a bid. So it's kind of a reinforcing system. So that's one reason that the one characteristic of the straw, so to speak. Another one is that because the U.S. has one of the biggest consumer markets in the and because it's one of the biggest economies in the world, we have the biggest and deepest financial markets in the world.

And the reason that's important is because that means there's lots of liquidity. Because there's a lot of people who want U.S. dollar assets, that means it's easier to sell your U.S. dollar assets when you need dollars. If you've ever invested in a illiquid asset, such as a piece of land that nobody wants or a commodity that nobody wants or a currency that nobody wants, that means it has less liquidity. it's harder to sell. But because U.S. dollars and U.S. dollar markets are very deep. That means they're very liquid. And so that's another reason why people choose to hold dollars. Another reason is the rule of law.

Now, again, you've got to think of this on a relative basis. You may argue that the rule of law does not exist to the way it should in the United States. And I would say that perhaps you're right, but then go around the world and tell me where it exists even better than the United States. And I think you'll find that at least there's a process here that people understand. They know how they can litigate. They know how they can settle disputes. You know, there are contracts that are legally enforceable. You know, that is not the case in all other countries.

And so the fact that people feel like they can come here as a good place to do business attracts people to the United States. Another thing that many people just don't realize is that because a lot of commodities and a lot of global goods are traded in dollars or are, priced in dollars, even when countries who have nothing to do with the United States trade with each other, they trade in U.S. dollars. So as an example, Brazil may be doing business with Japan, but those invoices may be priced in dollars. And if they're priced in dollars, when money gets wired back and forth between Brazil and Japan, because it's a dollar, then the United States government says, well, that's our jurisdiction. So if that flow of dollars needs to take place through a United States correspondent bank.

And basically, that's the U.S. dollar payment system. So in other words, in order to get, when money travels around the world, it doesn't just like magically appear, it travels over wires and channels and routes, however you want to define that, that are basically designed and overseen by the United States. And so we can allow people on that system or we can kick people off of that system. And if you're kicked off of that system, like has happened to Russia and Iran and Venezuela and some other countries over the last couple of, you know, after the last decade and maybe even further back than that, it becomes increasingly hard to do business on a global stage. So that, the fact that we control those channels, that is a part of the straw as well. The other part of the straw that many people don't like, but that is of absolute fact of life is the U.S. Navy, you know, the United States military.

enforces the use of the U.S. dollar as the global reserve currency. And if you think that this is all conspiracy theory, I would just say that I can name you two or three world leaders who have attempted to set up, I don't know, trade routes or trade treaties or, you know, currencies, non-dollar treaties who are no longer in power. You know, and these are in places like, you know, Iraq, Libya, Panama, you know, this isn't an accident that these things happen. And again, I might not like it, but it is a fact of life. So those are just a couple of the different things that lead, you know, to the world economy operating on a U.S. dollar basis.

Well, I think that the, I actually think that the Navy point is pretty important relative to understanding the global system that we have now, right? The Bretton Woods system that was architected after World War II, it wasn't just like the U.S. was saying, hey, you know, we just won that thing. So use our dollar now. It came with an implicit and in many cases explicit security guarantee, right? That was part of the nature of the system. And I think that what has made the last, well, the last 40 years since the end of the Cold War, but especially the last 15 years, let's call it, such a strange period is that we're seeing the unwinding of that security degree, but the kind of the dollar part of the system is still as strong. And as you're pointing out, in many is stronger. So it's a very strange time, but I think you're right to point out that this is

that the military, the historic military apparatus. And by the way, this is not a, for those who are just kind of like thinking about it as purely negative, and I think you've made some really important points about the negative parts of it, it's also the reason why countries didn't have to create their own internal supply chains anymore. Now, there's, I think, a lot of good conversation happening now about why that may not be in everyone's interest to have a totally global just in time supply chain, you know, and no one have to care about geography. But the fact of the matter is that that security guarantee was what allowed that to happen. So I actually think it's a really important point.

And I'll give you another example, too, because a lot of times when I point out the military, they'll think that this is, you know, that I'm claiming that we're going to war constantly and we're, you know, taking over other countries. And listen, I'm not saying that that hasn't happened, but that's just part of it. I'll give you another concrete example. And that is there's a one of the biggest and most important shipping lanes in the world takes place off the east coast of Africa, you know, through the Suez Canal down around South Africa, you know, out into the Indian Ocean. And, you know, a few years ago, that was a part of the globe where, you know, it sounds funny these days, but literally there were pirates and they were, you know, taking over ships and then holding those ships for ransom. And, you know, there's that famous, there was a movie even made about, I think it was called Captain Phillips, if I remember right, where, you know, a tanker was hijacked by, you know, some pirates.

