The Great Simplification with Nate Hagens - The Global Stakes of the U.S. Election: Debt, The Dollar, and Military Power | Reality Roundtable #12

Episode Date: October 27, 2024

(Conversation recorded on October 16th, 2024)     Ahead of the U.S. Presidential Election between Kamala Harris and Donald Trump, both of whom have distinct monetary and fiscal policies, there is much debate on the potential systemic consequences for the global economy. What is the current status of the United States in the socio-political landscape, and how might trends in energy, commodities, and geopolitical tension affect the actions and capabilities of the next U.S. presidential administration? In turn, how could this affect the global economy? In this roundtable discussion, Nate is joined by financial analysts Luke Gromen and Michael Every to explore the precarious nature of current fiscal practices, the relationship between military power and economic stability, and the potential need for radical policy shifts worldwide. They also delve into the future of the U.S. dollar as the global reserve currency and the importance of price, availability, and stability of energy resources for thinking about future economic strategies. What are the implications of NATO's actions in Ukraine for global financial relationships, and what are the resulting strategic dilemmas for Europe? How is China potentially using gold to prepare for a fundamentally different economy with fewer resources? Most of all, how can we begin to steward our economic systems in a more sustainable direction if we don't have a shared understanding of the values and goals that underpin everything we're doing, regardless of who the next U.S. President may be?    About Michael Every: Michael Every is Global Strategist at Rabobank Singapore analyzing major developments and key thematic trends, especially on the intersection of geopolitics, economics, and markets. He is frequently published and quoted in financial media, is a regular conference keynote speaker, and was invited to present to the 2022 G-20 on the current global crisis. Michael has lived and worked in 9 countries and been in the industry for nearly 25 years, with previous roles at Silk Road Associates, the Royal Bank of Canada, and Dun & Bradstreet. He holds a BA from Lancaster University, and a master's degree from University College London.   About Luke Gromen: Luke Gromen is the Founder and President of research firm Forest For The Trees, LLC, whose goal is to aggregate a wide variety of macroeconomic, thematic and sector trends in an unconventional manner to identify investable developing economic bottlenecks for clients. Luke founded FFTT to apply what clients and former colleagues consistently described as a "unique ability to connect the dots" during a time when he saw an increasing "silo-ing" of perspectives occurring on Wall Street and in corporate America. Luke has 25 years of experience in equity research, equity research sales, and as a macro/thematic analyst. He holds a BBA in Finance and Accounting from the University of Cincinnati and received his MBA from Case Western Reserve University. He earned the CFA designation in 2003. Show Notes and More Watch this video episode on YouTube   ---   Support The Institute for the Study of Energy and Our Future Join our Substack newsletter Join our Discord channel and connect with other listeners  

you have to ask the question, what's GDP for? Not just what's the structure of it. What are we trying to do? What kind of society do you want? What kind of world do you want? Broadly, you know, big picture. What does the US want to be like? What does it want the world to be like that the US is in?

Government planning everything is the road to hell. But if you give everyone complete freedom of choice and free will, you will achieve nothing if you don't have morality. And the only way you can have a purely free market is if everyone in the economy has a completely moral sense of, What are we here for? What's GDP for? Rather than just, I'm going to screw the next guy to try and get three or four basis points more for the next month. You're listening to The Great Simplification.

I'm Nate Hagen's. On this show, we describe how energy, the economy, the environment and human behavior all fit together and what it might mean for our future. By sharing insights from global thinkers, we hope to inform and inspire more humans to play emergent roles in the coming great simplification. One of the unexpected benefits of hosting this show is after almost three years and 150 guests, I now have repeat guests who can come back in interesting combinations on reality roundtables with me today, our repeat guest, Michael Evere, who is a global strategist

at the European Investment Bank, Rabobank, and Luke Groman, who founded and runs the financial advisory firm Forest for the Trees LLC. This was recorded on October 16th. We're going to release it before the election because there are many financial events with oil, with interest rates, with geopolitics, with gold, with the macro economy that move very rapidly. This is a fascinating conversation that could easily have gone three or four hours. As you all know, I don't care where the market is headed per se. I care about what the tea leaves in the financial system mean for the future of our society, our civilization, the environment, our culture.

Because I do think that the financial overhang is what is going to be our, you know, Achilles heel, Gordia not whatever you want to call it. This was a very high octane discussion with these smart gentlemen. Please welcome Michael Every and Luke Groman. Michael Every, Luke Groman. Welcome back to the show. Thanks for having me. Great to be here. Due to the time differences, Michael, you are in Singapore right now.

Our third guest, Helen Thompson, couldn't make this. So it's a round table with just the two of you, but I know you, both have a lot to say. You're both now emeritus guests on this show. So we go beyond the basics now on this roundtable. Just a reminder that you both professionally work in the investment markets. And this show is not about predicting where interest rates are gold or the stock market or oil is going to go per se, other than the implications that have for our rate. future society, our future civilization, future decisions, policies, et cetera, so that the broader socio-political backdrop. So with that intro, let's start here. Today is October 16th. In less than

three weeks, there is a pretty important election in the United States. And of the issues we're going to discuss today, debt, the U.S. dollar, growth, interest rates, the social contract, geopolitics, all of that. What are some of the key things that each of you think would be different under a Trump administration or a Harris administration? And what aspects of our situation are largely going to be the same no matter who wins? You know, I think ultimately the math doesn't care. We're looking at a situation as we sit today in the United States.

70 to 75% of tax receipts are being paid out every year in entitlements. Those are growing one and a half to two times faster than receipts. Another 25% of receipts are getting paid out in interest on the federal debt. That is growing a big multiple of receipt growth as interest rate prices from the lagged effects of the Fed's interest rate hikes. And that's, so that's 95 to 100% of receipts in interest and interest-like obligations. growing two to five times faster than receipts, and we're already in a position where interest on a net basis is already over above defense spending in the United States for the first time in at least 65 years and probably in U.S. history. So we're in uncharted waters, and making matters

worse is you can't hype tax rates because that will cause the deficit to rise as a percent of GDP, as we saw with ACA or Obamacare, which was a tax hike back in 2014, 15, by 16, the deficit to GDP was higher than it was when they implemented ACA in late 2014. And so the math says that the only policy questions are, are we going to cut defense and entitlements or are we going to print the interest? And if we print the interest, how long will we go through a period of dollar up, rates up, stocks down, economy down until we print the interest? And so I expect print the interest will be charged.

by either of the candidates pretty earlier in their terms, probably in the first one to two years at the latest. And I think the differences are pretty minimal. I think the focuses of industrial policy that the United States is clearly engaging on will probably be different under Trump than under Harris. I think U.S. foreign policy will probably be more pragmatic and quite frankly, better and peaceful under Trump than under Harris. And I think the dollar will be lower. Either way, rates will probably be relatively the same either way because some form of industrial policy with Fed or Treasury yield curve control or de facto yield curve control will be the policy chosen by either one. So I schedule these as just three-way conversations. I don't want

them to be debates. As some other podcasts are, I just want it to be kind of a conversation among friends. So I'm not sure whether to ask Michael to respond to what you just said or just give his view, because you mentioned that we're going to print the interest, which I agree with. Michael at Rabobank had a recent piece saying we can print the interest, but we can't print commodities, which I think both of you would agree. And we'll discuss that a little bit later. But Michael, where'd you like to go with this intro? Thank you. Yeah, absolutely. No debating here. This isn't Model UN. We're not trying to win points from each other. And in fact, Luke and I, this is the first time we've met, but we have interacted. And, you know, spoiler, we agree on about 90% of everything around us.

