Will Trump’s Indictment Hurt the US Dollar?
Jeff Deist explains why the Trump indictment is more than just political, the future scenarios that are likely for the dollar, and why the lack of the rule of law is deteriorating our money.
Connect with Jeff and Monetary Metals on Twitter: @JeffDeist @Monetary_Metals
Additional Resources
Why Today is NOT like the 1970’s
The Case for Gold Yield in Investment Portfolios
Podcast Chapters
00:51 Trump Indictment
03:13 The Cost of Deterioration
05:55 The Wealth Trick
09:47 Geography
11:00 The Little Guy
13:21 Utilizing Assets
14:40 The Future of the Dollar
15:06 The Status Quo
20:13 Demonetization?
30:14 Cold Currency War
35:15 The World Wants One Currency
38:31 Private Money
45:10 Monetary Metals
45:55 The Argentina Example
46:55 See You Next Friday!
Transcript:
BVN:
Welcome to Debased, a show about the current state of money with Jeff Deist. Welcome back to Debased. My name is Benjamin Vern Nadelstein. I’m joined by Jeff Deist. Jeff, how are you doing today?
Jeff Deist:
Ben, it is good to see you as always on Fridays.
BVN:
Jeff, lots going on here. And I want to let people listen over the weekend to lots of things. And you texted me. Ben, I want to talk about the four paths you see that the dollar could possibly take. I want to get your opinion, what are these four directions you think the dollar might be going?
Jeff Deist:
I’ve been working on this this week, the idea that there’s maybe four possible futures for the US dollar. I think that they all enjoy different degrees of likelihood. But maybe we start by this whole idea of why is the dollar so strong to begin with? And believe it or not, I think this indictment that’s coming this coming week of Donald Trump is actually the thing we need to be thinking about as dollar holders, as investors, as people who like gold or Bitcoin or equities or bonds or whatever people happen to think is their own personal path forward. I mean, we have to step back sometimes and think not in a macro sense, almost in geopolitical sense. So why does the dollar have value? Well, we know there’s a variety of reasons. Everything from the Brett Woods Agreement that created the world’s reserve currency to the strength of the US economy, the breadth and depth of it, which is no joke. The US military are proudest around the world. So all of these things matter. But there’s more to it than that. Why does money and capital continue to flow into the US? Why does it actually intensify during times of, let’s say, economic crisis or geopolitical crisis?
Well, there’s some reasons, but first and foremost is that we, relative to other countries, have enjoyed throughout the 20th century, the rule of law and the enforcement of contract rights, the enforcement of property rights, perhaps to a degree that no other Western country has. And so as a result of that, people want to hold US treasury debt. They want to hold US dollars. We’ve benefited enormously from that. But you start to see cracks in this foundation. Then, for example, this prosecution of Donald Trump. Now, depending on where you stand, if you’re a progressive, you’re probably thinking to yourself, Why did it take this long? He’s an obvious criminal. If you’re conservative, you might be saying, This is purely selective enforcement. Why was Hillary never indicted in charge for some of her crimes or alleged crimes? Why is the Biden family never investigated and charged for any of their dealings with Ukraine or Hunter Biden and this, that. While prosecutions and the use of the Justice Department, the use of federal law enforcement agencies like the FBI, these may always have been political. What’s different today is that the perception that it’s purely political is changing.
So the idea that America is a banana Republic, this is what I’m hearing right wingers saying today in response to these forthcoming Trump indictments. And then when you look at things beyond just the political machinations of whatever gang is running the White House and the executive agencies, you take things like contractual rights or property rights. We had a moratorium on rent payments and mortgage interest during COVID. We are seeing stores, retail stores, drug stores, for example, apparel stores around the United States ransacked and looted. We’re seeing certain states like Washington and California decide not to prosecute or charge felonies below a certain amount of shoplifting, like $1,000, which is pretty robust if you go into Target or CVS or Whole Foods. That’s a lot of stuff. And you start to see big corporations flirt with all kinds of woke type marketing. You see drug stores, for example, putting more and more merchandise behind these weird locks where you have to go and ask an employee. And you start to say, well, contract rights and the rule of law are not as robust in the United States as they once were. If I’m investing in a stock, let’s say, a publicly held company like Target, part of my investment assumes that shoplifting will not be rampant.
