Episode 2: One Radical Idea
After successfully selling his software company in August 2008, Keith Weiner pivoted to the study of economics in an effort to protect his assets. At first, his studies brought enlightenment about our monetary system. Then came the radical idea.
In the first half of this episode, Keith and Dickson Buchanan discuss the two main problems of our monetary system, and how they inspired the idea of paying interest on gold in order to pull it out of the woodwork and back into productivity.
The second half of the conversation centers around the entrepreneurial effort: ignoring the naysayers, proving there’s a market, and tackling the scalability issue.
- Austrian Economics
- Professor Antal Fekete
- Taylor’s Rule
- Peter Thiel
- Zero To One by Peter Thiel
Dickson Buchanan: Welcome to the Gold Exchange. My name is Dickson Buchanan. I’m here with Keith Weiner and today’s episode is called One Radical Idea. Ready to jump in. Keith?
Keith Weiner: I’m ready.
Dickson: So so, as mentioned, the title of this episode is one radical idea. And before we get to that, I just I want to kind of set the stage for what led up to the formation of this idea, how it kind of crystallized in your mind. So could you could you give us just a bit of background prior to starting Monetary Metals, prior to the beginning of this idea of forming? What were you doing? What’s your background? What were some of the things that you think are key that led to this?
Keith: So, I sold a company that I had built up over 14 years called Diamondware, to Nortel Networks, August 19th, 2008. During that fall of 2008, at first I felt like the luckiest guy in the world. And in fact, my investment banker who was diagnosed with late stage cancer in the summer right before the deal closed, and who recovered, made a full recovery, he called me up and said, Keith, you’re the luckiest BLEEP! man in the world. A guy who survived cancer said that.
Because of the timing of it, I’m sitting in cash at a time when everything was worth going over the edge. So first I felt kind of bemused. It felt very surreal. But then as things continued to play out, I began to become pretty alarmed at what was going on. At that point. I was reading and watching and studying everything I could related to markets and economics to try to figure out just how to protect myself.
I had worked 14 years, I didn’t want to lose what I had just sold my company for. Eventually it brought me to the professor of mathematics, but his real passion was economics. And so I came across his writings and it struck me at the time, I don’t know if he’s right or not, but he’s the only one trying to get at the root of the problem, asking the fundamental questions. It seemed everyone else was just starting in the middle, and “the Fed’s printing too much,” and all sorts of standard clichés that you hear. What really led to this was an inevitable…”how can you fix it?” You know, as you read all of the analysis post 2008, it was very clear…there are plenty of commentators that are pretty clear on this. That all they’re doing is, is leveraging up with more debt. As it were, fixing the problem that caused caused by too much debt, by adding more.
There’s an axiom in medicine that’s whatever is the poison that causes the disease, more of it can’t possibly be the cure.
Keith: You know, if somebody is an alcoholic and suffering from the way & tremors and all those things, you don’t give them more alcohol. You might have to give them a little bit while you manage the withdrawal symptoms. But, you know, alcohol is not the cure at that point, clearly. So, same thing with the monetary system. And everyone started to declare in spring of 2009, “Hey, it’s better. It’s all good. You know, they fixed it. The Feds got ahead of this thing. GDP is growing again. You know, jobs are being created.” But I said, so wait a minute. What did you do? You just did more of the same.
And so IS there a way out of this? This becomes the question. And then the deeper and deeper you go, you realize that our monetary system has two fatal flaws. That are not reparable. And certainly fatal. One is the interest rate is completely off the rails.
It can shoot the moon. So from after WWII through 1981, the interest rate skyrocketed, and it can collapse to zero. And now that we’re seeing in Europe and Japan and and elsewhere, it can go below zero. Which is kind of like a bizarro world where u[ is down and inside is out. And so the interest rate is completely unstable and with unstable interest rate and unstable prices. That’s problem number one.
Problem number two is that there was no extinguisher of debt. That means that if you pay a debt, you pay in dollars. And dollars are themselves IOUs, so if you pay a debt using an IOU, you shift the debt, but you don’t actually make the debt go out of existence. So the debt is piling up, necessarily piles up exponentially. Of course, there’s a finite point at which a debt can’t pile anymore and then it comes collapsing down. And that’s the problem. So I started to think about all these things. And then I thought, well, gold is clearly… it’s obvious to a lot of people, I’m not the first or only person to say gold clearly has something to do with solution.
But how does gold solve the problem? A lot of people would say it’s a matter of price. So, the Keynesian will taunt you if you say you’re interested in the gold standard, the Keynesian will taunt you and say, well, there’s not enough gold.
And the classic stock response from a gold standard person who’s sort of put upon by that, I use the word taunt, I don’t really know what other word to use for that. “It’s just a matter of price, right?”
Dickson: Right….price will solve that problem.
Keith: “Maybe there’s not enough gold at $1000 an ounce, but at $100,000 an ounce there’s plenty of gold.” Well, it turns out that number one, they should look at history. How much gold was in London, do you think? At the peak at the gold standard when London ran the world’s commerce and the world’s monetary system in the 1890s? How much money do you think was actually there?
Dickson: I’d have to guess…. the current supply is what, 180,000 tons or something like that? And so working back from there, half of that? 90,000 tons? I have no idea.
Keith: So according to the records from the Bank of England at the time, there was 160 tons in London. Now, that doesn’t include necessarily what people have hid under the floorboards within the Bank of England. And the major recognized banks. But 160 tons ran the world’s financial system, 160 tons. That was a time before computers and even fax machines, even, I guess they had telegraphs in the 1890s, but very inefficient, obviously, paper receipts, for everything.