In fact, I think about 95. Where we disagree, perhaps is in what we think some of the short-term, medium-term and long-term outcomes might be. That's all. But in terms of, are we in trouble in the US or globally are we in trouble? Yeah, absolutely. So in response to what was just said, again, I agree with nearly all of that. The math doesn't care. It's exceptional. concerning that the position the US finds itself in, alongside some exceptional strengths, by the way. There are some incredible strengths remaining in the US alongside huge, huge Achilles heels. But speaking from a global perspective, based here in Asia, having lived and worked in nine countries over my professional career, nearly everywhere else is in just as much trouble,

but in slightly different ways. There are very few places at the moment right now that are sitting pretty and thinking, I've got this. covered whatever happens in the US and whoever wins the election. And it is not a seesaw with one side going down and another side going up. It's more like the entire backdrop of the theater that this is being staged in just collapsing or the curtain setting on fire while everyone's on stage. It's something that dramatic. So, you know, day in day out when people say to me, what does this mean? I am supposed to be focusing on what does it mean for the dollar? What as it's supposed to mean for interest rates, etc.

But if we agree, and I do, that where we are now requires dramatic policies, what I think the difference between Trump and Harris was likely to be is how dramatic the policy is and in different areas. And I do think both of them will end up having to do some similar things. But I think how different foreign policy can be, for example, that's one front that can have a flow through onto many things, including defense policy. in defence spending, for example. But more concretely, if we are going to be printing that interest, let's cut to the chase, my broader thesis, and we discussed this last time we spoke late,

and I want to get this in early so we can build from there, rather than a slow buildup and then dropping it at the end and not being able to discuss it, is that I think that opens opportunities politically for both of them to think about how do we do this tactically and strategically because you can just, you know, quote-unquote monetize or print money. But what's the point of doing that if you do it on stupid things? You can do it for a very short period of time before the markets carry you out on a stretcher. And, you know, countries have, countries are still, and countries will. Are you going to put it into the supply side, China style, because they print money and they put it

into the supply side, or are you going to put it into the demand side, like tax cuts, or, you know, checks being sent to people to go and buy goods made in China? And if you do it on the latter, I think Luke and I will agree completely what a disaster that's going to be. Of course, Bloomberg and all the financial media will be cheering because, you know, there's the kind of moronic short-term consumption that thrills Wall Street. But if they put it into the supply side, and there are lots of other policies that would have to work alongside that, which are quite radical, quite quite radical vote would be necessary. My suspicion is that not just that the market will go along with it for a while, but there will be a gun place to their forehead saying you are going along with

this for a while because you really don't like what the world looks like if you don't. And that includes Wall Street. So just potentially we have a short window, like one presidency, I think that may be it to really shake the box and say policy gets weird from here, but it can be better. And then And the question is which candidate is prepared to get weirder? And I think they can both get weird in different ways. But I suspect, and I have suspected, since he first won the election in 2016, that Trump just may have the weirder people around him. And I don't mean that in a pejorative sense, the way that the Democrats are casting aspersions. I mean thinking outside the box.

Can you give an example of some of the quote-unquote weird things that would actually be long-term beneficial, just in speculation? Well, let's start with a really basic one, which at the time we're recording this was still very much a live discussion point because Trump had just been speaking to it again. And that's tariffs. So we don't know what he's going to do on that particular front. And they can be very badly mishandled and very inflationary and enormously destructive. Or they can be used in the way that Alexander Hamilton intended them to be, you know, hundreds of years ago. And the way the U.S. economic policy used them right the way up until post-World. World War II, which is to re-industrialize the US, to focus supply chains back into areas that

you want them to be and into geographies that you want them to be. And that can happen geopolitically in lots of different dimensions. You can say, right, we're going to tariff you, China, but we're going to cut tariffs on this country over here to transplant that industry from A to B, because geopolitically that suits us. Or you can try and bring the juicy parts back to the US. And does that solve all problems at once? No. But if done coherently. And again, it's got to be alongside other problems. It's got to be other policies alongside transportation, infrastructure, education, possibly including capital controls, very much, you know, re-regulation in some areas. A lot of this would be alien to Trump, but not to all the people

around him if you read the people who are, you know, advising him and the people who are advising them. It could potentially, and I stress potentially, really reshape large parts of the US political economy back to what they used to look like a long time ago. And I'm not saying it would be easy. I'm not saying it can be done quickly. And I'm not saying it couldn't fail. It could. But it would certainly impact everyone's lives dramatically, even in the attempt. So let me ask both of you this as a follow up to that. We have become very good at kicking the can increasingly financially since 2009, all kinds of too big to fail and artificial guarantees and the Fed and central banks step in.

And then stimulus in 2020 to people ever getting, everyone getting these checks, etc. What this has done has caused this complacency and this anesthetization that when there's a financial problem, the government comes to our rescue. And sure, they print more money, but that's never been a problem. And is the barrier to adopting some of these quote unquote weird but wise, long-term wise solutions, is it a recognition of the relationship between money and natural resources and commodities? Because I don't think most people, most people in our country, in our world don't understand that we can't print commodities. And where I'm going with this question is, of course, we're not going to voluntarily tighten our belt.

So we're going to, as both of you said, print the interest. So when that happens, there is an antidote in society that these memes bubble up, that that's okay, that that's natural. It's the modern version of Keynesian. Keynesianism is modern monetary theory, which since my first interview with both of you has become more prevalent, In my opinion, it ignores energy, ecology, inequality, the impact on international countries that are tethered to the dollar that don't get the benefits of borrowing more money. So do we need still more education on there are physical limits to debt and interest expansion? Or what are your general thoughts on all that?

I don't think it's physical limits, at least in the foresee. future as much as it is political. In other words, I agree with much of what Michael laid out and how it could work. And what Michael laid out is the United States unilaterally restructuring ending the dollar reserve status as it's been structured since 1971 and restructuring it into something that is a different type of dollar reserve status. But it is a reserve status built around subjugating the bond market and subjugating Wall Street and subjugating Washington, D.C. to the 90% of Americans, to the U.S. working class, to U.S. working and middle class wages. And that is a 180 degree political change versus, call it, 1982 to present, which was subjugate the U.S. middle class wages. and working classes and the U.S. defense industrial base in order to support the real value of the U.S.

bond market, in particular the U.S. Treasury market. And that was very, very good for Washington, especially certain interests. It was very, very good for Wall Street, especially for certain interests. And it was very, very good for the 1% in America and the 0.1% in America in particular. What Michael lays out, which I agree with a lot of, would basically be really good on a relative basis for the bottom 99.9%, the bottom 99%, the American Defense Industrial Base, and the U.S. middle and working class at the expense, relatively speaking, of the 0.1%, the 1% Washington, D.C. and Wall Street. This is a good thing. It's a good thing for the world. It's a good thing for America. It's a good thing for America. It's a good thing for political cohesiveness in the U.S. and the world, but it requires a political change that is arguably the biggest one we've probably seen in, I mean, decades or centuries. I mean, it is literally a political revolution. And so I hope we can do it. I hope we can do it. I hope we can do it safely, peacefully. However, if we do that, then you'll start to see things like, you know, I thought was really interesting two weeks ago.