And, you know, the way it was resolved is the U.S. military pulled a carrier up alongside that ship. And, you know, the commandos or the Delta Force members or the Green Brays, whoever it was, you know, snuck aboard the ship and took it over and. got the hostages of freed. And again, that's an example of the U.S. maintaining free trade lines that didn't involve the U.S. going to war. But again, it just, you know, that was the U.S. that did that. It wasn't Russia that did it. It wasn't Brazil that did it.

It wasn't England. It was the United States that did it. And it was on the other side of the world. And so that's just, but that type of activity, again, you might not like it, but it does allow for efficiency of trade. Yeah. And I think it's important. to be able to speak to historic realities of economic systems with clear eyes, you know,

regardless of whatever we're trying to drive them to. And, you know, I actually, not a ton of people know this because it's a totally different career path, but I lived on and off in Egypt, I don't know, probably a dozen times between when I was 19 and 25 because I thought I was going to do either Middle Eastern stuff or post-conflict resolution stuff. And there's a reason that Egypt was constantly, you know, controlled by someone else, whether it's the French or the the Ottomans up until basically the end of World War II. It's because of the value of the Suez Canal, because of the value of that shipping route. But I want to go back to another piece of kind of this overall argument because I think that you did a really nice job of painting out

all of these different elements that have put the U.S. and by extension, the dollar, in this totally unique position. And that's the reality. It's unique. It's different. It's hard to view in isolation because of all these comparative advantages. But let's talk about debt. And let's talk about the rise in debt that happened over the last 10 years in the wake of the global financial crisis and where we were coming into this. And just by way of adding a few statistics into this, Rob Paul, who's been talking a lot about the dollar recently as well, he just tweeted out the other day a number of stats that I thought were really interesting. 79.5% of all world trade conducted in U.S. dollars, 84% of all non-domestic debt globally is

under U.S. dollar debt. But let's get into what that. means and what the implications are. Yeah, you know, it's a fantastic point. And the reality is this is probably the biggest demand driver for the dollar. And it is one of the biggest parts of the straw that I didn't even mention. So thank you for bringing it up. And, you know, Ravel is a buddy of mine. And so, you know, we see things very similarly with regard to the dollar.

You know, I think another mistake that I think a lot of people make is when they will say, okay, the U.S. is taking on more dollar debt. You know, other countries around the world have taken on debt. If they default on that debt, that is bad for the U.S. dollar. In the long run, yes, that is absolutely true. But in the short term, it is not. And what I mean by that is that when you create debt or when you take on debt, you are basically saying, you're giving me dollars today.

I'm going to go do something else with it. And then in the future, I'm going to pay these dollars back to you. So what you're basically doing is you take those dollars. You go invest in some project. You buy something. But what you simultaneously do is you simultaneously take on the burden that says, you know, two years from now, five years from now, 30 years, whenever that debt comes due, you have to go get dollars and then pay them back.

So the fact that you are now short dollars and you owe, dollars means that there is a future demand for dollars. So every time U.S. dollar debt is taken on, it actually increases demand for dollars. And so the fact that all of this debt that has grown in the last 10 years, you know, everybody knows that the U.S. debt has just gone through the roof and we owe like, you know, $26 trillion or something along those lines. Well, the interesting fact is that there's a huge amount of debt by entities outside the United States. United States who also owe dollars. And, you know, the popular number is 13 trillion. We've done some research where we actually think it's actually much bigger than that when you

factor in off-balance sheet stuff, some shadow banking stuff and, you know, some assets that aren't tracked as closely. But let's just use 13 trillion as the base number. That is $13 trillion of demand for the dollar. Not only that, but if you fit, if you, if you, if you, if you, if, if, if, if, that $13 trillion had the same interest rate as the outstanding debt on the United States. So the average U.S. Treasury bond has a yield of like 2.2 percent or 2.1 percent or something like that. Now, there's no way the rest of the world has that same preferable rate that the U.S. does. But let's just pretend that they do. That would mean that on a yearly basis, there's a trillion dollars of interest payments that are due on the U.S.

So there's a trillion dollars of debt or demand for the dollar just to pay the interest on a yearly basis. So and the thing is, is there's really no other system that if you leave the dollar, there's really no other system to go to. Now, I think that there's a lot of other countries that would like to leave the dollar. I think there's probably great demand to leave the dollar, but wanting to do something and being able to do it are not. the same thing. You know, I always use examples. I would very much like to be able to hit a golf ball the way Phil Mickelson does, but me being able to go out there and do it, there are two totally different things. And so, you know, the fact, you know, going back to the whole reason that while the world, why the U.S. is the world reserve currency to begin with, you know,

world reserve currencies are not given, they're taken. And until somebody can take that global reserve currency from the U.S. and replace it. And then, you know, not just from an economic perspective, but from a military perspective, the dollar is the only game in town, so to speak. And so, you know, the idea that you can just walk away from using the dollar until there's another system, it's very hard to do. Not only that is then we get into the situation where people say, well, yes, but if all this debt is defaulted on, that would be very bad for the dollar because, you know, there would be no more demand. Well, that's partly true, but what I think people forget is that you have to understand how money gets into the system to begin with.

