We Study Billionaires - The Investor’s Podcast Network - TIP514: Permanent Supply Chain Disruptions That Will Sink the Economy w/ Jim Rickards

Starting point is 00:00:00 You're listening to TIP. Today, we welcome back economist and author James Rickards. Jim has a new book out titled Sold Out, How Broken Supply Chains, Surging Inflation, and Political Instability Will Sink the Global Economy. Supply chains have been a huge topic this year, and we always value Jim's insights into macroeconomics, geopolitics, and currencies. Jim spent over 35 years on Wall Street and has also advised the U.S. intelligence community, the Department of Defense, and countless hedge funds.

Starting point is 00:00:30 In this episode, we discuss how supply chains have evolved and how we've ended up where we are, how inflation has been winning the tug of war with deflation, but not for long, the importance of the velocity of money, the need for sound money, how China's power has peaked and much, much more. As a longtime listener of TIP before becoming a host, Jim was always one of my favorite guests. I'm excited to bring him back and get his thoughts on today's markets. So without further delay, I hope you enjoy this conversation with James Rickertz. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most.

Starting point is 00:01:09 We keep you informed and prepared for the unexpected. Welcome to The Investors Podcast. I'm your host, Trey Lockerbie, and today I'm so excited to have on our show again, Mr. Jim Rickards. Welcome to the show, Jim. Thanks, Trey. It's great to be with you. As I was kind of telling you before we started recording, I've been a longtime fan of yours. You are always one of my favorite guests on TIP. You have a great new book. It's very topical, of course, as it always is.

Starting point is 00:01:41 And I'm excited to dig into it. So let's get going and not further delay. I wanted to kick off here by talking a little bit about inflation and deflation. Of course, these have been huge topics this year. And for good reason, in your book, Currency Wars, you described inflation and deflation as sort of this tug of war like dynamic that's been playing out. And lately, inflation is more prominent, it would seem, but deflation, if it's a few, are very much still at work.

Starting point is 00:02:06 So could you walk us through how both scenarios might play out and how each of them might further impact the Fed's agenda? I'd be glad to do that. And before I can I get into that very explicitly, one question is, well, okay, inflation, deflation, great conversation, let's do it. But what does that have to do with the book about supply chain breakdown? And the answer is it has a lot to do with it.

Starting point is 00:02:27 Right about this time, about a year ago, when the supply chain breakdown was in all the headlines, you know, you have junior cheesecakes, in New York couldn't make cheesecake because 83% of the ingredients were cream cheese. And it was a cream cheese shortage. And it got more serious when it was baby formula in April and all that. But when I was planning the book with my editor, she said, well, Jim, yeah, we got all this great outline on the supply chain.

Starting point is 00:02:49 But we have to talk about inflation because this supply chain breakdown is causing a lot of the inflation. I said, absolutely. Of course, I thought of myself. But I said, I'll do that. I was going to write a chapter one, deflation because that could be coming very quickly behind the inflation. Everyone knows the inflation's here. You know, I see at the grocery store, the gas pump, home heating prices, a lot of other prices for goods and services. I mean, I may be a writer, but I put gas in my car and I go to the supermarket just like everyone else, so I see it

Starting point is 00:03:18 first hand. So people don't really need to be told about inflation, but what is not well understood are the sources of inflation. And broadly speaking, there are two places inflation can come from. One is the supply side. There's a name for it. It's called Cost Push. inflation. So costs go up and they get pushed onto the market, pushed onto consumer, and the prices of goods on the shelf go higher. And that's certainly what we're experiencing. The inflation we have right now is coming from the supply side, whether it's energy shortages, higher energy prices. The war in Ukraine has made things a lot worse with the sanctions on Russia. You know, Russia produces a large percentage of the world's aluminum and titanium. Well, guess what? Aircraft are made

Starting point is 00:04:00 from aluminum and titanium. Boeing gets about 35 percent of their tights. titanium from Russia. So if they can't export it, are we sanction it, then Boeing's assembly lines slow down, et cetera, and costs go up. So the inflation is coming from the supply side. That's very clear. The other place inflation could come from is the demand side from consumers. And this is much more psychological. It's, you know, you're thinking about buying a new refrigerator. And this thing near Russia, no one works, but I want to get a new one. But if you think the price is going to go up, you might say, hey, I'm going to go out and get it right now. Because if I wait six months, the price is going to be higher. And why would I do?

Starting point is 00:04:34 that. And of course, that's called demand pull inflation. You're pulling demand forward to beat the price likes. And of course, it's self-fulfilling. If enough people do that, then sure enough, shortages appear and prices go up. But these are very different dynamics, the supply side dynamics and the demand side dynamic. Now, in the 70s, interesting kind of test case, we saw both. It started out from the supply side. There was the Arab-Israeli war in 1973. That turned in the Arab oil embargo in 1973, 1974. The price of oil was. one up by a factor of four from $3 a barrel to $12 a barrel. Those prices are not pretty low by today's standards.

Starting point is 00:05:10 But when you multiply by four, it was a big shock back then. I weighed gas lines. And so that inflation kicked in, although there was a funny twist to that, which I'll come back to, which was at the time, people remember Gerald Ford and Alan Greenspan, who was on the Council of Economic Advisors at the time. They came up with this campaign. They had little buttons that said win, W-I-N.

Starting point is 00:05:28 And that's super whip inflation now. That was the whip inflation now campaign. Well, they whipped it. Okay, we had a severe recession in 1974. I remember I graduated from college in 73. I kept going to school because I guess it was easier than getting a job, but I was in graduate school at the time. But all my friends got out and they went to Wall Street.

Starting point is 00:05:46 They were like, yeah, I'm on Wall Street. And, of course, six months later I was same in New York. They were all fired because this recession, there was a stock market crash. But then the inflation came back because the oil price didn't go away. And then we had two grossly incompetent chairs of the Fed, Arthur Burns and Jude William Miller. They put the pedal of the metal of the money supply. Then the inflation took up, but then it morphed over to the demand side, as I described

Starting point is 00:06:08 earlier. And by the late 70s, the city's 77, 78, I started my career. I was working as a lawyer at Citibank. And it was funny, your boss would just give you a raise just because they say, hey, there's another $20,000 or whatever. You didn't even have to ask. The inflation was so out of control. They were just handing out raises so people could keep up so they wouldn't quit their jobs.

Starting point is 00:06:27 And then finally, Volcker came along and crushed the whole thing with 20% interest rates. So that was started from the supply side, went to a mild recession, actually not a mild recession. It was a severe recession in 74, but morphed over to the demand side and then finally had to be crushed by the Fed. So here we are today. We have the inflation from the supply side. That's very clear. There's no evidence that the inflation, at least not yet, is coming from the demand side. The demand side is still very subdued.

Starting point is 00:06:54 And that's because the Fed is determined to get ahead of it, unlike what happens. happened with, I mentioned Arthur Burns and Julian Miller. Jay Powell learned the lessons of Paul Volcker. He's raising rates very rapidly. But here's the problem. The Fed can't do anything about the supply side. They don't drill for oil. They don't build cars. They don't plant crops. They don't drive trucks. They don't do anything to alleviate the bottlenecks on the supply side. The only thing they can do is raise interest rates so high that it destroys demand and basically crushes the economy. But ask yourself, if the inflation is coming from the supply side and you can only control from the demand side, how much demand destruction do you have to do to actually affect the

Starting point is 00:07:33 supply side? The answer is a lot. You basically got to throw this economy into a very severe recession. So the inflation is here today. Again, it's at the store at the gas pump. You see it everywhere, but the Fed is going too far. It's not a big analytical challenge to say the FIS Committee mistake because that's all they ever do. They've made nothing but mistakes since 1913. But they're going to crush the economy. They are going to get rid of the inflation. It's going to come down more quickly than people expect. They will have to pivot. I mean, Jay Powell has told us they're going to raise interest rates 50 basis points on December 14th.