Kamala Harris, in her economic proposal, lays out the need to mine more nickel and cobalt and stockpilot. That's just a function of the dollar system. If you end the dollar's reserve status as it's been structured since 71, which is to say, get rid of the treasury bond as primary reserve asset, which I think we're well on the way to doing, then all of a sudden it makes sense to mine our own nickel, mine our own coal ball, etc. Eventually that will be a problem, but that's just a price of the dollar issue in the short run. In the long run, I agree there are some physical limits based on that. That's a price issue. That's a systemic structure issue. But I think in the short run, some of those physical commodity, limits are just a function of some of how we've managed our economy for the last 40 years. But let me take the international angle again, if I may for a second. You know, with America, again, that's what I think is the case, as Luke just stated it. But it would shake up the international economy in a way you can't believe because almost everybody here in Singapore, or everywhere else I go, directly, indirectly, you know, three steps removed, four steps

removed. They're all in the U.S. dollar economy. You're all making something that you sell to someone who sells to someone who sells to someone who sells it to the US, and a dollar flows down through that pyramid. And at the moment, yes, behind that is US treasury bonds and US financial assets that are the export, if you will, from the US, that prop that system up. And the debt dynamic always says, ultimately that collapses. And throughout history, they always have those kind of systems. And particularly, you know, with the stresses being priced on the US right now, that we're getting there and fast forward. And if we do go back to this alternative that we're both discussing here, it isn't the dollar suddenly going to collapse away. And that's

it. No one wants dollars anymore. It would be a different kind of dollar, a different kind of reserve, because if you're moving to a more protectionist world, and let's go beyond that, a more mercantilist world, which is what we had under gold standards in the past, at least pre-World War II, where everybody was attempting to try and sit on a hoard of gold coins like a dragon by exporting more than they imported. That's necessarily zero sum. Whether you've got a finite stock of commodities or not, you're trying to make sure that you are the one with the, you know, the top end of the seesaw and everyone else is at the bottom because then like Germany with Greece within the Eurozone system, you know, before the crisis, you basically get to be running the trade surplus, lending money to them and then telling them what to do

when they can't pay it back. So that's where you would move towards. And for that, you do need a strong military industrial complex because it's going to involve a lot of muscle. And you need a lot of nickel, a little coal, and a lot of, you know, physical strength across the spectrum to say to people that, you know, we are still top dog in a mercantilist world. We can do mercantilism again. And we We can do it well. And the US did do it well for a very, very long period of time. Now, you've got China up against you right now, which is a far larger producer of almost everything physical, not commodities, but everything else.

So the US challenge then is to say, okay, how can we manage to pivot back to production as quickly as possible? And I think it will have to be within a nexus of allies. I mean, Canada's not going to get a choice. They're going to be roped in. And obviously, you know, the election in Canada is likely to return a government that I think would get along probably fairly well with Trump, were he to win? or conversely, if Trudeau were to pull something out of the hat, he'll continue to get along well with Harris.

The UK, speaking as a Brit, no idea where they're going at the moment. They're just waiting for a larger dog to bark and to follow a lead. Australia, New Zealand, Japan, South Korea. This is a nexus of countries that I think are going to have to integrate more and more together. And where the US isn't able to produce right now, let's say for the next three years, it's going to have to lean more and more in Japan and South Korea. For example, for shipbuilding, I can imagine for a few years,

you're going to be building U.S. Navy vessels in Japan or South Korea until you get the shipyards back up to scale again within the U.S. I mean, this is a hypothetical, but it seems quite a realistic one to me. So the world starts to shift and change quite dramatically. Side start having to be taken, you know, bamboo curtains and iron curtains start going back up between who does and doesn't trade with each other.

And so there's a geopolitical kind of threshold. to this as well, which doesn't sit well when you're thinking about the earth as a single entity biologically and how you cooperate and collaborate across international borders to try and get the best of all outcomes. So it's quite frightening to think of it from a one world perspective, but it seems to me the only way we're going to ever get around to actually addressing the underlying imbalances which create larger problems is by creating geopolitical problems that look just as scary, if you see what I mean. I do see what you mean.

And let me, for those that don't follow a British accent or history, you mentioned mercantilism a couple times, which my understanding is back in the 16th and 17th century, it was based on the premise that kind of wealth was static and you had to manage the prosperity of your country by doing trade. and being a bigger exporter of things rather than an importer, which is kind of the opposite of what the U.S. has been. We import so much because of the dollar, because of the reserve currency and all that. So barring a war, a big war, which we can talk about in the second, isn't mercantilism or some sort of world like that a natural progression of once we reach peak growth and we, kind of bounce around for a while, that that's naturally where where countries will, we'll try to go? I think it is.

If you go back to, you know, 1980, the head of the BIS, Yel Zistra said, look, and, you know, we survive the first oil crisis. We survived the second oil crisis, but the world cannot, cannot survive a third oil crisis, because the oil importing countries won't be able, the oil exporters won't want the paper of the oil importers because the real value of the paper will be declining against oil. And so the oil exporters will start demanding a settlement asset that preserves their real purchasing power. Because otherwise, they're just better off leaving it in the ground. You know, if you have a treasury bond that, I mean, when you go back in time from 73 to 03 for 30 years,

the value of a $1,000 face value treasury bond was remarkably constant in barrels of oil. It traded between, call it, 15 and 22 barrels of oil for 80 to 90 percent of the time. And when oil hit 30, the Fed was tightening to slow the U.S. economy as the biggest importer and consumer of oil globally. And the Saudis were increasing production as our partner in that deal. And on the flip side, when oil got down to 1512, the United States was cutting rates. and the Saudis were cutting production, and the deal was under that system for 30 years, as the U.S. Treasury bonds were as good as gold for oil. And so that's exactly what Zilster was talking about.

And the problem is that system began to break down around 2005 due to a combination of geological factors that you guys are both well aware of, which is peak cheap oil. It began to break down because the emergence of China was driving a new major importer of oil. And all of a sudden, the real value of treasuries in oil terms, in underlying physical world terms, began collapsing. The U.S. Shale, Miracle, Revolution, whatever you want to call it, which was a combination of cheap money and significant technological advancement of a 30, 40-year-old fracking technology. But time for that. The United States has been able to support the oil value of the Treasury bond as a reserve asset by virtue of shale. Now, we are seeing what we're seeing in shale. Shale production hasn't grown in four years. It's probably not going to grow a whole lot, barring oil prices that go a lot higher, but oil prices going a lot higher create empirically problems in the treasury market. And so we've reached this point where I think, to your point, Nate, that once it's, it's Triffon's dilemma. If you are settling in a debt instrument, sooner or later, you have so, if trade grows globally as it has over the last 50, 60 years, sooner or later, you have so many debt instruments out, so many calls on the productive economy of the underlying issuer, you have to deval. And it begins to incent a move towards, you know, what Michael referred to as mercantilism. I'm not sure it's exactly that because it's not. because the price of gold would not be fixed to any nation's currency. It would be fixed to a value of energy, a value of oil. And so it would float in all currencies. And so it would actually incent

not mercantilist behavior of, hey, we need to sit on our pile of gold, but more, hey, energy now costs hard money. And if energy costs hard money, that starts incenting all kinds of really good behaviors. If I have to actually emit gold that I have a finite amount of and that gold floats against my currency as I emit it to pay for my energy imports, well, guess what I'm going to do? I'm going to invest in energy efficiency. I'm going to invest in alternative energy sources. I'm going to invest in nuclear. I'm going to invest in electrification. So unlike the mercantialism of, hey, the dollar is $20 an ounce of gold or the British pound is whatever, for, pounds 86 or whatever it was of gold. However, some sort of fixed parity, that's never coming back. But what the energy realities and the debt realities and Triffon's dilemma is pushing us toward, it is pushing us toward gold, but not gold mercantilism. It's pushing us towards fixing a unit of energy in a weight of gold. And as that happens, that is an outcome that is super good for humanity. That's the best possible outcome. That's the Nash equilibrium, because that in sense,

sense me to go, all right, my wife's driving an 8,000-pound truck because I'm an American, because I can print money for the oil. Americans have printed money for oil. What do I care? Gasoline's three bucks for me. I don't care. Now, if I have to emit my gold effectively to pay for my wife's truck, it's like, well, all right, I'm going to actually have, we're going to sell that at a huge loss, and we're going to get something that's electric or hybrid or something that's smaller. So that's what you need to really drive it. But it's not mercantilism. It's a, it's a shift in policy, but it's not mercantileism as it was, you know, 100 years ago, 200 years ago, 300 years ago.

