The Breakdown - The History of the Dollar System From Bretton Woods to QE Infinity, Feat. Luke Gromen

Episode Date: April 22, 2020

QE infinity. Corporate bailouts. Nudging UBI. The incredible economic phenomena going on now didn’t happen out of the blue. They are the byproducts of a key events spread across the 70 year history of the US dollar led global monetary system.  Luke Gromen is the founder of Forest From The Trees, a macro/thematic research firm. In this episode, Luke provides a TL;DR on those key events that got us to where we are today, including:  Bretton Woods and why the world went on a USD-based system rather than Keynes idea for a non-sovereign ‘bancor’ world reserve currency The move to the Petrodollar in the 1970s The financialization of commodities that started in the 1980s The monetary policy vacuum after the Cold War ended How a shift in executive compensation rules led to many of today’s problems with Wall Street The export of Treasury Bills as a business model The fallout of 2008 globally and domestically The end of Treasury Bill buying in 2014 Why the Fed is the only sugar daddy left

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The Breakdown is distributed by CoinDesk. Welcome back to The Breakdown. It is Wednesday, April 22nd, and boy, oh boy, do we have a good one today. We are all of us living in fast forward right now. Things that we thought unthinkable just weeks or months ago are now normal, and are now being preceded and followed by even more unimaginable things. One of the goals of this show of the breakdown is to try to contextualize these incredibly fast-moving events, right, to help you place them in a framework that makes them make more

sense, right? That isn't just random vagaries of the universe and the economy and all that sort of stuff. This requires having guests who can speak not only to Bitcoin and crypto and not only to the larger markets in their current setup, but the larger historical context, including the key events that got us to where we are today. My guest absolutely crushes on that front. Luke Graman is the founder of Forest from the Trees, which is a macro thematic research firm. He has decades of experience in macro research. He has been featured on real vision, on macro voices, basically everywhere you'd expect to hear really interesting, thoughtful, big picture macro thinkers.

And in this epic episode, we go deep and give you a serious 70-year context on the dollar system, the role of the Fed. Basically, everything that helps understand, helps explain how we got to where we are today and what might come next. So we go through the Bretton Woods system and the decision to have a U.S. global reserve currency system where the rest of the world's currencies were pegged to the dollar and the dollar was pegged to gold. We move on to the rise of the petro dollar in the 70s and why it was a product of losing or at that time feeling like we were losing the Cold War.

We talk about the financialization of commodities that starts in the 80s and proceeds all the way to now. We talk about the end of the Cold War and a shift in executive compensation rules under Clinton that led to some of the challenges that we're seeing now in terms of how war. Wall Street organizes itself. We talk about the export of treasury bills as a business model first to Europe, then to China, and how that's shaped geopolitical realities. We talk about the fallout from 2008 and the intervention in the markets, not just in the context of domestic policy or the rise of Bitcoin, but in the context of what it's signaled to the rest of the world about how the U.S.

was prioritizing its markets versus everywhere else. We talk about the end of global country's willingness to buy treasury bills starting in 2014 and why that has gotten us to this moment where the Fed is the only sugar daddy left. This is an awesome episode and I know that it will be educational, informative and helpful. So as always, long interviews are edited very, very lightly. So knowing that, let's dive in. All right, we are here with Luke Grumman. Luke, thank you so much for joining. Thanks for having me on today. I'm very excited to be here. Okay, great. So for those who aren't familiar with you, Could you give us just a little bit about your background and kind of how you came to do what you're doing now and what it is that you're doing now? Absolutely. So I'm the founder and CEO of a macroeconomic and thematic research firm called FFTT, which stands for forest for the trees.

And that's really what we try to do is help people see the forest for the trees, as the old saying goes. My background is I spent nearly 20 years in investment research on the sell side, started off in equity research back in the mid-1990s and then moved over to institutional equity sales. When I was in that seat, I was one of the founding editors of a product called The Herd in the Midwest at a firm I was at Midwest Research back in the late 90s. And Midwest research was known for very deep in the weeds, bottom-up fundamental research. We pioneered the use of surveys and that type of deep in the weeds investment research.

And what I has heard in the Midwest product that I found effectively aggregated a lot of the research that we were doing from bottoms up perspective, married it with the top down reading I was doing on my own. And it turned into being an extremely popular piece read throughout Wall Street, where I started sending it out to the clients I was calling on for the firm. Other salespeople began sending it out. And by the time, a few years had passed thousands and thousands of people reading this. And so I just had, for whatever reason, a knack of being able to put pieces together and used a bottoms up framework for coming to macro conclusions and thematic conclusions. And it was very, very popular with portfolio managers. And so fast forward a couple years, myself and about 20

other partners founded a firm, another research firm, Cleveland Research Company, in mid-two-thum. 2006. I reprised that role, writing a similar piece in addition to calling on clients for the firm. And then in the 2008-09 timeframe, that thematic and macro perspective was very helpful in terms of positioning clients of the firm properly for what happened. In the aftermath of that, the world became much more central bank and macro-driven, and I found myself spending more and more time doing macro and thematic type work. And so came to 2013. and I approached my partners that I wanted to work full-time on this macro-thematic. I want to stop calling on clients and focus on this.

And they said that they would love to have me in that seat. I told them my one caveat was I wanted to have complete creative control to write whatever I wanted to write because I just felt like some of the trends we were seeing were, it would be very useful to have the ability to say what you wanted to say rather than having to couch it. And so from a marketing perspective, my partners had a hard time sort of figuring out how they would position that within the product offering, just because they were known for just their very deep in the weeds, bottoms up fundamental research, and they're still do a tremendous

job at that. And so we instead agreed to part ways amicably. I'm still friends with those guys. And I hung out my own shingle as FFTT in early 2014. And so we're going into our seventh year of business. And we talk to and consult with provide investment research for. both institutional high net worth individual individuals, hedge funds, et cetera. And we also have a retail product as well called tree rings that has become extremely popular

since we rolled it out almost two years ago. This is a total aside. But one of the things I think about this all the time that's so interesting is how many folks in finance and in research particularly kind of almost preceded the trend towards these independent news sources, independent information sources, independent analysis, right? Like substack and substack subscriptions have become one of the biggest forces in media, right? Matt Tyby just left Rolling Stone to do his own, which makes total sense. And so many of the, I think the ancestors of that were actually these financial newsletters.