And without going into too much detail, because this conversation in itself could last five hours. But money in today's monetary system, for the most part, is loaned into existence. It doesn't actually exist in physical form. It's all just ones and zeros, and it's mostly digital. and it's mostly created in the form of loans. And so when one man's debt is another man's asset, or one woman's debt is another woman's asset. And so if debt gets defaulted on, yes, the demand for the dollar does fall

based on that amount of loan that's defaulted on. But because money is loaned into existence, a default leads to more defaults, leads to more defaults, and it actually creates a credit crunch where the supply of money will decrease even faster than the demand because of the default. And so even though the demand has fallen, if supply falls even faster or money becomes even harder to get because of this credit crunch, the price of the money can still rise.

And so because there's really no exit valve, other than gold, and we can talk about gold or Bitcoin or something like that if you want to as well, because there's really no other system to go to, the dollar will rise even if there are massive defaults on the dollar. Support for this podcast and this message come from ErisX. With ErisX, you can trade spot and regulated futures on cryptocurrencies through a licensed, U.S.-based exchange.

ArisX believes in fair access for all. Sign up today to take advantage of zero fees and learn more at erisX.com slash consensus. This episode is also sponsored by the Stellar Foundation. The Stellar Network connects your business to the global financial, infrastructure, whether you're looking to power a payment application or issue digital assets like stable coins or digital dollars. Stellar is easy to learn and fast to implement. Start your journey today at stellar.org slash coin desk. Our final sponsor is grayscale digital large cap fund. In times like these, diversification is key. Consider gray scale digital large cap fund, ticker symbol GDLC. It's the only

publicly traded investment product that offers diversified exposure to large cap digital currencies, all from your brokerage account. For more information, Visit grayscale.co slash coin desk. That's g-r-a-y-scale.co slash coin desk. The interesting thing is, you know, you take this, what you have is kind of this dollar powder keg, right? Where anything that, any sort of liquidity crunch, as we saw at the beginning of this economic crisis with COVID-19, just sets off a huge amount of demand for dollars, right? because it's not just the natural demand of kind of the U.S. is debt and debt held here, but the world's debt, right?

When everything comes due, there's this huge artificial debt, which creates a spiral up in the price, which then starts to impact local economies, especially emerging market economies, where it's not even necessarily kind of this super debt cycle, but just the fact that if you're a net importer and everything coming in is priced in dollars, but everyone's paying you, in a local currency, if those things start to break apart, it just creates chaos.

We're seeing that in, I mean, a huge number of economies around the world. Lebanon stands out as one that's had a real big shift in fortunes over the last six months. But it becomes this kind of spiral on a pretty big level. Yeah, I mean, and that's the thing, is that you get into this. This is actually part of the milkshake and part of the short squeeze is that, you know, as the dollar gets stronger, it puts more pressure on the rest of the world. You know, it gets squeezed even more. What little liquidity that there is gets squeezed into the U.S.

dollar because it's seen as the safe haven. And then as it gets squeezed into the dollar, the dollar goes even higher. The dollar going in higher puts even more pressure. And so, you know, it becomes a kind of a self-reinforcing loop. It's like a ratchet. The tighter it gets the less it can back up. And so, you know, and it can develop very fastly.

And the way I used to explain it is I'm not sure if your listeners are familiar with gold, you know, in the arguments for owning gold. But one of the arguments for owning gold is that there's just not that much of it, right? If we were to go back to some kind of a gold standard, there's not enough gold in the world to go around, you know, for all the demand there would be at least not at current prices. And so as that demand increases, the price of gold would increase and therefore you should own gold. That's part of the argument.

Well, it's the same dynamic. And part of the argument is that there's a lot of paper gold that's traded out there, but it's just a promise for gold. It's not actually physical gold. And so, like, you know, on the comics, you know, there's like 200 times the amount of gold trades on the comics, as there actually has, as they actually have, you know, in reserve, if everybody actually tried to take the gold that they're, that they quote unquote own. It's kind of fractional reserve gold banking, so to speak.