Part of my investment assumes that they won’t piss off 40 % of America with LGBT theme clothing or whatever it might be. And some of these assumptions are being tested. And so if more people in the United States and around the world increasingly perceive the United States as having politicized its judicial system, as having politicized law enforcement, and not having the rule of law, property rights, and contract rights to the extent we thought that those were really rock solid features of American life, that’s going to add cost. That’s going to add transaction cost to everything we do as Americans. Insurance will go up, security will go up, and we’ll all pay for that in the form of higher prices, apart from and separate, wholly separate from anything the Fed might be doing or the treasury might be doing. So I really think that this Trump indictment and these kinds of tremors that are further dividing US electric is not good for the future of the dollar. I think that’s a lot of our assumptions that we enjoyed holding for many decades, we have to begin to challenge and say, what does this mean for us as investors?
What does it mean for the dollar?
BVN:
Yeah, absolutely. I mean, if we are seeing the things that made America such a great place to be to have assets, to hold assets, to build wealth and to create wealth slowly begin to erode, and the Trump indictment might be the sight guise at the moment saying, look, this rule of law that has not been politicized like it has been in other countries. People might start to say, well, what’s the real difference between a Brazil and a United States? They’re both going after political competitors. At the end of the day, who has the more resources, who has a better safety of the assets? And this is an interesting thing that I know you touched on, Jeff, which is how did countries become rich? How did places like Singapore and South Korea and Japan grow their wealth? And most of the time, the answer is pretty simple. They had rule of law and they opened their capital account so that people could safely invest and know that their investments would be safe. And that’s why places like Hong Kong, which had essentially no infrastructure or anything to it whatsoever, became a huge financial hub, as did Singapore, as did South Korea.
And what do you notice about those places? They have Western financial rule of law. And do you see that as a deterioration happening, Trump inditing, and the Trump weaponization of the DOJ being the beginning of the end for that?
Jeff Deist:
Well, I hope not. In fact, for the sake of this country and our future, it’s very, very important that maybe people in the east are going to turn out to be better westerners than we are. And look, if you look at something like Singapore, particularly Japan, there was a bit much there. I mean, the United States has two vast oceans. We have millions of acres of arable farmland. We have timber, we have oil, we have natural gas. We have relatively friendly neighbors in Canada and Mexico. It’s very hard to invade us. America has so much going for it on paper geographically, apart from its people and its governance. When you look at a place like Japan, which came out of World War II, just absolutely devastated. They have no farmland, no oil, no natural resources. They’re on this mountainous little island. Just through sheer willpower and hard work, they managed to become a global superpower. Singapore. I’ve read a couple of biographies of Lee Kuan Yew, not the most touchy, feely guy from a Western democratic perspective, let’s be fair. But nonetheless, again, taking a swampy place without much in the form of resources as recently as the 1960s and creating what we think of today as Singapore, that’s a real achievement.
You would say that Singapore for the past several decades has been on the upswing. Would you say that about the United States? That’s starting to be a pretty open question. It takes more than just infrastructure. It takes a lot. The question of how did we get so rich and what if it all went away? It doesn’t just sustain itself. You don’t just wake up in the morning and have a Starbucks on every corner and electricity at your fingertips and hot and cold running water and grocery stores full of an unbelievable variety of food and insane technologically advanced smartphones in your hands that can tell you almost everything. These are miracles. Of course, it’s human nature that we get used to being surrounded by these miracles, so we take them for granted. Okay, we’re human beings. But I really do think that’s an important question. America has serious social, cultural, political divisions, and all of those would be deeply exacerbated by any real diminution in our material lifestyles. That’s not a joke. That’s something I think we got to take seriously.
BVN:
Yeah, absolutely. I think there’s a Thomas Sowell book. You should just read every Thomas Sowell book and you’ll find out where it is. So in the comments, tell me what Thomas Sowell book I’m thinking of. Thomas Sowell makes an interesting point about the actual geography of Africa and how, for example, there aren’t many rivers that go deep into Africa without having large drop offs, sometimes called waterfalls. And there’s mosquitoes that kill people and don’t allow cattle to bring food or travel. And so there’s actual geographical issues in a country or a nation or a region, and those will actually stop them from gaining wealth. America not only has none of those issues, but that unique rule of law has created such an environment that in some ways seems like we are completely forgetful of how we got here, why it’s so important, and why for so long property rights and the rule of law and contract law has created one of the most successful financial hubs the world has ever seen. It feels like people are forgetful of that or complacent or used to that. And unfortunately, we can’t have that if we expect to continue the standard of living that we have.