They were often in a firm, and they have this trajectory. We just had Jared Dillion on last week, who has been doing the Daily Dirtnap for 12 years, and Ben Hunt and Epsilon Theory have been on. And I think it's a, it's really interesting to see how, how kind of finance and market knowledge got to this idea of wanting, wanting to kind of find signal through the noise and being willing to pay for kind of those voices independently before, before a lot of other industries that I think are either getting there now or will in the future. Yeah, it is interesting. I prefer to do it as the iTunesization of Wall Street research where in the old days you had to have a record label and an R&D guy and, you know, or an A and R guy, excuse me, not an R&D guy, but A&R guy and all this stuff. you had to buy the CD and even if you didn't like 13 of the songs, you still, you know, if you like two of them, you had to buy the CD. And now it's, you know, it's harder to sell a 13

song CD for full boat, but if you can write songs, uh, you can find an audience and, and sort of the middleman has been taken out of that. So it's an interesting, uh, it's an interesting observation. Yeah. Well, I mean, it's great for independent content creators too, because what it does is it allows for a kind of an ending to credentialism, right? One of the last, credentials was the who's the one distributing this information to me. If that if that's just, well, it's more becomes whose information consistently provides me with value that then is reflected in the markets or in whatever kind of business I'm in. But that's total aside. So I won't hang here too long. So where I wanted to start, we were just talking about this before. You know, there's a

million different things we could get into. The context I think for listeners and why I was so excited to bring you on is I think so many folks, whether they're in Bitcoin and crypto or just, in markets in general are trying to wrap their heads around what feels like a radical set of changes that we're living through in real time, that we're witnessing in real time. And one of the things that I've been trying to do with the breakdown is bring people on who can provide context historical and contemporary to help people understand which of these things truly are new head spinning phenomenon versus things that are maybe accelerations of trends that were going on before. And so maybe the way to start is the widest possible view,

you had a tweet a couple weeks ago about the idea of the global economy set up as a company town. So maybe, you know, we don't have to even necessarily use that tweet, but I'd love to have, just for our listeners, some framework of how you view the economy in large kind of historical context. You know, are we coming to the end of a period that was kind of distinct? And if so, what was that period? Yeah, absolutely. I do think we're coming to the end of a period that was distinct. And that tweet regarding the company town was the gist of it was effectively that since 1973,

the U.S. dollars had a monopoly on oil pricing effectively. And so that we can call what the system was what we want, but it wasn't capitalism. It was effectively a company town. And so by way, a background company town was, you know, I think it was in the late 1800s tip there where you had one company and they hired everybody and you had a company store and so you worked at the company and you you got paid by the company and then you had to go to the company store and pay whatever price the company store was that's not really capitalism and once you start having multiple choices of where you can work where you can shop etc that's capitalism

and so my my point in highlighting this was we've had this the most important resource the master resource really is energy and there's been a monopoly on energy and and it's been enforced with financial sanctions, geopolitical wrangling, at times violence. But it's been a system that worked. And so some people say, well, this has been a bad system or it's an unjust. We need to go back in time and understand why this system evolves. So if we go back to at the end of World War II, at Bretton Woods, there were two options. There was John Maynard Keynes proposed something called the Bank Corps, which was a neutral settlement asset that floated in all currency.

and would have basically prevented systemic deficits and surpluses from building up over time that we have since seen because we didn't go with the bank or. We went with a proposal from the United States as voiced by Harry Dexter White, which was the dollar is the center of the system. The dollar is paid the gold at $35 and pounds, and everything else is then tied to the dollar. And it provided the U.S. what DeGal called exorbitant privilege. and that system worked at first. It came under stress because of the dollar pay and the U.S.

is spending in Vietnam and the great society spending by Johnson. By 1971, it was clear to everybody that the valuation, even though the U.S. had written the dollar down against gold from 35 to 42 announced in, I want to say 68 or 69, but at any rate, the system was strained. The was the weak length. Everybody knew the US owed way more money than it could satisfy with the gold we had. And so our choices were, number one, devalue the dollar significantly against gold to basically take that gold backing up to a level requisite to reestablish confidence in the dollar and in the Brettonwood system, or close the gold window, default on the whole system, and move to something else. And we chose the latter. Again, we can discuss was that the right thing or not,

but the key was we went, we closed the gold window. So now you have a global reserve currency, the dollar, with effectively no backing. And so then we moved to this petrol dollar system where what we effectively did was replace the gold backing of the dollar with oil backing. And to do that, you needed the price of oil to be higher to basically create more dollar liquidity to effectively, increasingly, you know, to make oil big enough to back the dollar effectively. And again, here, too, I don't moralize on why this happened or was it a good or bad thing. The reality is, in 1971, the United States was not exactly winning the Cold War. It was neck and neck. And what this system allowed us to do was print dollars for oil. And while the Soviets had to actually lift oil

out of the ground to achieve those same dollars. And so basically, once the system got set up, Once the Saudis sort of enforced this by saying they would only price their oil and dollars, we won the Cold War. It just hadn't been marked to market yet because we were printing money for oil and the Soviets had to dig it out or pump it out of the ground. The challenge in this is that it forces the U.S. to run these big deficits to basically hollow out our manufacturing, to basically subjugate our middle and working classes to run the deficits, supply the dollars to supply the dollars to the world. Once we've made the dollar, that part of,

you know, the reserve currency. So from 71 to 89, this is a system, some people liked it, some people didn't, but there was a broader geopolitical context. We needed to beat the Soviets in the Cold War. Eighty-nine, we defeat the Soviets in the Cold War. And at that moment, in a perfect world, have another monetary conference. We restructure things, but we didn't. We sort of took a unipolar moment in history of the U.S. and, you know, we continue this dynamic of running deficits and then having to find other nations to finance our deficits by basically buying our treasury funds and otherwise invest in U.S. financial assets. And so, you know, we have NAFTA, which helps out, effectively another process of another step of outsourcing jobs to increase deficits, finance

U.S. U.S. government spending. We get China into the WTO. And so the, the, we kept this process going so on and so, you know, for this period of time. I would say, you know, if we look back, the thing, you know, it wasn't like we could just spend willy-nilly and print money willy-nilly in the the overriding theme of this system, if you look at when we had oil backing the dollar, was you can see it. The dollar was basically managed to be as good as gold for oil. And when I say that, if you look back historically, right, so the dollar was as good as gold, then we removed the gold backing, replaced it with oil, but the dollar was still managed to be as good as gold for oil from, call it, 1973 to about 2003. And so when I say that, if you look at when for a 30-year period, the price of oil

was between, you know, $15 and $25 a barrel most of the time, you know, at extremes, when it got to 30, the Fed would start raising rates. And when it got below 15, the Fed would be cutting rates aggressively. And so there was this management of the U.S. economy, which was the biggest economy, the biggest oil consumer, et cetera, to manage the dollar to be as good as gold for oil. And that was a key tenet of this company town petro dollar system. Beginning in 2003, we began to stop doing this. You can see it in the chart where basically the price of oil began getting away from us. It would have implied massive rate rates in the U.S. economy, which, given how financialized we'd become, how indebted would be become, would have broken

the economy. And so we just, we just stopped doing it. Instead, we started doing some of these, you know, whether you look at NAFTA, but in particular post-01, get China into the WTO, where suddenly we have this sort of captive financier where we offshore our factories to China. We run the deficits, and China effectively, well, not effectively, they did take their treasury holdings from 60 billion in 01 up to 1.3 trillion in about 10 years later. And so this good as gold for oil system began to break down where basically you're sort of not keeping the dollar in a consistent range. You're not paging the dollar, the dollar oil peg, if you will, began breaking down in 03, continued to break down through 08. And post-08, I think things got a little bit more

hairy. And since then, we've been, you know, transitioning away. So I think, you know, the one framework that I use is this, you know, this breakdown of the system that has well underway, We're decade, you know, a decade plus into it of the good as gold for oil, the dollar being kept as good as gold for oil breaking down. And then the geopolitical in the last five to ten years, the geopolitical fallout of some of the decisions where we were, we made 20 years ago, for example, getting China into the WTO, which was, in my view, effectively, an attempt to extend to the dollar system as structured post-71. In the last five to 10 years, we've gotten into some of the bad fallout from that. And by that, I mean, we can now see it clear as day with the coronavirus crisis that we're the most powerful country in the world and we have a shortage of masks because we can't get enough of them from China.