Well, the same thing exists in U.S. dollars. It's a fractional reserve system, which means that, on any one day, if everybody went to the bank to pull out their money, there's just not enough money there. The banks do this because they know not everybody's going to go to the bank on the same day and pull all their money out. And so they keep a fraction, quote unquote, of the reserves in the bank, and the rest are lent out and sent around the world and money's created out of, you know, more money's created, et cetera, et cetera. But the same thing happens in fiat currencies that could happen in gold. If everybody who has these paper certificates or this paper

wealth wants to go and get their physical dollars, there's just not enough to go around. And so that would, that would cause each individual physical dollar to go up in value if everybody, you know, tried to get it on the same day. And that's exactly what we saw, you know, a few months ago in March. It was essentially a global margin call on the dollar. And not just the U.S., you know, people around the world needed dollars, too. that's why you saw all markets selling off. And it got into a situation where it wasn't just equity markets, commodity markets, the gold market, Bitcoin, government bonds, real estate, everything was getting liquidated because it didn't matter the price.

It didn't matter the fundamental. It didn't matter the future potential. All that mattered was, I need dollars today. And so it was, you know, it was that unwinding of all this leverage. And the central banks had to come in. in and provide short-term liquidity and make a bunch of promises and backstop a bunch of industries. And so, you know, that pressure has released. They flooded the market with more liquidity.

But that's essentially what, you know, what has happened and where we're at. I think March is a good example of proving the demand for the dollar. Yeah. And I think one thing that's worth, you know, making note of here is that we use these words, like strong is so often in other contexts means it's just, a synonym for good, right? But the problem is, you know, a strong dollar, it creates, well, one, an incentive to not spend all those dollars to hoard them, right? So all of a sudden, kind of the loaning of money goes out. It creates, it makes it impossible for American exports to be purchased by anyone,

right? There's a, we had Lynn Alden on the show last week, and she was making the correlation between times when the dollar has been the strongest and when corporate earnings. So actual, you know, not just top line growth in stock prices or anything like that, but actual earnings have been lower, again, for large their reasons, because everyone operates multinationally at this point. And I think it's just, you know, it's useful for people to understand that the spirals in a way that just freezes the whole system rather than just being kind of hard for some other places.

It's not good for the U.S., I guess, as well. So maybe we can get into that. Like, why, you know, because I think this is the crux of maybe understanding what happens next, at least on the policy side. I think the individual side, you know, diversifying into things like gold and Bitcoin is worth talking about as well. But from a policy perspective, you know, how does the strength of the dollar become bad for the U.S. itself? And can you see, although it's been the pillar of the global system for so long, can you see arguments start to crop up that it would be in the U.S.'s interest to not be the world

reserve currency anymore? Yeah. So one thing I should probably make clear. And I usually try to do this early on in the interview in case somebody doesn't say, listen to the whole thing is that, you know, I am, I, there's a big part of me that does not like my theory. And part of the reason that I was pretty sure I was right when I've kind of kind of kind of figured it out was because I hated the answer, you know, typically, you know, if you like the answer, it's because it's kind of comfortable and it makes sense and it feels good. I hated the answer when I first came to this. And it took me a long time to kind of accept it.

But that's kind of how I knew or kind of what made me feel like I was right as well. And so I think, you know, this is all going to end very, very badly for the dollar. I am not sitting here professing that we can continue these proffleget ways and, you know, print money out of nothing and spend whatever we want. And there's going to be no ramifications. the chickens are going to come home to roost. The point I like to make is that every other country has the same system. And it's just my belief that the chickens are going to come home to roost for them before it comes home to us.

It doesn't absolve us of our sins. The Piper is going to show up, right? I just happen to think he's going to go to a bunch of other towns before it comes to ours. And so to your point, will there come to? a time when the dollar loses value or could there even be a time when it would be in the U.S.'s best interest to have the dollar be lower? And I think the short answer is yes. I think that, you know, after the next call it two, three, four, maybe even five years of dollar strength, that there were more than likely come an event, whether it's a, you know, it's out of the blue

or whether it's a coordinated event where the dollar will get revalued. lower. And what I mean by that is perhaps the government after, you know, the dollar gets so much stronger and it kind of brings the global economy to its knees, maybe we'll have another Bretton Woods type conference or another Plaza Accord type deal where the world will come together and they'll say, listen, the debts have just gotten too big. The system that we've designed, it's a horror show. The dollar has just gotten too strong. We need to write off these debts. We need to come up with a new system. And I think in something like that, then it would probably be in not just the U.S. interest, but the whole world's interest to do that. But I don't think that something like that

happens until there's a lot of pain. Again, you've got to remember that this is a, this is a system that has been built over the last 80 years. And the amount of blood, sweat, tears, you know, political capital, you know, human sacrifice as far as military, this. This is not something that the U.S. is just going to wake up one day and hand over. And despite there being some advantages for the U.S. to have a lower currency, there are incredible advantages to being the World Reserve currency and having a strong dollar. I just don't see any politician that wants to give that up. Now, it's possible and make it to a situation where they don't have any choice.