It was an inefficient commerce world, but yet it was so efficient, 160 tons was enough. To put that in perspective, in the state of Nevada annually, they mine 166 tons. So is there enough gold? Well, we’ll leave that for the people that like to debate, you know, how many angels can dance on the head of a pin. And those sorts of things. But back to economics….is it a matter of price? Well, no, actually, turns out it isn’t.
Gold did not circulate when it was under $300 an ounce around the year 2000. Gold did not circulate at $2000 an ounce, which it nearly hit in 2011, and it recently hit this summer, over $2000 an ounce. And gold wouldn’t circulate if it $20,000 an ounce or $200,000 an ounce. It wouldn’t circulate. And that’s because without paying interest, gold was just for hoarding.
It’s either something that you hold, betting on the price to go up or you hold because you think inflation is going to take over, or because you think it’s a better speculation than whatever other bubbles everybody’s piling into. But gold cannot circulate, will not come to market, as a matter of price. It will sell from one person to another and the next person will do the same thing the first person does. He’ll just move it to a different shelf and continue to hoard it. What brings it out is interest.
So the one radical idea, if you want a gold standard, you want gold functioning as money. Not so much, I mean, this will come, gold being used as a medium of exchange. In other words, if I want to buy a car and you have a car to sell me, that I would hand you gold rather than hundred dollar bills. Yes, of course. But more importantly, in the context of a monetary system, that gold would be the basis for creating and extinguishing debt. That if you manufacture cars, that you would buy gold and ready to finance your factory, and that if you have gold, that you’d be lending gold to get interest.
That is the key to the gold standard ultimately. And think of it this way for a minute. Suppose you had a working gold standard and coins are actually circulating as a medium in exchange. For some reason, the interest rate was dropped to zero. What everybody was working for wages has to do is, of course, they have to save during their working years. And normally, savings means depositing the bank to get interest.
But suppose now there’s no longer any interest. Well, in gold, nobody is going to give their gold away in exchange for zero, they’ll just hold it and stick it under the floorboards. Or maybe they’ll pay a depository to store it. But that’s not a monetary use of gold. That’s just a dry asset. So if the interest rate goes to zero, everybody who is working for wages, is going to have to pick the coins out of circulation and put them into private hoards.
And they’ll keep picking until all those coins disappeared, just as the silver coins disappeared after 1965. You know, little by little or no, silver wasn’t worth that much…if those were gold coins. I guarantee you they wouldn’t….as a kid in the 1970s, I remember seeing silver quarters there were plenty of them. They were being picked out, but not that quickly. If those were gold those would have disappeared in a heartbeat. By 1966, there would not have been a single gold coin anywhere.
And so interest is the key to the whole thing. And so that was the radical idea for Monetary Metals.
Dickson: Right. OK, let me let me let me just press pause there, because you’ve you’ve said so much in an answer to that to that initial question. I feel like we could we could break up your answer and make ten different episodes out of it. So going back. As you said, the one radical idea is that, yes, gold is part of the solution, but it’s not just gold, it’s not didn’t have anything to do with gold’s price.
It’s gold with interest, which is what we need to resolve these two fatal flaws. It’s interesting to me. You you go from being, a software developer to starting your own software company and kind of leading that company to a successful exit. And then there’s this massive transition to economics, monetary economics in the middle of the great financial crisis. And what I want to know is when did it dawn on you that those were the two fatal flaws in our monetary system? And then secondly, can you remember a time where the light bulb went off about, oh, it’s gold with interest? We need to we need to start paying interest on gold. That’s the way out of here. I’m just curious if you could pinpoint kind of the revelation of those two of those two ideas.
Keith: You’re bringing me back to think about, you know, the crazy events of Fall 2008. To me as an engineer, the problem is compelling. An engineer, the type of engineer that I was, really thinks about systems, as systems problems. And you see a computer misbehaving or you see some engineering system not quite working right and you’re thinking, How do you solve that in an elegant way? So then, as I’m studying Fekete, I’m seeing all kinds of different ideas coming together from the failure of central planning, for one thing, to….use money is a signal in the economy, or prices are a signal. So prices go up, that’s a signal to consume less and produce more. But if money itself was distorting that, we’d have all kinds of problems that came from that. As I aluded to earlier, if the interest rate changes then automatically that re-prices assets because the asset price is basically the inverse of the interest rate. So if the interest rate’s unstable, asset prices are unstable, so that guarantees you’re going to have bubbles. And I think finally, the idea, at least in the Austrian School of E economics, even the Freidmanites realize this, Keynes puts far too much emphasis on consumption as the driver of the economy.
But that’s madness. That’s magical thinking. If you’re if you’re stranded on a desert island or even if there’s one hundred of you who shipwrecked on a desert island there’s nothing to consume until you first produce. So this idea that the definition and the very purpose and utility of a currency is just simply to be a transaction medium for consumer purposes is missing the point. We have to finance the production of those consumer goods first. And so then I thought about gold, you know, I was thinking about money in that context.
The dollar actually works pretty well at financing those things. We certainly finance mega-factories and all kinds of stuff. Life’s pretty good at the moment in the West. When you think about the lack of extinguisher and the unstable interest rate and you start to think, well, this is really bizarre, the interest rate keeps falling and with each downtick, there’s a perverse incentive to borrow more. And so if we didn’t want to borrow at five percent. What about at four? Oh sir, now we’re offering three. How about three? Three. OK, well, not three. OK, would you borrow at two?
You get more and more borrowing and what you do is you drag down the return on capital to just marginally above the interest rate. So everybody is forced to work more and more frantically, like on a treadmill being cranked up faster and faster to get less and less return. And then I’m thinking about gold and it was obvious that gold was part of the solution. And then all of these ideas come together for me. And I think, well, that’s it.