Starting point is 00:08:05 I would expect they'll raise them maybe another 50 basis points February 1st. We have the 2023 calendar for the Fed, FOMC, maybe 25 basis points in March. And there's three more rate hikes from here from today, but they're going to go too far. They've already done enough. They're already at the terminal rate. They just don't know it. They'll be the last ones to know for the economy. recession. And then here comes first disinflation and deflation. Disinflation is still a kind of

Starting point is 00:08:32 inflation, but it's coming down. And it behaves more like deflation than inflation in terms of expectations. So inflation goes from eight to seven to six to four, you know, zeroing on two, which is the Fed's target. It's still inflation. But when it's coming down like that, it's much more of a deflationary dynamic. So we have inflation now. We'll have deflation disinflation and deflation sooner than people expect, a very severe recession because the Fed is raising rates too high, too fast. They've blown past the terminal rate. The terminal rate is not, J.PAL doesn't know what the terminal rate is, but it's kind of like Potter Stewart. He'll know it when he sees it. And the point is, the terminal rate is defined as that rate which brings

Starting point is 00:09:13 inflation down on its own without further rate increases. You can get there and sit tight and the inflation will come down. That's true. It works that way, but we're probably all already there. Inflation has already turned around, but Powell doesn't believe it, doesn't want to blink, so they're going to throw the economy into very bad recessions. So get ready for the deflation coming soon. Maybe describe for the audience why the Fed can't have deflation, or at least doesn't want it, right? They're very much against deflation. So if they do go too far and we enter into a big bout of deflation, what would their response be just assuming it's not part of their ultimate goal. Well, I can tell you what they're responsible. I can also tell you right now it won't

Starting point is 00:09:54 work. Deflation is a central banker's worst nightmare. And there's several reasons for this. The obvious one is that it increases the real value of debt. Deflation is funny. If you have cash, people hate cash because there's no yield. In deflation, cash can be your best performing asset. Because even though the nominal return is quite low, the real return can be quite high. If you have deflation of 2%, and your money just stays constant, money's worth 2% more because that's what deflation prices go down so your money goes further, so it's worth more. In a world of 2% deflation, the real return on your cash is plus 2, even if the bank's pay you zero because it's worth 2% more. It helps creditors, but it hurts debtors. But who's the world's biggest debtor? It's the United States government. So they don't

Starting point is 00:10:41 want the real value of the U.S. debt, $31 trillion, would go up in a deflationary environment, and they don't want that. That's one reason. But the real reason, reason, the more powerful reason, this is what keeps them up at night. They can't stop it. See, with inflation, the Fed has always been confident. You get inflation, okay, they don't want it, but it happens, but when it does, we can crush it with high interest rates. That's what Volker did, and that's what J-PAL is doing right now. But when you get deflation, they don't have any tools. Now, they'll do QE. The QE is a joke. I mean, how does QE is like a mirage or a psychological game they play with people. How does QE actually work? Well, the way it works is it's money printing of a kind.

Starting point is 00:11:18 So the Fed buys bonds from dealers, from the primary dealers by treasury notes or bills, etc. They call out, they get an offer. They say, Don, the Goldman or city, whoever it is, sends the treasury notes to the Fed, and the Fed pays for it with cash that comes out of thin air. What do the banks do with the cash? They give it back to the Fed as excess reserves. So that money doesn't go anywhere. You're inflating two sets of balance sheets, the bank and the Fed.

Starting point is 00:11:42 The money doesn't get loaned out. It doesn't get spent. It doesn't increase velocity. It doesn't create jobs. The money doesn't go anywhere. It just sits on the Fed's balance sheet. So you can do it. They did do it.

Starting point is 00:11:53 They increased their excess reserves to $9 trillion back in the pandemic back in 2020, but didn't do any good. The other thing they can do is take interest rates as zero, and they will. This is the famous pivot. Wall Street correctly anticipates the pivot in ways that the Fed does not. But where Wall Street gets it wrong is they think the pivot is a good thing in the sense of, oh, the Fed's going to overtight and inflation is going to come down, and they're going to realize it.

Starting point is 00:12:18 pivot to interest rate cuts. And so that's a soft landing and buy tech stocks. That's kind of how Wall Street thinks about a very kind of one, not even two-dimensional. The reality is the Fed is blundering. They are raising rates. Inflation is going to come down. They are going to have to cut rates. They'll be the last to know. But they'll be cutting rates for a very bad reason, which is we'll be in a severe recession. Stocks will be down 30%. So the idea that you're going to have a Goldilocks ending or soft landing is not true. The Fed will pivot, but they'll pivot too late. the damage will be done and the damage to the economy, as I say, it will be severe. Getting back to deflation, they can lower a race to zero and they will, but then they're stuck.

Starting point is 00:12:55 There's no evidence that negative interest rates are more easing, if you want to call it that. Europe, Switzerland, Japan, other countries have all tried negative interest rates. They don't work. In fact, this is a good example of how PhD economists lack understanding of the economy and common sense. So their theory is if I cut rates from 2 to 0, that's stimulative. Well, it isn't really, but they can pretend that. So if I take them negative, it's more stimulative. But everyday citizens in the United States, they look at that and they go, wait a second,

Starting point is 00:13:28 why does the central bank have negative interest rates? They must be scared to death of deflation. And if they are, I'm going to save my money. I'm not going to spend it. First of all, the money will be more valuable as I described. It also means there's a really bad economic outcome on the horizon, which is exactly when you would want to spend less, save more, you know, build up cash reserves. So the idea of lowering interest rates into negative territory is, hey, you better go out and spend it

Starting point is 00:13:51 because, you know, you're going to lose it if you keep it in the bank. But people do the opposite. They hoard it. It actually is worth more in real terms, as I described. So you get the opposite of what they think. But again, the economists lack common sense. So negative interest rates don't work. QE doesn't work.

Starting point is 00:14:06 Nothing works. You can't get out of deflation. There's only one way out. And this was shown. By the way, everything I'm describing actually took place between 1929 and 1933 during the worst stage of the Great Depression. And FDR, one of his first jobs, I mean, FDR was sworn in the first day or the second day, by executive order, he closed every bank in America, every bank of the United States. Can you imagine a president getting on TV today and saying, my fellow citizens, as of now, all the banks are closed, all of them, we'll get back to you when

Starting point is 00:14:35 they reopen. Well, that's what he did in 1933. And then they went through like a phony, stress testing and reopened them a week later, and that worked okay. But his other problem was deflation. And the way FDR broke the back of deflation, and we had very good growth in 33, 34, 35, he devalued the dollar against gold. And he raised the price of gold, 75 percent from $20 and $20 an ounce to $35 an ounce. And it wasn't to enrich holders of gold. In fact, he compensated all the gold first and then devalued the dollar. So it was like an inside trade. He had all the gold. So it took the profits for the United States Treasury instead, of U.S. citizens. But that aside, he didn't do it to reward holders of gold. He did it to break the

Starting point is 00:15:17 back of a deflationary psychology. What he wanted and what he got, if the price of gold went up, which it did, the price of corn, wheat, steel, energy, everything else went up. And he turned the deflation around, turned it into inflation. In 1933, it was a great year for the stock market. So was 1934. We had good growth. Unemployment came down. Stocks rallied. And then the Fed, you know, right on Q, screwed it up again in 1937. We'd be a good. premature monetary tightening. We went into a second severe recession in the middle of the Great Depression. But getting back to the point, what can a central bank do about deflation? The answer is nothing, but a government, a treasury, and a White House can devalue the dollar. Now, it doesn't do any good

Starting point is 00:15:56 to devalue against euros or yen or, you know, with Chinese yuan or any other currency, because that's the race to the bottom of what my first book, Currency Wars was about, you know, I devalue, then you devalue, then I devalue some more, and you devalue some more. We never get any further ahead. In fact, it's a negative some game. But gold is different. Gold can't push back. If you devalue against gold, gold just sits there. They can't devalue. It's not a currency. There's no central bank of gold. So it's perfect for that. The problem today, of course, is that we're not on a gold standard. You can't break a pay that doesn't exist. So you don't even have the FDR toolkit from 1933. So deflation is one of the most serious economic problems you can have.