But I don't think that there's a bunch of politicians behind, you know, dark, curtains in Washington, D.C., trying to come up with a way to lose the World Reserve currency. You know, some people may believe that that's the case. I don't believe that's the case because I think the advantages vastly outweigh the disadvantages. However, what I will say is that Trump's policy of America first, unfortunately, as it may sound, does not fit with the current design of the monetary system. And what I mean by that is that there's this thing called Triffon's dilemma. And this is a famous economist named Robert Triffon from, I think, back in the 60s, perhaps the 70s, who kind of came out and said, you know, this global reserve currency issued by one country, it's all great for a period of time.

But eventually you will come into a situation where the needs of the global community come into conflict with the needs of the domestic community. and when that happens, you know, there's a crisis because you can't have it both ways. And what Donald Trump has done is drive us right into the heart of Triffon's dilemma. America first policies do not square with this current design of the U.S. of the global monetary system. And, you know, it's not like you can just walk into Trump and say, hey, the system isn't designed for this. Because you know what he's going to say? He's going to say, I don't care. This is the way I want it, America first.

and, you know, other countries be damned. And so, you know, something is, this is going to end badly. I don't know exactly how it's going to end. My thesis is that the dollar will get stronger before it gets weaker. But back to your initial question, I know I kind of went on a little bit of a tangent there. I do think it's possible that the dollar will go lower, perhaps significantly so in the years ahead. I just don't think that that's in the cards right now. It's really interesting seeing, you know, I think that the Overton window is kind of open and expanding on this conversation about what a post-global, you know, U.S. Global Reserve System might look like.

But it's so interesting that it's, we're so early in that conversation, I think this validates your point of there being no, no, no, neither no blueprint or consensus or political will to actually drive that conversation forward, even if someone became convinced that you have, you have, you have on the one hand, you know, Hank Paulus, Pulse in writing in foreign policy almost exclusively about the potential position of the Chinese R&B to replace the U.S. dollar. And coming up very, very clearly that that's not the case. Whereas then you have other people who are saying, no, no, no, the problem isn't just the U.S. dollar. The problem is the idea of any national sovereign currency. This goes back to a Keynesian idea, right? Or what Keynes was proposing at Bretton Woods. And you have Mark Carney last year proposing what effectively amounts to a modern bank court, right? Which is basically just that he proposed Libra, but run by central banks, which was interesting.

You know, and that's obviously like a little academic, and he was just, you know, he knew he was coming out of his role at the, you know, Bank of England. So who knows where that was coming from exactly. But I do think it's really interesting that this, the conversation is so nascent, but it's happening in some ways, which I think is different, right? And, you know, in the Bitcoin world, we've seen our version of this Overton window shift a little bit with Paul Tudor Jones coming in and, you know, talking about the great monetary inflation and talking about why that makes him interested in that asset. And I mean, I guess that's an interesting context to maybe talk about this sense that you have

that there's a scenario. You know, gold and Bitcoiners tend to view their assets, or at least some portion of them, tend to view their assets is diametrically opposed to the U.S. dollar, right? If the U.S. dollar is thriving and going up, that must mean that their thing is less relevant and going down. And you kind of have a sense that they may rise in tandem. Yeah, I think that that is most likely the case. Again, I think, you know, and it's understandable.

I understand why the idea behind, you know, gold or Bitcoin or some other stores of value, it makes sense to own them in the eventual collapse of the U.S. dollar. It intuitively makes sense. And, again, you know, the dollar will someday lose value. All fiat currencies eventually do. But I think, you know, when you think back logically about how things progress, very rarely is it like, you know, Star Trek where you can just beam yourself from one place to another and it just automatically happens. I'm not saying that there aren't events that can happen where things can happen overnight. You can have, you know, these big announcements come out overnight, which change the world.

But that's typically not how it happens, right? It can happen that way, but it's not typically the way it is. Typically the way it is it's a long road. There's much pain along it, and it's only once the pain gets so great, the change is enacted. So I get a little, I don't know, frustrated is the right word, but when people say that, you know, the dollar is just going to be devalued overnight or, you know, this is just going to happen overnight. Well, just because it's a possibility doesn't mean it's a probability. And while you can, you know, it's okay to have, you know, contingency plans for this small probability event.

But just because something has a small probability of happening doesn't mean you have to allocate a huge portion of your portfolio to this small potential event, right? I think it's more wise to have a position or, you know, be ready for something like that. But also realize that typically these big macro things, you know, something like the change of a global reserve currency. or the change of a trade deal or, you know, peace treaties. These typically, it takes a long time for these to develop. I mean, think about how long Brexit took, right? I think the original Brexit vote was in 2016 or something, and they finally just did it at the end of 2019, three and a half years later.