Gold has to take over from the dollar, not as a medium of exchange. That’s reversing the cart and the horse. But as a monetary asset for financing productive enterprise, it’s about production. And if we can solve the problem of production, I guarantee consumption will solve itself because everybody wants to consume.
Dickson: So would you say then that it was in your studying under Fakete in the New Austrian School…was it during that time you arrived at this idea?
Keith: Well, it kind of crept up on me. So I was giving talks and lectures at that time, starting in around 2010. And I used to have a slide, which was a picture of kind of an ordinary residential plumbing system. Most houses have some sort of check valve, but where the City Water comes to the house. There’s the fattest part of the pipe, was a one inch diameter, I guess. And there’s a valve that just has a little lever arm. If that lever arm is parallel to the pipe, which is what it normally is, then the water will flow. And if the lever arm was perpendicular – turn it 90 degrees – it will block the flow of the water in the pipe. I used to use a picture of that and talk about gold interest being the regulator of flow.
The other idea was the realization that in the dollar, the interest rate is arbitrary and meaningless. So in computer logic…if you’re designing a chip you draw out your truth tables for what your circuit’s supposed to do with various combinations of inputs.
There’s a little Greek Delta that you write in any box where either the output is arbitrary or you don’t care. And then it might make it easier to design a circuit that way if certain boxes, you don’t care about the output. And I thought that in the dollar, the interest rate is a delta. And that’s because to own a dollar bill is to be a creditor. There isn’t actually the free choice of being a hoarder holding the gold at home versus bringing it to the system and lending it.
The only reason to bring it to the system and lend it is if the interest rate is sufficient. So in the case of gold, default has no lending. But in the case of the dollar, not only the default, but in fact there’s a guarantee. You will be a lender. That was the brilliance, if I can dare call it, the evil. But it was genius in 1933 to say you can’t own gold anymore. That’s to say now you can’t not be a creditor anymore. You cannot opt out or the first of the animals into the pen and we’re going to lock the lock the gate. And now the only way out is through that chute that you don’t want to go out through.
Dickson: Right. They closed the exits and everyone’s inside right now.
Keith: So at that point, the interest rate is completely….it’s a delta. Our interest rate could be anywhere because you as the saver have I mean, you might have a preference, but in economic terms you don’t because you don’t have any teeth. If your preference is violated, what are you going to do?
And so that leads to my theory of interest and prices…actually you can buy consumer goods or commodities. So you get a cycle of rising prices and rising interest rates that come when your time preference is violated, they push the interest rate too low. And what happens when the interest rate rights itself from that, but also then the interest rate gets above marginal productivity of the entrepreneur. You get a falling interest rate. So you have all of these gyrations. You have a resonance system. The interest rate itself is kind of meaningless. It could be anything, you know, and and all these ideas are sort of percolating around in my head. I get confirmation in weird ways. So I was thinking about this idea that once the interest rate is falling, it can’t reverse once it gets past a certain point.
And so when you think about that in that way, when the next thought is, it’s kind of like falling into a black hole. Right. So if you’re in a spaceship, as long as you’re outside….every black hole has this radius that’s called the event horizon. And as long as you’re outside the event horizon, at least it’s possible to fly away. Once you fall inside the event horizon, then it’s guaranteed that you have to collapse into the black hole, the center, because escape velocity is greater than the speed of light.
Keith: So even light can’t escape. So as I’m thinking about that and I’m thinking interest rate has surely got to that point. And this was Fall of 2014. I was at a monetary policy conference at the Cato Institute. And that particular year they had must have been four or five different….some of them were central bankers and some of them were academic economists. And all these guys, one by one, stood up and said, you know, I don’t know what Chairman Bernanke is thinking.
He should have raised interest rates six months ago. And they’re all on the same page. They’re all monetarist. They all were using the Taylor Rule at the time or some variant of it. And they all presume to say that the Fed should raise rates. I struck, me, if they all have that same playbook, including Bernanke himself, the fact that they’re all puzzled as to why he wasn’t raising rates. And it clicked for me, because I’m sitting here thinking about the analogy of the black hole, the other analogy…we’ve all had the experience as kids and I grew up in, what we call upstate New York.
So it’s kind of hilly, and there’s certainly plenty of snow. You’d make a big snowball. And you start pushing the snowball down the hill. You know, up to a certain point, it’s actually effort because the snow is heavy and it’s kind of sticky and you have to pull the snow off the ground to get the snow to separate it later. And then you’re pushing and pushing it. But the snowball is getting bigger, exponentially. Right. And then it gets to a point. That, for lack of a better word, we can call it “Oh BLEEP!” point where we’re still moving along with the snowball it isn’t necessarily moving that fast yet. And you’re moving it, and you get your hands on it, and you’re pretending and you’re playing. But, you know, at that moment in your heart of hearts, you do not control that snowball anymore.
Dickson: That’s right. The snowball is moving itself. No more effort expended. Yeah.
Keith: Only only two things control the fate of that snowball, and that’s basically gravity, and the house or the car at the bottom of the hill.
Dickson: That’s it’s going to smash into, right.
Keith: It’s going to go where it’s going to go. Hopefully it misses, and good luck. And it struck me. But that’s the analogy for Bernanke at the time trying to manage the interest rate was all these years the Fed pushing and prodding and lifting and suppressing and all these things and playing and having their hands all over it. And eventually it gets to the point where it’s now falling off its own dynamic, you set in motion something that is going to work the way it’s going to work. Too bad. And that’s where the Fed found itself. And that’s why all those people, some of them were pretty close to Bernanke. They had a couple of presidents of the regional Fed banks. So when somebody like that says, gee, I don’t know why Chairman Bernanke is not raising rates, you got to pay attention to that because all the rules he understands Bernanke should have been doing that.
And the fact he didn’t makes me think maybe he can’t.