Starting point is 00:16:33 It keeps the central bankers up at night because they know they can't do anything about it. And you can't even play the gold card because you don't have a gold standard. You don't have a gold peg. So it's a very, very serious problem. So touching on gold there for a minute, because I know you've been a big proponent of gold throughout this fact in the book. And I think this is something that, you know, if you're just going about your normal day, you don't really think about this. But you highlight that inflation, even at its average rate of around 3%, cuts a dollar in half in about 23 years. So if you start to see disinflation or deflation, and we just get down to like a five or six percent range, I mean, for a prolonged period perhaps, how does an investor best protect themselves, whether it's gold or maybe some other assets?

Starting point is 00:17:15 Sure. It's a very good example. I use calculus when I have to, but I always tell people, most economic problems can be solved with like fifth grade math. To your point, Trey, let's just take six percent inflation. It's pretty high. Six percent inflation cuts the value of the dollar and half in 12 years, okay? 12 more years, it's half again. So from birth to the age of 36, which is just kind of early mid-career, whatever, the value of your dollar has been cut by 84%. That's with 6% inflation. Of course, higher rates of inflation is even faster, but even 2% inflation cuts it in half in 35 years, half again, and 35 years average lifetime to the age of 70, your dollar has purchasing power has been cut by 75%. That's with 2% inflation, not that high. Why central banks think that's target rate, I have no idea. The way I've described it is, it's like eight little kids who sees

Starting point is 00:18:04 a lot of money in his mother's purse, and it's like 50 bucks. If I steal the 50 bucks, I'll get caught, but if I take two bucks, nobody will notice. So I'll just take the two. So the Fed figures a very low rate of inflation over a long enough period of time, diminishes the value of the dollar and helps to pay off the national debt. And that is what we did from World War II until 1980. The debt to GDP ratio went from 120% to 30% when Ronald Reagan was sworn in, but it's been going up ever since. So that's why the Fed likes a little bit inflation, but not enough to notice, I would put it that way. But the danger is in trying to get there, they go too far because they don't really know what they're doing. They do in theory, but their models don't work. And they actually

Starting point is 00:18:42 end up in this deflationary travel that we talked about now. Where does gold come in? Gold holds its value. It doesn't mean I have a lot of, I know a lot of people who have to go I talk about gold all the time, and they're like, you know, they're, particularly the Austrians, you know, they're banging the table. We have to go back to a gold standard, get away from a fractional reserve banking. Let's have a gold standard. I said, well, be careful what you wish for it, because if you have a gold standard, you're not going to make any money. Gold will be pegged, and that'll be that. You might as well, you know, go to sleep. It's only in a world without a gold where you have blundering central bankers, that the price of gold goes up a lot, and it preserves wealth.

Starting point is 00:19:15 You know, I mean, gold's been going sideways for a few years at an interim peak of $2,039 an ounce in March 2021, so a little over a year ago, about a year and a half. But in 1999, it was $200 an ounce. And today, if it's 1800, okay, it's not 2000, but 1800, that's still nine times your money in about 23 years. So it does this job, but certainly in inflation, we've been talking about inflation, deflation, and the tug of war. We have inflation for the short run. We're going to have disinflation, borderline deflation early in 2023. We're going to have a very severe recession. but if the Fed decides to print money to get out of the recession, then the inflation may come roaring back again. So it's like a pendulum, but gold will serve you very well through those cycles.

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Starting point is 00:24:22 peaked? And this is the argument for deflation. And how much should investors be watching velocity in their kind of macro assessments here? Velocity is as important as any other variable. It explains why all the people screaming about money printing, you know, don't really understand the interaction of monetary policy and economic growth. So, a lot of the money. lot of ways to write the GDP equation, a lot of ways to calculate it, but one of the ways that the monitors should do it, and Milton Friedman advocated this, so the really Irving Fisher invented it much earlier in the 1920s, but a very simple equation, not to get too geeky,

Starting point is 00:24:57 but M times V equals p times Q. Well, M is money supply. We kind of all know what that is, and people watch that. V is velocity, which is the turnover of money, and just to illustrate that, you know, if I go out to dinner and tip a waiter, and the waiter takes the tip money, an Uber home and the Uber driver puts gas in her car. With the tip money, my dollar had velocity of three. It supported the tip, the tip the Uber driver and the gasoline. So my $1 produced three dollars of goods and services. But if I stay home and watch TV and don't spend any money, I have velocity of zero. So velocity is just that turnover of money. How rapid is it? And I remind people that the money supply is now about $25 trillion, but $25 trillion times zero is

Starting point is 00:25:40 meaning if you don't have velocity, you don't have an economy. So it's not just money supply. It's money supply times velocity equals nominal GDP. And nominal GDP has two parts. P is a price index and Q or Y, you know, different people use different variables, is real GDP. So you take real GDP times the price index gets you nominal GDP. So the Y is inflation or deflation. So Milton Freeman looked at that and said, well, okay, we want Y to be one, meaning we don't want inflation or deflation, we want nominal GDP equal to real GDP, so we want Y to be one. Real GDP in a mature industrial economy can grow about 3.5%. And that's about right.

Starting point is 00:26:19 He was right about that. It varies, but that's a pretty good central tendency. So looking at the other side, he said, velocity is constant. So it's pretty simple. If P is 1 and Y can only grow at 3.5% and velocity is constant, then all you have to do is dial the money supply up or down to target, you know, no inflation, no deflation, and maximum real growth, and that's monetary nebrana. And he, Friedman used to joke, you know, you don't need a board of governors of the Federal Reserve.

Starting point is 00:26:47 We just need a computer to do what I just described. There's a little more to it than that, but that's basically it. But Freeman was wrong about one important thing, which is velocity is not constant. It was from 1950 to 1980, which is the main part of his career. So maybe you cut him a break there, but velocity is not constant. It has plunged. Velocity is just GDP divided by money supply, but there are different measures of money supply. I always find it curious.

Starting point is 00:27:09 everyone thinks they know what money is. Well, the Fed doesn't know because they got M0, M1, M2. You know, they're making it up as they go along. But if you take M1, which is the Fed money, currency plus bank checking accounts, which is a pretty good measure in my view. That velocity has gone from 10 to 1 in the last 10 years. And those $1, you used to produce $10 of goods and services. Today it produces about $1 of business services. And it's dangerously close to getting below one where you could actually print money and it would reduce GDP, because people are hoarding it, not spending it. Anyway, it ticked up a little bit very recently, but it's not clear that that's going to be

Starting point is 00:27:44 sustainable, but we'll see. But either way, the velocity is crashed. And this is why we never had any inflation of any magnitude from 2009 to 2019, so from the end of the global financial crisis to the pandemic. So those are kind of extreme bookends, if you will, but for 11 years from 2009 to 2019, average annual growth was real growth was 2.2%. It wasn't 3.5, which, you know, pre-beenkind I hypothesized. It was 2.2. And inflation was barely at about 1.6. The Fed's target was two the whole time. They only got there a couple times and it didn't last for more than a month or two. I always say it's a sad day when a central bank wants inflation and they can't get it. So the whole time, the Austrians are screaming.