So I guess my, you know, I do think that we are going to get into a system where a lot of people would like to leave the dollar. They will see it as an increasingly hostile system or an increasingly complex, unnecessary weapon that is wielded by the United States. And I believe there's great demand for an alternative. I just think it's a little bit too little too late. And so as I think we get into the middle of this crisis,

the ulterior systems that do exist will get flows and will get increased attention. And that will cause, because those markets are relatively small, the gold market's relatively small, the Bitcoin market is relatively small. Because those markets are relatively small, as some of the global liquidity, you know, ascribe to the dollar peels off and looks for an escape hatch,

it will find its way into things like gold or Bitcoin or other things. And that will cause those markets to rise. But I don't think the whole world overnight all at once is going to leave the dollar and go to gold. I don't think the whole world all at once overnight is going to leave the dollar and go to Bitcoin. It just seems more likely to me that we'll go into a period of great chaos. There will be a lot of ups and downs, peaks and valleys and a lot of pain. And at the end of that valley, which could be three, four, five, seven years from now, a change will be mandated.

But it's very possible that along that route, things like gold and Bitcoin or other stores of value, maybe it's diamonds. Maybe it's, you know, farmland in New Zealand. I don't know, maybe those types of safe haven trades increase in price as the, you know, as the road to that eventual change of the system, you know, unfolds. But I just, I just think it's unnecessary. And I think it, it, it, I just, I don't want to say it's lazy thinking because it's, it, that's not the right way. But I think it's just too easy to say, you know, the dollar's going to lose value, so therefore buy gold or buy Bitcoin. I just don't think it's going to be that simple. I think it's going to be much harder than that.

Well, and I think that the kind of the point that you're making about the dollar's place in the world is that it almost has to be treated as this very fundamentally different force in the economy, right? It's a political asset as well, right? And so I think, so two interesting follow-ups to those thoughts. One is it was interesting because in the crypto space, one of the things that we saw is, you know, again, the first wave of this crisis was people who don't like Bitcoin basically being like, look, see it dropped off too, it's correlated, screw you, you're wrong. You know, like, it was to save haven. And then, and then after that, it, like, rebounded. So the resilience narrative came back. And then I think where, you know, where the narrative landed was a lot about the, the contrast between this sort of programmatic limitation and an overtime reduction of supply

issuance, you know, embodied in the, every four-year halvings happening at the same time as stimulus was ramping up in such a huge way was a really unique kind of narrative moment. And I think when it comes to Safe Haven trades, to use your term, those narrative moments really matter because they're about belief. They're about hedges in the future, right? So you saw that with Bitcoin, but the interesting thing was from an actual use perspective, what you saw was an unbelievable uptick in dollar stable coins, right? And this was all of them. I mean, Tether grew the most, but it was also USDC, the Circle Consortium and Paxos and all of them, you know, I think we went from like something like four billion total circulating supply of these things to

10 billion now. And a lot of it, it seems, you know, some of it was just crypto traders, right, moving liquidity out of whatever they had, you know, to kind of just sit there as dry powder. But I think it seemed like a lot of it was also people trying to get dollar exposure, even if it was this weird synthetic dollar exposure, right? It was this close enough different thing, which is really fascinating. And I think, again, kind of reinforces your point that there's this, I mean, look, the dollar got liquidity even in this market that was basically designed to be edge against the dollar system, you know? Right, right.

There's the straw right there. You may have seen this, and if you didn't, I'm happy to send it to you, but a friend of mine named Max Braunstein, who works at Coinbase, wrote a paper on this exact topic, and it talked about the increasing use of tether as a way, not that it was necessarily intended for this, but that actually increases the value or demand for the dollar. And tether being used as a way to get access. to US dollar funds or whatever. So I think it's a very interesting topic.

And certainly one that bears some scrutiny and then some, I'm very sympathetic towards that view. Yeah, he and Avi Feldman from Block Tower, who he writes with. And I think it's called, I can't remember what the name of the blog is, but it's a great one. So that was one point. The other follow-up that I thought was really interesting, I think really salient about what you were saying, is the expectation of the speed at which these radical shifts

happen and how the market might be able to understand them or bet on them or price against them. I think one of the things that also makes this so challenging is that any type of economic shift of the magnitude that we're talking about cannot be divorced from political reality, right? These things become political and those are X factors that you simply cannot predict. What we don't know, you know, you have this theory about the Dollar Milkshake, which makes tons of sense. The X factors are, what if politics gets us into a situation where there's a war? and then the military is involved, you know. And if you look at great historians, one of my favorite set of historical writings,

and it's from a source that not everyone loves, but Eric Hobbsbaum, who's a 20th century historian, and he wrote his books in such a way towards the end of his life. He did this compendium of books where he basically just sat down on a beach for three years and wrote everything that he knew. And each chapter looks at a period of time, so 1918 to 1930, or something, through the lens first of the economy. And then the next chapter is through the lens of the military. And then the next chapter is through the lens of politics, whatever the order is.