Keith: Maybe he’s like the wizard in The Wizard of Oz behind the curtain and he’s got this huge megaphone. Right. And he’s got all these amplifiers. And all it takes is a little dog to just grab the curtain with his teeth and pull on it. And then you see that it’s just this wizened little old geezer sitting on a stool, pretending. And completely powerless even though he has a bullhorn.
And all these things sort of percolating in my head. And then they all come together and you say, do you know what? If gold could finance something productive, then that gives the investors a choice for the first time since 1933. And so, then I do thought experiments. I say, OK, suppose you’re an investor and you have a choice of lending $190,000 to a corporation that can do something productive with it, with interest. The bonds that are the same people were doing the same thing with the same credit risk, the same balance sheet, the same everything and the same interest rate.
But one of them is going to pay you back $190,000 in ten years. And one of those, the other one’s going to pay one hundred ounces of gold in ten years. Which would you choose? Of course, it’s a rhetorical question. Obviously, no one has the slightest idea of the value of the dollar is going to be in 10 years. I mean, not even the people who manage the dollar could predict that, let alone maybe people are more skeptical, dubious of the dollar.
I mean, what do you think the dollar’s likely to be worth. Then you think, OK, it’s obvious that if there was interest on offer on gold, investors would take it. Now, you say, OK, who would want to borrow gold? And then that leads you to a variety of vertical markets where these companies are dealing in gold. And then the final thought that percolated in my head was the realization everybody sees problems in the world. You can’t be an adult of normal intelligence and not see problems. But what most people do is they see problems, and then they get together with their buddies and watch a football game and then they kind of bitch and moan about problems. And then they go back to doing whatever they did. Or maybe, you know, maybe the beer takes hold and they’re not thinking about problems anymore. Or they go back to work on Monday morning and they forget about it.
Some people think that, Oh, let me go to the government and lobby the government solve all my problems. And that isn’t really very productive. And that’s at best a Faustian bargain. So, the entrepreneur is that crazy guy who says I see a way to make money solving this problem. And thinking of myself as an entrepreneur, certainly much more than academic or an economist, I said, OK, how do we make money doing this? Well, obviously, you build a business that brings together people who have gold and want to get a return on it, with businesses who need to finance something productive and are willing to pay interest in order to get the financing they need.
That was the kernel of the whole thing that, you know, as you said, one unique idea.
Dickson: Right. And so that, in essence, is what Monetary Metals does. Brings opportunities that offer interest on gold. They match investors who want interest on their gold with businesses who have a productive use for gold. And you can either lease it or borrow it. And that dynamic creates an interest rate market on gold in gold.
Keith: That’s it in a nutshell.
Dickson: What that does is that addresses the first of the two fatal flaws you mentioned earlier, right? We have this interest rate, the dollar interest rate market is completely unhinged from reality. It’s been pushed and prodded and twisted and and turned by central bankers over the years. And it no longer is connected to what we might call time preference of savers or marginal productivity. It’s been manipulated and distorted to where those things have been turned inside out.
Very important price has become destructive and organizing capital structure. So that’s the kind of the answer to number one. And then the answer is number two, in terms of the fatal flaws, no extinguisher of debt. That’s just solved by virtue of the fact that it’s gold. Right. Because gold is no one else’s liability. It’s not a debt. It’s not a promise to pay.
Keith: Right. So if you think about what’s a dollar and what’s what’s a gold coin? People may focus, it’s almost like fetishizing the token. They look at the dollar bill as a piece of paper. It’s a rectangle and it has green ink on it and so forth. But, you know, paper itself doesn’t have any value. It’s the fact that it says Federal Reserve Note and it’s issued by the Federal Reserve. And the law says it’s money, so people treat it as money.
But to have a gold coin is to have a thing, or to use the philosophical term, it’s an entity. It is an actual object that exists or we can call it an existant. To have a dollar, is not to actually have a thing. A dollar is not an object that exists. A dollar is a relationship of owing. That is to have a dollar is to be in a relationship where there’s a counterparty that owes you one dollar. And so, you know, maybe a really oversimplified terms to have a gold coin is to have a positive thing.
To type a dollar is to be in a relationship of a negative. So one’s the hole and one’s you know, maybe the ball that fills the hall. When you take that idea and explore it, you end up with some really counterintuitive things. And this is what I would argue, that if there was to be a monetary science, that’s what monetary science should do, is explore down and say, well, that’s interesting. OK, can I refute that? I mean, did Keith just make up something that’s bogus or is that really real? And if that’s really real, then that leads to some very counterintuitive things. The dollar doesn’t extinguish a debt because it’s just a negative in itself. It actually is a debt in a way in itself. Whereas the gold coin is a positive thing? So if I owe you a gold coin and then I give you a gold coin, there is no debt instrument anymore, the credit is extinguished.
And it turns out that extinguishing is a really important feature of another thing, which is, it keeps the borrowers, which is principally, or certainly first, the banking system. It keeps them honest.
Keith: If I’m a banker, I just can’t take for granted that you’re going to keep giving me your gold coin and letting me keep it indefinitely. If you don’t like the terms or whatever you might demand it back at the end of the loan agreement or the end of the time deposit in the account.
And so that redeemability, my ability to demand give me my gold coin back, really is a very powerful motivator. And today our entire system is dominated by the opposite of the forces of honesty that keeps them on their toes. And we call it moral hazard. If I’m the banker and I say, well, you know, I can count on Dickson…..what is he going to do, bring it to another bank?
So I have to make sure I’m no worse than any other banks. But if the entire banking system realizes that, then whether or not they formally collude, whether they all get together at some place like Bretton Woods or Jekyll Island. Doesn’t really matter. The incentives are lined up and they’re all going to end up in collusion, making sure that there’s no outlier that’s really particularly worse than any of the others. Right. So but in gold, there’s a fundamental honesty to it.