Starting point is 00:28:25 I shouldn't pick on Austrians. The Neokane's in and monitors said the same thing. You know, money supply, money supply, Fed printing and Fed printing are going to cause inflation. There was no inflation. It just wasn't. The Fed couldn't even. reached their target. But the reason was velocity. The money printing was there, for sure, into the trillions, but the velocity wasn't. So here we are today. The Fed, by the way, for those screaming about money supply, money printing, the Fed is burning money. The Fed is actually reducing the balance sheet. They're reducing M-Zero, which is their base money, by selling bonds to Wall Street. So it's the opposite of money creation. When you sell the bonds, you get the money, and it

Starting point is 00:29:01 disappears. Just as the Fed creates money out of thin air, the money disappears into things. there once it gets inside the Fed. So the Fed is not only raising interest rates. They're reducing their balance sheet. They're reducing the money supply. And I expect that it'll hurt velocity even more. So this is really extreme form of money tightening, which will cause the recession we talked about earlier.

Starting point is 00:29:22 I'd like to segue here and talk about supply chains, which is what this book is not all about, but at least half or so of the book is really this huge deep dive into how supply chains work and why they're important. And I wanted to kind of call out what you, I don't know if you came up with this phrase yourself, but you refer to it as this meta supply chain. That's what we've evolved into now. So as we enter this new age of potential de-globalization, well, first of all, explain what a meta-supply chain is, but then also how does the meta-supply chain unwind potentially in de-globalization and what would be the risks and ramification of that?

Starting point is 00:29:58 Sure. Well, let's start with a simple supply chain. It'll kind of build out from there. So you're in a supermarket and somebody's buying a loaf of bread and you say to them, where'd the bread come from? They go, oh, well, there's a bakery on the other side of town. They bake it and they send it over here on a truck and I buy the bread. Okay, that's a simple supply chain. But even that, it's not so simple because who made the truck? You know, where the diesel come from? Where was that refinery? Where the truck drove over? Get his training, et cetera. Oh, the law for bread? Well, it has a wrapper. It was it plastic or paper? Well, it could be out of the one, but that came from somewhere. And then you get over to the baker. But let's just go further.

Starting point is 00:30:31 So looking at the baker, how did they bake the bread? Well, they baked it in an oven. Where'd the oven come from? You know, it's got tempered glass and steel and the semiconductors and thermostats and all kinds of parts might be from 15 or 20 different countries that was assembled and put together. And then the oven was produced. Well, how do you make bread? We'll use flour.

Starting point is 00:30:49 Well, okay, where'd the flour come from? Oh, it came from the mill. Okay, well, how did it get from the mill to the baker? Well, it came on a truck. Oh, another truck, another diesel, another driver, et cetera. How did the mill make the flour? where did they get their ingredients? Well, they got wheat from the farmers, really. How did it get there? Well, it came on a train. Well, trains run on diesel. Who built a train, you know, etc.

Starting point is 00:31:09 Then back to the farmer, where the farmer gets the seeds. And by the way, the farmer needs tractors and diesel fuel and workers and GPS and a lot of other scientific equipment irrigation systems. And they need fertilizer, nitrogen fertilizer to grow the wheat. And where does that come from? Happens it come from Russia. Russia's in a little war right now. We're not buying their fertilizer, you know, and so forth. So you can kind of keep going. So that's what's called the extended supply chain. So Baker-Dess store is the simple supply chain, but, you know, farmer, fertilizer, on the one hand from Russia to the store with all those intermediate inputs is the extended supply chain. But then if you think about it, if you think of the supply chain as being horizontal from,

Starting point is 00:31:47 you know, farmer to store with 10 stops in between the transportation lanes, every one of those intersecting points is a vertical supply chain. Again, all the components in the oven, all the components in the truck, et cetera. And you pretty quickly, this is where I say this in the book, the supply chain is not part of the economy. The supply chain is the economy. And the meta-supply chain is this vertically and horizontally expanded supply chain of supply chains that I described. And you can just kind of keep going in terms of inputs and all the way back to mines and semiconductor fabrication plants and so forth. And you realize that if it's not literally infinite, it might as well be infinite because you cannot model it. You can model it theoretically.

Starting point is 00:32:27 And you can do some computational work around it, but there's not enough computing power in the world. And nor is there all the data in the world, nor enough proper algorithms, take everything I just described and put it into a computer. It can't be done. But you can manage it in certain ways. So that's the meta supply chain. But I also talk about what I call supply chain 1.0 and supply chain 2.0. And to your point about where this is all going. So supply chain 1.0, I date from 1989 to 2019.

Starting point is 00:32:54 So what happened in 1989? I actually start the book with a story in the introduction about a shipwreck found off the coast of Turkey in a place called Ula Barone by a sponge diver. It was a bronze-age shipwreck dated to around 1,200 BC. It was a sponge diver who found a pot, and he said had the ears. Well, experts knew the ears were handles and let's say you move the pot around. But notified the authorities, the Turkish Archaeological, the Bureau went in. They did a 10-year underwater excavation, and it was by far the... most laden, interesting, diverse shipwrecks they had ever found, again, we're talking to

Starting point is 00:33:29 Bronze Age, but in that vessel, they found amber, which comes from the Baltic region. They found gold, which comes from, at the time, came from Sudan, not far from the equator. They found weapons, which were made in present-day Syria, Damascus, what was Phoenicia at the time. They found figs and olives and olive oil, which would have come from Italy or Greece. They even found a little carving of Queen Nefertidia, which is probably on its way to Alexandria, Egypt. The point is I plotted out all those locations, and the Baltic Sea, not that far from the Arctic Circle, Sudan, not that far from the equator, as far east as present of Iran, Persia at the time, as far west as Italy, maybe Spain. It was five million square miles. That's how big that supply chain was on a single vessel in 1,200 BC.

Starting point is 00:34:14 So there's nothing new about supply chains, but what was new in 1989 was supply chain science. It was a combination of increased computing power, algorithms, applied mathematics, artificial intelligence, better data collection. With that toolkit, you know, engineers and scientists, mathematicians could get a much better grip on supply chains and make them more efficient, you know, in terms of things like just in time delivery and, you know, sourcing certain, you know, reducing your number of supply of your transport lanes and, you know, reducing a number of warehouses, etc. You know, Walmart invented something called cross-docking. It used to be a truck pulled up in a warehouse and they moved the goods from the truck to the warehouse. Then another truck pulled

Starting point is 00:34:51 up, they picked the goods out of the warehouse, put it up on the truck, it went on this way. And Walmart said, wait a second, why don't we skip the warehouses, moving from a truck A to truck B, send it to its destination, and that's called cross-docking. And they did, and that's very efficient. And for that matter, what's the idea behind a big box store? A big box store like Costco or Walmart is the warehouse. They don't need warehouses because the store is a warehouse. So all that was done in the name of efficiency and cost reduction, and it worked.