But each chapter you read, you're like, that was literally the most comprehensive, clear-headed look at how those systems all fit together that I've ever read. And then you read the next chapter and you're like, holy crap, how could I have missed all of that in that same 30-year period? And I think that's one of the real challenges when we have these conversations. We're in a time, I guess, that's so interesting. And this is why I think the work that you've done to kind of try to bring this together as a theory that people can wrap their head around is so important. We're in a time when the implications of what's happening in the economy are inherently, have huge political implications that are a part of much larger political forces that you kind of can't divorce them from. Right. Right.

And, you know, I'll use a competitor to use X dollar as an example to kind of prove this point is whatever you think about the U.S. dollar and the problems with it. I don't see how you can't describe those same characteristics to the euro. But then not only that, but it's like getting 20 different, if you've ever had a family reunion and you tried to agree on something, you realize how hard it is to get 20 different people to agree to do the exact same thing. Now you've got 20 different countries, right, or whatever their exact number is. And the idea that you can have this, you know, this, you know, this unified currency when you've got 20 some different,

disparate countries with needs and wants and desires and da-da-da-da-da. I guess my point, but look how long, you know, number one, how long it's held together. Number two, you know, the first euro crisis was, you know, 10 years ago and the euro is still together. The amount of political capital that has been spent to keep the euro together should not be, you know, underestimated. Now, I'm somebody who is hugely bearish on the euro. I think the euro is most likely to fail.

But that doesn't change the fact that it has had a number of things thrown at it, and yet it's still here. And I think a big part of that is you have to consider the political capital that has been spent to keep it so. So the idea that the U.S., after spending 80 years of political capital, is just going to roll over or is just going to give up the global reserve currency and these types of things. I think people don't have a proper appreciation for how much work has gone into setting the system up as it is.

And I think it will end, but it will end because of the poor design of the system, not because people want to change it. It's not because the U.S. will want to give up on the global reserve currency. I don't think it will be because, you know, a politician in Washington suddenly, comes up with a new system and everybody buys into it. The political capital and the institutional effect of the global monetary system is,

it's kind of hard to fathom when you kind of step back and really think about it. No, I completely agree. Well, I've kept you at the super macro level because I think that's where my head spends a lot of time. but what do you think about, what do you look about kind of day over day, week over week? You know, what are you watching right now in terms of how things are playing out? Yeah, the first thing I look up at when I wake up in the morning is the price of gold. The second thing I look at is the price of the dollar. And then I start looking at things like what are treasury rates doing, what's the stock market doing?

So, you know, I like to look at the big picture stuff first. You know, I'm not necessarily looking at an individual stock or what an individual industry is doing. I like to get a, you know, the, I like to get a big picture view of just kind of what's going on in the markets itself. You know, the other thing that I'm following very closely is the political events and how that ties into monetary events. So, you know, the thing that I've been focused on recently is Hong Kong and the fact that, you know, Hong Kong has had this autonomous nature from China for, well, for forever. It used to be under British law. And then, you know, since, you know, in 23 years ago when the British. handed Hong Kong back off to China. China had this, you know, this philosophy, I guess,

for lack of a better word, of, you know, one nation, but two systems. And, you know, last week for the first time in the 23 years of its existence, you know, the communist, the Chinese Communist party did away with that, with that pledge. It was no longer one country, two systems. And, you know, Hong Kong is in the process of losing its autonomy. And that has implications because right now, because Hong Kong is autonomous from or has historically been autonomous from China, they have received from the United States kind of most favored nation status. They get special trade concessions that China does not get. And so with the result of, you know, China kind of folding Hong Kong into their one China policy, they are no longer going to, it's likely that they are no longer going to, you know, enjoy those special trade circumstances with the United States. And it just so happens that, you know, the Hong Kong dollar is pegged to the U.S. dollar.

It just so happens they also have the most leveraged banking system in the world. And it also happens that they've had, you know, almost a year of protests now with what's going on between China and Hong Kong. And not only that, to complicate things even further, their economy has probably been hurt by COVID as much, if not more than any other region in the world. You know, their three biggest industries are retail, tourism, and real estate. And all three of those have just been decimated by the COVID crisis. So we thought Hong Kong was in trouble prior to this. But now when you consider what's going on with the COVID crisis and now with the China doing away with the autonomous nature, we think it's very likely that this Hong Kong pig breaks.