I have so many questions. Just on oil, just on debt, just on geopolitics, just on the dollar, we could all spend 90 minutes on that. So this is, unfortunately, you know, going to be too short of a conversation. I think Luke's example of his wife's 8,000-pound vehicle is a microcosm for all the things that we face. And I have some other follow-up questions, but Michael, I'll let you respond now. Okay. This is where I really regret that it's very late at my time because this is an extremely complicated argument. I have to try and put together really quickly in order to kind of follow on from the conversation and to remember everything that Luke said, which is very coherent.

This is one of the few areas where we do disagree. And when we've had chats together, you know, we've come to different conclusions. As I said, having recognized the same problems. First of all, very, very briefly, yeah, mechanelism was a European concept where you had to basically recognize that money was either silver or gold, it was usually silver back in those days, not gold. And when you traded, it left your pocket and it went to the other city. So if you ran a trade deficit, money physically left your economy. There was no money for anyone to pay their debts or to buy anything, et cetera. Your economy collapsed. So people tried to hoard money by only running a trade

surplus. And it's economically inefficient, but it's very good for the person who's on the upside of the seesaw. So yes, I'm not saying we go back to that completely. And as a quick, quick adjunct for that, the people who do think we are going back to that completely, and you're not one, but there are people out there listening who think, well, you know, if the dollar's going to collapse, the US goes back on gold, this isn't Dungeons and Dragonss. We're not going to be walking around with little coin purses on our waist going, I've got five gold pieces and 20 silver pieces and some copper pieces. It's not how it's going to work. Even if it did go back to that, you would still have dollars in your pocket, but when you went for the bank, you could exchange them for gold if you had to. And on an international balance of payments basis, payments would be made between countries on gold. Okay, so let's get that clear for a start. In terms of energy, this is where I see things slightly differently. Yes, of course it's important. I don't deny that for a moment, even if new energy sources are coming along all the time and changing, you know, that the parameters of what is and isn't possible and the price point of which it isn't is impossible. But to extent, we already have that kind of discipline of energy prices built in. If we go through a period of high energy, everyone starts tightening their belt.

If it's cheap energy, everyone does silly stuff. That's just basic economics. And we have it. now. But the Fed as currently constituted, which I am no fan of, you know, the comments that Trump was making about it today, the day that, yesterday, sorry, in the US, the day that we're recording saying, you know, it's the easiest job in the world. You flip a coin and everyone talks about you, like your God, which you, hurrah. I've been wanting to make comments like that, even stronger than the ones I normally write for a long time. They have a weapon right now. For example, if the Fed ever wanted to try and, you know, get oil prices down, above and beyond the White House's ability, past ability to use the strategic petroleum reserve, which they did temporarily, you know, in

recent years, you could just say, right, let's jack up interest rates to 7 or 8 percent. Now, provided inflation isn't out of control at that particular time, money floods out of the Middle East. It floods out of commodities. Suddenly Saudi Arabia can't afford to build these ridiculous, you know, straight-line cities made of glass in a desert, which are just, you know, absolute flights of fantasy that tell you the Middle East has got more money than sense when it's thinking about things like that, it can still do that. And because of the power of Fiat, which temporarily, I said at the beginning is still there, temporarily, you can turn around and do that for a narrow window whilst using acronyms like BTFP is a really boring technical one that was rolled out

last year by the Fed to try and make sure that when we had a banking crisis or what looked like a banking crisis, that all that funding could flow to the banks. They could access capital again. China uses similar mechanisms all the time, which is here's a, of a off-balance sheet or a, you know, one-step-remove financing mechanism for this particular constituency so you don't worry about the effects of high interest rates, but you field them in full offshore. You can use that combination of interest rate weapons, and it is a weapon against others, together with more focused incentives and free money for people who want it, to try and restructure the physical side of your economy to achieve what you want to achieve. And I have to

just move on to one very quick point here as like a tennis return back to you, Luke, because that's basically me running to try and catch the ball. But now to pass it back if I can, last time we spoke, Nate, at the end, I think I said something, if I remember correctly, that I want to throw in now much earlier, which is, I remember in America quite a few years ago, people wearing these bracelets. Was it WWJD? What would Jesus do on them? Do you guys remember when that was the thing? So the reason I'm bringing it up is most people in my mind. day to day, say to me, you know, what's GDP going to be or what's GDP? And I'm literally writing a piece at the moment explaining when you look at the world

in terms of economic statecraft and from a bigger picture view, you have to ask the question, what's GDP for? Not just what's the structure of it. What are we trying to do? And the link to this bracelet is this. If you're just worried about is it 2.1 or 2.2 and you think 2.1 or 2.2 matters, you've completely missed the big picture, which is what kind of society do you want? What kind of world do you want?

And I don't mean trying to micromanage everything because that's the road to hell. But broadly, you know, big picture, what does the US want to be like? What does it want the world to be like that the US is in? And does it really require a flat rate of interest, either high or low, for everyone to get there? And my argument is it doesn't. And the person backing me up on this, actually, is someone who was a fan of gold. Schumpeter. I'm sure you've both heard of Schumpeter right there, you know, the great economist from the past.

We normally refer to him in modern economics purely in terms of, of talking about creative destruction. That's probably like the shorthand bullet point we're all aware of. Well, I mean, the guy wrote telephone book, thick, you know, economic literature. They're incredibly economically dense. I defy anyone listening to this today to pick up an original text by Schumpeter and start reading it. And you see what a real genius thinks like when they're writing.

Someone with a planet-sized brain who's incredibly cultured was the finance minister of Austria really knows their history, politics, culture, theory, maths, everything. So anyway, most of his life, of course, he was anti-state, anti-big government, anti-trying to micromanage everything, pro-free market, but within the rigid straight jacket of wanting hard money and gold. And I think he would have been, you know, hard energy in those days, too, if that had been more of a finite limit. But on his deathbed, on his death bed, he recanted. And he openly said, you know, he'd become more religious as he got older. He was Catholic. I'm not, I don't know if you guys are, but he got more and more

religious as he got older. And he realized, he said, government planning everything is the road to hell. I largely agree with that. We start well and it goes wrong. But if you give everyone complete freedom of choice and free will, you will achieve nothing if you don't have morality. So when you have the WWJD bracelets, it's supposed to say to you, you can do whatever you want on this earth, but what would Jesus do? Would he really be doing that? And the only way you can have a purely free market is if everyone in the economy has a completely moral sense of what do we hear for? What's GDP for? Rather than just, I'm going to screw the next guy to try and get three or four basis points more for the next month.

That's not going to work. And even if you go back to gold, that won't work. That won't help heal society. Gold has always been a very cruel mistress for the poor and for the middle class. It's been good for the rich, generally. And even if we go to oil as a modern gold, that would be good for efficiency. I'm in favor of energy efficiency, of course. But it turns off the possibility of saying, well, we can use fiat.

to print for a few years, to finance a project, like the new deal, the FDR used, you know, to build dams, et cetera, which were necessary for hydropower. You can't do that if you're on a rigid straight jacket. So we need to have some sort of reinvention. And it's going to get weird to go back to that, really weird to think, what is GDP for? How do we get there? And does it mean we just have one Fed fund rate? Or do we do we have variable ones? You get cheap money. You get expensive money. and we want to blow you up, either, you know, with a high interest rate or if it's someone being too cheeky geopolitically, politically. Do we really literally mean blowing people up sometimes? Two addendums to that. I would say first, the 7 to 8 percent rate you highlight that the Fed could do

to fight oil, that used to be true. It's not true anymore for two reasons. Number one, seven to eight percent rates are going to crater U.S. shale, number which has been 90 percent of global production growth over the last decade. Basically, you would actually, very possibly, by sending rates to 7 to 8%, actually send oil prices up, not down. And then the second part is at 7 to 8%, with $35 trillion in debt, 120% debt to GDP, and receipts that are extraordinarily interest rate sensitive, you would actually send U.S. interest expense pro forma above receipts, just the interest expense, not even the $3.3 trillion in entitlements. at 7 to 8%. And so that, I think, are the two things that the world sees that sort of the American dollar status quo centric doesn't see, and it's the reason why gold has completely diverged from

real rates. It's not that people want to go to gold. It's that people are looking at the math and going, okay, it's 7 to 8 percent. the U.S. cannot keep shale producing where it is, which is the only reason my treasury bonds have not continued collapsing against oil post-08. Number one, okay, so that tells me I need to get rid. If all I care about, if I care about preserving the purchasing power of my reserves, I have to switch from treasuries to gold, number one. And then number two, if the Americans can't make their debt, if they can't even make the interest pay, at 7 to 8% out of receipts without printing the money. Why do I own this paper again?

That also speaks to Golden. So I think those are the shifts that are occurring and the reason why we're seeing the behavior we're seeing. Again, I agree with you. But literally, that's part of the argument I was making because while that is still true, and you can't mathematically push back against that. What I'm saying is you can kind of cheat in that, for example, let's say you specifically spoke to shale. So you're saying 7 or 8% Fed funds, Shale blows up. Now, I'm no energy expert. I really want to make that clear, but I know that's true. So what happens if you, hypothetically, and it's not any kind of forecast, you put Fed funds back up, even going up to five and a half would freak people out. But let's say you go to seven, right, the low end of that. But at the same time,

the Fed, as the regulator, gets on the phone to every bank that's lending to Shale and said you're lending to them at two. They could, well, they could absolutely do that. However, and you made the very valid point that that's what China does. But, But, but, but China has capital controls. The dollar as reserved. Hold on, hold on, hold on as the dollar as the dollar as structured post-1971 cannot have large capital controls. You start putting large capital controls on the dollar and the dollar's reserve status changes. It has, they stop reserving dollars.

And so you can do that. And perfect example of that is we already ran that playbook. We said, Russia, we disagree that you invaded. Ukraine. We're going to seize your treasuries. Ha ha. And you know what happened? Free markets happen. What happened? The Russians said that's fine. We'll use gold. And the Saudis, I've heard multiple people at very high levels in Saudis. Saudis were quote unquote terrified. What did the Saudis start doing? Buying gold, not treasuries. What did global central banks do? They started buying gold, not treasury. So you can do that. Yes, I totally agree you can do that. If you do that, that is a restructuring of

dollar reserve status, full stop, end of story. to a system where gold is the neutral reserve asset no longer treasury bonds. No one's going to reserve treasuries under that system. If you're going to pick and choose what the rate is based on what suits you, then you would be a fool to do that. I just want to jump in because you both have talked about the power of fiat. And is the power of fiat ultimately the dollar and the bond market or underneath that? is it the technology and productivity of the economy or underneath that is some hard currency backing it like gold or the three of us understand that energy is is what powers the world

and money is ultimately a claynum energy. And if you even go a layer below that, it's the military power that enforces things around the world. So how much of it is all tethered to that? Like we're printing money to pay for our defense budget to build new naval fleets and move to the Middle East, et cetera. Michael, go ahead. Yeah, I mean, you've literally gone where I was going to go because Luke and again, we agree and disagree at the same time. We're seeing the same things and maybe just looking at different sides of the same gold coin when we're describing it.

It's not like we're disagreeing. We're just viewing it from different angles. I am saying exactly that. Yeah, capital controls would be required. And I mean internally to make sure you don't lend to someone at two and they lend it to someone else at seven. Yeah, you'd have to do that. Like in a war, we've done that before in the West. We'd have to do it again.

And it would mean a massive international explosion because all of the euro dollar debt, 50 or trillion of it, however it's constituted, people would not have dollars to get hold of them. It's very dollar positive because those who want to remain in the US camp would try and service their debt, those who would say, look, we can see which way the ship is sailing or the dreadnought or the battleship or the aircraft carrier. And we're not going to go with that particular fleet. So we're just going to default. And we know the list of countries that would probably do that.

It would complete havoc. They're all the creditors, are the ones that would default, by the way. Sure. So the creditors was, yeah. And we'd find out then how stable their economies really are when you wipe out the whole pillar of collateral that they're using domestically. Like, you know, China relies on dollar steel. Trust me.

If that all disappeared, it would be a big push, even though they could do it to try and reallocate towards something else, particularly for a country with very few commodities. albeit lots of widgets, you know, which don't last very long most of the time. Okay. So I agree that's the case. But then if you then say, well, the US dollar is again going back to a mercantilist or quasi-mecantilist asset, which is backed by the world's most powerful military and a lot of commodities because the US still has a lot of different kinds of commodities. And by the way, Canada gets no choice. All the energy in Canada and the, you know, the other, the untapped projects in Canada, you're now with us.

And Australia, which is just full of assets, you're with us and New Zealand. And Japan, which has productive capabilities, but doesn't have any commodities in South Korea, too. If all of those guys basically get ring fenced in together, which is where the U.S. military bases are and is already moving together in tandem, I still think, and again, this is not a 12-month, not a 24-month forecast, although, trust me, things can move faster than you expect if geopolitics suddenly goes haywire. but this is the glide path you inexorably move towards because if you don't, if we stick with the US dollar and the, as it is now, and you stick with treasury bonds as the main asset and reserve class, which you're talking about, yeah, you continue to deindustrialize, you continue to see your military strength gradually hollowed out to the point where other people can push you and you can't push back, which we're seeing in location after location. And if we're talking about oil and energy in the Middle East, which I think is a great way to pivot to it, maybe like the next point that I think, you know, Nate was saying, he wanted to get to earlier. If you look at the Saudis, yes, they've been kissing up to Iran recently. And everyone was saying, look, they've joined the bricks, etc. I mean, anyone who knows the region well, and I know it pretty well for an outsider,

they were doing the typical bizarre, I'm not interested in that when you want to buy it. You know, the one thing you don't ever do is go to a bazaar in the Middle East and say, oh, that's nice. How much is that? You're going to pay 10 times the price. You know, you act very, very cool. So that was basically giving themselves a plan B while they were trying to get U.S. nuclear technology, a U.S. defense shield, guarantee.

and as a path of that, some kind of peace treaty with Israel at some point. And I know there are a lot of big wrinkles there, but that's what they'd like. And when you see in the next couple of months, and it will happen, Israel rolling out its new laser defense screen, first of all, that's going to be truck-based to be able to shoot down drones and small items. But they think within another 12 months, you're actually going to have a science fiction style laser shield that basically can shoot down most things coming through the sky. Yeah, I think Saudi Arabia is going to be looking at it and thinking, I'd rather be on that side with my oil than on the side that's going to be firing impotently things that just can get shot down. So there's a lot of real world nastiness and

unpleasantness there that can decide which countries sit alongside other countries while they're trying to flesh out what does a new financial system look like, a new trading architecture look like, and a new what is GDP4 look like for our team. And within that, I still think there's going to be a need for some fiat for a while to lubricate things in the same way that during a war you never turn around and say well you know we're going to run a tight we're going to run a tight ship and we're going to run a balanced budget during a war you never do that you bring money like crazy but for a purpose i think it's a very fair point i think it raises a really important point that may pull what you highlighted forward which is that i think after the election it's going to become

clear to most of the West that NATO lost to Russia and Ukraine. There's already signs, if you look in between the lines. And I've been getting credible rumblings that that's been the case for about the last two, three, four months. And I think ultimately, talking about morally reprehensible things, I think we are seeing strategies to basically extend things till after the election, because one side thinks it'll help the incumbent if they don't have to sort of say NATO lost here. That's never happened in a U.S. election before. Never. Never. Right? Which is exactly, right? So I think what that means is sort of this military backing of which side do we on? We better have those lasers because if we don't, the decision may not go the way you think it's going to go.

You know, in the same way that I heard, you know, five, six years ago, one of the biggest tech companies in Asia from a, from a real thing. relationship like, look, don't make us pick because a push comes to shove, we have to pick China. Let me just add a further wrinkle into this. What are the implications for Europe of all the fiscal problems that you mentioned and the Euro dollar and all the debt if it also has to address re-arming if this NATO situation kind of unravels and the U.S. moves its support to the East or just stops its support there. If Europe has to rearm, how do they do that with all the trillions in debt extent? I work for a European bank. So we have this conversation regularly. And I think, you know, the exasperation you just saw on Luke's face is what I experience daily

when we're discussing this. And I think that the perfect encapsulation of that is the one European country that has really got serious about this. And it's very pro-U.S. is Poland. Poland is currently spending an enormous amount on defence. It's really, really ramping up its defense spending. If it keeps doing what it's doing now, within another few years, that's going to be a very, very, very credible, very powerful army, probably the only one in Europe apart from France because of its nuclear triad and even that is the only part it's resting on now, really. And yet Brussels, so the centre point of the European Union, is about to fine Poland for running too large a budget deficit as being the only.

only country that's rearming and defending Europe's eastern frontier. They have no idea what they're doing. And I tell them regularly, and in fact, tomorrow morning I've got an early breakfast following this very late night podcast in which I'll be talking to Europeans and telling them, you all tell yourself you're searching for strategic autonomy. And actually, you're going to end up with strategic on top of me. Like, everyone's going to be dog piling on you if you don't wake up. But one more point on that, if I may, we looked at this using the kind of framework I'm describing here within Europe. And my European colleagues are excellent, and they've done great work looking at the nuts and bolts of Europe in a way that I don't have the time or the energy to look at. But within this conceptual framework, and we spent a long time coming out with a paper, which we published in December last year, and I'm very proud of it, called Strategic Autonomy.

And actually, I've got a good pun in. It was called Troil and Error, T-R-O-Y-A-L, how to cure Europe's Achilles Heels. And we made the argument there that I'm making here. I said that they're going to have to spend loads of money they don't have. so they're going to have to print it. They're going to have to print it and the supply side. They're going to have to have tariffs, which is anathema to Europe, but they're going to have to introduce them to kick Chinese products out.

They're going to have to reshape every other policy to link up with it. And it will mean a complete reshaping of their entire political economy of what is Europe for. And it's not for soft power and free trade and euro trash and rock concerts and festivals in the summer and, you know, nice holidays in Italy. It's a much more muscular being. And then just recently we had Mario Draghi, former ECB president, Mr. Whatever It Takes, he comes out with his competitiveness report on Europe and it says exactly what we said.

And he even came out with the same figures. We said, look, it's going to take, we think, between 4 and 6% of GDP in new spending, most of which will be printed every year for at least a decade, if not decades, to get Europe to where it needs to be. and, you know, frankly, internally, we were having conversations before we published it. Can we publish something that crazy? Six percent of GDP every year being printed, more or less? You know, this is La La Land.

Dragi, you know, Soto Voce on how it's going to be done, but it will have to be printed pretty much. He said the same thing, because that's the only route you can go, or he said, it's slow agony. And that's true for America. True, it's slow agony you're looking at if you don't do it. So I have a follow up to that, and then Luke, I'll let you respond. ways, you know, the role of a podcast like this is to be an Overton window sort of thing to get ideas that are too politically difficult out in the sphere so that they normalize the conversations around them in the same way that your report, Michael, possibly was taken

up by Draghi, because we're in a situation now where the things that need to happen are still socially and politically untenable to voice. in the media and at press conferences. So that's why, you know, these conversations to me are important. Luke, did you want to respond anything to what Michael just said? You know, Europe has been, the degree of European self-immolation has been probably one of the biggest surprises to me. And it was interesting.

I spent two weeks in Europe about two months ago. And as I talk to people, you know, they, of course, wanted to ask about the U.S. election, but then they asked, you know, the conversation would turn to their politics as well sometimes. And what I found was a complete disconnect between a lot of people in Europe and their leaders. In other words, they don't want to fight Russia. They want cheap Russian gas. They don't want to lose their factories to America because, Oh, by the way, Mr. America, didn't you blow up our pipeline? The Nord Stream? Sure seems like you did. Yeah, maybe we did. I don't know. They say no, but that doesn't mean anything.

So you're our ally, and you want us to buy weapons from you, and you blew up our pipeline. And I said, oh, it gets better. Ten years ago, we had a white paper talking about how to weaponize migration from the Middle East. And they're like, what? And so, like, to me, there's this really interesting. dynamic going on in Europe, which is, and I agree with Michael's point that, hey, they're going to print it and the draggy. I saw that with great interest. You know, let's see what they actually do. But when I was, when I spent, you know, two, three weeks there a couple months ago, I was really

struck by the degree of awareness and the degree of the difference between their leadership. And so, you know, earlier in the summer, we saw like, you know, this, this year's version of, oh gosh, far right people are, you know, winning elections in Europe. And oh, gosh, you know, AFD is winning more and more seats in provinces in Germany. Oh, and like, then you see what the platforms are that they're winning on. And it's like, let's have common sense immigration. Let's not fight Russia. Let's get cheap gas. Let's not send our factories to America because we can't afford the energy because we have to buy expensive LNG from America instead of cheap gas from Russia. And so, like, I hear, I hear the strategic, the top down from Europe.

But I think their leaders don't have a clue what their people want. I think they're trying to fit, you know, some sort of idealistic, you know, plan. And it's never going to work at the ground level. Europe's fix is make peace with Russia, buy the gas, fix. Nord Stream 2, compete, restart the nuclear power plants instead of panicking and shutting them down like Germany did, and then go to the Middle East and like you did with Saddam and Ode 3 and say, listen, sell us oil in euros so we can print euros to buy oil. Because the reality is, is Draghi can print all he wants. If they can't print euros for oil, they're done.

So that too requires an end of the dollar reserve status is structured and sort of gold as a neutral reserve asset because the Europeans aren't going to settle all of this printing to buy the commodities in Euro debt because that's not what they do. You can't do that and build factories. So there are like a lot of fundamental inconsistencies. And so, you know, until Europe actually takes a strategic view, a real strategic view, which is, hey, let's listen to what our people want, common sense immigration, cheap Russian gas, nuclear power plants, and let's buy energy in our own currency. Europe is on the path to being a place that is very cheap for rich Americans and rich Chinese to go visit in the summertime.

I'm struck by so many things that in this conversation, which I wish could be longer, so many of these things like we want to do what the people want, yet the backdrop of what the two of you are inferring is no matter how we slice it in the not too distant future, we humans in aggregate the world over are going to have to use less. The rest is details, less material throughput on average. I don't know how that's sliced and maybe there's some faction

of humans that use more and a lot of others use considerably less. What do you think about that? I mean, there's the pull push between humans wanting more and doing the pragmatic things that Luke just suggested and the ability for the global economy to continue to grow in the face of energy depletion, climate disruption, geopolitics and the bricks. and currency dislocations and all that. Michael, start with you. I mean, it's one of the questions of the human condition, isn't it? I think we've described a lot of the complexities, and we've still only just brush the surface, because, you know,

just to reflect back to one quick point or two quick points we've made previously, on one hand, you know, no one knows what's happening with Russia, Ukraine, but let's presume that may or may not be done soon one way or another, and Russia may or may not have the upper hand. Let's say it does, Okay, hypothetically. On the other hand, you could see that, you know, Israel looks like it's in a much stronger position in the Middle East relatively now than it did six months ago. And with the correct application of, you know, further targeted force, you know, maybe making Iran look like a lot weaker than people thought that was six months ago. And China with Taiwan, they just practiced a blockade around it. That's making China look relatively a lot stronger.

So it's a mixed picture within this kind of, you know, anti-West or anti-U.S. block. but in terms of how we address that fundamental human issue related to this. I was having a chat with someone, you know, a very intelligent chat just the other day. And they were talking about Europe's desire for sustainability in the food system, which obviously at Rabobank, where I work is a very important part of what we do. And obviously it's a very important part of the climate puzzle. And we were discussing geopolitics in food. And I said there's always been geopolitics in food.

This isn't a new thing. Since year dot, I've got food and you haven't makes me rich and powerful. and also not sleep very well at night because you haven't got food and I have. And you can go to free trade route and presume that the more you free trade together, the more integrated you are and the more interdependent you are,

as we were talking about at the beginning. And yet the history of economic outcomes and economic history is that you have periods of interdependence and it actually then creates polarization, winners and losers, this country is doing better than that one. This demographic in each country is doing better than that one. The rich get richer, the poor get poorer.

and then it actually breaks down and countries start realizing now. We're not interdependent. We're dependent on you. We rely on your food or I don't want to rely on you one way or the other. So things do fall apart. Food has always been geopolitical and it will be again. And I said, imagine you're Europe and you've got this perfect plan for how the world should look in terms of sustainability for food, which they do.

I said, what are you going to do if everyone else says no? What are you going to do if one by one countries democratically vote for it, democratically and so we're not interested. We're poor. We want to eat more meat, not less. Yeah, the price is going to keep going up as a market function. There's nothing we can do about that, but we're not going to voluntarily give it up. Or we're going to try and become friends with countries that can produce it like Brazil because they can do that relatively cheap, cheaper than America. So we're just going to try and become friends with them. And if they become friends with China and Russia, so we're friends with China and Russia because we want more meat.

Are you going to invade them, Europe? Are you going to say tut, tut, tut, tut? Are you going to set up a committee, are you going to wear a t-shirt, you're going to make a documentary, what are you going to do to actually make the world be the way you wanted to be? And I said, I don't have an answer for you, but you don't have the force to do it. If you did, morally, would you want to do that? Probably not. So how do you persuade people? And this is where the planned economy road to hell comes from. We've all got a vision for how great it would be, if we could all do it. Most people's visions are wrong. And when you impose them, you actually create more evil than the good you're trying to do. But if you leave it to the free market, which is what the other purists say,

you end up with the rich getting rich, the poor getting poorer, and people, you know, ripping everybody off for a few basis points. So, unless you get some kind of- Ecological collapse at the end of that, but keep going. So, you know, and again, I'm a secular person. I want to be completely clear on that. But I completely echo what I've been hearing, in fact, I've been saying it in the years, well before they were, what I've been hearing very intelligent chaps like Brett Weinstein

saying recently, which is I wish I were religious. Because I fully understand that without a core value system telling you what, GDP is four at every level up to the geopolitical from the local. And without a market that works within those paradigms, nothing works. And I really hope we can come to that conclusion. But that's only going to happen when, as in science, you know, progress comes one death at a time. One person shuffles off this mortal coil. Someone comes onto it, hopefully with a different way of seeing the world.

And eventually the ship of state can turn around. But, you know, we're going to have to do it on fast full. in the next few years. And to go back to the point, you know, we've discussed a few times, that's why I am still clinging to something, you know, silly and I know dangerous like Fiat, because I don't think we've got a generation to have that shift. We've got like four to eight years, one or two elections to try and get some movement on it. And if we have to print some money to do it, I'm willing to take the risk of that turning out wrong vis-a-vis playing by the rules, which aren't rules that work. And I think we'll stay with Fiat. I just think we won't stay

was saving in Fiat. It's because that's a system that can't work if you're going to print it. Well, it's better than what we have now, which is actually the system of saving in houses. 100%. Almost almost every global economy, everyone just wants to put it in houses. I mean, you know, I go to Australia, it's the same disease. I go to New Zealand, it's the same disease. Every country in Europe, the same disease. The UK, same disease. It's fascinating, right? Because China, it's not the same disease. China's letting home prices fall and they're letting people save in gold. And China, what, do we hear from every Western economist? China's collapsing. China's doom. It's fascinating to me. They're actually making the right move, which is save in something that is not used for anything

rather than something that is used for something because that is in the long run, what would Jesus do? It's politically stabilizing. If you have a bunch of young people, they can't afford a house, that is not politically stabilizing. Who is more politically stable right now based on their policies going forward? If I had to bet, I would bet heavily that China is going to be more politically stable than the U.S. over the next two to four years. Well, first of all, that's a no-brainer. And any year you could have said that about China apart from, you know, a very, very brief window. I used to cover China professionally for a long time.

And I speak bad tourist Chinese and I lived in greater China for a number of years. But above and beyond that, and I'm not sure if I revealed this last time we spoke, Nate, but I grew up in a Marxist household, you know, that great European tradition, or similar to like, you know, maybe some parts of the U.S.E. coast and nowadays anyone at a US university where it's completely okay to be a radical Marxist and still think that you're a flag waving member of the country. Now that doesn't mean I am, but I was absolutely brought up in that tradition. You know, we had, you know, Communist Party literature on the shelves, et cetera, et cetera, and Marx was like a regular figure in conversation. So I know my Marxism for a non-Marxist really well. I mean, Marxist academics, of course,

can run circles around me because they've specialized it in their whole life. But if you, you understand that, which I do, and you understand Lenin, it was a whole dangerous ballgame further on. And you know China fairly well, the only part of that that I have pushed back against, which I think is important for the listeners to understand, is that temporarily China may or may not, and I'm not saying it is, although Hong Kong today here at our time, and again, this will be dated when viewers listening to this, have said that its new economic plan is to be a gold trading hub internationally, which was interesting when I saw that. I thought, hmm, wonder if they're going have the Hong Kong dollar pegged to gold rather than U.S. dollar going forward. But China would never

allow anything like gold to actually be gold within China. Because the one, what rule of what is GDP for in China is for the CCP. You don't worship gold. Gold worships you. That's the way that they are actually. I think that's this, I think that is what the Western mindset is missing what China's doing with gold, which is gold. The yuan is down 50% against gold in the last two years. And And so people frequently, I think what China wants, why China would set up a gold trading hub in Hong Kong is not that they have any designs of pegging the Hong Kong dollar or gold. God no. Or the yuan gold, there is no chance that's going to happen. What they are doing is if when they sit down with the Saudis, when they have sat down with the Russians, when they sat down with the Russians 10 years ago and say, we China are going to collapse if we have to buy our oil in.

dollars and because we're going to run out of dollar reserves and the price of oil is rising because of all the things we've highlighted we've talked about here, peach, cheap oil, etc. We have to be able to buy our oil in yuan when we want to, not all of it, not even the majority of it. But when we call and say it has this shipment has to be in yuan or else you have to say yes, Saudi, you have to say yes, Russia. You have to say yes, Iran. And the answer then is as, you know, Kyle Bass says, well, why would they take the wampum or as, as Hugh Henry says, well, why would they take the red cabbage? Two reasons. Number one, it's good for Huawei 5G equipment and, and, and, and they're the factory of the world. And any net settlement will be done in gold

in Hong Kong, in London, where there is an offshore rememn-and-be clearing bank, in Switzerland, where there is an offshore rememn-mnb clearing bank, in UAE, in Singapore, right? So, You're going to, to the extent there is net gold settlement of energy for China, that is what China is doing with this. And now, why would Saudi do that? Well, look what gold is doing in yuan terms. It's up 100% in the last two years in yuan terms. So now when Saudi goes, I need Huawei 5G for my shiny glass houses in the desert that make no sense, they call up China and go, hey, we need Huawei 5G. and China says, hey, good news.