Dickson: I can’t help but think as we’re talking, this all sounds well and good to you and I. We know each other. These are things that you’ve written literally hundreds of thousands of words on, if not into the millions. And I’ve read most of those words. So it’s kind of familiar territory to you and I, but probably not to most people. You know, I’m wondering I mean, we’re talking about problems, and when you mention the problem of an unhinged interest rate and the fact that we have this growing debt burden that we can’t really seem to get under control and there’s actually no mechanism to get it under control.
These are massive problems. These are problems that exist on a on a scale that affects every human being on Earth?
Dickson: Wouldn’t that be fair?
Keith: Yes, absolutely.
Dickson: So doesn’t it seem just a little far fetched to think that we can actually make a dent in any of these things? I mean, how would you, I’m just curious, how would you respond to to someone who would say that? Right. Like, OK, Keith, your theory sounds great. I like your ideas, but do you really think you’re going to move the needle at all? These things are just too big they’re too ingrained. They’re too far gone. How would you respond to that?
Keith: I would say is that a well designed startup is designing itself around whatever the problem is it’s trying to solve. So take Uber as an example. And Uber said the experience of trying to get a taxi in any city in the world is really just a terrible experience. There’s just so many things wrong with it. And so you’re taking this problem, you’re designing a solution. The most important attribute of that solution is that it’s highly scalable. The reason why scalability matters is because investing in a startup is obviously a great risk and the investors want to know that if things are successful, they’re not going to make a few million dollars. But ultimately, the business will go on and make billions.
Keith: So you’re trying to design something that’s scalable. In our case, if it is scalable then it’s solving the problem that we just outlined and it is moving the needle of the world. But scalability for a startup is nothing more than, once you have the idea and the idea…the idea for Uber is relatively simple….everybody’s got a smartphone that has GPS in it, it has Google Maps, let’s use that now for taxis.
But there are companies that have complicated technologies as their crazy idea when they get started. You know, Intel, the company that makes the chip and, you know, computers, when they got started, semiconductors, were still a wild and woolly thing. And the people that understood it were these off the wall, PhD physicists types. But once you have the idea, once the idea is well understood enough to start to build a company around it, scalability is just a matter of execution.
And all startups that are serious players in the game, that are trying to get to scale are just always thinking about scalability. But in our case, scalability to get to scale means….and I think this is kind of a good working definition of the gold standard. And forget this idea that the gold standard is going to be imposed by having the Fed, number one, figure out what’s the right price of gold is whatever the heck that means, and then ramming it down your throat by force of law, imposing or administering a price of gold, which is just absurd. Anyway, a good working definition of the gold standard is that anybody who wants to has the right, but not the obligation, to deposit their gold coin or gold, period, and to get interest on it. Or has the right to take it home, take the marbles home and not play.
If we can scale up Monetary Metals, then we’re achieving that definition of the gold standard. How many years did it take before Uber basically had that same proposition? Anybody who wants to pick up their smartphone and summon a car in any city in the world, you know, ten years if something like that. Right? So that’s what startups do, is they design a platform, the platform is designed for scalability. You have to work out all the processes. You have to work at all the system. You have to build the custom software, and once you get all that dialed in, you know, you scale like hell, you’ve achieved, and you’ve achieved the ubiquitous solution to the problem that you’re setting out to solve.
Dickson: So if I can maybe try and repackage that a little bit, if Monetary Metals is able to do what it set out to do once and it does that successfully, which that once being it pays interest on gold in gold and then it does it another time. It does it 10 times more, 100 times more, a thousand times more, 100,000 times more. Each time the dynamics kind of self reinforce, obviously, because you incorporate new information as you grow. But to the extent that it repeats its success over and over at that point, you look back and you hopefully say, we did it.
Keith: Yeah, I mean, so let us now the conversation has shifted away from the craziness and away from the one unique idea and into the kind of discussion that any startup would be having with its board or investors or for that matter, any class on entrepreneurship in, Stanford University and Silicon Valley or any other entrepreneurship program or any other school around the world. OK, how does it work? So you have to do it once to prove the concept that you can make the mechanics actually work. You plug all these things together, like an internal combustion engine.
The first one that somebody built, he really had to be nervous. OK, now we’re going to give a little bit of gasoline. Is it gonna actually spin under power? Or is all this time in my shop, my wife calling me crazy, is this is all for naught, right? And then you get it to sputter to life just for a brief moment and then it flickers out and something happens and it leaks the oil or whatever it does. But then you’ve proven something right? We have to do one deal, essentially, where one investor or maybe a small handful of investors gets a little bit of interest on a small bit of gold with one company leasing it.
If you do that and you say, OK, you know, when all the pieces make sense, they all plug in in ways that are predictable. We could actually repeat that. And then you do a second one with some more investors and some more gold to another company. You do a third one at a time. You get to three. Well, this is just standard Silicon Valley startup kind of thinking. By the time we’ve got the three you’ve proven a couple of things.
You’ve proven the idea works and you’re on your way to proving that there’s a market you can address. So one question is, is there a market? Does anybody actually want this? And the second question is, can you address it? And that’s a very different question, by the way. Sometimes there’s a market and you can’t address that as a startup. It’s too expensive, too far away, too whatever. But if you’ve done three, you’ve started to prove it. That’s how you get to 10 and 10, you’ve proven that there is a market and you can address it.
And now you’ve started to dial in your business model. Now you know what it costs to set up a deal. You know what it costs, what you have to pay the investors and what you charge the company. And is they’re actually positive margin in this business, because sometimes you have a business that, oh yeah, we could do lots of it, but actually make a negative margin.