And this geopolitical reality of basically supply chain vulnerability, particularly as it relates to defense, but as we're seeing it, you know, written much more broadly here. in the last month, pharmaceuticals, masks, equipment is sort of another framework we've used then, is in terms of this transition, is, okay, we used to keep the dollar as good as gold for oil, we stopped, and we've seen a transition of that. And then more recently, the geopolitical pressures of the reality that our supply chains have become overwhelmingly dependent on another nation that when we started was sort of a small emerging market competitor and is now, by everyone's account, an adversary of some or competitor or adversary of some description.

So those are the two big frameworks. I apologize for kind of going on, but those are the two sort of big frameworks we look at. Yeah, no apologies necessary. I asked for the frameworks, and we got the TLDR on the monetary system and economic system for the last 70 years, which is exactly what I was going for. So it's interesting. So basically you kind of described a few different waves, right? You have a first wave post-Bretton Woods and kind of on the U.S.

is the U.S. dollar is the reserve currency, the world backed by gold. You kind of shared this period where we have to make a transition based on our need for oil. But it's still within the context of the broader kind of an intentioned set of U.S. global objectives, right? It's not just foreign policy. It's right, what it looks like to live in a, in a U.S.-led world or a world where the U.S. is trying to be the leader vis-a-vis the Soviet Union. Then there's this break in this moment where a lot of folks kind of point to, you know, some people have called 1890 is the year that ended the short 20th century.

Hobbsbom called it that. You have Peter Zahann who just wrote Disunited Nations, who was on the podcast a couple weeks ago, who talks about this being such an inflection point because basically you have Herbert Walker trying to rally for perhaps not that exact new Bretton Woods, but a larger national conversation of what do we want the world to look like, going forward. And we elected Bill Clinton and understandably, right? People were tired of war.

They wanted to focus on domestic issues. But because of that, we never had the conversation with ourselves about what is, how are we going to design the new American century? We even had, you know, think tanks. I feel like one of the last gasps of think tanks was people trying to design the new American century and never kind of ever having that influence again to actually be a real part of the politicalist. So anyways, then you have what feels in a lot of ways like a slow calcification of the system where we do things kind of without intention per se or it's a short-term intention, right? It's based on what comes next, which leads us into kind of this is another another tweet. So what I'm trying to do here is drive us closer to the moment that we're living in now, right? And so you had another tweet from 2002 to 2014, the U.S. biggest export were treasuries, right? And then this shifted. And so, I guess talk just a little bit more about that period, this idea of treasuries being the biggest

export and what that meant. I mean, you got into a little bit of it in that first answer. And then from there, kind of where I want to get to is effectively where the last year, what the signals we were getting from the last year before COVID-19 and then what COVID-19 and the crisis has done to kind of accelerate them. Sure. So let me frame on my thought process here, a sex. So the, you know, as we noted back, the way this system had worked was basically the world sends us stuff and we send them dollars and then they take the dollars and they buy treasury bonds and other financial assets and then that finances more purchases of their stuff. And it was basically a virtuous cycle of vendor financing is effectively what that was. The amounts of vendor financing steadily rose. So we have a table that shows that from 1971 to 1985,

the, you know, of the aggregate U.S. Treasury bonds issued in that 15-year span of time, foreign central banks bought about 15% of them and held them as their reserve asset, basically as their gold. And that ties into the keep in the dollar as good as gold for oil, because they're basically stockpiling the stuff like gold. From 86 to 02, they stockpiled, or they bought, excuse me, roughly 28 to 30 percent of all the treasuries we issued. So there's now sterilizing almost a third. From 02 to 14, they bought 53%. So over half of the treasury bonds we issued, central banks were sterilizing as sort of, you know, their gold. And then the value

their cold started collapsing against oil right when we did that, you know, shortly after that period in time, right? It's shortly in the beginning of that period of time, you know, 0203. And then since 2014, they have stockpiled negative 4% of our total treasury bond issuance. So they've, they've begun dishearting, basically have stopped buying while our deficits have continued to rise faster. And so this was the hallmark of the system was, again, this vendor financing. You send us stuff, you know, we send you our jobs and our factories. You send us stuff. We send you dollars. You buy our treasuries. And then we repeat the whole process. In 3Q14, this began unwinding. And some of it was, I think a lot of it was,

a breakdown of any number of things. The relative economic importance of the US had been falling and continued to fall in terms of percentage of GDP. The importance of emerging markets, in particular China, was rising at the same point. I think the bigger issues were ultimately tied to economic and geological reality.

Oil was getting more expensive to pull out of the ground. The US had, had, had showed that in 08, they would no longer, with push came to shove, the U.S. could not and would not manage the dollar system to be as good as gold for oil. We showed in 2008 that if push comes to shove, we are going to print every dollar we need to to take care of the U.S. And that, I think, was a wake-up moment. You know, in the immediate aftermath of the O8 crisis, the world worked together to try to get things stabilized. However, once you get to 2013,

I think particularly after we weaponized the SWIFS system in 2012 against Iran, where we basically weaponized the dollar against Iran, we did so against Russia and 1314 as well. Late 2013, China says it's no longer in our interest to grow our holdings of FX reserves anymore, which was basically we're going to stop buying treasuries. and some of that was economically related to them. They were having some issues.

The dollar was getting stronger. Emerging markets were having some issues. Some of that was, I think, just the implementation of a plan that probably started right after the crisis when they realized two things. Number one, when push comes to shove, the Americans will take care of the Americans first, which means they'll print whatever they need to print to cover their deficits. And number two, the U.S. baby boom generation means the U.S. is going to have to print 100 to 200 to trillion dollars in coming years and decades. And so we need to start transitioning to some sort of new monetary system. And in particular for China, I think the move was that the reason they stopped

buying treasuries is if oil is still only priced only in dollars when we start printing the 100 trillion plus for baby boomer entitlements, et cetera, the price of oil for China is going to skyrocket in dollar terms. They're going to run out of dollar reserves and have sort of a classic balance of payments crisis like we saw in Southeast Asia in the late 1990s, economy crashes, unemployment, social unrest, political discontent, all non-starters for the Chinese Communist Party. And so they began moving away from this company town model of dollar hegemony, dollar monopoly in commodity markets broadly, but energy markets specifically and started moving towards pricing energy in their own currency. The Europeans, you know, actually tried to do so, you know,

20 years ago, you know, Saddam Hussein switched his pricing of oil or 5% of the world oil market from dollars to euros in October of 2020, excuse me, October of 2000. That didn't work out well for Saddam, ultimately, as we all know. So it's something that Europeans have been trying to work towards for decades. It's something the Chinese have been working towards. The Europeans have been joining them more recently getting much bolder in this. But I think this then takes us toward this new system where, you know, We stop keeping the dollar as good as gold for oil.