The gold you have buys you twice as much 5G equipment, constant yuan as it did two years ago. And the more oil you buy in it, the more it's going to buy in the future. It's a virtuous cycle of trade that China is instituting in plain sight. And sort of people don't see that that's sort of like, well, are they going to, their bond market isn't big enough to settle yuan in balances? No, but gold is. Well, not at current prices. Exactly. Again, we're looking at similar things, but just interpreting it in different ways.

That's perhaps the best analogy. It's slightly raw shack, and you're seeing one thing in it. I'm seeing something that's similar, but a bit different. So when you said, why would you take the Remimbi? They don't take the Remembe. They immediately say, well, we want to offset that against these many goods, which are made in China. So they're not actually keeping it. Is that any different than what they do with the U.S., where they actually just buy our stocks?

Well, it used to be that they would actually send dollars to each other, and then there would be a balance in dollars in one country or the other. Now it's like we're not even, we're pricing in dollars, which is important. How much is that? 70 bucks. How much is that 70 bucks like widget? Right. Okay, we'll swap them. And, you know, technically we can say we invoiced in rem, but we know what the actual price was when we converted it. It goes across. So you're describing the euro dollar system without the euro dollar system? Well, I'm describing barter. That's one described. But that's the euro dollar system without the euro dollar system. They're training in dollars without dollars, right?

That's the Eurodollar system. But the Eurodollar system is based on debt. And there's no debt on the back of this. There are no financial issuance here. It's purely just one physical good for another, which is good and bad at the same time. So they're very, very different, right? But that's how they get out of the problem. Well, yes and no.

But this is the broader point I want to come back to. If we say that some aspect of that starts to emerge, the second and third and fourth order effects of that are calamitous. I've already described the hypothetical where Europe and America might be saying right here, capital controls domestically, so I lend money to you, to him at seven, you can't lend your money to him, you're not allowed to. They're people watching you. And, you know, money won't go into the U.S. The extension of that, more broadly, is that the entire global network of trade and finance flows collapses with massive defaults, hard rewrite. You just said it doesn't. By virtue of the border, China then calls the next day after that happens, China calls up Saudi and says,

listen, we'll value, you know, your barrels of oil for our Huawei and no dollars need to change hands and we'll do it just like we did yesterday. If you actually look through the numbers of the trade data, and I can't tell you how boring this is to do, but I've done it over the years, you end up with a chart that shows you that, yes, all this is happening within, let's call them bricks, even though Saudi Arabia hates Iran and there's no bricks friendship there. Iran just recently let it be known if their oil gets blown up, they'll blow up Saudi's oil. So they're not friends, right?

But within the bricks camp, that's all swapping around, right? And trades going up all the time. But if you look at how much trade as a group they do with the OECD, so into the West, into Europe and into America in particular, it dwarfs it and it's still accelerating into the OECD. So the day on which China finally says, right, this is working, this system you're describing, we're going to push it past a certain threshold. And Trump or Harris may have different tolerances for that threshold to bring it back to the election. They lose everything going into the US. And suddenly all the support for tens of millions of workers who make widgets which go to Europe or America disappear. And they have to find someone in the bricks who can buy a staggering amount of product.

And this is for an economy in China which won't inflate its own consumer demand. That's what the gold's for, though. As they're inflating their gold, they've been encouraging the Chinese people to buy lots of gold since 2002. State media. The gold goes up in that scenario. Gold explodes higher because the other side of the coin to what you just described. Yes, I agree it's going to be very deflationary for the bricks. It is going to be hyperinflationary for the West.

Think about what you just said. We're going to cut off all the stuff from China. Sh shelves go empty in the West. The bond market collapses. The Fed prints it to keep financing the government. Gold goes to the moon. So now when gold goes to the moon in the bricks, we've got how many, how much gold did Chinese people own, or number one?

And then how many do the Indians own? They're, you're going to create a consumer class overnight. Again, I understand the vision, but just to retort quickly, it's not that it can't happen. That is a possible future. But what did the Fed do with gold in the 30s? Just confiscated it. All it would take in that kind of environment, which would be a warlike environment, would be one step away from global war without to happen because it would be 2008, but with guns loaded on all sides,

is to say, no one does any business with them. You get arrested if we see any of you doing it. And we're doing massive fiat to immediately, within our group of producing companies, countries, set out factories for everything. We're going to have a really crappy three or four years, or two or three years, depending on how much groundwork we've done building up to it. But on the other side, there's a hard break. You've got your shiny gold medal over there. It's illegal here. Internationally, nothing comes in or goes out of the port. You're going to have to be smuggling things in like, you know, medieval style again, on little boats to try and get in your television

sets. Like pharmaceuticals. I'm reluctant to ask this, but it's a natural progression of where you're going. Does, does Bitcoin or crypto offer any relief valves to the direction you guys were just talking about? I think Bitcoin does. Yeah. And potentially, I mean, if particularly you're talking about a new money source, you can print. Well, Bitcoin, you can't, but you can create new coins, right? Which is the same thing as printing. If you can get enough people to use it, sure. But I mean, how you use it and how it's going to be used, I think it will be part of it, but there are many different ways it could be. So ultimately, and I, you know, it's approaching midnight where you are. Yeah, I'm feeling it.

You have a professional breakfast. I don't know how you're going to get to sleep after this. But all I've got to say is something far more prosaic, but thank you for the opportunity to both of you to discuss this today. Because I think all of us agree on an awful lot. It's only merely just a difference of nuance and timing in terms of how we think it's best expressed as a way to address this. We're not arguing in terms of. of the problems that we face and what we would like to see happen. It's just how do we get there and over what time frame and how best. And I would hope that more conversations like

this can flow from this one. I hope people watching, if they enjoy it, can share it with others and can start trying to have their own discussions because this is a complex field. And let me tell you, don't feel intimidated by it. Because if you talk to someone who's your typical Wall Street economist or a brilliant trader, they'll understand parts of this and large parts of it will be alien. And if you talk to a politician, they'll understand different parts and large parts will be alien. You talk to someone in the military and they'll understand a different part. You talk to an environmentalist, they'll get a different part. But what we then need to do is get all of these guys watching these kind of conversations, you know, better, smarter than people than me, certainly,

talking to each other and understanding what do we all need to understand about each other in order to understand what GDP is for. And as you said, what money is for. And then hopefully, collectively, we get an answer. So that's where I'd like to conclude if I can. That's the pathway. Thank you both for your continued Herculean efforts to understand this complex space. And Michael, I hope you can get some sleep. To be continued, my friends. Absolutely. Thanks so much for having me on. And Michael, thank you. Thank you. Thank you. Thank you. Thank you. If you enjoyed or learned from this episode of the Great Simplification, please follow. us on your favorite podcast platform. You can also visit the great simplification.com for references

and show notes from today's conversation. And to connect with fellow listeners of this podcast, check out our Discord channel. This show is hosted by me, Nate Hagan's, edited by No Troublemakers media, and produced by Misty Stinnett, Leslie Batlutz, Brady Hyen and Lizzie Siriani.