Starting point is 00:35:18 And cost reduction could either mean higher profits for a supply chain participant or lower cost for consumers. And in practice, it meant both. So it was very, very efficient in that respect. But something else happened around that time, which was 1989, you had the fall of the Berlin Wall. 1999, you had the dissolution of the Soviet Union. In 1992, Deng Xiaoping conducted what he called the Southern Tour, which was really when China entered the global economy. They had some success in 1980s, but that went off the rails in 1989, with that. the Tiananmen Square Massacre, and the U.S. backed away from China. I was traveling in China

Starting point is 00:35:53 at the time in 91, 92. And I went all over. It wasn't like in downtown Beijing. I was in Wuhan, actually, Shang-Shang, Jian, elsewhere. I didn't see a single American. I mean, there were Brits, Germans, Aussies, but no Americans. But in 92, we patched things up. And then that's when China really started to boom. So in this very compressed period from 89 to 92, you had the fall the Berlin Wall, the Soviet Union, the opening of China, new republics in Central Asia, more independent republics in Eastern Europe and so forth. And that was the beginning of the edge of globalization. And I had been involved in international finance and law and commerce for a long time before that. And in the 90s, you know, my kids were college Asia at the time and their

Starting point is 00:36:34 friends. All they wanted to talk about was globalization. I said, well, what's this globalization? We did international economics for a long time. But globalization really was no because now China was in the game, Russia was in the game, supply chains were longer, supply chain science worked, and it became more and more and more efficient and reduced costs. But here's the problem. When something's that densely connected, when something's that's complex and that stretch, there were hidden costs. The visible costs were passed along to the consumers, but the hidden costs were not taken into account. When something that is that complex, it's extremely fragile, extremely frail to the point that if one aspect of it, one link in the chain breaks, the whole thing

Starting point is 00:37:13 collapses. And that's where we are now. We've reaped the benefits of what Walmart car calls everyday low prices, but we're now paying the cost, the hidden costs of the breakdown. I can give you another concrete example. So Germany is very well known for their car manufacturing, so you've got Mercedes and Portionality and BMW and Volkswagen and the rest. Well, it turns out in a car, there's about 100 miles of wire, which is not surprising. I mean, think of all the connectors and gauges and lights and radios and telecommunications, you name it. You've got all this wire. We can't just throw the wire on the front seat or stick it on the floor.

Starting point is 00:37:46 They have these conduits, these custom-made plastic conduits, that they run the wires to it. And it's one of the first things you have to put in the car in the assembly line so you can get all the wires to where they're supposed to go. Turns out those conduits are made in Ukraine. Well, sadly, there's a little war going on, and they can't get those conduits produced. So you had to shut down. this did happen, shut down BMW assembly lines in Germany because you couldn't get a single plastic part from Ukraine. Now, you call around, you scramble, you find another provider, and eventually someone has that part, but it just goes to show how fragile the whole thing is. And then that's just

Starting point is 00:38:23 one example, I could give you many, but you take the point that as these things break down and in a complex system, when it starts to break down, I mean, the best way to understand it, I don't like to overuse metaphors, but sometimes they're helpful. If you have like a beautiful, oriental vase and somebody like knocks it over and it breaks into 5,000 pieces, you don't sit there on the floor and try to put the pieces back together. You've got to go get a new vase. And that's what happened to the supply chain. It's broken. It cannot be put back together. It's just cascading, one cascading failure after another. And we're going to need a new supply chain. They've always been around. We'll get into one, but it's going to look very different.

Starting point is 00:38:57 I'm curious to see what you think about the recent news of Apple, on-shoring its production and and TSM building chip factories now in America. And what that might do to inflation, does that mean Apple's margins go down or does that mean iPhone prices go up? Well, maybe both, but this is an example of what I call supply chain 2.0. And yeah, the insuring example is true. And, you know, people kind of root for that. How do you get more high paying jobs in the United States?

Starting point is 00:39:24 That's a good thing. But it's a lot bigger than that. Take what you just said. And you're exactly right. And just kind of expand that. So, Thailand, semiconductor, a good example. largest and most sophisticated semiconductor producer in the world by far. They've got the best chips, and they're huge.

Starting point is 00:39:39 So they've announced, as you described, Tra and you're right, they've announced $40 billion to build four new semiconductor fabrication plants, so-called fabs, in the Phoenix area. Well, wait a second. They can build them in Taiwan. They can probably build them in China or Vietnam. Why are they building them in Phoenix? The answer is that there's a danger and probably a growing danger

Starting point is 00:40:00 that China might invade Taiwan. And the U.S. military has a doctrine we call it the broken nest theory, and it's based on a Chinese proverb, ironically. And the proverb is, if the nest is broken, how can the eggs survive? And the answer is they can't. So TSMC, Taiwan Semiconductor, know that if China invades, we know, that China invades Taiwan, the U.S. military is going to destroy Taiwan semiconductor physically,

Starting point is 00:40:25 whether you burn into the ground, vomit, whatever it takes, destroy it because we don't want it to fall into Chinese hands. Taiwan Semiconductor know that. So they're like, okay, well, we want to survive as a company. We'll build in Arizona. So on the one hand, it's a defensive place. So the company survives if there's an invasion by China. But on the other hand, it's a really good example of onshoreing.

Starting point is 00:40:45 And by the way, what are you doing? You're reducing those supply chains. Remember, I said they were 9,000 miles long from Chongqing to New York or Shanghai to Amsterdam. Well, now you're compressing them. You're making it simple. It will probably increase costs in some ways in the short run, maybe reduce margins to some extent. But I describe it as like buying insurance. You know, you have insurance, I have insurance.

Starting point is 00:41:05 Nobody wants their house to burn down, but sadly if something happens, you're glad you have the insurance. And when you pay that insurance bill, when you write a check or, you know, pay it online or whatever, you don't think you're wasting your money. You're incurring a cost, but you say it's money well spent because I'm getting insurance against this catastrophic outcome. It's the same thing with supply chains. You know, maybe skilled labor in Phoenix is a little more expensive than skilled labor in Taiwan. Maybe not, by the way. That's an interesting question. But even if it is, you're getting robustness and resilience that you don't have sitting there with your factories in Taiwan. Jana Yellen calls this friend-shoring.

Starting point is 00:41:42 We're going to bring our trading relationships to friendly countries. Manuel Macron is called it Constellation Nations. He has a vision for a new EU. That would be, I guess, side by side, but different rules, maybe get the UK involved or whatever. I refer to it my book as the College of Nations. But basically the idea is, yeah, we'll still have supply. and we'll have some outsourcing. We'll have trade, but it will be like a club. And to be in the club, you're going to have to be kind of a democratic, liberal, you know, in the political sense,

Starting point is 00:42:08 society with a good rule of law. That's an important part of it that respects human rights. And that would be, you know, the United States and Canada, Australia, New Zealand, Japan, Western Europe, probably India. You know, people think this is emerging market. Well, it is, but it's the largest democracy in the world, 1.4 billion people. So they'll be in the club. And they'll trade with each other, but China will not be in the club because of, you know, genocide and killing baby girls, 20 million baby girls, and ethnic cleansing and concentration camps and torture and a lot else, they'll be out of the club. They can form their own group and they may team up with ASEAN members, South Asian members, Central Asian Republics, Russia and others. But this will be a probably more than a bipolar world,

Starting point is 00:42:48 maybe a multipolar world of clubs who trade with each other inside the club, but not with members outside the club. And that would be kind of a little bit more of the way it was in the Cold War. I remember, I think it was late 1960s, maybe early 1970s. Pepsicole announced they were building a bottling plant near Moscow. You would have thought that World Peace had broken out. It was like, unbelievable. You know, you get a Pepsi in Moscow. It was one bottling plan. I mean, it wasn't more than that. But that's how a restricted trade was at the time that a single soda plant in Moscow was breeded with, you know, cheers to the rafters. And Russia had, you know, traded, but they were pretty much just producing oil and some basic commodity exports. But the world may be going back to a place like that

Starting point is 00:43:31 because of, first of all, the need to build more robust, resilient supply chains and also because for a variety of ideological and geopolitical reasons. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why Vanta is a game changer. Vantzaa ought to automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC 2 or running an enterprise GRC program, VANTA keeps you secure and keeps your deals moving. Instead of chasing spreadsheets and screenshots, VANTA gives you continuous automation across more than 35 security and privacy frameworks.