Dickson: Right, right.
Keith: And that’s nice…..
Dickson: …but not a business you want to continue.
Keith: No unless you’re in Silicon Valley and it’s 1999. And, you know, you say it’s a new economy and it’s all about eyeballs and who cares about revenue. But if something like this….anyway you get to that point and then with each…there are basically milestones. With each subsequent milestone, can you do one? Can you do three? Can you do 10? Can you start to get the cost out of it? Can you start mass producing them, is there scalability? Do investors come in at a faster and faster rate, at lower and lower cost of customer acquisition.?
And then each time, you know, there’s a series of milestones that an entrepreneur knows what he’s doing, you know, working with his board or defining milestones. And if you’re achieving them, you’re saying, okay, what’s the next milestone. It’s less and less about the crazy economic idea.
Keith: Economics sort of recedes into the background that informs your business model initially as physics informed Intel initially and before Intel, Fairchild Semiconductor. So, you know, you’re developing your milestones. You’re saying, OK, what’s next, what’s next, what’s next? And it’s all about how do we make this at less cost available to more customers. And you keep doing that, of course. You build a brand, all of your customers are pretty excited. So then there’s the whole crossing the chasm problem.
You have a small group of loyalists that are so excited because let’s say you’re a dancing bear. Just to use a cliche analogy from Startup World, you’re a dancing bear. You don’t really have to dance all that good. Because, I mean, hey, look, it’s a dancing bear. Dancing at all is actually pretty cool. I remember the early days of computers. It was this bear dancing on this chair or whatever it was, and some cheesy music. So the animation was flickery, very low resolution the animation was poor, the bear was crude, music was extremely crude.
And I was just delighted to see it. Because first of all, it’s a dancing bear. And then secondly, the fact that it was doing that at all on a computer…there was no indication that on a computer you could do that sort of thing. That was pretty cool. But really, for the industry to evolve, that computer was not real interesting. Not a lot of people wanted to spend $2500 to buy an Apple II Plus computer in 1981. Very small market. You have to work on getting the cost down. You have to work on getting the performance up, better software, better user experience.
And bit by bit, they’ve built this thing that’s now ubiquitous. Who doesn’t have at least a couple of computers, one in your pocket, which is your phone and a laptop or a tablet or something. You know, it’s all the quest for scale. The same thing applies here, could we move the needle of the world? Absolutely.
It’s just a matter of getting to scale. Can we get to scale? Well, we’re doing it now. We’re not all the way scaled up yet, but we’re a heck of a way farther down the road than just having a handful of enthusiasts getting a little bit of interest on a little bit of gold for one more borrower either.
Dickson: Yeah, and that was that was actually going to be my next question is where would you say Monetary Metals is on that journey towards scale?
Keith: We’ve proven that there’s a there’s a market and we can address it. I think we’ve proven that there’s a reasonable cost to serve this market, and that is that we can make a positive margin. I think we’ve proven that there’s scalability here, if we can get the costs out and get the friction out. And that’s kind of the phase we’re working on right now. Good news is that’s at a pretty advanced stage because that’s where you’re really starting to de-risk and optimize the business.
And the next stage of growth comes from both de-risking and optimization. Before I started this thing, I talked to a lot of people that I knew through gold, and I’ve been writing about gold for a long time. And pretty much the consensus in the gold world was: nobody will give you their gold, forget about it, they just won’t do it. And I said, I think the gold will come out for interest.
And they said nothing doin’, forget about it. You’re crazy. That’s where entrepreneurship…that’s that moment of truth. Somebody who has a job, maybe doesn’t like the job, whatever, at night he’s sitting and thinking about, “I could do this” and then typically, shares that idea with family and friends. And they’re all naysayers, Negative Nellies. “Don’t quit your job, you’re in a good spot.” I think a lot of, you know, would-be entrepreneurs stop right there. Because they listen to the Negative Nellies. Now, in some cases the Negative Nellies are right. Maybe it really isn’t that good, or idea is actually really bad. And the best thing you can do is listen to that advice. But in some cases, the advice is wrong. You know, maybe very spectacularly wrong, as I think it is in this case.
So there was a time when there was an open question, would anybody trust a company with their gold? It was a consensus. Nobody disagreed. Everybody said, “No, nobody’s going to give up their gold. Forget about it.” I was the only one saying no, I think they will. And the good thing about, you know, us still being a relatively free economy, if you’re an entrepreneur who disagrees with everybody else, you’re free to spend your own time and your own money pursuing your disagreement.
You don’t have to get permission from some commissar. You just go do it. And if you lose your money, then eventually, you know, it stings enough and you get back into line. But, you know, we’ve come a long ways away from that. There was no longer any question people will invest their gold with reasonable expectation of getting a return on it. And obviously to a company that has built a brand and a reputation, internal controls, and processes to to protect and safeguard that gold.
Of course, it goes without saying that people will investigate a return because that’s what has driven humanity forward since, you know, before the dawn of time, before history, was people looking for a better solution for themselves and their families. This is nothing more than that.
Keith: So if you are planting crops and saying we’ll do agriculture, that was a better life than being a hunter gatherer. So they got whatever to say, I’m not going to pursue that. I’m going work for you as a farmer because it was a better life and a better living. To every step forward of progress has been offering somebody something better. That’s what, ultimately, this is about.
Dickson: Yeah, it’s funny. As I was thinking about this episode and just the title one radical idea, one of the questions I was going to ask is radical to who? What are the groups that would perceive this idea of paying interest on gold as radical? And I came up with two, you just touched on one, which is the gold community. Gold investors would have certainly, at least prior to Monetary Metals, you know, balked at the idea of, “You want my gold?!” Over my dead body, right?
Keith: You can pry it from my cold, dead, hands.