Jeff Deist:
Let’s just take a small guy or gal example. Let’s say a person of pretty modest means of income goes out and buys a small duplex for investment purposes, thinking that this will appreciate in value and that over the years they’ll pay the mortgage off through their tenants and that they’ll have an asset that later in life may provide them cash income or something they can sell for a capital gain to help fund their retirement. We’re just talking about an average person, not a rich person. And so all of a sudden they have to assume that if the tenants don’t pay their rent, or if the tenants trash the place, that there will be a pretty straightforward legal mechanism, an eviction process which isn’t too lengthy, which will allow them to move on with their investment. But what if during COVID comes along and all of a sudden you have somebody living in there for two years rent free? And the whole economics of the deal of you buying the duplex was that it was a break even proposition with the rent and now you’re hemorrhaging money. Take something small like that as an example of how important these rules really are and then multiply that across the economy.
It’s a serious question. I think it’s something that we have to understand and grapple with. It’s not an abstraction. It’s very real.
BVN:
Absolutely. I know lots of cities around the United States are working their best to regulate or ban ride sharing, for example. Well, that actually has a material harm, not only to the people who would love to drive for Uber and make some extra money on the side, but also for the ability for people to transport in a way they’d like to transport. Airbnb being another easy example. If the government says, Well, anything that is a short term rental under one month is illegal because whatever you’re competing with the hotel monopoly in our state, that is just detrimental to the economic well being of, like you’re saying, not incredibly wealthy people. This is not Jeff Bezos who is harmed by Airbnb policies. It’s by people who would otherwise make this rental income or this passive income through something like an Airbnb. When you see something like squatter rights or a rent moratorium, this is just harming those very same people that supposedly these laws are enacted to help.
Jeff Deist:
Well, I would add that if we think back now, everything’s simple in hindsight, but the brilliance of an Uber and Airbnb in utilizing resources that were otherwise sitting around basically fallowed. All over this country, millions of cars are sitting in garages or in workplace parking lots all day long, unused, while other people need rides. You can say the same thing about Airbnbs. And in a sense, that’s part of what we’re trying to do at Monetary Metals. There’s thousands of tons of gold sitting around. It’s an asset. It can be utilized to finance inventory or to finance a company in the form of a bond. And so why don’t we pull some of that value out of it rather than letting it sit around fallow? But it’s really interesting how sometimes progress happens kicking and screaming when it comes to government.
BVN:
Yeah, absolutely. I found Uber and Airbnb such incredible examples. And for Monetary Metals, an interesting model how a private business revolutionized whole economies. Taxis and the taxi monopoly are entirely gone. Hotels are now competing heavily with Airbnb across the globe. Now that we’re thinking about all these regulations and these rule of law, let’s talk about your four things that you possibly think the dollar could be headed. You said you have four ideas. Let’s hear Jeff Deist, four ideas of where you think the dollar might be going.
Jeff Deist:
Yes. I think the future of the dollar takes one of these forms. First and foremost, let’s just say the status quo lasts a lot longer than we think. I think that’s one very definite possibility for the future of the dollar. In other words, the dollar is not knocked off its pedestal. The dollar continues to be the world’s reserve currency. Congress continues to spend beyond what it takes in tax revenues. We continue to promise and even pay entitlements widely beyond the actuarial realities of the next 50 years or whatever. And that nonetheless, the dollar hangs in there. I think that’s their scenario number one. And that may sound farfet. We like to think the famous economist Hermes Stein, who is Ben Stein’s dad. People know Ben Stein from when Ben Stein’s Money and from Ferris Bueller’s Day Off. So the great Ben Stein… Ben Stein is pretty elderly now. He still writes, I think, for the American spectator. But nonetheless, his father, Hermstein, was an economist, and he was the head of the Council of Economic Advisors during the Nixon era. And so he had what was known as Stein’s Law, which is if something cannot continue, it will not.