And that has many both effects on growth. global currency markets, global financial markets, and geopolitical as well. So, you know, looking at things like that, you know, is one of the things I do a lot of work on. Yeah, it's a major kind of escalation in some ways of that today with Secretary Pompeo tweeting out. Today I reported to Congress that Hong Kong is no longer autonomous from China given facts on the ground. Exactly. It's a big tweet even by this administration's big tweet standards, right? That's a good way of saying it, yeah.

Well, listen, what, you know, do you think that these, I feel like Charles Dickens talking to the ghost of Christmas future, are these things that will come to pass or only may come to pass if we don't change our ways? I guess the question is, you know, how inevitable are some of these shifts or is it too hard to know what could intervene in the meantime? Well, I think that they are inevitable. And I think it's Doug Casey who coined this phrase. And if I'm attributing it to him incorrectly, then I apologize. But I've heard him say, you know, inevitable does not mean imminent. And I think that's what everybody needs to remember is things in the macro world and the geopolitical world, they always take longer than you think they should.

And I'm somebody who looks at this stuff very closely. And I think that they take longer than they should. And then they take even longer than I think they should, right? So even I'm surprised at how long that they take to play out. So my point is I think this stuff is largely, you know, it can't be stopped. The die has been cast, so to speak. You know, all Fiat currency systems do come doing it. And that's just kind of a mathematical fact.

The question is when. And I would say that we're getting closer to the endgame than we ever have been before. But it still may take longer to play out than many people think. I would not be shocked to see this play out over the next five or ten years. I think it'll play out over the next two to four years. But again, but if it takes five or ten more years to play out, it won't shock me. But, you know, I certainly think over the next couple of years, this whole topic, all these topics that we've been talking about are definitely going to become, you know, part of the popular conversation. Well, it's super interesting conversation.

And I really appreciate the time. And I guess I just want to end on one thing that I immediately noticed when I ran into your fund. It's named Santiago Capital. And I pinged you about this. And you had done the commuter to Santiago, which is basically an 800-year-old pilgrim trail across Spain. You told me when, but when did you actually do it? So I did that in 1999. spent 26 days, walked 20 miles a day for 26 days and 520 miles.

Greatest experience of my life. Yeah, so did you do the French route down from the Pyrenees? I did. Yeah. Yeah. I did it in 2004. Yeah, I did it in 2004. Yeah, during the año Santo.

So the año Santo means that it's a year, it's a whole year where the, the day of St. James falls on a Sunday. So you get two-thirds off purgatory instead of one-third. Exactly. So do you have your free ticket in heaven? I do, but I'm not Catholic, so I didn't take communion. So it was waived, basically. Oh, yeah, yeah. Okay, well, I have my certificate and I'm not giving up.

Yeah. No, I think it is a pretty amazing experience for anyone who did it. It's such, you know, I'd be interested to see how it, what it was like now. You know, when I did it, the Euro had just barely been born. It was still like there was, I mean, we never. spent more than seven, you know, euro a night on, on lodging or anything. And I'm sure it's changed a lot since then. Yeah, it was, it was fantastic.

So did you start in, you know, just north of Pamplona and come over the French border? Yep. Yep. Yep. We did the St. John paid to port and then down. Yep. Yep. Fantastic. Oh, man, you're getting excited thinking about it again.

I told my son when he graduates high school, if he wants to do it, I'll do it with him again. So that's about six or seven years away. so we'll see if he decides to do it. Yeah, that's perfect. My wife and I have plans to do that with, we're just going to make them, I think, is our goal at the high school. Well, we're going to try to be diplomatic about it. We're going to try to tell stories about it,

or at least I'm going to tell stories, because my wife hasn't done it yet either. So much that they get excited and think it's their idea. But listen, Brett, really, really great talking to you. So much insight. And I think a lot for our listeners to chew on. So thanks for spending some time. Well, thanks for having me and happy to come back anytime and wish all our listeners good health

and good luck. One of the things that I think was so important about that conversation, about the perspective that Brent has, is this idea that economic realities and economic predictions can't be divorced from their political context and the larger geopolitical context. Right now, we're seeing, for example, of serious uptick. an increase in the tension between the U.S. and China. That is not just an economic tension. It's a deeply political tension with a hopefully not military outcome, but it's something that certainly people are talking about. Those types of political and even military actions obviously have

huge, huge impact on how these different economic flows will shape out. And so to me, it seems like if we're going to have a conversation about the strength of the dollar and the relative strength of all these other assets, we can't divorce it entirely from the larger political context in which it operates. I hope that that's a conversation that you guys are interested in. It's certainly something that a perspective that I'm going to keep trying to bring into this show. Anyways, guys, I hope you enjoyed that conversation. Like I said, I know I did. And as always, I appreciate you listening. So until tomorrow, be safe and take care of each other. Peace.