Geopolitically, it's in the Chinese interest and the Europeans' interest to begin moving away from this dollar-monopoly system. They start doing so. And it starts to be in the U.S.'s interest to begin bringing supply chains back. And so there's sort of this everyone has the same, you know, everyone has interests in moving in the same direction, but there are, you know, contrary interest in both. I'm sure there's Chinese domestic political powers that wanted the mercantile and export model to continue. Here in the U.S., there are powers that like being able to print dollars for stuff. And, you know, sort of the neoliberal economic establishment thinks everything Trump and, et cetera, have done is a really bad idea. The, you know, they don't look at it too much from the geopolitical side.

So that you've started to see this movement post-08. So let me stop there. And then remind me against sort of where you want to take that from there. No, that's perfect. So I think one of the things that is really interesting, especially for folks, a lot of folks who are in the crypto and Bitcoin space, they, 08 is an important inflection point, right? Obviously, it's tied up in the mythos of Bitcoin. You know, chance around the brink of a second bailout was built into the Genesis block.

Although I joked a couple weeks ago how quaint that critique looks in the way at the last few weeks. But the interesting addition, the framing that I think is really valuable that you added to that is the idea that there was a geopolitical ramification for 082 in terms of money printing being a signal that the U.S. as the steward of the U.S. dollar was not something necessarily that people could count on anymore and not having its own implications in terms of how things were shifting. So I guess let's bring it from, from 08, I guess, Let's move up to what was happening over the last decade that, you know, again, we're kind of talking about the end of this era. We shifted to this mode. You kind of spoke about it from a geopolitical perspective.

What about domestically, right? I know another theme of your tweets and your essays is kind of this idea that we've hyper-financialized commodities markets, that we've been hyper-financialized in just a variety of different products. Again, the intention here is we're all bringing this up to, you know, what we've seen in the last six weeks. What was going on? What were the ramifications, the fallout of 08? on the domestic side in terms of the relationship between Fed and the economy, you know, that was happening simultaneous to these kind of geopolitical ramifications that you were just discussing. Yeah, so I think domestically, you saw some of it was organic, some of it was chosen, going back to, you know, the things that Volker had to do in the early 80s to defend the dollar, effectively taking rates to where he took rates to, defended the dollar. The downside was

is it created this, between it and policies chosen, created this perfect storm of financialization, right? You start the cycle with rates at 15 and you sort of roll down the curve for 30 years. And you drive a lot of financialization, the increased financialation of commodities, the increased financialization of interest rates, actually. you know, when you talk about interest rate fusion. When I say financialization, you're talking about just the proliferation of the amounts of futures, forwards, derivatives, just the aggregate leverage riding on, you know, sort of an increasingly small sliver of underlying, whether it's commodities, gold, interest, you know, interest rates. And then broadly speaking, when you go from

15% to 0% on rates, your, you know, perfect example is U.S. government debt was 30% when we start, because at 15% rates, you can't afford more than that. Well, at 0% rates, you know, we're at 120% moving higher rapidly because the interest expense doesn't kill you at all. It's pay as you go or same as cash. So the fact that rates have come down the way they have have also expanded these levels of financialization. And so when you tie that into post-08, because the financial system had become such a big part of GDP, because we'd become so financially levered, because the derivative markets were so ridiculously large, hundreds of trillions of dollars, if not quadrillions, it basically forced the Fed to do what they had to do. They had to save the system.

They had to print whatever it took to save the system because the alternative was simply a disorderly collapse of the system, ATM stopped working, sort of all the way. worst parts of, you know, apocalyptic movies that we may have watched. And so they had to do that, but again, the flip side to that decision was this recognition that, as you put it, the U.S. was no longer going to, could no longer manage the dollar as a public utility as something that is a store, you know, managed to be as good as gold for oil as it had been, you know, from 1973 to 2003. And so the cracks emerged 03 to 08.08 was. when it was announced. That's it. Where push comes to shove, you know, we're not going to do this

anymore. And so you started to see movements away from that. So in early 2009, actually right away after we did the big QE, the head of the PBOC wrote a white paper at the BIS, he said, listen, we need a new global currency system. And he specifically cited Keynes's Bank Corp from the Bretton Woods conference saying the fact that the Brett, the choice we made at Bretton Woods has worked so poorly, is a sign maybe we should have chosen that one. There's some merit to it. And they talked about a neutral, the Chinese talked about a neutral reserve asset.

The IMF and the World Bank in the intervening years, 2010, 2011, made references to that. 2014, the World Bank again, we get to 2014, global central banks stop growing their holdings of treasury bonds. And I think that represents a key moment of this quickening, of a pace of this process. 2000s, you know, once global central banks stop sterilizing our deficits, the United States desperately needs to find, you know, for lack of a better word, a new sugar daddy, right?

So the Europeans under Bretton Woods were the sugar daddy stockpile in the treasuries, and they sort of stopped and cashed it in for gold and they forced the changes in the 70s by doing so. 1999, when they launched the euro, beyond that, the Europeans effectively stopped buying nearly enough treasuries. U.S. needed to find a new sugar daddy. China, get China into the WTO, here, China, you take our factories, you take our jobs, you make us stuff, we'll send you dollars, the vendor financing sort of virtuous cycle, that worked for a while. Post 14, post 13, China says, we're done here.

U.S. needs to find a new sugar daddy. Problem is, is the size of our deficits and the prospective size of our deficits, there's no sugar daddy's big enough. In theory, maybe Africa, but you would need Africa to run deficit or surplus against the U.S. to the tune of you know, nowadays, anywhere from 400 to 500 billion a year. And there's just nothing we're buying from Africa that's big enough without weakening the dollar massively. So Africa is not a choice, you know, Mars, Jupiter, you know, maybe, but other than that, it really only left the U.S.'s own economy to finance its own deficits. And then once that, you know, that balance sheet got too full, the Fed with printed money. And so this 3Q14 was a huge moment. And we saw,

you know, regulatory changes were made to the banking system, had to buy more treasuries, money market funds had to buy more treasuries in 14, 15. Even Obamacare, when looked at through this lens, was effectively a program that pushed government's cost of health care onto U.S. consumers as a way of helping finance deficits. The Wall Street Journal actually wrote an article noting that it helped reduce U.S. deficits, did Obamacare. But ultimately, you know, in 3Q16, the first symptom of U.S. balance sheet, U.S. private sector balance sheet running out of room was when U.S. deficits began to rise as a percent of GDP, which was the first symptom that, uh-oh, we're starting to crowd ourselves out. 3Q18, FX hedge treasury yields went negative, and that means that basically the global private sector that was still helping finance U.S. deficits once the central banks left. suddenly that the bank balance, you know, basically when foreigners buy treasuries, they buy the treasury,

they buy a hedge against the dollar, and then whatever net amount left over is their coupon. And in 3Q18, the cost of hedging U.S. dollar debt got so expensive that it went above the coupon. And so basically their choice was either don't hedge the dollar, which means I take the dollar risk. If the dollar falls, I lose money. or lock in and take a negative rate on treasury debt, and some did that. Or I start moving money out of dollars into other sovereign debt. And you saw the movements of, you know, German and Boone yields and JGB yields go negative.