Dickson: Right, exactly. But now we’ve discovered that well, that that actually changes once gold pays two, three, four percent per year and upwards of that depending on the offering. And then the other group, though, and I guess I’m going to pose this to you as a question. Obviously, I have one in mind. But at this stage, who else does that idea appear radical to?
Keith: Pretty much everybody. First of all, the mainstream would say, “Why are you messing around with gold?!” Why don’t you just get a job with a conventional investment bank? You know, you want to go do deals, go to New York, get a job at a bank and run around and do you your thing? Mainstream investors: “I knew a guy who bought some coins that was supposed to be salvaged off some Spanish rock in the Caribbean and he bought those, you know, bought our gold in 1980 and he lost his shirt.”
Keith: And that’s supposed to mean that gold is just intrinsically terrible asset? We were actually talking to a PR firm, interviewing them, whether we want to hire them or not. This is back in 2016. And the president of the PR firm, looked up and said, you guys want to what, replace the dollar with gold? You guys are insane! I don’t want anything to do with this. And, you know, kind of fired us before she got started. She was so blustering with offense and outrage. And, you know, who the heck do you think you are? Outrage. But I think most people us look at and say, well, gold, you know, pork bellies, you know, speculation, who knows? Right now, gold’s in a bubble. You know, it’s going to whatever. And I’d rather have safety. I’d rather have….I’ll load up on technology stocks because, you know, that’s safer.
Keith: I’m saying that with my tongue in cheek.
Keith: …Because I buy stocks, with 150 P/E and you know, that’s safe…this gold thing. That’s that’s crazy. That’s for crazy people.
I think everybody would be dismissive of it, and not to denigrate anybody. I think that’s just the nature of human progress. There’s an old saying that science advances one funeral at a time. And it’s kind of morbid and it’s very pithy in a way. But, you know, there’s some validity to that, that society tends to be conservative.
And the political left and right, Republican and Democrat, I mean clinging to the status quo
Dickson: Kind of a normalcy bias.
Keith: Right. How things were done is how things ought to be done, how things were yesterday is how things should be tomorrow.
Keith: And to the extent things come along… So if you say I have a new light bulb, it’s going to fit in the same screw socket as all the old bulbs, only it’ll use less electricity. First compact fluorescents, now we have LEDs, those things slowly gain penetration unless they go lobby the government and they mandate it. And they make the incandescent light bulb illegal.
But, you know, short of that, these things take a long time to penetrate, even if there’s a clear benefit. And it’s incremental, there’s a clear benefit and the change doesn’t really ask me to change my behaviors in any way. I just when my light bulb burns out I buy a different kind of light bulb. But it’s the same shape. It fits in the same socket, you know, I don’t buy new lamps or anything like that.
And that takes forever to go through because, you know, people are conservative. Now you’re saying we’re going to we’re going to mess with the money. You know, we don’t say that it’s money, not in our investment pitches. You can’t really do that. In my economics work. I’ll talk about why gold is money and why the dollar isn’t, but an investment deck or whatever, it’s gold, and that’s it. It’s not quote-unquote money. But people feel like you’re messing with something at a pretty basic level and they they either don’t get it, or in a lot of cases they willfully don’t want to get it. At the end of the day, people do want something better. If the dollar is paying….rewind two and a half years and you could get over three percent on a ten year Treasury bond. So selling against that is potentially a challenge because people might feel that over three percent in a world where the central banks can’t really gin up any inflation, they’re getting three percent on Treasury bonds, that’s pretty good. For a zero risk investment.
Now, the ten year Treasury bond is well under one percent. So it’s taken away most of the reward. And that means that investors that are aware of this or more active looking for something better because what had been good is obviously not good anymore. So what do you do if you don’t want to buy a Treasury bond? You want to go out on the risk curve and you want to start buying b-rated corporate securies? What do you want to go do?
So then suddenly the idea of getting a return on gold becomes relatively way more attractive. Right. So at the end of the day, we’re going to win because we’re offering something that just makes sense. Apart from whatever people might feel as the theory of it. The practice makes sense because it’s fulfilling a need for them that they can’t fulfill any other way.
Dickson: Right? Let’s just kind of imagine you run into your average Joe or Jane on the street and, you know, you’ve told them your radical idea. They respond “Gold?! What do I need gold for? Why do I need to earn interest on gold? Dollars work just fine.” What would be your kind of elevator response to that? You know, obviously, keeping in mind what you just said, that at the end of the day, you want to offer something that’s better but to try and help people to see problems inherent in the dollar. What are the things that you point to?
Keith: First I’d want to understand are they investing dollars for a fixed income return like true savings, or they’re just betting in the casino, which is the stock market. Because there are some people who just put you know, I’ve seen plenty of people in their 30s now they’re just putting 100 percent of their life savings in the stock market because they think that the stock market can’t really go wrong or they believe the Fed has their back, or whatever it is they believe. A lot of cases they may be a bit young to remember the incredible collapse of 2008 or they think the Fed has figured it out and never going to happen again or whatever.
Of course, I’m old enough to remember that in the lead up to that, the Fed had said it was at a permanent plateau and that the Fed has ended the business cycle and all these things that were believed in the run up from 2001 to 2008. So if they’re just betting in the casino with extreme confidence, there’s not a lot you can say to somebody like that because they have the the certainty of somebody who’s young and inexperienced. But if the person is older and he clearly lived through and maybe even suffered in the global financial crisis of 2008 and now, let’s say he’s in his 50s or 60s and he’s a lot more inclined to fixed income.