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Starting point is 00:47:21 was a huge influence on Ray Dalio. He gifted it to his entire company at one point, I believe. But he just wrote a new book as well, and this is the changing world order, where I think he's alluding to a world where China is actually the rising power. And we've just yet to see them become the next world order, right? So I'm curious where the disconnect is here because it seems to fly in the face of his theories. Well, look, I know Ray, he's a great guy and world's greatest hedge of a manager and deserves a lot of crazy smart guy. He's still kind of coming up the curve in terms of history and geopolitics and so forth.

Starting point is 00:47:52 But yeah, the conventional wisdom is the 20th century was the American century. The 21st century is going to be the Chinese century or the Asian century. And they're going to blow past the United States in a matter of years in terms of being the world's largest economy, higher GDP, technology. technology coming on stream, artificial intelligence, quantum computing, stronger military. They'll be at worst, Western Pacific hegemon, if not a global hegemon, and it's all China, and they're going to rule the world. Everything I just said is wrong, but that is the conventional wisdom, and you see variations of that all over the place. You know, Jeffrey Sacks, Richard Haas, Ray Dalio, all smart people, but that's fundamentally flawed. Now, the

Starting point is 00:48:30 peak China thesis, and to give credit, and I mention the names in the book, there's been advanced by Michael Becky and I forget how it's lesson. He's a scholar at the John Salvin School of International Studies. Becky's a scholar at Tufts University. And they took a hard look at this and said, no, this is as good as it gets for China right now. They point to a number of reasons, and I can kind of go down the same list, have done the same research. So half the water in China is poisoned. It's not just dirty. You've got to clean it up before you can use it. It's poisoned. I know a lot about the mining industry. I invest in mines. And I know that in the U.S. and Canada, for example, if you use cyanide to extract gold from gold ore, which you do, that's pretty standard.

Starting point is 00:49:09 You got to weigh the cyanide before you use it, then use it, case it, weigh it again, and it better be the same. Like, none of that cyanide can escape, you know, careful control and disposal. In China, they do the same thing, they dump the cyanide into the rivers, and a lot of else besides in terms of mining, industrial output, and so forth. So half the water is poisoned. They don't have that much water to begin with, not enough of the size of the country. If you look at the geography of China, half of its desert or high plateau or mountains, people picture rice paddies. That's about 20% of the land in the southeastern corner.

Starting point is 00:49:39 Most of it's quite high and quite dry. They don't have enough water to begin with. They've got a real estate collapse that makes what happened here in 2007 look like a picnic. They've got massive defaults. I've been around China. Like I said, I got mud on my boots, but I was wearing Italian loafers, but I was out on construction sites looking at the ghost cities being built and so forth. And just to give you one example, in the U.S., when you buy a house, if you get a mortgage,

Starting point is 00:50:03 the mortgage lender shows up the closing, they give the seller the check, you sign the note, and they record it, and you've got a mortgage. In China, they have a mortgage system, but you take out the mortgage before the house is even built. And then you take the money and you give it to the developer, and they use it to build the house. Well, guess what? The developers stole the money. They used it to cover other debts. The houses never got built, but you still have the mortgage.

Starting point is 00:50:24 You sign the note in the bankstreet trying to collect on mortgages from people who never got the house. So this is leading to some, you know, if not rise, demonstrations and social unrest. And, you know, the government's bailing out the banks and the banks are bailing out the lenders. But that's a complete real estate collapse. So the water's poisoned, real estate sector, which is one of the biggest internal investment sectors, is collapsing. There's a dollar shortage you see the reserves coming down, treasury information available. You look at a month by month. The reserves are coming down sharply.

Starting point is 00:50:51 And they don't have the technological edge. Anything they've got, they sold from us or firms in Europe, Siemens, or something like that. And that's not being cut off. It's worked for them so far. When I studied development economics in the 1970s, and we thought that the hard part was to get from low income to middle income. But if you could do that, then it was a straight path to high income. You would just kind of keep going.

Starting point is 00:51:12 Turns out that's not true. It's actually kind of easy to get from low income to middle income. You don't have too much corruption, which is you bring the population from the countryside to the city and you give them basically assembly-type jobs. People say iPhones are made in China. Not really. They're assembled in China.

Starting point is 00:51:26 Those parts come from 26 different countries. The semiconductors come from South Korea, but they assemble them in China. But that's kind of Lego-style manufacturing. And you can get there. You can get to $10,000 per capita annual income, although not evenly distributed. But getting from middle income to high income, that's really hard. And that requires technology and high-value-added production. And they can't get there.

Starting point is 00:51:47 They are stuck in what is known as the middle-income trap. But the biggest problem, well, bigger than everything I just mentioned, is they are facing, and it's here now, it's going to play out. over a 50 year, 55-year period, the greatest demographic collapse in history. Worse than the Black Death, worse than the 30 years war, worse than the Spanish flu of 1918, they're going to lose 600 million people in the next 50 or 60 years. Population is going to go from 1.4 billion to about 800 million. Now, there are a lot of different equations for GDP, but the simplest one is workforce times

Starting point is 00:52:22 productivity. How many people are working times how productive are they? that there's your GDP. How do you maintain any kind of economy if you're going to lose 600 million people, which they are? And it's worse than that because they're losing them because their birth rate is so low. The magic number or the key number is 2.1. If two people have 2.1 kids, that's enough to keep your population constant. Why not two? Well, the answer is for mortality and not every birth makes it to maturity so they can have children. But on average, two people have 2.1 kids that will keep your population constant. The replacement rate,

Starting point is 00:52:59 that's the replacement rate, earth rate in China right now, they say 1.7, but they always lie about their numbers. Other experts put it at kind of 1.2. Some people think it's one. That is behind this demographic disaster, but the reason it's worse is that while you're not getting new births to replace the population, the existing population is getting older. And hundreds of men are moving into their 70s, 80s, and 90s. Those age groups are highly, age cohorts are highly correlated with Alzheimer's, Parkinson's, dementia, various kinds of cognitive decline, all of which are common at that age, they're incurable, and they're progressive in the sense that they get worse.

Starting point is 00:53:35 So they're there, they're alive, but they're not at the least bit productive. And then you need a large segment of the kind of, it's called working age population, 25 to 54, as caregivers to the people in their 80s and 90s, who are suffering dimension. Now, that's a very worthy occupation, but it does not lend itself to productivity gains. There's been no increase in productivity in giving someone a bath in 5,000 years. I mean, maybe, okay, 1870 indoor plumbing and hot water. Nice going, but that's it. So you're taking productive people, putting them as caregivers, which does not lend itself to productivity increases. A large segment of your population is not productive at all, and so many

Starting point is 00:54:16 suffering from a severe cognitive decline. So the portion that's left, who were actually productive, working age, people doing productive things, not caregivers and not people in their 80s and 90s, keeps getting smaller. Some scholars estimate that that's actually inflationary because you're going to need to pay them more. And we did see this after the Black Death in the late 14th century, early 15th century. Returns to Labor went up. Wages went up because there weren't enough workers. Now, it didn't last, maybe last 75 years, but eventually the Monarchs got the everhand again. But there's a very good period for labor because the third of the European population was dead. Well, the answer, I think, to how do you grow your GDP with less people is AI and robotics,

Starting point is 00:54:56 which might be why they're so interested in developing that and there's a kind of race going on. And as you were talking, I was thinking about this. That might also explain or further explain their interest in Taiwan, right, and TSMC being based there. You talk about in the book how if China is to invade Taiwan, that now would be the time to do that. And if that's true, then what would be the economic implications, and if it's not, where does that leave China? Right. By the other, that is part of this peak China thesis. And the scholar's name was Hal Brands. I didn't think it was last year. Hal Brands and Michael Beckett were the two leading proponents to this, but other scholars are looking at the same thing. So I just give you a long digression

Starting point is 00:55:34 on Chinese decline, and it's all factually based. There's a lot to back that up. But they said that that makes China more dangerous right now. And the reason is, if you were the rising power, If the Ray Dalio theory were correct, and I don't pick them, Ray, you could mention a lot of people say the same thing. If that increasing power theory were correct, if the U.S. were declining power and China were an increasing power, what's the hurry? You wouldn't invade anything right now. You would just wait. Why not wait until that gap gets bigger? Why not wait until you get relatively stronger than you are today and then do the invasion?

Starting point is 00:56:05 It'll be that much easier when you do. But the opposite is the case. By the way, if we know it, the Chinese know it, China's a declining power as of now or as of very recently. And if that's the case, this is as good as it gets. If you're going to invade, like, you may not be stronger than the United States, but on a relative basis, this is as strong as you're going to get. It doesn't make sense to wait because you're going to get weaker. And if you're going to do it, do it now.

Starting point is 00:56:29 There's a lot of historical precedent for this. In 1941, nobody thought the Japanese Navy was stronger than the U.S. Navy, but it was as good as it was going to get because FDR was ramping up production in anticipation of being in World War II. so the Japanese said it's now or never, and they went for it at Pearl Harbor. The same thing with Germany and World War I. Nobody thought the German Navy was stronger than the Royal Navy. But again, the Royal Navy was expanding.

Starting point is 00:56:54 The Germans were stuck. They didn't have the resources. They said, this is as good as it gets. So that peak Germany, peak Japan, and now peak China is a very dangerous period because it's not that they're superior, but the relative strength is at a peak. And if you're going to go for it, go for it. And that is a danger. Now, circling back to the College of Nations, as you described it, in the book, you highlight

Starting point is 00:57:15 that for that to work, you actually need sound money. And you've been pounding the table to raise awareness of the STRs. And I guess gold would be maybe your first choice for sound money to back that. And I'm curious, I have some questions around that. The SCRs, though, are interesting. It's essentially the IMF's currency, and they would like to see that become the new global reserve. But it seems like the literature coming out, I'm seeing at least, is paving this path more towards

Starting point is 00:57:39 a CBDC or Central Bank Digital Currency, which is kind of the opposite of sound money, I would think, right? So is there an argument to be made that a CBDC in the U.S. at least could preserve the Global Reserve dominance we currently have, or does it only kind of expedite its demise? When we talk about the rise of holes of currencies, you know, kind of broadly, and I have mentioned SDRs and I mentioned gold. To me, it's a horse race. There were probably five or ten entrants in the horse race. I talk about all of them, but we'll see which one comes out on the top at the end.

Starting point is 00:58:09 But it's really important in this discussion to distinguish between a reserve currency and a payment currency, because there are two different things. Now, the reserve currency is a big deal. And you say the U.S. dollar is 60 percent of global reserves, which it is, but it's not really dollars. It's not really the currency. The People's Bank of China does not have a palace of $100 bills, you know, stacked up in their basement. What they have is a dollar-denominated security. So they have treasury bills and treasury notes, which are denominated in price and dollars, and you need dollars to buy them. but it's not really the currency that's the reserve. It's the security that's the reserve.

Starting point is 00:58:42 And what gives the U.S. dollar its strength in the form of U.S. Treasury's securities primarily is the fact that you have a large liquid, pretty good rule of law securities market that can absorb global savings. Now, if you don't have that, you can't be a reserve currency because there's nothing to invest in. It won't be the Chinese you want. Forget it. There's no Chinese bond market of any magnitude. There's no rule of law in China. And nobody would buy a Russian rule of bond. There's no good rule of law in Russia. And it's not just having bonds. Let's say you started issuing bonds. Well, great. You need dealers. You need primary dealers. You need repo. You need futures. You need options, settlement, clearance, rule of law, hedging techniques. You need a whole infrastructure that takes,

Starting point is 00:59:21 oh, you know, at least 10, maybe 20 years to build if you set out to build it. The U.S. Treasury market has been around since Alexander Hamilton. So we've had 230 years to get this right. So it's going to be very, very difficult to dislodge the dollar as the reserve currency. As a payment currency, that's completely different. When we were kids, we could use, you know, baseball cards and bottle caps if we wanted to. And basically, anything that I want to tender that you're willing to accept is a potential payment currency. Now here, there is a lot more ferment, if you will, the Brits, that's, you know, Brazil, Russia, India, China, South Africa, but they now style themselves Brick Plus. So when they have their meetings, they invite Argentina, Iran, Turkey, and others,

Starting point is 00:59:57 they are working on a new commodity-backed currency that they would use for trade between and among themselves. The Shanghai Corporation Organization, Russian China and some of the Central Asian republics, but again, they're welcoming new members, including Pakistan and others. They're working on this. There's something called the Eurasian Economic Union, which is kind of Putin's answer to the European Union. Same thing. They're working on a new payment currency. Comrade Xi Jinping from China is in Saudi Arabia as we speak, meeting with the Crown Prince and the King, King Salman, and MBS, Muhammad bin Salam, to talk about, you know, a lot of things, but included and among them, would the Chinese, sorry, would the Saudis be willing to sell oil for Chinese yuan?

Starting point is 01:00:37 Again, I'm not saying it's a reserve currency. It's not, but as a payment currency or something you could swap in the markets for other kinds of currencies, yeah, that's entirely feasible. So that's going on around the world. One of the things that's driving, and this was happening anyway, but one of the things that drove it was the U.S. sanctions, which are, and the EU sanctions on Russia, which are complete blunder. I actually teach financial warfare at the U.S. Army War College, and it's a seminar style of an elite class of about, you know, 11 or 20, 12, you know, lieutenant colonels, Navy commanders, full colonels, all branches, State Department, CIA, and others. But a small group of about 12, they're the future big brains, you know, future national security advisors and so forth.

Starting point is 01:01:13 And when I taught the class in April, not far from the start of the war, I said these sanctions are going to fail. I said it's going to be worse than fail because they're actually going to backfire and hurt the United States more than it hurts Russia. And there was some skepticism in the class. And I welcome that. And I think it's good. You know, they should express that. But I was exactly right. The Russian ruple today is significantly stronger than it was at the beginning of the war in Ukraine.

Starting point is 01:01:36 Remember Biden running around, we're going to destroy the ruble. The rubble is stronger today than it was then. Russia has not lost oil sales, whatever Western Europe doesn't want to buy. India is buying it. China's buying it. India never bought into the sanctions. They're friends of the United States. They're a democracy, but they're like, hey, this is not our fight, and we're going to buy all the oil from Russia that we can get.

Starting point is 01:01:55 So it's had very little impact on Russia, some, but not a lot. it's been awful for Western Europe and the United States. You know, they ran around and they seized all these oligarch assets, you know, townhouses and Bulgaria, yachts, you know, we got all this stuff. We're taking all this wealth away from the oligarchs. Putin should send Biden like a handwritten thank you note. He hates the oligarchs. We're doing Putin a favor by taking down the oligarchs.

Starting point is 01:02:16 Putin's support, he never wanted to take this guys on because they were somewhat powerful. But what he said was to the oligarchs, this is 20 years ago, you can keep your wealth, but keep out of politics. Don't get in my way. And they put Kodorowski in jail, who's head of Eucos. He's been in jail ever since because he didn't get the memo. But now it's even better than that

Starting point is 01:02:34 because we're destroying the oligarchs. And actually some of the oligarchs are taking the wealth back to Russia as a safe haven. Putin's strength is the military, the intelligence, the Orthodox Church, and everyday Russians. Those are the four pillars of his strength. The oligarchs are not part of it. So that doesn't affect things one way or the other. But just look at energy prices in Europe.