That was part of the reason that was happening was that wasn't an irrationality. That was a perfectly rational market reaction to FX hedge treasury yields going negative, because as soon as that happened, the flip side of that was JGB yields after hedging for the yen or boon yields after yielding for the euro were much more positive. And so you began seeing these fund flows happen in 3Q18. You go to early 2019 and you began seeing symptoms that the U.S.'s banking system was being, you know, was basically choking on too much treasury supply. We get to the third quarter of last year when we had the repo rate spike where in September

repo rates puzzlingly spiked to 8 to 10 percent. So basically overnight interest rates in the United States went to 8 to 10. This was a critical, critical moment because this was now a moment that says, okay, we are absolutely out of balance sheet capacity because if you look at where the U.S. was issuing a lot of its debt in 2019, the U.S. issued about $11.5 trillion worth of treasury bonds on a gross basis, not a net basis, but a gross basis. But 72 percent of that issuance was taking place in six months or less. So it was in the money markets. And so the money markets break in September of last year, the Fed immediately has to come in and basically start growing their balance sheet to pin those yields, to keep those yields low, because the reality is

8 to 10 percent overnight rates would quickly translate into, you know, 10 to 12 percent mortgages and and the whole system would collapse. So they had to do that. That bought us some time. And then you fast forward to where we get to today, which is you're basically. Basically, in the next crisis, the Fed's balance sheet was going to have to go vertical, no matter what. Because, again, global central bank stopped buying, the global private sector was moving back from it. The U.S. private sector was out of balance sheet. Mars and Jupiter aren't buying treasuries, so it's only the Fed with printed money. And, you know, any crisis would have caused this.

The COVID crisis was an absolute doozy. And importantly, it wasn't just a financial crisis. This was not something the Fed could paper over. It was an exogenous shock that impacted real demand, real economy, real supply chain. So that's sort of the process that brings us to hear. Yeah, I think it's really interesting because, you know, this year has been so headspinning in so many ways that we forget that there was a real sense, even last year, that there were big seismic shifts happening, right?

So you obviously saw that. I think the repo markets were a key one where a lot of the folks in the crypto markets, maybe hadn't spent that much time thinking about Fed policy other than it kind of as a legacy of creating Bitcoin started to pay attention and say, hey, what's going on? And maybe I should learn about this. But simultaneously in this space, people were, you know, the introduction of Libra was this very catalytic moment for people to have conversations about what the role of the dollar in the world was going to be long term, right? And what was interesting is that Libra did a couple things. First, it introduced this basket of currencies approach, right? It was actually similar to that kind of bank or

idea. You know, that was being reintroduced to the markets. And you had people like Rao Pahl who were calling that out as the most interesting part of the proposal. Now, you also had the U.S. Congress and the U.S. Senate immediately identifying as the most disturbing part of the proposal, right? And subsequently, we just learned last week that they have ripped that out, right? So that's gone. But you then had China respond, right? And it super put, they slam the foot on the gas of their digital currency project, their DSEP, which we're now seeing, you know, the first kind of screenshots of the app that people are using it with. But then you also had this larger Overton window shift on the conversation about the role of the dollar. You had Mark Carney who,

you know, in Jackson Hole proposes a synthetic hegemonic currency, right? Just bringing back the bank or with a much more laborious name. And so all of these things were brewing and then, boom, you know, COVID hits, right? So I guess, you know, we've all been watching this massive injection of capital into the markets and huge kind of U.S. intervention. Again, like I was joking before, makes the chancellor on the brink of a second bailout look like nothing. Your argument, it's clear, is that whatever crisis would have produced some sort of similar response, right, just because there's no other place to go. But were you, have you been surprised about anything? What has been notable, I guess, about the way, either in terms of speed,

aggressiveness, size, would surprise you, if anything, about this intervention that we've seen? You know, I think the size surprised me. You know, I gave an interview, I think last year in the third quarter after the repo crisis. And I said, look, I think in a couple years, you could see the Fed's balance sheet at $10 trillion. And, you know, maybe by, you know, late 21 or, you know, mid-22. And that seems adorably quaint now. And to be clear, some of that is a function of probably the majority of that's a function of just the severity of this crisis. I mean, there's no way, I mean, I just, I saw it as, and we had been doing our analysis based on just sort of a mild recession, here's what the deficit's going to do.

And there's no, you know, it's all about the financing. And there are no more sugar daddies. It's just the Fed. This means the Fed's balance sheet's going to have, you know, the U.S. deficit's going to go up by this percent. as it has traditionally, and the Fed's going to have to buy it all, and they're probably going to have to buy some treasuries being sold by emerging markets, and maybe you see the Treasury markets sell off until the Fed buys those, but there was just no way of forecasting the 30, 40 percent drop in GDP that we've seen, and the degree of potential severe and sustained disruption of physical supply

chains that we're seeing as a result of that. So that to me has been, that to me has been been probably the biggest surprise. There's not a lot of other things that as I think about them that you could, if you would have said to me before, hey, this is how it's going to go down where I would have said, whoa, you know, the thing I said, whoa, was first was when the Fed did $625 billion in a week of growing their balance sheet. That to me was a whoa.

Like I, my, my estimate had been for a long time that in the next recession, the Fed's going to have to go to somewhere between $250 billion and $350 billion, a month in QE. And so they did a trillion six or whatever it was, two trillion in six weeks. That's been probably the biggest woe to me. And I think that's a nod to the severity of the crisis. You made a comparison to Japan, right? It took them a decade to do what we basically did in six weeks, right? Yep. So let's talk about, I guess, knock on effects or where we go from here. Because I think this is where people are starting to shift. This thing has happened.

You know, there's still furious debates about how to open the economy back up and when and all these sort of things. But, you know, we're going to get back moving again. But I'm really interested now. And I think a lot of people are trying to make sense of what changes because of this. How do you see the dollar coming out of this? Obviously, the dollar has been extremely strong. And maybe we can incorporate this, the dollar as compared to other safe havens, you know, or other just kind of alternative assets in this context. Yeah, I think ultimately where we go from here is and what the dollar does as a result is a function I think of two things. Number one, how fast do we come back out of it to sort of normalized economic activity and what are the incremental hangover effects? And then number two, what is the pace of the Fed response relative?