Everyone thought, Nixon’s like, Why am I paying you? But nonetheless, the idea that if something’s unsustainable, it’s got to come to an end. I think we all understand that conceptually, and we almost understand that in our bones. But nonetheless, you go back to 1971 when foreign central banks could no longer redeem gold with the US Fed and Nixon severed that last remaining tie of what we could call a gold redemption or a gold standard. A lot of people in hard money circles, a lot of really brilliant people, people like Doug Casey, were predicting that this was going to mark the pretty rapid unraveling of the US dollar as a dominant player and as it gets toward value and all this and that. And look, there were some rough times in the 1970s in terms of inflation, stagflation. So I’m not going to say that Doug Casey was entirely wrong, but it was incorrect that the dollar would lose its status when any more connection to gold was severed. That didn’t happen. That’s what, almost 50 years now? I’m sorry, it’s more than 50 years now since 1971, and here the dollar still is. And you can talk to people like Keith Wiener, you can talk to people like Brent Johnson at San Diego Capital, and they will give you all kinds of reasons why knocking the US dollar off its pedestal is the world’s reserve currency, as the currency that’s needed to settle trades, to do business internationally, to buy oil, all kinds of things is actually very, very difficult.
And so the dollar’s current status could go on for a long time. And in economic crisis, let’s say on the level of 2008, that could actually bring a lot more money into the dollar as a relatively better run currency than some of the other major Western and the Chinese Yuan, the Japanese Yen, etc. And that may actually be the most likely scenario, let’s say, for the next decade. De dollarization may not be happening anytime as soon as we think it is. So that’s my scenario number one is that the status quo of the US dollar lasts longer than we think.
BVN:
So, Jeff, let me summarize that point there, which is that, yes, the dollar does have problems. And in 1971, a bunch of very smart people went, Whoa, we are severing the currency from the redeemability into gold. Now, of course, there were perversities before then, but at least there was still some connection. Foreign central banks could redeem their dollars for gold. Now, once that actually was severed by Nixon, most people thought, oh, this is the death of the dollar. The dollar is going to tank and there’s going to be a new currency or a new regime. And although there were issues, the dollar continued to live on as we continue to use it today and actually higher in some cases than ever before. And part of that reason, as Brent Johnson and Keith Wiener and many other people have pointed out, that there are structural issues with the dollar, but those structural issues are much worse in other countries like China, Russia, any competitor who would even have half of a chance. They’re technically reliant on the US dollar. Their currency is a derivative of the value of the US dollar. So the chance that their currency overtakes the dollar, you would have to see something big happen before global trade was denominated in yu an or in Yen or in rubles.
And as of right now, for the next decade, doesn’t seem likely.
Jeff Deist:
Well, in popular parlance, excuse my French, the currencies is like the US dollar, but yet at the same time dependent on them. I would argue that a lot of so called cryptocurrencies are dependent on Bitcoin for their existence. Now, I recently listened to a really interesting conversation on the podcast between a gentleman named Tom Luongo, not sure if people are familiar with him. He’s a really brilliant outside the box type thinker. Don’t always agree with him. Our friend, Caleb Long, who runs Custodia Bank, which is a venture in Wyoming that attempts to be a full reserve digital asset bank that she has gotten chartered under Wyoming law. So she’s a fascinating person. And so they were talking about, well, once that last tether to gold was severed in ’71, gold lost all of its purpose. In other words, other than let’s say its jewelry uses. The entire reason for gold to exist in the monetary system is to act as a break on central bank or government spending and debt. And once gold ceased to do that, it’s useless. It no longer has any purpose in the global financial system. I thought that was an interesting point.
But the counterpoint that immediately occurred to me was then why hasn’t gold lost significant value in those 50 years since 1971? If it’s no longer a tether on governments and central banks, and I fully admit it is no longer a tether on governments and central banks, although a lot of them are snapping it up of late. I thought that was a point worth taking. I thought that was a good challenge to pro gold people like us. But nonetheless, gold has hung in there pretty darn well since ‘ 71.
BVN:
Yeah. Gold does have this monetary quality which you can see in its price. If gold truly were useless other than its jewelry demand, let’s say, or its industrial demands, its price would trade much differently. So clearly there is still some monetary value attached to gold. People are buying gold for other reasons than purely the supply and demand in the jewelry market. Now, gold has incredibly interesting stock to flow ratios and other interesting things that make it an interesting money. But to say that gold is completely useless the same way that copper is completely monetary useless, I don’t think it’s the case. And obviously with monetary metals, we are working and showing the plumbing of that working gold standard with financing, lending, interest payments, and wealth preservation all paid in gold. So, Jeff, let’s go to your second case scenario. First case scenario of the dollar that’s got more kicks in the can than anyone could have guessed. Let’s go to scenario number two.
Jeff Deist:
So scenario number two would be the other extreme. One would be the world using the dollar remains as we know it. The other would be the complete demolition of the dollar and a completely new global reserve currency, probably under the auspices of somebody like the IMF or the World Bank. Now, this would be the scenario where we have a really severe economic crisis, maybe globally worse than 2008. And so the dollar starts to decline rapidly, not necessarily only thinking in terms of versus other currencies, but against real goods and services, which it is already to an extent in the past couple of years. And so here we would see calls like we saw in 2008. For example, people don’t know this, but the Europe struggled mightily in the aftermath of the global financial crisis. That was a really rough time. And so what the Fed did was it set up a liquidity swap arrangement whereby the ECB was given lots and lots of US dollars in exchange for euros and some interest, which was in fact paid. And the ECB in turn distributed those dollars to its own to the various central banks within Europe and then on the commercial banks because they needed those for liquidity to keep maintaining trade.
Now, the legality of this swap arrangement, in other words, who authorized this? Well, that takes us back to the rule of law question. Is the Fed acting within the rule of law? We tend to think of it as an entity unto itself, but it was created by Congress. Congress has the ability to regulate it up to and including repealing the Federal Reserve Act and doing away with it. When the Fed does things like create a liquidity swap with foreign central banks, which is wildly beyond its purview as created back in 1913, when the Fed does things like create this temporary lending facility that it just announced a few months back, the BTFP, is that legal? Is the Fed operating under the rule of law? What it’s effectively doing, as Keith pointed out on his Twitter actually earlier today, I think, he said, Well, okay. So the Fed decided to raise rates precipitously. Commercial banks are holding lots and lots of US treasury debt that was issued under much lower interest rates over the past, let’s say, 10 years. So that bond debt is all under water. So as a result, a lot of commercial banks are technically insolvent.
So what does the Fed do? It comes along and says, Hey, don’t worry about it. You bought that bond at 100. It’s now effectively worth 60 because it’s paying a much lower interest rate than I can go out and get on the market. But nonetheless, if you lend it to us as collateral, we’ll link and nod and say it’s worth 100 and loan you 100. Now, that’s pretty odd. Who loans 100 against an asset with a fair value of 60? Well, the Fed does. Is that legal? Is that effectively backed by the treasury? Well, the treasury is us. The treasury is the long suffering citizens of the United States. I would argue that’s a pretty gray area, Ben, in that the FOMC is acting like a cowboy or a renegade and just shooting from the hip and doing what it needs to do, making it up as it goes along. And to me, that’s not the rule of law. Bailouts aren’t the rule of law. Saving Signature Bank or Silicon Valley Bank, that’s not the rule of law. The rule of law is if you screw up, you go bankrupt and the investors take a haircut and the management and owners get fired and the assets are revalued and sold to new owners.
That’s the rule of law. So the second scenario would be when the rule of law collapses, there’s a global financial crisis and the powers that be say, Look, we’ve got all these countries around the world. They’ve all got their own central banks. They’re all issuing their own bond debt independently. Even the countries within the Eurozone still have their own central banks issuing bond debt like Germany and Greece, even though they use the Euro. So that’s a really awkward scenario there. And we just can’t have this. We can’t have the whole world dependent on these currency wars between all these different central banks. Jim Rickards wrote an interesting book called currency Wars a long time ago on this very subject. And so we need one international standard, one international currency. The IMF already has what they call STR, special drawing rights, which could form the basis of this currency. They’ve talked about using at first a basket of currencies and commodities to make it more understandable to people. You’d have six or seven of the biggest currencies, maybe gold and some other commodities in there. But over time it would become a Fiat currency effectively issued by the IMF.
The IMF would become the central bank to the world’s central banks and that these special drawing rights could become a new form of global reserve currency. That would be probably hard to imagine, not unthinkable, I think, in a real global or worldwide depression when people would be clamoring for solutions. They’d be clamoring for people to appear like adults in the room. That would be the doomsday scenario, which was 180 degrees opposite scenario number one, whereby the US dollar just hangs in there.
BVN:
All right, Jeff, so doomsday scenario is a broader organization like the IMF says, Hey, there’s a lot of bad stuff going on with all these individual currencies, these individual bond markets. Here’s what would be better. We’ll centralize these all into one big currency. Listen, we’ll have some euros, we’ll have some dollars, we’ll have some yen. It’ll be fair. All the countries will be represented. We’ll have one big, maybe even digital currency. And we’ll make sure that we are the liquidity provider to the world. You don’t want all these different currencies. It’s confusing. You know who’s issuing what. What if a central bank does something it’s not supposed to? Instead, why don’t we just centralize this? We’ll have one big currency, like one big happy family, and everything will be much better.
Jeff Deist:
Well, if you look at how our own central bank has grown so much so wildly in just 120 odd years beyond its original purpose, I would say something like that’s not unthinkable. The degree to which it becomes thinkable, I believe, is the degree to which we have a real global meltdown where almost all asset classes are going down at the same time, which we did see in 2008. People talked about diversification. People talked about hedging. But in 2008, almost everything went down at the same time. Stocks, bonds, currencies, real estate, all kinds of things. Gold hung in there as the canary in the coal mine. But yes, so that’s scenario number two.
BVN:
All right, let’s what is scenario number three?
Jeff Deist:
Well, so number three is I think a breakdown of the US dollar as the dominant reserve currency into some competing, let’s say, regional type arrangements. We already have central banks competing against one another. It depends on whether a particular country wants to stress exports or imports. China, for example, is a country that has openly and notoriously suppressed the value of its own currency in order to boost exports. And that’s one reason, not the only reason, that there’s lots of cheap Chinese stuff in stores around the world. T hat’s an example. But the idea that the world, from a geopolitical standpoint, wants to engage in warfare with the United States, but perhaps not military warfare, because I think they would lose that. So how do we engage in warfare? How do we fight up close and what we do so via economic arrangements. And there’s already been lots of talk about this in all the podcasts and articles and financial press and Fin twin talking about de dollarization. Well, this is viewed as a form of cold war that we need to knock the US down a peg. And to be fair, the US deserves it because the US has used its dollar as a tool of empire.
The United States government and central bank has used the dollar to export inflation, to force the rest of the world to accept our hegemony, to buy military grade, to buy weapon systems wildly beyond what we’re actually taxing people to pay for. There’s all kinds of ways in which we’ve weaponized the dollar. I don’t like analogies to real war because people who have served in the real war, that’s a horrific thing. But nonetheless, we think of this as low, great economic warfare against the United States. S ome of the scenarios which have arisen would be now a new geopolitical alliance given Putin’s invasion of Ukraine between the Russians, the Chinese, maybe the Indians go along with that. And because these are large countries with large GDPs, that they could get together and form a currency or at least an economic trading arrangement where they don’t use the dollar. Maybe you get Iran involved because Iran has a big oil burs. And so if Iran were to accept currencies other than the US dollar, like the euro, like the yu an, and countries around the world could buy oil from Iran without needing dollars, that would be a blow to the dollar.
And some people would argue that that’s part of the reason that Uncle Sam has been belligerent towards the Iranians, not just because they’re mean to women or they don’t allow gay marriage or something like that, but actually because we would be harmed by seeing Iran price oil and something other than dollars. So you can see arrangements like that. There’s been talks of a bricks currency. Our friend Peter St. Annes did an interesting little video today on his Twitter about the idea of a brick currency where these countries could get together and say, look, guys, we’ve all got tons of these dollars. We all realized that if the dollar goes down in value, we’re all going to lose because it’s like a game of musical chairs. None of us can dump all of our dollars at the same time because then everybody else would be scrambling to dump theirs. It would send a signal. Just like if Jeff Bezos started dumping all of his Amazon stock, that would probably produce a run on dumping Amazon. So the rest of the world is in a bit of a catch 22. And I mean, the Asian treasures in central banks, Brazil and South America, Russia, India, all the big players, they have lots of treasures and they have lots of dollars.
So they can’t just dump them easily. But at the same time, the dollar going down in value would hurt their short term interest. It might help their long term interest because they increasingly view the United States as at least an economic foe, if not an outright geopolitical foe. Peter St. Annes suggested, What if China, on its own or in conjunction with some of these other countries, introduced a gold back currency that actually had some hardness to it, that actually put a limit on the ability of the currency to be inflated unlike the yu an. That would be attractive. That would probably cause some capital flows into that currency and they wouldn’t need to have that much gold to back it. The Chinese central bank has been buying gold of late in large quantities, but they would only need, let’s say, anywhere from 2 % to 5 % of the value of the currency out there to be held in actual physical gold. There are scenarios like that. The irony here is that these currency wars that could produce a regional currency would be, in terms of the global economy, would overall be inefficient. And there would be cost to this, there would be transaction cost.
The world, in a sense, wants one currency. And it had one under gold when things like the British pound were really… They call it the pound sterling, it was really backed by hard currency. And so anywhere you go around the world, gold was understood as a form of money and it was tradeable for the local currency. So the world wants one currency to make doing business around the world, especially in a world today where we’ve got these giant shipping container, these giant ships going plying their trades across the Atlantic Pacific. You’ve got huge cargo planes. The world wants to do business with each other. We want to have the division of labor. We want to have specialization. We all benefit from that. Having different currencies required to do, let’s say, business within a China, India, Brazil consortium or an America Western Europe, Canada consortium, that makes us all a little bit poor. But nonetheless, human nature is such that everybody wants to act in their interests. And so we get suspicious and nervous about other countries. It was not long ago, people were talking about an Amero currency, a unified currency between Mexico, United States and Canada.
They call it the Amero. So this idea has been floated. It’s out there. And if we had, let’s say, another pandemic event, if we had a really significant terrorist event, if we had the conflict between Ukraine and Russia turned into something broader with America becoming involved or Western Europe becoming involved, then this retreat into more closed or insular thinking, regional thinking, I think would be very attractive to countries that are just… They’re pretty sick of being under the thumb of Uncle Sam’s economy and Uncle Sam’s dollars. So I think the idea of regional currencies is a real possibility.
BVN:
All right, Jeff, I’ve heard option one, which I think is the most likely. I’ve heard option 2, which I fear, I hope is not likely. And now I’ve heard option three, which again, I hope is not likely. And your point about gold at one point being money and then all of these different currencies simply being currencies, right? Ways to describe gold. I found that so interesting.
Jeff Deist:
Claims on gold.
BVN:
Claims on gold, correct. I found that interesting. We have trillions of dollars every single day being hedged in the FX market saying, well, I have yen and I have a dollar income, so I need to hedge my yen exposure. And all of this is completely unnecessary when the world has won money, which is gold. And we never had this insane currency swapping. And, Oh, we need your currency to have our currency. Our currency is valued because of your currency. None of that was necessary under a gold standard. Everyone just had their own currency, which described a certain amount of gold to be redeemed in that currency. All right, so let’s give me option number 4. The first one, not great, but maybe better than options 2 and 3. Let’s hear option number 4.
Jeff Deist:
Well, option number 4 is the idea of a truly private or market currency and payment system emerging out of the ashes of what all these terrible governments and terrible central banks are doing all around the world. They all inflate as a matter of policy. They all harm savers as a matter of policy. They all hurt our retirement savings. They all make our incomes buy less. They all encourage profligacy. Top to bottom. I can’t think of it. Even the Swiss Bank, which used to be viewed as just the ultimate stater, I mean, even the Swiss central bank has lost its mind in the last 10 years, buying all kinds of fang stocks and caving in to international pressure on their bank privacy and this and that. So basically all national currencies and all national central banks, I think, have really been degraded. And that’s a sad thing for the world. But nonetheless, that’s where we are. And so if this were to go far enough, you could see a truly private currency and payment system emerging. Now, the two most likely scenarios for that at present would be some form of gold backed or commodity backed money, which was issued either in paper form or like the digital form where you were using, let’s say, a swipe card or a chip in your phone or whatever, but you had an account that was actually somewhere on Earth, you wouldn’t have to move around backed by a physical commodity, probably gold would be most likely simply because we’re familiar with that.
There’s a lot of it has enduring value, subjective value, but enduring value. And people understand it because there’s still lots of people alive who can remember even back to the World War II days before Britain Woods. The other would be, of course, Bitcoin, which I think is far and away the leading cryptocurrency, the most robust cryptocurrency. But both of these scenarios are where a new currency is emerging, first of all, on the market, which would mean governments would kick and scream to try to regulate it, to try to ban it, to try to outlaw it, to force it into black markets. Not unthinkable. Black markets are used for lots of things. Black markets flourished under the former Soviet Union. Black markets flourished today in all kinds of things like the drug trade. Black markets could flourish in the currency trade if governments are that hell bent on trying to prevent us, meaning the marketplace, human beings acting voluntarily from avoiding the harms that they’re placing on us with their inflationary policies. So this would be what Hayek dreamed about in his essay, The Denationalization of Money. He spelled it that funny English way with an S instead of a Z, but nonetheless.
This would be the dream that a truly private currency emerges and that like Uber, like Airbnb, the regulators just got behind the curve and it started to gain popularity and traction before they could really contain it. And that so they had to live with it. And to be fair, there are members of Congress, Thomas Massey, the Senator from Wyoming, gosh, tell me her name again. She’s great. Cynthia Lomas, like Hummus, who are not against this, who would actually want to pass legislation that would force the Fed and the Treasury to allow it to not make it illegal. But for the most part, you would have to expect more lawmakers to react like the terrible Brad Sherman who represents the district of Los Angeles. He is just absolutely unhinged when it comes to Bitcoin, just once it’s banned and wants its practitioners presumably put in jail if they don’t cease and desist. So you could see a lot of pushback on this. But nonetheless, Hayek talked about this. He said you’d hope that something like this could happen quietly and on the slide before they really understood the full ramifications of this. And I’m sure Bitcoin maxis would say that that’s already the case, that Bitcoin is already in use.
It’s been around long enough. It’s held its value long enough. It’s suffered enough price crashes. And I’m not nearly as bearish on Bitcoin as Keith Wiener, for example. I think I view it very differently. But I also know that gold and Bitcoin could exist quite comfortably, I think, independently of one another. I think they could coexist just fine. I think there could be a market for both, just like there’s a market for different kinds of automobiles. And I think they could almost serve different purposes. Bitcoin could serve a marketplace of people who are, let’s just say, younger, more comfortable with a while fluctuations, both on the purchaser side but also on the merchant side. And that Bitcoin can be seen as a more volatile currency, whereas gold could be seen as a more staid or steady currency. But nonetheless, with the digital world before us, you no longer have to worry about gold coinage. You no longer have to worry about how do you pay for something that just costs a dollar 20 when gold, let’s say… I think in my opinion, pretty soon at $2,500 an ounce, you no longer have to slice that up.
Jeff Deist:
You’ve got digital means to spend gold in all kinds of forms, whether that’s a debit card or a chip on your phone or whatever it might be. So I guess in Jeff’s happy world, this private currency could emerge without bloodshed, without governments trying to jail people, and we could see the obsolescence. Again, this is Jeff’s happy world, Jeff’s daydream. The obsolescence of these terrible central bankers who I think at best are clueless technocratic mathematicians at worst, people who are enriching themselves at our expense and who have very happy, soft, issue, soft landings arranged for themselves. So that would be scenario number four, truly private currency. And I think that’s one that most of our listeners and viewers would hope for.
BVN:
Absolutely. And for those interested in gold and the workings of the plumbing of the working of a gold standard, earning interest, financing and gold, obviously, monetary medals, we welcome the free market and competition of other cryptocurrencies, Bitcoin, what have you. We’d love in the comments, why don’t you give us your guess, which is most likely option 1, 2, 3 or 4? Maybe you have an option 5 that Jeff and I have not thought of. We want to thank you so much for joining us. Jeff, any final words before we end out here?
Jeff Deist:
No, I would just mention that none of this stuff matters without that affirmation rule of law. If you go back and read about a pretty recent currency crisis in Argentina around 1999 and 2000, when you really see how people were forced to live there, it didn’t become Mad Max. I mean, life went on. People still went to work. People still had groceries. People still had electricity. But unemployment went through the roof. Prices inflation went through the roof. Electricity became sporratic. You’d have to go to, let’s say, a mall that had really rigid private security in order to just even relax for an evening and watch a movie without worrying about crime. If someone rang your doorbell, you’d go up to the second floor and open your window and say, Who’s there? You don’t have to. Things don’t have to devolve into Mad Max. There are halfway scenarios between what we enjoy today in the United States and that Mad Max scenario. And I would say Argentina in the late 1990s provides a cautionary tale of that. So I think we all need to work really hard to not let these politicians turn us into a scenario like that.
BVN:
Jeff, thanks so much for joining us on this episode of Debased. And we’ll see you next Friday.
Jeff Deist:
Yes, you will.
Additional Resources for Earning Interest in Gold
If you’d like to learn more about how to earn interest on gold with Monetary Metals, check out the following resources:
In this paper, we look at how conventional gold holdings stack up to Monetary Metals Investments, which offer a Yield on Gold, Paid in Gold®. We compare retail coins, vault storage, the popular ETF – GLD, and mining stocks against Monetary Metals’ True Gold Leases.
The Case for Gold Yield in Investment Portfolios
Adding gold to a diversified portfolio of assets reduces volatility and increases returns. But how much and what about the ongoing costs? What changes when gold pays a yield? This paper answers those questions using data going back to 1972.
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