Starting point is 01:02:52 They're going to freeze in the dark this winter. It's already happening. The Germans are running around saying, we got our reserves up to 100%. And natural gas reserves are up to 100%. Well, that's true, but they don't tell you that the reserves are only 20% of the requirements. So they have 100% of 20%.

Starting point is 01:03:06 They don't have the rest. And it's not coming from anywhere. We're not any time soon, not for years. And we all know what's going on with energy prices, home heating prices in the United States. This is feeding the inflation. It's making people poorer. And there's more to it than that. But the point is these sanctions have been a complete disaster.

Starting point is 01:03:23 And we'll remain so. And Biden said, we're not removing the sanctions until Russia leaves Ukraine. Well, I got news to the president. Russia's not leaving Ukraine. You could have had that deal before the war. There's never been a war that was easier to prevent. But the U.S. wanted the war.

Starting point is 01:03:36 You know, Victoria Newland and Tony Blankan, Jake Sullivan and Susan Rice and all the other war mongers in the White House, they won at the war. They got it. Now, good luck. It seems to me like you keep a pretty close eye on gold inflows. I've seen you on Twitter and elsewhere kind of monitoring gold inflows in Russia, especially.

Starting point is 01:03:55 With the sanctions you just mentioned, there, there's been a lot of talk about the circumvention of the U.S. dollar. But, I mean, as of late, from what I'm seeing, it sounds like they're almost embracing crypto options, you know, perhaps Bitcoin or something of the sort. How do you see Russia adopting sound money in the near future, or do you agree that that's still what they're going after with those inflows? Well, they did in advance. They anticipated this. Avila Navilina, who's the head of the Central Bank of Russia, I discovered he was the only central bank in the world who knows her job. She built Russian reserves. 20% of Russian

Starting point is 01:04:25 reserves are in gold. Round numbers about 500 billion, a little more, actually about 600 billion reserves, of which over 100 billion, about 120 billion are in gold. So they anticipated this. And going back to your earlier question, Trey, about why are these other countries looking for ways out of the dollar? We put sanctions on the central bank of Russia now, but I don't want to debate the war in Ukraine. I will, I feel like, but that's a separate debate. But my point is the world was shocked. It's like, hey, it's one thing to sanction titanium exports or something. You froze the reserves of Central Bank. So countries like Turkey, China, Saudi Arabia, they're watching this and saying, hey, what if the U.S. doesn't

Starting point is 01:05:03 like something we do? What if they don't like us next year? And they freeze our reserves. We better get out from under the dollar before that happens. And one of the ways to do that is gold. I mean, buying German bones doesn't put you much further head because Germany is kind of a vassal state of the United States when it comes to this until they break away. But gold does it.

Starting point is 01:05:20 Gold isn't an alternative. Crypto is not going to come to much. but central bank digital currencies will. That's different. They're not cryptocurrencies. They're not recorded on a blockchain. The ledger is maintained by the central bank or the Treasury, finance ministry, as the case may be. They're definitely coming.

Starting point is 01:05:36 They're already here in some places. Coming soon, the U.S. Biden assigned executive order accelerating that path beyond the research, the R&D phase, into a pilot program that will be coming very soon. And that is the last step in the totalitarian agenda, because they'll have to do two things that wants. So I have to bring in the CBDCs, but also eliminate cash. Because if you don't like central bank digital currencies, you just say, well, okay, I'll get a big pile of cash and pay cash and that with that. So you got to get rid of cash also. But once you do, you're now in the total

Starting point is 01:06:06 surveillance state. So right now, if I go into a bookstore and I buy a book like, you know, I love Ronda Sanders, oh, MasterCard may know, maybe, maybe not. They know I bought a book. But all of a sudden, the government and the FBI, the weaponized FBI and the new, called the New Gestapo, they're going to know that I bought a book in print. of one of the president's political enemies, and that makes me a political enemy, or if I give a campaign contribution to a Republican politician and so forth. So they already know you're there. You've got your iPhone unless you turn it off and stick it in a Friday sack. They know you there through GPS. They don't know exactly what you're doing. They could subpoena a MasterCard,

Starting point is 01:06:41 I guess. You need judicial help with that, but with the central bank digital currency, they would know. And then they can retaliate very simply with a couple of keystrokes, freeze your account, seize your account. And for example, I say you work and you got a regular job and you get a paycheck. Well, they withhold tax. There's withholding tax when your paycheck. You get a W-2 at the end of the year, file a tax return, do a reconciliation. But that's not true for doctors, lawyers, consultants, architects, small business people, entrepreneurs, professionals, et cetera. They don't have withholding tax. And but all of a sudden they could. They say, hey, you know, you lawyers, you're doctors. We're going to take 10% out

Starting point is 01:07:14 of your bank account every month with a couple keystroy. And again, they'll send you a 1099 or whatever, 1099 crypto. And, you know, you can sort it out with us a year later on the tax return. Those kinds of seizures, freezes, withholdings, political surveillance, weaponized FBI, that will all come to a peak as a result of the Central Bank digital currency. That's the bad news. The good news is Americans, I would say people all over the world are extremely adaptive and inventive when it kind of created it when it comes to making new forms of money. When I was a kid, you know, they're 10 years old to be some uncle or somebody who said, hey, kid, don't take any wooden nickels. I was like, what's a wooden nickel? Well, it turns out during the Great Depression, there actually were wooden nickels.

Starting point is 01:07:50 There was the Fed screwed up so barely there wasn't enough money. Communities would make their own money out of wood and paint a little logo on it. And merchants accepted it. It's circulated it. It was the way to expand the money supply. And they'll be able to do that. The recent was to do it, by the way, was silver dollars, which is where the whole American currency system started. Just so, you know, when else marry silver eagle, if I'm willing to tender it and you're willing to accept it, the heck with your central bank digital currencies.

Starting point is 01:08:13 People will go to that once they realize and they are realizing that this is a tool of political surveillance and political enforcement. by a weaponized FBI. Maybe they'll have wood nickels, but I think American silver dollars were just fine. Well, Jim, it's always a pleasure and I always learned so much from your books

Starting point is 01:08:30 and also from your interviews, and I'm very excited that we got the opportunity to do this with you today. Best of luck with the book. I definitely want to give you the opportunity to hand off to the audience where you'd like them

Starting point is 01:08:39 to find more about you and the book and whatever else you'd like to share. Yeah, a couple places. I'm the editor of really the number one leading financial newsletter called Strategic Intelligence. So if you just Google, Jim Ricker's Strategic Intelligence, she'll find the landing page.

Starting point is 01:08:52 Very active on Twitter. My handle is at James G. Rickards, R-I-C-K-A-R-D-S-1 words, at James G. Rickards. Interview links, articles, commentary, and baseball. I put that all out on Twitter. And, of course, my book is sold out, available on Amazon, Barnes & Noble, and Bookstores in your town. Fantastic. Well, Jim, thanks again. All right, everybody, that's all we had for you this week.

Starting point is 01:09:13 If you're loving the show, don't forget to follow us on your favorite podcast app. And if you'd be so kind, please leave us a review. It really helps the show. out directly, you can find me on Twitter at Trey Lockerby. And don't forget to check out all of the amazing resources we've built for you at the investors podcast.com. You can also simply Google TIP Finance and it should pop right up. And with that, we'll see you again next time. Thank you for listening to TIP. Make sure to subscribe to millennial investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes,

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