to number one. And what I mean by that is there was a great, there was a great article by Michael Everie at Rabel Bank that he submitted to Zero Hedge. I think it was last week regarding the Euro dollar system. And, you know, we didn't touch on the Eurodollar system back through the history. It was sort of a natural organic outgrowth of regulatory and the Petro dollar from 70s, et cetera. The punchline is that every estimates, rival bank estimates that it is now a 50, there's 57 trillion dollars in the euro dollar system is 57 trillion dollars all in, which, you know, and, you know, by way of background, your dollar system is just dollar denominated loans and liabilities created by banks offshore, entities offshore that cannot create the

dollar base money to cover those. So in other words, they're creating these dollar short. offshore and only the Fed can create the base money to cover those shorts. And so you've got this offshore $57 trillion shortage of dollars in extremists, in extremists, right? So when the economy's functioning normally, monetary velocities high, the dollars get created and particularly given the structure of the system where our job is to export these dollars for stuff, when the economy's working, okay, the system, the system sort of works. But when anything goes just a little wrong, this 57 trillion dollar short begins to exert upward pressure on the dollar. And this is, you know, some of the thing, this is the dollar milkshake that Brent Johnson talks about. So all else equal,

in just a modest slowdown, the dollar should rise as or until the Fed begins to, you know, sort of ameliorate that with, uh, with dollar liquidity. In what we just experienced, you know, something we wrote about a month ago was that you had you if you have open markets and closed stores and closed borders, you touch off a one-way doom loop trade. And by that I mean you've got this $57 trillion short and you've got no cash working to address that short. So basically you're going to take every asset out there is going to be sold to try to generate cash. And so if the if we leave the economy closed, but the markets open, if the Fed doesn't do enough, then what you're going to see is basically a mad dash to sell everything for cash to try to avoid defaulting on these offshore

dollar debts. And the flip side to that is that if we leave the corollary is that if we leave the economy closed, as we leave the economy closed, the longer we leave it closed, the closer the Fed's balance sheet is going to have to move towards $57 trillion, towards them fully reserving the offshore dollar denominated debt. Now, that's just the offshore side. The domestic side is another 47 trillion of non-financial debt. So in theory, if we left the economy closed for some period of time, and the question is, is that a year? Is it six months? Is it two years? Is it three months? I don't know. The leverage in the system makes me think it's less. But the punchline is, if The longer we leave the system effectively closed or it's not operating at full capacity,

full monetary velocity, the closer the Fed's balance sheet is going to have to approximate $57 trillion and offshore plus $47 trillion to basically create the debt to fully, the dollars to fully reserve that debt to make sure it doesn't default. So you're talking about $100 trillion, $104 trillion balance sheet, $114 trillion dollar balance. No, 104, I did it right. $104 trillion balance sheet and, you know, the feds at, you know, six today, six and a half today. And so to me, where we're going, I think we can look at the last month and you say, okay, we need to figure out, number one, where is the economy at? Where are we in terms of reopening and do we

revert in terms of cases, et cetera? But then number two, what's the Fed doing? Because what we saw was when the Fed began growing their balance sheet at a $35 trillion annual rate, you know, citing that $625 billion weekly number that they did back in March, that the fact, when they were able to grow their balance sheet by 10% of US GDP in six weeks, risk assets went up. And that can ultimately basically cover the dollar short enough to allow risk assets to rise. And that, those are the two key questions that to me. And that, you know, that kind of touches on a point that I made before about the importance of the stock market being a political utility.

You know, we can, we can dive into some of that and go on from there. But those are the two things. It's, you know, when do we recover and what's the Fed doing? Yeah, I'd love to actually get into this idea of the stock market as a political utility. Because I think one of the, one of the main things, again, that people are trying to grok this right now is trying to understand the, how possibly kind of asset prices could be rising while we're still in lockdown, right? And there's a lot of kind of just like common sense explanations for it. But I think it does touch on a larger dislocation or disconnect between the real economy and the kind of financial world, right, and markets. So I'd love you, you spoke a little bit about that. You had a tweet kind of talking about how

this has become more of a political utility. I'd love to talk about that and what the implications of that are, especially as, you know, we get to retirement with the boomers, right? Because there are these large, you know, secular trends that have nothing to do with right now that are also that we're always coming, kind of coming due. And I guess, you know, the question is, is, are we just kind of buying our way out of something that's going to be, you know, do again later, right? Right. You know, I think you have to look back in terms of the political, why we think these stock markets of political utility is, is the preponderance of the evidence suggests that it is. And the reason we say that is if you look back to 1995, President Clinton signed legislation

that made cash compensation to executives over $1 million non-ded deductible to the company, but exempted incentive compensation, so stock-based comp. And so naturally, what did everybody do? They started taking all their comp as incentive comp. And that's the moment where you really start to see, if you look at charts of where does wealth inequality in the U.S. really go off the reservation and separate, where does consumer spending and tax receipts start to,

to lag the stock market as opposed to either have no relationship or lead. And that was sort of the genesis moment of that. And so what that sort of original sin, if you will, has driven has been a system where 5% of the taxpayers pay 60% of the individual tax receipts, 30% of the overall tax receipts. Now, the top 5% of U.S. taxpayers, they're not collecting a cash hourly wage. They're getting paid some wage, and then they're collecting the vast majority of that individual income in stock options, restricted stock, incentive crop, et cetera.

So that's part one, and ultimately the tax receipts being so disproportionate to the percentage of taxpayers is it carries on to consumption. And you can see that, for example, in IRS data where we've done work, it shows from the IRS days shows net capital gains plus taxable IRA distributions are about 200% of the annual growth in personal consumption expenditures within the United States, which doesn't mean that people are selling stock to buy boats, RVs, cars, health care, because PCE is a wide category. But what it means is that it's mathematically impossible for PCE to grow if asset prices aren't rising. It's just mathematically impossible.

And so, and critically, those, the net capital gains and taxable IRA does not include that incentive count from the executives because that's taxes ordinary income, not cap gains. So, so what this tells you is, and you can see in the chart that ever since 1995, increasingly the stock market has become a leading indicator of recessions, which had kind of always been the case. But more importantly, tax receipts, which was not always the case, consumer spending, which was not always the case. And I think this is understood at high levels, and you can see inferences of that from Ben Bernanke when he talked about the benefits of QE. One of the first things out of his mouth was, well, stock prices rose. And so if you understand that consumption's two-thirds of GDP and consumption can't rise unless stocks are rising, you sort of arrive at this place where it's a political utility. The policymakers have as policy, they have to have as policy, again, because of decisions. Clinton made 30 years ago, they have to get stocks up no matter what. And that then ties into your

point of this mismatch where it's the same mismatch we have in terms of the top 5% of taxpayers paying 60% of individual tax receipts. The same directional outcome is true in terms of the top 5% of asset holders in the U.S. own some similarly large disproportionate number of the assets. And they're all getting older by and large. And when they all turn to sell, there's in theory no buyer on the other side, or at least there is a buyer, but at a very wide bid-esque spread. And if we had, if we allowed capitalism to work, it would be a problem. But because the U.S. government can't fund itself without these asset prices rising, the U.S. GDP cannot rise without asset prices rising. We're likely going to be continually stuck in sort of this

stop-start of asset prices down. Fed comes in with big amount of money, and then asset prices go back up and then Fed tries to pull back. And we're going to wash, rinse, repeat this with both shorter periods of time between the time of asset prices selling and the Fed responding and with ever increasing amounts of Fed responses until we get basically no response time between selloffs and the Fed's balance sheet getting bigger and bigger and bigger. And this, again, is I'm not moralizing on whether it's right or wrong. I'm just saying that if we wanted to fix it, we would need, you know, an 83 DeLorean with a flux capacitor and we'd have to go back in time, you know, take that baby to 88 miles an hour and, you know, stop Clinton from signing that legislation.

And we probably should go back another 30 years and stop LBJ from, you know, going to Vietnam and doing guns and butter. And then really, it probably should go back and rethink some of the Social Security stuff in terms of retirement ages, et cetera, back in, you know, in 37, 38 with FDR. So these are, these are baked in the cake. And because we've made the decisions, particularly post- 95 with Clinton, they have to get stocks up. And so they, they, we go from the Fed is targeting the economy to move the stock market. We have fully moved to the Fed is targeting the stock market to move the economy. Interesting. What, what do you think the impact is, does this spill over into other aspects of life, right? So, so one of the arguments that some people have made is that,

you know, if, that basically the, the widespread corporate bailouts, right, the, the, the, the expectation that the Fed or the government is going to backstop corporations is inevitably going to spill over into doing the same for citizens, right, with some form of UBI, whatever it's called to make it politically palatable. Do you think that that's another inevitability that we're, I mean, we're just moving into this kind of MMT UBI world? I do. I do. And, you know, one of the things we've said in terms of the, you know, when you asked before about the implications domestically after 2008 was something we've been writing about for a long time and talking about with people was, you know, I'm based in Cleveland, Ohio. I went and saw the big short, the movie, in the

theater, and it was fascinating the response from the audience here in Cleveland, Ohio, which was virulent, for lack of a better word. People were actually, because, again, it was, it's, there were fancy words, et cetera. It was, it was fraud. It was, it was, it was, the, there were key parts of it were fraud. I mean, in fact, Steve Eisman's character played by Kerrell and Steve Carell says, when did fraud become okay? When did it become, you know, when, that's not how we do things, but it was fraud. So the point is, is that the aftermath of 08, while I think policymakers were congratulating themselves on a job well done in terms of getting us back from the abyss. And to be clear, they had to do that. What they missed was the sort of late, political cost to the way they handled it. In other words, somebody had to go in the volcano. You had there had to be some more indictments. There had to be more people that, you know, were losing, losing, guys that did wrong had to lose. You couldn't bail guys out at par and then not bail out the people because what the way 08 was handled meant that it was politically,

it made it politically impossible to ever reform entitlements in the United States, which needed to happen to avoid us getting to this spot where corporations, airlines, restaurants, and ultimately everybody gets bailed out. And so, again, we didn't do that for political reasons. It is what it is. And it's a story really as old as time in history. You had a bunch of oligarchs, for lack of a better word, in the financial industry that got into trouble. And they got bailed out. And there was not reforms of that system done. And so then when the next crisis hits, Now there's just no political ability to go to mom and pop and say, hey, I know, I know you need that $3,500 every month from Social Security to make ends meet, but we're going to need to cut that 40%. That's not going to happen.

And so once you arrive at the conclusion that because of how they handled 08, that's not going to happen. It leads you, you know, once you eliminate the improbable, you know, all that what you're left with, no matter how, you know, once you eliminate the impossible, no matter what you're left with, however improbables, is must be the truth. And if it's impossible to reform these entitlements because of 08, I think it's, we're, we're rapidly moving towards this UBI helicopter money world going forward. How do you think about these kind of market alternatives like Bitcoin and gold in that context? I think they, I like both of them a lot. And the reason I think about that is ties back to sort of my framework of where for a long time the dollar was kept as good as gold for oil. And that was that dollar system. And it created all these other dollar instruments, these dollar shorts because the, oh, the bedrock.

rock underpinning this $57 trillion monster in the offshore dollar markets was the dollar will be kept as good as gold for oil. And now it's not, you know, despite it's the contrary. And now it's definitively not. And so I think particularly in the aftermath of 08, you saw the central banks move first when they started buying gold again for the first time in 35 years. And then in 3Q14, they stopped buying treasuries altogether, but they kept buying gold and they keep buying gold. And so to me, this system, the way it has organically shifted, it still needs some sort of neutral settlement asset. You cannot, you know, you cannot have a depleting asset like oil where the U.S. has the ability to basically print money for that oil in short, because energy,

it's energy, right? Energy, there's no such thing as free energy anywhere in the world. And so I have to give credit to that. I think to Josh Crum, who came up with that. I think it's a great concept, the way of explaining us. There is no such thing as a free energy machine in the world. And the dollar system has structured from 44 to 71 was a free energy machine in a way, but it had that gold tie. So there was a, you know, there was a governor on it.

Post-71, there was less of a governor on it, you know, but we still managed to keep the dollar as good as gold for oil. post-03, it's gone into Lala land and there's no governor on it. And so it naturally begins to push people back toward the market solution, which is you need a neutral settlement asset. You need a bank or. And I think ultimately, I think gold and Bitcoin as neutral settlement assets for what I would say, gold for the official sector and big institutions and Bitcoin for the people, if you will,

are these bank core solutions that allow you to, you know, to allow creditors to escape this system because you, in the system we're describing in a UBI world, you cannot store your surplus wealth in the debt of another when that debt is just being created, when that debt effectively becomes currency, which is what, which is what we just described. So I think gold and Bitcoin do extremely well. They've, you know, Bitcoin obviously has done extraordinarily well. Gold's finally showing some legs in the last 12 months after a long period of time. But I think they are likely to be two of the biggest winners in terms of assets over the next five to 10 years. Speaking of oil, I just want to divert it to that for a second, because obviously for the last

couple of days, everyone has been looking at what's happening in oil. I mean, this is one of those economic moments where people who didn't know anything about that industry or that space before are racing to figure out who to follow on Twitter, what to read to catch up so they can possibly wrap their head around it. How do you read what's been going on with oil over the last, you know, a couple days? Yeah, I think there's, you know, I think there's two things that the way I look at the world, and I'm not the right guy to talk to in terms of the structure of the futures and stuff. But in terms of the lens we use and how we think about the world, I think there's two key

takeaways. I think the first is the real obvious one, which is when you shut down a third of the economy or GDP is down a third. The infrastructure for the energy business is not structured to handle this, the storage, et cetera, et cetera. So it's a simple on one level of something happened that the economy is not structured to handle. The oil infrastructure is not structured to handle.

The second thing within this is this fascinating dynamic of it going to negative $38 per barrel. And that to me is, you know, again, within, a few negative numbers, okay, how much does it actually take to take a barrel somewhere if you're out of storage? I can't imagine it's negative 35. It's probably some modest negative number. It takes a while to shut-in product. But what I think it speaks to, the second thing I think it speaks to is the degree of financialization that I was alluding to earlier, where suddenly you have these people that are betting on oil, that are involved in oil, that have no interest

whatsoever in the oil business. And I think it's a very big hint at the degree to which the paper markets have overtaken the pricing discovery mechanism as a result of this hyperfinancialization that we've described that's taken place of the last 35, 40 years. And to the extent that this shines a light on that, I think it could be a very important moment in terms of other markets that are financialized that way. Gold, for example, you have Jeff Gunlach saying yesterday, be careful with what you own. You know, paper gold and gold are not the same thing. And now, there have been a lot of people who have said that myself included for a long time, but it starts to take on different meaning when Jeff Goodluck's of the world begins saying those

types of things. When you see some of the things developing in the paper gold markets that we've seen develop. And so I think it could be a bit of a watershed moment in terms of just this aha moment where people can no longer say, well, you're the paper physical thing, you know, stop. It's not, it is a big deal. You can see it. And importantly, when you take a step back and say, well, why did this develop? The big, the financialization was allowed to grow to the size it was because it ultimately supported this dollar company town structure in the past.

You have to be able to control pricing. of the underlying in order to sort of keep that system together. It's really interesting. The company town analogy, I think, is really fascinating. I keep thinking about it, especially because one of the hallmarks of the company town before it was shut down and made illegal was Scrip, right? Company Scrip, where they didn't pay you in the currency

of the political jurisdiction. They paid you because it was the store. It didn't matter. You could go use the shrewpucks right in the store. And you had Dave Portnoy a couple days ago, a couple weeks ago, I guess, screaming on Twitter about how the U.S. dollar was shrewbucks. I saw that. I laugh.

Yeah, it's an interesting, interesting little antecedent to that analogy. But listen, I've kept you for a really long time. I really appreciate your perspective, particularly I appreciate how dispassionate you can analyze these things, right? Because I think it's so hard when you're watching these things, especially when there's big decisions you don't agree with or patterns that you want to kind of rip to the other direction to look at them and be able to kind of assess them as they are. But I like to close with kind of, you know, inward, such turbulent times. What's the thing that's got kind of creating the most

pessimism or nervousness for you, you know, from a kind of structural economic standpoint? And what's your biggest source of optimism going into the future, going into the post-COVID-19 world? So my biggest source of concern or potential fear, and I say this as a father of three boys, you know, one who's 19 this year, one who's 17 this year, and one who's 14, is this is going to work out one of two ways. Increase this. The size and, you know, the fact that this crisis happened and the severity and the fact that it's a physical disruption crisis has basically pushed us that there's going to be one or two outcomes.

either they're going to do the right thing in terms of restructuring the system from a currency monetary system perspective or they're not and if they don't the system's likely to collapse in a very disorderly way and if it does you are likely to see all of the sort of worst parts of what that implies you know bank shutdowns potential hyperinflations supply chain interruptions that caused that hype. You know, you've got this very, very complex society, all based on just in time, and that would all go away. And so you'd be talking about shortages and bank problems, financial system collapse, potential armed conflicts. It's ugly. So I don't like to go there, but I'm not a Pollyanna. If they handle this poorly, we're, you know, we're not on,

we're not on the edge of the cliff yet, but we're moving towards the edge of the cliff. They need to do the right thing. The thing that gives me the most optimism is if they manage this, even mostly properly, if they don't mostly well, I don't want to put them a position where they got to get everything right. They don't. They just got to get it mostly right. And we could have the biggest global economic boom since the immediate aftermath of World War II. Because when you look at what this system has wrought, has been this massive imbalance of the Chinese and foreigners do all the production and very little of the consumption, relatively speaking.

And we do most of the consumption and very little of the production, relatively speaking. And if you start to rebalance those things and then also factor in the amount of infrastructure changes that would have to take place or could take place to support those changes, you would be talking about just this incredible economic boom where you're basically reallocating resources to away from consistent 20 years of warfare, which is a horribly unproductive enterprise, except for a few, to things that start to have the same type of immediate payback, but then also have a positive ROI, whether you're talking about Belt and Road in Asia and across Eurasia, you could do a Belt and Road in Asia. You could do a

at Belt and Road in the U.S. I mean, our infrastructure compared to a lot of places that go internationally is suboptimal, shall we say. And that's being kind. So there's this great opportunity, if they get it mostly right, partially right, to have this global economic boom. And there'd be winners and losers

relative within that relative to where they sit now, but there'd be mostly winners because there's not that, there's not that many winners right now, And even those winners would still, they'd be fine. They'd do well. But again, if they don't manage it properly, you can get to a pretty scary place pretty quickly, especially now that we have these supply chain disruptions that have begun that we're a month into. I think this is a, I agree that this is a potential source of optimism that this is causing a bit of a

national wake-up call, national conversation on both sides of the aisle, right? People who are, you know, Republican, Democrat, and independent in between asking, these major questions about how self-contained and, you know, our economy should be. And what are these real kind of serious issues that are, that relate to our lack of capacity, especially in the face of the fact that those, that lack of capacity seems entirely by choice and by design, right? It's not a lack of the stuff. It's not by a lack of the know-how. But it does take a redesign. But in that redesign, you know, you're talking about retrofitting factories to build new things and fast turnaround machine shops that require new types of knowledge and vocational training that

picks up those skill sets that weren't there before that shifts people away from a university system that's already heaving. So you can tell this story. You can project this out in a way that leads to a lot more building of real things, you know? And so I'm kind of, I share that, that optimism that that's a potential outcome. And, you know, I think that for anyone who kind of shoves their nose in this, ultimately you have to be something of an optimist or else you just go crazy, right? You do. I mean, there's, there's, and there's times where you go back and forth a bit and there, I don't know what the triggers are, but one way or another, you know, I would know the trigger when I see it, right? It's like Maple Thorpe's art, right? I don't know what obscene is,

but I know when I see it. I don't know what a, something that would make me really go, oh God, we're beyond the point of return is, but I think I would know it when I see it. But like you said, you're starting to see, to me, very encouraging signs, uh, in the, you know, in terms of the political unity of, you know, just print the money. Let's print the money and let's bring the stuff back. You know, this, you know, something we said a couple weeks ago report was you're starting to see signs that as opposed to 71 up until just recently, the U.S. economy was basically about subjugating the U.S. middle and working classes to support this dollar system.

It's just the way the world had to work. And in the last month, month and a half, we've started to see signs that maybe we're going to start subjugating the dollar to support the middle and working classes and the broader U.S. economy. And there's, you know, it's a great thing for the U.S., but it's a great thing for the world as well. There's a lot of imbalances that have swung very, very far to one way that would start swinging back the other way, which would suggest very positive economic outcomes and very positive outcomes for a very extended period of time. You're basically talking about a 50-year pendulum that has gone from here to here that now starts coming back the other way. So there'd be a lot

of open field running in front of that possibly. Well, look, we could have a whole additional conversation about that. I'll have to have you back. But for now, I really appreciate you taking so much time. I know the listeners will appreciate it too. Absolutely. Thank you so much for having me on, Nathan. It was great talking.

And there you have it. Wow, 70 years of economic history, TLDR, for you. Now, obviously, there's so much more to dive into on all of these topics and a million different perspectives and a million different ways that people explain these phenomena. So you should take all of this as one person's informed, I think extremely informed perspective. As I said in the interview, what I appreciate so much about how Luke comes at this is this dispassionate way that he tries to organize all the inputs, all of the evidence to come out with just the way things are, right? He doesn't try to map it to some political theory or some

wishful thinking explanation of the world. It's just for him, this is the set of inputs that created a set of outputs and it is where we are. And I think that's a good basis to talk about where we move next, right? To understand and appreciate how things have come to be where they are and where the levers of change might be. So hopefully this was a helpful episode to you today, guys. Let me know. Hit me up at NLW on Twitter. And as always, thanks for listening. Until tomorrow, guys, be safe and take care of each other. Peace.