And the person says the dollar’s fine, whatever, I’d say, “Just what return are you getting right now and do you think you’re going to get your retirement goals at that rate?” And by the way, we’re not talking about the scenario where the Fed loses control and everything goes completely bananas. What about in the scenario where the Fed achieves its objective? Its stated objective is 2% debasement of the dollar per year. I don’t agree with the very metric of how we measure that debasement, which is consumer prices. But, you know, in the mainstream to which that person adheres, the Fed is trying to take away two percent of the value of that per year. What exactly are you getting on your fixed income investments right now. And if you’re getting two percent that’s basically zero. You’re not going to ever retain your retirement goals, ever. You’re on a treadmill. You can’t move forward. Do you not see that?
But I have a simple answer that may be less satisfactory, but much more practical from a business perspective. Which is: all the gold that has been mined in human history is in somebody’s hands. And that can change from hand to hand every time somebody buys, somebody else sells.
We don’t have to persuade people who don’t own gold to go buy some. We just have to persuade the people who do have gold why it’s better to get interest on it rather than pay to store it, or to take the risk of a home invasion or fire, you know, at home and just store it at home. And so that’s a very different proposition, and a much easier one. So now, there’s a direct tie to self interest versus trying to persuade somebody who’s a paper bug why he should own some gold. That’s that’s hard. Persuading somebody who’s paying zero point seventy five percent per year to store it. Why it would be better to get paid three percent to invest it. That’s relatively easy.
Dickson: Very good. So just kind of looking to wrap up this discussion…we started out talking about what led to the formation of the radical idea, your background, software development entrepreneur, running a business, selling a business, making this kind of massive transition to economics, but then coming back to the entrepreneurial world and starting Monetary Metals out to solve very large problems, deep problems, gold obviously a part of that solution. And to the extent that Monetary Metals makes forward progress in that journey, that radical idea of gold paying interest becomes less radical.
At the end of the day, the more success, the more deals you do, the more you move forward. What once seemed so radical and otherworldly and extreme begins to look like it should have existed all along.
Keith: Isn’t that true for all entrepreneurial innovations. And just take Uber, as my example, to keep beating that dead horse to death. Before Uber, nobody thought of it.
Dickson: That’s right.
Keith: It took Travis Kalanick to to think of it. After Uber comes out, I’m sure it’s obvious. You don’t need to see Uber’s code, you don’t need to talk to their scientists to figure out how to do it. It’s just…Oh, that makes sense.
I’ve had a couple people over the years try to sort of say, gotcha. And the gotcha is, “Your idea isn’t really very new, is it? People have done that for thousands of years, haven’t they?” You’re absolutely right. But what’s new is figuring out how to make it relevant in this world, in this economy, and figuring out how to get it started, when they choked the life out of the gold standard in 1933. It’s been dead for going on 100 years. You know, when you have a lifeless corpse, it’s a little harder to figure out how to breathe life into it then back when it was a couple of thousand years ago when nobody could have dreamed of choking the life out of gold, you know, as such.
It’s an idea that I think in retrospect was obvious. It was obvious 87 years ago. It was obvious. I gave a talk at the Harvard Club three or four years ago and they have all this memorabilia on the walls. And one of the things caught my eye immediately was a gold bond that was bought by Harvard endowment, the president, and the fellows of Harvard, whatever it was called.
And it was in 1902, 1906 something like that. It was a 98 year bond. And right on the bond it specifies it’s to be payable in the standard gold coin. And it’s printed right on there. So this idea of lending your gold and getting it back with interest on it and then getting gold back at the end. But that idea is not new. It was obvious in 1902. It’s no longer obvious, just only simply because everybody’s been programmed by TV and government education system and of course, the regulatory world that we live in.
I call it the regulatorium. Every government-induced signal is telling you that money means pieces of paper with green ink on it. If you do a Google image search and search for money, you’ll get pages and you can just keep scrolling, scrolling, scrolling. It’s all dollar bills. Cartoon dollar bills, real dollar bills, pallets of dollar bills. It’s all paper. And that’s the madness of crowds. That’s the prevailing mythology. Of course, it isn’t true. And that’s what makes this unique idea, you know, compelling.
Dickson: You’re absolutely right. And as you were talking just now, it made me think of that, it’s become a popular question now in Silicon Valley and I guess amongst entrepreneurs, startup culture. That famous question by Peter Thiel, which is what important truths do very few people agree with you on? And basically this entire discussion has been kind of your your answer to that.
Keith: That’s right. That gold was once highly prized for its usefulness in facilitating transactions, especially financing, and could be and will be once again. Right. That’s the thing. I think Peter Thiel said, what’s the one truth that NOBODY nobody agrees with you on. And this is this is that truth that, you know, as an entrepreneur, you’re betting against the entire world, “I’m right and all wrong.” You have to be the right combination of hubris and/or really confident in the validity of your idea.
Dickson: This has been a lot of fun to have this discussion and to kind of dive into the radical idea behind Monetary Metals. I’m going to end this on a quote by Peter Thiel. It comes from that same book, Zero to One, which is where where that question comes from – What important truth do very few people agree with you on? – And this is what Peter says right behind that as it relates to that question. He says this question sounds easy because it’s straightforward.
Actually, it’s very hard to answer. It’s intellectually difficult because the knowledge that everyone is taught in school is by definition agreed upon. And it’s psychologically difficult because anyone trying to answer must say something that he or she knows to be unpopular. Brilliant thinking is rare, but courage is in even shorter supply than genius. So to wrap us up, what struck me about that quote is it’s one thing to discuss having a radical idea. It’s another thing altogether to have the courage to start a business built upon that idea and to actually put it into practice.
So thank you again, Keith, for the time. It’s been a privilege. We’ll see you again on the next episode of the Gold Exchange.
After leases and bonds to those in the precious metals arena, how does the radical idea move out into the main street economy?
Great suggestion for an upcoming conversation, thank you! Stay tuned (: